Military Housing: Management Issues Require Attention as the	 
Privatization Program Matures (28-APR-06, GAO-06-438).		 
                                                                 
The Department of Defense (DOD) intends to privatize about 87	 
percent of the military-owned housing in the United States by	 
2010. As of December 2005, it had awarded 52 projects to	 
privatize over 112,000 family housing units and had plans to	 
award 57 more projects to privatize over 76,000 more units over  
the next 4 years. The program, begun in 1996, has become DOD's	 
primary means to improve family housing and to meet its housing  
needs when communities near installations do not have enough	 
suitable, affordable housing. Because of expressed interest	 
related to the oversight responsibilities of several committees, 
GAO assessed (1) whether opportunities exist to improve DOD's	 
oversight of awarded housing privatization projects, and (2) to  
what extent projects are meeting occupancy expectations.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-438 					        
    ACCNO:   A52647						        
  TITLE:     Military Housing: Management Issues Require Attention as 
the Privatization Program Matures				 
     DATE:   04/28/2006 
  SUBJECT:   Accountability					 
	     Data integrity					 
	     Housing programs					 
	     Military housing					 
	     Military personnel 				 
	     Performance management				 
	     Privatization					 
	     Program evaluation 				 
	     Government agency oversight			 

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GAO-06-438

     

     * Report to Congressional Committees
          * April 2006
     * Military Housing
          * Management Issues Require Attention as the Privatization Program
            Matures
     * Contents
          * Results in Brief
          * Background
          * Opportunities Exist to Improve the Oversight of Awarded
            Privatization Projects
               * Navy Program Oversight Did Not Identify and Address Some
                 Project Concerns and Reporting Inaccuracies
               * OSD's Primary Program Oversight Report Is of Limited
                 Usefulness
               * Methods for Measuring Servicemember Satisfaction with
                 Privatized Housing Are Not Consistent
          * Lower Than Expected Occupancy Creates Concerns in Some
            Privatization Projects
               * Occupancy Was Below Expectations in Some Projects
               * Lower Than Expected Occupancy Causes Financial Stress and
                 Could Reduce Funds for Future Reinvestment
               * Increased Housing Allowances and Unreliable Needs
                 Assessments Contribute to Occupancy Concerns
          * Conclusions
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * Scope and Methodology
     * Details on 12 Housing Privatization Projects
     * Comments from the Department of Defense
     * GAO Contacts and Staff Acknowledgments

Report to Congressional Committees

April 2006

MILITARY HOUSING

Management Issues Require Attention as the Privatization Program Matures

Contents

Tables

Figures

April 28, 2006Letter

Congressional Committees

The Department of Defense (DOD) intends to privatize about 87 percent of
the military-owned housing in the United States by 2010. Since the
enactment of the National Defense Authorization Act for Fiscal Year 1996,
which provides for private-sector financing, ownership, operation, and
maintenance of military housing,1 privatization has become DOD's primary
means for improving family housing and meeting requirements when the
communities near installations do not have an adequate supply of suitable,
affordable housing. Similar to servicemembers who live in the local
community, servicemembers who choose to live in privatized housing receive
a housing allowance that they use to pay rent and utilities. According to
DOD officials, the purpose of the housing privatization program is to help
improve servicemember quality of life by improving the condition of
military-owned housing faster and more economically than would be achieved
by the use of traditional military construction funding. By the end of
December 2005, the services had awarded 52 projects to privatize over
112,000 family housing units and had plans to award 57 more projects to
privatize over 76,000 more units over the next 4 years.2 According to DOD,
the 52 awarded projects will provide about $13.9 billion in housing
improvements, with private-sector developers and lenders providing about
$12.9 billion, or about 92 percent of the financing, and DOD providing the
balance.

This report represents a continuation of our long-standing reviews of
issues related to housing privatization. We initiated this engagement
under the authority of the Comptroller General of the United States, and
the report is addressed to you because of expressed interest related to
your committees' oversight responsibilities. This report determines (1)
whether opportunities exist to improve DOD's oversight of awarded housing
privatization projects, and (2) to what extent awarded projects are
meeting occupancy expectations.

To address these issues, we summarized program implementation status and
costs, compared the status to DOD's goals and milestones, and discussed
issues affecting program implementation with DOD and service officials. In
doing so, we relied on program status data provided by DOD and the
services. We confirmed the status data for 12 projects, but we did not
otherwise test the reliability of the data. We visited installations where
12 projects were underway to review actual project performance and to
determine whether performance information and concerns were adequately
captured and reported to top management in a timely manner. The
installations were chosen because they contained established privatization
projects, represented each of the military services, and in some cases had
reported occupancy challenges. We compared occupancy rates in awarded
projects with occupancy expectations; and, for the 12 projects at the
installations we visited, we explored the causes, consequences, and
service response when occupancy levels were below expectations. We also
examined and compared DOD's and the services' policies, guidance, and
procedures for overseeing awarded privatization projects. We conducted our
work from July 2005 through February 2006 in accordance with generally
accepted government auditing standards. A more detailed description of our
scope and methodology is included in appendix I.

Results in Brief

Although DOD and the individual services have implemented program
oversight policies and procedures to monitor the execution and performance
of awarded privatized housing projects, opportunities exist for
improvement. Though owned and managed by the private sector, adequate
oversight of privatized housing is essential to help monitor and safeguard
the government's interests and to help ensure the long-term success of the
housing privatization program, and its importance has become even greater
as the number of housing privatization projects has increased. We
identified three areas of concern-the adequacy of the Navy's oversight
methods, the usefulness of DOD's primary oversight report, and the
consistency of tenant satisfaction data-which offer opportunities for
enhancing the oversight of awarded privatization projects.

o The Navy's methods for overseeing its awarded projects have not been
adequate to identify and address operational concerns in some projects or
to ensure accurate reporting of project information. As a result, there is
less assurance that Navy management could become aware of project
performance issues in a timely manner in order to plan needed actions to
mitigate the concerns. For example, we found that funds earmarked for
future project needs at one project had not been deposited to a Navy
reserve account and the Navy had not been reimbursed for the cost of
police and fire protection services provided to another project, as
specified in a project memorandum. Also, status information for five of
the eight Navy and Marine Corps projects we reviewed was inaccurately
reported to DOD headquarters management. Compared to the Navy, the Army
and Air Force had more robust and comprehensive methods for overseeing
awarded projects and we did not find similar oversight concerns in the
Army and Air Force projects we reviewed. Navy officials stated that they
recognized the need for improvements to their oversight methods. As such,
they informed us that they have begun a review to upgrade their monitoring
and oversight process to ensure consistency and completeness, and the Navy
says it has taken steps to address the concerns identified at the projects
we visited. However, until improvements are implemented, the adequacy of
the Navy's oversight will continue to be questionable.

o Although primary responsibility for overseeing awarded privatization
projects rests with the individual services, opportunities exist to
improve oversight at DOD headquarters by enhancing the value of DOD's
primary oversight tool-the semiannual privatization program evaluation
report. The report consists of information submitted by the services on
each awarded project and includes data on project contract structure,
construction progress, occupancy, financial performance, and tenant
satisfaction. However, the value of the report as an oversight tool has
been limited because the report (1) lacks a focus on key project
performance metrics to help highlight any operational or financial
concerns, (2) has not been issued in a timely manner, and (3) does not
ensure data accuracy by requiring periodic independent verification of key
report elements.

o Improving the consistency of data collected on servicemember
satisfaction with privatized housing offers another opportunity to improve
program oversight. Because the overall goal of the privatization program
is to improve servicemember quality of life by improving the condition of
military housing, DOD requires the services to report data on
servicemember satisfaction with privatized housing as an indicator of
program success. However, because DOD has not issued guidance for
accomplishing this task, the services have used inconsistent methods for
collecting housing satisfaction data. As a result, value of the data could
be improved for assessments of satisfaction levels over time, comparisons
of satisfaction levels among projects, and identification of trends among
the services. Further, because housing satisfaction information is not
routinely collected on servicemembers who do not live in privatized
housing, DOD lacks complete information on the impact of its overall
housing program on servicemember quality of life.

Sixteen, or 36 percent, of 44 awarded privatization projects had occupancy
rates below expectations with rates below 90 percent, as of September 30,
2005.3 Specifically, occupancy was below expectations and below 90 percent
in 6 of the Army's 19 awarded projects, 4 of the Navy's and Marine Corps'
13 awarded projects, and 6 of the Air Force's 12 awarded projects.
Although the projects were originally justified on the basis of meeting
the needs of military families, some projects had begun renting housing
units to parties other than military families in an attempt to increase
occupancy and keep rental revenues up. For example, 20 projects had rented
1,116 units to servicemembers who were single or unaccompanied by their
families; 662 units to retired military personnel, and civilians and
contractors who work for DOD; and 299 units to civilians from the general
public. At one Air Force project, only 29 percent of the available
privatized housing units was rented to military families. Still, rental
revenues in some projects are not meeting planned levels, resulting in
signs of financial stress. If lower than expected occupancy and rental
revenues persist in the long term, the result could be significantly
reduced funds available to provide for future project needs and
renovations or, in the worst case, project financial failures.4 Factors
contributing to the occupancy challenges in some projects include
increased housing allowances, which have made it possible for more
military families to live off base, thus reducing the need for privatized
housing, and the questionable reliability of DOD's housing requirements
determination process, which could result in overstating the need for
privatized housing. To help ensure that the size of housing projects is
accurately determined, we previously reported that DOD needed to study how
increased housing allowances might affect future housing needs.5 Also, we
previously reported that changes were needed to improve the reliability of
DOD's housing requirements process and to ensure maximum reliance on local
community housing, as required by DOD policy.6 Because DOD has yet to
implement these steps, the planned size of future privatization projects
may not be based on reliable assessments, which could result in overstated
requirements and thus contribute to occupancy and financial challenges in
some future projects.

