Segment 1 Of 4 Next Hearing Segment(2)
SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOC Segment 1 Of 4
March 5, 1997
April 24, 1997
May 15, 1997
June 19, 1997
TESTIMONY
MARCH 5, 1997
Peck, Robert A., Commissioner, Public Buildings Service, U.S. General Services Administration
PREPARED STATEMENT SUBMITTED BY A MEMBER OF CONGRESS
Brown, Hon. Corrine, of Florida
PREPARED STATEMENT SUBMITTED BY A WITNESS
Peck, Robert A
SUBMISSIONS FOR THE RECORD
Peck, Robert A., Commissioner, Public Buildings Service, U.S. General Services Administration:
Chart, GSA Public Buildings Service, FY 1998 Sources and Uses
Responses to questions from Rep. Kim
Letter to Hon. William Cohen, Chairman, Subcommittee on Oversight of Government Management and the District of Columbia, Committee on Government Affairs, U.S. Senate, from J. William Gadsby, Director, Government Business Operations Issues, U.S. General Accounting Office, July 14, 1995
Page 2 PREV PAGE TOP OF DOC Segment 1 Of 4
Responses to questions from the majority staff of the Subcommittee on Public Buildings and Economic Development
Report, General Services Administration Revenue Projection Process Discussion Outline, by Ernst & Young Kenneth Leventhal Real Estate Group
APRIL 24, 1997
Peck, Robert A., Commissioner, Public Buildings Service, U.S. General Services Administration
Motley, Michael, Associate Director, Government Business Operations Issues, U.S. General Accounting Office
PREPARED STATEMENT SUBMITTED BY A MEMBER OF CONGRESS
Traficant, Hon. James A., Jr., of Ohio
PREPARED STATEMENT SUBMITTED BY A WITNESS
Motley, Michael
(iii)
SUBMISSION FOR THE RECORD
Peck, Robert A., Commissioner, Public Buildings Service, U.S. General Services Administration:
Page 3 PREV PAGE TOP OF DOC Segment 1 Of 4
Chart, Vacant Space History
Responses to questions
ADDITIONS TO THE RECORD
Gisbon, Hon. John R., Judge, U.S. Court of Appeals, Eighth Circuit, statement and responses to questions
Lew, Jacob J., Deputy Director, Office of Management and Budget, statement
MAY 15, 1997
Bulls, Herman E., Principal, La Salle Partners
Blumenauer, Hon. Earl, a Representative in Congress from Oregon
Chagares, Robert L., Managing Director, Trammel Crow Company
Franklin, Herbert M., Executive Officer, Architect of the Capitol
Peck, Robert A., Commissioner, Public Buildings Service, U.S. General Services Administration
Page 4 PREV PAGE TOP OF DOC Segment 1 Of 4
Zarrilli, Thomas P., Senior Vice President, Dillon, Read and Co. Inc
PREPARED STATEMENT SUBMITTED BY A MEMBER OF CONGRESS
Blumenauer, Hon. Earl, of Oregon
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Bulls, Herman E
Chagares, Robert L
Franklin, Herbert M
Peck, Robert A
Zarrilli, Thomas P
SUBMISSION FOR THE RECORD
Blumenauer, Hon. Earl, a Representative in Congress from Oregon, proposed report language
JUNE 19, 1997
Page 5 PREV PAGE TOP OF DOC Segment 1 Of 4
Lew, Jacob J., Deputy Director, Office of Management and Budget
PREPARED STATEMENT SUBMITTED BY A MEMBER OF CONGRESS
Shuster, Hon. Bud, of Pennsylvania
PREPARED STATEMENT SUBMITTED BY A WITNESS
Lew, Jacob J
SUBMISSION FOR THE RECORD
Lew, Jacob J., Deputy Director, Office of Management and Budget:
Newspaper article, ''Law Blocks Good GSA Rental Deals, Hill Panel Told'', October 29, 1993
Responses to questions from Rep Traficant
PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.
GSA FY 1998 PROGRAM AND RENT SHORTFALL
WEDNESDAY, MARCH 5, 1997
Page 6 PREV PAGE TOP OF DOC Segment 1 Of 4
U.S. House of Representatives,
Subcommittee on Public Buildings and Economic Development,
Committee on Transportation and Infrastructure,
Washington, DC.
The subcommittee met, pursuant to call, at 9:10 a.m., in Room 2253, Rayburn House Office Building, Hon. Jay Kim [chairman of the subcommittee] presiding.
Mr. KIM. Good morning, everybody. The subcommittee will come to order. I would like to welcome all the Members this morning. It is going to be our first hearing, and again I would like to welcome our Ranking Member Mr. Traficant. I understand you were a Chairman in the past and were working pretty well in a bipartisan spirit. I hope we can continue to do so.
I don't see any freshmen this morning.
I would like to make just a brief comment. This hearing is the first hearing we are going to have. As you know, I am surprised to find out we have a 650 million revenue shortfall, which is shocking news to me. This morning we are going to find out why that happened, how did that happen. Perhaps we will discuss how we can prevent it from happening again. Perhaps we will discuss some kind of innovative idea or innovative financing to make this up. I don't know how we are going to do it, but I do have some idea. It is a serious matter with that kind of financial disaster.
Page 7 PREV PAGE TOP OF DOC Segment 1 Of 4
Again, I would like to welcome all of you, especially the panelists this morning, Mr. Peck.
At this time I would like to ask our Ranking Member would you like to make any opening comments?
Mr. TRAFICANT. Thank you, Mr. Kim. I welcome the opportunity to hear from the officials here today an explanation of what I believe to be the first significant shortfall in the Federal Building Fund. No construction program and a greatly reduced repair and alteration program for fiscal year 1998 are the direct results of that shortfall. The indirect effects may be more prolonged and seriously inhibit the Agency's ability to manage a governmentwide real estate program.
Especially perplexing are the situations—because in March of 1994, just 3 years ago, I was chairman of this subcommittee. A series of hearings was held on the health of this Federal Building Fund. Then Administrator Johnson, when questioned about the wisdom of reducing rents in 18 metropolitan areas, testified, and I quote, ''I feel confident that the predictions are not excessive and that the Federal Buildings Fund will not lack the resources necessary to carry out its responsibilities.''
Mr. Johnson then continued by saying, ''There is no relationship between the loss in Federal Building Fund revenues due to the rent reductions and the level of funding we are requesting for our capital program.'' He further added that he would go to the Office of Management and Budget to get an appropriation if needed to supplement the Federal Building Fund.
Page 8 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. Johnson was very confident. In the fiscal year now there are no appropriations for any GSA construction.
