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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.
BUDGET SCORING RULES AS THEY RELATE TO REAL ESTATE TRANSACTIONS
THURSDAY, JUNE 19, 1997
U.S. House of Representatives,
Subcommittee on Public Buildings and Economic Development,
Committee Transportation and Infrastructure,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:07 a.m., in room 2253, Rayburn House Office Building, Hon. Jay Kim (chairman of the subcommittee] presiding.
Mr. KIM. Good morning.
The meeting will come to order now.
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I'd like to welcome the members this morning to this meeting of the Subcommittee on Public Buildings and Economic Development.
This is the fourth hearing the subcommittee has held concerning the General Services Administration's rent shortfall and capital investment program.
Testimony at the previous hearings on March 5, April 24 and May 15 focused on causes that led to the shortfall in the Federal Buildings Fund and steps taken to prevent a reoccurrence. We also discussed how the Federal Government can support a capital investment program for fiscal year 1998 through alternative, innovative financing options.
We meet today to continue this dialogue. The GSA rent shortfall and its effect on the Federal Government's Capital Investment Program is a very serious matter.
Today, the subcommittee welcomes Mr. Jacob Lew, who is not here yet, the Deputy Director of Office Management and Budget, to testify on this matter. OMB is the lead agency responsible for determining the size and scope of the Federal Government's Capital Investment Program for Federal buildings.
The focus of this hearing will be budget scoring system as they relate to realistic transactions. We are also interested to know about OMB's role in the budget process and its relationships to GSA.
Mistakes have been made in operating the Federal Building Fund, however, we must solve this problem so that the Federal Government can continue its Capital Investment Program and maintain its building inventory.
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With that interest in mind, I'd like to welcome Mr. Lew. We're pleased to have you this morning and I look forward to your testimony.
Before I proceed, I'd like to recognize Mr. Traficant, our ranking member.
Mr. TRAFICANT. Thank you, Mr. Chairman.
As you may be aware, I've introduced scoring bills in each of the last three Congresses and OMB has opposed them. The reason for those bills was to get the best deal for the taxpayer.
To find the best deal, GSA, in conjunction with OMB, must review requests for certain types of space and how long the space is needed. The decision regarding space has been made basically by the client agency. It's not a question of whether to house Federal workers, it's a question of determining the most cost efficient way to do so.
I'd like to emphasize that for GSA, the decision to house Federal employees is not discretionary. GSA is required to house employees. Unlike other agencies whose spending decisions can be discretionary, GSA is faced with a mandatory process. The question is not whether, but how and what is the most economical way.
I can see some of the OMB people looking at me because I've been questionable here of OMB. I think you're way off base; I think you're costing us a lot of money; and I think you're making deals politically.
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In general, to determine the space needed establishes a fundamental principle for this financing mechanism. Naturally, for long-term needs, ownership is preferred and probably more effective short-term needs leasing.
According to testimony before me in 1994 by then OMB Acting Director Alice Rivlin, ''After this determination of scoring rules helped ensure that the Government acquires space through the lowest cost means.'' She went on to say ''They should never fully determine the Government's asset acquisition process.''
Unfortunately, scoring rules have not ensured the lowest cost means. They determine in most cases, unfortunately, how they now acquire office space. So instead of examining all options that cover the expense of housing, GSA presents to its congressional oversight panels financial information limited by these ridiculous scoring rules.
In 1993, we looked into the matter and since that time, the members of this committee have been presented with a narrow range of just two financing strategies—long-term leasings, which in most cases is the most expensive choice, and the other extreme, direct Federal construction, usually the most economical method but money difficult to obtain up front. To make the deficit look palatable, they just jam the taxpayer with OMB leading the charge. That's the way it is.
This subcommittee has been short-changed. Because of the scoring rules, GSA is unable to present to this subcommittee for review and consideration, all of the financing choices that are necessary to how we most economically house our work force.
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Needless to say, everybody knows about the charge that we have. There are a variety of leasing choices similar to mortgage arrangements which we all are familiar from policy viewpoint decisions regarding the Federal Government's Real Estate Program are now made, in most cases, without any input from this Congress.
Decisions are no longer made by deliberation and discussion, but they are squeezed out of the formula of scoring rules. Congress has become a rubber stamp and we have been approving stupid real estate decisions and transactions regularly.
