General Services Administration: Actions Taken to Correct Rent Expense
Estimation Weaknesses (Letter Report, 08/19/1999, GAO/GGD-99-123).

Congress has raised concerns about how the General Services
Administration (GSA) estimated the funding needs for the rental-of-space
account within the Federal Buildings Fund. In August 1997 and again in
January 1998, GSA requested that it be allowed to reprogram $324 million
from other Fund accounts into the rental-of-space account to cover its
underestimation of expenses to be paid out of that account. GSA
officials said that the reprogramming was necessary because of
forecasting problems relating to lease expansion, lease cancellations,
rent increases for existing leases, and the annualization of the fiscal
year 1997 reprogramming. GSA has been changing its rent expenditure
tracking and estimating process and has been developing a new computer
program, known as Galaxy, to facilitate this process. This report
discusses whether (1) the new Galaxy program included the elements
needed for tracking actual rental expenditures and forecasting future
rental-of-space funding requirements and (2) the additional steps that
GSA's Public Buildings Service was taking to improve its budget process
addressed the causes of its underestimation of the rental-of-space
account.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-99-123
     TITLE:  General Services Administration: Actions Taken to Correct
	     Rent Expense Estimation Weaknesses
      DATE:  08/19/1999
   SUBJECT:  Rental rates
	     Federal office buildings
	     Cost analysis
	     Future budget projections
	     Management information systems
	     Federal agency accounting systems
IDENTIFIER:  GSA Galaxy Program
	     PBS System for Tracking and Administering Real Property
	     Federal Buildings Fund

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    United States General Accounting Office GAO               Report
    to Congressional Requester August 1999       GENERAL SERVICES
    ADMINISTRATION Actions Taken to Correct Rent Expense Estimation
    Weaknesses GAO/GGD-99-123 United States General Accounting Office
    GAO                 Washington, D.C.  20548 General Government
    Division B-282846 August 19, 1999 The Honorable Bob Franks,
    Chairman Subcommittee on Economic Development, Public Buildings,
    Hazardous Materials and Pipeline Transportation Committee on
    Transportation and Infrastructure House of Representatives Dear
    Mr. Chairman: This report responds to the Subcommittee's request
    for a review of the General Services Administration's (GSA) system
    for estimating the rental expenses of the Federal Buildings Fund
    (FBF).  The Subcommittee was concerned about how GSA estimated the
    funding needs for the rental-of- space account within FBF.  On
    August 8, 1997, and again on January 9, 1998, the Subcommittee
    received requests from GSA to allow it to reprogram a combined
    total of $324 million in New Obligational Authority (NOA) from
    other FBF accounts into the rental-of-space account to cover its
    underestimation of the expenses to be paid out of this account in
    fiscal years 1997 and 1998.  In its requests, GSA attributed the
    need for the reprogramming actions to forecasting problems
    relating to lease expansions, lease cancellations, rent increases
    for existing leases, and the annualization of the fiscal year 1997
    reprogramming. At the time we started work on this request in
    August 1998, GSA's Public Buildings Service (PBS) was changing its
    rent expenditure tracking and estimating process and developing a
    new computer program, known as Galaxy, to facilitate this process.
