Military Housing: Further Improvement Needed in Requirements	 
Determinations and Program Review (19-MAY-04, GAO-04-556).	 
                                                                 
The Department of Defense (DOD) plans to spend about $9.8 billion
in fiscal year 2004 to provide housing for about 711,000 families
of activeduty military personnel in the United States. DOD's	 
policy for some time has been to rely on housing in the local	 
communities and provide military-owned or privatized military	 
housing when the communities cannot satisfy requirements.	 
Historically, DOD has viewed private sector housing as more	 
cost-effective. In January 2003, DOD approved a revised housing  
requirements determination process designed to provide a solid	 
basis for justifying on-base family housing needs. GAO looked at 
whether (1) reliance on community housing remains costeffective, 
(2) the revised process has resulted in consistent and reliable  
needs assessments, and (3) DOD's top-level review of military	 
housing construction proposals could be improved.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-556 					        
    ACCNO:   A10047						        
  TITLE:     Military Housing: Further Improvement Needed in	      
Requirements Determinations and Program Review			 
     DATE:   05/19/2004 
  SUBJECT:   Cost effectiveness analysis			 
	     Families						 
	     Housing allowances 				 
	     Housing construction				 
	     Military cost control				 
	     Military expense allowances			 
	     Military housing					 
	     Military personnel 				 
	     Private sector					 
	     Privatization					 

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GAO-04-556

United States General Accounting Office

                     GAO Report to the Secretary of Defense

May 2004

MILITARY HOUSING

 Further Improvements Needed in Requirements Determinations and Program Review

GAO-04-556

Highlights of GAO-04-556, a report to the Secretary of Defense

The Department of Defense (DOD) plans to spend about $9.8 billion in
fiscal year 2004 to provide housing for about 711,000 families of
activeduty military personnel in the United States. DOD's policy for some
time has been to rely on housing in the local communities and provide
military-owned or privatized military housing when the communities cannot
satisfy requirements. Historically, DOD has viewed private sector housing
as more cost-effective. In January 2003, DOD approved a revised housing
requirements determination process designed to provide a solid basis for
justifying on-base family housing needs. GAO looked at whether (1)
reliance on community housing remains costeffective, (2) the revised
process has resulted in consistent and reliable needs assessments, and (3)
DOD's top-level review of military housing construction proposals could be
improved.

GAO recommends that the Secretary of Defense (1) expedite efforts to
provide more detailed guidance on the requirements determination process,
(2) review the rationale for allowed exceptions to using community
housing, (3) update information on servicemember housing preferences, and
(4) apply a more consistent top-level review for housing construction and
privatization proposals. DOD generally agreed with the recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-556.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barry W. Holman at (202)
512-5581 or [email protected].

May 2004

MILITARY HOUSING

Further Improvements Needed in Requirements Determinations and Program Review

DOD's policy of relying primarily on local community housing to meet
military family housing needs has been and continues to be cost-effective
for the federal government. GAO's analysis of DOD's fiscal year 2004
estimated housing costs showed that the annual costs to provide housing
for a typical military family were about $13,600 for local community
housing, $16,700 for privatized military housing, and $19,000 for
military-owned housing.

Although DOD's revised housing requirements determination process
represents a significant step in the right direction, the process has not
resulted in consistent and reliable estimates of military installation
housing needs and does not require the services to maximize reliance on
local community housing-the least costly housing option. Because DOD has
not provided the services with timely detailed guidance addressing the
particulars of performing housing requirements assessments, the services
often used inconsistent methodologies, questionable assumptions, and
outdated information in performing these assessments. Further, although
the use of military-owned or privatized family housing is clearly
justified when local community housing is not acceptable or available, or
to meet military mission requirements, the process provides the services
with several exceptions to community housing use that may allow the
services to build or retain more military housing than necessary. It is
also unclear whether servicemembers' housing preferences have changed in
view of recent changes, such as increases in housing allowances and the
increase in the number and length of deployments.

DOD could improve the top-level review of proposed military housing
construction projects. DOD has different top-level review and approval
processes for service proposals for military housing construction and
housing privatization projects with the process for privatization
proposals including additional steps, for example, a top-level review of
the adequacy of the associated housing requirements analyses.

Privatized Military Family Housing at Fort Hood, Texas, and Elmendorf Air
Force Base, Alaska

Source: DOD.

Source: Air Force.

Fort Hood, Texas

Elmendorf Air Force Base, Alaska

Contents

  Letter

Results in Brief
Background
Community Housing Remains the Least Costly Option for Meeting

Military Family Needs Family Housing Requirements Assessments Are
Inconsistent and Questionable DOD's Revised Housing Requirements
Determination Process Does Not Maximize Reliance on Community Housing
Opportunities Exist to Improve the Top-Level Review of Proposed

Housing Construction Projects Conclusions Recommendations for Executive
Action Agency Comments and Our Evaluation

                                       1

                                      3 7

11

16

21

26 30 31 31

Appendix I Scope and Methodology

Appendix II	Selected Information from Installation Housing Requirements
Analyses

Appendix III Comments from the Department of Defense

  Tables

Table 1: Prior Estimates of Annual Government Costs for Military-Owned and
Community Housing Options 13 Table 2: Estimated Annual Government Costs
for Housing Options in 2004 15 Table 3: Selected Information from
Installation Housing Requirements Determination Analyses 36

Abbreviation

DOD Department of Defense

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separately.