We are making five recommendations to improve the oversight of awarded
housing privatization projects and to help ensure that the size of future
projects is reliably determined. Specifically, we are recommending that
DOD require the Navy to upgrade its oversight of awarded projects, improve
the department's semiannual evaluation report, provide guidance to help
ensure consistent collection and reporting of housing satisfaction
information for all servicemembers, determine how increased housing
allowances will most likely impact future housing requirements, and
expedite issuance of guidance to improve the reliability of housing
requirements assessments. In written comments on a draft of this report,
DOD fully agreed with three and partially agreed with two of our
recommendations and stated that shortcomings identified in our draft would
be addressed. We discuss DOD's comments in detail later in this report.

Background

In the mid-1990s, DOD became concerned that inadequate housing allowances
and poor quality military housing were negatively affecting quality of
life and readiness by contributing to servicemember decisions to leave
military service. DOD noted that when living in private-sector housing in
the local communities, servicemembers were paying about 19 percent of
housing costs out of pocket, because housing allowances were inadequate.
DOD also noted that the quality of military-owned housing had been in
decline for more than 30 years because military-owned housing was not
considered a priority and because earlier attempts at solutions ran into
regulatory or legislative roadblocks. DOD officials stated that much of
the military-owned family housing in the United States was old, lacked
modern amenities, and required renovation or replacement. DOD estimated
that completing this work with historical funding levels and traditional
military construction methods would take more than 20 years and cost about
$16 billion.

In response, and with the approval of Congress, DOD began two major
initiatives. First, DOD began an initiative to increase housing allowances
to cover the average cost of housing and utilities in each of the nation's
various geographic areas, thus eliminating the average out-of-pocket
housing costs paid by servicemembers. This initiative was completed at the
beginning of calendar year 2005. Second, DOD began an initiative to
privatize most military-owned housing to use private capital and
construction expertise to replace or renovate inadequate housing faster
than could be achieved using traditional funding methods at historical
funding levels. At DOD's request, Congress enacted legislation in 1996
authorizing the Military Housing Privatization Initiative to allow
private-sector financing, ownership, operation, and maintenance of
military housing.

DOD policy states that private-sector housing in the communities near
military installations will be relied upon as the primary source of family
housing. However, when communities do not have an adequate amount of
suitable housing, DOD intends to use housing privatization-rather than
military-owned housing financed with military construction funds-as the
primary means for meeting family housing requirements. As of December
2005, the services had awarded 52 projects to privatize over 112,000
family housing units and had plans to award 57 more projects to privatize
over 76,000 more units by 2010. Table 1 shows implementation status by
service. Also, appendix II contains more detailed status information on
the 12 projects at the installations we visited during this review.

Table 1: Privatization Projects Awarded and Planned as of December 2005

                                        

    Service  Number of      Number of housing   
             projects             units         
               Awarded                  Planned Total Awarded Planned   Total 
Army             19 16                    35        59,571  23,813  83,384 
Navy and         17  7                    24        38,106  20,500  58,606 
Marines                                                            
Air Force        16 34                    50        14,615  32,133  46,748 
Total            52 57                   109       112,292  76,446 188,738 

Source: DOD.

The duration of the initial development period-that is, the period when
developers construct new housing units and renovate older units-varies
among privatization projects, often lasting from 5 to 10 years. Thus,
planned housing improvements resulting from privatization normally are not
completed for several years after the projects are awarded. For all
awarded projects as of September 2005, privatization developers had
completed the construction of 10,911 new housing units and the renovation
of 9,161 older housing units. Figures 1 through 5 show photographs of
newly constructed and older privatized housing units at selected
installations we visited.

Figure 1: Newly Constructed (left) and Older (right) Privatized Housing at
Fort Meade, Maryland

Figure 2: Newly Constructed (left) and Older (right) Privatized Housing at
Fort Stewart, Georgia

Figure 3: Newly Constructed (left) and Older (right) Privatized Housing at
Robins Air Force Base, Georgia

Figure 4: Newly Constructed (left) and Older (right) Privatized Housing at
Patrick Air Force Base, Florida

Figure 5: Newly Constructed (left) and Older (right) Privatized Housing at
the South Texas Project (Naval Air Station Corpus Christi), Texas

Servicemembers can choose whether or not to live in privatized
housing-there are no mandatory assignments. Those who choose to live in
privatized housing receive the same housing allowance (which is used to
pay rent and utilities) as they would if they rented or purchased housing
in the local communities.

Within the Office of the Secretary of Defense (OSD), the Housing and
Competitive Sourcing Office, which reports to the Deputy Under Secretary
of Defense (Installations and Environment), provides oversight of the
housing privatization program, but the primary responsibility for
implementing it rests with the individual services. OSD designed and uses
the program evaluation plan report to oversee the effectiveness of the
program and the performance of awarded projects. The report, prepared
semiannually for the periods ending June 30 and December 31, is a
compilation of extensive data submitted by the services for each awarded
project and includes information on project contract structure,
construction and renovation progress, occupancy, financial performance,
and servicemember satisfaction with the housing.

This report is a continuation of a series of reports that we have issued
on matters related to DOD's housing privatization program as well as DOD's
process for determining housing requirements. The following summarizes key
issues from these reports:

o In July 1998, we reported on several concerns as the housing
privatization program began, including (1) whether privatization would
produce insignificant cost savings and whether the long contract terms of
many projects might cause the building of housing that will not be needed
in the future; (2) whether controls were adequate to protect the
government's interests if developers failed to 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.7

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, and DOD lacked a plan for evaluating
the effectiveness of the program.8

o In June 2002, we reported that DOD needed to (1) revise its housing
requirements determination process to take into account greater use of
community housing as well as the projected impact that the housing
allowance initiative might have on military installation housing
requirements; and (2) improve the value of the primary privatization
oversight report by completing the report on time, including information
on funds accumulated in project reinvestment accounts, and obtaining
periodic independent verification of key report elements.9

o In May 2004, we reported that DOD needed to improve its revised housing
requirements determination process to help ensure that housing
investments, whether through military construction or privatization, were
supported by consistent and reliable needs assessments. We also reported
that DOD needed to survey servicemembers with dependents to update
information on the housing preferences for family housing, given recent
changes such as the increase in housing allowances.10

In response to each report, DOD officials have stated that they planned
management actions to address our concerns.

Opportunities Exist to Improve the Oversight of Awarded Privatization
Projects

Although OSD and the services have implemented program oversight policies
and procedures to monitor the execution and performance of privatized
housing projects, opportunities exist for improvement. Though owned and
managed by the private sector, DOD maintains a strong interest in the
operational and financial performance of privatized housing projects
because it is accountable for public funds expended and because, according
to DOD officials, the military's housing objectives can be met only if the
projects remain viable. Thus, adequate program oversight is essential to
help monitor and safeguard the government's interests and to help ensure
the long-term success of the program. However, we identified three areas
of concern-the adequacy of the Navy's oversight methods, the usefulness of
DOD's primary oversight report, and the consistency of tenant satisfaction
data-which provide opportunities for enhancing the oversight of awarded
privatization projects. Specifically, as evidenced by issues identified in
some Navy and Marine Corps projects we visited, the Navy's oversight
methods are not adequate to identify some project operational concerns or
to ensure accurate reporting of project information. As a result, in
contrast to the Army and the Air Force which have more robust oversight
methods, there is less assurance that Navy management could become aware
of project performance issues in a timely manner in order to plan needed
actions to mitigate the concerns. Also, the usefulness of OSD's primary
program oversight tool-the semiannual privatization program evaluation
report-has been limited because the report has not focused on key project
performance metrics, has not been issued in a timely manner, and has
included inaccuracies. Moreover, data on servicemember satisfaction with
housing are inconsistent because DOD has not issued guidance to the
services for collecting and reporting satisfaction information. As a
result, data gathered to date cannot be readily tracked over time or
compared among the services, and their value could be improved as a tool
to more fully assess the impact of the privatization program, as well as
the impact of DOD's overall housing program, on servicemember quality of
life.