I'd like to move now to a case back in 1993 where the Office of Management and Budget said in an effort to get the best deal, they approved a 30-year lease at $25 million for the construction of a building in Atlanta, Georgia—three-quarters of a billion dollars without any equity. It was this committee that said we will not allow you to do that.
The OMB approved that lease, recommended it to the President, then they go on television and say that we're blowing money.
That was 1993. We're talking 1997 with the OMB here, the prospectus process for the Department of Transportation. In September 1996, GSA, with the concurrence of OMB, submitted to this subcommittee for authorization a replacement lease prospectus for DOT. The conclusions in there were absolutely absurd.
For example, OMB did not recommend construction—no construction for long-standing Cabinet level departments. They recommended leases. Then, to further assault the intellect of this subcommittee, OMB recommended only a 15-year lease, 15 years. Finally, OMB concluded that requesting authorization for 15 years at an estimated cost of $43,500,000 per year for a total cost of $654 million was the most cost effective manner to house the Department of Transportation—$654 million. Lease. No equity. No ownership. A handful of rent receipts.
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At the end of this 15 years, I guess OMB then feels that the subcommittee can insult the taxpayer by further recommending and rubber-stamping another lease because, my God, what will it cost to build then.
For good reason, the subcommittee refused to consider this prospectus and directed GSA to prepare an enhanced 11(b) report. The committee expected to receive the report which identified all acquisition methods, not just lease arrangements.
The staff met with GSA on at least three occasions to discuss this matter. GSA engaged a consultant to help prepare the 11(b) report. GSA was given an extra 30 days by the end of January to submit that report.
On May 29th of this year, GSA again, with the concurrence of OMB, finally submitted an enhanced 11(b) report. The report now recommends ownership, either through construction or purchase but goes on to add that an operating lease is necessary under any of the ownership scenarios. I think that needs to be explained.
OMB now claims that lease-purchase arrangement with private sector financing would be the most expensive alternative—$644 million, yet in September of 1996, OMB recommended spending $654 million over 15 years in a lease with no ownership. I'm beating you up here.
As far as I'm concerned, OMB has taken most of the oversight, the power of the people and the Congress of the United States. They run real estate programs.
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I further believe, and it's not a slap at this Administration, it's been every Administration, they swing and make deals that hand out political favors to people, not illegally, but to try and massage people who need a building.
Our job here, folks, may not be one of the most high profile committees but there is an awfully lot of money that goes into this real estate and we don't run it, and we're charged with the responsibility to run it.
I'm opposed to OMB running our real estate transactions. I am making a strong recommendation to the Republican majority because the Democrats didn't have the anatomy to tackle it, we must change scoring and that scoring must, in fact, give us the best opportunity to make a deal for taxpayers.
No offense, Mr. Lew, but we listened to Alice Rivlin try and justify these policies and she couldn't.
I'm leaving at 9:30 and I'm going to read what you have to say, but my questions are going to be submitted to you in writing and I want OMB to be specific in answering my questions. I'm just the son of a truck driver but I'm mad as hell over this.
I hear all this beating our chest about balancing the budget. You're not balancing anything but friendships here. You're back to balancing my ridiculous spent time on this disgusting, frustrating matter.
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Mr. KIM. All right.
Are there any other members who wish to make an opening statement?
The gentleman is recognized.
Mr. COOKSEY. I'm not as articulate or perhaps as forceful as my good friend and I'm trying to learn to emulate him because he does a good job and points out a point that I'm very concerned about.
I wrote you a letter a month ago. I have it over here and I'd like to get a response to the letter because it dovetails with his comments. If necessary, we'll just stay here all day and all night until we get a response, but I'd really like to get a response to that letter because it echoes his concerns.
Thank you, Mr. Chairman.
[The prepared statement of Rep. Shuster follows:]
[Insert here.]
Mr. KIM. Thank you.
I wish to welcome our witness, Mr. Jacob Lew. Mr. Lew, we appreciate your attendance at this meeting. Please proceed.
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TESTIMONY OF JACOB J. LEW, DEPUTY DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
Mr. LEW. Thank you, Mr. Chairman and members of the committee. It's a pleasure to be here this morning.