United States General Accounting Office Washington, DC 20548

May 19, 2004

The Honorable Donald H. Rumsfeld Secretary of Defense

Dear Mr. Secretary:

The Department of Defense (DOD) plans to spend about $9.8 billion in
fiscal year 2004 under various programs to provide housing for about
711,000 families of active-duty military personnel in the United States.
DOD's policy is to rely on private sector housing in the local communities
near military installations as the primary source of family housing. About
two-thirds of all military families in the United States live in local
community housing and receive a cash housing allowance to help defray the
cost of renting or purchasing a home. Until 2001, the housing allowance
covered an average of 81 percent of the typical housing costs, and
servicemembers paid the rest out of pocket. An initiative started in 2001
has significantly increased housing allowances and is slated to cover 100
percent of typical housing costs by 2005. When local community housing is
unavailable, unsuitable, or too expensive, DOD's policy is to provide
families with military-owned or privatized housing.1 Privatized housing,
authorized by legislation in 1996, is housing normally located on military
installations that is owned, operated, and maintained by private
developers.2 Families in privatized housing use their housing allowance to
pay rent and typical utility costs while families in military housing
receive no housing allowance but pay nothing for housing or utilities. In
privatizing housing, DOD expects to leverage private sector funding to
achieve greater gains in housing improvements than could otherwise be
achieved through use of military construction appropriations. This report
is being addressed to you to bring to your attention opportunities to
strengthen program management.

1 DOD considers local community housing to be unsuitable if it is
structurally unsound; is not well maintained; poses a health, safety, or
fire hazard; does not possess amenities or a size consistent with housing
in the local area, or is located outside of the market area used to
determine local housing allowance rates. The military services normally
consider local community housing to be too expensive if it costs more than
the servicemember's housing allowance plus average out-of-pocket costs.

2 Section 2801, National Defense Authorization Act for Fiscal Year 1996
(Pub. L. No. 104-106, Feb. 10, 1996).

Prior reports from us and others have noted that DOD did not have a
consistent and reliable process to determine family housing requirements.3
These reports showed that significant uncertainty existed in both the
number and location of housing units required in the future because DOD
often underestimated the ability of local communities to meet housing
needs and thus overestimated the need for military-owned or privatized
housing. In January 2003, DOD approved a revised housing requirements
determination process designed to provide a solid basis for justifying the
number of family housing units actually needed on each installation,
whether financed through use of military construction funding or through
privatization. In implementing the revised process, DOD reaffirmed its
policy of primary reliance on housing in local communities and stated that
the construction, operation, and maintenance of military-owned housing
would be considered only when local communities could not provide military
families with housing.

In view of DOD's housing policies, the potential impacts from increased
housing allowances, and the importance of having a consistent and reliable
housing requirements determination process to avoid unnecessary housing
investments, this report, undertaken pursuant to our basic legislative
authorities, addresses whether (1) DOD's policy of primary reliance on
local community housing remains cost-effective, (2) implementation of
DOD's revised housing requirements determination process has resulted in
consistent and reliable needs assessments, (3) DOD's revised housing
requirements determination process maximizes reliance on local community
housing, and (4) opportunities exist for DOD to improve its review of
proposed military housing construction projects.

To address these objectives, we used DOD's budget and program information
to determine and compare the government's costs to provide housing for a
typical military family using each of the three housing options-local
community housing with payment of a housing allowance; military owned,
operated, and maintained housing; and privatized housing that is owned,
operated, and maintained by private developers under the military housing
privatization program. We primarily used cost data

3 U.S. General Accounting Office, Military Housing: Management
Improvements Needed As the Pace of Privatization Quickens, GAO-02-624
(Washington, D.C.: June 21, 2002); U.S. General Accounting Office,
Military Housing: DOD Needs to Address Long-Standing Requirements
Determination Problems, GAO-01-889 (Washington, D.C.: Aug. 3, 2001); and
DOD Family Housing Requirements Determination (Inspector General Report
No. 98-006, Oct. 8, 1997).

contained in DOD's fiscal year 2004 budget justification material
submitted to the Congress in February 2003 and did not test the
reliability of this data because it represented DOD's official information
used to support the President's budget. We reviewed the housing
requirements determination analyses for 12 installations to evaluate the
basis for the estimates and assumptions used and assess consistency and
compliance with DOD's guidance but did not otherwise attempt to
independently determine housing requirements at the 12 installations. We
reviewed and discussed the details of the revised housing requirements
determination process with DOD and service officials and specifically
examined the basis for provisions in the process that allow exceptions to
using local community housing. Finally, we documented differences in DOD's
review and approval processes for service proposals for military housing
construction and privatization projects and discussed with DOD officials
the reasons for the differences and potential advantages from making the
processes more consistent. We conducted our work from May 2003 through
March 2004 in accordance with generally accepted government auditing
standards. A more detailed description of our scope and methodology is
included in appendix I.

DOD's policy of relying primarily on local community housing to meet
military family housing needs has been and continues to be cost-effective
for the federal government. Previous studies by the Congressional Budget
Office4 and DOD showed that compared to the cost of providing
military-owned housing, the government's cost was significantly less when
military families were paid housing allowances and lived in local
community housing. Since these studies were performed in the mid-1990s,
several factors have affected military housing costs, such as the
initiative to increase the amount of the housing allowance paid to
individual servicemembers to eliminate average out-of-pocket costs and the
implementation of a new military family housing option-privatization of
military-owned housing. Nevertheless, our analysis of fiscal year 2004
estimated housing costs showed that reliance on local community housing
continues to be the government's least costly option for housing military
families. Specifically, our analysis showed that the government's annual
costs to provide housing for a typical military family were about $13,600
for local community housing, $16,700 for privatized military housing, and

  Results in Brief

4 Congressional Budget Office, Military Family Housing in the United
States (Washington, D.C.: September 1993).

$19,000 for military-owned housing.5 The cost difference between local
community housing and military privatized housing was primarily caused by
additional federal impact aid paid to local school districts for children
of families living in on-base privatized housing that is not subject to
local property taxes.6 The cost difference between privatized and
military-owned housing, according to DOD officials, primarily reflected
the estimated difference in the costs of a housing unit constructed,
operated, and maintained by the military and a unit constructed, operated,
and maintained by private developers. Other factors possibly affecting
cost differences include differences in construction specifications and
the size of privatized, military-owned, and community housing units rented
by military families.