Navy Program Oversight Did Not Identify and Address Some Project Concerns
and Reporting Inaccuracies

The Navy's oversight program for monitoring Navy and Marine Corps projects
has not adequately identified and addressed some project operational
concerns, nor does it ensure accuracy in project information reported to
DOD headquarters. Adequate program oversight is essential to help monitor
and safeguard the government's interests and to help ensure the long-term
success of the program. However, in contrast to the Army's and Air Force's
oversight programs, the Navy's oversight program was less comprehensive
and thus provided less assurance that Navy management would become aware
of project performance issues in a timely manner. To illustrate, we found
that the Army and the Air Force have robust, well-developed portfolio
oversight programs to help top management monitor implementation of their
privatization programs. Both of these services collected and analyzed
detailed performance information on each project including construction
progress, construction costs, occupancy levels, rental revenues, operating
expenses, net operating income, and the debt

coverage ratio.11 These services prepared detailed project reports, which
compared actual project performance data with expectations and discussed
reasons for significant variances. The Army and the Air Force also
prepared quarterly portfolio summary reports, which monitored project
execution, analyzed trends, highlighted current and potential performance
issues, and documented recent and planned actions to address any project
concerns.

In contrast, the Navy's oversight program was less structured, included
fewer details on project performance, and did not include summary
oversight reports on portfolio performance, even though such reports were
required by Navy guidance. Specifically, in February 2004, the Navy
established a portfolio management group and assigned the group
responsibility to oversee the Navy's and Marine Corps' housing
privatization program. Although the group's charter stated that it would
review project performance information and prepare consolidated portfolio
summary reports, Navy officials stated that no such reports had been
prepared at the time of our review in January 2006, almost 2 years after
the charter was approved. Navy officials initially told us that the
required summary reports were not needed because portfolio monitoring was
performed in other ways, such as a review of monthly status reports from
each project. They further stated that the Navy intended to eliminate the
reporting requirement. Subsequently, Navy officials told us that the
summary performance reports were needed and would be prepared in the
future.

During our visits to Navy and Marine Corps privatization projects, we
found instances where Navy oversight had not been adequate to identify and
address some project operational issues and ensure accurate reporting of
project performance information to OSD. For example:

o During our September 2005 visit to the Navy's Kingsville II project at
the Naval Air Station Kingsville, Texas, we found that project funds had
not been disbursed in accordance with the project agreement. According to
the agreement, 30 percent of the project's net cash flow-that is, the
rental revenue remaining after payment of expenses and debt service-was to
be deposited to a Navy-owned reserve account to be available for future
project needs. On the basis of the project's net cash flow during the
first and second quarters of 2005, over $42,000 should have been deposited
to the Navy's account. Yet, only $314 was deposited. When we asked about
this, Navy officials initially told us that the deposit amount was correct
and consistent with original expectations. When we again questioned the
deposit amount, Navy officials stated that the funds had not been
appropriately disbursed and that they had asked the project developer for
a complete analysis of the reserve accounts from project inception. The
officials subsequently stated that a deposit was made to correct the
balance in the Navy reserve account. Navy officials also stated that, in
light of the shortcomings identified, the project agreement would be
amended to require deposit and disbursement reports for all reserve
accounts and to ensure that the project's annual audit included a
compliance review.

o During our visit to the Navy's South Texas project in September 2005, we
found that the project had not reimbursed the Navy for police and fire
protection services, as specified in a memorandum signed by the Navy in
January 2002. The memorandum stated that the project would pay the Navy
for police and fire protection services provided by the Naval Air Station
Corpus Christi beginning in calendar year 2002. The initial annual payment
was to be $84,756 with cost-of-living adjustments in future years.
However, when we asked about the payments in September 2005, we were told
that no payments had been made because the Navy had not processed the
proper paperwork to bill the project for reimbursement. When we again
asked about the reimbursement status in December 2005, Navy officials
stated that they were working to resolve the issue. As of January 2006, 4
years after the project memorandum was initially signed, the Navy still
had not billed the project for reimbursement.

o We found that inaccurate project status information was reported to OSD
for five of the eight Navy and Marine Corps projects we reviewed in
detail. For example, data reported to OSD on the San Diego II project
showed that the project's total development cost was $304 million,
although the correct amount was $427 million. Also, data reported to OSD
for the Camp Pendleton I showed that the project's reinvestment account
balance was $725,000 although the correct balance was $104,000. Further,
data reported to OSD for the Marine Corps' Tri-Command project showed that
no net operating funds or interest would be used to help finance the
project during the initial development period even though project closing
documents in March 2003 showed that $53.6 million from net operating funds
and interest were expected to be used to help finance the project.12 Navy
officials stated that corrections would be made in the information
reported to OSD.

During our review, Navy officials stated that they had begun a
top-to-bottom evaluation of the privatization oversight program. They
stated that our review had been helpful in identifying items that required
attention, such as those we mentioned. The officials stated that while
they believed that their current procedures protected the government's
interests and alerted top management to project concerns, they were
conducting a comprehensive review to ensure consistency and completeness,
upgrade the monitoring and oversight process, and make oversight
responsibilities better defined and, perhaps, more aggressive. As part of
the review, the officials stated that they intended to consider the Army's
and the Air Force's oversight procedures and reports and also intended to
ensure that appropriate portfolio performance summary reporting was
completed in a timely fashion. The officials said that they planned to
complete the review and implement oversight improvements by late spring
2006.

OSD's Primary Program Oversight Report Is of Limited Usefulness

OSD's semiannual privatization program evaluation report is of limited
usefulness because it is unwieldy, untimely, and includes inaccurate
information on some Navy and Marine Corps projects. Established in January
2001, the report is OSD's primary tool for overseeing the program's
effectiveness and the performance of awarded projects. Although the report
is a potentially useful tool for monitoring program implementation, the
value of the report has been limited for several reasons.

First, as the number of awarded projects has increased from 7, when the
report was established, to 52 at the end of December 2005, the report is
not well focused, and has become unwieldy with the growing volume of data
provided. The December 2004 report contained 268 pages and, unless
changed, the report size will continue to increase as additional projects
are awarded. A streamlined report that focuses on a few key performance
metrics from each project could more readily highlight any operational or
financial concerns that might require management attention. Both the Army
and the Air Force portfolio summary reports include such focused
information and thus might provide useful insight in restructuring the OSD
report.

Second, the report's usefulness has been limited because the report is not
timely. Although the report is not intended to provide for real-time
monitoring of awarded projects-the individual services have this
responsibility-information included in the report is so dated by the time
the report is issued that its value, as a tool to highlight any
operational or financial concerns to top management in a timely manner, is
questionable. For example, the report containing project information as of
December 31, 2004, was due March 15, 2005, but it was not issued until
June 2005, 3 months late, and contained data that were about 6 months old.
Similarly, the report containing project information as of June 30, 2005,
was due by September 15, 2005, but was not issued until February 2006,
almost 5 months late, making the information in it more than 7 months old.

Third, the reports include inaccuracies because data reported by the
services are sometimes incorrect. OSD officials stated that, although they
review data submitted by the services for consistency and accuracy
compared to other information provided to OSD, reported information has
not been subjected to periodic independent verification to check accuracy.

We previously noted similar concerns about the privatization program
evaluation report. In our June 2002 report, we recommended that DOD
improve the report's value by completing the report on time, including
information on funds accumulated in project reinvestment accounts, and
obtaining periodic independent verification of key report elements.13
Although the report now includes information on funds accumulated in
project reinvestment accounts, concerns remain about the report's
timeliness and accuracy. These concerns may be of additional importance
given that the House Appropriations Committee requested in 2005 that DOD
begin submitting a summary of the results of the program evaluation plan
used to monitor the military housing privatization initiative to the

committee14 and that information from the report has been cited in DOD
testimony on the housing privatization program.15

Methods for Measuring Servicemember Satisfaction with Privatized Housing
Are Not Consistent

The services have adopted different methods and time frames for collecting
and analyzing information about servicemember satisfaction with privatized
housing, largely because OSD has not issued guidance on how or when the
data must be collected. This limits the data's value for tracking occupant
satisfaction over time as well as making service-to-service comparisons.
Given that the overall goal of the housing privatization program is to
improve the quality of life for servicemembers by improving the condition
of military housing, DOD considers that one measure of program success is
whether or not servicemembers are satisfied with privatized housing. To
gauge servicemember satisfaction, OSD requires the services to collect and
report satisfaction information from occupants at each awarded project as
part of the input to the privatization program evaluation report.
Specifically, OSD requires the services to survey occupants and to report
the occupants' responses to the question "Would you recommend privatized
housing?" Data are reported separately for occupants of privatized housing
that is newly constructed, newly renovated, and not renovated. Similar
satisfaction information is not routinely collected from the majority of
servicemembers who live in the communities surrounding military
installations.

