Limitations in the Air Force's Proposed Housing Plan for	 
Spangdahlem Air Base, Germany (19-MAY-06, GAO-06-736R). 	 
                                                                 
The Air Force plans to construct 233 military housing units on	 
Spangdahlem Air Base, Germany at a cost of $131.3 million spread 
over fiscal years 2006-2008, and to fund 270 build-to-lease units
nearby at an annual cost of $32,888 per unit over 20 years. The  
Military Quality of Life and Veterans Affairs Appropriations Act 
for fiscal year 2006 directed the Secretary of the Air Force to  
submit to the Committees on Appropriations of both Houses of	 
Congress a report containing a housing plan for Spangdahlem. The 
House Conference Report accompanying H.R. 2528 stipulated that	 
the report must include a complete cost-benefit analysis of	 
available housing options to include build-to-lease housing, and 
that none of the funds appropriated for family housing at	 
Spangdahlem--nearly $45.4 million--may be obligated until the	 
Secretary of the Air Force certified to the Appropriations	 
Committees that the report had been completed and received the	 
Committees' response or a 30-day period has elapsed after the	 
Committees receive such report. In response to the mandate, the  
Air Force issued a report in January 2006 that compared its	 
proposed plan with four other housing options that included a	 
combination of traditional military construction, build-to-lease 
housing, and replacement of existing housing units to meet its	 
housing requirements at Spangdahlem. In the report, the Air Force
recommended implementation of its proposed plan and release of	 
the military construction appropriations for fiscal year 2006.	 
The Air Force also concluded that, depending on the results of	 
its efforts to explore cooperative ventures with the local German
government and communities and the potential for a larger	 
build-to-lease program, the scope of its military construction	 
projects for future years may need to be adjusted. The Air Force 
also stated it would provide a status report regarding these	 
adjustments to Congress within 365 days of the Appropriations	 
Committees' release of the fiscal year 2006 military construction
appropriation. Specifically, the Air Force proposed to report on 
the results of the cooperative ventures, number of housing units 
procured in the fiscal year 2006 military construction project,  
and proposed adjustments in the scope of the fiscal years 2007	 
and 2008 military construction projects. In February 2006, the	 
Appropriations Committees released nearly $45.4 million in fiscal
year 2006 military construction budget authority for 79 housing  
units at Spangdahlem. During our ongoing review of the Department
of Defense's (DOD) comprehensive overseas master plans, we met	 
with Air Force officials and visited family housing units at	 
Spangdahlem and the base's Bitburg Annex. We briefed Congress on 
the results of our site visits on February 27, 2006.		 
Subsequently, on March 1, 2006, Congress requested that we review
the assumptions and methodologies used in the Air Force's report 
issued in January 2006. This report responds to that request.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-736R					        
    ACCNO:   A54363						        
  TITLE:     Limitations in the Air Force's Proposed Housing Plan for 
Spangdahlem Air Base, Germany					 
     DATE:   05/19/2006 
  SUBJECT:   Construction costs 				 
	     Cost analysis					 
	     Data integrity					 
	     Housing construction				 
	     Life cycle costs					 
	     Military appropriations				 
	     Military housing					 
	     Reporting requirements				 
	     Air Force bases					 

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GAO-06-736R

     

     * Results in Brief
     * Background
          * Legislative Reporting Requirement
          * Air Force's Proposed Plan and Alternatives
          * Updated Analysis Could Change Overall Military Family Housi
     * Some Limitations in Build-to-Lease Housing May Have Been Ov
          * Air Force Information IndicatedLimitations on Numbers of Bu
          * Some Build-to-Lease Limitations May No Longer Exist and Som
     * Air Force Did Not Always Follow Guidance in Its Life-cycle
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments and Our Evaluation
     * Description of Both Air Force's and Our Calculations of Lif
          * Air Force's Economic Analysis and Key Assumptions
          * Our Adjusted Life-cycle Cost Analysis
     * PDF6-Ordering Information.pdf
          * Order by Mail or Phone

May 19, 2006

The Honorable Kay Bailey Hutchison

Chair

Subcommittee on Military Construction and Veterans' Affairs, and Related
Agencies

Committee on Appropriations

United States Senate

Dear Senator Hutchison:

Subject: Limitations in the Air Force's Proposed Housing Plan for
Spangdahlem Air Base, Germany

The Air Force plans to construct 233 military housing units on Spangdahlem
Air Base,1 Germany at a cost of $131.3 million spread over fiscal years
2006-2008, and to fund 270 build-to-lease units nearby at an annual cost
of $32,888 per unit over 20 years. The Military Quality of Life and
Veterans Affairs Appropriations Act for fiscal year 2006 directed the
Secretary of the Air Force to submit to the Committees on Appropriations
of both Houses of Congress a report containing a housing plan for
Spangdahlem.2 The House Conference Report accompanying H.R. 2528
stipulated that the report must include a complete cost-benefit analysis
of available housing options to include build-to-lease housing,3 and that
none of the funds appropriated for family housing at Spangdahlem-nearly
$45.4 million-may be obligated until the Secretary of the Air Force
certified to the Appropriations Committees that the report had been
completed and received the Committees' response or a 30-day period has
elapsed after the Committees receive such report.4 In response to the
mandate, the Air Force issued a report in January 2006 that compared its
proposed plan with four other housing options5 that included a combination
of traditional military construction, build-to-lease housing, and
replacement of existing housing units to meet its housing requirements at
Spangdahlem.6 In the report, the Air Force recommended implementation of
its proposed plan and release of the military construction appropriations
for fiscal year 2006. The Air Force also concluded that, depending on the
results of its efforts to explore cooperative ventures with the local
German government and communities and the potential for a larger
build-to-lease program, the scope of its military construction projects
for future years may need to be adjusted. The Air Force also stated it
would provide a status report regarding these adjustments to Congress
within 365 days of the Appropriations Committees' release of the fiscal
year 2006 military construction appropriation. Specifically, the Air Force
proposed to report on the results of the cooperative ventures, number of
housing units procured in the fiscal year 2006 military construction
project, and proposed adjustments in the scope of the fiscal years 2007
and 2008 military construction projects. In February 2006, the
Appropriations Committees released nearly $45.4 million in fiscal year
2006 military construction budget authority for 79 housing units at
Spangdahlem.

United States Government Accountability Office

Washington, DC 20548

1 Hereafter referred to simply as Spangdahlem.

2 Pub. L. No. 109-114, S: 130 (2005).

3 According to Air Force officials, the primary benefits of using build to
lease are that it provides housing quicker and requires less up-front
appropriations from the United States than the traditional military
construction method. Under a build-to-lease agreement, the United States
contracts with a developer to construct housing for a specified number of
units for use by military personnel under a fixed lease term, such as 10
years, with renewal options for additional periods of time. A developer
builds the housing with no U.S. government funds and the only investment
by the United States is a commitment to lease the housing from the
developer once the housing is built.

4 H.R. Conf. Rep. No. 109-305, at 34 (2005).

As you know, during our ongoing review of the Department of Defense's
(DOD) comprehensive overseas master plans,7 we met with Air Force
officials and visited family housing units at Spangdahlem and the base's
Bitburg Annex. We briefed your office on the results of our site visits on
February 27, 2006. Subsequently, on March 1, 2006, you requested that we
review the assumptions and methodologies used in the Air Force's report
issued in January 2006. This report responds to your request.