Although DOD's revised housing requirements determination process
represents a significant step in the right direction, the process has not
resulted in consistent and reliable assessments of military installation
housing needs and may result in over reliance on more costly
military-owned family housing. Determining an installation's housing needs
requires a complex analysis involving many subjective factors and
assumptions, and DOD did not provide the services with timely detailed
guidance addressing these matters or the level of oversight needed as the
services began to use the process. Thus, it is not surprising that the
services adopted different methods for determining installation housing
needs as they began implementing the process. For example, the services
independently decided how to address many subjective factors, estimates,
assumptions, and methodologies, including methods and assumptions (1) to
determine an installation's housing requirement considering base
population, servicemember rank, family size, and associated bedroom

5 In determining the costs for the privatization option, we used the
budgetary scored costs of privatization projects as determined by the
Office of Management and Budget. Each privatization contract that DOD
enters into must be scored for budget purposes. Scoring seeks to determine
the cost that should be recognized and recorded as an obligation of DOD at
the time the contract is signed. However, there are differences between
the Office of Management and Budget and the Congressional Budget Office
over budgetary scoring for DOD's military housing privatization program.
In the view of the Congressional Budget Office, privatization projects
should be scored at a higher amount.

6 Federal impact aid is paid to local governments to help cover the cost
of educating dependents of military servicemembers. The impact aid for
each dependent is significantly higher for students who live with their
families in military-owned or privatized housing located on military
installations because such housing is not normally subject to local
property taxes. When military families live in housing in the local
communities, a much smaller amount is paid for each student because the
housing is subject to local property taxes.

needs; (2) to project changes in the supply and availability of local
community housing; (3) to estimate how many military families are home
owners and therefore will not need community rental housing; (4) to
identify unsuitable community housing units that are excluded from
consideration for military family use; and (5) to estimate the competition
between civilian and military families in securing available community
housing. Collectively, differences in these factors result in inconsistent
installation housing requirements analyses and could result in generating
higher or lower on-base housing needs and costs than warranted. Without
consistent and reliable housing requirements assessments, DOD cannot know
with assurance how many housing units it needs, where it needs them,
whether its housing investment decisions are justified, and whether its
overall housing costs are minimized.

In addition, DOD's revised housing requirements determination process
provides the services several exceptions to the policy of maximizing
reliance on local community housing near military installations that could
result in further reliance on on-base housing than necessary. Although one
exception-military mission requirements-appears clearly justified, the
other exceptions do not and could result in the services identifying more
on-base family housing requirements than actually needed. For example,
regardless of the availability of local housing, the revised process
allows installations to maintain an on-base military housing community
that can accommodate up to 10 percent of the projected number of families
at the installations. Applying this exception, the 12 installation
analyses we reviewed determined that 4,576 military family housing units
were required regardless of the ability of local communities to meet these
housing needs.7 The process also permits installations to provide
additional on-base military housing in some cases for servicemembers with
lower incomes, even though housing allowances for these servicemembers are
expected to fully cover the actual cost of local housing by 2005.
Application of the permitted exceptions could decrease reliance on
community housing and increase family housing costs. Also, the services
had no analytical support showing that there would be negative impacts if
military families were housed in suitable, affordable housing in the local
communities rather than on base where some preferred to live. DOD's 1999
survey of active duty personnel showed that 72 percent of servicemembers
preferred local community housing if costs

7 The total on-base military community housing requirement is overstated
by 31 housing units because one analysis made a computational error.

were equal and that there was no clear link between housing and retention.
However, we cannot be sure to what extent these survey results may change
given other recent changes based on the increase in housing allowances and
the increase in the number and length of troop deployments.

Opportunities exist for DOD to improve the top-level review of proposed
military housing construction projects to provide additional assurances
that the projects are justified and optimally integrated with the
privatization program. DOD has different review and approval processes for
service proposals for housing construction and housing privatization
projects. The process for reviewing privatization proposals includes
additional steps, such as a briefing from service officials describing
each project and its justification and a top-level review of the adequacy
of the associated housing requirements analysis. These extra steps provide
additional assurances that proposed projects are adequately justified
before approval. Also, DOD's top-level review of military housing
construction proposals normally does not include an analysis of whether
the planned improvements could be more economically achieved through
housing privatization. Our review found that the Army, the Air Force, and
the Marine Corps have recently used, or plan to use, military construction
projects to build replacement military family housing at installations
slated for privatization in the near future. The Army, for example, has an
approved $41 million fiscal year 2004 project at Fort Knox, Kentucky, to
replace inadequate housing with 178 new houses. The Army plans to convey
the new housing units to a privatization developer when all Fort Knox
family housing is privatized in 2006. Although military housing
construction projects may be appropriate at installations scheduled for
privatization, a top-level review of such proposals could provide
additional assurances that the alternative used to achieve needed housing
improvements is the more advantageous option for the government-a feature
not always present in the current process.

We are recommending that DOD expedite efforts to provide the military
services with more detailed guidance on implementing the revised housing
requirements determination process to help ensure that housing
investments, whether through military construction or privatization, are
supported by consistent and reliable needs assessments. We are also
recommending that DOD (1) review the rationale supporting each of the
exceptions to using local community housing provided in the revised
process in an effort to reduce or narrow the scope of the exceptions and
minimize family housing costs, (2) survey servicemembers with dependents
to update information on preferences for family housing, and

Background

(3) apply a more consistent top-level review and approval process for both
military housing construction and privatization project proposals to help
ensure that proposed housing construction projects are adequately
justified and appropriate consideration has been given to privatization
options and plans. In commenting on a draft of this report, DOD generally
agreed with our recommendations and indicated that actions were under way
or planned to deal with most of them.

