Federal Real Property: NIH Has Improved Its Leasing Process, but 
Needs to Provide Congress with Information on Some Leases	 
(08-SEP-06, GAO-06-918).					 
                                                                 
The National Institutes of Health (NIH) is the nation's primary  
medical and behavioral research agency. NIH's need for leased	 
space has more than doubled since 1996 to about 3.9 million	 
square feet in 2005. In 1996, General Services Administration	 
(GSA) delegated leasing authority to NIH that includes performing
budget scoring and prospectus analysis. In light of NIH's	 
increased use of leased space, GAO was asked to address two	 
issues: (1) Is NIH complying with budget scorekeeping guidelines 
and Office of Management and Budget's (OMB) requirements for	 
implementing the guidelines to determine if a lease should be	 
classified as operating or capital and ensure that no violations 
of the Antideficiency Act occur because of improper budget	 
scorekeeping? and (2) Is NIH complying with the congressional	 
prospectus process for both leases and alterations to leased	 
buildings? To address these issues we interviewed leasing and	 
financial officials, reviewed laws and reviewed budget scoring	 
and prospectus analysis of 59 leases.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-918 					        
    ACCNO:   A60486						        
  TITLE:     Federal Real Property: NIH Has Improved Its Leasing      
Process, but Needs to Provide Congress with Information on Some  
Leases								 
     DATE:   09/08/2006 
  SUBJECT:   Budget obligations 				 
	     Budget scorekeeping				 
	     Congressional oversight				 
	     Health care facilities				 
	     Leasing policies					 
	     Program evaluation 				 
	     Program management 				 
	     Public Health Service facilities			 
	     Real estate leases 				 
	     Reporting requirements				 
	     Anti-deficiency act violations			 
	     Leasing Management and Oversight Program		 

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GAO-06-918

     

     * Results in Brief
     * Background
     * NIH Has Improved Its Lease Scoring Process and Believes that
     * NIH Corrected Weaknesses in Implementation of Prospectus Gui
     * Conclusions
     * Recommendation for Executive Action
     * Agency Comments
     * Appendix I: Comments from the Department of Health and Human
     * Appendix II: GAO Contact and Staff Acknowledgments
          * GAO Contact
          * Staff Acknowledgments
               * Order by Mail or Phone

Report to the Chairman, Committee on Energy and Commerce, House of
Representatives

United States Government Accountability Office

GAO

September 2006

FEDERAL REAL PROPERTY

NIH Has Improved Its Leasing Process, but Needs to Provide Congress with
Information on Some Leases

GAO-06-918

Contents

Letter 1

Results in Brief 3
Background 5
NIH Has Improved Its Lease Scoring Process and Believes that Its
Unrecorded Obligations for Operating Leases Do Not Violate the
Antideficiency Act 6
NIH Corrected Weaknesses in Implementation of Prospectus Guidance, but
Some Past Prospectus-level Leases Remain Unreported 10
Conclusions 12
Recommendation for Executive Action 12
Agency Comments 13
Appendix I Comments from the Department of Health and Human Services 14
Appendix II GAO Contact and Staff Acknowledgments 16

Abbreviations

GSA General Services Administration

HHS U.S. Department of Health and Human Services

LeMOP Leasing Management and Oversight Program

NIH National Institutes of Health

OBSF Office of Business Systems and Finance

OMB Office of Management and Budget

ORF Office of Resource Facilities

ORFDO Office of Research Facilities Development and Operations

Property Act Federal Property and Administrative Services Act of 1949, as
amended

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separately.

United States Government Accountability Office

Washington, DC 20548

September 8, 2006

The Honorable Joe Barton Chairman Committee on Energy and Commerce House
of Representatives

Dear Mr. Chairman:

The National Institutes of Health (NIH), a part of the U.S. Department of
Health and Human Services (HHS), is the nation's primary medical and
behavioral research agency. Composed of 27 institutes and centers, NIH
provides leadership and financial support to programs designed to protect
and improve the nation's health by conducting research in such areas as
the causes, diagnosis, prevention, and cure of human diseases; the
biological effects of environmental contaminants; and the understanding of
mental, addictive, and physical disorders. At the end of September 2005,
the agency owned or leased more than 17 million square feet of space for
research, administration, and other needs. Since 1996, NIH's leased space
has more than doubled-from about 1.4 million square feet in 1996 to about
3.9 million square feet in 2005.