I want to begin by apologizing for the scheduling difficulty last month when the subcommittee had a hearing. As I think you know, we were literally in the final day of the bipartisan budget negotiations and while I had planned to appear here and would very much like to have done so, I was in a 17-hour long negotiation which—at the end of that day—culminated in the bipartisan budget agreement.
So, I appreciate the committee's indulgence in rescheduling the hearing so that I could appear this morning.
In the interest of time, I would like to briefly go through my statement while Mr. Traficant is still here. I would be delighted to answer any questions you submit in writing.
I'd like to note at the outset, Congressman Cooksey, that we received your letter 2 weeks ago, and we have a response that will be forthcoming in a matter of days. In the course of preparing for this hearing, we have developed a response. And I think my testimony will address many of the issues raised in your letter. We will have a written response to you before the end of the week.
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This is an important issue. It doesn't get a lot of public attention, but this issue deserves public attention because it's at the very core of what the Federal Government does. It goes to the heart of how we manage our fiscal affairs, and how we do our business of government.
I understand the frustration of the subcommittee. Frankly, it's a frustration that we all share. It's very difficult to square our competing demands.
On the one hand, we have an absolute obligation to provide space for Federal workers. We take that obligation very seriously. We do our very best, with GSA taking the lead, to estimate what our needs are and to plan for meeting those needs in the most cost effective way.
But I fear the problem that the committee is identifying in terms of scorekeeping rules is not the real issue. Clearly, the scorekeeping rules are complicated, and we are going to spend a good deal of this morning discussing them. But I would suggest to the committee that the real issue is one of the choices that we, Legislative and Executive Branch policymakers, are required to make.
The cost of housing Federal agencies is very real. It's real over time, and it is very difficult to justify doing things that are not at the lowest cost. We have rules that are designed, to produce the lowest cost results, though I can't sit here and argue that in every case the action resulted in the lowest cost.
Congressman Traficant can point to some examples, which we will discuss in further detail, that are exceptions to the rules. These are unfortunate. I'd like to discuss them and come to an understanding—and we're open to suggestions—as to how to implement the rules in a way that doesn't produce those kinds of effects.
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The bottom-line principle behind the rules is really very simple. The Federal Government, when it constructs a building, borrows money at the lowest interest rate available. The cost of financing a Federal building is always lower when the Federal Government builds it than when a private party does so.
A lease-purchase arrangement has the effect of having the Federal Government buy a building at what is effectively a higher interest rate than the Government would pay if we were constructing the building ourselves.
That is not to say we have perfect choices. We often find ourselves in a situation where we are faced with the choices of constructing a building, entering into a long-term lease, or opting not to house Federal workers. In a case like that, we may not have the perfect set of choices, and we have to work together to design choices that are better.
These are not OMB rules. They are joint Congressional-OMB scorekeeping rules that were produced out of the 1990 Budget Act, and were designed to prevent past instances in which long-term arrangements were entered into that were more expensive than the Federal Government purchasing buildings.
I would ask that my statement be submitted for the record, and in the interest of time, I will not go through it in great detail. But I think the real issue comes down to this. If there is a high priority to acquire new space for Federal offices, what is the most cost-effective way to acquire that space?
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We don't think that lease-purchase is the most cost-effective alternative. Clearly, members of this subcommittee are concerned that under the lease-purchase rules, there have been instances in which we've entered into leases that were not the most cost-effective alternatives.
We firmly believe, as an economic and policy matter, that were we to change the lease-purchase rules, in general, we would be ratcheting up the cost of Federal space.
Now there may be a case you can point to where it would be less costly, but overall, we don't believe that could be true given the differential in the cost of borrowing for the Federal Government and private developers.
I would hope that, coming out of this hearing, we are able to work together to discuss some of these options because, clearly, this issue isn't going to just go away. And that is due, in part, to the reason I was absent from the May hearing. We live in a world of very limited resources because we've agreed, on a bipartisan basis, to balance the budget.
If we're going to balance the budget, we are not going to be able to enter into scoring arrangements where the costs of projects are invisible in the year that the decisions are made. That is the fundamental reason for up-front scoring. We should be able to see the full costs associated with the decisions we make when we make those the decisions.
If there are problems with some of the operating leases, we should discuss those problems and discuss how to have better alternatives. We think the best alternative is full, up-front funding. If it's a high priority, we should construct the building, Congress should appropriate the money, and we should go forward in the most cost-effective way.