These are serious issues which require examination, resolution and leadership. The GSA should be developing a long-term plan to restore health and revenue to the fund. The subcommittee has consistently questioned the wisdom of abandoning the fund as a source of revenue for Federal construction and thus becoming totally reliant on the largesse of the Office of Management and Budget for Federal construction dollars. The fund was created to promote a degree of autonomy so as not to be a drain from the Treasury for acquiring real estate assets, to kiss somebody's ring over at OMB. The autonomy issue of GSA is maybe more important now as dramatized by the shortfall in the Federal Building Fund.
It appears the Agency is moving backwards, not now only totally relying on OMB for construction funds, but hamstrung by the scoring rules of OMB. Maybe, Mr. Chairman, we should be discussing the issues of the Federal Building Fund, the Real Estate Program of America, the Building Construction Program for America with the Office of Management and Budget.
Now, the GSA appears to be a subsidiary of OMB, so I am very disappointed, and for the life me I can't understand how the GSA continues to allow the OMB to make its decisions for them. That is my opinion, and I it think was evident over that building in Atlanta where OMB testified in here that they were willing and had authorized a 30-year lease at 25 million a year with no equity position.
So with that in place on the record, I want to thank you, Mr. Kim, wish you well in the dispatch of your new duties.
Page 9 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. KIM. Thank you, thank you, Mr. Traficant.
Mr. Duncan, would you like to make an opening statement?
Mr. DUNCAN. Not really, just to congratulate you on assuming your new post as chairman of this subcommittee. I have certainly enjoyed my service here, and I feel that there are a lot of opportunities to do good things for the taxpayers on this subcommittee, and you are fortunate to have Mr. Traficant working with you as your Ranking Member. I worked under his leadership when he was chairman, and so I think we can work together this year, and hopefully we can accomplish some good things. Thank you very much.
Mr. KIM. Thank you, Mr. Duncan. He told me this was going to be an easy job.
[The prepared statement of Ms. Brown follows:]
[Insert here.]
Mr. KIM. I would like to welcome again our first witness, Commissioner of the Public Building Service of GSA, Mr. Peck. Without objection, your statement will be made part of this official statement, the record. Thank you, and proceed, please.
Page 10 PREV PAGE TOP OF DOC Segment 1 Of 4
TESTIMONY OF ROBERT A. PECK, COMMISSIONER, PUBLIC BUILDINGS SERVICE, U.S. GENERAL SERVICES ADMINISTRATION
Mr. PECK. Thank you, Mr. Chairman, and Members of the committee, and I, too, would like to welcome you to the chairmanship, Mr. Kim, and say I look forward to working with you on all of issues that arise around the Federal Public Buildings Program, particularly those about the Federal Buildings Fund.
I am here today to discuss, obviously, our fiscal 1998 budget, and my statement says I am pleased to appear before you today. This is true. I am less than pleased to have to appear before you to discuss the revenue shortfall, but I will discuss it nonetheless.
Our budget, as you know, requests $4,864 million for fiscal 1998, in Obligational Authority; approximately 3.7 billion for operations; 434 million for repairs and alterations; $50 million to continue the chlorofluorocarbon replacement program; and $84 million for one capital project, the third and final phaseof the modernization of the ICC, Connecting Wing and Customs Building in Washington, which will house the Environmental Protection Agency.
We have 10 prospectus-level leases that I believe were delivered to your staff yesterday. We are requesting $680.5 million in new obligational authority in 1998 to fund projects and programs authorized in prior years. Some of this gets into the arcane recesses of Federal budget scoring, and I have to admit my depth in that is not great, so I will take you through just a bit of this and then explain what we are doing—how we think the shortfall happened, and what we are doing to try to prevent it in the future.
Page 11 PREV PAGE TOP OF DOC Segment 1 Of 4
Our new Obligational Authority funding estimates for fiscal years 1996 and 1997 were based on what we thought we would get in anticipated revenues. Obviously, as in any business you have to anticipate your revenues in setting out a budget. Our actual rent revenues in 1996 and the ones which we are bringing in in 1997 are going to be less than we predicted to the Congress. Because OMB and the Congress rely on those estimates to set a budget and decide whether our revenues can cover our expenses, a reduction in revenues means that we don't wind up with enough money to cover the cost of projects we have been directed by Congress to build.
And because of the scoring rules—and this is more difficult for me to explain—the fact that you have not had enough revenue in a prior year means you wind up doing several things. One is what in 1996 and 1997, when it was not necessary to fund some projects because they weren't ready to be constructed, we have obviously not had to spend that money.
Second, we have tightened our belts in our operating accounts as any business does when it doesn't have the money to cover its immediate expenses. But the scoring rules also require that we go back forward, I guess is a more accurate way to put it, into fiscal 1998 and ask for Obligational Authority to cover the shortfall.
Let me tell you why the shortfall happened. One, we misjudged the impact of downsizing on the Federal space inventory, both in terms of timing and degree. The amount—the increase that we have usually anticipated in Federal space has been smaller and slower than projected, and we have canceled more leases than we thought we would cancel. Ultimately that is good news for the government. It means that the downsizing of the Federal Government is actually now showing up in the amount of space that we need. And that eventually is good news for the taxpayers.
Page 12 PREV PAGE TOP OF DOC Segment 1 Of 4
Second, as Mr. Traficant noted, we did adjust rental rates downward in 1995. That in and of itself was a business decision made before I arrived at GSA, and I am not going to second-guess that. I will tell you, however, that we made a mistake in that having reduced those rental rates, we did not then apply that reduction to our estimates for the fiscal year 1997 budget. That is a flat out bonehead error.
Third, our technical assumptions as to when new government space would enter the inventory, in other words, when new projects would be open and bringing in new rent revenues to us were wrong, and we have some construction projects which have stretched out and caused us to have less rent revenue than we anticipated. This is a serious matter for us because we are, as a public agency, supposed to operate as much like a business as we can, and that is my goal and the goal of our acting administrator.
We have done a number of things in response. We have changed the way we do our forecasting. We called in Ernst and Young as the advisors to us. We changed our technical forecasting method. We will now use two methods to establish a range of possibilities and that we are told by the consultants will at least in many cases pick up trends that we might not have picked up with a single method we were using before.
We are also—in instances before where we applied national rules of thumb to how we thought our inventory was going to change or how our rental rates would change, it turned out to be too broad-based a method, and we are now going down to the local level in our organization and asking people what they see in terms of downsizing for a coming year and where the rental rates actually are in their areas. I mean, our rental rates.
Page 13 PREV PAGE TOP OF DOC Segment 1 Of 4
So we believe we are going to get a budget based more on actual events to the extent we can anticipate them rather than some broad measures, which, as I said, have not borne out because we have a changing dynamic. A changing dynamic is that the government is downsizing. At least that is one dynamic.
I have to tell you that this is a change in forecasting and budgeting that I think is the right one to make, in any event, because particularly given the kinds of information technology one can acquire these days, we should be able to, as so many businesses do, be able to keep a more accurate account on our inventory and track it with actual numbers and not with some broad-based estimates developed solely in Washington.