In September 1996, the General Services Administration (GSA) delegated
authority to HHS to issue leases for a term of up to 20 years and to
perform all functions related to leasing, such as obtaining space in
accordance with all applicable laws and regulations, budget scorekeeping1
guidelines, and the Office of Management and Budget's (OMB) requirements
for implementing the guidelines for leases. Simply put, budget
scorekeeping ensures that agencies comply with budgetary laws. There are
obligational requirements2 that are meant to ensure compliance with fiscal
statutes such as the Antideficiency Act.3 The budget scorekeeping rules
for leases are consistent with the obligational requirements. Thus,
failure to comply with budget scorekeeping guidelines could cause an
Antideficiency Act violation. In addition to transferring this
scorekeeping responsibility to HHS, GSA's delegation provided that, for
each lease whose cost exceeds a legislatively established threshold, the
agency would work through GSA to secure an approved prospectus4 from the
appropriate congressional committees, under the Public Buildings Act of
1959, as amended.5 In December 1996, HHS redelegated its authority to its
four lease-holding agencies, which included NIH. Currently, NIH has 59
active leases issued under its delegated leasing authority with a total
value of about $1.3 billion.

1Budget scorekeeping, of which lease scoring is a part, is the process of
estimating the budgetary effects of pending and enacted legislation and
comparing these effects with limits set in the budget resolution or
legislation. Scorekeeping tracks such data as budget authority, receipts,
outlays, the surplus or deficit, and the public debt limit. Scorekeeping
guidelines for leases require that an agency first determine if a lease is
an operating or capital lease; OMB requirements describe how to calculate
the budget authority that is required to cover the government's legal
obligations and how outlays are to be recorded in agency budgets. In
addition, OMB interprets the scorekeeping guidelines to determine the cost
that should be recognized and recorded as an obligation at the time an
agency signs a contract or enters into a lease. The scorekeepers are the
House and Senate Budget Committees, the Congressional Budget Office, and
OMB. The budget scorekeepers determine the rules, and OMB issues guidance
to the agencies on implementing them.

Because of NIH's increased use of leased space, you asked us to review
certain parts of the agency's leasing process. In response, we addressed
the following issues:

           o  Is NIH complying with budget scorekeeping guidelines and OMB's
           requirements for implementing the guidelines to determine if a
           lease should be classified as operating or capital6 and ensure
           that no violations of the Antideficiency Act occur because of
           improper budget scorekeeping of leases?
           o  Is NIH complying with the congressional prospectus process for
           both leases and alterations to leased buildings?

           To address NIH's compliance with budget scorekeeping guidelines
           and OMB's requirements, we reviewed (1) the laws and regulations
           relating to leases; (2) budget scorekeeping guidelines and OMB's
           implementing requirements; (3) the Antideficiency Act; (4) NIH's
           inventory of leased properties, its revised budget scoring of the
           58 leases7 under its delegated authority in 2003, and its leasing
           guidance; and (5) HHS's views on the Antideficiency Act. In
           addition, we interviewed HHS's Deputy Assistant Secretary from the
           Office for Facilities Management and Policy; NIH's Director of the
           Office of Acquisitions; NIH's Acting Chief of the Budget Branch
           from the Office of Business and Systems Finance, who performed the
           revised budget scoring; other relevant NIH leasing and financial
           officials; and GSA officials. We also wrote to OMB concerning
           agencies that are considered self-insuring under budget scoring
           guidelines.

           To address NIH's compliance with the congressional prospectus
           process, we (1) reviewed the laws and regulations relating to
           leases; (2) GSA's prospectus guidance and delegation of authority
           to lease; (3) NIH's inventory of leased properties, its revised
           prospectus analysis of the 58 leases under its delegated authority
           in 2003, and its leasing guidance. In addition, we interviewed
           HHS's Deputy Assistant Secretary from the Office for Facilities
           Management and Policy; NIH's Director of the Office of
           Acquisitions; NIH's Acting Chief of the Budget Branch from the
           Office of Business and Systems Finance, who performed the revised
           prospectus analysis; other relevant NIH leasing and financial
           officials; and GSA officials. GSA informed us that no alterations
           to leased buildings were submitted for prospectus approval between
           fiscal years 1996 and 2005. For the purposes of our review, the
           information we gathered was sufficiently reliable. We conducted
           our work between July 2005 and August 2006 in accordance with
           generally accepted government auditing standards.