    As agreed with the Subcommittee, the objectives of our review were
    to determine whether (1) the new Galaxy program included the
    elements needed for tracking actual rental expenditures and
    forecasting future rental-of-space funding requirements, and (2)
    the additional actions PBS was taking to improve its budget
    process addressed the causes of its underestimation of the rental-
    of-space account. Galaxy has seven basic components that appear
    capable of providing the Results in Brief    data elements needed
    to track the actual expenditures made from the rental-of-space
    account and thus aid in forecasting the funding required for the
    rental-of-space account for budget purposes.  PBS has recognized
    that the success of the Galaxy program depends on the accuracy and
    maintenance of the data entered into Galaxy.  Consequently, it has
    emphasized this issue in its training manual for Galaxy.  This
    manual states Page 1                               GAO/GGD-99-123
    PBS' Rent Estimating System B-282846 that all active leases and
    projects loaded into Galaxy "must be validated." The manual lists
    five steps that the analyst must follow to validate the
    information.  Rent account analysts1 that we interviewed
    emphasized the need to maintain good communications among (1)
    themselves, who maintain Galaxy; (2) the realty specialists, who
    maintain PBS' System for Tracking and Administering Real Property
    (STAR),2 the system from which the data in Galaxy were downloaded,
    and (3) customer agencies, that provide information on their space
    needs.  We agree that GSA and its customer agencies need to have
    good communications to ensure that GSA knows about any potential
    changes in inventory that a customer agency may plan in a given
    fiscal year, so that those changes are reflected in GSA's budget
    submission. PBS has taken steps to improve (1) how it calculates
    the rental-of-space estimate, such as using local market rental
    increases instead of national averages in calculating the rent
    increase estimates, and (2) the budgeting process in general, by
    establishing the Office of Financial and Information Systems (FIS)
    to, among other things, oversee budget formulation, including
    estimating the rental-of-space account funding requirements.  We
    believe that the actions PBS has identified to improve its
    budgeting process, if effectively implemented, address the causes
    it identified for its underestimation of the rental-of-space
    account. Funds from the rental-of-space account in FBF pay for all
    leased space in Background    GSA's inventory.  During fiscal
    years 1997 and 1998, GSA received appropriations of about $4.6
    billion in NOA for this account, about $2.3 billion in each fiscal
    year.  GSA submitted two requests, totaling $324 million in NOA,
    to reprogram funds from other FBF accounts into the rental-of-
    space account.  On August 8, 1997, GSA requested approval to
    reprogram $110 million of the fiscal year 1997 appropriated funds,
    and on January 9, 1998, it requested approval to reprogram another
    $214 million of fiscal year 1998 appropriated funds.  Both
    requests were approved.  The amounts requested equaled about 4.7
    percent of the amount initially requested by GSA in its budget
    requests for the rental-of-space account for fiscal year 1997, and
    9.4 percent of the amount requested for fiscal year 1998. 1 We
    have used rent account analyst as a generic term for the budget
    analysts and program analysts who assist in maintaining the Galaxy
    program. 2 STAR is a new information system that became
    operational in January 1998.  GSA currently uses STAR for project
    administration, space management, and client billing. We are
    currently reviewing STAR to determine what user problems may exist
    and what steps PBS is taking to ensure accurate, reliable, and
    consistent data in it. Page 2
    GAO/GGD-99-123 PBS' Rent Estimating System B-282846 In its August
    8, 1997, reprogramming request for fiscal year 1997, GSA
    attributed the need for the reprogramming to three causes.  First,
    it had estimated that the overall average rents would increase by
    2 percent, but actual rent increases ranged from 3 to 5 percent.
    This resulted in the cost to the account being underestimated by
    about $30.9 million.  Second, on the basis of regional
    expectations, GSA had overestimated the amounts that would be
    saved through lease cancellations by about $74.1 million. Third,
    GSA had not been able to absorb a $5.1 million congressional
    reduction in appropriations requested for rental-of-space
    expenditures in fiscal year 1997.3  According to a GSA official,
    the agency could not absorb this cut because GSA was already short
    of NOA in this account.  GSA alerted its oversight committees in
    its reprogramming request letter that these problems would also
    affect the rental-of-space account in fiscal year 1998. In its
    January 9, 1998, reprogramming request for fiscal year 1998, GSA
    attributed the need for the reprogramming to four causes.  First,
    GSA needed $143.6 million to cover the $110 million
    underestimation in fiscal year 1997 and to annualize this error
    for fiscal year 1998.  Second, as in fiscal year 1997, GSA had
    estimated the overall average rental rate increase at 2 percent,
    but actual increases ranged from 3 to 5 percent.  This resulted in
    the cost to the account being underestimated by about $22.5
    million. Third, as in fiscal year 1997, it had overestimated
    savings from lease cancellations, this time by about $41.8
    million.  Finally, on the basis of what regional staff believed
    was going to happen, GSA had underestimated the need for expansion
    space.  This resulted in a need for an additional $6.1 million.