DOD seeks to provide servicemembers and their families with access to
adequate, affordable housing either by paying a cash allowance to help
cover the costs of renting or purchasing a home or by assigning families
to military-owned or leased housing. In fiscal year 2004, DOD plans to
spend about $7.1 billion for housing allowances for about 527,000 military
families living in local community or military privatized housing and
about $1.8 billion to operate and maintain about 169,000 military-owned
family housing units in the United States and lease about 15,000 units.
The Congress also authorized DOD to spend about $908 million in fiscal
year 2004 to construct and renovate military-owned family housing units.

                           Family Housing Initiatives

Recognizing that housing is a major component of the military's
compensation package and a key factor affecting quality of life, DOD has
placed priority on improving the family housing program for several years.
Partly due to initiatives to improve the program, DOD's family housing
costs increased by about $2.4 billion, or 37 percent, between fiscal year
1998 and 2004. For example, DOD began a quality-of-life initiative in 2001
to increase housing allowances and eliminate average out-of-pocket costs
paid by servicemembers for rent and utilities when living in community
housing. Prior to this initiative, enlisted servicemembers with families
living in community housing received, on average, an allowance of $681 per
month and paid 19 percent more for housing costs out of pocket. In 2004,
enlisted servicemembers will receive, on average, an allowance of $1,027
per month and pay 3.5 percent more for housing costs out of pocket.8
Similarly, in 2004, officers will receive, on average, an allowance

8 The amounts shown reflect the average housing allowance for
servicemembers with dependents in all enlisted paygrades in all areas of
the country. Actual housing allowance amounts vary based on the local cost
of housing in about 350 geographic areas in the United States. Also,
housing allowances increase by paygrade except for junior enlisted
servicemembers in paygrades E1 through E4. Servicemembers with dependents
in paygrades E1 through E4 in the same geographic area receive the same
housing allowance amount. Housing allowances do not vary by family size.

of $1,486 per month and pay 3.5 percent more for housing costs out of
pocket. By 2005, DOD plans for the average housing allowance to fully
cover the normal costs of housing and utilities with the typical
servicemember paying no additional out-of-pocket costs.

DOD also started initiatives to improve the condition of military-owned
housing. A DOD official testified in 1998 that the majority of
military-owned housing units were old, had not been adequately maintained
and modernized, and needed to be renovated or replaced. DOD established a
goal to eliminate nearly all inadequate family housing by 2007 using a
three-prong approach consisting of increased housing allowances,
privatization, and military construction. First, DOD expects the housing
allowance initiative to reduce the requirement for military-owned housing
because more community housing units should become affordable to military
families. Second, widespread use of military housing privatization is
expected to result in renovating and replacing inadequate housing units
faster than use of traditional military construction funds. DOD's plans
call for privatizing the majority-about 146,000 units-of the existing
military-owned housing inventory by 2007. Third, DOD plans to use military
construction funds to eliminate inadequate housing at installations where
privatization is not considered to be a viable option. Also, compared to
the past, DOD officials stated that they are providing on-base family
housing units with more bedrooms to meet the needs of larger families.

                              Housing Requirements
                             Determination Process

DOD's policy is to rely primarily on local community housing and provide
families with military-owned or privatized housing when local community
housing is unavailable, unsuitable, or too expensive. To help implement
this policy, the military services follow a housing requirements
determination process that includes a periodic analysis at major
installations to estimate housing needs. Each analysis estimates the
number of military families at an installation and their housing needs,
including bedroom requirements, considering family size and servicemember
rank. The analysis compares the housing requirement with the availability
of local community rental housing that meets the military's

criteria for suitability and affordability.9 When the analyses predict
that local communities cannot meet family housing needs, the services have
a basis to justify military-owned or privatized housing. When the analyses
predict that local communities could meet most or all housing needs, the
services may have a basis to justify elimination of existing
military-owned housing units that are no longer needed.

The housing determination process is complex and involves many subjective
factors, assumptions, estimates, and projections. In the past, the
services used different methods to determine housing requirements, and DOD
was criticized by us and others for not having a consistent process that
produced reliable results.10 To address this issue, the Deputy Secretary
of Defense issued a memorandum on January 8, 2003, directing the services
to begin using a new, revised process for determining family housing
requirements.11 This memorandum confirmed a revised process that the
military services had already agreed to and put into use.

    Family Housing Program Management

Separate DOD organizations manage the two key components of the family
housing program-housing allowances and military housing. Housing
allowances are the responsibility of the Under Secretary of Defense for
Personnel and Readiness and primarily are managed centrally at DOD
headquarters by the organization responsible for all compensation issues,
including basic pay and other types of allowances. Military-owned and
-leased housing and the military housing privatization program are the
responsibility of the Under Secretary of Defense for Acquisition,
Technology and Logistics. Although DOD headquarters establishes overall
policy for military and privatized housing, primary management
responsibility is delegated to the individual services, their major
commands, and individual installations.

9 The analyses assume that military families will rent housing when living
in local communities. However, to recognize that some families purchase
homes, installation housing analyses normally estimate the number of
military family home owners, assume that the home owners are adequately
housed, and exclude the home owners from the installations' rental housing
requirements.

10 See GAO-02-624, GAO-01-889, and Inspector General Report No. 98-006.

11 See Memorandum for Secretaries of the Military Departments Directors of
the Defense Agencies, Subject: Housing Requirements Determination Process
Policy Guidance, the Deputy Secretary of Defense (Washington, D.C.: Jan.
8, 2003).