           Results in Brief
			  
			  NIH has developed a formal leasing process that, if implemented
           effectively, should comply with budget scorekeeping guidelines and
           OMB's requirements for classifying operating and capital leases.
           NIH's process should also ensure that no Antideficiency Act
           violations occur due to leasing. NIH was prompted to formalize its
           leasing process after it reviewed all its leases in 2003 and
           discovered problems with its budget scoring and prospectus
           analysis. The agency's new multistep leasing process, which was
           developed in 2003 and updated in 2005, now addresses previous
           problems with inconsistent and informal implementation of the
           guidelines and requirements by properly identifying operating and
           capital leases, so the lease obligations may be properly recorded
           for budget scoring purposes. Furthermore, to address the improper
           classification of eight operating leases identified in its 2003
           review, NIH reclassified or renegotiated leases to make them
           comply with the budget scoring rules. In October 2005, HHS
           expressed its belief that the potential $565 million in unrecorded
           obligations from 50 active multiyear NIH leases identified in the
           2003 review were not considered to be Antideficiency Act
           violations. We agree that no Antideficiency Act violations exist.
           According to a GSA official, GSA is modifying its guidance for
           delegated leasing authority, which would make it clear that
           agencies with delegated leasing authority can score operating
           leases in the same manner as GSA. The scoring process for capital
           leases would remain unchanged.

           As part of its leasing process, NIH has also established decision
           points for identifying any leases for which a prospectus should be
           submitted for congressional approval under the Public Buildings
           Act of 1959, as amended. In addition, NIH's Office of
           Acquisitions, Office of Resource Facilities (ORF) is now
           responsible for ensuring that the contracting for alterations to
           leased buildings does not exceed the prospectus threshold for
           alterations to leased buildings. To enforce this threshold, a
           warranted real estate contracting officer from the Office of
           Acquisitions begins reviewing an alteration to a leased building
           project as early as the concept stage. However, there is an
           unresolved issue involving some prior NIH prospectus-level leases.
           Five leases from past years were not submitted to the appropriate
           congressional committees for review and approval, as provided for
           in the Public Buildings Act of 1959, as amended. While there is no
           penalty provided in law for not submitting a prospectus, failure
           to do so hinders the ability of the appropriate congressional
           committees to fulfill their oversight responsibilities for all
           prospectus-level leases. We are recommending that the Director of
           NIH, using GSA as the proper channel, report to the appropriate
           congressional committees the five previous NIH prospectus-level
           leases that did not follow the congressional prospectus process.
           We provided a draft of this report to NIH, HHS and GSA. HHS,
           responding for NIH and itself, concurred with our findings and
           recommendation and provided some technical comments, which we have
           incorporated where appropriate. HHS stated that, as a matter of
           policy, it does not object to voluntarily complying with the GSA
           prospectus requirements for the five leases dealt with in our
           draft report. GSA informed us orally that it had no comments.

           Background
			  
			  In 1996, GSA began a program called "Can't Beat GSA Leasing" that
           offered federal agencies the choice of (1) using GSA as their
           leasing agent, (2) assuming responsibility for their own leasing,
           or (3) using a combination of both options. The program was an
           outgrowth of GSA's commitment to streamline its leasing
           operations, respond to the government's changing needs, and
           address recommendations from client agencies. GSA delegated
           leasing authority to HHS in September 1996, and HHS redelegated
           this authority to NIH, one of its four lease-holding agencies, in
           December 1996. GSA's original delegation consisted of six
           conditions, which included the requirements that federal agencies
           acquire and utilize leased space in accordance with all applicable
           laws and regulations8 and -prior to finalizing lease contracts and
           alterations to leased buildings that exceed a legislatively
           established threshold-work through GSA to secure an approved
           prospectus from the appropriate congressional committees. Since
           1997, NIH has elected to rely on GSA for some of its leasing
           needs, but it has issued a majority of its leases on its own.

           NIH Has Improved Its Lease Scoring Process and Believes that Its
			  Unrecorded Obligations for Operating Leases Do Not Violate the
			  Antideficiency Act
			  
			  In response to past problems identified in a 2003 internal review
           of its leases, NIH developed a formal leasing process in 2003 that
           includes decision points for budget scoring. The process was
           updated in 2005, and if implemented effectively, it should ensure
           that NIH leasing complies with OMB's scorekeeping guidelines for
           classifying leases. This new process should also ensure that no
           violations of the Antideficiency Act occur due to improper
           scorekeeping.