    The process of formulating the budget is to begin no later than
    the spring of each year, about 9 months before it is transmitted
    to Congress and 18 months before the beginning of the fiscal year
    in which the budget becomes effective.  During the first 6 months
    of this period (from about April through September), PBS compiles
    information on the various budget elements, including the rental-
    of-space account; reviews the information for reasonableness and
    accuracy; and prepares its budget estimates.  During the next 3
    months (October through December) these estimates are to be
    submitted as a portion of GSA's budget request to the Office of
    Management and Budget (OMB) for review.  OMB reviews the budget
    request and passes it back to GSA with any changes, and GSA may
    appeal OMB `s changes before the budget is finalized.  Early the
    following year (between the first Monday in January and the first
    Monday in 3 The three figures total $110.1 million for fiscal year
    1997 after rounding. Page 3
    GAO/GGD-99-123 PBS' Rent Estimating System B-282846 February), the
    budget is to be submitted to Congress for its review and
    appropriation of funds. Because of the timing of the budget
    process, when GSA realizes that an estimation error has been
    included in its budget request for that fiscal year (in fiscal
    year 1997 in this case), the error usually cannot be corrected in
    a future budget estimate until the second fiscal year after the
    error occurred (in this case, fiscal year 1999). To accomplish our
    objectives, we observed the Galaxy program in Scope and
    operation, reviewed training materials on its operation, reviewed
    Methodology           documentation on the reprogramming requests,
    and interviewed PBS officials and budget and/or program analysts
    responsible for maintaining Galaxy in 10 of GSA's 11 regions.  We
    discussed with the PBS Deputy Controller what elements were needed
    to track and forecast rent expenditures.  We checked to see that
    the elements discussed were included in the Galaxy program.  We
    did not verify the accuracy of the data in Galaxy, but we did
    obtain information from PBS on how it planned to ensure that the
    data would be accurate, reliable, and consistent.  We also did not
    contact customer agencies to verify the extent to which they were
    being contacted by GSA regarding their future space needs. We did
    our work in Washington, D.C., between August 1998 and May 1999 in
    accordance with generally accepted government auditing standards.
    We requested comments on a draft of this report from the
    Administrator of GSA.  GSA's comments are discussed at the end of
    this letter. GSA has taken corrective actions to specifically
    improve its tracking of the GalaxyGSA's Major    rental-of-space
    account and to improve its budget estimating for this Effort to
    Improve     account.  The major step taken to improve both the
    tracking and estimating of the rental-of-space account was GSA's
    development of the Tracking and          Galaxy program to be the
    primary tool to manage the rental-of-space Estimating in Its
    account for fiscal year 1999 and to help manage project
    expenditures for Rental-of-Space       fiscal year 2001.  The
    reason Galaxy was developed was to provide a Account
    means to have all the regions use a consistent format, the same
    set of tools, and the same assumptions to monitor, reconcile, and
    estimate future expenditures from the rental-of-space account.
    Rent account analysts responsible for the rental-of-space account
    had not had a financial management tool for tracking and analyzing
    the account since September 1997.  The previous automated system
    was discontinued when STAR was being put on-line.  Rent account
    analysts had been using manual spreadsheets to monitor the account
    since that time. Page 4                                GAO/GGD-99-
    123 PBS' Rent Estimating System B-282846 The Galaxy program
    software was developed under an existing support services
    contract, at no additional cost to GSA except for some travel to a
    region, as an interim program until a module could be developed
    for STAR. Current plans are to enhance Galaxy so that it will
    interface with STAR.  A statement of work to accomplish this
    objective is currently being developed. To implement Galaxy, GSA
    provided each region with training on its use and a copy of the
    software already loaded with the region's data for active lease
    contracts and active lease projects as of October 1, 1998.  Galaxy
    has seven basic components, which include the elements PBS has
    identified as needed for tracking actual expenditures and
    estimating the funding requirements for future expenditures from
    the rental-of-space account. These components are described in
    table 1. Table 1: Galaxy Components    Component title
    Component description Base leases                 Provides an
    inventory of all active lease contracts for space leased by GSA.
    This database includes lease number, building address, base square
    feet, and rental cost per square foot. Reimbursable work
    Tracks agreements, using RWA number, between GSA and an
    authorizations (RWA)        agency to have GSA provide specific
    services that are beyond the standard level covered by the rental
    agreement. Intra-budget activity       Tracks transfers of funds,
    using the IBAA number, from the authorizations (IBAA)
    rental-of-space account, Budget Activity 53, to the field office
    for each lease when the government is paying utilities and/or
    services not included in the lease. Lump sum (debits) and
    Tracks debits or credits to lessors other than recurring monthly
    withholds (credits)         rent, such as tax claims, damage
    claims, and lessor default. Operating cost              Tracks any
    increases or decreases in annual rental that are not
    escalations/consumer        the result of changes to the base
    leased square footage, such price index (CPI)           as a
    scheduled increase in cost per square foot agreed to in the lease.
