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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 RENT SHORTFALL AND VACANT SPACE
THURSDAY, APRIL 24, 1997
U.S. House of Representatives,
Subcommittee on Public Buildings and Economic Development,
Committee on Transportation and Infrastructure,
Washington, DC.
The subcommittee met, pursuant to recess, at 9:15 a.m., in room 2253, Rayburn House Office Building, Honorable Jay Kim (chairman of the subcommittee) presiding.
Mr. KIM. Good morning. Today's hearing, as you know, is the second hearing on the issue of the so-called GSA's Federal Buildings Fund. Based upon the testimony we receive here today, we intend to schedule a hearing again that will focus on the finer points. However, we cannot consider these issues without first establishing the facts. The first hearing was held on March 5th. At the hearing, questions were posed to GSA for a written response.
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I was very disappointed with GSA's response. Not only for their questions being incomplete and non-responsive, but they included factually incorrect statements. I found this quite upsetting. Most notably, I am disturbed by GSA's response as to who was responsible for the rent shortfall. I find this especially disturbing, considering that at our March 5th hearing GSA accepted full responsibility for the shortfall and provided at least three reasons for this. Number one, GSA's misjudgment of impact on Federal Government downsizing; number two, GSA's 1995 reduction in rental rates; number three, GSA's very optimistic assumptions for when rental space could enter their inventory.
Not once was it ever mentioned that Congress had some role in this debate. That is because Congress did not have a role in this. Yet GSA's written responses make different assertions which are unlike the testimony they provided us at the March 5th hearing.
The second issue of great concern is the level of vacant and uncommitted space in GSA's inventory and how GSA is managing this vacant space. For example, in 1995, 13 million square feet of space; 16 million in 1996; and 18 million today.
Today the subcommittee has the opportunity to revisit the questions and answers by GSA on this matter. I intend to pose questions to GSA as well on how GSA has considered this, since it was not sufficiently answered in the written response.
The subcommittee has invited participation from the Office of Management and Budget. But I understand they could not come this morning because they were too busy. In addition, we will receive testimony from the General Accounting Office concerning Federal downsizing and the management of vacant space as a result.
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I welcome our witnesses. I look forward to their testimony.
At this time, I would recognize the gentleman from Ohio, Mr. Traficant.
Mr. TRAFICANT. Before we get started, Mr. Chairman, I would ask unanimous consent that any and all questions submitted to the panel in writing, regardless of their verbal responses to any questions here, I would like my questions answered in writing.
Mr. KIM. Without objection.
Mr. TRAFICANT. Second, I would like to say that in the 1992 and 1993 session, I look back at a situation where a lease was brought before this subcommittee for 30 years at $25 million for a project we didn't plan on. If my mathematics is correct, that is three-fourths of $1 billion. Is anybody in the audience from OMB? Anybody here representing the interest and taking notes?
What is your name?
Ms. HAAS. Julie Haas.
Mr. TRAFICANT. OMB was present and I asked OMB if they approved that lease. They said they had. They said they thought it was in the best interest of our Nation and our future. Three-fourths of a billion dollars, a 30-year lease, no equity position, and the capital of the stock was the most expensive real estate throughout our holdings.
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As chairman of that subcommittee at that time, we did not allow that lease. I believe they have come back with a one-time appropriation of about $250 million to move the Atlanta project on.
The point I am trying to make is that because of the scoring of Federal real estate, we are making a bunch of fools administering a massive real estate program that doesn't give our real estate arm, the GSA, an opportunity to make our best deal. I oppose the way we are doing business on this.
Second of all, I want to concur with this chairman, Mr. Kim, that the answers submitted to the questions in writing were inconclusive and not specific. I know the OMB is not here, but they should be here. I recommend to this chairman that before they come before us, we continue to purge to try to put GSA in a position where they can represent the interests of the taxpayers of this country, not looking over their shoulder to OMB and the budget manipulations that are going on in this situation.
I have a statement here. I would ask unanimous consent that my official statement be included in the record.
Mr. KIM. Without objection, your prepared statement will appear in the record.
[The prepared statement of Mr. Traficant follows.]
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[Insert here.]
Mr. TRAFICANT. I would state again that before we do anything, I think OMB should be here and OMB should answer to the types of policy decisions being made that affect GSA that have tied the hands of GSA and have tied the hands of this subcommittee from any practical oversight.
I thank you and yield back the balance of my time.
Mr. KIM. Thank you very much.
At this time I would like to invite Mr. Robert Peck, Commissioner, Public Buildings Service, General Services Administration.
I understand that you have no written statement to present today. Does that mean that you are here for a question and answer period?
TESTIMONY OF ROBERT A. PECK, COMMISSIONER, PUBLIC BUILDINGS SERVICE, U.S. GENERAL SERVICES ADMINISTRATION
Mr. PECK. Mr. Chairman, that is correct. I don't have a written statement. I do have a couple of points that I would like to make.
I would like to state again that I think it is important to put in perspective what we are and what we are not when we talk about running a shortfall. What happened in the years fiscal years 1996 and 1997 is that we made estimates of what our revenue stream would be, just as any business does, because GSA is in the enviable position, I think, of at least being asked to operate like a business. We have a revenue stream that we can count and have expenses that we can count. So we have the opportunity to behave in a business-like way.
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Also I would address Mr. Traficant's very valuable points that our hands are tied in many ways so that we are not able to behave like a business. We are a little bit betwixt two. What has happened here is that our revenue stream for fiscal years 1996 and 1997 has not been as large as we anticipated. In other words, our revenues didn't meet expectations. We submitted records. Unfortunately, the Federal budgeting cycle requires that we begin planning 18 months in advance of your budget year. When we came up against reality in fiscal years 1996 and 1997, the rents that were paid by Federal agencies came in, and as you have seen, that is $680 million short.