           The executive and legislative branches formulated the budget
           scorekeeping rules in connection with the Budget Enforcement Act
           of 1990. The purpose of these rules is to ensure that scorekeepers
           adhere to scorekeeping conventions and specific legal requirements
           when they measure the effects of legislation. They are also used
           by OMB for determining amounts to be recognized in the budget when
           an agency signs a contract or enters into a lease. The rules are
           reviewed annually by the scorekeepers and revised, as necessary,
           to achieve their purpose.9 According to scorekeeping guidelines, a
           lease is classified as either operating or capital, based on six
           criteria.10 If a lease meets all six criteria, then it qualifies
           as an operating lease; otherwise, it must be treated as a capital
           lease for purposes of budget scoring. For operating leases for
           agencies other than GSA, budget authority is required for the
           estimated total payment that is expected to arise under the full
           term of the contract or, if the contract includes a cancellation
           clause, for an amount sufficient to cover the lease payments for
           the first fiscal year plus an amount sufficient to cover the costs
           associated with cancellation. For GSA operating leases, only the
           budget authority needed to cover the annual lease payment is
           required.11 For a capital lease, budget authority is required for
           the net present value of the total cost of the lease and property
           taxes (but not for imputed interest costs and identifiable annual
           operating expenses).

           In 2003, NIH's Assistant Director for the Chief Financial Officer
           and Central Services asked the Acting Director of the Office of
           Research Facilities Development and Operations (ORFDO) to certify
           that all leases were operating leases for the purposes of the
           annual NIH financial statements, according to an NIH official. To
           address this request, the ORFDO Acting Director conducted an
           internal risk assessment. This resulted in a review of all NIH's
           leases, which identified problems with implementing budget
           scorekeeping guidelines and OMB requirements, as well as
           identifying prospectus leases. More specifically, this review
           identified eight leases that had been improperly classified as
           operating leases instead of capital leases and potential
           unrecorded obligations from 50 active multiyear operating leases
           that totaled $565 million, as of September 30, 2005. According to
           the Director of the Office of Acquisitions, NIH's lease scoring
           process had been inconsistent and informal from 1996 to 2003,
           which may explain the improper lease classifications and
           unrecorded obligations identified in the 2003 review. Due to staff
           changes at the agency in past years, we were not able to determine
           why the budget scoring process was inconsistent and informal from
           1996 to 2003.

           In 2003, NIH attempted to address its problems in complying with
           scorekeeping guidelines by developing the Leasing Management and
           Oversight Program (LeMOP), a new multistep leasing process that
           includes budget scoring. LeMOP is a means for NIH to exercise
           stronger oversight in the leasing process than it had done
           previously. The process consists of a business case12 that goes
           through the following five critical decision points:

                        1. Initial approval that there is a justifiable need,
                        2. Approval of a general strategy on how the need
                        will be met,
                        3. Approval of a detailed strategy for meeting the
                        need,
                        4. Signing of the lease and obligation of the funds,
                        and
                        5. Documentation that the agency has reviewed the
                        action and the space requirement is being met.

           As part of the third decision point, the Office of Business
           Systems and Finance (OBSF) uses the budget scoring process for
           leases that it developed during NIH's 2003 review to conduct an
           independent test of the planned lease contract against OMB's
           budget scorekeeping requirements. The test is based on estimates
           of the lease rate, the lease term, and other factors. As part of
           the fourth decision point, OBSF tests the final lease price
           against OMB scoring requirements to determine if the proposal
           conforms to applicable rules for budget scoring. In effect, the
           process establishes a specific requirement that ensures that NIH
           leases undergo budget scoring.

           In addition to implementing LeMOP, NIH corrected its improper
           classification of the eight operating leases identified in the
           2003 review. Two of these leases were reclassified as capital
           leases, and the remaining six were renegotiated by eliminating the
           option-to-renew clauses from the lease so that they could properly
           qualify as operating leases. By deleting the option-to-renew
           clauses, NIH reduced the terms of the leases, which impacted
           budget scoring. This allowed the leases to meet the scoring
           criteria for an operating lease-that the present value of the
           minimum lease payments over the life of the lease not exceed 90
           percent of the fair market value of the asset at the beginning of
           the lease term. Leases exceeding this 90 percent level are to be
           identified as capital leases.

