Federal Real Property: Further Actions Needed to Address	 
Long-standing and Complex Problems (22-JUN-05, GAO-05-848T).	 
                                                                 
In January 2003, GAO designated federal real property as a	 
high-risk area due to long-standing problems with excess and	 
underutilized property, deteriorating facilities, unreliable real
property data, and costly space challenges. Federal agencies were
also facing many challenges protecting their facilities due to	 
the threat of terrorism. This testimony discusses the problems	 
with federal real property, particularly those relating to excess
and deteriorating property, and what needs to be done to address 
them.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-848T					        
    ACCNO:   A27497						        
  TITLE:     Federal Real Property: Further Actions Needed to Address 
Long-standing and Complex Problems				 
     DATE:   06/22/2005 
  SUBJECT:   Federal facilities 				 
	     Federal property					 
	     Federal property management			 
	     Real property					 
	     Surplus federal property				 
	     Facility security					 
	     Agency missions					 
	     Financial analysis 				 
	     Strategic planning 				 
	     High Risk Series 2003				 
	     High Risk Series 2005				 

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GAO-05-848T

                 United States Government Accountability Office

GAO Testimony

Before the House Committee on Government Reform

For Release on Delivery

Expected at 10:00 a.m. EDT FEDERAL REAL

Wednesday, June 22, 2005

PROPERTY

      Further Actions Needed to Address Long-standing and Complex Problems

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

GAO-05-848T

[IMG]

June 22, 2005

FEDERAL REAL PROPERTY

Further Actions Needed to Address Longstanding and Complex Problems

                                 What GAO Found

The federal real property portfolio is vast and diverse-over 30 agencies
control hundreds of thousands of real property assets worldwide, including
facilities and land worth hundreds of billions of dollars. Unfortunately,
many of these assets are no longer effectively aligned with, or responsive
to, agencies' changing missions. Further, many assets are in an alarming
state of deterioration; agencies have estimated restoration and repair
needs to be in the tens of billions of dollars. Compounding these problems
are the lack of reliable governmentwide data for strategic asset
management, a heavy reliance on costly leasing, instead of ownership, to
meet new needs, and the cost and challenge of protecting these assets
against terrorism.

In February 2004, the President added the Federal Asset Management
Initiative to the President's Management Agenda and signed Executive Order
13327. The order requires senior real property officers at specified
executive branch departments and agencies to, among other things,
prioritize actions needed to improve the operational and financial
management of the agency's real property inventory. A new Federal Real
Property Council at OMB has developed guiding principles for real property
asset management and is also developing performance measures, a real
property inventory database, and an agency asset management planning
process. In addition to these reform efforts, some agencies such as the
Departments of Defense (DOD) and Veterans Affairs (VA) have made progress
in addressing long-standing federal real property problems. For example,
DOD is preparing for a round of base realignment and closures in 2005.
Also, in May 2004, VA announced a wide range of asset realignment
decisions.

These and other efforts are positive steps, but it is too early to judge
whether the administration's focus on this area will have a lasting
impact. The underlying conditions and related obstacles that led to GAO's
high-risk designation continue to exist. Remaining obstacles include
competing stakeholder interests in real property decisions, various legal
and budgetrelated disincentives to optimal, businesslike, real property
decisions, and the need for better capital planning among agencies.

    Examples of Vacant GSA, VA, and USPS Facilities United States Government
                             Accountability Office

Mr. Chairman and Members of the Committee:

We welcome the opportunity to testify on the 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, and we issued an update
on this area in January 2005.1 My testimony is based on our January 2003
and January 2005 high-risk reports and other GAO reports on real property
issues. My testimony focuses on the problems with federal real property,
particularly those relating to excess and deteriorating property, and what
needs to be done to address them.