    Prior GAO Reports on the Military Family Housing Program

Since 1996, we have issued several reports on DOD's family housing program
that addressed the overall program, housing allowances, military housing
requirements, and the military housing privatization initiative.

o  	In September 1996, we reported that the family housing program allowed
significant differences in the housing benefit provided to servicemembers
of the same paygrade depending on whether they lived in military-owned or
community housing because of the differences in out-of-pocket costs paid
for housing.12 DOD's initiative to reduce out-of-pocket costs to zero by

2005 will eliminate this inequity.

o  In July 1998, we reported on several concerns related to the new
military

housing privatization program.13 These concerns included (1) whether
privatization would result in significant cost savings and whether the
long contract terms of many projects might result in building housing that
will not be needed in the future; (2) whether controls were adequate to
protect the government's interests in the event developers might not
operate and maintain the housing as expected; and (3) whether DOD would
face certain problems if privatized housing units were not fully used by
military members and were subsequently rented to civilians, as the
contracts permit.

o  	In March 2000, we reported that initial implementation progress for
the privatization program was slow, the services' life-cycle cost analyses
provided inaccurate cost comparisons because DOD had not issued
standardized guidance for preparing the analyses, and DOD lacked a plan
for evaluating the effectiveness of the program.14 As DOD subsequently
quickened the pace of family housing privatization, it issued standard
guidance for privatization life-cycle cost analyses and developed a
program evaluation plan.

o  	In May 2001, we reported on the results of our analysis of selected
results from a broad-based 1999 survey of active duty personnel.15 We
noted that

12 U.S. General Accounting Office, Military Family Housing: Opportunities
Exist to Reduce Costs and Mitigate Inequities, GAO/NSIAD-96-203
(Washington, D.C.: Sept. 13, 1996).

13 U.S. General Accounting Office, Military Housing: Privatization Off to
a Slow Start and Continued Management Attention Needed, GAO/NSIAD-98-178
(Washington, D.C.: July 17, 1998).

14 U.S. General Accounting Office, Military Housing: Continued Concerns in
Implementing the Privatization Initiative, GAO/NSIAD-00-71 (Washington,
D.C.: Mar. 30, 2000).

15 U.S. General Accounting Office, Military Personnel: Higher Allowances
Should Increase Use of Civilian Housing, but Not Retention, GAO-01-684
(Washington, D.C.: May 31, 2001).

although increasing the housing allowance to eliminate out-of-pocket costs
should help satisfy servicemember preferences and increase servicemember
demand for community housing, DOD should not expect a substantial increase
in retention to result solely from increasing housing allowances.

o  	In August 2001, we reported that despite earlier recommendations, DOD
had not implemented a standard process for determining military housing
requirements.16 In that report, we pointed out that the initiative to
increase

housing allowances heightened the urgency for a consistent process,
because the initiative could lessen the demand for military housing by
making housing in local communities more affordable. In January 2003, DOD
approved the revised family housing requirements determination process
addressed in this report.

o  In June 2002, we reported that by investing about $185 million in the
first

10 family housing privatization projects, DOD should obtain housing
improvements that would have required about $1.19 billion in military
construction funds had only government funds been used.17 We also noted
that privatization projects were supported by inconsistent and
questionable needs assessments and that the overall requirement for
military housing was not well-defined. Further, although DOD had included
provisions in project contracts designed to protect the government's
interests, our report identified several areas where DOD could further
enhance protections to the government. DOD responded by outlining ongoing
and planned management actions to address the concerns noted in the
report.

Similar to information we previously reported, our analysis of fiscal year
2004 estimated housing costs showed that the government's most economical
option for meeting military family housing needs continues to be reliance
on local community housing with payment of housing allowances. Although
costs and other factors have changed over the past 10 years, the results
of our analysis are consistent with similar analyses performed in the
mid-1990s and show that DOD's policy of relying primarily on local
community housing continues to be cost-effective. We estimated that the
cost difference to the government for each family that lives in local
community housing, instead of military-owned housing, is about $5,400 less
annually. The difference for each family that lives in local

  Community Housing Remains the Least Costly Option for Meeting Military Family
  Needs

16 See GAO-01-889. 17 See GAO-02-624.

community housing, instead of military privatized housing, is about $3,100
less annually. The cost differences are primarily due to three reasons.
First, the government pays significantly less federal impact aid for
military dependents educated in local schools when they live in community
housing, which is subject to local property taxes. Second, according to
DOD officials, the private sector generally can build, operate, and
maintain a family housing unit at less cost than the government. Third,
according to DOD officials, other factors possibly affect cost differences
such as differences in construction specifications and the size of
privatized, military-owned, and community housing units rented by military
families.

    Previous Cost Comparisons of Housing Options

In 1993, the Congressional Budget Office issued a report on military
family housing that included an analysis comparing the average annual cost
of a military-owned housing unit with the cost of a community housing unit
obtained by a military family.18 The comparison showed that in the long
run the government spent $5,500 more annually when military-owned housing
was provided instead of paying an allowance for a family to live in
community housing. In response to the report, DOD compared the same costs.
Because of some differences in the assumptions and data used for some cost
elements, such as long-term capital investment and federal impact aid
costs, DOD's estimates differed somewhat. Nevertheless, DOD also estimated
that the reduced costs to the government when families used community
housing were significant-about $3,200 per family annually. Details from
these analyses are shown in table 1.

18 See Military Family Housing in the United States.

Table 1: Prior Estimates of Annual Government Costs for Military-Owned and
                           Community Housing Options

Then-year dollars

1993 Congressional Budget Office study 1994 DOD study

Category

Cost per family Difference Cost per family Difference

             Military-owned housing option Community housing option

Operations and maintenance                  $6,200                  $6,505 
Capital investment                          4,900                    2,803 
Federal impact aid                          1,900                    1,478 
Total                                      $13,000                 $10,786 

           Housing allowance           $7,500              $7,506   
          Federal impact aid                  0              62     
     DOD housing referral services            0              37     
                 Total                 $7,500              $7,605   
            Cost difference                      $5,500                $3,181 

Sources: Congressional Budget Office, Military Family Housing in the
United States (Washington, D.C.: September 1993) and U.S. General
Accounting Office, Military Family Housing: Opportunities Exist to Reduce
Costs and Mitigate Inequities, GAO/NSIAD-96-203 (Washington, D.C.: Sept.
13, 1996).