    Allowances and monthly/ Tracks amounts provided to each GSA region
    for its rental-of- quarterly reports           space account and
    the plans for expending them. Projects                    Tracks
    agencies' requests for such things as new space and/or expansions
    to and deletions from existing space. Source: GSA documents and
    officials. The program can also generate various reports on both
    leases and projects, such as base rent by month, RWAs by lease
    number, IBAAs by lease number, lump sums by lease, operating cost
    escalation/CPI by lease, NOA by base lease, and estimate of rent
    increases tied to projects. Rent account analysts are responsible
    for ensuring that Galaxy's data are accurate, reliable, and
    consistent.  The training manual states that all active leases and
    projects loaded in Galaxy "must be validated."  The Page 5
    GAO/GGD-99-123 PBS' Rent Estimating System B-282846 manual lists
    five steps that the analyst must follow to validate the
    information.  Table 2 lists these steps. Table 2:  Data Validation
    Steps Step Activity 1         Reconcile Galaxy base leases to
    National Electronic Accounting and Reporting System (NEAR).a Any
    discrepancies must be resolved and accounted for properly. NEAR,
    STAR, and Galaxy must reflect the same data at the start of the
    fiscal year. 2         Review all lease projects in Galaxy to see
    whether they upload from STAR, there is a project for every
    expiring lease, and all projects are up-to-date and make sense. 3
    Enter estimated average CPI increase for each lease in order to
    activate the CPI projections. 4         Enter all Lump Sums,
    IBAA's, or RWA's. These data should be identified through STAR,
    budget call data, and interviews with realty specialists. 5
    Ensure that the analyst keeps the database up-to-date throughout
    the fiscal year. aNEAR is GSA's financial accounting system.
    Source:  GSA document. Also, other guidance in the manual
    indicates that Galaxy must be reconciled to NEAR on a monthly
    basis to ensure that accurate obligations are stated in NEAR.
    Further, the manual states that the effectiveness of any system is
    contingent upon the information it is supplied.  Therefore, each
    region is responsible for ensuring the accuracy of the data input
    into Galaxy.  Without accurate data, a credible status report for
    the rental-of- space account cannot be produced. Further, the
    regional rent account analysts we interviewed all agreed that
    communications between themselves and the realty specialists will
    be key in maintaining the accuracy of Galaxy.  The analysts
    believed that communications would be of particular importance in
    estimating the rent account for a future budget year because, in
    order to estimate future expenditures, they rely not only on
    information about active leases, but also on information on
    projects in process.  Project information is dependent upon the
    realty specialists' communications with the customer agencies.
    The analysts we interviewed all believed that, with proper
    communications, Galaxy should help avoid past problems and improve
    the estimating process.  We were told that all GSA regions are to
    create a branch that will have as one of its responsibilities the
    initiating and inputting of all project data into STAR.  This
    process should help ensure that the projects are entered into
    STAR.  In May 1999, at least one region had already begun
    interviewing applicants for positions in the new branch. We agree
    that good communication between the analysts maintaining Galaxy
    and the realty specialists maintaining STAR is critical to the
    accuracy of the data in Galaxy.  To project the rent expenditure
    account, it Page 6
    GAO/GGD-99-123 PBS' Rent Estimating System B-282846 is
    particularly important to obtain data on lease projects, which
    reflect potential changes in the inventory.  This information is
    not as readily available as data on existing leases, but must be
    obtained from customer agencies.  Further, we agree that good
    communication between GSA and its customer agencies is essential
    to improving the accuracy of the rental- of-space estimate.
    However, this may not be easily accomplished, even with good
    communications, given that for budget purposes GSA needs to
    estimate changes in space requirements approximately 18 months in
    advance.  In his testimony on April 24, 1997, the PBS Commissioner
    testified that, when he asked federal agency facility managers in
    a quarterly meeting whether they could identify the space
    reductions from downsizing a year in advance, they all said that
    they could not.  This shows how difficult it may be for GSA to get
    accurate information on changes in the inventory. In addition to
    implementing Galaxy, GSA has taken other steps to address
    Improvements to Other its underestimation that led to a total of
    $324 million in reprogramming Problem Areas in PBS' requests for
    fiscal years 1997 and 1998.  Table 3 lists the areas with budget
    estimation problems in the rental-of-space account as well as the
    NOA Rental-of-Space                            needed by fiscal
    year. Forecasting Process Table 3: Areas Underestimated in the
    Dollars in millions Rental-of-Space Account, by Fiscal Year
    Problem area                                               FY 1997
    FY 1998 Underestimating rent increases
    $30.9                $22.5 Overestimating lease cancellations
    74.1                  41.8 Congressional reduction for lease
    expenditures                  5.1                    0.0
    Annualization of fiscal year 1997 shortage
    0.0                 143.6 Underestimating expansions
    0.0                     6.1 Total
    $110.0a              $214.0 aDoes not total due to rounding.