                                    Summary

As we reported in February 2005, the physical footprint of agencies is
outmoded, which reflects the failure to take advantage of opportunities
provided by new technology to modernize operations and the changing nature
of agencies' missions.2 More than 30 federal agencies control about $328
billion in real property assets worldwide, and maintain a "brick and
mortar" buildings and/or office presence in 11 regions across the nation.
But this organization and infrastructure reflects a business model and the
technological and transportation environment of the 1950s. Many of these
assets and organizational structures are no longer needed; others are not
effectively aligned with, or responsive to, agencies' changing missions;
and many assets are in an alarming state of deterioration, potentially
costing taxpayers tens of billions of dollars to restore and repair. In
addition, federal agencies face problems with their real property data and
protecting their facilities due to the threat of terrorism.

Since our designation of this area as high-risk in January 2003, some
important efforts to address these problems have been initiated by the

1GAO, 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, GAO, High-Risk Series: An Update, GAO-03-119
(Washington, D.C.: Jan. 2003); and GAO, High-Risk Series: An Update,
GAO-05-207 (Washington, D.C.; Jan. 2005); these reports are intended to
help the new Congress focus its attention on the most important issues and
challenges facing the federal government.

2GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-352T (Washington, D.C.; Feb. 16, 2005).

administration and executive agencies, including a Presidential Executive
Order3 on real property reform and the Office of Management and Budget's
(OMB) development of guiding principles for real property asset
management. The executive order is clearly a positive step. However, it
has not been fully implemented, and further actions are necessary to
address the underlying problems and related obstacles, including competing
stakeholder interests in real property decisions and legal and
budget-related disincentives to optimal, businesslike, real property
decisions. GAO continues to believe that there is a need for a
comprehensive transformation strategy for real property to build upon the
executive order. More specifically, the additional step of developing a
transformation strategy would provide decisionmakers with a road map of
actions for addressing the underlying obstacles, assessing progress
governmentwide, and for enhancing accountability for related actions.

If actions resulting from the transformation strategy and other efforts
address the long-standing problems 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, likely organizational structure, geographic presence, 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. According to its
fiscal year 2003 financial statements, the federal government currently
owns billions of dollars in real property assets. The Department of
Defense (DOD), U.S. Postal Service (USPS), the General Services
Administration (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

  The Federal Real Property Environment

               3Presidential Executive Order 13327, Feb. 6, 2004.

  The Federal Government Has Many Assets it Does Not Need

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; and GSA is responsible for the acts'
implementation.4 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.

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
several 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, gave DOD the authority for another
round of base realignments and military installation closures in 2005.

4For 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.

In addition, 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 co-location 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.5 In April 2005 we reported that USPS faces
future financial challenges due to its declining First-Class Mail volume
and has excess capacity in its current infrastructure that impedes
efficiency gains.6 USPS has stated that one way to increase efficiency is
to realign its processing and distribution infrastructure.

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.

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. 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

5President'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).

6GAO, U.S. Postal Service: The Service's Strategy for Realigning Its Mail
Processing Infrastructure Lacks Clarity, Criteria, and Accountability,
GAO-05-261 (Washington, D.C.: Apr. 8, 2005).

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.

  The Federal Portfolio Is in an Alarming State of Deterioration

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.
In recent discussions, a GSA official said that its $5.7 billion backlog,
which we reported in 2003, has grown to between $6 and $7 billion.7 In
recognition of the importance of addressing deferred maintenance, federal
accounting standards require agencies to report deferred maintenance as
supplementary information in their financial statements. As of September
30, 2004, the government's consolidated financial statements showed a
deferred maintenance cost range of $13.4 billion to $25.3 billion for the
asset category General Property, Plant, and Equipment-which includes
federal real property.

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. 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.8 Too little funding to
adequately maintain facilities is also aggravated by DOD's acknowledged
retention of facilities in excess of its needs.

7GAO-03-122.

8GAO, 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).

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.9 As discussed above, the
overall cost could also be reduced 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 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 those at national parks
and museums-are not well maintained or in generally poor condition.

As we reported in October 2003, in addition to the difficulties with
excess and deteriorated property, the federal government faces other
longstanding real property-related problems.10 For example, there is a
lack of reliable and useful real property data that are needed for
strategic decision-making. In April 2002, we reported that the
government's only central source of descriptive data on the makeup of the
real property inventory, GSA's worldwide inventory database and related
real property reports, contained data that were unreliable and of limited
usefulness.11 GSA agreed with our findings and has revamped this database
and

  Other Long-standing Problems Continue to Exist

9GAO, Federal Buildings: Funding Repairs and Alterations Has Been a
Challenge- Expanded Financing Tools Needed, GAO-01-452 (Washington, D.C.;
Mar. 20, 2001).

