    Federal Courthouses: Rent Increases Due to New Space and Growing
    Energy and Security Costs Require Better Tracking and Management
    (22-JUN-06, GAO-06-892T).

    The judiciary pays over $900 million in rent annually to GSA for
    court-related space, representing a growing proportion of the
    judiciary's budget. The judiciary's rent payments are deposited
    into GSA's Federal Buildings Fund (FBF), a revolving fund used to
    finance GSA's real property services, including the construction
    and repair of federal facilities under GSA control. In December
    2004, the judiciary requested a $483 million dollar permanent,
    annual rent exemption which GSA denied, saying that it undermined
    the intent of FBF and that GSA was unlikely to obtain
    appropriations to replace lost FBF income. GAO reviewed (1)
    recent trends in the judiciary's rent and space occupied and (2)
    challenges that the judiciary faces in managing its rent costs.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-892T
        ACCNO:   A55850
      TITLE:     Federal Courthouses: Rent Increases Due to New Space and
    Growing Energy and Security Costs Require Better Tracking and
    Management
         DATE:   06/22/2006
      SUBJECT:   Budget obligations
    	     Federal courts
    	     Federal property management
    	     Interagency relations
    	     Rent policies
    	     Rental rates
    	     Federal Buildings Fund

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    GAO-06-892T

         * Background
         * Increases in Square Footage and Operating and Security Costs
         * Judiciary Faces a Number of Challenges but Could Take Action
         * Recommendations
         * Agency Comments
         * Scope and Methodology
         * GAO Contacts and Staff Acknowledgements
              * Order by Mail or Phone

    Testimony

    Before the Subcommittee on Economic Development, Public Buildings and
    Emergency Management, Committee on Transportation and Infrastructure,
    House of Representatives

    United States Government Accountability Office

    GAO

    For Release on Delivery Expected at 11:00 a.m. EDT

    Thursday, June 22, 2006

    FEDERAL COURTHOUSES

    Rent Increases Due to New Space and Growing Energy and Security Costs
    Require Better Tracking and Management

    Statement of Mark L. Goldstein, Director Physical Infrastructure Issues

    GAO-06-892T

    Mr. Chairman, Ranking Democratic Member, and Members of the Subcommittee:

    Thank you for the opportunity to testify before you today on our work
    related to federal courthouse rents. Since the early 1990s, the General
    Services Administration (GSA) and the federal judiciary1 have undertaken a
    multibillion dollar courthouse construction initiative to address what the
    judiciary has identified as growing needs. According to the Administrative
    Office of the U.S. Courts (AOUSC), the judiciary's workload has grown
    substantially and the number of court staff has doubled since 1985. The
    judiciary pays over $900 million in rent annually to GSA to occupy
    court-related space, and this amount represents a growing proportion of
    the judiciary's budget. The rent payments, which by law approximate
    commercial rates, are deposited into GSA's Federal Buildings Fund (FBF).
    With slightly over 20 percent of its budget allocated for rent payments,
    in December 2004, the judiciary requested a $483 million permanent, annual
    exemption from rent payments to GSA so that according to judiciary
    officials, the judiciary would not have to cut personnel to pay the rent.
    In denying the judiciary's requested rent exemption, GSA noted that FBF
    was designed to encourage efficient space utilization by making agencies
    accountable for the space they occupy, and that it is unlikely GSA could
    obtain direct appropriations to replace lost FBF income. In June 2005, we
    testified2 that federal agencies' rent payments provided a relatively
    stable, predictable source of revenue for FBF, but that this revenue has
    not been sufficient to finance both growing capital investment needs and
    the cost of leased space. In fact there have been several direct
    appropriations to FBF to cover this funding gap. We also found that
    previous rent exemptions, such as the one requested by the judiciary,
    hampered GSA's ability to generate sufficient revenue for needed capital
    investment. You asked us to review the judiciary's courthouse rent costs.

    Today my testimony will discuss (1) recent trends in the judiciary's rent
    payments and square footage occupied; and (2) challenges that the
    judiciary faces in managing its rent costs. My statement is based on our
    report that will also be released today.3 In summary, we found the
    following:

    1 The federal judiciary is comprised of 94 judicial districts organized
    around state boundaries and grouped into 12 regional circuits, each of
    which has a United States Court of Appeals. There is also a 13th Circuit,
    the Court of Appeals for the Federal Circuit, which has nationwide
    jurisdiction to hear appeals in specialized cases, such as those involving
    patent laws and cases decided by the Court of International Trade and the
    Court of Federal Claims.