The cost differences in these analyses were primarily caused by three
factors. First, in the mid-1990s, prior to the initiative to eliminate
out-of-pocket costs, military families living in community housing
typically paid about 19 percent of their housing costs out of pocket
because housing allowances covered about 81 percent of average housing
costs. Thus, in comparison to military-owned housing where the government
paid all housing and utility costs and families paid no out-of-pocket
costs, the government's annual cost for families living in community
housing was smaller. Second, the federal impact aid paid by the Department
of Education to local governments to help cover the cost of educating
dependents of military families differed depending on where families
lived. When military families lived in community housing, a relatively
small amount of federal impact aid was paid for each student because the
housing was subject to local property taxes, which can be used to help pay
for schools. When families lived in military-owned housing, a
significantly higher amount of federal impact aid was typically paid
because the property was not subject to local property taxes. Third, the
Congressional Budget Office concluded that the private sector can build,
operate, and maintain housing more economically than DOD for reasons
including DOD's higher project contracting and oversight costs, higher
labor costs,

and more detailed regulations and constraints on housing design and
construction.

    Relying on Community Housing Continues to Be the Least Costly Option for
    Meeting Military Family Housing Needs

Because DOD had not updated its 1994 study of housing costs, we reviewed
the current costs of each housing option to determine whether reliance on
community housing continues to be the government's most economical option
in view of family housing program changes since the mid-1990s. As shown in
table 2, our review showed that, even though housing allowances have
increased significantly and the new privatized housing option is less
costly than the military-owned housing option, the community housing
option continues to be the federal government's least costly option for
meeting military family housing needs.19 Compared to the cost of
military-owned and privatized housing, the government will typically spend
about $5,400 and $3,100 less, respectively, each year for each family that
lives in community housing.

19 See note 5.

     Table 2: Estimated Annual Government Costs for Housing Options in 2004

Fiscal year 2004 dollars

Category

Cost per family Difference

                     Costs of military-owned housing option

Operations and maintenance $9,006

Capital investment 6,923

Federal impact aid 3,106

           Total $19,035 Costs of military privatized housing option

Housing allowance $13,433

Federal impact aid 3,106

Other net privatization costs 165

Total $16,704

              Difference with military-owned housing option $2,331

                       Costs of community housing option

Housing allowance $13,433

Federal impact aid 149

DOD housing referral services 34

Total $13,616

Difference with privatized housing option $3,088

Difference with military-owned housing option $5,419

Source: GAO's analysis of DOD data except for federal impact aid.

Note: Federal impact aid estimates were obtained from the Congressional
Research Service's report: Impact Aid for Public K-12 Education: General
Overview and Current Status, RL31885 (Washington, D.C.: May 6, 2003).

According to DOD officials, the privatization option costs less than the
military-owned housing option primarily because of the efficiencies gained
from the use of private sector housing construction and management
expertise and the use of local building specifications instead of
sometimes more stringent military construction building specifications.
The cost difference between the privatization option and the community
housing option is primarily the result of differences in federal impact
aid costs. According to DOD officials, because most privatized housing is
on military-owned land, which is not subject to local taxes, federal
impact aid is normally paid at the higher rate when dependents of
servicemembers living in this housing are educated by local public
schools. DOD officials also noted that because DOD's housing standards
differ for

  Family Housing Requirements Assessments Are Inconsistent and Questionable

servicemembers living in privatized and government-owned housing and for
those living in community housing, cost differences might be affected by
differences in the average size of privatized or military-owned housing
units compared to the average size of community housing units rented by
military families. Specifically, DOD considers family size when
determining military housing requirements and assigning servicemembers to
government housing, but ignores family size when determining housing
allowances for servicemembers living in local communities. As a result,
servicemembers in lower paygrades with larger families are entitled to a
residence with more bedrooms in privatized or military-owned housing than
they are able to afford in the local community on the basis of their
housing allowance. However, detailed data is not available to determine
whether the average size of privatized and military-owned housing units
exceeds the average size of community housing units rented by military
families.

Although DOD's revised housing requirements determination process
represents a significant step in the right direction, the process has yet
to achieve one of its key objectives-consistent and reliable assessments
of military family housing needs. Determining an installation's housing
needs requires a complex analysis involving many subjective factors and
assumptions, and DOD did not provide the services with timely detailed
guidance addressing these matters or the level of oversight needed as the
services began to use the revised requirements process. In the absence of
detailed guidance, we found that the services used inconsistent methods
and sometimes questionable data sources and assumptions when determining
family housing needs at various installations. Collectively, these factors
could result in installation housing requirements analyses generating
higher or lower on-base housing needs than warranted. Without consistent
and reliable housing requirements assessments, DOD cannot know with
assurance how many housing units it needs, where it needs them, whether
its housing investment decisions are justified, and whether its overall
housing costs are minimized.

DOD Has Not Issued The January 2003 memorandum that announced the revised
housing Timely Detailed Guidance requirements determination process
directed the Deputy Under Secretary for Implementing the of Defense
(Installations and Environment) to consult with the military

services and prepare necessary guidance to implement the revisedRevised
Housing process. Determining an installation's housing requirement
involves aRequirements complex analysis of military housing needs and the
ability of local Determination Process communities to meet those needs,
and DOD officials understood that

detailed guidance was needed to help ensure consistency and accuracy as
the services implemented the revised process. However, DOD officials
stated that developing detailed guidance has taken more time and
coordination than expected and that final guidance might not be ready
until 2005.

Without detailed DOD guidance, each service independently decided how to
implement the revised requirements determination process and what level of
oversight would be provided to the process and to the housing requirements
analyses. Thus, the services independently decided how to address many
subjective factors, estimates, assumptions, and methodologies associated
with each housing analysis, including methods and assumptions (1) to
determine an installation's family housing requirement considering
projected base population, servicemember rank, family size, and associated
bedroom needs; (2) to project changes in the supply and availability of
local community housing; (3) to estimate how many military families are
home owners and therefore will not need community rental housing; (4) to
identify unsuitable community housing units that are excluded from
consideration for military family use; and (5) to estimate the competition
between civilian and military families in securing available community
housing. With the services independently deciding how to address these
factors, it is not surprising that the services adopted different methods
for determining installation housing needs as they began implementing the
revised process.