We are, in fact, this year going to acquire a new computer system to manage our inventory, and it is a system that has been used by AT&T to manage its real estate, and it is a relatively inexpensive system, certainly nothing—costing nothing like the computers—the proprietary computer systems which GSA tried to develop at some point in the 1980s and failed. This one, we believe, will allow us to keep a more accurate track on our inventory and what space is being rented, and what we are charging for it.
We have with our senior managers tried to instill a new focus on revenue and figure out where, in fact, we are not collecting revenues, whether it is because agencies have had rent caps applied, whether it is because we simply have vacant space. We are considering shifting the way we use some of our minor repair funds so that more of that repair money goes into renovating vacant space so we can get Federal agencies into that vacant space in our buildings, which has the dual impact of increasing revenues from our own inventory, allowing us also to reduce our leased inventory.
Page 14 PREV PAGE TOP OF DOC Segment 1 Of 4
We are emphasizing to our managers that they have to go out and lease out space in our buildings more aggressively where we are authorized to do that, because that can bring in new revenues.
I would also note, Mr. Kim, because you and I have discussed this, that we have for several months had a small group looking at some creative financing means to supplement rent revenues as a way of getting capital projects financed, and we have looked at things that are done in the private marketplace, such as sale/lease-back alternatives in some cases. It is also possible that we may go to OMB and ask for some sort of increased borrowing authority.
I am also setting up a task force inside GSA to look at the entire way the Federal Buildings Fund works to figure out—there are in this fund, as in any fund like this, lots of internal cash flows, and we need to understand better where the cash is flowing from and where it is going to. I don't mean that we don't know how much money we are getting in this given year and where we are spending it. What I mean is on a building-by-building basis, we need to understand better what buildings make money for us and what buildings don't make money for us, because in any business that has to drive a lot of decisions we make.
I would note that the President has established a commission to look into a capital budget, and I will follow that with great interest.
Finally, I will note that, as you know, we are not requesting any new authority for construction in fiscal year 1998. We will, however, continue to have a vigorous construction and major repair program because we have in our pipeline $1.2 billion in previously authorized projects available for design and construction awards.
Page 15 PREV PAGE TOP OF DOC Segment 1 Of 4
That concludes my statement, Mr. Chairman, and I will be happy to answer any questions.
Mr. KIM. Thank you, Mr. Peck.
Mr. Traficant, do you have any questions?
Mr. TRAFICANT. Thank you, Chairman.
Mr. Peck, your statement mentioned that the GSA misjudged the impact of this Federal downsizing, both in timing and degree. I don't want the answer now, but I would like to have this answer submitted in writing to the committee. How many leases has GSA canceled? How much square footage is involved? How many dollars are involved? How many employees were involved?
You also stated in your testimony that you were going to ask OMB for an increase in borrowing authority. I would like for you to explain in writing the amounts and the details of what that will be.
[The information received follows:]
Mr. PECK. Mr. Traficant, on borrowing authority I have had a discussion with OMB about whether it would be possible for us to devise some sort of program. I have not given them specific numbers. We are, in fact, going to develop when we look at our building fund some question about how we might go about that, and I will be happy to share that with you when we get it, but that may be 2 months or so.
Page 16 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. TRAFICANT. Okay. I would like to have it when that happens, those specifics in writing for the committee.
Mr. PECK. Yes, sir.
Mr. TRAFICANT. Specifically, I would like to know in broad terms the following here today—and I will have a number of other questions that I would like submitted in writing, Mr. Chairman, but I have a specific question today that I would like to discuss with Mr. Peck. I would like to know the role of the OMB in this entire process. In the past, OMB has been deeply, deeply involved in GSA matters. It is my understanding that OMB reviewed GSA's projections and calculations. I want to know in general where was OMB this time? Where was OMB on this whole process of a blackout that that has developed, because in all fairness, Mr. Peck, it seems OMB has been making the decisions.
Mr. PECK. Let me attempt to answer where I think OMB is in this. In the interest of full disclosure, my first job was at OMB. It was a short-lived one, mutual disagreement or something. But anyway, I will—but I should just note that.
Obviously, OMB in the first instance has to rely on our estimates. We have a budget examiner and a branch chief, as everyone else does. I have to say that they have to rely on our estimates of revenue to a large extent. They don't really have their own means for checking those. OMB—may I continue—wait just a moment. I have to check one thing.
Mr. Traficant and Members of the committee, I am advised—I should note two things: One, with respect to the rent reductions, in the first place it took place in 1995. I am told that OMB was not necessarily in favor of those but went along with them.
Page 17 PREV PAGE TOP OF DOC Segment 1 Of 4
Second, last year and every year there is a mid-fiscal-year budget review, and OMB in the middle of last year did a review with us of our budget and did note at that time that there was a shortfall and notified the appropriations committees that—which is the routine in the midyear budget review—that there looks like there was a shortfall.
At that point, I will also tell you we had discussed it with OMB. It is about the time I was notified that there was going to be a shortfall. We then entered into discussion with OMB about how this was going to impact our budget for the succeeding 2 years. I am not—I will not tell you that the way we have come out is the way I would have liked to come out, but we did wind up in discussions on the budget, and so they became somewhat closeted discussions about how to handle this shortfall. It was clearly a decision in the administration's budget, for example, to go back and ask for an appropriation in this one single fiscal year to cover this shortfall and also not to have a construction budget. So there is that.
To the extent you are saying the OMB makes the final decision on the budget, you are absolutely correct.
Mr. TRAFICANT. I am not going to belabor it too much longer. There are a number of questions I have here that I want submitted in writing—the answers in writing, not only from Mr. Peck, but also to the administrative offices of the United States courts. But I would just like to say this: I think everybody has been—in so beating their chest about reinventing government has reinvented a lot of problems in the public building fund and construction program for our country. We have an archaic system of financing. I have seen no leadership coming from the executive side of this thing at all. We had commissions after commissions. The bottom line was we had GSA and OMB willing to spend a half a billion dollars more for a building in Atlanta Georgia without an equity position, and there is no explanation of this.
Page 18 PREV PAGE TOP OF DOC Segment 1 Of 4
And I think, Mr. Chairman, as I yield back my time, I want to encourage this committee to look seriously in this new makeup of this Congress for the second term to look at the scoring aspects of how we conduct our business and perhaps move towards making a change there. I think OMB makes the decisions, and I think Congress better provide some oversight.
Thank you, Mr. Chairman.
Mr. KIM. Thank you, Mr. Traficant.
Mr. Duncan.
Mr. DUNCAN. Mr. Peck, has there ever been a shortfall of this magnitude before?
Mr. PECK. Hold on a second, sir.
No, sir.
Mr. DUNCAN. I think the downsizing business is too easy of an excuse. Federal spending has continued to go up just not nearly as fast as it was, and there has been a whole lot more publicity about downsizing than there has been actual downsizing.