    2 GAO, Courthouse Construction: Overview of Previous and Ongoing Work,
    GAO-05-838T (Washington, D.C.: June 21, 2005).

               o  About two-thirds of the judiciary's $210 million rent increase
               from fiscal years 2000 through 2005 is attributable to a 19
               percent increase in net square footage. The remaining increase is
               attributable to disproportionately high increases in security and
               operating costs. We also found that neither the judiciary nor GSA
               had routinely and comprehensively analyzed the factors influencing
               the rent increases. In the report released with this testimony, we
               recommended that the judiciary begin tracking and analyzing rent
               trends in order to improve its understanding and ability to manage
               its rent costs. The judiciary agreed that tracking trends is
               necessary, but said that the specific types of data we recommended
               would not be particularly useful for program planning, management,
               or budgeting purposes.
               o  The judiciary faces several challenges to managing its rent
               costs including costly architectural and structural requirements
               for modern courthouses, a lack of incentives for efficient space
               use, and a lack of space allocation criteria for appeals and
               senior district judges. AOUSC also identified several challenges
               in addition to the ones we identified, including statutorily
               designated places of holding court, the benefits to GSA and the
               Federal Buildings Fund of backfilling courthouses with other
               courts, and inconsistencies in the funding stream for courthouse
               construction projects. In our report released with this testimony,
               we recommended that the judiciary establish incentives to
               encourage local decision makers to use space efficiently and
               improve its space allocation criteria in a number of ways. The
               judiciary disagreed that additional space allocation criteria are
               needed for appeals courts and senior judges, and said that it has
               already started updating its space allocation criteria related to
               technological advancements and plans to consider other changes in
               the future.

               Federal agencies, including the judiciary, that operate in
               facilities under the control and custody of GSA are required to
               pay rent for the space they occupy. Rent payments, which by law
               must approximate commercial rates, are deposited into the FBF,
               which is a revolving fund that GSA uses to provide a range of real
               property services, including maintenance, repairs, and
               alterations, to space occupied by federal agencies. GSA, through
               FBF, encourages federal agencies to be accountable for the space
               they use by requiring them to budget and pay for their own space
               requirements. A committee report accompanying the enactment of FBF
               noted that because each agency would have to budget for its space
               needs, doing so would promote more efficient and economical use of
               space by government agencies.4 The judiciary's rent payments
               represent roughly 15 percent of all rent payments made into FBF,
               making it one of the two largest contributors.5

               On the basis of a rent pricing policy introduced in the late
               1990s, the rent GSA charges is composed principally of shell rent,
               operating expenses, tenant improvements, and security costs. These
               components account for over 96 percent of the judiciary's rent
               bill payments in fiscal year 2005.

               o  The shell rent represents the cost of using the structure, base
               building systems, concrete floor, and basic wall and ceiling
               finishes and is the largest rent component, representing 60
               percent of the judiciary's annual rent bill payments in fiscal
               year 2005.6 For most government-owned properties, shell rent does
               not represent the actual costs, but is based instead on comparable
               private sector commercial rents in the local commercial market.
               o  Tenant improvements reflect customizing space for that tenant
               and can include private offices, special type spaces, floor
               covering, doors, and wood finishes. The tenant is responsible for
               deciding how to finish the space beyond some basic minimum
               standards and thus has control over much of the cost. GSA
               officials have said that the judiciary has the highest costs for
               tenant improvements in its inventory because of the level of
               finishes needed in federal courthouses. Unlike the other rent
               components, tenant improvement costs are removed from the rent
               bill once the tenant has completely paid for them.
               o  Operating costs-which cover cleaning; general maintenance; and
               heating, air conditioning, and other utilities-are set as part of
               the market appraisal for the shell rent in owned space. But unlike
               the shell rent, operating costs are adjusted annually for
               inflation in between appraisals.
               o  Until fiscal year 2005, the judiciary paid Federal Protective
               Service (FPS) security costs to GSA as part of its rent payment.
               Starting in fiscal year 2005, however, the judiciary began paying
               these security costs directly to the Department of Homeland
               Security (DHS) after FPS was transferred to that department.
               However, since FPS security costs still exist, and they were an
               important part of rent for all of the other years we analyzed, we
               included these costs as if they were still part of annual rent
               bill payments for fiscal year 2005.
               o  Rent is also composed of several other components, including
               fees for parking, building joint use, antennas, and GSA's Public
               Buildings Service. These other components comprised about 4
               percent of the judiciary's entire rent bill in fiscal year 2005.