           As a final measure in response to the 2003 review, NIH sought
           HHS's advice on whether it had $565 million in unrecorded
           obligations that violated the Antideficiency Act. The unrecorded
           obligations occurred because NIH scored its operating leases
           without cancellation clauses similar to GSA-that is, it scored
           only the budget authority that was needed to cover the annual
           lease payment.13 This was done instead of following scorekeeping
           guidance for an operating lease for agencies other than GSA-that
           is, budget authority is required for the estimated total payment
           expected to arise under the full term of the contract or, if the
           contract includes a cancellation clause, for an amount sufficient
           to cover the lease payments for the first year plus an amount
           sufficient to cover the costs associated with the cancellation
           clause.

           NIH asked HHS whether it thought that the $565 million in
           unrecorded obligations was an Antideficiency Act violation. This
           act states that an officer or employee of the United States is
           prohibited from making expenditures or incurring obligations in
           advance of available appropriations unless otherwise authorized by
           law. HHS stated that it did not believe the potential $565 million
           in unrecorded obligations from scoring operating leases to be
           Antideficiency Act violations.

           We concluded that no Antideficiency Act violation exists. Under
           the Federal Property and Administrative Services Act of 1949, as
           amended (Property Act), GSA is authorized to enter into a lease
           agreement for a term of up to 20 years to accommodate the federal
           government.14 In addition, GSA is authorized under the Property
           Act to delegate to the head of another federal agency most of its
           authorities, which includes leasing authority.15 When GSA
           delegated its leasing authority to the Secretary of HHS, who then
           redelegated this authority to NIH, the GSA leasing delegation
           signed by the Administrator specifically stated, "I hereby
           delegate authority to the heads of all federal agencies to perform
           all functions related to the leasing of general purpose space for
           a term of up to 20 years regardless of geographic location."

           GSA has specific statutory authority to obligate funds in advance
           of available appropriations. This authority provides that, when
           entering into multiyear leases, "the obligation of the amount for
           a lease is limited to the current fiscal year for which payments
           are due without regard to the Antideficiency Act."16 Accordingly,
           GSA is directed by law to obligate funds for multiyear leases one
           year at a time, and it is exempt from the general prohibition in
           the Antideficiency Act against obligating the government in
           advance of appropriations for GSA leases. Since GSA delegated all
           of its leasing authorities through HHS to NIH, the provision in
           the Property Act relating to the obligation of multiyear leases
           also applies to NIH. This delegation authorizes NIH to enter into
           multiyear leases without recording the entire amount of the lease
           in the first year. Therefore, the fact that NIH entered into
           multiyear leases without having an appropriation for the entire
           amount of each lease did not constitute a violation of the
           Antideficiency Act.

           GSA is drafting a modification to its guidance for delegated
           leasing authority which, according to a GSA official, will clarify
           that agencies with delegated leasing authority can score operating
           leases in the same manner as GSA does. GSA and agencies with
           delegated leasing authority are expected to continue to score
           capital leases according to OMB's requirements.

           NIH Has Improved Its Lease Scoring Process and Believes that Its
			  Unrecorded Obligations for Operating Leases Do Not Violate the
			  Antideficiency Act
			  
			  As part of its leasing process, NIH has established decision
           points for identifying leases whose costs exceed a legislatively
           established threshold and for which a prospectus should be
           submitted for congressional review and approval prior to
           finalizing contracts. In addition, all alterations to leased
           buildings are reviewed by an NIH leasing official. These changes
           should ensure that NIH identifies leases that need to be submitted
           for review. However, five prior leases that should have been
           submitted for review still remain unreported.

           The Public Buildings Act of 1959, as amended, provides for GSA to
           submit a prospectus for review by the appropriate Senate and House
           authorizing committees when the cost of a proposed construction,
           lease, or alteration project exceeds the legislatively established
           dollar threshold for leases or alterations to leased buildings,
           which is indexed and revised each year. For an agency with
           delegated leasing authority, GSA, working in consultation with the
           agency, prepares a prospectus for any lease involving a net annual
           rental-excluding services and utilities-in excess of the
           prospectus threshold. For alterations to leased buildings, the
           prospectus threshold is one-half of the lease prospectus
           threshold. After the prospectus is prepared, GSA submits it for
           approval to the appropriate congressional committees.