    Source:  GSA documents. In addition to implementing Galaxy, GSA
    has taken several other steps to specifically address the problem
    areas listed in table 3.  First, a GSA official told us that GSA
    regions would use local market rental rate increases to determine
    the region's estimated rental rate increase for a budget year.  In
    fiscal years 1997 and 1998, GSA used national averages to
    determine rental rate increases.  Further, according to an
    official, GSA will try to improve its estimation of lease
    cancellations by comparing the amount of a region's projected
    cancellations with the historical trends for that region.  If the
    projected cancellations for a region appear to deviate from the
    historical trends, the divergence will be reviewed to see whether
    there is a justification for it.  If there is not, GSA will rely
    on the historical trend data.  In fiscal years 1997 and 1998, the
    budget estimates that Page 7
    GAO/GGD-99-123 PBS' Rent Estimating System B-282846 overestimated
    the savings from lease cancellations relied on the figures
    provided by the regions.  Finally, with regard to expansion space,
    according to a GSA official, no specific action other than the use
    of Galaxy is being taken.  The variance in this area only amounted
    to 0.03 percent and that only in fiscal year 1998. Also, PBS
    officials told us that four controls have been established to
    improve the rental-of-space account estimate of future
    expenditures.  Each region (1) will be required to develop a
    financial plan to be used to track the rental-of-space account on
    a quarterly basis, (2) will be required to provide an explanation
    for a variance of plus or minus 0.5 percent between actual
    obligations and the established targets, (3) will have a set limit
    of NOA for existing leases and annualizations of leases, and (4)
    will have a "cannot exceed limit" for indefinite authority.4
    Further, as we stated in our March 1998 testimony on
    overestimation of rental revenue projections, GSA issued an order
    in July of 1997 establishing FIS, with one of its responsibilities
    being the budget estimating process.5  It also hired a chief
    financial officer to oversee FIS.  If implemented as designed,
    both actions should, in our opinion, improve PBS' financial
    management of FBF. Galaxy appears to have elements needed to track
    PBS' rental-of-space Conclusions                     account and
    aid in more accurately estimating this account for future budgets.
    To the extent that PBS effectively implements the steps it has
    taken to maintain accurate data and good communications within GSA
    and with its customer agencies, has improved its estimation and
    budgetary process, and has corrected the problems it identified as
    causing its underestimation of the rental-of-space account, it
    should be able to produce better estimates of this account in the
    future. On July 16, 1999, the PBS Deputy Controller provided oral
    comments on a Agency Comments and draft of this report.  He said
    that GSA generally agreed with the draft Our Evaluation
    report and pointed out that PBS had established a requirement that
    the regions explain variances of plus or minus 0.5 percent between
    actual obligations and established targets.  We modified our
    report to reflect this requirement. 4 PBS defines indefinite
    authority as the funding for unplanned expansions whereby the net
    new increase in revenue is sufficient to cover all associated
    costs of the lease action. 5 General Services Administration:
    Overestimation of Federal Buildings Fund Rental Revenue
    Projections (GAO/T-GGD-98-69, Mar. 5, 1998). Page 8
    GAO/GGD-99-123 PBS' Rent Estimating System B-282846 We are sending
    copies of this report to Representative Robert E. Wise, Ranking
    Democratic Member of your Subcommittee; Senator Ben Nighthorse
    Campbell, Chairman, and Senator Byron L. Dorgan, Ranking Minority
    Member, Senate Subcommittee on Treasury and General Government,
    Committee on Appropriations; Senator George V. Voinovich,
    Chairman, and Senator Max S. Baucus, Ranking Minority Member,
    Senate Subcommittee on Transportation and Infrastructure,
    Committee on Environment and Public Works; Representative Jim
    Kolbe, Chairman, and Representative Steny Hoyer, Ranking Minority
    Member, House Subcommittee on Treasury, Postal Service, and
    General Government, Committee on Appropriations; the Honorable
    David J. Barram, Administrator, GSA; and to others upon request.
    If you have any questions regarding this report, please call me or
    Ron King at (202) 512-8387.  The key contributor to this
    assignment was Tom Keightley. Sincerely yours, Bernard L. Ungar
    Director, Government Business Operations Issues Page 9
    GAO/GGD-99-123 PBS' Rent Estimating System Page 10    GAO/GGD-99-
    123 PBS' Rent Estimating System Page 11    GAO/GGD-99-123 PBS'
    Rent Estimating System Page 12    GAO/GGD-99-123 PBS' Rent
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