Now I would like to emphasize this: on a $5 billion total revenue stream. We came up about 6 percent short of our projections in each of 2 years. That is a significant amount of money, but I noted just the other week in picking up the Wall Street Journal that there were at least three major American corporations on page three of the Journal that reported similar income. It is not unheard of in business.
A 6 percent shortfall is a problem which no one likes to have, and when you have a shortfall you have to take a look at your forecasting records. As I testified last time, we have done that. The problem here is of course that the first thing you do when you don't have income is that you start cutting expenses. The first thing you do when you have to cut significantly is to cut those expenses which you can cut without hurting ongoing operations. In our case, that means a large part of our capital program in fiscal 1998. Just about all of it doesn't get funded from the Federal Buildings Fund.
The other point I would make about the capital program for fiscal year 1998 is that in the past number of years most of the construction program has been funded through congressional appropriations. That is in part because our fund, while it generates sufficient income to pay for minor repairs on buildings and some major renovations, it has not in the past over the years provided enough funds to provide the major capital programs that we would all like to have.
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Our vacancy rate in the inventory at this point is approximately 5 percent of our total inventory. As we can show you, I have a chart. I would like this to be in the record.
Mr. KIM. Without objection, your prepared statement will appear in the record.
[The referenced chart follows.]
[Insert here.]
Mr. PECK. The vacancy rate has been in fact going up. I should note that a 5 percent vacancy rate in our inventory is below what most private sector inventories want. The general vacancy rate in the country at the moment is 16 percent in downtown markets and 20 percent in suburban markets. In Washington, DC, the downtown vacancy rate is between 10 and 11 percent. So our vacancy rate is lower than that. I would also note that no one running an inventory as large as ours actually plans to have no vacancy whatsoever because you need some vacant space to be able to provide for contingencies such as floods or fires, in order to be able to move people from one location to another. We have had situations where we have had a sick building and had to move people to vacant space. It is useful to have some around.
Also I would note this about our vacancy: 5 percent in our inventory might be a significant amount of spaces—it turns out that our computer system, which is archaic, managed to report some occupied buildings as vacant, including the Central Intelligence Agency. I have no comment on the appropriateness of that.
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[Laughter.]
Mr. PECK. In any event, that winds up being about 14 million square feet. A lot of it is in small pockets of space, which are hard to rent out.
At some point, I would also like to address our need to have some sources of funds to be able to renovate those spaces to move agencies around so that you get enough office space in one place so that you can actually really use the space.
Finally, with respect to questions and answers, Mr. Chairman, I believe there are answers in general. They are as specific as we could make them and they are as timely as we could make them, with one exception. I will note that the first answer that you mentioned about the notification to the Congress, that that written answer was in error. I have checked. While we did in fact in May 1996 inform the Appropriations Committee and the Congressional Budget Office in the course of the mid-year 1996 review of the fact that revenues were not going to meet our estimates, we did not formally inform this committee.
Moreover, there was a statement in that answer that said that Congress provided a higher level of obligational authority than the building fund could support. That may technically be true, but certainly leaves the impression—since the President's budget did also support a higher level of obligational authority than we could support on revenues alone, it certainly could lead one to the impression that Congress somehow shared in the problem.
We did not intend to say that.
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Mr. KIM. I need to interrupt for just one second.
Can you tell us if that is an error? Is that a mistake?
Mr. PECK. It was a mistake to say it. And I have taken steps to ensure that our answers—I had seen an earlier version of this answer which did not read this way. I have taken steps to ensure that the answers from now on, when they are revised subsequent to my having reviewed them, to make sure that I see them. So I can at least assure you that on subsequent answers you will know that I have actually read and approved them.
Finally, concerning the timeliness of our answer, Mr. Chairman and members of the subcommittee, as I think you all know, we are information system-challenged in the Public Buildings Service. We are still operating a computer system which was devised somewhere around 1970. The GSA during the 1980s attempted, at significant cost to the taxpayers, to produce a new system to track our inventory. At the expenditure of a huge amount of money, they were unable to produce something.
We have this year, for $17 million, obtained a license from AT&T to use a computer software system which they use to track their real estate inventory. We will have it in test operation in October of this year and expect it to be in full use in the Public Buildings Service in the spring of 1998. That system will make it a lot easier for us to track our inventory, to find out where vacant space is. That is a necessary step in improving the management of our service.
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Mr. KIM. Thank you for that fine presentation. I would know like to ask you a couple of questions.
Who is responsible for this huge mistake, this revenue loss? Mistakes are made, lost money, $680 million. You had a $680 million loss of revenues by mistake. And this mistake was because of downsizing by the Government, and despite corporate downsizing for the past two decades, this has never been before now. You have no historical data on which you could base projections? In other words, you didn't anticipate this downsizing in the last two decades?
The second reason why there was a $680 million mistake is that you used the rental rates in 1995 and did not apply those reductions when you estimated fiscal years 1996 and 1997 budgets. How could you make such a mistake, which create million dollar mistakes?
Who is responsible for this? You mentioned two names. One is Mr. Kimbrough, who is no longer with the GSA. The second person is you. You are solely responsible for the huge mistakes. Are you considering resignation?
This is huge: $680 million. This matter is not a joke. As a result, we would like to propose a freeze for next year. Then you should lay off people because you don't need these people since they are no longer necessary to manage—yet you want to keep the same staff, the same size of Government, even though $1.35 billion in construction—yet you are going to keep the same status quo, keep the same size. To me, it is hard to believe you have written such a statement, such an arrogant statement.
Mr. PECK. Mr. Chairman, may I answer your questions?
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Mr. KIM. Yes, go ahead, please.