10GAO, Federal Real Property: Actions Needed to Address Long-standing and
Complex Problems, GAO-04-119T (Washington, D.C.: Oct. 1, 2003).

11GAO, Federal Real Property: Better Governmentwide Data Needed for
Strategic Decisonmaking, GAO-02-342 (Washington, D.C.: Apr. 16, 2002).

produced a new report on the federal inventory; we have not evaluated
GSA's revamped database and related report. In addition to the problems
with the worldwide inventory, in February 2005, we reported that as in the
7 previous fiscal years, certain material weaknesses12 in internal control
and in selected accounting and financial reporting practices resulted in
conditions that continued to prevent us from being able to provide an
opinion as to whether the consolidated financial statements of the U.S.
government were fairly stated in conformity with U.S. generally accepted
accounting principles.13 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.

In addition to problems with unreliable real property data, the government
continues to rely on costly leasing for much of its space needs. 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-purchase-under which payments are spread
over time and ownership of the asset is eventually transferred to the
government-are generally less costly than using ordinary operating leases
to meet long-term space needs.14 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. Operating leases have become an attractive
option in part because they generally look cheaper in any given year, even
though they are generally more costly over time. Budget scorekeeping rules
allow these costly operating leases to look cheaper in the short term and
have encouraged an overreliance on them for satisfying long-term space
needs. Finding a solution for this problem has been difficult; however,
change is needed because the current practice of

12A material weakness is a condition that precludes the entity's internal
control from providing reasonable assurance that misstatements, losses, or
noncompliance material in relation to the financial statements or to
stewardship information would be prevented or detected on a timely basis.

13GAO, Fiscal Year 2004 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing Our
Nation's Future Fiscal Challenge, GAO-05-284T (Washington, D.C.: Feb 9,
2005).

14In an operating lease, the government makes periodic lease payments over
the specified length of the lease in exchange for the use of the property.

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.

Federal agencies also face challenges in protecting their facilities due
to the threat of terrorism. Terrorism is a major threat to federally owned
and leased real property, 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 2001 attacks, 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 bollards. 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.

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

In February 2004, the President added the Federal Asset Management
Initiative to the President's Management Agenda and signed Executive Order
13327 to address challenges in this area. The order requires senior real
property officers at specified executive branch departments and agencies15
to, among other things, develop and implement an agency asset management
plan; identify and categorize all real property owned, leased, or
otherwise managed by the agency; prioritize actions needed to improve the
operational and financial management of the agency's real property
inventory; and make life-cycle cost estimations associated with the
prioritized actions. In addition, the senior real property officers are
responsible, on an ongoing basis, for monitoring the real property assets
of the agency. The order also established a new Federal Real Property
Council (the Council) at OMB.

In April 2005, OMB officials updated us on the status of the
implementation of the executive order. According to these officials, all
of the senior real property officers are in place, and the Council has
been working to identify common data elements and performance measures to

15See 31 U.S.C. S: 901(b) (1) and (b) (2) for a list of the executive
branch departments and agencies required to establish a senior real
property officer.

be captured by agencies and ultimately reported to a governmentwide
database. In addition, OMB officials reported that agencies are working on
their asset management plans. Plans for the DOD, VA, Energy, and GSA have
been completed and approved by OMB. The Council has also developed guiding
principles for real property asset management. These guiding principles
state that real property asset management must, among other things,
support agency missions and strategic goals, use public and commercial
benchmarks and best practices, employ life-cycle cost-benefit analysis,
promote full and appropriate utilization, and dispose of unneeded assets.