               The Judicial Conference of the United States (Judicial Conference)
               is the judiciary's principal policy making body. The Judicial
               Conference works in coordination with AOUSC, which is responsible
               for administering the federal judiciary's budget as well as
               performing other programmatic and administrative functions, such
               as paying the judiciary's rent bill from its annual appropriations
               from Congress. Each circuit has a judicial council, which is
               composed of federal judges in that circuit, and the council has
               the authority to determine the need for all space accommodation
               within its circuit. As such, the district, bankruptcy, and appeals
               courts occupy space in courthouses or lease space in other federal
               or private office buildings. The district courts are the trial
               courts of the federal court system, housing both district and
               magistrate judges. They occupy the most space within the federal
               judiciary. The district courts have jurisdiction to hear nearly
               all categories of federal cases, including both civil and criminal
               matters. The federal judiciary has exclusive jurisdiction over
               bankruptcy cases, which are overseen by bankruptcy judges. The
               court of appeals from each circuit hears appeals from the district
               courts located within its boundaries, as well as appeals from
               decisions of federal administrative agencies. Figure 1 illustrates
               the rentable square feet distribution within the federal
               judiciary.

               Figure 1: Space Distribution within the Federal Judiciary in
               Fiscal Year 2005

               Note: The remaining space is composed of AOUSC, the Federal Public
               Defender's Office, and other specialized federal courts.

               The federal judiciary's rental obligations for federally owned and
               leased space have steadily risen from $780 million to $990
               million, or 27 percent from fiscal years 2000 through 2005, after
               controlling for inflation using the Gross Domestic Product price
               index. During this period, the judiciary had a net increase in the
               amount of space it occupies, from 33.6 million to 39.8 million
               rentable square feet, which is a 19 percent increase nationwide.
               About two-thirds of the rent increase is attributable to this
               increase in square footage. Among the components of rent, shell
               (the building with basic infrastructure) grew proportionately with
               the amount of net space added-about 19 percent. However, increases
               in operating costs (driven by increases in energy costs) and
               security costs grew disproportionately higher than the percentage
               of net space added, thus contributing to the overall increase in
               rent (see figure 2). The costs of tenant improvements (finishes
               such as carpeting) increased at a slower rate than the amount of
               net space added. AOUSC disagreed with our methods for attributing
               costs to the judiciary's net growth in square footage. We continue
               to believe that our methods are sound.

               Figure 2: The Approximate Share of Judiciary Rent Increases
               Attributable to the Net Growth in Square Footage and Other Factors
               (Fiscal Years 2000 through 2005)

               Square footage and total rent growth occurred in all years,
               circuits, and courts (see figure 3). The judiciary's rent
               increases have outpaced those of other agencies located in GSA
               space, largely because the federal judiciary's square footage is
               growing faster than that of other agencies. However, the rate of
               operating cost growth was similar to that experienced by other
               agencies.7

                                       Background

    3GAO, Federal Courthouses: Rent Increases Due to New Space and Growing
    Energy and Security Costs Require Better Tracking and Management ,
    GAO-06-613 (Washington, D.C.: June 22, 2006).

    4H.R. Rep. No. 92-989, at 3 & 4 (1972).

    5The other is the Department of Justice.

    6According to GSA, it uses shell rent proceeds to finance the cost of
    acquiring, repairing, altering, and operating buildings under the custody
    and control of GSA.

        Increases in Square Footage and Operating and Security Costs have Driven
    Increases in the Judiciary's Rent Bill from Fiscal Years 2000 through 2005

    7 Interagency comparisons regarding security costs are not possible since
    the methods used to secure federal courthouses differ from other agencies.