To meet our objective, we made extensive use of information gleaned from
our site visits of Spangdahlem and the Bitburg Annex in December 2005. We
also interviewed officials of the Office of the Secretary of Defense; U.S.
European Command; U.S. Air Force Europe; Air Force Headquarters Civil
Engineer Directorate; and Parsons Corporation-the contractor that
conducted analyses for the Air Force's report. We reviewed and evaluated
the housing requirements and market analysis the Air Force used in
preparing its housing report and interviewed Air Force officials regarding
the data and assumptions they used in preparing their analysis. We
analyzed the Air Force's efforts in considering build-to-lease
opportunities by interviewing Air Force officials and reviewing
correspondence to and from the German government involving limitations and
possible cost sharing for these initiatives. We also compared the
assumptions, methods, and economic cost analyses used to develop the Air
Force's proposed plan and alternatives with the guidance contained in
Office of Management and Budget (OMB), DOD, and Air Force instructions and
manuals. We also worked with Air Force officials to assess whether their
economic cost analysis was based on this guidance. We determined that our
data were sufficiently reliable for our purposes.

5 The Air Force's proposed plan and four housing alternatives are
described on pages 6 and 7 of this report.

6 Air Force, Report to the Committee on Appropriations of Both Houses of
Congress on A Housing Plan for Spangdahlem Air Base, Germany (Washington,
D.C.: Jan. 25, 2006).

7 Senate Report 108-82 on the Military Construction Appropriations Bill,
2004 directed GAO to monitor the infrastructure master plans developed and
implemented for the overseas regional commands and to provide the
congressional defense committees with annual assessment reports.

We conducted our review from March through May 2006 in accordance with
generally accepted government auditing standards.

                                Results in Brief

Although there is no basis to question whether the Air Force needs to
upgrade its housing at Spangdahlem, key assumptions and methodology used
in the Air Force report on housing plans for Spangdahlem, in some
instances, were based on dated and incorrect information. As a result,
there is uncertainty as to how many housing units are needed and which
method-traditional military construction, build to lease, or other
methods-is the most appropriate means to meet the housing requirement
given costs and other considerations. The Air Force has recognized that
there may be a need to adjust the scope of the military construction
projects proposed for future years, and is in the process of updating its
information and reassessing the mix of housing methods. Nevertheless, we
identified the following weaknesses in its 2006 report that the Air Force
should address before it issues a status report to the Appropriations
Committees. Specifically:

           o  Air Force officials stated that they relied on a 2003 housing
           requirements and market analysis8 as the foundation to determine
           the need for family housing in the Air Force's 2006 Spangdahlem
           housing report. Although the 2003 analysis concluded that no
           additional family housing construction was needed, according to
           Air Force officials the analysis did not take into consideration
           the inadequate condition of some existing housing units and was
           based on outdated information, such as demographic data almost 2
           decades old. Officials said that they also used other sources of
           information to develop the housing requirements identified in
           their 2006 report. While we reviewed these sources, we made no
           assessment of their suitability in determining the housing
           requirements. At the same time, we are concerned that the Air
           Force report may have overestimated the number of new housing
           units needed because it did not take into account other
           information indicating that a new highway had recently opened up
           access to more villages, increasing opportunities for off-base
           housing. Air Force officials said that this information will be
           contained in a new housing requirements and market analysis to be
           issued in July 2006, but they did not expect it to significantly
           change their housing requirements. However, we believe that the
           Air Force may not fully know the amount or mix of housing needed
           until it recalculates its on-base housing requirements using this
           and other new information.
           o  In the House Conference Report to H.R. 2528, the conferees
           urged the Air Force to consider all options to address the housing
           needs, and stated specifically that build-to-lease housing has the
           potential to provide quality housing quickly to the families at
           Spangdahlem, while also providing a more cost-effective and
           flexible option to the United States. Although the Air Force plans
           to use off-base, build-to-lease housing to meet over half of its
           requirements for new family housing in Spangdahlem, it did not
           recommend a larger number of build-to-lease units because it
           assumed that local conditions existed that limited support for
           such projects. For example, Air Force officials assumed, based
           upon limited discussions with state and local German officials,
           that local developers considered the projects too financially
           risky to undertake, without officially testing the market. As a
           result of its assumption, the Air Force may have underestimated
           the number of build-to-lease opportunities and overestimated the
           need for military construction funding or vice versa. Information
           the Air Force received from German officials after publishing its
           report suggests that some limitations may no longer exist, that
           additional build-to-lease opportunities may exist, and that
           military construction needed under the Air Force proposed plan
           could differ from that previously planned. For example, a concern
           that large, U.S.-style developments were not in keeping with the
           culture of the region is being addressed by designating small
           residential zones for appropriately 50-60 units near the air base
           that can be planned, developed, and offered as the U.S. need
           increases.9 Accordingly, to determine local interest in
           build-to-lease developments, the Air Force plans to provide a
           requirements document for 364 build-to-lease units to the German
           government by June 2006 and expects a final build-to-lease
           agreement to be complete in February 2007.10 Until the Air Force
           tests its original assumptions about build-to-lease developments
           and completes all assessments of available housing off base,
           Congress will not be in a position to know whether the Air Force's
           planned allocation of new family housing units in Spangdahlem
           between build-to-lease and military construction units is fully
           justified or to what extent other amounts may be required
           depending on the availability of military construction funding.
           o  We found that the Air Force did not follow OMB, DOD, and Air
           Force guidance on performing life-cycle cost analysis in two
           instances-when it used an incorrect discount rate to calculate the
           present value of the costs and benefits of the Air Force's
           proposed plan and four housing alternatives, and when it
           incorrectly calculated the remaining worth of the housing units
           funded with military construction appropriations after 20 years.
           However, our recalculations based on OMB, DOD, and Air Force
           guidance did not result in a significant variance from the Air
           Force's analysis, in that the estimated life-cycle costs of both
           analyses fell between the other alternatives. As a result, there
           is little, based on our recalculations of the life-cycle costs, to
           support a change in the Air Force's selected proposal, especially
           given the risk assessment criteria the Air Force assigned to
           compare the housing options. Nevertheless, the Air Force should
           use the correct discount rate and remaining worth of the housing
           in its analysis of the housing options presented in its upcoming
           status report to the Appropriations Committees.

8 Parsons Corporation, Housing Requirements and Market Analysis 2003 -
2008: Spangdahlem Air Base Germany (Oct. 6, 2003).

9 According to DOD, the 50-60 unit limitation levied by the German
government limits the ability for large-scale development and encourages
multiple, small developers that will increase the complexity and risk of
the build-to-lease projects.

10 According to DOD, the German government real estate office
(Bundesanstalt fu:r Immobilienaufgaben) will conduct the acquisition
process in this instance for the Air Force.

We are making recommendations to the Secretary of the Air Force to ensure
that the Air Force's upcoming status report to the Appropriations
Committees includes an analysis of available housing options that is based
upon the most currently available data and sound assumptions and
methodology, including (1) the new housing requirements and market
analysis scheduled to be completed in July 2006 and (2) calculations of
life-cycle costs in accordance with government guidance on the use of
discount rates and how to calculate the remaining worth of housing. In
written comments on a draft of this report, DOD concurred with our
recommendations. We discuss DOD's comments and our evaluation of them
later in this report.