What I am getting at, if you had a private corporation of this size with this kind of budget and the leadership misjudged to this extent, I mean, heads would roll. This would really be just a terrible thing. The stockholders would scream. And we are representing the stockholders of the company.
Page 19 PREV PAGE TOP OF DOC Segment 1 Of 4
It seems to me that we are hearing too many easy excuses here, and this hiring—and also I am concerned how much did it cost you to hire Ernst and Young to come up with whatever they came up with?
[The information received follows:]
How much did the Ernst and Young Consultants cost?
Response: $18, 000
Mr. PECK. I don't know. I can get you that number.
Mr. DUNCAN. It seems to me we have these agencies with thousands of employees with Ph.Ds and master's degrees, but when something goes wrong, we hire some outside firm at several hundred dollars cost to come up with recommendations that you should have been able to come up with in House. What recommendations have they made to change things?
Mr. PECK. I could give you some more detail. Let me say this now. I have been in the private sector. I would like to put two things in context. You are absolutely right that the stockholders in a business, and you all as the representatives of our stockholders, do have every reason to be concerned and even upset about the shortfall.
Mr. DUNCAN. I am not blaming you, but I am telling you, somebody, I don't know who, but somebody has messed up bad, it seems to me.
Page 20 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. PECK. I can't contradict that.
Let me say this: You are right also that in the private sector there would be a lot of interest about who was responsible. On the other hand, I don't want to spend a lot of our time internally trying to point fingers. We did do this: When you discover that your forecasting method and the one that your own people have been using didn't work the way it is supposed to, one thing you would do even in the private sector is say, I think I had better bring somebody in who hasn't been part of this process to look at it from top to bottom.
I want to say, too, that Ernst and Young was a fairly quick review. I am skeptical of consultants myself, and I do believe that we have very good people in the Public Building Service who have done a very good job every day. On the other hand, in this case when we missed the mark by this much, I wanted someone else to take a look.
Mr. DUNCAN. What total budget authority was requested last year? Do you have that figure?
Mr. PECK. It was 5.2, if I remember correctly, 5.2 billion.
So, Mr. Duncan, one other thing I would note. This is a bad revenue shortfall, and I don't mean to trivialize it, and I am not trying to give facile answers for what happened. We are trying to do an honest analysis of what went wrong so we can make sure it doesn't happen. The numbers are that we missed the budget estimate by about 7 percent of revenues. The Federal Building Fund takes in about $4.8 billion. So in each of 2 years we were off by about 350 million. It is about a 7 percent shortfall.
Page 21 PREV PAGE TOP OF DOC Segment 1 Of 4
I don't know—we are trying to figure out historically how much on or off we have been in our estimates before. That is not to say that 7 percent of $4.8 billion doesn't add up to real money, but it is—it seems to me that it is outside the range that you would be comfortable with just as a variation because you can't predict the world. But as I said, we have tried to do a better job of putting in some forecasting technology and information systems to do a better job in the future.
Mr. DUNCAN. All right. Thank you very much.
Mr. KIM. Mr. Cooksey from Louisiana, do you have any questions? Thank you.
I do have a couple of questions, Mr. Peck. It is really shocking to me that we made such a mistake; not 68 million but $680 million. It is absolutely shocking to me. We are not talking about honesty or dishonesty here. We are talking about serious mistakes have been made. I think we should know as Members of Congress to find out who is responsible for this huge mistake.
You are suggesting because of the mistake you made, we have to freeze up all the major renovation and alterations. Those projects involve public safety. We cannot compromise those projects. We have to continue going on the certain projects. We must continue.
My first question is how long have you been with this commission, Mr. Peck?
Page 22 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. PECK. With the Public Building Service? For 14 months.
Mr. KIM. In history, has this kind of magnitude, this kind of mistake, ever been made in the past with GSA, or is this the first time?
Mr. PECK. This the first time, and I hope the last.
Mr. KIM. I agree. Why did we make such a mistake? We have such a sophisticated computer system and all kinds of consultants out there. You say you made a misjudgment on the inventory, and I guess that means some leases have declined or have been dropped. You also mentioned downsizing and also rate reductions; and finally, construction delays as reasons for your shortfall. But isn't that—for example, rate reduction, isn't that something any high school kid can project it. That is not something that just happened. You did that a couple of years ago. How could you forget to include that in part of your projection? And also construction delay, how can you be so wrong about this? To me it is very difficult for me to understand how you can make such a huge mistake of 680 million.
Mr. PECK. Let me answer in another way. One, we do not have sophisticated computers. I will tell you we are still doing back-of-the-envelope work. The computer—we just on January 10th of this year shut off a batch processing mainframe computer, which we have relied on for years to do our inventory control. It was turned on, I believe, in about 1970, which means it is basically Paleolithic by computer terms.
Second, I honestly do not know how you can reduce the rent and then not carry that over into your future year—into your future year projections.
Page 23 PREV PAGE TOP OF DOC Segment 1 Of 4
Third, on the question of construction delays, the problem here is that you don't predict in advance that you are going to have construction delays, and then they have occurred. They have occurred on some very large projects which are a fairly large contributors or potential contributors to the fund. There are lots of reasons why some of those things undergo construction delays, everything from lawsuits to subservice conditions, to longer term than you thought getting authorizations or approvals either from Congress or from other agencies.
So those are the reasons. There are no good reasons, obviously, for making a mistake of this magnitude, for having your forecasting off.
I have to say this: That in any given year, as I was saying to Mr. Duncan, you have to expect that there would be some variance, because obviously budgets attempt to predict the future. But it is—it looks to me like we do a better job anticipating the effects of tax increases or decreases in our economy than we are doing right now on our Federal Buildings Fund, and we need to fix that.
Mr. KIM. What assurance do we have which suggests that this will not happen again; not that you will blame it on the computer, but that it will never happen—it is the first time it ever happened. Do you have any idea how to prevent this from happening again?
Mr. PECK. We have done a number of things. We have changed our forecasting methods. I can tell you when something like this happens, it means whatever rosy scenarios you built into your budget assumptions go out the window. We are using the most conservative—where we have a range of forecasts, we are now projecting the most conservative forecasts we can. We don't assume that you know that rents are going to increase by a certain amount. We are now projecting that downsizing will continue to mean that we are going to have less revenue in certain areas.
Page 24 PREV PAGE TOP OF DOC Segment 1 Of 4
The other thing you can do on the other side, we talk about this as a rent shortfall, but as in any business, what that means is that sometimes revenues go down. The way the market works, you can't control every revenue, and sometimes because of different competition your revenues go down. That means you have to cut expenses, and that means you have to become more efficient.
I do want to put this on the record: We still do have a repair and alteration budget, and we are not deferring anything that would endanger life or safety of people that would work in or visit our buildings.