    Figure 3: Percentage Net Change in Square Footage and Major Rent Bill
    Components, by Judicial Circuit, Fiscal Years 2000 through 2005

    Note: The Federal and District of Columbia circuits were included in the
    aggregate statistics but are not listed in the map.

    Much of the judiciary's recent growth in net square footage was caused by
    the construction of new courthouses. New courthouses represent about 8.8
    million rentable square feet of new space that the judiciary has taken
    occupancy of since fiscal year 1998 (a larger timeframe than our rent
    trend data). According to judiciary officials, much of the judiciary's
    growth and accompanying space-related needs have been the result of
    elevating workloads, such as increases experienced in civil case filings.
    The judiciary's courthouse construction effort may continue. Before it
    imposed a moratorium in 2005, postponing new courthouse construction
    projects for two years, the judiciary indicated that it had 35 additional
    courthouse construction projects planned for fiscal years 2005 through
    2009, estimated to cost billions of dollars. According to AOUSC, these
    projects will be subject to the judiciary's new asset management planning
    process that will consider renovation and other ways to limit new
    construction. As of May 2006, no final decisions had been made.

    We found that neither the judiciary nor GSA had routinely and
    comprehensively analyzed the factors influencing the rent increases. This
    information could help the judiciary better understand the reasons behind
    its rent increases, make more informed space allocation decisions in the
    future, and identify errors in GSA's billing. Furthermore, the lack of a
    full understanding of the reasons for increases in the judiciary rent, in
    our view, contributed to growing hostility between the judiciary and GSA.
    Conversely, GSA's lack of full understanding of the reasons for the rent
    increases left it unable to justify them to the judiciary and other
    stakeholders, such as Congress.

     Judiciary Faces a Number of Challenges but Could Take Actions to Better Manage
                                Its Future Rent Payments

    The federal judiciary faces several challenges to managing its rent costs
    including costly new construction requirements, a lack of incentives for
    efficient space use, and a lack of space allocation criteria for appeals
    and senior district judges. First, modern courthouses require structural
    and architectural elements that make them among the most costly types of
    federal space to construct. Chief among these elements are the three
    separate circulation patterns for judges, prisoners, and the public that
    the U.S. Marshals Service requires for security (see figure 4). These
    construction costs necessitate rental rates under GSA's pricing policy
    that are more expensive than the highest-quality office space in some
    markets, including Denver, Colorado; Phoenix, Arizona; and Seattle,
    Washington. This necessitates GSA using an approach for calculating rent
    charges that is based on the costs to construct the building-known as
    return on investment pricing-instead of an appraisal. The judiciary's
    policy of providing one courtroom per district judge sets the number of
    courtrooms needed in new federal courthouses and adds space requirements,
    consequently increasing rent payments.

    Figure 4: Sample Courtroom and Associated Support Spaces That Were Based
    on Design Guide Criteria

    The judiciary has initiated a rent validation effort, but it does not
    address the lack of incentives for efficient space use at the circuit and
    district levels. Because rent is paid centrally by AOUSC, circuits and
    districts have few incentives to efficiently manage their space. An
    example of the inefficiencies that may result is in the Eastern District
    of Virginia, where the judiciary paid about $272,000 in 2005 to rent 4,600
    square feet of office space for an appeals judge in McLean, Virginia, in
    addition to paying for 4,300 square feet of chamber space originally
    designated for that judge in the Albert V. Bryan U.S. Courthouse in nearby
    Alexandria, Virginia. According to AOUSC, the judiciary has subsequently
    pursued alternative uses for this chamber space. During site visits, we
    observed multiple instances of unused or unassigned courtrooms, chambers,
    and support spaces. Although planning and building for future needs may
    limit alternative uses of space until it is occupied, some of this
    underutilization is the result of outdated criteria, which stipulated the
    existence of support areas, such as libraries, that in some cases are now
    rarely used. In most cases, this was because judicial officers are
    increasingly turning to electronic sources and research and keeping the
    limited number of books they need in their chambers. However, since the
    Design Guide provides space for law libraries, the districts we visited
    all had them (see figure 5).