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If that is impossible because of the policy environment that we're in, where the resources aren't available, we might have to discuss other solutions for financing Federal housing. But we don't think one of the solutions can be understating the real cost to the Federal Government.
With that, I would dispense with the reading of the rest of my statement. I've tried to summarize the important points, and I look forward to answering all of your questions on the technical details of the issues before us.
Mr. KIM. I'd like to yield to the gentleman from Ohio, the ranking member.
Mr. TRAFICANT. I want to thank you, Mr. Chairman. I want to thank you for being considerate and giving me an opportunity.
It's good to see Mr. Duncan, who has worked with me on this issue too.
Mr. Lew, I'll tell you something. You're very intelligent. As a Democrat, you make a very good impression for this Administration. You know financing and you know government. You're getting a grip on it.
You made a statement that because of the interest rate scenario, in a lease-purchase arrangement, you're afraid that you're ''going to rachet up the cost for the taxpayer.''
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For the life of me, I'm trying to reconcile that. Reconcile is a key word and that's another point I want to make about the budget. The first one is how you can reconcile that statement with the scenario in Atlanta, Georgia and now with the Department of Transportation where OMB has recommended and was willing to sign the checks for $750 million in Atlanta over 30 years without an equity position and $654 million for the Department of Transportation on a 15-year lease with not one dime of equity knowing full well this Congress some day, down the line, if this place still exists with this type of machinations, is going to reapprove some lease prospectus with a tremendous high cost factor in that heavily populated cost environment for real estate in Atlanta and Washington, D.C. For the life of me, I do not believe that.
Second of all, on reconciliation, I was under the impression the Republicans worked very hard to include my scoring bill into this process and it was met with opposition in the final analysis.
I am just a Democrat here in the minority now, but I believe, and I honestly say this, the Republicans, more than likely, are going to do something about this. For the life of me, I cannot understand how Alice Rivlin in her brilliance, and now Jacob Lew, in his evident brilliance here, come before this committee and be willing to sign rent receipts for $1.3 billion in just two buildings without a dime of owner equity and tell us because the lease-purchase arrangement is so costly.
Mr. LEW. Congressman, if I can answer that question?
Mr. TRAFICANT. Yes, I wish you could.
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Mr. LEW. I would like to try.
Clearly, the exceptions to the rules are the most difficult to address, and the Atlanta building is not the rule—it is the exception. It is a very long operating lease, much longer than most.
The reason I would like to step back is to distinguish between operating leases and lease-purchase arrangements in normal instances, and I will get to Atlanta very quickly.
We're now in a very fluid environment with regard to the Federal workforce. We've seen downsizing, and we've seen the introduction of technology, telecommuting, and other arrangements that make the long-term predictability of the need for Federal office space dramatically different than it was a decade or a generation ago. In terms of reorganizing the ways in which people work, we're probably in the most fluid period that we've had since the Second World War.
Most operating leases are much shorter than the Atlanta lease, and it is probably a very good deal in most cases where there is not a clearly understood, long-term need for us to enter into operating agreements.
In the case of the Atlanta building, I think we would agree with this subcommittee that the ideal option would have been for the Federal Government to construct a building. At the time, there were discussions about that alternative and it was clearly a difficulty in the policy—not the scorekeeping process—that prevented it from being a viable option.
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With due respect to the power implied for OMB, which I probably shouldn't rush to deny since it's something we probably should covet, it wasn't just OMB that made that decision. It was the Administration and Congress.
The support for the Atlanta project was very strong—on a bipartisan basis—from the regions entire delegation, many of whom are still in Congress. So we cannot say that this was solely an OMB decision.
At that time, our choice was not whether to construct a building or to enter into an operating lease, it was to enter into an operating lease or a lease-purchase arrangement. Perhaps in this case, a lease-purchase arrangement would have been less costly because of the length of the lease.
I can't argue with the arithmetic. This is not an ideal operating lease, but I firmly believe that were we to change the rule so that, as a typical practice, we entered into lease-purchases, we would ratchet up the cost of Federal housing. It is a simple matter of mathematics and finance that makes it impossible for us to enter into arrangements with private parties, whose cost of money is higher than ours, on a repeated basis without us paying more.