The information required by OSD could be useful in assessing satisfaction
levels over time and for comparing satisfaction levels among projects and
the services to identify trends and factors attributing to higher or lower
satisfaction levels. However, using satisfaction data for these purposes
requires that the services collect consistent information, and this is not
the case. Largely because OSD has not provided guidance on how or when the
services should collect servicemember satisfaction data, the services have
adopted different methods and time frames for collecting and analyzing
satisfaction information.

o The Army uses a contractor to survey privatized housing occupants
annually between April and July. The 2005 survey asked 72 questions on
various aspects of maintenance and property management services, unit
condition, and amenities. Responses to most questions were requested using
a 5-point scale-for example, where "1" represents very dissatisfied or no
agreement and "5" represents very satisfied or extreme agreement. Prior to
2005, the Army's survey requested most responses on a 7-point scale. Army
officials stated that the change was made to be more compatible with
surveys performed by the other services. However, the requested response
to the "Would you recommend privatized housing?" question was "yes" or
"no", rather than a requested response on a 5-point scale. Therefore,
because the Navy and the Air Force request that servicemembers respond to
this question using a 5-point scale, the Army did not achieve
compatibility with the other services in the responses to this key
question.

o The Navy uses a different contractor to survey privatized housing
occupants at various times during the year. The survey asks 48 questions
with responses requested on a 5-point scale, including the question on
whether the occupant would recommend privatized housing. Navy officials
stated that the Navy strives to survey each project once a year. However,
surveys were not conducted at some Navy and Marine Corps privatized
housing projects in 2004 or 2005, and for six projects, the Navy reported
no satisfaction information to OSD for inclusion in the December 2004
privatization program evaluation report.

o Air Force officials stated that until 2005 each privatized project
conducted a local survey of occupants. However, due to disparities in the
ways the survey was administered from one installation to another and
because of the difficulty in achieving statistically significant response
rates (for example, only nine responses were obtained from 382 tenants at
the Patrick Air Force Base project in 2004), the Air Force decided to
adopt a centralized approach. In June 2005, the Air Force used the same
contractor as the Navy and surveyed occupants at all Air Force privatized
projects. The survey asked 54 questions-mostly the same questions that the
Navy asked-with responses requested on a 5-point scale, including the
question on whether the occupant would recommend privatized housing.

With different survey methods, questions, and time frames, the information
being collected cannot be readily used for the purposes of benchmarking,
tracking, or comparing servicemember satisfaction levels. Thus, the value
of the information to help measure whether or not the privatization
program is succeeding in its goal of improving servicemember quality of
life could be improved. Further, because housing satisfaction information
is not routinely collected on servicemembers who do not live in privatized
housing, DOD lacks complete information on the impact of its overall
housing program on servicemember quality of life.

Lower Than Expected Occupancy Creates Concerns in Some Privatization
Projects

Sixteen projects, or 36 percent, of 44 awarded privatization projects had
occupancy rates below expectations with rates below 90 percent, as of
September 30, 2005, raising concerns about project performance. Although
the projects were justified on the basis of meeting military family
housing needs, 20 projects have begun renting housing units to parties
other than military families, including unaccompanied military personnel
and the general public, in an attempt to keep rental revenues up. Still,
rental revenues in some of the projects we visited have not met
expectations, resulting in signs of financial stress such as having months
where project revenues were insufficient to pay all project expenses. In
the long term, if lower than expected occupancy and rental revenues
persist, the result could be significantly reduced funds deposited into
reserve accounts, which provide for future project needs and renovations.
Or, in the worst case, there could be project financial failures. Factors
contributing to occupancy challenges include poor condition of existing
housing that has not yet been renovated in some projects, significantly
increased housing allowances, which have made it possible for more
military families to afford off-base housing thus reducing the need for
privatized housing, and continued problems in DOD's housing requirements
determination process, which could result in overstating the need for
privatized housing. Although deployments can also contribute to occupancy
challenges, they were cited as a contributing factor to lower than
expected occupancy rates in only 1 of the 12 projects we reviewed. The
services are monitoring occupancy and revenue concerns, and in some cases,
have taken or planned steps to address the concerns. However, without
additional steps to help ensure that the size of future privatization
projects is reliably determined, future projects could face similar
occupancy and financial challenges.

Occupancy Was Below Expectations in Some Projects

We found that some awarded projects, as shown in table 2, were not meeting
occupancy expectations. According to service officials, the expected
occupancy rate during a project's initial development period, when many
housing units are being constructed or undergoing renovation, is usually
around 90 percent of the units available for rent. After completion of the
initial development period, most projects expect occupancy rates of about
95 percent. As of September 30, 2005, occupancy was below expectations and
below 90 percent in 6 of the Army's 19 awarded projects, 4 of the Navy's
and Marine Corps' 13 awarded projects, and 6 of the Air Force's 12 awarded
projects. Although most of these projects were in their initial
development periods, 1 Navy and 2 Air Force projects were not. In total,
of 85,590 privatized housing units available for rent, 77,355 units or 90
percent were occupied and 8,235 units or 10 percent were vacant.

Table 2: Awarded Privatization Projects with Occupancy Rates Below
Expectations as of September 30, 2005a

                                        

    Service/Project    Expected occupancy    Actual  Housing  
                           rate (percent) occupancy   units   
                                               rate           
                                          (percent) Available Occupied Vacant 
Army                                                                
Fort Meade                          94        80     2,778    2,230    548 
Fort Stewart                        94        79     3,089    2,433    656 
Fort Hamilton                       94        70       286      199     87 
Fort                                94        78     7,074    5,520  1,554 
Shafter/Schofield                                                   
                                                                       
Barracks                                                            
Fort Leonard Wood                   94        83     2,229    1,853    376 
Fort Bliss                          94        83     3,001    2,491    510 
Navy/Marine Corps                                                   
South Texas                         80        78       398      311     87 
Kingsville IIb                      97        89       150      133     17 
Tri-Command                         93        83     1,680    1,393    287 
Pendleton                           93        89     3,656    3,261    395 
II/Quantico                                                         
Air Force                                                           
Dyess Air Force                     97        86       402      344     58 
Baseb                                                               
Hanscom Air Force                   88        84       722      607    115 
Base                                                                
Kirtland Air Force                  90        85     1,078      919    159 
Base                                                                
Little Rock Air                     90        86     1,320    1,141    179 
Force Base                                                          
Patrick Air Force                   90        73       592      433    159 
Base                                                                
Robins Air Force                    97        83       670      559    111 
Baseb                                                               

Source: DOD.

aOur analysis excluded seven projects awarded as of September 30, 2005,
because six projects had been privatized for less than 2 months and one
had no units yet available for rent. Also, the table includes only
projects with occupancy rates below 90 percent. Six additional projects
were not meeting occupancy expectations but had occupancy rates of 90
percent or more.

bThe initial development period was completed at these projects.

Occupancy rates would have been lower if 20 projects had not rented units
to nontarget tenants-that is, tenants other than military families.
Although the projects were justified on the basis of meeting the needs of
military families, project managers are allowed to offer units for rent to
nontarget tenants, when occupancy rates fall below expected levels for a
designated period of time, such as 2 or 3 months. Normally, project
managers follow a priority list, referred to as a tenant waterfall, when
renting units to nontarget tenants. In a typical tenant waterfall, vacant
family housing units are first offered to single or unaccompanied active
duty military servicemembers; then to DOD-related individuals, such as
retired military personnel and civilians and contractors who work for DOD;
and finally to civilians in the general public. As of September 30, 2005,
of 44 awarded projects, 20 projects, or 45 percent, had rented units to
individuals other than military families. More specifically, 20 projects
had rented 1,116 units to single or unaccompanied military personnel; 662
units to retired military personnel and civilians and contractors who work
for DOD; and 299 units to civilians from the general public. In all, 2,077
family housing units were occupied by parties other than military
families.

Although renting vacant units to nontarget tenants increases rental
revenue, the practice includes some associated concerns. For example,
although background checks are performed on prospective general public
civilian tenants, several service officials stated that additional
concerns exist when civilians live on military installations, such as
whether they should have access to on-base amenities available to military
families. Also, when units are rented to unaccompanied servicemembers, the
rental revenue is usually less than with military family occupants because
the rental rate is normally based on housing allowance rates, and the
allowance rates for unaccompanied servicemembers are less than the rates
for servicemembers with families. Therefore, although occupancy rates
increase, the increase in rental revenues usually falls short of the
revenue expectations for the units.