Mr. PECK. Number one, Mr. Chairman, I was brought up in a military household and I served in the United States military. I was an officer in the United States Army. My position is that a commander is responsible for all that his organization does or fails to do. That is why you got the answer that you got about who is responsible for this mistake.
I decided that there was absolutely no benefit for the organization, to the Congress, or to the American people for us to engage in a witch hunt in the Public Buildings Service to try to figure out which of our employees didn't put a certain piece of data in an antiquated computer system, resulting in an overestimate of our revenue.
I believe that when you talk about what has happened with our failing to factor in Administrator Johnson's unilateral rent reduction into our estimates, you are talking about the fact that while our rent rates are returned locally, our computer system which we have—which I already described as archaic—does not interact with our managers on the ground so that the actual rental rates get plugged into the system. This is a problem that we have in that particular computer.
Second, I will say again that a revenue gap—as you can see here, of $296 million in 1 year and $383 million in another year—was a result of estimating problems. It is not a loss to the American people. It is not a cost to the American taxpayers. The shortfall means that appropriations that were made to other Federal agencies to be transferred to GSA for rent to that extent were not made.
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Finally, sir, we have a $1.2 billion construction program currently underway. We still have 6,200 leases and 1,800 Federal buildings. It is a significant workload for all the people on the Public Buildings Service work force.
Mr. KIM. Sir, You said that there is no cost to the taxpayers. That is the problem I see. You are tasked with important projects. Now you are telling me that there is no cost to the taxpayers? I don't understand.
Mr. PECK. Mr. Chairman, The program in which we are engaged is primarily a courthouse construction program to alleviate overcrowding in the courts and in some cases to improve security. We have placed the security projects at the top of the priority list.
Mr. KIM. Let me remind you the projects that you are submitting to be canceled. Some scheduled maintenance has been canceled. Some of those are affecting those States. I want some ideas on how to continue these projects. Whoops, I have a $680 million mistake. Let's just cancel the whole project. Are you going to lay off people, too? You don't need that many people, do you?
Mr. PECK. Yes, sir, we do.
We do have a continuing construction program, Mr. Chairman, of $1.2 billion. That is not being canceled. Your numbers are wrong. What we are deferring——
Mr. KIM. What numbers were wrong?
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Mr. PECK. If you were suggesting that we had a $1.2 billion construction program that we were canceling——
Mr. KIM. Is that a mistake?
Mr. PECK. We had a $1.2 billion construction program that is continuing. We have $1.2 billion worth of projects currently underway, already funded. What we deferred is approximately a $500 million construction program for fiscal year 1998, which we are proposing to move a year into the future. The courthouse construction program, which we have had underway now for several years, we have always said is an 8- to 10-year program. There has always been a range in those projections and we have always said that our construction program is dependent upon the President's budget and on appropriations. Appropriations finance most of it.
Mr. KIM. I will proceed to the next question.
Can you generously extend the project completion date of construction projects to avoid delaying? In other words, it seems the completion date of some construction projects creating—can you make 6 months for the completion date since you are including other construction costs? My suggestion is to make construction projects for 6 months. You would then have 6 months rent service.
Your answer is that GSA realizes construction schedules many times are too optimistic and do not take into account delay costs such as congressional budget, appropriations, and congressional authorizations, environmental situations, cost estimates for tests, including concerns. You do not plan these kind of delays. Therefore, these overly optimistic schedules have caused trouble.
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We will have one more hearing, and I wish you could come back with some idea of how to offset this thing. I want you to come back next time to talk about how to solve this $680 million problem without affecting the price.
I mentioned that with that much loss, to me, either you have to raise the rent or cut operational cost. You made such a huge error, so then what do you do? Either raise the rent or cut expenses. But you don't want to cut expenses. You don't want to raise the rent. How are you going to solve that problem?
Looking at the answer, you cannot raise the rent because that is not commercially prudent. You cannot cut cost. Where does all this come? What is commercially prudent with the rent? I guess that is market price. How accurate is market price? Market price can be off 10 percent. It depends on who's view is being used. What's wrong with raising it 5 percent? Is that something feasible to raise it 5 percent? Why couldn't you make it more flexible and raise the rent 5 percent? Then it would cover this $230 million loss.
Mr. PECK. My first comment is on the construction schedules. Part of my answer was that construction schedules are overly optimistic. When we submit prospectuses to this committee and to the Senate committee, I have found that the construction schedules which GSA has traditionally used assume that Congress, within a period of only a few months, will approve the prospectus that is submitted and that construction will generally begin and there will be no delays.
In fact, going back to almost the beginning of this Republic, Federal construction projects have taken longer than private sector projects. It is just a fact. I am not attempting to explain it. I am just saying that at some point when you have a 200-year history of something, you probably have already taken it into account when you build up your cost estimates and time estimates. We will do that from now on when we do our estimates.
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However, it is not possible to go back—what we're talking about is what was anticipated for fiscal years 1996 and 1997. We cannot now arbitrarily go back and say that the schedules should have been such and such, that we didn't anticipate those revenues coming in when we said we did.
Moreover, Mr. Chairman, when a construction schedule stretches out in this way, we not only lose the revenues that we anticipated having from people moving into that building, but we paid extra money often for rent because agencies are in leases and continue to have to pay on the leases. So in a way it is a double hit to our budget.
Finally, with respect to raising the rent, the market is itself a concern, Mr. Chairman. I have been in the private sector real estate market both as a commercial mortgage banker and as a real estate attorney. I have unfortunately had to represent a company which experienced economic difficulties. I do not know of a single real estate company which faced the problem of a vacant building and decided that it could respond effectively by raising the rent in the building above what the market would allow.