    Figure 5: Law Library in the Evo A. Deconcini Courthouse in Tucson,
    Arizona

    Assigning space to appeals courts and senior district judges poses
    challenges due to a lack of criteria, which can lead to variation and
    inefficiencies and, thus, higher rent. Although the appeals court is
    required by law to hold court in specific locations, the statute does not
    indicate how much space it should occupy. For example, the judiciary plans
    to increase the space the appeals courts occupy by taking over former
    district courthouses in Richmond, Virginia, and Seattle, Washington, for
    appeals court use, even though the appeals courts conduct court there once
    a month or less. Circuit and district officials said that national
    criteria for managing the space allocated to the appeals courts and senior
    district judges could help limit the space assigned to them. In commenting
    on the report associated with this testimony, AOUSC also identified
    several challenges in addition to the ones we identified that we
    subsequently incorporated into the report but did not evaluate. These
    included statutorily designated places of holding court, the benefits to
    GSA and the Federal Buildings Fund in backfilling courthouses with other
    courts, and inconsistencies in the funding stream for courthouse
    construction projects.

                                    Recommendations

    We made the following five recommendations to the judiciary in our report
    associated with this testimony8 in order to help the federal judiciary
    better understand and manage rent costs:

               1. Work with GSA to track rent and square footage trend data on an
               annual basis for the following factors:

                            o  rent component (shell rent, operations, tenant
                            improvements, and other costs) and security (paid to
                            the Department of Homeland Security);
                            o  judicial function (district, appeals, and
                            bankruptcy);
                            o  rentable square footage; and
                            o  geographic location (circuit and district levels).

    This data will allow the judiciary to create a better national
    understanding of the effect that local space management decisions have on
    rent and to identify any mistakes in GSA data.

               2. Work with the Judicial Conference of the United States to
               improve the way it manages its space and associated rent costs.

                            A. Create incentives for districts/circuits to manage
                            space more efficiently. These incentives could take
                            several forms, such as a pilot project that that
                            charges rent to circuits and/or districts to
                            encourage more efficient space usage.
                            B. Revise the Design Guide to establish criteria for
                            the number of appeals courtrooms and chambers and the
                            space allocated for senior district judges and make
                            additional improvements to space allocation standards
                            related to technological advancements (e.g.,
                            libraries, court reporter space, and staff efficiency
                            due to technology) and decrease requirements where
                            appropriate.

    8 GAO-06-613 .

                                    Agency Comments

    We provided a draft of the report that is being released today9 to GSA and
    AOUSC for official review and comment and received written comments from
    both. GSA agreed with the thrust of the report and concurred with our
    recommendations, but expressed one concern. GSA felt it was more aware of
    the reasons for rent increases than our draft portrayed. In commenting on
    the report associated with this testimony, AOUSC said that it does not
    believe tracking the data recommended by GAO would be useful-we disagree
    with this assessment. AOUSC also said it is already implementing
    incentives and updating its criteria, however the actions it identified do
    not fully address our recommendations. For a more thorough discussion of
    the agency comments, see the report associated with this testimony.10

                                 Scope and Methodology

    We conducted our work from May 2005 to May 2006 in accordance with
    generally accepted government auditing standards. During our work, we
    analyzed nationwide judiciary rent data generated from GSA's billing data,
    reviewed laws and the regulation related to FBF and GSA's rent pricing
    process and policies, and reviewed the U.S. Courts Design Guide and other
    judiciary rent planning documents. Additionally, we conducted site visits
    at federal courthouses in the following districts: Arizona, Eastern
    Virginia, Maryland, Nebraska, Rhode Island, and Western Washington. We
    selected Arizona, Nebraska, Rhode Island, and Western Washington because
    they were in districts that experienced large overall rent increases from
    fiscal years 2000 through 2005 and were geographically dispersed. We also
    visited Maryland and Eastern Virginia court facilities while we were
    designing this audit and included them in the review because they
    contained a new courthouse, a renovated courthouse, and a courthouse that
    was targeted for replacement. The findings from these courthouse visits
    can not be generalized to the population of federal courthouses
    nationwide. We interviewed district, magistrate, and bankruptcy judges;
    officials from the AOUSC, which is the judiciary's administrative agency;
    clerks, circuit executives, and other representatives from U.S. circuit
    and district courts with authority over space and facilities; GSA
    officials in headquarters and the regions; and other real property
    management experts. We determined that the rent data were sufficiently
    reliable for the purposes of our review.