In addition to these reform efforts, Public Law 108-447 gave GSA the
authority to retain the net proceeds from the disposal of federal property
for fiscal year 2005 and to use such proceeds for GSA's real property
capital needs. Also, Public Law 108-422 established a capital asset fund
and gave VA the authority to retain the proceeds from the disposal of its
real property for the use of certain capital asset needs such as
demolition, environmental clean-up, repairs, and maintenance to the extent
specified in appropriations acts. And, agencies such as DOD and VA have
made progress in addressing long-standing federal real property problems
and governmentwide efforts in the facility protection area are
progressing. For example:

o  	VA has established a process called Capital Asset Realignment for
Enhanced Services (CARES) to address its aging and obsolete portfolio of
health care facilities. In March 2005, we reported that through CARES, VA
identified 136 locations for evaluation of alternative ways to align
inpatient services-99 facilities had potential duplication of services
with another nearby facility or low acute patient workload.16 VA made
decisions to realign inpatient health care services at 30 of these
locations. For example, it will close all inpatient services at 5
facilities. VA's decisions on inpatient alignment and plans for further
study of its capital asset needs are tangible steps in improving
management of its capital assets and enhancing health care. Accomplishing
its goals, however, will depend on VA's success in completing its
evaluations and implementing its CARES decisions to ensure that resources
now spent on unneeded capital assets are redirected to health care.

16GAO, VA Health Care: Important Steps Taken to Enhance Veterans' Care By
Aligning Inpatient Services with Projected Needs, GAO-05-160 (Washington,
D.C.: Mar. 2, 2005).

o  	In DOD's support infrastructure management area, which we identified
as high-risk in 1997, DOD has made progress and expects to continue making
improvements. In May 2005, we testified that DOD implemented the
recommendations from the previous BRAC rounds within the 6-year period
mandated by law.17 As a result, DOD estimated that it reduced its domestic
infrastructure by about 20 percent, as measured by the cost to replace the
property; about 90 percent of unneeded BRAC property is now available for
reuse. Substantial net savings of approximately $29 billion have been
realized over time. DOD's expectations for the 2005 BRAC round include
further eliminating unneeded infrastructure and achieving savings. It also
expects to use BRAC to further transformation and related efforts such as
restationing of troops from overseas as well as efforts to further joint
basing among the military services. The results of the 2005 BRAC round
will be known later this year, once the legislatively mandated Defense
Base Closure and Realignment Commission completes its work and its
recommendations are considered by the President and the Congress.

o  	In light of the need to invest in facility protection since September
11, 2001, funding available for repair and restoration and preparing
excess property for disposal may be further constrained. The Interagency
Security Committee (ISC), which is chaired by the Department of Homeland
Security (DHS), is tasked with coordinating federal agencies' facility
protection efforts, developing standards, and overseeing implementation.
In November 2004, we reported that ISC had made progress in coordinating
the government's facility protection efforts by, for example, developing
security standards for leased space and design criteria for security in
new construction projects. Despite this progress, we found that its
actions to ensure compliance with security standards and oversee
implementation have been limited. Nonetheless, the ISC serves as a forum
for addressing security issues, which can have an impact on agencies'
efforts to improve real property management.

The inclusion of real property asset management on the President's
Management Agenda, the executive order, and agencies' actions are clearly
positive steps in an area that had been neglected for many years. However,
despite the increased focus on real property issues in recent years, the
underlying conditions-such as excess and deteriorating properties and
costly leasing-continue to exist and more needs to be

17GAO, Military Base Closures: Observations on Prior and Current BRAC
Rounds, GAO-05-614 (Washington, D.C.: May 3, 2005).

done to address various obstacles that led to our high risk designation.
For example, the problems have been exacerbated by competing stakeholder
interests in real property decisions, various legal and budget related
disincentives to businesslike outcomes, and the need for better capital
planning among real property-holding agencies.

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. 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 should 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- 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,18 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.

As you know, GSA is required by law to charge agencies for renting space
in federal office buildings, courthouses, and other assets GSA owns. The
rental receipts are deposited into the Federal Buildings Fund (FBF), a
revolving fund used to fund GSA real property services, including space
acquisition and asset management for federal facilities that are under
GSA's control. Over the years, there have been various efforts to restrict
or exempt agencies from paying rent to GSA for some or all of their space.
This, however, can have a negative impact on the government's ability to
"re-invest" in its portfolio. Currently, the federal judiciary is seeking
such an exemption. This is a very important issue, since it would serve to
provide a precedent with significant governmentwide implications.