Moreover, in this case, we would cause a problem in all the other Federal agencies because we tell them in advance of the budget year what rent rate they will be paying at various locations. If we were to raise the rents now, we would be saying to agencies such as the Department of Justice that their rent bill, which they expected to be, say, in the order of $400 million or $500 million, is now going to be increased by another $20 million. The Justice Department would have to take that money out of other activities.
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Mr. KIM. Mr. Peck, I appreciate your comprehensive answer. Market value is not just one figure. It is the average of a bunch of figures. Some of them are higher and some of them are lower and sometimes vary as much as 30 percent. Don't tell the market cannot adjust because the market is just an average. Your rent could be 5 percent higher than market value. That is okay. In some areas lower and in other areas higher. Those are averages.
Have there ever been mistakes like this in the past? The answer is yes. Did you learn anything from the previous mistakes?
Mr. PECK. Mr. Chairman, I don't have all these figures with me at the moment. But what we are talking about again is the gap between an estimate that is made at a given point in time 18 months in advance of a budget year. In between the time we make the estimate and the time agencies actually pay rent, any number of things can happen. In a $5 billion revenue stream, it would be nothing short of miraculous for us to be accurate to the penny 18 months later. It doesn't happen in the revenue estimates in any private sector or public sector organization.
I am not using that as an excuse for a gap of this magnitude. I am just saying that $10.5 million is probably explainable. And we have taken a number of steps to change our forecasting system so that we don't make an estimating error of this magnitude in the future.
Mr. KIM. When was this mistake first identified? When was it admitted that it was a mistake, and that the answer was clearly a mistake?
The next question—again, you're saying that it is not commercially prudent to raise the rent 2 percent or 3 percent. We will talk about that at our next hearing. We want you to come back with some idea of how to solve this problem.
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Mr. PECK. This is complicated and I am not sure I fully understand it myself, however, let me say this also about notifying this committee last year.
When we identified the shortfall in the estimate, because it is not actually a—we were told in the mid-year review that under the Congressional Budget Office rules, this sort of a gap between our original estimates and what we were getting in rent would not be scored. We were led to believe that there would be some sort of—at least as far as CBO is concerned, if I understand this correctly—and I will obviously provide a written answer to the record—I am still struggling to understand budget rules—we didn't think this had an impact upon projects. We were informed during the course of our OMB budget negotiations in the fall that this would have to be scored under these budget rules and that there would have to be a reduction in our fiscal year 1998 budget.
I just wanted to put that on the record. I will also give a fuller explanation later to explain it.
Mr. KIM. In question number seven, I asked who was responsible for this mistake. You said the Public Buildings Service chairman was responsible and from 1996 actually the Office of the Controller was responsible. Before that, it was the Public Buildings Service.
This is serious. Don't you think we should find out who has made such mistakes again and fire them for incompetence?
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Let me ask some broad questions on this.
These are serious mistakes of $680 million. You may not think so, but I think so. It is a lot of money. Don't you think we should find out who made such mistakes again and reprimand them? Fire them, those incompetent employees who really made these careless mistakes?
Mr. PECK. Mr. Chairman, as we have noted, $242 million of this is due to the fact that Federal agencies downsized in a way that we didn't predict. We have a quarterly meeting of the Federal agency facilities managers. I talked to them yesterday morning. I said that I had questions for them because I knew I would be asked at this congressional hearing. I wanted to know if they could tell me if a year from now where and when they would be downsizing space in their organizations where they were in fact losing employees. They all told me that they could not do it. When I asked them why not, they said because although they know in the aggregate how they are downsizing, they didn't know until very late in the process where and when they were going to downsize an office, which field office would be downsized, and how much space was going to be given up.
So if you want to start looking for where the problems are, you really have to go throughout the Government to try to figure out who wasn't able to tell us 18 months in advance of the budget year where exactly they were downsizing.
The Office of the Controller and the Office of the Portfolio Management are both organizations inside the Public Buildings Service. So our answer that the Public Buildings Service—I think the question was whether PBS or the Office of Management and Budget—I think the answer is the Public Buildings Service does it.
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Let me tell you one thing that we have done as a result of this shortfall. We have now a Chief Financial Officer, as many organizations have. The difference is that the controller has often just managed budgets to ensure that we don't overspend our appropriations account—which is very important—but don't know doesn't plan strategically. We have hired a new CFO. He is going to be in charge of rent estimates from now on. We discovered that we have too many hooks in this particular issue.
Mr. KIM. I would like to ask you to come back. This is a huge, huge mistake. You have to show some math. I am not talking about downsizing. You have to do something. I don't see how you can get away from this. You are responsible you said.
Let's move on to the next question, question number eight.
You said that the $680 million mistake was actually more than that. But then you said that you were going to work it out somehow to $176 million, such as rental space. So you think you can cut $176 million. If you can cut $176 million, can't you cut more? Again, I am going to give you plenty of time to think about this and ask you to come back next week. I want to know what changes you are going to make. I don't want it today, here. Let's find out other ways to make cuts. Whatever it is, I want you to come back with that at our next hearing.
Mr. PECK. Thank you, Mr. Chairman. I appreciate that.
I want to assure you, as I started saying earlier, we have made some management changes. We have changed the way we do these estimates. I do appreciate the invitation to come up with some innovative financing techniques. I want you to know that I am not the first commissioner who will recommend such changes in financing for the Federal Buildings Fund. I have been asking about this at this job and I felt we could have used some help.
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Mr. KIM. Mr. Peck, I don't blame you. You took the responsibility and I respect that.
Mr. Duncan, what brings you up here?
[Laughter.]
Mr. DUNCAN. Curiosity, Mr. Chairman.
Mr. KIM. Do you have any questions?
Mr. DUNCAN. No.
Mr. KIM. Mr. Cooksey?