In an operating lease the issue is how many years and at what rate. I would argue that most of the short-term operating leases are a good deal for the Federal Government. There are going to be instances in which long-term operating leases technically meet the operating lease requirements, but we may then get into that gray area where we wish we had more options.
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I would argue that, in those instances, the option we should have is constructing a building. We should work together and make our choices, and the choices are not just within the subcommittee. The choices are also at the Appropriations Committee with how the 602(b) is allocated amongst the subcommittees.
Year after year, Congress gives the Treasury Postal Subcommittee, which has to find the resources for these buildings, less resources than the Administration recommendation. If the subcommittee had more resources, we clearly could get a better economic deal for the taxpayer by constructing the building.
I think it would be a big mistake for us to find an exception to the rule, rewrite the rules on the basis of the exception, and find ourselves at the end of the road having increased our cost structure for all Federal space or for a good deal of Federal space.
I would conclude by saying this is not an OMB decision; it is not something that OMB wrote on its own. This is a joint, Congressional-OMB scoring convention pursuant to the 1990 Reconciliation law. And while we've seen suggestions for changing the scorekeeping rules, we've yet to see any that would really solve the fundamental problem, which is: how do policymakers allocate scarce resources? We beleive that is the fundamental issue.
Mr. TRAFICANT. Congress surely did want and support a building in Atlanta but OMB wanted the lease, Congress did not want the lease. This subcommittee said no to the lease. Appropriators appropriate but they only appropriate on the strength of the authorization.
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That is another thing that should be fixed in Congress, but that's not your problem.
Another thing you said is we'd rachet up if all of our business was done lease-purchase. I think you assume that by giving the taxpayer the best deal, the only deal will be lease-purchase.
Second of all, let me remind you, there is a very simple element to scoring. Back in 1993, it was $25 million a year pursuant to the scoring laws versus $250 million one-time construction. The OMB chose to go $25 million a year for 30 years to keep the deficit problem looking more palatable. That is the only rationale for that.
We've been here a long time. Let's not kid ourselves. We're not before the rotary having a little debate.
The second thing I'd like to say is why not authorize the GSA to borrow from the Federal Finance Bank, let them make the lowest interest rate loan possible? Why do we always have to say that we're going to compound the interest rates?
Mr. LEW. When the Federal Government builds a building—
Mr. TRAFICANT. I'm not done.
Mr. LEW. Excuse me, Congressman.
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Mr. TRAFICANT. I'm not done.
Mr. LEW. I apologize.
Mr. TRAFICANT. What we're trying to do, and believe me, we're not as astute as you on this, but what bothers me is that we're not as astute as you and your people on this, but why is it that we can see the flaws that you continue to purport are not flaws but are ratcheted decisions to save our taxpayers?
With that in mind, I want to say this to you in general and maybe to this committee. We're getting government from the Executive Branch, the Office of Management and Budget, these appropriators, these deals when they are made at the end of the year when they're made in reconciliation, the 602(b).
What is it you hear all the time in these committees, we're going to have to do this because this is what the Administration wants and we don't want to bog down the deal and get into a fight over this, over that, and we must reconcile.
This is what OMB wants, what does OMB want, what does OMB say about the building, Mr. Duncan, Mr. Traficant?
What I'm saying is that Congress should set a policy and OMB certainly can have that type of authority within the constraints of a reasonable policy. It doesn't exist now. We're giving them the authority to go ahead and run the largest real estate program in the world without conferring with us and putting us through a number of mumbo-jumbo, intercommittee machinations that continue to drive up our costs.
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I really don't have a question; mine are going to be presented in writing. I want detailed answers.
Here is my last question. I want to know, upon receipt of these questions, what is the time frame in which this committee can expect an answer?
Mr. LEW. Just to give you a sense of the time frame, we received Congressman Cooksey's letter on June 4th and he'll get a response today or tomorrow. We will try to do it in the same time frame.
Mr. TRAFICANT. Mine will be much more extensive than that. Are you saying you'll have it in 2 weeks?
Mr. LEW. We'll do our best. If they are more extensive, it may take us a little longer.
Mr. TRAFICANT. Thank you.
Mr. KIM. Do any of the other members wish to ask questions? The gentleman is recognized.
Mr. DUNCAN. Mr. Chairman, I simply want to say that I served for 2 years as the Ranking Republican under Chairman Traficant and Mr. Traficant was an outstanding chairman of this subcommittee.