    9 GAO-06-613 .

    10 GAO-06-613 .

    Mr. Chairman and members of the Subcommittee, this concludes my prepared
    statement, I would be pleased to respond to any questions that you or the
    other Members of the Subcommittee may have.

                        GAO Contacts and Staff Acknowledgements

    For further information about this testimony, please contact me at (202)
    512-2834 or goldsteinm@gao.gov . Keith Cunningham, Randy DeLeon, Bess
    Eisenstadt, Brandon Haller, Grant Mallie, Susan Michal-Smith, Joshua
    Ormond, Elizabeth Repko, David Sausville, and Gary Stofko made key
    contributions to this statement.

    (543176)

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    Highlights of GAO-06-892T, a testimony before the Subcommittee on Economic
    Development, Public Buildings and Emergency Management, Committee on
    Transportation and Infrastructure, House of Representatives

    June 2006

    FEDERAL COURTHOUSES

    Rent Increases Due to New Space and Growing Energy and Security Costs
    Require Better Tracking and Management

    The judiciary pays over $900 million in rent annually to GSA for
    court-related space, representing a growing proportion of the judiciary's
    budget. The judiciary's rent payments are deposited into GSA's Federal
    Buildings Fund (FBF), a revolving fund used to finance GSA's real property
    services, including the construction and repair of federal facilities
    under GSA control. In December 2004, the judiciary requested a $483
    million dollar permanent, annual rent exemption which GSA denied, saying
    that it undermined the intent of FBF and that GSA was unlikely to obtain
    appropriations to replace lost FBF income. GAO reviewed (1) recent trends
    in the judiciary's rent and space occupied and (2) challenges that the
    judiciary faces in managing its rent costs.

    What GAO Recommends

    In an associated report, GAO recommended that the judiciary (1) track rent
    trends and (2) improve its management of space and associated costs by
    providing incentives for efficient use and updating its space allocation
    criteria. AOUSC strongly disagreed with our report and said that it does
    not believe tracking data recommended by GAO would be useful. We believe
    otherwise. AOUSC also said it is already implementing incentives and
    updating its criteria, however, the actions it identified do not fully
    address our recommendations. GSA generally agreed with the report.

    The federal judiciary's rental obligations to GSA for courthouses have
    increased from $780 million to $990 million or 27 percent from fiscal
    years 2000 through 2005, after controlling for inflation-primarily due to
    a simultaneous net increase in space from 33.6 million to 39.8 million
    rentable square feet, a 19 percent increase nationwide. Much of the net
    increase in space was the result of new courthouses that the judiciary has
    taken occupancy of since 2000. According to the Administrative Office of
    the U.S. Courts (AOUSC), the judiciary's workload has grown substantially
    and the number of court staff has doubled since 1985. Shell rent (the
    building with basic infrastructure) increased proportionately with square
    footage growth, but operational (utilities and general maintenance) and
    security costs grew disproportionately higher than square footage due to
    external factors, such as increasing energy costs and security
    requirements. Neither GSA nor the judiciary had routinely and
    comprehensively analyzed the factors causing rent increases, making it
    more difficult for the judiciary to manage increases.

    The Approximate Share of Judiciary Rent Increases Attributable to Growth
    in the Net Square Footage and Other Factors (Fiscal Years 2000 through
    2005)

    The federal judiciary faces several challenges to managing its rental
    obligations, including costly new construction requirements, a lack of
    incentives for efficient space use, and a lack of space allocation
    criteria for appeals and senior judges. First, building enhancements, such
    as three separate circulation patterns for judges, prisoners, and the
    public, and structural and architectural elements make courthouses among
    the most expensive federal facilities to construct in GSA's inventory,
    often leading to higher rent payments. Second, the judiciary has begun a
    rent validation effort intended to monitor GSA rent charges, but it does
    not address the lack of incentives for efficient space management at the
    circuit and district levels. An example of the inefficiencies that may
    result is in the Eastern District of Virginia, where the judiciary paid
    about $272,000 in 2005 to rent space for an appeals judge in McLean,
    Virginia, in addition to paying for space designated for that judge in a
    nearby federal courthouse that the judiciary later used for alternative
    purposes. Finally, the lack of criteria for assigning courtrooms for
    appeals and senior judges can contribute to inefficiencies in the amount
    of space provided, which can result in higher rent payments.
    *** End of document. ***