Lower Than Expected Occupancy Causes Financial Stress and Could Reduce
Funds for Future Reinvestment

When project occupancy levels are less than expected, project rental
revenues are less than expected, which can cause financial stress, such as
having periods when revenues are insufficient to pay all expenses. If
revenue shortfalls persist in the long term, the result can be reduced or
no funds remaining after payment of operational expenses, debt service,
and developer returns to be deposited into the reserve accounts
established to pay for future project needs and renovations. In a
worst-case scenario,

there could be insufficient funds to make a project's loan payments, which
could lead to a financial default.16

Although the housing privatization program is relatively young and the
majority of the projects awarded through September 2005 appeared
financially healthy, lower than expected occupancy rates and rental
revenues in some projects were causing financial stress in some of the
projects we visited. The examples below illustrate the occupancy and
financial challenges facing some projects, the reasons for the challenges,
and steps taken or planned in response. While many vacancies involved
older housing units not yet renovated, we also found vacancies involving
newly constructed and renovated units.

o At Fort Meade in July 2005, 2,044 units, or 81 percent, of the available
units were occupied, compared to an expected occupancy of 2,332 units, or
92 percent. Army officials stated that the project's 491 vacant units were
older units that had not been renovated. Occupancy would have been lower
if the project had not rented units to nontarget parties. Of the occupied
units, 205 units, or 10 percent, were occupied by nontarget tenants,
including unaccompanied military servicemembers, military retirees, and
DOD civilian employees. The shortfall of 288 expected occupants had caused
financial stress for the project. For example, the project's net operating
income was 33 percent below expectations for the quarter ending June 30,
2005. Army officials stated that lower than expected revenues had slowed
the project's construction progress because funds remaining after payment
of project expenses were to be used to help pay for construction costs
during the initial development period. The officials stated that lower
than expected occupancy was caused by three main factors. First, the poor
condition of much of the privatized housing that had not yet been improved
made it unattractive to military families. Second, increased housing
allowances made more local community housing affordable and caused many
military families to decide to rent or buy housing off base. Third, recent
private-sector housing development in the local communities surrounding
Fort Meade increased the availability of local housing. In response to the
occupancy and financial concerns, Army officials stated that plans were
underway to restructure the project and reduce the project's planned
number of units. Army officials were optimistic that occupancy would
increase as more units were renovated and additional new units were
constructed, making the project more appealing to military families.

o At the Navy's South Texas project, Navy officials stated that lower than
expected occupancy had been a concern since the project's beginning in
February 2002. At the time of our visit in September 2005, the occupancy
rate was 78 percent, with 311 units occupied and 87 units vacant. Navy
officials stated that a key reason for low occupancy was that the project
was still in its initial development period, and progress in improving
housing conditions had proceeded much more slowly than planned. As a
result, much of the privatized housing was in poor condition and
unattractive to military families. However, of the 87 vacant units, Navy
officials stated that only 11 were awaiting renovation or replacement, and
the remaining 76 units consisted of newly constructed or renovated housing
units. Other causes for low occupancy included reduced housing
requirements caused by reductions in military personnel assigned to the
area and increased housing allowances, which made more local community
housing affordable for servicemembers. With reduced occupancy, the project
had experienced signs of financial stress. For example, in July 2005, the
project's rental income was 26 percent below budget and was insufficient
to pay the project's operating expenses. Also, the project's debt coverage
ratio was a negative number, meaning that net operating income was
insufficient to cover the project's debt payment. Navy officials stated
that the project faced little risk of financial failure during its initial
development period because accounts were established at the project's
inception to provide for debt service payments during this period.
Nevertheless, Navy officials expressed concern about the project and had
taken actions to address the situation. In August 2004, an agreement was
reached to reduce the project's scope by 80 units, and Navy officials
stated that further project scope reductions might be considered in the
future.

o At Robins Air Force Base, 559 units, or 83 percent, of 670 available
units were occupied in September 2005 compared to the expected occupancy
rate of 97 percent. This project had completed its initial development
period and consequently all available units are newly constructed or
renovated. Of the occupied units, 109 units were occupied by nontarget
tenants, including 42 civilians. Air Force officials stated two reasons
for the low occupancy. First, increased housing allowances and attractive
mortgage interest rates had caused some servicemembers to decide to
purchase homes in the local community. Second, the project's design, which
included many two-bedroom units, was less appealing to some military
families. As a result of the low occupancy rates, Air Force officials
stated that the project faced significant financial challenges. The Robins
project was one of three Air Force projects rated as unsatisfactory in the
Air Force's September 2005 portfolio summary report because of financial
weakness and concerns about meeting developmental and/or financial
obligations. Air Force officials stated that alternatives were being
explored, which may require renegotiation of the project agreement with
the developer to improve the project's long-term financial viability.

o At Patrick Air Force Base, military families occupied 172, or only 29
percent, of the 592 available units. Nontarget tenants, including 135
unaccompanied servicemembers and 126 civilians, occupied 261 additional
units to make the overall occupancy rate 73 percent compared to an
expected occupancy rate of 90 percent. Air Force officials attributed the
low occupancy to the poor condition of the project's units, where planned
improvements were far behind schedule. The project, which will consist of
all new units when completed, had no new units ready for occupancy at the
time of our visit in early December 2005. The officials also said that
increased housing allowances had caused many military families to decide
to obtain housing in the local community. Although the project's nontarget
tenants had significantly reduced the financial challenges that would have
occurred if only military families occupied the housing, the project still
faced financial stress. For the quarter ending September 30, 2005, the
project's net operating income was 28 percent below expectations. Largely
because of financial issues, the project was restructured in April 2005 to
increase debt and provide additional funds needed to complete the initial
development period. As part of the restructuring, some funds that had
initially been required to flow into the project's reserve account for
future project needs and renovation were allowed to be used for
construction funding. Air Force officials stated their belief that, as
housing improvements are completed, both occupancy rates and the number of
military family tenants will increase and the project's financial
performance will improve.

o At the time of our visit to the Marine Corps' Tri-Command project in
early October 2005, the expected occupancy rate was 93 percent. However,
the actual rate was 83 percent, with 1,393 of 1,680 available units
occupied and 287 units vacant. Service officials stated that most vacant
units were older units that had not been renovated. According to
installation officials, the lower than expected occupancy rate was caused
by increased housing allowances, which had led some servicemembers to
decide to rent or buy housing in the local community. Also, although the
project was awarded in March 2003, the project was still undergoing
initial development and, with many of the planned housing improvements not
yet completed, much of the on-base housing was in poor condition and
unattractive to military families. With lower than expected occupancy, the
project showed signs of financial stress. In September 2005, the project
reported that rental revenues were 14 percent below expectations and the
net operating income was 30 percent below expectations. Also, the
project's debt coverage ratio was .66, meaning that the project's
operations did not produce sufficient funds to cover the debt payment.
Marine Corps officials stated that the project faced little risk of
financial failure during its initial development period because accounts
were established at the project's inception to provide for debt service
payments during this period. Still, the officials expressed concern about
the project's finances. In an effort to improve occupancy and financial
performance, the project revised its revitalization strategy in August
2005 and obtained $44.1 million in additional private loans to finance
upgrades to more housing units than originally planned to make the units
more appealing to potential renters. Marine Corps officials stated that
the revised strategy should result in improved project performance.

Increased Housing Allowances and Unreliable Needs Assessments Contribute
to Occupancy Concerns

Increases in monthly housing allowances and unreliable estimates of
housing requirements contribute to occupancy concerns in some
privatization projects by reducing the need for privatized housing or
possibly overstating the required size of some projects. Some causes of
occupancy concerns, such as changes in personnel assignments and
deployments, often cannot be predicted and are beyond the control of the
services. While deployments can contribute to occupancy challenges, they
were cited as a contributing factor to lower than expected occupancy rates
in only 1 of the 12 projects we reviewed. Also, as the condition of
privatized housing at some installations improves with the construction of
new housing and the renovation of older housing units, the projects may
attract more military families and the occupancy rates may improve.
However, other factors, such as the impact of DOD's zero-out-of-pocket
housing allowance initiative and the reliability of DOD's overall housing
requirements assessment process, can also affect occupancy rates and are
important considerations in planning for future housing privatization
projects. To help ensure that the size of housing projects is accurately
determined, we previously reported that DOD needed to study how increased
allowances might affect future housing needs and to make improvements in
its requirements process to maximize reliance on local community housing,
as required by DOD policy. Yet, because DOD has yet to implement these
recommendations, the planned size of future privatization projects may not
be based on reliable needs assessments, which could contribute to
occupancy and financial challenges in some future projects.

For example, in June 2002, we noted that uncertainties existed in the
future need for military-owned and privatized housing because of DOD's
initiative to increase housing allowances.17 Prior to the initiative,
servicemembers with families living in community housing received, on
average, an allowance that covered about 81 percent of housing costs,
including utilities. Servicemembers paid the remaining 19 percent of
housing costs out of pocket using other sources of income. Under the
initiative begun in 2001, housing allowances increased each year over a
5-year period, progressively eliminating the average out-of-pocket costs.
By January 2005, the average housing allowance fully covered the average
costs of housing and utilities in each geographic area with the typical
servicemember paying no additional out-of-pocket costs. Table 3
illustrates the increase in housing allowances for selected military
paygrades in five locations before the initiative in 2000 and after the
initiative in 2006.