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He's mentioned several things. We got extensively one time into the Atlanta project and that was not a good deal for the taxpayers. There was so much political wheeling and dealing that went on which was behind that, there is no need to go further into that.
It seems that almost every deal that we look into, whatever it is, construction or whenever we see these buildings that cost $285 a square foot or the NSA building which cost $310 a square foot, whether it's a lease or construction, whatever it is the Federal Government does, it seems to cost about twice what it would in the private sector.
I've read this thing I was handed a few minutes ago where the Department of Transportation headquarters has been housed in a privately-owned building, the Nassif Building, in Washington, D.C. for the past 27 years. The Nassif Building was built in 1970. I've heard about some of this before but this refreshes me. It was built in 1970 for approximately $35 million. The GSA has leased the building for DOT and has already paid over $350 million in rent and will pay an additional $90 million through the current lease term of March 2000. That's $440 million in lease payments for a $35 million building.
The real crux of this problem is in two sentences in this briefing paper that we have from the staff. It says, ''Since enactment of the 1990 Budget Enforcement Act, GSA has been limited in its use of alternative financing methods for real estate and acquisition and has been limited to acquiring space be it direct Federal construction or operating leases. An operating lease is the primary choice of late and have proven to be very costly to the Federal Government.'' That is an understatement. Very costly to the Federal Government.
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I have a copy of the letter that was sent to another member of this subcommittee, Mrs. Brown, a few months ago in which the Regional Administrator for GSA n Atlanta says they could save $42 million over current leases if they were allowed to purchase a building known as the Jacksonville Center Building.
There is just example after example of that. We had a GAO report in 1989 which said we could save I think $12 billion if we had done things a little bit differently. This GAO study was of only 43 GSA Federal office space leases and they found the taxpayers could have saved $12 billion had GSA, instead of leasing, acquired buildings or entered into lease purchase arrangements.
We need more flexibility, Mr. Chairman. Sometimes, it's probably best to enter into leases where leases can be obtained on very favorable terms. Sometimes it's probably best to go ahead and construct buildings, if we're not going to be paying $285 or $300 a square foot. We need to look at all of these deals separately and individually, and there needs to be more flexibility.
We don't need a bunch of bureaucratic mumbo-jumbo trying to justify deals that anybody with any common sense at all would know are terrible deals for the taxpayers. It gets kind of frustrating when almost every situation that you look into, it turns out to be a bad deal for the taxpayers.
If we can't do better than we're doing, we just ought to—the people at OMB can do better, the people at GSA can do better, we should do better on this subcommittee and we need to watch this money.
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We've got all these arrangements that nobody, if they were spending their own money, would be entering into. The easiest thing in the world is to spend other peoples' money in just a wasteful or extravagant way.
That's all I've got to say. Thank you very much.
Mr. KIM. Mr. Cooksey.
Mr. COOKSEY. Thank you, Mr. Chairman.
Mr. Lew, have you ever been to Louisiana?
Mr. LEW. Not in a very long time, but I've been to Louisiana.
Mr. COOKSEY. Louisiana is a snakepit of politics at times. I came from the private sector. Part of the reason I ran is because one particular administration has been in and out of government for the last 20 years and they have taken building leases and given them to all their friends, so it's been a patronage thing and it's blatant. They've taken it to an art-science.
I really thought that there was a little bit higher level of integrity and there was less patronage which is the root cause of most of the evil in Louisiana politics. I thought, maybe it's going to be better, a higher level of integrity at the Federal level.
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I see these numbers and it makes me think, gee, deja vu and it's the same thing, just on a much expanded scale, and that concerns me. That's the reason I ran against all those career people that were a part of the system. It was real easy to beat them because the public is tired of that sort of activity.
Does that go on at the Federal level the way they have done it in Louisiana, the people in the other party have done it in Louisiana for years?
Mr. LEW. Congressman, I personally agree with you. I think the public is fed up with decisions that appear to be made on that basis. I would argue that, at the core, the technical issue we're discussing this morning is, in many ways, designed to prevent situations like the kind you're referring to.
Just as a matter of practice, the full cost allocation principle says you have to, up front, own up to what you're really committing the Federal Government to do. It makes it a lot more difficult for members, and Administrations, to make decisions that happen to be convenient politically if, at the front end, you have to own up to the full cost of the decision.