    Housing Requirements Analyses Use Inconsistent Methodologies, Questionable
    Assumptions, and Outdated Information

As illustrated below, our review of the services' housing requirements
analyses for 12 installations found areas of concern, including use of
inconsistent methodologies, questionable assumptions, and outdated
information. Most of the analyses appeared to underestimate the ability of
local communities to meet military family housing needs and thus
overestimate the need for more costly military-owned or privatized
housing.

o  	Ten of the 12 analyses used outdated information from military housing
expenditure surveys completed from 1994 to 1997 as the basis for

estimating the number of military family home owners.20 Since 1997,
however, several factors have changed to make home ownership more likely
for military families, such as significantly increased housing allowances,
decreased average out-of-pocket housing costs, and lower mortgage interest
rates. Yet, the analyses assumed that the home ownership rates reported in
1997 would remain constant through the end of each study
period-specifically until 2006 to 2008. At Shaw Air Force Base, for
example, the housing requirements analysis used 1994 to 1997 data to
estimate that 785 of the 3,151 military families at the installation in
2002 were home owners and that approximately the same number, 784, would
be home owners in 2007. Because underestimating the number of military
family home owners can result in overestimating the need for more costly
military-owned or privatized housing, accurate estimates are important and
the use of outdated information to make home owner estimates appears
unreasonable.

o  	Eight of the 12 analyses eliminated suitable community rental housing
units from potential use by military families simply because the units'
rental costs were too low. These analyses assumed that servicemembers
would spend at least a stated minimum amount-either their full housing
allowance, an amount based on spending patterns identified from housing
surveys completed in 1997, or an amount determined on another basis-on
housing costs and would not rent suitable local housing that cost less
than this amount. For example, the analysis for Fort Eustis eliminated
from consideration over 3,800 suitable two-, three-, and four-bedroom
community housing units because they rented for less than $600 a month-the
approximate amount of the housing allowance for servicemembers in the
lowest paygrades at this installation. Also, the analysis for Naval
Station Everett eliminated from consideration over 12,500 suitable two-,
three-, and four-bedroom community housing units because they rented for
less than $800 a month-the minimum rental cost considered appropriate,
which was about 80 percent of the maximum allowable housing cost for
servicemembers in the lowest paygrades at this installation. Similarly,
the analysis for Luke Air Force Base eliminated from consideration over
23,000 suitable two-, three-, and four-bedroom community housing units
because they rented for less than about $700 a month-the minimum rental
cost considered appropriate in the housing

20 Prior to 1998, DOD conducted an annual survey to collect housing
expenditure information because housing allowances were partially
established on the basis of the amounts servicemembers actually spent for
housing and utilities. Beginning in 1998, the basis for housing allowances
changed to the actual median costs of local housing in various geographic
areas of the country. DOD conducted the last housing expenditure survey in
1997.

analysis based on military family spending patterns identified in 1997
survey data. However, servicemembers are not required to spend their
entire housing allowance on housing, and if they spend less, they can keep
the difference. One of the reasons that DOD changed the basis for
determining housing allowances in 1998 from servicemember housing
expenditures to actual housing costs was that servicemembers, particularly
in high-cost areas, often spent less than expected on housing. Further,
because housing allowances are determined on the basis of the median
rental cost in each geographic area, half of the rental units in the area
will normally rent for less than the housing allowance amount plus the
average out-of-pocket costs. For these reasons, the methodology used in
the 8 analyses appears questionable and could result in underestimating
the ability of the local communities to meet family housing needs and
overestimating the need for more costly military-owned or privatized
housing.

o  	Although DOD's guidance states that normally no more than 20 percent
of a local community's total rental units would likely be unsuitable for
military families, 3 of the 12 analyses estimated that more than 20
percent were unsuitable.21 Specifically, after eliminating rental mobile
homes, these analyses eliminated from 30 to 50 percent of the local
communities' remaining rental units from consideration for use by military
families because the units were judged to be unsuitable. According to the
analyses, the suitability estimates were primarily based on interviews
with local civilian housing officials, census and similar data, opinions
from installation officials on areas that should be excluded from
consideration and drive-by observations. However, the analyses did not
include detailed information to explain or support their estimates. To
illustrate, the analysis for Fort Sam Houston estimated that 50 percent of
the approximately 205,000 rental units in the local communities
surrounding the installation were unsuitable for use by military families
because of quality or safety concerns. Similarly, the analysis for Dyess
Air Force Base estimated that over 41 percent of the 22,000 local
community rental units

21 Memorandum for Assistant Secretaries of the Army (Installations and
Environment), Navy (Installations and Environment) and Air Force
(Installations, Environment and Logistics), Subject: Standardization of
Housing Requirements Determination for Housing Privatization Projects in
Hawaii, Principal Assistant Deputy Under Secretary of Defense
(Installations and Environment) (Washington, D.C.: Mar. 27, 2003). The
memorandum discussed results from the services' joint effort to apply the
revised process in Hawaii. On the basis of an analysis of the results of
this effort and in an effort to apply lessons learned, the memorandum
noted that future housing requirements assessments should normally exclude
no more than 20 percent of a local community's total rental units due to
unsuitability criteria. DOD officials stated that the 20 percent criterion
is used after rental mobile homes in local market area have been excluded
from consideration.

were unsuitable for use by military families because of quality or safety
concerns. Because it was beyond the scope of our review, we did not
determine the validity of the suitability estimates. However, DOD
headquarters officials stated that accurate estimates are critical to the
results of the housing requirements process. They also stated they are
suspect of unsuitable estimates that exceed 20 percent. If more rental
units are declared unsuitable than is appropriate, housing analyses could
underestimate the ability of communities to meet family housing needs and
overestimate the need for more costly military-owned or privatized
housing.