Mr. KIM. Mr. Peck, this is not a question, it is a matter of statement I would like to make as the new Chairman. These kind of mistakes we should not tolerate. I would like to ask you to submit the names of the persons who are responsible for these mistakes in 2 weeks. Can you do that?
Mr. PECK. I think I can.
[The information received follows:]
Our decline in revenue was the result of a combination of factors. First, we underestimated the impact of downsizing on the Federal space inventory. Despite talk of downsizing in the past two decades, it has never been achieved before now. As a result, we had no historical data on which we could base projections of how fast an employment downturn would result in agencies actually relinquishing space. Agencies vacated space faster than we anticipated. Second, we reduced rental rates in 1995 and did not apply those reductions to our estimates for the FY 1996 and 1997 budgets. Third, we had a number of large projects which were not completed within the expected time frame, causing us both to have less rent revenue than expected and to have to continue to pay for space that we thought would become excess.
Page 25 PREV PAGE TOP OF DOC Segment 1 Of 4
During 1994 and 1995 literally hundreds and possibly thousands of GSA employees throughout the nation were involved in the activities described above. These employees are dedicated, hardworking public servants and after an agency downsizing of 25% since 1993, those who are left are working even harder now.
Ultimately, however, the Commissioner of PBS is responsible for the performance of the Public Buildings Service. During the time period in question, the Commissioners of PBS were Kenneth Kimbrough and Robert Peck.
Mr. KIM. Thank you.
At this time—yes, Mr. Cooksey, from Louisiana.
Mr. COOKSEY. Thank you, Mr. Chairman.
I read your testimony, did a quick read. Let me ask you this: You said there has been a problem in construction of buildings. When you build government buildings and pay for them, do you put incentives in and penalties in for meeting or preceding the construction deadlines?
Mr. PECK. Yes, sir.
Mr. COOKSEY. In the past?
Mr. PECK. Yes, sir.
Page 26 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. COOKSEY. It does work, you think?
Mr. PECK. It does. I am not going to say it works as well as I have seen it work in the private sector, but it does work, because what happens—this happens in the private sector, too, but a little bit more in the public. If there is a delay, and you try to say to the contractor, okay, now you owe us some money, you wind up almost always in a dispute about who caused the delay. Was it because the government came in and said in the middle of construction, we have changed requirements, or something else? And that makes it difficult. But we do put those incentives in our contracts, yes, sir.
Mr. COOKSEY. Another question. How much do you feel mandatory union contractors on Federal buildings adds to the cost of the government building—the building that is being paid for by the taxpayers; 5 percent, 10 percent, 20 percent?
Mr. PECK. You mean Davis-Bacon construction or service contract and maintenance? We have——
Mr. COOKSEY. Davis-Bacon construction.
Mr. PECK. I will have to get you that number. I don't know if it has been running before.
Mr. COOKSEY. You don't know what a wild guess is?
Page 27 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. PECK. No, sir. That would be a real wild guess.
Mr. COOKSEY. Do you think it is over 5 percent?
Mr. PECK. I am not sure. I will say this: The one reason it is probably hard to tell is it depends on the labor market. In construction markets that are heavily unionized, the prevailing wage is basically paid by everybody. So, say, in a market, I suspect, like New York, whatever you do, it is going to cost the same amount. There are other labor markets where it may in fact could have a larger impact than 5 percent but, again, I would like to get some real numbers.
Mr. COOKSEY. No answer to the question. That is what I am going to get.
Let me ask you this: What will your administration do if you do not receive this extra $680 million in funds?
Mr. PECK. One of the things if we don't, we have at some point to figure out a way that we can stretch—I am going to ask my budget people to stop me if I am way off here—out for at least several years paying back this what is basically an income loss we have had, net income loss over the past several years. We could stretch it out over a longer period of time by rolling previous year's funding that hasn't been used yet into succeeding years, and that always happens when you are running a continuing business. You can do that. At some point, however, the scoring rules will catch up with us. At some point we will have to start shutting things down because we will run out of money.
Page 28 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. COOKSEY. I just came into the Congress from the private sector, and shutting things down is not what people want to hear out in the private sector, I think. They tried that once before.
What would you do if you were in the private sector in the same dilemma?
Mr. PECK. Not a whole lot different from what we have done here. And if I can tell you—here is what I would do, because I have not had this situation in the private sector before, but I think I am reacting the way people in business do. I am saying to our people, you know, the good thing about the Federal Buildings Fund, and I think the wisdom of having it in place in the first place, is the following: It says to a government agency, the Public Building Service, you have revenues coming in, you have costs going out. A lot of Federal agencies don't have that kind of discipline. We have to accept it more as a discipline. If we do cut rents, then you have to anticipate that those rents are going down, and you also have to get really creative on how you are going to continue to run a building with less income.
I am not sure if in the past we have made those kinds of good connections where we say to people, when you come up with a construction budget for a building, no matter what the cost, whether it is Davis-Bacon or whatever, aside from just looking at how much you are spending per square foot, you have to take a look at this Federal building and say, over the next 20 years, what revenue am I going to get out of the building?
What happens if you build a building, it costs you on the average over that period $35 per foot and—we are in the rental market like everybody else—the rental market only allows you to charge $32 a foot? We, as the government, are supposed to charge our agencies private sector rates. We bought into a building that will lose us money for as far as the eye can see. That has to be factored better into the estimates we make on constructions and renovations, and we are working on that right now.
Page 29 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. COOKSEY. Closing comment. I assume that everyone at GSA knows what GAP is. Do you have many accountants, CPAs at GSA? Coming from the private sector, I have been struck by the fact that there are a lot of people here that have degrees in English, journalism, and political science and premed, but there are not enough people that have degrees in accounting, and know what a balance sheet is, and have to meet a payroll, and have to meet a budget. And I think that is the dilemma in government, period. There are too many people up here that should not be here in the bureaucracy in the government because they don't know what an accounting course is because they have never seen one.
Mr. PECK. Mr. Cooksey, may I say one thing without wanting to disparage the people we do have who are very good, otherwise I completely agree with you. And we have taken a look. In fact, we have not been allowed basically to hire new people for the last several years. We have just gone out and said we will do some limited hiring in the Public Building Service. I have said to our senior managers in several regions where I feel we are deficient in business skills that they may only use those slots to hire MBAs. So we are trying. We will see if we can recruit them.
Mr. COOKSEY. That is a move in the right direction. I got an MBA in my old age, and it is not too late to do it.
[The information received follows:]
[Insert here.]
Mr. KIM. At this time I would like to recognize the gentlelady from Texas, Ms. Johnson. No comments.
Page 30 PREV PAGE TOP OF DOC Segment 1 Of 4
Ms. JOHNSON OF TEXAS. Excuse me. Thank you. There is a memo to service one of my colleagues starting at 10, but you caught me.