                                   Background

Spangdahlem is an enduring installation designed to ensure a strong
presence in the European theater and to facilitate close cooperation with
North Atlantic Treaty Organization allies and currently has a total
population of 12,014 servicemembers, civilians, contractors, and
dependents. Historically, the air base has hosted a fighter-aircraft
mission; however, its mission was enhanced by the closure of Rhein-Main
Air Base in December 2005 when a portion of its airlift mission was moved
to Spangdahlem. Spangdahlem is currently comprised of a main base and four
annexes, which are geographically separated from the main base by 7 to 15
miles.11 The Air Force plans to consolidate all activities, such as base
support and family housing, at Spangdahlem and close the four annexes.
According to Air Force officials, the plan would provide operational
efficiencies and reduce the exposure of U.S. service members and their
families traveling on roads between the annexes and Spangdahlem. According
to Air Force officials, they recorded a total of 196 accidents on the road
between the Bitburg Annex and Spangdahlem in 2004 and 2005.

Legislative Reporting Requirement

The Military Quality of Life and Veterans Affairs Appropriations Act for
fiscal year 2006 directed the Secretary of the Air Force to submit to the
Committees on Appropriations of both Houses of Congress a report
containing a housing plan for Spangdahlem.12 In the House Conference
Report accompanying H.R. 2528,13 the conferees noted the current need for
housing at Spangdahlem and provided funding for such purpose. The
conferees urged the Air Force to consider all options to address the
housing need at Spangdahlem and stated that build-to-lease housing has the
potential to provide quality housing quickly to the families at
Spangdahlem, while also providing a more cost-effective and flexible
option to the United States. In the Statement of Managers accompanying the
Conference Report for H.R. 2528, the conferees directed the Air Force to
report the results of a complete cost-benefit analysis of all available
housing options at Spangdahlem, including build to lease, and that the
analysis should include but not be limited to the cost per housing unit of
each option and evidence of efforts made to lower such cost.

11 The annexes are Bitburg, Oberweis, Zemmer, and Sulm.

12 Pub. L. No. 109-114, S: 130 (2005).

13 H.R. Conf. Rep. No. 109-305, at 34 (2005).

The Conference Report also stated that none of the funds appropriated for
family housing at Spangdahlem-nearly $45.4 million-may be obligated until
the Secretary of the Air Force certified to the Committees on
Appropriations that the report had been completed and received the
Committees' response or a 30-day period has elapsed after the Committees
receive such report. These military construction funds were released to
the Air Force in February 2006.

Air Force's Proposed Plan and Alternatives

The Air Force's January 2006 report to both Appropriations Committees
includes a proposed housing plan and four alternatives for Spangdahlem
representing a combination of traditional military construction,
replacement of existing housing units, and build to lease. This report
also provides an overview on Spangdahlem's mission, the Air Force housing
strategy, and coordination efforts involving cost sharing with the German
government. The Air Force's proposed plan calls for military construction
of 233 family housing units at Spangdahlem at a total cost of $131.3
million spread over fiscal years 2006-2008, using housing units at Bitburg
Annex as temporary living quarters (but eventually closing them), and
obtaining 270 build-to-lease units at an annual cost of $32,888 per unit
for 20 years in the communities surrounding Spangdahlem. The Air Force
anticipates that it would take 5 to 6 years from the start of the fiscal
year 2006 military construction to fully implement the proposed plan. The
report also offers four other alternative ways to meet the projected
housing needs of servicemembers stationed at Spangdahlem.

           o  Alternative 1  provides for military construction of 139 family
           housing units at Spangdahlem in fiscal years 2006-2007, using
           family housing units at Bitburg Annex as temporary living quarters
           (but eventually closing them), and obtaining 364 build-to-lease
           units.
           o  Alternative 2 provides for no military construction at
           Spangdahlem and obtaining 503 build-to-lease units.
           o  Alternative 3 provides for military construction of 164 family
           housing units at Spangdahlem over fiscal years 2006-2008, and
           replacing 339 housing units at Bitburg Annex.
           o  Alternative 4 provides for military construction of 503 family
           housing units at Spangdahlem and using family housing units at
           Bitburg Annex as temporary living quarters (but eventually closing
           them).

Table 1 shows the quantities and sources of proposed housing units as well
as the life-cycle costs as projected and reported by the Air Force for its
proposed plan and four alternatives. All of the housing options include
continued use of 134 units the Air Force considers adequate on Spangdahlem
and 200 units currently leased in German communities near Spangdahlem.

Table 1: Quantities and Sources of Housing Units and the Air Force's
Estimated Life-cycle Costs for Its Proposed Plan and Four Alternatives

        Sources      Proposed Alternative Alternative Alternative Alternative 
                       plan        1           2           3           4      
Fiscal year 2006     79        79                      79          79      
military                                                       
construction                                                   
Fiscal year 2007     60        60                      60          60      
military                                                       
construction                                                   
Fiscal year 2008     94                                25          364     
military                                                       
construction                                                   
Build to lease      270        364         503                 
Replace existing                                       339     
Bitburg Annex                                                  
housinga                                                       
Use existing        134        134         134         134         134     
Spangdahlem                                                    
housing                                                        
Renew existing      200        200         200         200         200     
leases                                                         
Total housing       837        837         837         837         837     
units                                                          
Total life-cycle  $228,437  $253,560    $287,034    $154,276    $135,688   
costsb                                                         

Source: Air Force.

aThis alternative also includes the costs to construct front gate
improvements, a fire station, and demolition of 715 existing, inadequate
housing units located at Bitburg.

bTotal life-cycle costs are in fiscal year 2005 dollars in thousands using
the Air Force's 3.5 percent nominal discount rate.

In its January 2006 report to both Appropriations Committees, the Air
Force recommended implementation of the proposed plan. In addition, the
Air Force committed to executing the fiscal year 2006 military
construction project for 79 housing units and, since it considered
traditional military construction appropriations as the most
cost-effective solution, it also included military construction projects
for fiscal years 2007 and 2008. Because more military construction over
these proposed levels will require utilization of additional contiguous
tracts of land from the German government, the Air Force also recommended
pursuit of 270 build-to-lease units. In addition, the primary benefits of
using build to lease, according to Air Force officials, are that it
provides service members housing faster and requires less up-front
appropriations than traditional military construction. Given current
budget limitations, these officials believe that housing options requiring
less up-front funds may be more acceptable to DOD and Congress despite
their greater life-cycle costs than options with lower life-cycle costs
but greater up-front funding requirements, such as those that rely
primarily on traditional military construction appropriations.