o  	In defining the local community housing market area surrounding each
installation, 9 of the 12 analyses did not use the definition prescribed
in the revised process. The revised process stated that the services
should use the same housing market area to determine housing requirements
as DOD uses to determine housing allowances.22 The analyses that did not
follow this guidance defined the local housing market area in four
different ways. For example, the housing analysis for Fort Sam Houston
defined the market area as the communities within 20 miles of the
installation and the analysis for Marine Corps Air Station Yuma defined
the market area as the communities within a 1-hour commute of the
installation. In neither case did the market area used match the area used
to determine housing allowance rates. Differences in the way the local
housing market is defined can cause over-or underestimates of a local
community's ability to meet family housing needs.

o  	Six of the 12 analyses included an assessment of the housing
requirements for single servicemembers who live off base. These analyses
assumed that single servicemembers who live off base competed with married
servicemembers and civilians for available community housing. The other
six analyses assessed only family housing needs and thus assumed that
single servicemembers did not compete with married servicemembers for
community housing. The two approaches were inconsistent and resulted in
different assessments of family housing needs. Also, the housing analysis
for Naval Station Everett included single servicemembers but
inappropriately assumed that single personnel in paygrade E4 lived off
base and that 269 single servicemembers in paygrade E4 would require
either a two-bedroom or a three-bedroom housing unit in 2008. However, the
Navy requires single E4 personnel with less than 4 years of service to
live in military barracks, and the housing allowance standard for single
E4

22 DOD determines housing allowances based on the local cost of housing in
about 350 geographic areas in the United States. Each geographic area,
termed a military housing area, is defined by a set of zip codes
surrounding an installation or a metropolitan area that includes housing
markets generally within 20 miles or an hour's drive in rush hour traffic.

personnel living off base is a one-bedroom unit, not a two- or a
three-bedroom unit. The faulty assumptions reduced the number of community
rental units considered available to military families at the installation
and increased the estimated requirement for military-owned or privatized
housing.

In combination, the use of inconsistent methodologies, questionable
assumptions, and outdated information has resulted in inconsistent and
questionable estimates of on-base military housing needs, which may result
in under reliance on community housing. The results from our review also
raise questions concerning the adequacy of the services' reviews of
completed analyses for accuracy and compliance with criteria. Service
officials stated that they provide guidance to and approve the assumptions
used by the contractors selected to perform the analyses. Also, they
stated that installation officials review the initial results of the
analysis for their installation prior to the analysis being finalized.
Nevertheless, the use of inconsistent and questionable data sources,
assumptions, and methodologies continues to exist. See appendix II for
additional details on all 12 housing requirements analyses.

DOD's revised housing requirements determination process provides the
services several exceptions to the policy of maximizing reliance on local
community housing near military installations that could further detract
from reliance on local housing. The basis for some of these exceptions was
the consensus of DOD and service military housing officials rather than
military mission requirements, results from analytical studies, or
evidence that retention would be negatively affected if more families
lived in local housing. Consequently, the basis for such judgments was not
always clear and thus subject to question. If achievable, reducing or
narrowing the scope of any of the exceptions could increase reliance on
community housing and reduce family housing costs.

  DOD's Revised Housing Requirements Determination Process Does Not Maximize
  Reliance on Community Housing

    Instances When the Services Are Not Required to Use Available Community
    Housing

The Deputy Secretary of Defense's memorandum that announced the revised
housing requirements determination process emphasized DOD's long-standing
policy requiring primary reliance on the local communities surrounding
installations for housing military families. The memorandum stated that
because housing is not a core defense function and adequate capability
exists in the private sector to perform this function, DOD will consider
the construction, operation, and maintenance of military housing only when
the private sector is not capable of meeting family housing needs.

However, even in view of these policy statements, the memorandum also
included guidance that provided four instances when the services are not
required to use available, suitable community housing. Specifically, the
guidance stated that notwithstanding the overall policy to look first to
local community housing, the services may retain or build military housing
by applying the following exceptions to the use of local community housing
at each installation.23

o  	Exception for key and essential personnel. The services may provide
military family housing for servicemembers identified as key and essential
personnel at each installation.

o  	Exception to establish a military housing community. The services may
include up to 10 percent of the projected number of military families in
each paygrade as a military housing requirement to establish a minimum
military housing community at each installation.

o  	Exception to provide targeted economic relief. The services may
include as a military housing requirement housing to accommodate families
when the servicemembers' regular military compensation falls below 50
percent of the local median income in the community surrounding an
installation.24

o  	Exception for historic housing. The services may include as a military
housing requirement any historic family housing units that an installation
is obligated to retain in government ownership by agreement, regulation,
or other requirement.

As discussed below, application of these exceptions individually or
collectively could result in greater reliance on on-base family housing
than is warranted in view of DOD's policy of reliance on local community
housing. According to DOD and service officials, the exceptions were
formulated during the years-long effort to develop a revised housing
requirements determination process. The services believed that there were
legitimate reasons for an installation to maintain some on-base military
family housing regardless of the availability of community housing, for
example, the mission-related need to house on-base personnel identified as
key and essential. To recognize and address these reasons, DOD and

23 The guidance stated that the exceptions may not be used cumulatively.
The services may use the exception that produces the greatest military
housing requirement for each paygrade, but they may not combine exceptions
within paygrades to create a larger military housing requirement.

24 Regular military compensation is considered the military equivalent of
civilian salaries and includes servicemembers' basic pay, allowances for
housing and subsistence, and the tax advantage of the tax-free housing and
subsistence allowances.

service officials reached consensus that the four exceptions to the
overall policy should be an essential part of the revised process.

    Basis for Three of the Four Exceptions Appears Subject to Question

      Basis for Military Housing Community Exception Appears Subject to Question