The question I have can probably be submitted in writing, and it has to do with the lease plan for Dallas. I have been asking this question now for about 2 years, and if you will submit me an update, I would appreciate it.
Mr. PECK. Yes, ma'am.
Ms. JOHNSON OF TEXAS. Thank you, Mr. Chairman.
Mr. KIM. At this time, Ms. Norton from Washington, D.C., would you like to ask a few questions?
Ms. NORTON. Thank you very much, Mr. Chairman. I apologize. I was detained in another hearing, and I am pleased to welcome Mr. Peck here.
Mr. Peck, I would like to ask you about what remains an unresolved issue of enormous impact here, but I suspect elsewhere as well, and that is the new security requirements for existing space and new space. When the Oklahoma bombing took place, the first cut out of the study was essential to look at every building in Washington as if it were a building that needed secured space. Then we were all told, don't panic, don't panic. This is just the first cut. Now we have to look at the actual buildings themselves, and we know there is a difference between the kinds of missions agencies have.
Page 31 PREV PAGE TOP OF DOC Segment 1 Of 4
Since then we have learned in this city, for example, and again I stress this will have an impact throughout the country, but here the impact is devastating for proposals to take whole streets, parking meters out; no systematic plan, as far as I can tell, to compensate cities, and most of these are located in cities—in troubled cities. I don't understand a—that a difference has yet been made among different kinds of facilities.
I would like to know what your approach is and when this approach is likely to be settled and systematized. I particularly am interested as well in whether or not there is an impact, as I imagine there must be, on the cost of construction from the new security requirements for places such as the ATF, for example.
Mr. PECK. Boy, that is a set of good questions. Let me see if I can answer fairly briefly.
We did institute, after the Department of Justice issued its study, I believe, in August of 1995 following the bombing of the Murrah Building, a scheme by which Federal buildings are placed in four categories, level 4 being—there is always a fifth. There are four categories; the FBI, CIA, places like that become a level 5 building. And so, for example, the U.S. Secret Service headquarters under construction in Washington and ATF will be a level 5. Most other buildings are 4 or lower. Fours are the ones which we have concentrated on in terms of capital improvements, capital being X-ray machines, magnetometers, those kinds of things.
At the beginning of this fiscal year we completed 70 percent of the countermeasures, the installation of cameras, X-ray machines and the like, in our level 4 buildings. The total cost at least of those capital improvements and new contract guards has been over $200 million since 1995. I should note that that has been largely—and some agencies have supplemented that with some of their own spending. This has been largely unrecovered in rent revenues, I should note. We do propose in fiscal year 1998 making a surcharge to Federal agencies for the increased security. We have always had as a component of rent some security, but in any event, we need to kick it up.
Page 32 PREV PAGE TOP OF DOC Segment 1 Of 4
We have a couple of construction projects that have been even while they are underway have done things to brief up security. Without saying what they are, I will note for you the FBI regional building going up in Washington at 4th and F Streets was somewhat redesigned and built differently even after the final plans were done. I don't know how much that added. We have come out with some new design standards for new buildings that are going up, and some of the courthouses that we have built will be more expensive because of some of the security things we will now put in. It is true in Washington—
Ms. NORTON. Is this a lot more expensive? I can't tell whether this is a large cost or not from what you are saying.
Mr. PECK. Well, I will have to get to the answer on the FBI regional building and Secret Service.
[The information received follows:]
The estimates listed below for the ATF and FBI Buildings are based upon criteria in the Justice Vulnerability Study for Level V buildings. Because the vulnerability study was not complete during the design of the Secret Service building, its security enhancements were based upon a security risk study by a security consultant.
Ms. NORTON. I would be particularly interested in that one and in what you expect the ATF—to be added to the ATF.
Page 33 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. PECK. ATF is interesting because it connects with something Mr. Traficant had said before about the scoring rules. Because we will have to build a building for the ATF inside with a lot of security investment under the OMB scoring rules and that is good news for us. A lease becomes a capital lease, and so OMB has told us that leasing for ATF and constructing a building for them basically have the same impact, have the same budgetary impact; in other words, it would have to be scored up front. So we have proceeded—one reason we are looking at how we get a building through the ATF is because of the added cost.
It will add a certain amount of money to courthouses. That depends in part on the site you buy. If can you buy a site for a new courthouse and set it back a certain distance from the street, you will pay a little bit more for the site, but—I am using gross terms, obviously, but not a whole lot more for the building. If it is a building that will be right on a fairly active street, you will spend more money hardening the structure and putting in different kinds of glazing and that kind of thing.
It is also true as you noted in Washington and other cities, right after Oklahoma City we removed parking from areas around some of our buildings. And, in fact, in the counterterrorism act last year, a couple of law enforcement agencies were given direct authority to do that. We have also done it.
The question—the biggest impact is clearly in the District of Columbia. We have raised that issue with OMB and with the sort of the informal task force that the administration has in the District of Columbia's assistance, and have told them that this is an impact, and I am not sure, the number $3 million sticks in my head as an annual loss to the District on this, but let me check that number.
Page 34 PREV PAGE TOP OF DOC Segment 1 Of 4
We have also proposed and are going ahead with an environmental impact statement, which allows us to take into account some of the traffic effects and parking effects of doing that, and I am told that that study should be done in about 6 to 9 months, and that is a way to try—
Ms. NORTON. I want to know—this has been going on for some time now. The District has been continually losing revenue. There is a plan to even take down more of the meters. I just want to know what is the approach.
I also want to know how many number 5s, 4s, 3s, 2s and 1s. I would like you to submit for the record which are they.
I would like to have a timetable on when this $3 million is going to be paid up. You submitted it; they owe it. Have people ever heard of a taking? You can't come into a city and say, hey, here are your meters, I am taking them down. 'Bye. This money ought to be right down in the Treasury. A private party couldn't do that. I need to know what is the approach.
We need to know how many—let me ask this systematically. Would you submit for the record how many buildings in the District of Columbia go from 5s down to 1s. Would you submit that within the next 30 days. Would you submit for the record exactly how much money has accrued up until this time. Would you submit for the record how many parking meters you believe or intend to further take down. And would you submit for the record what approach you will use in deciding or recommending that such security measures be taken in the District of Columbia.
Page 35 PREV PAGE TOP OF DOC Segment 1 Of 4
I believe this is going to end up being a model for the rest of the country. It needs to be systematized, so cities need notice. We don't need—we are already having an executive order that says we ought to locate Federal buildings in your cities. Obviously your intention is to make things better for cities. This has been outstanding too long, and if we were to have this information, I think we could easily get to a way to deal with it.
Mr. PECK. We can get you that information fairly quickly because it is something we have been concerned about, and we have collected information.
Ms. NORTON. Thank you very much, Mr. Chairman.
Question: Is An Estimate Of $3 Million/Year In Lost Meter Revenue Accurate?