The core of the principle that we're discussing is what really drives your question, and I think it is one of the reasons the public wants us to balance the budget and downsize the Federal workforce. They want us to run a government that is leaner, more efficient, and doesn't waste their money.
I've been in and around this kind of work for 20 years. I'm not going to pretend that we're ever going to design a system that eliminates political discretion from being exercised. Frankly, I wouldn't want to. The political system has served this country very well, and I suspect if we were to have artificially stringent rules, we would be sitting here discussing other mechanical rules that make important political objectives impossible to achieve.
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Now, that doesn't mean we should tolerate ineffective, inefficient Federal spending. I think we have a set of rules that was designed to establish a responsible regime. If that regime doesn't work, we should discuss it.
But the answer isn't to discard the regime and replace it with something that we all know will not only make it more expensive, but easier to make precisely the kinds of decisions you're concerned about. And I know from an appropriations point of view, if you have to look at the full cost, it's a lot more difficult to spread the money around than if you look at just a little piece of it.
Operating leases should not be viewed as a way of getting around scoring. In many situations, operating leases are the most efficient alternative.
If we have an anomaly where there is an operating lease that does not comport with our standards of cost effectiveness, we should discuss it. Amongst ourselves, we may not be able to resolve that there won't be anymore political decisions by Congress or the Executive Branch, but we can try to keep the decisions well within the bounds of acceptability.
I think the notion that the current rules are driving us in the direction of more decisions like that is incorrect. I think they probably have diminished that kind of spending. Frankly, part of the frustration we hear comes from members well beyond this room, members who are frustrated that the current rules make it difficult to build their projects.
I've been through many appropriations cycles. And I've not been disappointed by the number of calls I've gotten from the Hill requesting help on projects. The desire for projects is very strong.
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We've tried to mediate that process with standards that we can feel very comfortable with, but the desire for projects is very real. We need rules that coexist in a world where members want to build projects.
I think we have a balance now that protects the taxpayer if we jointly do our jobs well. I'm afraid if we change the rules, we open the door to decisionmaking that—5 or 10 years later—we would regret very much from the point of view of the question you asked.
Mr. COOKSEY. I was not a member of Congress or participating on this committee when this Atlanta building was discussed. I have two questions.
Who owns the building beneath the layers of the cover or coverup, who really owns it, who are the owners? Two, would you explain for the record very briefly the difference between an operating lease and a capital lease?
Mr. LEW. The Downtown Development Authority in Atlanta owns the property. I'd have to get back to you for the record as to the composition of the Downtown Development Authority.
Mr. COOKSEY. I meant names.
Mr. LEW. I don't have those names.
Mr. COOKSEY. Do you know the answer? Do you want to tell it for the record?
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Mr. DUNCAN. Well, there are a lot of names like Andrew Young, John Lewis and many others who were involved in that project in a way that was very costly to the taxpayers, but I don't have the figures right here in front of me.
Mr. LEW. With due respect, Congressman, Mr. Cooksey's question was who owns it. They don't own it. I think we should be careful not to suggest that.
Mr. DUNCAN. No, they don't own it, but that's who all is involved in the Downtown Atlanta Development Authority.
Mr. COOKSEY. That's what I want to know is names. You know, we are an open government. The people want that, the public wants that. That's the kind of answer I really want, not one of these clouded, shaded answers.
Mr. LEW. Congressman, I'd like to answer your question. I actually asked a similar question myself in preparing for this hearing. I think you're going to find there is not a partisan answer.
This Atlanta building served a very important purpose in terms of the the area's economic development. There was bipartisan support for the Atlanta Project.
If 10 years ago, we were in an era where there were more dollars available in the appropriations process, there probably would have been support for coming up with an up-front appropriation. The support for the project was that great.
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I'm not sure there is a connection between the owners and the decision. One would have to look at the context in which it was made. But it was not a partisan decision. We have records of inquiries that are very bipartisan.
Whether it was a good or bad decision is something we can discuss, but it's not a question of fingerpointing. We should, between us, work to make the resources available to buy a building when we want one that badly. I think that's the bottom line.
[The information received follows:]
The Atlanta Development Authority owns the Atlanta Federal Center Building. Members of the Authority are: The Honorable Bill Campbell (Chairman), David Swann (Vice Chairman), Elaine Clarkson (Secretary), Edward C. London (Treasurer), Gloria Bromell-Tinubu, Richard W. Harrell, and Zeta Sartor.