Table 3: Examples of Changes in Monthly Housing Allowances for
Servicemembers with Dependentsa

                                        

         Location          Paygrade          Monthly      Monthly Increase in 
                        (E=enlisted and allowance in allowance in   allowance 
                          O=officer)            2000         2006   (percent) 
Fort Meade, Maryland E-3                     $774       $1,259          63 
                        E-6                    1,148        1,605          40 
                        O-3                    1,245        1,785          43 
Naval Air Station    E-3                      592          979          65 
Corpus Christi,      E-6                      715        1,333          86 
Texas                O-3                      857        1,393          63 
Robins Air Force     E-3                      540          898          66 
Base, Georgia        E-6                      673          967          44 
                        O-3                      807        1,237          53 
Patrick Air Force    E-3                      506        1,027         103 
Base, Florida        E-6                      662        1,437         117 
                        O-3                      817        1,531          87 
Marine Corps Air     E-3                      502          961          91 
Station Beaufort,    E-6                      701        1,271          81 
South Carolina       O-3                      853        1,345          58 

Source: DOD.

aChanges in the housing allowance amounts reflect the impact of the
zero-out-of-pocket initiative as well as changes in cost of housing at
each location since 2000.

Our report further noted that increased housing allowances from the
zero-out-of-pocket initiative would make a significant impact on the
military housing program. First, increased allowances should decrease the
requirement for military-owned or privatized houses by making local
community housing more affordable to servicemembers. Second, over time,
the supply of community housing available to military families could
increase and reduce the requirement for military-owned or privatized
housing as private developers construct new housing near military
installations to profit from renting to servicemembers at market rates.
Third, increased allowances should allow DOD to better satisfy the
preferences of most servicemembers to live off base and reduce demand for
on-base housing.18 For these reasons, we recommended that DOD take into
account the projected impact that the housing allowance initiative might
have on military housing requirements. Yet, as of January 2006, DOD had
not conducted detailed analyses to consider the effects of increased
allowances on requirements, nor had the department provided guidance to
the services on how these effects should be considered in their housing
requirements assessments.

We also previously reported on changes needed to increase the reliability
of DOD's housing requirements determination process.19 In May 2004, we
noted that, although DOD had revised its process and made improvements,
additional steps were needed to ensure consistency, accuracy, and maximum
reliance on private housing in the communities surrounding military
installations. Specifically, we noted that (1) DOD had not provided the
services with timely detailed guidance for implementing the revised
requirements process; (2) in the absence of detailed guidance, the
services used inconsistent methods and sometimes questionable data sources
and assumptions when determining family housing needs at various
installations; and (3) as a result, DOD could not know with assurance how
many housing units it needed and whether its housing investment decisions
were justified. The report also noted that DOD's revised requirements
process provided exceptions to the use of available, suitable local
community housing at each installation. We noted that one
exception-military mission requirements-appeared clearly justified, but
the other exceptions did not and could result in the services identifying
more on-base family housing requirements than were actually needed. For
example, DOD's process allows installations to include in its
military-owned or privatized housing requirement a quantity of housing to
accommodate up to 10 percent of the projected number of families at those
installations, regardless of the availability of local housing.

To address these matters, we recommended that DOD provide the military
services with more detailed guidance on implementing the revised housing
requirements process to help ensure that housing investments, whether
through military construction or privatization, were supported by
consistent and reliable needs assessments. We also recommended that DOD
review the rationale supporting the exceptions to using local community
housing in an effort to reduce or narrow the scope of the exceptions and
help maximize use of available community housing. In response, DOD stated
that it planned to include detailed guidance on implementing the
requirements process in a forthcoming revision to the DOD housing
management manual. DOD officials stated that the revised manual would also
include guidance narrowing the scope of the exceptions provided to the
services in the use of available community housing. Although the revised
manual was originally scheduled for issuance in December 2004, the manual
had not been issued at the time of our review in January 2006. DOD
officials stated that they were still revising the manual and that the
final version should be issued during 2006.

Upcoming changes in personnel assignments at some installations resulting
from Base Realignment and Closure decisions, the return of forces from
overseas bases, and the implementation of the Army's modularity program
will increase the importance of reliable housing assessments. In
particular, some installations stand to gain substantial numbers of
military families, which could increase requirements for privatized
housing and increase occupancy in current projects. Conversely,
implementation of the Army's force stabilization initiative may result in
reduced requirements for privatized housing because more service members
may choose to purchase homes if they know that they will be assigned to
the same installation for a longer period of time. However, until
improvements are implemented in the housing requirements assessment
process, the assessments for planned privatization projects at some
installations may indicate a need for more housing units than required,
which could lead to future occupancy and financial concerns. In its
September 2005 portfolio summary report, the Air Force highlighted this
concern. The report noted that:

Conclusions

Adequate privatization program oversight is essential to help monitor and
safeguard the government's interests and ensure the long-term success of
the program. Unless the Navy follows through with its plans to improve its
policies and procedures for overseeing its housing privatization program,
Navy management will continue to lack assurance that it can become aware
of project performance issues in a timely manner. Also, unless DOD
streamlines its privatization program evaluation report to focus on key
project performance metrics, completes the report on time, and obtains
periodic independent verification of key report elements, the report's
value as an oversight tool will continue to be limited. Further, until DOD
provides guidance to the services to help ensure consistent collection and
reporting of housing satisfaction from all servicemembers, the value of
the information to help measure this aspect of the privatization program's
success, as well as the impact of DOD's overall housing program on quality
of life, will also continue to be less useful than it could be.

In the long term, if lower than expected occupancy rates and rental
revenues at some privatization projects persist, the result could be
significantly reduced funds flowing into reserve accounts that were
established to provide for future project needs and renovations. In the
worst-case scenario, the program could see project financial failures,
which could affect the quality of housing available to military families.
Such concerns may occur in future privatization projects unless DOD fully
considers the impact of increased allowances on housing requirements and
implements improvements to its requirements determination process so that
the planned size of future projects is reliably determined.

Recommendations for Executive Action

We recommend that the Secretary of Defense direct the Deputy Under
Secretary of Defense (Installations and Environment) to take the following
five actions:

o Require the Navy to upgrade the monitoring and oversight of its housing
privatization program to ensure consistency, completeness, and preparation
of appropriate portfolio summary performance reports.

o Improve the value of DOD's privatization program evaluation report by
streamlining the report to focus on key project performance metrics,
completing the report on time, and obtaining periodic independent
verification of key report elements.

o Provide guidance to the services to help ensure consistent collection
and reporting of housing satisfaction information from all servicemembers,
which would allow for benchmarking and tracking of tenant satisfaction
over time as well as for making service-to-service comparisons.

o Determine how increased housing allowances from the zero-out-of-pocket
initiative will most likely impact future family housing requirements and
provide guidance on how the impacts should be factored into the services'
housing requirements assessments.

o Expedite issuance of the revised DOD housing management manual and
ensure that the revision includes guidance to improve the reliability of
housing requirements assessments and reduce the scope of the exceptions
provided to the use of available community housing.

Agency Comments and Our Evaluation

In written comments on a draft of this report, the Director for Housing
and Competitive Sourcing within the Office of the Under Secretary of
Defense for Acquisition, Technology and Logistics fully agreed with three
and partially agreed with two of our recommendations and stated that
shortcomings identified in the report would be forthrightly addressed.
Noting that our report was an important contribution to DOD's oversight of
the housing privatization program to date, DOD stated that steps were
already underway to streamline the privatization program evaluation report
and improve the report's accuracy. Also, DOD intends to closely observe
project vacancy rates in view of the increased housing allowance rates and
ensure that the revised housing management manual, now scheduled for
completion by the end of calendar year 2006, addresses the housing
requirements issues identified in our report. DOD also stated that its
privatization program evaluation report was not intended to provide
real-time project oversight and that this was the role of the services'
portfolio management systems. Our report does not imply that the
evaluation report should provide for real-time project oversight.
Nevertheless, because the evaluation report is the department's primary
tool for evaluating the program's effectiveness, we continue to believe
that such a report which focuses on key performance metrics and contains
accurate and timely information is important for OSD in carrying out its
oversight and effective stewardship of the program.

DOD partially agreed with our recommendation that the Navy be required to
upgrade the monitoring and oversight of its housing privatization program
to ensure consistency, completeness, and preparation of appropriate
portfolio summary performance reports. DOD stated that it disagreed with
our assumption that, because the Navy did not prepare summary portfolio
briefings and the Navy's input to the privatization program evaluation
report contained errors, the Navy was at risk of not being aware of
potential problems with projects. DOD also stated that a review of other
projects conducted by the Navy and a Navy consultant did not identify
issues such as those we identified at the Kingsville II and South Texas
projects. However, DOD stated that additional guidance was being developed
for internal reviews of audits and financial data from general partners to
ensure accurate monitoring and oversight of distributions. Finally, DOD
stated that the cost of fire and police services at the South Texas
project was not invoiced or reimbursed for 2 years, not for 4 years, as
stated in our report.