Response: This figure was based on the District of Columbia's Department of Public Works data in August 1996, which resulted from a joint GSA/DPW compilation of various recommendations to remove meters around 37 buildings. Once EIS is complete, we will decide on the final number of meters to propose for removal and, in collaboration with DPW, the final estimate of lost revenue.
Question: Is There A Plan to Compensate The City For Any Lost Revenue?
Response: GSA is participating with the OMB Task Force on the District of Columbia to develop a policy and methodology to recognize and compensate the District for the meter removals. As a result, GSA agreed to conduct an EIS to further assist the Task Force in determining what the policy and methodology should be. In the interim GSA has asked agencies in GSA controlled buildings to refrain from any further removal of meters until the decisions are made. The only exceptions have been some of the Law enforcement agencies covered under the Anti-terrorism Act of 1996, which are:
Page 36 PREV PAGE TOP OF DOC Segment 1 Of 4
Question: How Many Meters Will DC Lose?
Response: Since we are relying on the EIS combined with community input, we do not know, at this time, how many meters will ultimately be controlled. The EIS process will be used as a tool in determining the extent of parking restrictions that will need to be implemented as well as a tool to analyze impacts of various alternatives. Local business and community input, ideas, and recommendations will also influence our decision. The final number will be determined based on safety, security, economic development and community factors.
Question: What Is The Approach Being Taken Toward Making Recommendations For the Elimination Or Reduction Of Parking Meters Near Federal Buildings in DC?
Response: A multifaceted approach has been undertaken which includes Building Security Studies, Security Expert analysis, and an Environmental Impact Statement including a vigorous community outreach to aid in making final decisions on perimeter security enhancement. As an outgrowth of the DOJ report, we engaged Building Security Committees to evaluate and recommend the security enhancements at each Federal Building. This resulted in recommendations to control parking around 19 federal buildings, however, many of the Level 4 buildings were not addressed. Subsequently, we hired a security expert to further analyze the needs for all Level 4 and 5 buildings which resulted in the identification of 80 buildings where there was some level of risk.
The next phase of our approach is to undertake a comprehensive review of the potential impacts of the alternative security enhancements on the community, such as traffic, economic, tourism, and public perception. This will be accomplished through an Environmental Impact Statement (EIS), which will allow full public participation in the decision process. We have further enhanced this effort by initiating a comprehensive outreach effort that involves extensive meetings with local government, business, industry and community representatives. Additionally, EIS scoping meetings are planned with Federal, regional and local officials, citizens, and organizations to advise them of our study and seek their input. Our objective is to utilize the data from the EIS, combined with local community input to decide on the best alternative that furthers our goals to assist in the revitalization of the District.
Page 37 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. KIM. Thank you.
At this time I would like to ask Members do you have any further questions?
Mr. TRAFICANT. Mr. Chairman.
Mr. KIM. Question, Mr. Traficant.
Mr. TRAFICANT. I would comment and ask this committee to be cognizant of it. I believe that the situation is very ironic here that the only—only this committee sensed this shortfall in 1994, and the reason we sensed it, and we have far fewer staff than GSA and OMB, is that there wasn't just downsizing going on throughout our government, there was revenue rent reduction going on as well. Everybody was feeling good.
The statement I would like to make is in line a little bit with what Ms. Norton was talking about. When we talk about Oklahoma City, we have talked about much of the terrorist activity in this Nation. That which has been foreign has been politically—there are disgruntled Americans, it seems, with an axe to grind, but has the GSA looked at all at the future?
We have seen spread from Colombia into Mexico near our borders narcoterrorists that are fighting back against any attempt to create a war on drugs. We have yet to see a theme in this country predicated around the narcotics phenomenon. Has anybody looked towards the security of our buildings, in our courthouses, and our public officials who mete out our system of justice from this phenomenon that is spreading and spread everywhere else? And it seems that nobody in any levels of our Federal Government has yet to talk about it as a security factor yet.
Page 38 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. PECK. Mr. Traficant, let me just give you a brief answer. There are—I can't tell you across the board, but I can tell you this: In a number of our courthouses which are either near the borders or in other places, or near large courts where the big wholesale drug trade tends to concentrate, a lot of our security measures have been driven through, are going on, and we have consulted with other intelligence agencies in the government to see what sorts of threats we could face from those sorts of people, and what you are alluding to is absolutely right. It is somewhat scary the firepower and other kinds of things that people who are involved in that kind of trade could bring to the system. And we consult all the time to try to figure out what the threat is, because as you know and I know, you have done this business, the first thing you do in law enforcement is to figure out what the threat is. You don't just sort of decide you are going to have closed-circuit cameras or X-ray machines. You try to figure out what it is I am trying to stop, and we have been trying to do that.
Mr. TRAFICANT. I will give one last comment. Providing security is very important, but you have to have understanding first of what the greatest security threats are. I am not sure we have looked at what the security threats are or what might develop, but we have talked about providing money for, quote/unquote, security development. I am not sure that is money wisely spent.
Thank you, Mr. Chairman.
Mr. KIM. Thank you Mr. Traficant.
I would like to make a couple of suggestions, by the way. It is not a question, it is a statement I would like to make. Look at some of the shortfalls you have made, based on three reasons. One is declining—I guess leasing demand. The second is rate reduction. The third one is construction schedule misjudgment.
Page 39 PREV PAGE TOP OF DOC Segment 1 Of 4
The first one is tough to make some modification, but the second one, can you raise the rent? Why does GSA have to suffer? Let's spread out everybody else; same thing, just internal transfer anyway. I would like to find out how much we can raise to come up with this figure without compromising other alterations or construction delays.
Now, if you raise 10 cents per square foot, do you think the CIA will move out, FBI will move out? So I don't see any difference whether they pay 10 cents more or we suffer and delay all the other construction projects.
Second is delaying construction projects, you mentioned. Again, don't you have any other construction projects going on right now? Can't you make—artificially project how much delay there is? Another year? Then you are going to have unexpected revenue surplus, make this up. It all seems like manipulating bookkeeping, it seems to me. You have a loss because occupancy was delayed.
Why not do the opposite? Look at some buildings. Instead of occupying in June, let's make it occupying in June next year. That will make us 12 months additional rent, make this 142 million. That is not that difficult to do. Let's do that.
If you cannot do anything else, truly have a—let's say another 200 million—let's spread this out to 10 years or 5 years, 10 million a year. So that impact would be less. We can tolerate that. I am surprised to find out from my colleague—Mr. Traficant told me that misstated a while ago that this was anticipated back in 1994. Our committee really hasn't—this is shocking. Again, we knew about this way back when and haven't done anything, and now we have this huge surprise. So how long will it take you to come up with this idea that I suggested? It is a bad idea? It is a good idea? Can you do this? Is that really a bad idea?