           To address previous problems with inconsistent and informal
           implementation of prospectus guidance, NIH has incorporated into
           its leasing process several decision points for identifying any
           leases for which a congressionally approved prospectus should be
           submitted. As part of the third decision point of LeMOP-approval
           of a detailed strategy for meeting the need-OBSF will use the
           prospectus analysis formula, which it developed during NIH's 2003
           review of all leases, to conduct an independent test of the
           planned lease contract against the annual prospectus threshold.
           NIH plans to have GSA issue any lease that exceeds the prospectus
           limit, with NIH providing the appropriate information and support.
           As part of the fourth decision point-signing of the lease and
           obligation of the funds, OBSF will test the final lease price
           against prospectus thresholds to determine if the proposal
           conforms to applicable rules for the prospectus process. This
           prevents the agency from issuing a prospectus-level lease without
           a congressionally approved prospectus, even though the lease was
           initially identified as nonprospectus as part of the third
           decision point.

           Furthermore, according to NIH's Office of Acquisitions, ORF, it is
           now responsible for ensuring that the contracting for alterations
           to leased buildings does not exceed that prospectus threshold. To
           prevent any delay in the process, reviews of an alteration project
           in a leased building begin as early as the concept stage to
           determine whether a prospectus is required. The Office of
           Acquisitions also takes into account all other approved
           alterations to the leased building for the given year to ensure
           that the total cost of all alterations to that leased building
           does not exceed the prospectus threshold.

           As part of the 2003 review of all its leases, NIH identified five
           leases that had not been sent to the appropriate congressional
           committees for approval, under the Public Buildings Act of 1959,
           as amended.17 GSA is to provide a lease prospectus to the
           appropriate congressional committees for approval prior to signing
           a lease. This process involves agencies with delegated leasing
           authority, which must identify prospectus level leases to GSA for
           submission. According to the Director of the Office of
           Acquisitions, NIH had not established a formal prospectus analysis
           for leases or alterations to leased buildings from 1996 to 2003.
           As a result, NIH did not notify GSA of the five prior
           prospectus-level leases that should have been submitted to the
           committees. While there is no legal penalty for not following the
           congressional prospectus process, failure to do so hinders the
           ability of the appropriate congressional committees to fulfill
           their oversight responsibilities for all prospectus-level leases.
           Although these five leases have been in effect for several years,
           GSA officials told us that it would still be appropriate for NIH
           to work with GSA to notify the committees of their existence. The
           officials noted, for example, a past instance where GSA reported,
           after the fact, a prospectus level lease that was issued without
           approval of the appropriate committees. NIH officials stated that
           they want to clear up any unresolved issues concerning their
           prospectus and budget scoring problems.

           Conclusions
			  
			  NIH has taken actions to formalize its processes of lease scoring
           and prospectus analysis by developing and implementing LeMOP, its
           new leasing process. The specific decision points in this process
           should address the problems NIH had with consistently complying
           with OMB's scorekeeping guidelines and the congressional
           prospectus process. Because only one lease has been issued under
           the new process, it is too early to assess the effectiveness of
           NIH's implementation of LeMOP.

           An issue remains with five prior leases that were not submitted to
           the appropriate congressional committees for review under the
           Public Buildings Act of 1959, as amended. Although these leases
           have been in effect for several years, it is nonetheless important
           that information on them be submitted to the appropriate
           committees in order to maintain NIH's accountability to Congress
           in this area and allow the committees to exercise their oversight
           responsibilities. NIH has expressed its desire to resolve any
           remaining issues concerning its prospectus and budget scoring
           processes.

           Recommendation for Executive Action
			  
			  We are recommending that the Director of NIH, using GSA as the
           proper channel, report to the appropriate congressional committees
           the five previous NIH prospectus-level leases that did not follow
           the congressional prospectus process.

           Agency Comments
			  
			  We provided a draft of this report to NIH, HHS and GSA for
           comment. In response, HHS provided written comments for itself and
           NIH. HHS concurred with our findings and recommendation and
           offered some technical comments that we have incorporated in this
           report. HHS stated that, as a matter of policy, it does not object
           to voluntarily complying with the GSA prospectus requirements for
           the five leases dealt with in the draft report. A letter from HHS
           commenting on our report is included as appendix I. GSA informed
           us orally that they had no comments.

           As agreed with your office, unless you publicly announce its
           contents earlier, we plan no further distribution of this report
           until 30 days after the date of this letter. At that time, we will
           send copies of this report to the appropriate congressional
           committees, the Director of the National Institutes of Health, the
           Secretary of Health and Human Services, the Administrator of the
           General Services Administration and the Director of the Office of
           Management and Budget. We will make copies available to others
           upon request. In addition, this report will be available at no
           cost on the GAO Web site at http://www.gao.gov .