We disagree with DOD's description of the Navy's oversight of its housing
privatization program and continue to believe that, without improvement,
the Navy is at risk of being unaware of potential problems with projects.
First, our report notes that in contrast with the Army and the Air Force,
the Navy's oversight program was less structured, included fewer details
on project performance, and did not include summary oversight reports on
portfolio performance, even though such reports were required by Navy
guidance. Also, as noted in our report, the Navy agreed that oversight
improvements were needed and had begun conducting a comprehensive review
to ensure consistency and completeness, upgrade the monitoring and
oversight process, and make oversight responsibilities better defined and,
perhaps, more aggressive. Further, we continue to believe that inaccurate
project status information reported to OSD for five of the eight Navy and
Marine Corps projects we reviewed indicates a lack of adequate oversight
and attention to detail. Second, while the Navy and its consultant
apparently did not identify issues at other projects, the Navy was
developing additional guidance for internal reviews of audits and
financial data from general partners to ensure accurate monitoring and
oversight of distributions. We believe that this action indicates the Navy
has recognized the need for better oversight and also raises the question
of why such guidance was not already in place given that the housing
privatization program began in 1996. Third, regarding the reimbursement
for the cost of fire and police services at the South Texas project, our
report contains information provided by top management in the Navy's
housing privatization program and which we revisited with the Navy
officials several times over the duration of this review. For example, we
posed a written question to the Navy headquarters housing officials in
mid-November 2005 in which we reiterated a statement they had previously
made to us earlier that Navy never billed the South Texas project for fire
and police services, and asked for the status of the issue. On November
22, 2005, an official on the staff of the Assistant Secretary of the Navy
for Installations and Environment, without stipulating a set number of
years, provided the following written response, "Navy Region South East
and the installation are working to resolve this issue. As of November 15,
2005, the project had not been billed for the services." Subsequently in a
December 13, 2005, meeting with Navy privatization program officials, we
again discussed this issue and were told that they were working to resolve
the issue. On January 25, 2006, a senior Navy housing official told us
that the installation had billed the project and had received payment
within the last month. When we asked about the month in which the billing
occurred, the same official responded 2 days later that "The billing has
not yet occurred." In view of these statements from the top Navy
management officials responsible for overseeing the housing privatization
program, we believe that DOD's comment that cost of fire and police
services at the South Texas project were not invoiced or reimbursed for 2
years, rather than 4 years, only helps to illustrate our point-that the
Navy should be required to upgrade the monitoring and oversight of its
housing privatization program.

DOD partially agreed with our recommendation that DOD provide guidance to
the services to help ensure consistent collection and reporting of housing
satisfaction information from all service members, which would allow for
benchmarking and tracking of tenant satisfaction over time as well as for
making service-to-service comparisons. DOD stated that tenant survey
guidance already exists and that it would not be suitable to overlay a
programwide directive because of differences among the services in the
data they need to help support their specific, negotiated business
structures. However, DOD also stated that it would revise its guidance to
require consistent use of a 5-point numerical system to measure tenant
satisfaction across the services. DOD also agreed that (1) housing
preferences should be surveyed for all service members, not simply those
occupying privatized housing; (2) it is important to reevaluate
servicemember housing preferences driven by increased allowances and
housing revitalization; and (3) a panel at the Office of Secretary of
Defense has been studying how to best implement such a survey. The intent
of our recommendation was not to require the services to use identical
questions when assessing tenant satisfaction, but rather to ensure that
the services' methods, questions, and time frames were of sufficient
consistency to allow for benchmarking, tracking, or comparing
servicemember satisfaction levels. Ensuring that the services use a
consistent 5-point numerical system for measuring tenant satisfaction is a
step in the right direction. However, we continue to believe that DOD
needs to ensure that the services use consistent time frames in order to
make maximum use of satisfaction information as a tool to help measure
whether or not the privatization program is succeeding in its goal of
improving servicemember quality of life.

DOD's comments are reprinted in their entirety in appendix III.

We are sending copies of this report to other interested congressional
committees; the Secretaries of Defense, Army, Navy, and Air Force; and the
Director, Office of Management and Budget. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call me
at (202) 512-5581 or email at [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. The GAO staff members who made key contributions
to this report are listed in appendix IV.

Barry W. Holman, Director Defense Capabilities and Management

List of Congressional Addressees

The Honorable John Warner Chairman The Honorable Carl Levin Ranking
Minority Member Committee on Armed Services United States Senate

The Honorable Kay Bailey Hutchison Chair The Honorable Dianne Feinstein
Ranking Minority Member Subcommittee on Military Construction and
Veterans' Affairs, and Related Agencies Committee on Appropriations United
States Senate

The Honorable Duncan L. Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives

The Honorable James T. Walsh Chairman The Honorable Chet Edwards Ranking
Minority Member Subcommittee on Military Quality of Life and Veterans
Affairs and Related Agencies Committee on Appropriations House of
Representatives

Appendix I

Scope and Methodology

To determine whether opportunities exist to improve the Department of
Defense's (DOD) oversight of awarded housing privatization projects, we
summarized program implementation status and costs, compared the status to
DOD's goals and milestones, and discussed issues affecting program
implementation with DOD and service officials. We relied on program status
data provided by DOD and the services and confirmed the status data for 12
privatization projects, but we did not otherwise test the reliability of
the data. We also obtained, reviewed, and compared DOD and service
policies, guidance, and procedures for monitoring implementation and
measuring progress in the housing privatization program. We questioned DOD
and service officials responsible for the program about how they oversee
project performance, how they compare performance with expectations, and
what actions they take when performance does not match expectations. We
obtained and reviewed applicable oversight reports and assessed the extent
to which the reports included key project performance data, trends, and
discussion of any performance concerns. We also compared the issue dates
of DOD and service oversight reports with the due dates to determine the
timeliness of the reports; reviewed and compared the services' methods and
time frames used to measure servicemember satisfaction with privatized
housing; and reviewed the results of DOD and service efforts to assess
servicemember housing preferences.

Further, we visited selected military installations with housing
privatization projects to review oversight at the local level, to examine
project performance, and to determine whether performance information and
concerns were adequately captured in oversight reports and provided to top
management in a timely manner. Specifically, we visited Fort Meade,
Maryland; Fort Stewart, Georgia; Naval Air Station Corpus Christi, Texas;
Naval Air Station Kingsville, Texas; Naval Station San Diego, California;
Patrick Air Force Base, Florida; Robins Air Force Base, Georgia; Marine
Corps Base Camp Pendleton, California; and Marine Corps Air Station
Beaufort, Georgia. These installations were chosen because they contained
established privatization projects, represented each of the military
services, and a balance of some with and without challenges. Together, the
installations contained 12 separate privatization projects.

To determine to what extent awarded privatization projects are meeting
occupancy expectations, we interviewed DOD and service officials to
discuss project occupancy expectations, the factors that contribute to
lower than expected occupancy rates, the financial and other impacts that
result from lower than expected occupancy rates, and the responses
normally taken when occupancy is below expectations. We obtained,
reviewed, and analyzed project occupancy rates and trends for all projects
awarded as of September 30, 2005, and compared these data to occupancy
expectations. We relied on occupancy data provided by the services and did
not otherwise attempt to independently determine occupancy rates. Also,
for the 12 projects at the installations visited, we reviewed project
justification and budget documents to determine each project's occupancy
expectations and compared actual occupancy rates with the expectations.
When occupancy rates were below expectations, we reviewed project
performance reports and interviewed local officials to determine the
causes, consequences, and any actions taken or planned in response. We
also reviewed information on the number of privatized family housing units
rented to parties other than military families and discussed the
associated impacts with service officials. Further, we determined the
status of steps taken by DOD in response to previous GAO recommendations
to address concerns in the reliability of the services' housing
requirements assessments.

We conducted our work from July 2005 through February 2006 in accordance
with generally accepted government auditing standards.

Appendix II

Details on 12 Housing Privatization Projects

Table 4 provides details on the 12 housing privatization projects at the
installations visited during this review.

Table 4: Details on the 12 Housing Privatization Projects We Visited

                                        