At the same time, Air Force also reported it will continue to explore
cooperative ventures with the German State of Rheinland-Pfalz and local
communities, and a larger build-to-lease program to meet its housing
requirements. Depending on the results of these efforts, the Air Force
concluded that the scope of future years' military construction projects
may be adjusted. The Air Force also proposed to provide a status report
and report these adjustments to Congress within 365 days of the
Appropriations Committees' release of the fiscal year 2006 military
construction funds appropriated for Spangdahlem family housing.
Specifically, the Air Force proposed to report on the (1) realized savings
from cooperation with the State of Rheinland-Pfalz or the success of its
proposed build-to-lease program, (2) number of housing units procured in
the fiscal year 2006 military construction project, and (3) proposed
adjustments in the scope of the fiscal years 2007 and 2008 military
construction projects to meet its housing requirements. The Air Force
concluded by stating that it was committed to reassessing its housing
requirements and adjusting its strategy to provide the most cost-efficient
housing investment solution at Spangdahlem.

Air Force May Have Overestimated Requirements

While the Air Force relied on a housing requirements and market analysis
that concluded no additional family housing construction was needed at
Spangdahlem to develop its 2006 housing report, it also used other sources
of information for this analysis but overlooked other information that may
also affect on-base housing requirements. We are concerned that the Air
Force may have overestimated the number of new housing units needed on
base in its 2006 report because it did not take into account information
showing that a new highway had recently opened up, which has created
access to more villages and subsequently more rental housing and
potentially more build-to-lease locations. Air Force officials said that
this information will be contained in a new housing requirements and
market analysis to be issued in July 2006, but that they did not expect it
to significantly change their housing requirements. However, we believe
that the Air Force may not fully know the amount or mix of housing needed
until it recalculates its on-base housing requirements using this new
information.

Air Force Selectively Relied on Housing Requirements and Market Analysis

Although Air Force officials say that they relied on its 2003 housing
requirements and market analysis to estimate the total family housing
requirement for Spangdahlem, they used other sources of information for
their analysis. A key finding in the housing requirements and market
analysis, which concluded that no additional family housing construction
was needed, does not support the Air Force's current request for military
construction. However, Air Force officials said the 2003 housing
requirements and market analysis did not take into consideration the
inadequate condition of some existing housing units in the Spangdahlem
area. Thus, they believe the number of surplus family housing units
identified in the 2003 analysis did not represent an accurate depiction of
the amount of family housing available for military personnel and their
dependents. Air Force officials also used data provided in another
document completed in June 2005 called the housing community profile,
which provided an assessment of housing conditions and improvements
required to meet Air Force standards, to support the Air Force's proposed
housing plan and alternatives.

Air Force officials recognized that, in some instances, the 2003-2008
analysis reflected dated information, and the Air Force used additional
sources of information to develop its housing requirement. Although Air
Force officials said they used the most current information available when
they prepared the 2003 housing requirements and market analysis, in some
cases they used information that was almost 20 years old. Specifically, in
its assessment of the ability of the private sector to potentially house
military families, the 2003 analysis used data collected by the German
national census of 1987 as a reference for the amount of suitable rental
housing in the community around Spangdahlem. The Air Force also relied on
more current housing data, on-site surveys, and interviews with local
experts in the real estate market and base personnel. While we reviewed
these added sources, we did not make an assessment of their suitability in
determining the housing requirement.

Updated Analysis Could Change Overall Military Family Housing Requirement

The Air Force plans to complete another housing requirements and market
analysis for Spangdahlem in July 2006 using more current data, which could
change-increase or decrease-the overall military family housing
requirement.14 Our prior work, and that of the DOD inspector general, has
emphasized the importance of determining the availability of off-base
housing for military families in communities surrounding military
installations to prevent overstated government housing requirements.15 The
Air Force may have overestimated the number of new housing units needed in
its plan because it did not take into account areas near Spangdahlem that
may be able to support build-to-lease opportunities. In a letter to the
German government dated March 2006, an Air Force official said the results
of the new housing requirements and market analysis this summer would
incorporate factors such as a new highway that has created access to more
villages and subsequently more rentals and potential construction
locations for build-to-lease units. Air Force officials acknowledge that
this updated analysis may reduce the overall family housing requirements
at Spangdahlem by taking into account these newly accessible areas that
may provide additional rental units and be able to support build-to-lease
housing. Air Force officials said, however, that they did not expect this
information to significantly change their housing requirements. Until the
Air Force reevaluates its housing requirements based upon more current
information in its new housing requirements and market analysis, it may
not fully know the amount or mix of housing needed at Spangdahlem.

14 Housing requirements and market analyses are routinely updated every 4
years to determine whether housing requirements in an area have changed.
The upcoming analysis at Spangdahlem will cover the 2008-2013 time frame.

15 GAO, Military Housing: Management Improvements Needed As the Pace of
Privatization Quickens, GAO-02-624 (Washington, D.C.: June 21, 2002).

Some Limitations in Build-to-Lease Housing May Have Been Overcome and Additional
                          Opportunities May Now Exist

Information the Air Force received after publishing its report suggests
that some previous limitations in build-to-lease housing near Spangdahlem
may have been overcome and, consequently, additional build-to-lease
opportunities may exist. The Air Force considered build-to-lease housing
as a significant source of off-base housing under its proposed plan and
under two alternatives, but at the time the Air Force wrote its report,
Air Force officials stated that they did not recommend pursuing larger
numbers of build-to-lease housing units because of local conditions that
limited support for such projects. The Air Force has received information
since publishing its report suggesting that these limitations may no
longer exist, that additional build-to-lease opportunities may exist, and
that military construction needed under the Air Force proposed plan may be
less than stated. To test its original assumptions about local interest in
build-to-lease developments near Spangdahlem, the Air Force plans to
provide a requirements document for 364 build-to-lease units to the German
government by June 2006 and expects a final agreement to be complete in
February 2007.

Air Force Information Indicated Limitations on Numbers of Build-to-Lease

At the time of the Air Force's 2006 report, Air Force officials said that
information indicated there were limitations to pursuing greater numbers
of build-to-lease units than those proposed in the Air Force plan. Air
Force officials cited meetings with representatives of the State of
Rheinland-Pfalz and local communities where these representatives
expressed various concerns. Air Force officials considered the primary
challenge for a build-to-lease proposal at Spangdahlem to be the ability
of local developers to acquire loans from banks to pay for construction of
the housing units, because the projects were considered too financially
risky to undertake. According to Air Force officials, the military
services, by statute,16 are limited to leasing family housing units for a
maximum of 10 years, which may not provide sufficient time for developers
to recoup their investment. Further, the State of Rheinland-Pfalz was
reluctant to guarantee lease payments beyond 10 years because of concerns
that the Air Force might close Spangdahlem at some time in the near
future. Air Force officials stated that, at the Army's Grafenwoehr
Garrison in Germany, the Army addressed this limitation by obtaining local
German government commitment to guarantee an additional 10-year lease
period, thus providing a 20-year leasing agreement for the developers of
build-to-lease housing projects. At Spangdahlem, the State of
Rheinland-Pfalz has been reluctant to provide the same type of commitment
for build-to-lease housing because Rheinland-Pfalz officials believe there
is not a secondary market of German citizens in the area who could lease
the large number of build-to-lease units that could be available at the
end of the 10-year lease period.

16 Section 2828 (d) (1) of Title 10, United States Code provides that
"Leases of housing units in foreign countries under subsection (c) for
assignment as family housing may be for any period not in excess of 10
years, or 15 years in the case of leases in Korea, and the costs of such
leases for any year may be paid out of annual appropriations for that
year."