Mr. COOKSEY. How long have you been in this position at GSA?
Mr. PECK. It was a Christmas gift in 1995, sir.
Mr. COOKSEY. When were these estimates made in regards to your Christmas gift?
Mr. PECK. Before that.
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[Laughter.]
Mr. COOKSEY. Seeing what's happened and being concerned about the taxpayer—I have a personal confession. Back when I was still in the private sector, I engaged in commercial real estate investments.
Anyway, it seems we have a choice to either short some people at GSA or as an alternative make some legislative tools that would provide some solutions for this problem. Could you suggest which alternative you would prefer?
[Laughter.]
Mr. PECK. I think that is obvious.
I would like to have some of the tools as would my colleagues in the Public Buildings Service. I would like to have some of the same tools for managing real estate as people in the private sector.
The Government is in most senses of the word the best tenant that a private sector landlord can have. We never default on our obligations. Some of the biggest corporations and law firms have. We pay on time. We have been for over the past decade. So we are a darn good tenant.
Where you have that income stream, you can do things like go to the real estate market and secure ties. You are a rental stream, which will allow you to go to a private sector landlord and say that they can be a part of a pool of Government leases that can get financing cheaper and we can share in the savings. That is one thing you can do.
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Mr. COOKSEY. Very brief, in ten words, what is amiable?
Mr. PECK. Securitization. Securitization simply means that you take a basket or set of real estate assets and put them into a financial instrument which can be triggered. It used to be hard to do this because each lease is different and each building is different. But the real estate market in the past few years has come up with a lot of instruments which are real estate assets to be traded somewhat like stock. That means you get more money in a real estate investment and it is safer a risk. Government leases are pretty good to have.
Just as important, or more important, on the construction side, everyone knows we need help in two different ways. One—and Mr. Traficant alluded to this—we are all in a position of leasing buildings for the long term, that you can't own because if we lease a building with a firm option to purchase it at the end of the lease time, it is scored by OMB and I think CBO as a capital investment, meaning that we have to pay for the entire thing up front. One of the problems is getting the money to buy it. Also you can't go out on the market and borrow the money. So we have to wait until we get $300 million to get the building.
The problem is that people never accumulate enough cash to put that kind of money out? They go borrow it and pay it back over time. We think we need those kinds of tools.
Mr. COOKSEY. So number two, borrow from the private sector?
Mr. PECK. Either the private sector or the Federal financing bank.
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Mr. COOKSEY. That's the taxpayers in some way?
Mr. PECK. They would all be scored—once you borrow it is a Government obligation, which gets scored somehow or other. The Government is able to borrow at a cheaper rate. But anyhow, you have to work out this scoring. We are continually having problems funding our projects.
We had a discussion. Your staff knows more about the Federal buildings. But I have looked at why it has been operated the way it has been. There was an assumption, I believe, that we would have a large inventory of federally-owned buildings with heavy enrollment for 20 or 30 years and not free and clear on any accounting principle, then you charge them like a bank and you are only paying for operating expenses, and you have some comfort built in.
But what happened about the same time is that we started leasing more and more buildings. When you lease a building—we generally don't make money on the Federal Buildings Fund. So to make a long story short, we have wound up with a lot of lease assets, but we don't make money through the fund. We have a lot of fallibility, which as they get older and more expensive to operate, it also cuts into our profit margin.
So we never build up quite the cash that we thought we might. That really causes us some problems—and you all, too, obviously—because then you have to appropriate funds from the tax fund directly into the Federal Buildings Fund to build buildings.
Mr. COOKSEY. That's number two.
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Mr. PECK. We think there are other ways in which we might be able to apply some creative financing tools the private sector has. We have some Federal land on which we could develop also with private sector planning. There are a lot of rules that mean that we can't do certain joint ventures with the private sector.
I am reminded that some of the previous commissioners any number of times suggested that when we dispose of assets, whether by selling them off or by leasing out that space, for example, that the Federal Building Fund be authorized to retain some of the proceeds. Right now, we are allowed to retain our cost of disposing the asset, but the rest of the money goes to the Land, Water, and Conservation Fund. And that fund does a very good thing. The problem for me is that neither we nor the Federal agencies who we work for are getting much of an incentive to even recording space. It is a fairly well-known fact that some Federal agencies sit on vacant land or space because they think that they might have a use for it some day and it is going to cost so much to keep it. The money doesn't go to them. A legislative tool might help in that area.
Mr. COOKSEY. This is four.
More creative financing tools to be able to attain the assets?
Mr. PECK. To be able to sell and retain the proceeds of assets.
Mr. COOKSEY. You mentioned that. That is not so much in my area as it is lands and buildings that they really don't use and don't need. You are basically confirming that.
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Mr. PECK. One of the things we do quite relevant at GSA is act as an agent for the Government in disposing of real property assets. We are talking about things like installations that were once used by agencies that they don't need and could probably get rid of. It would be more interesting if they could see some profit from selling it off.
Mr. COOKSEY. Okay.
Mr. DUNCAN. Mr. Peck, I have some people waiting in the office so I will be brief. I don't have that many questions.
The staff didn't know about the shortfall until December of 1996. If I understood you correctly, you said that one of the reasons you didn't inform the staff of this committee is that you determined that the score probably would not have an impact. I am not sure that I really understand that. This seems like a pretty large shortfall to determine that it would not have an impact.
Mr. PECK. Let me explain. I didn't say that it was a good reason for not informing the committee.
[Laughter.]
Mr. PECK. I was just stating why we might have overlooked doing that. That was a bad judgment. But it did have something to do with it.