           If you have any questions about this report, please contact me at
           (202) 512-2834 or [email protected] . Contact points for our
           Offices of Congressional Relations and Public Affairs may be found
           on the last page of this report. GAO staff who made major
           contributions to this report are listed in appendix II.

           Sincerely yours,

           Mark L. Goldstein Director, Physical Infrastructure Issues

Appendix I: Comments from the Department of Health and Human Services

Appendix II: GAO Contact and Staff Acknowledgments

           GAO Contact
			  
			  Mark L. Goldstein (202) 512-2834 or [email protected]


           Staff Acknowledgments
			  
			  In addition to those named above, John Finedore, Tom Keightley,
           Susan Michal-Smith, Chris Bonham and Tamera Dorland made key
           contributions to this report.

           GAOï¿½s Mission
			  
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231 U.S.C. S: 1501.

3The Antideficiency Act prohibits an officer or employee of the United
States from making expenditures or incurring obligations before
appropriations become available, unless otherwise authorized by law. 31
U.S.C. S: 1341.

4A prospectus is a justification for a proposed construction, lease, or
alteration project (which includes an alteration to a leased building). A
prospectus for a proposed lease is submitted when the cost exceeds a
legislatively established threshold, which is $2.41 million for fiscal
year 2006, and includes information on the project's size, cost, location,
and other features. For alterations to leased buildings, the prospectus
threshold is one half the prospectus threshold for a lease. An agency with
delegated leasing authority analyzes each lease to determine whether it
needs a prospectus. GSA then prepares a prospectus in consultation with
the agency and submits the prospectus to the appropriate House and Senate
authorizing committees.

540 U.S.C. S: 3307.

6An operating lease is a lease that meets the six criteria listed in the
scorekeeping guidelines in OMB Circular A-11 appendix A. A capital lease
is any lease other than a lease purchase that does not meet all six
criteria.

7One of the 59 leases was issued in January 2006, this report discusses
the remaining 58 leases that were in NIH's 2003 review of all its leases;
therefore, we refer to only 58 leases in this report. In addition, NIH has
16 active leases that were contracted for through GSA.

8The conditions included, but were not limited to, the Competition in
Contracting Act, Executive Order 12072, Executive Order 13006, Davis Bacon
Act, the GSA Acquisition Regulations, and GSA Federal Property Management
Regulations (FPMR). When the delegation was issued to NIH in 1996, the
FPMR stated that delegated leasing authority shall be exercised in
accordance with the Budget Enforcement Act of 1990 and OMB Bulletin 91-02,
Part B (41 C.F.R. S: 101.18.104-1). In 2003, GSA revised its regulations
to provide that all agencies are required to follow the budget
scorekeeping guidelines and OMB's requirements for leases, capital leases,
and lease purchases identified in appendixes A and B of OMB Circular A-11.
(41 C.F.R. S: 102-73.130).

9We previously reported that the budget scorekeeping rules favor leasing
and that one option for scorekeeping would be to recognize that many
operating leases are used for long-term needs and should be treated on the
same basis as purchases. This would entail scoring up front the present
value of lease payments covering the same time period used to analyze
ownership options. Applying the principle of up-front full recognition of
long-term costs to all options for satisfying long-term space
needs-purchases, lease purchases, or operating leases-is more likely to
result in selecting a more cost-effective alternative than using the
current scoring rules. GAO, Budget Scoring: Budget Scoring Affects Some
Lease Terms but Full Extent Is Uncertain, GAO-01-929 (Washington D.C.:
Aug. 31, 2001).

10The six criteria are (1) ownership of the asset remains with the lessor
during the term of the lease and is not transferred to the government at
or shortly after the end of the lease term; (2) the lease does not contain
a bargain-price purchase option; (3) the lease term does not exceed 75
percent of the estimated economic life of the asset; (4) the asset is a
general purpose asset, it is not for a special purpose of the government,
and it is not built to unique specifications of the government lessee; (5)
there is a private sector market for the asset; and (6) the present value
of the minimum lease payments over the life of the lease does not exceed
90 percent of the fair market value of the asset at the beginning of the
lease term.

11According to scorekeeping guidelines, for funds that are self-insuring
under existing authority, only the amount of budget authority needed to
cover the annual lease payment is required to be scored. In November 2005,
OMB clarified its requirements by stating that the only funds that are
considered self-insuring are certain revolving funds in GSA.