Page 40 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. PECK. Let me go back. On spreading the shortfall, I expect—I suspect under the way the budget rules—the internal government's budget rules work, which say that I am beholden to OMB for what I say the budget—I can probably now suggest to you we spread the shortfall. Second on, basically I think you are suggesting we accelerate construction, and you can try to do that. I am not sure how well we can—how much we can do that because you can—you know—
Mr. KIM. You did a mistake in estimating occupancy to date. What is wrong the other way around? A mistake has been made. Let's make one more mistake this time. Suppose we estimated a little too late and turned out to be a much quicker construction schedule.
Mr. PECK. Actually I am glad you said that because I have suggested it to our managers also that our construction schedule, in my opinion at least, if you take them from the point at which a prospectus comes up here to when we say in the prospectus that we are going to get the construction done, is optimistic, to say the least, in most cases because it doesn't take into account budget—you know, budget exigencies like this one. You never know quite if you are going to get the budget, how long it will take to get authorization, how much community protest over environmental factors.
The good thing about running a program this large is you should have historical data that tells you, for example, maybe the average is 6 years to construct a building, and if that is the case, we should be honest with you and tell you that when we send up a prospectus.
Page 41 PREV PAGE TOP OF DOC Segment 1 Of 4
Second, we have discussed with other managers on this issue, too. I discovered when we tracked our construction program, we said to ourselves any project that is within 90 days of its anticipated completion schedule we count as on time. Then we track how many are 90 to 108 days late. Well, there are two problems with that. That is sort of like the old, you know, gentlemen's see. As long as you get within 90 days, you are okay, but more importantly, every day you are late on a construction project is lost revenue; every day early is found revenue.
We, just in our management conference last week, I think, for the first time in history, threw up charts which showed our folks—which translates the number of days they are late on particular projects, and I should note to you about 75 percent of our projects or so come in on time, at least within 90 days. But we just want to say that every day late on certain projects is $50,000 lost revenue. And that is a different way for our managers to look at it.
Mr. KIM. You made a mistake in estimating this completion date, and in ongoing construction you can make an overly conservative schedule and end up plus revenue. It is all bookkeeping.
Anyway I want you to think about this and get back to me in 2 weeks. [The information received follows:]
Question: Can you generously extend the projected completion date of construction projects to avoid delayed income?
Page 42 PREV PAGE TOP OF DOC Segment 1 Of 4
A number of different factors influence the schedule of a large construction project. GSA realizes that the construction schedules many times are too optimistic and do not take into account delays caused by such things as congressional budget, appropriations or authorization actions, environmental situations, contracting protests, community concerns, etc. This unduly optimistic timeframe has caused some of the shortfalls in RENT. It is our intent to be more realistic, if not to say conservative, in the calculation of completion dates at the time we develop the prospectuses. Secondly, our managers are being given data so that they can see how each day of delay can be converted into lost revenue. We believe that through these changes, along with streamlining the work processes, we will be able to forecast our expected revenue much more accurately.
Mr. KIM. Let's go back to raising the rent. Now what is the problem with that one?
Mr. PECK. Here are two things, and this is a discussion I hope we can have very quickly in the next couple of months. We are required by the 1972 Property Act amendments to run a building fund and charge the commercial equivalent for the rents to Federal agencies. There is always a question about that. Some of our buildings are not commercially equivalent buildings. They are grander public buildings and probably don't have an equivalent private sector.
It is difficult for us—unilaterally for us to raise rents in part because our agencies, we behave like a landlord, and agencies behave somewhat like tenants, and now they are a bit captive. We can't just say, we have just decided to raise the rent 10 cents or 25 cents. If they say that market is going down, how can we say the market is going up? However——
Page 43 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. KIM. I am sorry to interrupt you, but it doesn't make any sense to me. If you—your rent is compatible to private industry, they are making a good profit out of it, why can't you make a profit? Why such a huge loss then? Is there something wrong with the operation? I don't believe you are actually charging a market rate. It has to be below market rate, otherwise you don't get this kind of shortfall.
Mr. PECK. I don't know for a fact whether when we made the rent reduction in 1995 we wound up below the market in those areas. We have had a very long, inflexible system for determining rents running on a 5-year appraisal system. Five years is really not—in the real estate market is much more dynamic. It doesn't run a 5-year cycle. We have missed cycles a lot of times. I think the people here know better than I do. We end up being high when the market is low and low when the market is high. It is not a good way to do business. We wind up trying to predict to OMB about 18 months in advance what an agency is going to have to pay in rent because right now we are—OMB is starting to prepare the fiscal year 1999 budget, which starts on October 1, 1998, so we are going to have to say to them, the Department of Justice can expect to pay $8 million in rent to GSA at that time. That means we are making an 18-month prediction on rents on hundreds of buildings all over the country.
So sometimes you are off. I am also saying we will have to go—we have to go through OMB when we say, you know, it is time to raise the rents and pass that through to the other Federal agencies.
Now I agree with you that—two points I would like to make. One, I think our rates should be commercially equivalent, and I think—because I think we should behave as much like a market as possible. I think our rates need to be adjusted when our buildings are not commercial equivalent; in other words, if I were running a private sector building, I would build it in a certain way so I knew that my mortgage payments were much more covered by the rents so I can pay my mortgage, pay my operation and make a profit. I am not sure in every instance that we are doing that or, in fact, are quite able to do that, but that is part of the look at this Federal Building Fund and the way we run our business that I think we need to work out with the committee in the next couple of months.
Page 44 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. KIM. Please.
It is obvious to me when you have this kind of shortfall, because the rental is too low, then you have two choices: Raise the rent, cut your operational costs. I don't see any other explanation besides those two.
Anyway, can you get to me within 2 weeks? I appreciate that.
At this time I would like to ask designated staff to ask questions. First of all, would you like to ask any questions?
[The information received follows:]
Question: It is obvious to me when you have this kind of shortfall because the rental is too low, then you have two choices: Raise the rent, or cut your operational costs. What is your thinking on that?
GSA is required by the law to run Federal Building Fund charge commercially equivalent rent. With this constraint and very little flexibility, GSA intends to achieve savings by improving our Buildings Operations activity, the process of providing building services and by adapting a more business-like approach in operating space for our tenants. Examples of changes in our business practices to accomplish these savings include, but are not limited to: 1. Implementing cost and performance contracting for cleaning and maintenance contracts, 2. Renegotiating cleaning contracts to procure periodic services on an ''as needed'' basis, and 3. Negotiating multi-state utility contracts.
Page 45 PREV PAGE TOP OF DOC Segment 1 Of 4
Mr. KIM. All right. How about our counsel?
Submit it for the record. That is great.
From now on, I am going to ask staff to ask questions as well. Any further questions?
Well, then, thank you very much, Mr. Peck, and the committee is adjourned.
[Whereupon, at 10:20 a.m., the subcommittee was adjourned.]
[Insert here.]
Next Hearing Segment(2)