Discussions in December 2005 between Air Force officials and
representatives of the State of Rheinland-Pfalz and local communities also
yielded concerns regarding a lack of public infrastructure to create more
than 270 private units in a short period of time. In addition, local
officials expressed concerns that large, U.S.-style developments were not
in keeping with the culture of the region. In its report to Congress, the
Air Force acknowledged the difficultly of this situation and stated that
it does not want to pursue a large amount of build-to-lease units, because
the result could be little or no family housing if the limitations they
identified cause build-to-lease plans to fail due to low investor
confidence in the long-term future of the air base coupled with a
questionable secondary market if the base was closed or its mission
significantly reduced. This could force military families to live in
inadequate existing housing and consequently require additional military
construction funds at a later date.

Some Build-to-Lease Limitations May No Longer Exist and Some Military
Construction Funds May Not Be Necessary

Some limitations to build-to-lease developments may no longer exist or may
have been mitigated by recent events. Air Force officials have stated that
the release of fiscal year 2006 military construction funds for family
housing units at Spangdahlem provided assurance to the German private
market that the U.S. government was committed to maintaining a presence in
the area and that the State of Rheinland-Pfalz is now more likely to
provide lease guarantees. As a result, the Air Force has accelerated its
efforts to pursue cooperative ventures with the State of Rheinland-Pfalz
and local villages for a build-to-lease program.

Recent correspondence between the Air Force and the German government
suggests that additional build-to-lease opportunities may exist and that
some military construction funds requested under the Air Force proposed
plan may not be necessary. From January through March 2006, the Air Force
and the German government discussed progress toward attaining additional
built-to-lease units in the Spangdahlem area. A January 2006 letter to the
Air Force from an official of the State of Rheinland-Phalz discussed
overcoming their concern that U.S.-style developments were not in keeping
with the culture of the region by designating small residential zones for
appropriately 50-60 units near the air base that can be planned,
developed, and offered as the U.S. need increases. The letter also
discussed overcoming the concerns of local developers that the projects
were too financially risky by providing financial grants to assist
developers by reducing their total cost liability. Another letter from the
Air Force to the State of Rheinland-Phalz predicted that the results of a
new housing requirement and market analysis will recognize access to more
villages, rental units, and potential housing construction locations. This
should reduce the overall military family housing requirement, which may
reduce local concerns about the size and obtrusiveness of off-base
build-to-lease efforts.

The Air Force plans to test the local market interest in build-to-lease
developments through the German government starting with the Air Force's
requirements document for 364 build-to-lease units in June 2006 and
expects a final build-to-lease agreement to be complete in February
2007-an action that could provide a more complete picture of the potential
use of build-to-lease units. Air Force officials said that if this effort
is successful, the fiscal year 2008 military construction requirement for
94 family housing units may no longer be required. However, the Air Force
is not in a sound position to fully know the amount or mix of housing
needed until it has received the results of the build-to-lease proposal
and other new information. The Air Force proposes to report any
adjustments in its upcoming status report to the Appropriations
Committees. Until the Air Force tests its original assumptions about local
interest in build-to-lease developments and completes all assessments of
available housing off base, Congress will not be in a sound position to
know whether the Air Force's planned allocation of new family housing
units in Spangdahlem between build-to-lease and military construction
units is fully justified.

  Air Force Did Not Always Follow Guidance in Its Life-cycle Cost Analysis of
                                Housing Options

The economic analysis the Air Force used in estimating the life-cycle
costs of its proposed plan and four alternatives presented in its
Spangdahlem housing report did not follow applicable guidance from OMB,
DOD, and Air Force in two instances. The Air Force varied from the
guidance in (1) using a discount rate of 3.5 percent to calculate the
present value of expected costs, and (2) calculating the remaining worth
of the housing units funded with military construction appropriations at
an estimated replacement value. On the basis of the applicable guidance,
we adjusted the Air Force's calculations by (1) using a discount rate of
5.2 percent to calculate the present value of expected costs, and (2)
depreciating the housing units constructed with military construction
appropriations to calculate the remaining worth of the housing at the end
of the period of analysis. (We describe the details of the Air Force's and
our calculations in enclosure I of this report.)

However, as shown in table 2, our recalculations did not result in a
significant variance from the Air Force's analysis.17 Like the Air Force's
life-cycle cost estimate ($228.4 million), our adjusted life-cycle cost
($225.6 million) of the Air Force's proposed plan falls between the
life-cycle costs of other four housing alternatives and the difference
between the life-cycle cost estimates for the proposed plan was only -1.3
percent. As a result, there is little, based on our recalculations of the
life-cycle costs for the current housing options, to support a change in
the Air Force's selected proposal, especially given the risk assessment
criteria the Air Force assigned to compare the housing options.
Nevertheless, the Air Force should use the correct discount rate and
remaining worth of the housing in its analysis of the housing options
presented in its upcoming status report to the Appropriations Committees.

Table 2: Comparison of Air Force Reported Life-cycle Costs with GAO
Adjusted Life-cycle Costs for the Proposed Plan and Four Alternatives

                  Air Force life-cycle         Adjusted Difference Percentage 
                                 costs life-cycle costs            difference 
Proposed plan              $228,437         $225,557    -$2,880     -01.3% 
Alternative 1               253,560          237,614    -15,946     -06.3% 
Alternative 2               287,034          245,113    -41,921     -14.6% 
Alternative 3               154,276          150,910     -3,366      -2.2% 
Alternative 4               135,688          163,646    +27,958     +20.6% 

Source: Air Force and GAO.

Notes: Fiscal year 2005 dollars in thousands.

The life-cycle costs to retain 134 housing units at Spangdahlem and to
continue to lease 200 units in the local community are common to all five
options and, consequently, are not included.

Air Force officials stated that the Air Force would not change its
conclusions and recommendation supporting the proposed housing plan based
on our recalculations, because the Air Force also relied on its
established criteria to measure the benefits and risk of each housing
option. The benefits criteria considered whether each option supported
construction of government-owned housing; provided flexible funding and
execution; consolidated operations at Spangdahlem and returned land and
facilities to the German government; leveraged cost sharing with the
German government; or capitalized on build-to-lease housing. The risk
criteria considered whether each option kept military construction
investment below, over, or at the current program level;18 included 270 or
more units in a build-to-lease program; or provided no U.S. military
construction investment resulting in a lack of private developer
confidence in investing in build-to-lease housing for Spangdahlem. For
example, as shown in table 3, the Air Force concluded that its proposed
plan represented the best-case scenario in that the plan provides for a
large number of benefits while the risks were low. On the other hand,
according to the Air Force, alternative 4 provides for the worst-case
scenario in that, while the alternative supports the goal of consolidating
operations at Spangdahlem, the risk is considered high due to the
overreliance on U.S. government funding for all housing construction. In
addition, this alternative requires the German government to acquire land
adjacent to Spangdahlem, which increases risks due to the potential
difficulties and delays in acquiring the land from private owners.19 Based
on the results of the benefits and risk analysis, Air Force officials
believe our recalculations by themselves would not have caused the Air
Force to change the overall conclusions and recommendation in its report
to Congress. We have no basis to challenge the Air Force's position
regarding its risk assessment.