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I will have to answer in writing, but I was trying to explain that when we discovered this in the mid-year review with OMB and CBO, we were under the impression that it would not be scored again in such a way that we would have to make a budget reduction or even 6 percent in this budget. So it wasn't until 1997 when we were going to have to make some kind of an investment in the fiscal year 1998 budget—until that time we didn't think it was necessary. That is the best answer I can give you right now.
[The information received follow:]
GSA did submit a fiscal year 1998 capital investment program to OMB. Because of the rent shortfall, GSA requested an appropriation to the FBF to fund this program. In submitting this program we were operating under the assumption that the rent shortfall did not prevent our asking for an appropriation for capital projects in fiscal year 1998. Discussions with OMB and CBO after GSA submitted its request to OMB made it clear that budget scoring rules established by the Budget Enforcement Act required that $681 million for projects previously scored, be scored again in fiscal year 1998. The prior scoring was invalidated since the estimated income on which that scoring was based did not materialize.
Mr. DUNCAN. I have another meeting, but I did want to hear what you had to say.
What is occurring now?
Mr. PECK. Vacant, available space—meaning that it is vacant and could be let out and not under construction, 14 million square feet—it is about 5 percent of our inventory.
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Mr. DUNCAN. And speaking of the inventory, the staff says that material from the last hearing showed that GSA has assigned space of 257 million square feet, but documents show inventory of 280 million square feet. Do you know why there is a difference?
Mr. PECK. Yes, 257 million is the assigned and the 13 million or so is the vacant available.
Mr. DUNCAN. That would be 23.
Mr. PECK. Correct. I am sorry. That includes the vacant available and vacant unavailable. There is about 24 or 25 million square feet that is either vacant and available for signing or not available for one reason or another.
Mr. DUNCAN. So the answer before you said 14 million?
Mr. PECK. Yes, sir.
Mr. DUNCAN. Now there is 24 or 25 million? Is that the difference between available and unavailable?
Mr. PECK. Well, we have 14 million vacant available, meaning space that we could put something in right now. Vacant committed means that it is vacant but we have an agency that we know we are going to move into the space and that is 4.8 million. Vacant under construction—we include buildings that are actually undergoing in the inventory—obviously they are not ready for anyone to move in yet—that is 2.7 million. Vacant to be traded means that we are trying to dispose of it in one way or another and that is 5.2 million. That adds up to about 26.5 million. If you add that to 257 million, you get 284 million. I will share the actual numbers.
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Mr. COOKSEY. What about GSA's building in Silver Spring, Maryland? Are you familiar with that?
Mr. PECK. Yes, sir.
Mr. COOKSEY. Why does that building not show up on the vacant space report that was supplied?
Mr. PECK. It beats the daylights out of me. It is a vacant building. It has been vacant for several years. It certainly should be in our inventory. We have some things carrying as buildings in our inventory like the CIA building.
Mr. DUNCAN. Are there other buildings like that that are vacant and for some reason or another are not on this report?
Mr. PECK. I don't know personally, but since there are several thousand buildings, I can't say definitely one way or another. I am the first one to say that when you have a—I have known this since the time I learned about the other side of this Hill—when you have a computer system which the day-to-day managers don't use, you get pretty lively data because—you also can get space and inventory assignments. The way you get it accurate is when people have to use it every day to see the mistake.
How could we possibly be paying $55 worth of space on Pennsylvania Avenue, but that is what our computer said. It turns out that we added some space under a lease years ago. We added the space and we added the cost of that in our inventory but not the space. It was clear when the computer was accessed. We had to verify the data and it was pretty clear.
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Mr. DUNCAN. Thank you very much.
Mr. COOKSEY. Let me ask you, How much revenue loss have you had that you feel is related to the congressional mandate to downsize the Government? Out of the $600 million shortfall, how much is related to that?
Mr. PECK. Our estimate was $242 million due to downsizing that we didn't anticipate. There is more downsizing than just $242 million, which we did anticipate.
Mr. COOKSEY. Will this trend continue?
Mr. PECK. Yes, sir. Our estimates from here on out show an adjustment to meet the slope of the curve of downsizing.
Mr. COOKSEY. Will you sell those properties as they are unused? Some of them are your own and some you rent?
Mr. PECK. That's right.
Our basic strategy is that as we downsize we collapse into the Federal portfolio. In most cases, they are very good, solid assets. So you want to use them as much as you can. In some cases, we decided that the buildings were so functionally obsolete that it makes no sense to try to use them again and we try to sell them off or give them away to State or local governments.
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As leases come up and we think we can collapse the agencies into public buildings, we try to terminate leases. In some cases, we actually go out to the landlord and say, ''We have 3 years running on the term of this lease, but we would like to buy out our interest so that we can get out of this building.'' You can often get them—if there is a decent real estate market and they think they can relet the space, you can usually get them to do it.
The other problem we have, which I think would be solved by borrowing authority, is that it is hard to move agencies into vacant space until you get some pile of money—which the agencies don't have currently and we don't have—to consolidate the renovation for the existing buildings. For example, our headquarters building—GSA has downsized 25 percent since 1993. We have vacant space in our building. We have done a couple of studies to estimate what it would cost to renovate the space, compress the remaining employees in our building, and then use the space for other Government agencies.
We know that we could do a move with people from the Interior Department, which is across the street from us. One estimate was for $9 million. But it will cost money. If you go to other Federal agencies and ask for it from their budgets, they don't have.
Mr. COOKSEY. I will close with this comment.
In my State of Louisiana, we had a Governor who made his reputation around his support to what was going into the State. It became a major problem. Again, I am not a finder of fault. I am a seeker of solutions. As long as I feel that you are seeking out the solutions that are to the advantage of the taxpayer, you will hear a lot of support from me. I think we have a very serious effort here.
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The taxpayers—those of us who just recently left the private sector—don't want to subsidize campaign supporters or the political system out of our tax dollars.