12The business case consists of the need for the lease action, the reason
it cannot be met within current space, the Space Justification Document,
and a general estimate of the range of life-cycle costs.

13As previously noted, GSA is considered by OMB to be self-insuring and,
as such, is required to score only the amount of budget authority needed
to cover annual lease payments for an operating lease.

1440 U.S.C. S: 585.

1540 U.S.C. S: 121 provides that the GSA Administrator may delegate
authority under the act except for the (1) authority to prescribe
regulations on matters of policy applying to executive agencies, (2) the
authority to transfer functions and reallocated amounts from one component
of GSA to another under certain situations; and (3) other authority for
which delegation is prohibited under the act. The Property Act does not
prohibit the delegation of leasing authority.

1640 U.S.C. S: 585.

17GSA informed us that several prospectus level leases were submitted to
the appropriate committees and were approved and issued by GSA for NIH
space between 1996 and 2005. NIH's 2003 review of all leases did not
include reviewing alterations to leased buildings.

(543142)

www.gao.gov/cgi-bin/getrpt? GAO-06-918 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Mark Goldstein at (202) 512-2834.

Highlights of GAO-06-918 , a report to the Chairman, Committee on Energy
and Commerce, House of Representatives

September 2006

FEDERAL REAL PROPERTY

NIH Has Improved Its Leasing Process, but Needs to Provide Congress with
Information on Some Leases

The National Institutes of Health (NIH) is the nation's primary medical
and behavioral research agency. NIH's need for leased space has more than
doubled since 1996 to about 3.9 million square feet in 2005. In 1996,
General Services Administration delegated leasing authority to NIH that
includes performing budget scoring and prospectus analysis. In light of
NIH's increased use of leased space, GAO was asked to address two issues:
(1) Is NIH complying with budget scorekeeping guidelines and Office of
Management and Budget's (OMB) requirements for implementing the guidelines
to determine if a lease should be classified as operating or capital and
ensure that no violations of the Antideficiency Act occur because of
improper budget scorekeeping? and (2) Is NIH complying with the
congressional prospectus process for both leases and alterations to leased
buildings?

To address these issues we interviewed leasing and financial officials,
reviewed laws and reviewed budget scoring and prospectus analysis of 59
leases.

What GAO Recommends

GAO recommends that the Director of NIH, using GSA as the proper channel,
report to the appropriate congressional committees five previous NIH
prospectus-level leases that did not follow the congressional prospectus
process. In commenting on our report NIH concurred with our
recommendation.

NIH has implemented a formal leasing process that, if carried out
effectively, should comply with budget scorekeeping guidelines and OMB's
requirements for classifying operating and capital leases. This process
should ensure that no Antideficiency Act violations occur due to leasing.
The agency's new leasing process addresses previous problems with
inconsistent and informal implementation of the guidelines and
requirements by properly identifying operating and capital leases and
properly recording lease obligations for budget scoring purposes. In
October 2005, the U. S. Department of Health and Human Services expressed
the belief that the potential $565 million in unrecorded obligations from
50 active multiyear NIH leases were not Antideficiency Act violations. We
agree that no Antideficiency Act violations exist because the GSA
delegation of leasing authority included specific authority that directed
NIH to obligate funds for multiyear leases, one year at a time, and that
such actions were exempt from the Antideficiency Act. GSA is also
modifying its guidance for delegated leasing authority, which would make
it clear that agencies with delegated leasing authority can score
operating leases in the same manner as GSA. The scoring process for
capital leases would remain unchanged.

As part of its leasing process, NIH has also established decision points
for identifying any leases for which a prospectus should be submitted
through GSA for congressional approval, under the Public Buildings Act of
1959, as amended. This process involves submitting leases and alterations
to leased buildings for approval whose costs exceed a legislatively
established threshold. In addition, NIH has designated the Office of
Acquisitions, Office of Resource Facilities to review prospectus-level
alterations to leased buildings to ensure that the contracting for
alterations to leased buildings does not exceed the prospectus threshold
for alterations to leased buildings. However, NIH has taken no action to
address five prospectus-level leases that were not submitted to the
appropriate congressional committees in past years. While there is no
penalty provided in law for not submitting a prospectus, failure to do so
hinders the ability of the appropriate congressional committees to fulfill
their oversight responsibilities for all prospectus-level leases.
*** End of document. ***