More specifically, GSA has historically been unable to generate sufficient
revenue through FBF and has thus struggled to meet the requirements for
repairs and alterations identified in its inventory of owned buildings. We
reported in 2003 that the estimated backlog of repairs had reached $5.7
billion, and consequences included poor health and safety conditions,
higher operating costs, restricted capacity for modern information
technology, and continued structural deterioration. Restrictions imposed
on the rent GSA could charge federal agencies have compounded the agency's
inability to address its backlog in the past. Consequently, we recommended
in 1989 that Congress remove all rent restrictions and not mandate any
further restrictions, and most rent restrictions have been lifted. The GSA
Administrator has the authority to grant rent exemptions, and all of the
current exemptions are limited to single buildings or were granted for a
limited duration. Together, these current exemptions represent about $170
million, a third of the $483 million permanent exemption the judiciary is
requesting from GSA. The judiciary has

18GAO, Executive Guide: Leading Practices in Capital Decision-making,
GAO/AIMD-99-32 (Washington, D.C.: Dec. 1998).

  A Transformation Strategy Is Needed

requested the exemption, equal to about half of its annual rent payment,
because of budget problems that it believes its growing rent payments have
caused. GSA data show that one reason the judiciary's rent is increasing
is that the space it occupies is also increasing. We are currently
studying the potential impact of such an exemption on FBF, however our
past work shows that rent exemptions were a principal reason why FBF has
accumulated insufficient money for capital investment.

The magnitude of real property-related problems and the complexity of the
underlying factors that cause them to persist put the federal 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
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. In addition, a
governmentwide perspective regarding the extent of excess or underutilized
space, deferred maintenance, and the costs of real property would improve
transparency. That is, all stakeholders would know the condition of the
problem and overall, the government could better manage its real property.
Given this, we concluded in our high-risk report and in our update in
January 2005, and still believe that a comprehensive and integrated
transformation strategy for federal real property is needed. Such a
strategy could build upon the executive order by providing decisionmakers
with a road map of actions for addressing the underlying obstacles,
assessing progress governmentwide, and for enhancing accountability for
related actions. Based on input from agencies, the private sector, and
other interested groups, the strategy 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; whether agencies
should keep some of the disposal proceeds to recoup the costs of preparing
properties for disposal; 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 decision-making 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. For example, we at GAO are currently leasing space to the
U.S. Army Corps of Engineers to better utilize our space, generate
revenue, and reduce the Corps' need to lease space from the private
sector. The revenue we receive provides us with an incentive to
efficiently manage our space. 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
propertyholding 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 continue to work
together to develop and enact additional reform legislation to give real
propertyholding 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.

Regarding this Committee's draft legislation known as the "Federal Real
Property Disposal Pilot Program and Management Improvement Act of 2005,"
we believe that the objectives of the legislation and several of its
provisions have strong conceptual merit. For example, it would establish a
pilot program for the expedited disposal of excess, surplus, or
underutilized real property assets identified and would enact many of the
requirements of Executive Order 13227 into law. In particular, pursuing
this pilot program, as outlined in Title I, would allow for assessing
lessons learned and help determine the merits of the program and whether
it should continue. Furthermore, making the requirements of the executive

order law, as outlined in Title II, would serve to elevate their
importance and show that Congress and the administration are unified in
pursuing real property reform. We would respectfully suggest that the
Committee give consideration to including a requirement that a
transformation strategy for federal real property be developed, as we have
recommended.

Solving the problems in this area will undeniably require a
reconsideration of funding priorities at a time when budget constraints
will be pervasive. 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 propertyholding 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 established a new
Federal Real Property Council to address 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.

Mr. 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.

For further information on this testimony, please contact Mark Goldstein
on (202) 512-2834 or at [email protected]. Key contributions to this
testimony were made by Christine Bonham, Daniel Hoy, Anne Izod, Susan
Michal-Smith, and David Sausville.

  Contacts and Acknowledgements

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