17 More complete data on the potential for build-to-lease housing and the
number of available rental units in the local communities near
Spangdahlem, which will affect life-cycle costs, will not be available
until the Air Force analyzes the results of its solicitation for proposals
about build-to-lease housing and updates its housing requirements and
market analysis later in 2006.

18 The Air Force assigned a higher level of risk to options in which the
U.S.-funded military construction exceeded the current program because an
increase in up-front funding requirements was expected to be less
acceptable to DOD and Congress than the current level.

Table 3: Air Force Reported Benefit and Risk for the Proposed Plan and
Four Alternatives

                 Benefit    Risk   
Proposed plan   High     Low    
Alternative 1   High   Moderate 
Alternative 2   High     High   
Alternative 3   Low      High   
Alternative 4 Moderate   High   

Source: Air Force.

                                  Conclusions

The Air Force 2006 report to the Appropriations Committees provided an
assessment of housing options that was not always based on current
information, and did not follow the government guidance on cost-benefit
analysis methodology. Although we found no basis to question whether the
Air Force needs to upgrade its housing at Spangdahlem, there is
uncertainty over how many housing units are needed and which housing
method-traditional military construction, build to lease, or other
methods-is the most appropriate means to meet its housing requirements.
Consequently, we believe, as the Air Force concluded in its 2006 report,
that there may be a need to adjust the scope of the military construction
projects proposed for the future. While the Air Force specified that the
results of its efforts to explore cooperative ventures and develop a
larger build-to-lease program are needed to make these adjustments in its
upcoming status report to the Appropriations Committees, it did not
identify other factors, such as its new Spangdahlem housing requirements
and market analysis, it planned to consider in making these adjustments.
Until the Air Force fully explores cooperative ventures and a larger
build-to-lease program, as well as the results of its new housing
requirements and market analysis-all of which the Air Force expects to be
completed later in 2006 or early 2007-the Air Force and Congress will not
be in a sound position to know the full potential for build-to-lease
housing near Spangdahlem and the need for military construction in fiscal
years 2007 and 2008. Until then, there is a possibility of overestimating
or underestimating the number of housing units needed to be built on base
with military construction appropriations.

19 According to the Air Force, the acquisition of additional land will
occur at no cost to the U.S. government and ownership will ultimately
remain with the German government.

While Air Force did not fully follow OMB, DOD, and Air Force guidance on
performing life-cycle cost analysis, our recalculations based on the
guidance did not result in a significant variance from the Air Force's
analysis, in that the estimated life-cycle costs of both analyses fell
between the other alternatives. As a result, there is little based on our
recalculations of the existing life-cycle costs using current information
to support a change in the Air Force's selected proposal in its 2006
report or the Air Force's reliance on its established criteria to measure
the benefits and risk of each housing option. Nevertheless, since there
may be a need to adjust the scope of the military construction projects
proposed for fiscal years 2007 and 2008 and the other housing methods
presented in its upcoming status report, the Air Force cannot accurately
calculate and objectively assess the costs and benefits of different
housing options unless it follows OMB guidance on the use of discount
rates and with DOD and Air Force guidance on the use of depreciation to
calculate the remaining worth of housing.

                      Recommendations for Executive Action

We recommend that the Secretary of the Air Force take the following two
actions and reflect the results of these actions in its upcoming status
report to the Appropriations Committees.

           o  Because of the uncertainty associated with which factors the
           Air Force plans to consider when it adjusts the scope of the
           military construction projects proposed for fiscal years
           2007-2008, the Secretary should include, at a minimum, the results
           of its new housing requirements and market analysis for
           Spangdahlem (scheduled to be completed in July 2006) in making the
           required adjustments.
           o  To ensure that the status report is based upon sound economic
           assumptions and methods, the Secretary should calculate life-cycle
           costs in accordance with OMB guidance on the use of discount rates
           and in accordance with DOD and Air Force guidance on the use of
           depreciation to calculate the remaining worth of housing.

                       Agency Comments and Our Evaluation

In written comments on a draft of this report, the Assistant Deputy Under
Secretary of Defense (Environmental, Safety, and Occupational Health)
agreed with our recommendations. However, the Assistant Deputy Under
Secretary commented that DOD expects the implementation of our
recommendations would have minimal effect on the outcome of the Air
Force's analysis and would not significantly change the recommended course
of action. We are reluctant to agree with this expectation since many of
the key data needed to base such a conclusion will not be known until
later this year. For example, the results of the new Spangdahlem housing
requirements and market analysis due to be completed this summer would
incorporate factors such as a new highway that has created access to more
villages and subsequently more rentals and potential construction
locations for build-to-lease units. This updated analysis has the
potential to reduce the overall family housing requirements at Spangdahlem
by taking into account these newly accessible areas that may provide
additional rental units and be able to support build-to-lease housing. We
believe that until the Air Force has sufficient time to assess the results
of its efforts to further explore cooperative ventures and develop a
larger build-to-lease program, as well as the results of its new housing
requirements and market analysis, DOD will not be in a sound position to
know the full potential for build-to-lease housing and more rental housing
near Spangdahlem, and the need for military construction funding in fiscal
years 2007 and 2008. As a result, we continue to believe, as the Air Force
concluded in its 2006 report, that there may be a need to adjust the scope
of the proposed military construction projects because of the uncertainty
over how many housing units are needed and which housing
method-traditional military construction, build to lease, or other
methods-is the most appropriate means to meet its housing requirements.

In addition, the Assistant Deputy Under Secretary's comments outlined what
DOD believed were three deficiencies of our draft report. However, in its
comments DOD misquoted our draft report and made incorrect conclusions as
discussed below:

First, DOD stated that our report "supports the Air Force's selected
proposal, especially given the risk assessment criteria the Air Force
assigned to compare the housing options." In addition, DOD concluded that
this quote should have been the primary focus of our audit and reflected
in the results and conclusions sections of our report. However, we
actually reported that "As a result, there is little, based on our
recalculations of the life-cycle costs for the current housing options, to
support a change in the Air Force's selected proposal, especially given
the risk assessment criteria the Air Force assigned to compare the housing
options." By misquoting our report, DOD failed to recognize that our
statement referred to our recalculations of the life-cycle costs using
then currently available information for the housing options identified in
the Air Force's January 2006 report. As discussed above, there may be a
need for the Air Force to adjust the housing options in its upcoming
status report based on the results of its efforts to further explore
cooperative ventures and develop a larger build-to-lease program, as well
as the results of its new Spangdahlem housing requirements and market
analysis. While we appreciate DOD's view that our recalculations of the
life-cycle costs should be the primary focus of our report, we believe
that DOD should recognize that we completed this review in response to a
request from the Chair of the Senate Subcommittee on Military Construction
and Veterans' Affairs, and Related Agencies, who asked that we review all
the key assumptions and methodologies the Air Force used to develop its
January 2006 report, and that the life-cycle costs analysis was only one
aspect of our review, not the primary focus. Accordingly, we have made no
change to our report.