  Service,         Total       Total   Estimated    Project   At the time 
  project,       housing   estimated  completion  description   of our    
 location,   units after     initial    date for              visit, was  
 and award       initial development     initial                project   
    date     development    cost (in development              Development    Meeting     Renting  
                  period   millions)      period               progress     occupancy   units to  
                                                                          expectations?  parties  
                                                                  on                      other   
                                                               schedule?                  than    
                                                                                        military  
                                                                                        families? 
Army,              3,170      $461.2        2012  Government  No          No            Yes       
                                                  conveyed                              
Fort Meade,                                       existing                              
                                                  units and                             
Maryland,                                         leased                                
May 2002                                          land.                                 
                                                  Developers                            
                                                  to                                    
                                                  construct                             
                                                  2,748 new                             
                                                  units,                                
                                                  renovate                              
                                                  422 units,                            
                                                  and own,                              
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Army,              3,702      $353.4        2011  Government  No          No            No        
                                                  conveyed                              
Fort Stewart                                      existing                              
and Hunter                                        units,                                
Army Air                                          leased                                
Field,                                            land, and                             
Georgia,                                          contributed                           
Nov. 2003                                         $37.3                                 
                                                  million.                              
                                                  Developer                             
                                                  to                                    
                                                  construct                             
                                                  1,868                                 
                                                  units,                                
                                                  renovate                              
                                                  1,597                                 
                                                  units, and                            
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Navy, South         585a       $75.4      2007 a  Government  No          No            No        
Texas,                                            conveyed                              
Texas, Feb.                                       existing                              
2002                                              units,                                
                                                  leased                                
                                                  land, and                             
                                                  contributed                           
                                                  $29.4                                 
                                                  million.                              
                                                  Developer                             
                                                  to                                    
                                                  construct                             
                                                  470 units,                            
                                                  renovate                              
                                                  114 units,                            
                                                  and own,                              
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Navy,                150       $14.5   Completed  Government  Initial     No            Yes       
Kingsville                                        conveyed    development               
II,                                               units and   completed                 
                                                  land,                                 
Texas, Nov.                                       contributed                           
2000                                              $4.3                                  
                                                  million,                              
                                                  and                                   
                                                  provided                              
                                                  $2.5                                  
                                                  million                               
                                                  loan.                                 
                                                  Developer                             
                                                  provided                              
                                                  land,                                 
                                                  constructed                           
                                                  150 units,                            
                                                  and will                              
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  the units                             
                                                  for 30                                
                                                  years.                                
Navy,              3,248      $328.8        2006  Government  Yes         No            No        
                                                  conveyed                              
San Diego I,                                      units,                                
California,                                       leased                                
Aug. 2001                                         land, and                             
                                                  contributed                           
                                                  $20.9                                 
                                                  million.                              
                                                  Developer                             
                                                  to                                    
                                                  construct                             
                                                  1,400                                 
                                                  units,                                
                                                  renovate                              
                                                  1,058                                 
                                                  units, and                            
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Navy, San          3,217      $427.0        2007  Government  Yes         Yes           No        
Diego II,                                         conveyed                              
California,                                       units and                             
May 2003                                          leased                                
                                                  land.                                 
                                                  Developer                             
                                                  to                                    
                                                  construct                             
                                                  460 units,                            
                                                  renovate                              
                                                  1,072                                 
                                                  units, and                            
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Marine               712       $88.3   Completed  Government  Initial     Yes           No        
Corps, Camp                                       conveyed    development               
Pendleton I,                                      units,      completed                 
California,                                       leased                                
Nov. 2000                                         land, and                             
                                                  provided                              
                                                  $29.4                                 
                                                  million                               
                                                  loan.                                 
                                                  Developer                             
                                                  constructed                           
                                                  512 units,                            
                                                  renovated                             
                                                  200 units,                            
                                                  and will                              
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  the units                             
                                                  for 50                                
                                                  years.                                
Marine             4,534      $590.3        2008  Government  No          No            No        
Corps, Camp                                       conveyed                              
Pendleton II                                      units,                                
and                                               leased                                
Quantico,                                         land, and                             
California                                        contributed                           
and                                               $70.7                                 
Virginia,                                         million.                              
Oct. 2003b                                        Developer                             
                                                  to                                    
                                                  construct                             
                                                  2,040                                 
                                                  units,                                
                                                  renovate                              
                                                  2,394                                 
                                                  units, and                            
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Marine               897       $85.5        2006  Government  Yes         Yes           No        
Corps, Camp                                       conveyed                              
Pendleton                                         units,                                
III and                                           leased                                
Yuma,                                             land, and                             
California                                        contributed                           
and Arizona,                                      $18.6                                 
Oct. 2004b                                        million.                              
                                                  Developer                             
                                                  to                                    
                                                  construct                             
                                                  253 units,                            
                                                  renovate                              
                                                  257 units,                            
                                                  and own,                              
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Marine             1,718      $175.9        2007  Government  Yes         No            No        
Corps,                                            conveyed                              
Tri-Command,                                      units,                                
South                                             leased                                
Carolina,                                         land, and                             
Mar. 2003                                         contributed                           
                                                  $26.5                                 
                                                  million.                              
                                                  Developer                             
                                                  to                                    
                                                  construct                             
                                                  491 units,                            
                                                  renovate                              
                                                  1,227                                 
                                                  units, and                            
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  all units                             
                                                  for 50                                
                                                  years.                                
Air Force,           670       $56.5   Completed  Government  Initial     No            Yes       
Robbins Air                                       conveyed    development               
Force Base,                                       units and   completed                 
Georgia,                                          land,                                 
Sept. 2000                                        provided                              
                                                  $22.3                                 
                                                  million                               
                                                  loan, and                             
                                                  provided a                            
                                                  guarantee                             
                                                  on the                                
                                                  private                               
                                                  loan.                                 
                                                  Developer                             
                                                  constructed                           
                                                  370 units,                            
                                                  renovated                             
                                                  300 units,                            
                                                  and will                              
                                                  own,                                  
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  the units                             
                                                  for 50                                
                                                  years.                                
Air Force,           552      $120.6        2008  Government  No          No            Yes       
Patrick Air                                       conveyed                              
Force Base,                                       units and                             
Florida,                                          land.                                 
Oct. 2003                                         Developer                             
                                                  to                                    
                                                  construct                             
                                                  552 units                             
                                                  and own,                              
                                                  operate,                              
                                                  and                                   
                                                  maintain                              
                                                  the units                             
                                                  for 50                                
                                                  years.                                

Source: DOD.

aThe original scope for the South Texas project was 665 units and the
original completion date for the initial development period was February
2005. The project agreement was modified in August 2004.

bWe did not visit the Quantico or Yuma portions of these projects.

Appendix III

Comments from the Department of Defense

Appendix IV

GAO Contacts and Staff Acknowledgments

GAO Contact

Barry W. Holman, (202) 512-5581 ([email protected])

Acknowledgments

In addition to the person named above, Mark A. Little, Assistant Director;
Janine M. Cantin; Susan C. Ditto; Gary W. Phillips; and Sharon L. Reid
also made major contributions to this report.

(350718)

www.gao.gov/cgi-bin/getrpt? GAO-06-438 .

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].

Highlights of GAO-06-438 , a report to congressional committees

April 2006

MILITARY HOUSING

Management Issues Require Attention as the Privatization Program Matures

The Department of Defense (DOD) intends to privatize about 87 percent of
the military-owned housing in the United States by 2010. As of December
2005, it had awarded 52 projects to privatize over 112,000 family housing
units and had plans to award 57 more projects to privatize over 76,000
more units over the next 4 years. The program, begun in 1996, has become
DOD's primary means to improve family housing and to meet its housing
needs when communities near installations do not have enough suitable,
affordable housing.

Because of expressed interest related to the oversight responsibilities of
several committees, GAO assessed (1) whether opportunities exist to
improve DOD's oversight of awarded housing privatization projects, and (2)
to what extent projects are meeting occupancy expectations.

What GAO Recommends

GAO recommends that DOD take five actions to improve the oversight of
awarded housing privatization projects. In commenting on a draft of this
report, DOD generally agreed with our recommendations.

Although DOD and the individual services have implemented program
oversight policies and procedures to monitor the execution and performance
of awarded privatized housing projects, GAO identified three opportunities
for improvement. First, the Navy's methods for overseeing its awarded
projects have not been adequate to identify and address operational
concerns in some projects or to ensure accurate reporting of project
information. As a result, there is less assurance that Navy management
could become aware of project performance issues in a timely manner in
order to plan needed actions to mitigate the concerns. For example,
contrary to project agreements, funds from one project had not been
deposited to a Navy reserve account to provide for future project needs,
and the Navy had not been reimbursed for police and fire protection
services provided to another project. Compared to the Navy, the Army and
Air Force had more robust and comprehensive methods for overseeing awarded
projects and GAO did not find similar oversight concerns in the Army and
Air Force projects it reviewed. Second, the value of DOD's primary
oversight tool-the semiannual privatization program evaluation report-has
been limited because the report lacks a focus on key project performance
metrics to help highlight any operational or financial concerns, has not
been issued in a timely manner, and does not ensure data accuracy by
requiring periodic independent verification of key report elements. Third,
data collected on servicemember satisfaction with housing, which is
important for benchmarking and tracking of satisfaction levels over time
as well as for making service-to-service comparisons, are inconsistent and
incomplete because DOD has not issued guidance to the services for
standardized collection and reporting of satisfaction information for all
servicemembers.

Sixteen, or 36 percent, of 44 awarded privatization projects had occupancy
rates below expectations with rates below 90 percent, as of September 30,
2005. In an attempt to increase occupancy and keep rental revenues up, 20
projects had begun renting housing units to parties other than military
families, including 2,077 units rented to single or unaccompanied
servicemembers, retired military personnel, civilians and contractors who
work for DOD, and civilians from the general public. Still, rental
revenues in some projects are not meeting planned levels, resulting in
signs of financial stress. If lower than expected occupancy and rental
revenues continue in the long term, the result could be significantly
reduced funds available to provide for future project needs and
renovations or, in the worst case, project financial failures. Factors
contributing to occupancy challenges include increased housing allowances,
which have made it possible for more military families to live off base
thus reducing the need for privatized housing, and the questionable
reliability of DOD's housing requirements determination process, which
could result in overstating the need for privatized housing. DOD has yet
to implement some previous GAO recommendations to improve the reliability
of the requirements assessments supporting proposed projects.
*** End of document. ***