Mr. PECK. Mr. Chairman, I will defend the integrity of our program. In the 20 some years that I have dealt with the program—sometimes from the outside as an adversary or attorney and sometimes working up here—I have found only a few instances in which I even suspected that any real political influence was involved in the actual selection of the lessor to the Government. It is not to say that politics doesn't enter into the question of who put in what facility and what location. But we are the very cleanest procurement system you can find.
There are people who own buildings that we lease who are active politically and give campaign donations and all that stuff, but I will say that I have not been pressured at any point in the 16 months that I have been there to show any favoritism in any sense.
Mr. KIM. Thank you.
Welcome to our colleague from Virginia, Mr. Tom Davis. Do you have any questions?
Mr. DAVIS. I have a couple of questions.
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We just had an issue out in our area where a military base was closed with some office spaces being leased that were specially suited to them where they claim that there is a savings, and there is in the DOD budget. Sometimes there appears to be savings and you end up taking the fall. This is an instance where it shows up as a debit through no fault of your own.
What additional tools could you use to be help you be more efficient about this?
Mr. PECK. Mr. Davis, I've been there. To specifically respond to your question, we do need the authority to retain at least some of the proceeds of the sale of our buildings. It's easy to criticize the Congress, but we ought to give them credit that in the acquisition requirements, which have been passed in the last couple of years, it may be easier for us to respond to downsizing more quickly.
One of the things that we find exciting, Mr. Chairman, is that we don't talk about trying to get better intelligence and where things happen, but at some point, you have to face reality. The agencies don't know until late in the day if they are going to give up a building. I think our job is a good way to say that we have to respond whenever they give us notice and minimize the amount of down time that we have on space. We have to be able to respond when they notify us.
Mr. DAVIS. Is there additional legislative tools that you need?
Mr. PECK. The problem is the money. We need to be able to borrow to effect the moves that we need to do.
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Mr. DAVIS. Thank you.
Mr. KIM. I understand the problem you have. With all the downsizing, you have your hands tied. This is a ridiculous cost. They should get some responsibility. If you have this forecasting, I understand it. I also look at these vacancies a little more seriously.
I appreciate your fine answers and your persistency. I appreciate it very much.
Before we continue with our next witness, let's take a 5-minute break.
[Recess.]
Mr. KIM. Ladies and gentlemen, let's proceed.
The subcommittee will now move into our next witness, Associate Director of Government Business Operations Issues, United States General Accounting Office, Mr. Michael Motley.
Welcome.
TESTIMONY OF MICHAEL MOTLEY, ASSOCIATE DIRECTOR, GOVERNMENT BUSINESS OPERATIONS ISSUES, U.S. GENERAL ACCOUNTING OFFICE
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Mr. MOTLEY. Thank you, Mr. Chairman. I appreciate it.
I would first like to introduce Sherill Johnson to my right. He is an assistant director who is heavily involved in the report we will be speaking about this morning about downsizing.
Mr. Chairman and members of the subcommittee, we welcome this opportunity to discuss our July 1995 letter, ''Downsizing and Space''. Mr. Chairman, I am going to summarize some of the things in my statement and ask that my entire statement be included in the record.
Mr. KIM. Without objection, your prepared statement will appear in the record.
Mr. MOTLEY. Our testimony today, provides information on the General Services Administration's and Office of Management and Budget's and 10 Executive Branch agencies' efforts to identify and manage Federal office space that may be unneeded or underutilized after agencies downsize. It also includes our ongoing work on this issue.
Our 1995 letter, issued early in the downsizing process, noted that Federal civilian agencies occupied over 750 million square feet of office space in thousands of Government-owned and Government-leased buildings nationwide. We expressed concern that with the loss of about 107,000 non-Department of Defense-related FTEs through downsizing, millions of square feet of costly Federal office space could become unneeded or underutilized. Our letter recognized that it probably was not possible to save the full cost of all office space associated with FTE reductions because personnel losses could be scattered over multiple locations.
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We said in 1995 that neither of the two central Federal management agencies responsible for space management and budget matters, GSA and OMB, had developed a Government-wide strategy for managing office space reductions resulting from the Government's downsizing efforts. We reported, however, that both agencies had taken steps to identify and restrain potentially unneeded or underutilized Federal office space.
Steps taken by GSA included calling for a ''Time Out and Review'' of high-dollar-value capital spending projects, instituting a no net new office space as a policy to stop agencies from acquiring net new office space, proposing a timeout for the review of the need for current and pending agency leasing actions, and instituting a temporary moratorium on most agency leasing actions pending Administration downsizing decisions.
As for OMB, they directed agencies to project their office space needs for fiscal years 1996 through 1999, taking into consideration anticipated personnel reductions, and to submit these projections to OMB by June 30, 1994. GSA officials told us that these projections showed no net reductions in office space needs by Federal agencies even though they projected an 18 percent reduction in total employment.
Finally, our 1995 letter pointed out that 10 Executive Branch agencies, plus GSA and OMB, had either taken proactive space management approaches or were awaiting on the outcome of other issues prior to beginning specific initiatives.
At the request of the chairman of the House Committee on the Budget, we have recently begun to follow up on our 1995 report, and we expect to complete this effort in the summer of 1997. Although it is too early in our review for us to have any conclusions or recommendations, we do have several preliminary observations. Since our 1995 letter, GSA has taken additional steps that it believes will improve its management in general of Government-owned and Government-leased properties, and that it could help in identifying and restraining the amount of unneeded and underutilized Federal office space resulting from agency downsizing.
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For example, GSA is in the process of implementing a new automated system, STAR, which standards for System Tracking and Administering Real Estate, that is designed to be an integral part of GSA's day-to-day real estate activities. Mr. Peck spoke about this extensively this morning.