Second, DOD commented that our draft report stated the 2003 housing
requirements and market analysis did not take into consideration the
inadequate condition of some existing housing units and that we reported
the Air Force substituted other sources of information for its 2003
housing requirements and market analysis. Actually, our draft report
stated that "Although the 2003 analysis concluded that no additional
family housing construction was needed, according to Air Force officials,
the analysis did not take into consideration the inadequate condition of
some existing housing units and was based on outdated information, such as
demographic data almost 2 decades old. Therefore, officials say, they
substituted other sources of information to develop the housing
requirements used in their 2006 report." By using the term "substituted"
in this case and other instances in our draft report, we were attempting
to reconcile the differences between the Air Force 2003 market analysis'
conclusion that no additional family housing construction was needed and
its 2006 report's conclusion that additional housing construction was
needed at Spangdahlem. We were also trying to explain that the Air Force
used other sources of information along with the 2003 market analysis to
determine the housing requirements identified in its 2006 report. Because
we continue to believe that it is important to reconcile the differences
between the conclusions of the 2003 market analysis and 2006 report, we
did not change our report in this respect. However, we revised our report
to eliminate the use of "substituted" as DOD suggested. Further, our draft
report did not state that the 2005 housing community profile was done to
complete the Air Force's January 2006 report as DOD stated in its written
comments. Accordingly, we made no change to our report in that regard.

Third, DOD expressed concern that our draft report stated that the Air
Force had "limited discussions with state and local German officials" and
DOD noted instead that there had been numerous discussions. DOD also noted
that the Air Force cannot issue a request for proposals to test the level
of interest by local developers in build-to-lease projects and that German
government will conduct the acquisition process in this instance for the
Air Force. With respect to DOD's first concern, we actually reported that
"Air Force officials assumed, based upon limited discussions with state
and local German officials, that local developers considered the projects
too financially risky to undertake, without officially testing the market
[through] a request for proposals." Our use of "limited" in this instance
was based primarily on both: (1) the Air Force 2006 report's description
of only one meeting with state government of Rheinland-Pfalz
representatives where Air Force and German officials discussed options
involving the German government cooperation including cost-sharing, road
repair, and loan guarantees; and (2) that the Air Force had not yet tested
the local market by having the German government issue a request for
proposals. We continue to believe our use of limited in this instance is
proper. In addition, the statement in our report that the Air Force
planned to issue a request for proposal was based on the documentation Air
Force officials provided to us, which states that the "USAFE [U.S. Air
Force Europe] plans to test the market through a Request for Proposal
(RFP) for 364 units." This documentation did not state, nor did Air Force
officials mention, that the German government would actually issue the
request for proposals. Nevertheless, as DOD suggested, we revised this
report to reflect that the German government would conduct the acquisition
process in this instance for the Air Force.

The Assistant Deputy Under Secretary's comments are reprinted in their
entirety in enclosure II. DOD also provided technical clarifications,
which we incorporated as appropriate.

                                   _ _ _ _ _

We are sending copies of this report to other interested congressional
committees; the Secretaries of Defense and the Air Force; and the
Director, OMB. 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 . The GAO staff members who made key contributions
to this report are listed in enclosure III.

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.

Sincerely yours,

Barry W. Holman, Director

Defense Capabilities and Management

    Description of Both Air Force's and Our Calculations of Life-cycle Costs

The economic analysis the Air Force used in estimating the life-cycle
costs presented in its Spangdahlem housing report varied from applicable
Office of Management and Budget (OMB), Department of Defense (DOD), and
Air Force guidance in (1) using a discount rate of 3.5 percent to
calculate the present value of expected costs, and (2) calculating the
remaining worth of the housing units funded with military construction
appropriations at an estimated replacement value at the end of the period
of analysis-in this case 20 years. Using Air Force data, we recomputed the
life-cycle costs based on the applicable guidance by (1) using the correct
discount rate of 5.2 percent, and (2) depreciating the housing units
constructed with military construction appropriations to calculate the
remaining worth of the housing.

Air Force's Economic Analysis and Key Assumptions

The Air Force used a variety of data sources and analytical steps to
estimate the life-cycle costs of its proposed plan and the four other
housing alternatives for Spangdahlem.

           o  First, the construction costs of the family housing units were
           derived from the cost estimates contained on DD form 1391 for
           projects where they existed,1 and from DOD's family housing cost
           model, which contains estimates of construction costs. To compute
           the present value of these construction costs in fiscal year 2005
           dollars, the Air Force used a 3.5 percent nominal discount rate.
           Air Force officials said the 3.5 percent discount rate was
           selected automatically from a Web-based program model that is
           available for public use in making net present value calculations.
           o  Second, to follow DOD guidance on economic analysis,2 the Air
           Force offset the costs of the military construction projects by
           their remaining worth, which the guidance and the Air Force's
           report call residual value, of the family housing units at the end
           of the period of analysis. The guidance specifically states that
           residual value should be calculated for alternatives that have
           assets (buildings, equipment, structures, etc.) that will still
           have a useful value at the end of the period of analysis. It is
           important to note here that the term "residual value" used in the
           Air Force's analysis should not be confused with the residual
           value terminology also commonly used overseas to describe an
           amount a host nation would pay the United States for improvements
           made to property when it is returned to the host nation. In no
           instances do Air Force officials believe the United States would
           receive the amount of residual value used in its economic cost
           analysis if the housing were to be returned to Germany sometime in
           the future. Although Air Force guidance further states that
           residual value amounts are normally calculated using a straight
           line depreciation method3 of the started value over the project's
           economic life,4 the Air Force did not depreciate the value of
           housing in its economic cost analysis. Instead, Air Force
           officials assumed that the Air Force would fully fund the
           sustainment of the housing necessary to cover expenses of all
           recurring maintenance costs as well as major repairs (e.g.,
           replacing the roof or repairing the air conditioning) and,
           consequently, they concluded these units would not depreciate in
           value. However, it is important to note that historically the Air
           Force has not fully funded sustainment of its facilities. For
           example, we have reported that hundreds of millions of dollars
           designated for sustainment continues to be redesignated by the
           services to pay for base operations support services and other
           programs and priorities, and that amounts spent on facilities
           sustainment have fallen short of what is needed to halt the
           deterioration of facilities.5 
           o  Third, on the basis of historical data on actual operation and
           maintenance costs for family housing, the Air Force estimated that
           it would incur $4,900 in annual operation and maintenance costs.
           To compute the present value of these construction costs in fiscal
           year 2005 dollars, the Air Force used the Web-based program model
           to inflate the $4,900 estimate 2.5 percent per year and adjusted
           for the time value of money by 3.5 percent.
           o  Fourth, using historical cost data for build-to-lease
           agreements, the Air Force estimated that the annual cost of the
           build-to-lease housing was $32,888 per unit. To compute the
           present value of these costs in fiscal year 2005 dollars, the Air
           Force used the Web-based program model to inflate the $32,888
           estimate 2.5 percent per year and adjusted this figure for the
           time value of money by 3.5 percent.

1 DD form 1391 is used by DOD to submit requirements and justifications in
support of funding requests for military construction to Congress.

2 DOD Instruction 7041.3, Economic Analysis for Decision Making
(Washington, D.C.: Nov. 7, 1995).

As shown in table 4, the estimated life-cycle cost ($228.4 million) of the
Air Force's proposed plan falls between the life-cycle costs of other four
housing alternatives, which range from $135.7 million to $287 million.

3 Straight line depreciation is a method of calculating the depreciation
of an asset which assumes the asset will lose an equal amount of value
each year. The annual depreciation is calculated by subtracting the
salvage value of the asset from the purchase price, and then dividing this
number by the estimated useful life of the asset.

4 Air Force Manual 32-1089, Air Force Military Construction and Family
Housing Economic Analysis Guide (Washington, D.C.: Aug. 1, 1996).

5 GAO, Defense Infrastructure: Issues Need to Be Addressed in Managing and
Funding Base Operations and Facilities Support, GAO-05-556 (Washington,
D.C.: June 15, 2005), and Defense Infrastructure: Changes in Funding
Priorities and Strategic Planning Needed to Improve the Condition of
Military Facilities, GAO-03-274 (Washington, D.C.: Feb. 19, 2003).

Table 4: Air Force Life-cycle Costs for Its Proposed Plan and Four
Alternatives

Fiscal year 2005 dollars in thousands

                     Proposed Alternative Alternative Alternative Alternative 
                         plan           1           2           3           4 
Military                                                       
construction:                                                  
New family       $126,205a     $80,769                 $96,097    $210,146 
housing at                                                     
Spangdahlem                                                    
Demolition at                               $2,755             
Spangdahlem                                                    
Replace Bitburg                                        128,140 
Annex housingb                                                 
Subtotal (total   $126,205     $80,769      $2,755    $224,237    $210,146 
military                                                       
construction)                                                  
Less residual     (69,982)    (44,634)               (112,316)   (116,813) 
value                                                          
Subtotal           $56,223     $36,135      $2,755    $111,921     $93,333 
(military                                                      
construction                                                   
less residual                                                  
value)                                                         
Operation and       19,620      11,704                  42,355      42,355 
maintenance                                                    
Build to lease     152,595     205,721     284,279             
Total life-cycle  $228,437    $253,560    $287,034    $154,276    $135,688 
costs                                                          

Source: Air Force.

Notes: Totals may not add due to rounding.

The life-cycle costs to retain 134 housing units at Spangdahlem and to
continue to rent 200 units in the local community are common to all five
options and, consequently, are not included in this table.

a$131.3 million in original military construction costs for fiscal years
2006-2008 presented in fiscal year 2005 dollars.

bThis alternative also includes the costs to construct front gate
improvements, a fire station, and demolition of 715 existing, inadequate
housing units located at Bitburg.

Although military construction and build-to-lease programs are typically
analyzed on a 40-year basis, the Air Force used a 20-year time frame to
generate the life-cycle costs of each of the housing options shown in
table 4. According to Air Force guidance, the time frame for the economic
cost-analysis period used to compare various alternatives is normally the
construction period plus the shortest of the known economic life of the
different alternatives.6 In this instance, according to Air Force
officials, the initial lease period for housing units is not to exceed 10
years with a 10-year renewal option.7 Air Force officials also said to go
beyond 20 years in its analysis would create several challenges because of
the lack of information on the costs of build-to-lease units since the
lease would have to be renegotiated and housing built with military
construction appropriations would have to be renovated, which would
require adjustments in its cost estimates for the different housing
options. Consequently, the Air Force chose to use a 20-year time frame in
its economic costs analysis, as we did when we adjusted the Air Force's
life-cycle costs analysis.

6 Air Force Manual 32-1089.

7 10 U.S.C. 2828 S: (d) (1).

Our Adjusted Life-cycle Cost Analysis

We recalculated the life-cycle costs of the Air Force's proposed plan and
the four alternatives after making two adjustments to better follow OMB,
DOD, and Air Force guidance. (See our adjusted life-cycle costs in table
5.) First, we used a 5.2 percent discount rate to calculate the present
value of the expected military construction costs, annual operation and
maintenance costs, and annual build-to-lease housing costs. OMB guidance
on economic cost analysis, such as those performed by the Air Force,
provides specific guidance on the discount rates to be used in evaluating
federal programs whose benefits and costs are distributed over time.8
DOD's instruction on economic analysis decision making states that the
estimate of the discount rate for use in economic analysis shall be issued
annually in accordance with OMB guidance and the data shall be based on
estimates of real and nominal borrowing rates provided by OMB.9 Air Force
guidance on military construction and family housing economic analysis
also requires an economic analysis to use discount rates provided by
OMB.10 For fiscal year 2005-the base year of the Air Force study-OMB
guidance requires that 5.2 percent be used for a 20-year period by federal
agencies as the nominal discount rate for their economic cost analyses.11
Second, to follow Air Force guidance, we depreciated the housing units
constructed with military construction appropriations using a straight
line method to calculate the residual value of the housing at the end of
the period of analysis. Air Force guidance states that residual value is
normally calculated using a straight line depreciation method.

8 OMB Circular A-94, Guidelines and Discount Rates for Benefit-Cost
Analysis of Federal Programs, (Washington, D.C.: Oct. 29, 1992). The
circular states that the standard criterion for deciding whether a
government program can be justified on economic principles is the net
present value, which is calculated by assigning monetary values to
benefits and costs, discounting future benefits and costs using an
appropriate discount rate, and subtracting the sum total of discounted
costs from the sum total of discounted benefits.

9 DOD Instruction 7041.3.

10 Air Force Manual 32-1089.

11 OMB Circular No. A-94, App. C, Discount Rates for Cost-Effectiveness,
Lease Purchase, and Related Analyses (Washington, D.C.: Jan. 5, 2006). The
5.2 percent rate is available in a table of past years discount rates from
Appendix C of Circular No. A-94.

Table 5: Adjusted Life-cycle Costs for the Air Force's Proposed Plan and
Four Alternatives

Fiscal year 2005 dollars in thousands

                     Proposed Alternative Alternative Alternative Alternative 
                         plan           1           2           3           4 
Military                                                       
construction:                                                  
New family       $118,620a     $77,124                 $91,123    $195,280 
housing at                                                     
Spangdahlem                                                    
Demolition at                               $2,662             
Spangdahlem                                                    
Replace Bitburg                                         89,554 
Annex housingb                                                 
Subtotal (total   $118,620     $77,124      $2,662    $180,677    $195,280 
military                                                       
construction)                                                  
Less residual     (39,979)    (24,943)                (65,890)    (67,757) 
value                                                          
Subtotal           $78,641     $52,181      $2,662    $114,787    $127,523 
(military                                                      
construction                                                   
less residual                                                  
value)                                                         
Operations and      16,773       9,982                  36,123      36,123 
maintenance                                                    
Build to lease     130,143     175,451     242,451             
Total life-cycle  $225,557    $237,614    $245,113    $150,910    $163,646 
costs                                                          

Source: Based on Air Force data.

Notes: The life-cycle costs to retain 134 housing units at Spangdahlem and
to continue to rent 200 units in the local community are common to all
five options and, consequently, are not included in this table.

a$131.3 million in original military construction costs for fiscal years
2006-2008 presented in fiscal year 2005 dollars.

bThis alternative also includes the costs to construct front gate
improvements, a fire station, and demolition of 715 existing, inadequate
housing units located at Bitburg.

                    Comments from the Department of Defense

                     GAO Contact and Staff Acknowledgements

GAO Contact

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

Acknowledgements

In addition to the person named above, Nelsie Alcoser, Susan Ditto, Mark
Little, Charles Perdue, Gary Phillips, and Roger Tomlinson also made major
contributions to this report.

(350835)

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