In addition, GSA is pilot testing a program called ''Ponding'', which is an effort to consolidate about 1.2 million square feet of leased office space in 37 Federal properties. GSA is funding this program with the goal of identifying 600,000 square feet of underutilized space.
GSA officials told us that GSA is now formally considering the effects of Federal agency downsizing and space reduction plans in its forecast of rent collections, which in large part make up GSA's Federal Building Fund used to fund real property management activities. GSA said that its regional asset managers, who usually have specific knowledge of pending actions relating to local agencies' space requirements, are now reviewing the data supporting GSA's rent collection estimates to improve their accuracy. With improved rent collection estimates, GSA officials believe that the agency will be positioned to better manage the Federal Building Fund.
Although it is too early to assess the effectiveness of any of these GSA actions, in discussions with OMB staff responsible for reviewing GSA's budget, they told us that they believe that actions taken or underway by GSA might help in their overall management of these activities.
Our work in updating the space management strategies of the 12 Executive Branch agencies has also just begun. Although we are not in a position to report on these activities at this time, we are aware of one agency's achievements in the area of space management. We recently reported that NASA has achieved an estimated $250 million in cost reductions through fiscal year 2000, mostly from moving contract personnel from off-site leased space into agency-owned space left vacant by staff reductions related to NASA's downsizing efforts.
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This concludes my prepared statement. I would be happy to respond to any questions you might have at this time.
Mr. KIM. Thank you for that fine presentation. I appreciate it.
If you look at page two, there is a statement that the agencies project no change in office space through fiscal year 1999 even though they project a 18 percent reduction in personnel.
Define this concern.
Mr. MOTLEY. I think at the time we were doing the report, Mr. Chairman, we found that somewhat surprising that they would do that. As a matter of fact, that is one of the reasons we felt in our report that agencies needed to take some more specific actions, and I believe some of them have since that time taken some more specific actions.
As Mr. Peck also noted, it is very difficult for agencies to project when those locations will become vacant as a result of buy-outs or downsizing or people retiring at some point in time.
But at that point in time, we did find that somewhat surprising. But I think there are some reasons that agencies are unable to project out that far.
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Mr. KIM. I understand an agency has an entire building and they don't need it. There is empty floor for the GSA. They have heard this compact. There is a commitment to pay for that space, so GSA has a time table of 5 years. They are helpless.
Why is this happening? Why do we have this situation? It doesn't take corrective action.
Mr. MOTLEY. Well, I really can't speak for GSA, Mr. Chairman, but I might suggest that part of the problem here is that Federal agencies only have to provide 120-day notice to GSA when they make a determination to move out. They are going to provide that to GSA. I think the suggestions you made to Mr. Peck are some things that he might be able to do to prevent this in the future. One of the things they might sincerely look at is the notice from Federal agencies.
Mr. KIM. Well, you know this. You didn't make any recommendations to GSA about it?
Mr. MOTLEY. Well, we haven't done specific work looking at it. Our recommendations might be on other Federal agencies, Mr. Chairman, at this point in time. So it would be a little bit premature for us to make that kind of recommendation. But I believe that GSA just might come to that conclusion themselves.
Mr. KIM. I notice on the answers from GSA that this downsizing they talk about is anticipated. Don't they talk to GSA about it? Don't they talk to each other?
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Mr. MOTLEY. I believe that communication, Mr. Chairman, is probably not as great as it could be in many areas. I think Mr. Peck alluded to a problem that GSA has heard GAO talk about for years and that is basically the infrastructure in the organization as it relates to computer capabilities and communications, even among the regional offices, has has been difficult over the years primarily because of the antiquated equipment and software that they have.
It is my belief that they are in the process of upgrading all those things now. It is a little bit too early to tell, but I would say that would be an area to focus on in the future.
Mr. KIM. I notice from your statement an 18 percent reduction in personnel didn't affect the space needed. Is that the same thing as GSA still needing the same staff? This bothers me.
If you have an 18 percent reduction in personnel, you need more space?
Let's go on to the next question.
You mentioned that GSA has this real estate tracking system set up?
Mr. MOTLEY. Yes, sir.
Mr. KIM. Is that being done manually now?
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Mr. MOTLEY. I think the sense I got from Mr. Peck's discussion and some of the work we have done in the past make me believe that various regional offices throughout GSA probably have their own systems set up. None of them are interactive. None of them can communicate very well with each other. It certainly won't be the state-of-the art type of software system that they are expecting the STAR system to be. What they have had in the past seems to be very cumbersome, Mr. Chairman. I believe it would be very difficult for them to do a lot of the things that they need to as far as the management of the real estate of the Federal Government.
Mr. KIM. Mr. Cooksey, do you have any questions?
Mr. COOKSEY. No, Mr. Chairman.
Mr. KIM. At this time, I would like to allow a couple of questions from our counsel.
Do you have any questions?
Staff COUNSEL. No questions at this time.
We can submit any questions that we may have in writing.
Mr. MOTLEY. I would be happy to respond.
Mr. KIM. Thank you very much. I appreciate your fine presentation.
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In closing, I believe that this is a serious matter. I would like to ask GAO to issue a copy of GSA's Federal Buildings Fund. If I don't get a satisfactory answer from you, I am going to go to the next step.
How long will it take?
Mr. MOTLEY. I really don't know at this time, Mr. Chairman, but I would be happy to get back to you and work with your staff on those kinds of things.
Mr. KIM. Do you agree with that?
Mr. MOTLEY. Certainly, Mr. Chairman.
Mr. KIM. Thank you very much.
The committee will stand adjourned.
[Whereupon, at 10:42 a.m., the subcommittee was recessed, to reconvene at the call of the Chair.]
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