Mr. LEW. This gets to the second part of your question, the difference between a capital lease and an operating lease.
An operating lease is a lease for a number of years, typically for a shorter-term period. The Atlanta lease is an exception in terms of its length. The expenses under an operating lease are scored on an annual basis, much like electricity and other services for a building that are scored on an annual basis.
A capital lease is a longer-term lease. With a capital lease, we are effectively entering into an arrangement where we should be realizing the full cost of the building, because it is as if we were owning it and the full cost is scored up front.
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There are technical differences that I could try to go through, but I'd probably make a mistake. But the technical requirements for an operating lease were satisfied in the Atlanta case.
As with any scorekeeping rules, when you're operating on the margin, you're going to find situations that look fairly similar. I think the Atlanta building is in that margin. It looks like something that might have been more properly called a capital lease, but technically it is an operating lease.
I think that is part of the reason for why the questions always come back to projects like Atlanta, where you are asking me about a building downtown where the rent was cheap and the Federal Government rented it for 10 years, because we needed more space, and we didn't know if we'd need it in 20 years.
The arithmetic on such a deal would look very different than a project like Atlanta and that is more the norm in terms of operating leases.
If I may respond to something Congressman Duncan said in his opening remarks, because it is related, Federal buildings often cost more to construct than private buildings. And the reason for that is not all a question of how we do our business in terms of finance or competition.
Many Federal buildings are courthouses. We all know that courthouses are built to standards that private buildings don't have to meet. If we were making the decisions as a two-branch system of Government, we probably would design courthouses somewhat differently than we now do in our three-branch system, where there is a lot of deference to the Judicial Branch.
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We have rules about one courtroom per judge, and design features that preserve some of the aura of the courthouse as a very substantial edifice. So they are very expensive buildings. We also have rules that require the Federal Government to have additional capital put into buildings for normal office space.
It's not like going to K Street or Main Street in a town outside of Washington and comparing Fedral buildings to private buildings. We make Federal buildings different than private buildings, and they are often more expensive. Perhaps that's something we should discuss separately.
Mr. DUNCAN. Let me say this. I didn't mean this as criticism of you, but I can tell you this. You can't explain it away that easily because let's say there are rules that require us to spend more money, then we need to look at those rules because State governments have been building beautiful courthouses for half the cost of the Federal Government.
Mr. LEW. Actually, I agree with you. We should look at them separately. What I am saying is that it's not exclusively a finance issue.
Mr DUNCAN. Let me say another thing. It's been so many months since I looked at the Atlanta project that I can't recall all the facts and figures, but you are right, there were high level Republicans involved in that too. It was a bipartisan thing, but the worse part about it is not who all was involved, it's the arithmetic as you said a while ago. The arithmetic, if you look at it, was a very bad deal for the taxpayers. There are Republicans at fault and there are Democrats at fault.
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Mr. LEW. If we had our choice, we would have owned the building.
Mr. COOKSEY. We would or would not own the building?
Mr. LEW. We would have. If the choice was between owning or entering into an operating lease, owning would have been preferable. We believe that a lease purchase would not have been the best alternative, even if—in that case—it might have been cheaper. In general, it's not going to be the cheaper. You can't make a rule by the exception to the rule. If we do, we're going to regret it in terms of the long-term costs.
Mr. COOKSEY. No matter who is involved, if there are political decisions made, it's hard to justify that.
I'm a physician by training and that's where I made a honest living until a few months ago, but in this time of declining revenues, if we're going to put inordinate amounts of money into these buildings to satisfy politicians, both Republicans and Democrats and political supporters, that means there are going to be fewer dollars for a child.
Sometimes you need to look in the eyes of a child that's got a terminal illness, a dying child and think, gee, if we hadn't squandered that money on those buildings, that child's leukemia could have been detected earlier, their meningitis could have been picked up earlier and that child could have a full life.
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The tradeoff is you've got some people who have political clout that get what they want and that's the thing that bothers me about government. There are people that participate in the political system for their own benefit and they are the ones that have the clout.
Mr. LEW. I'm just suggesting that it's not a scorekeeping issue. I don't disagree with you about the fact that we made some decisions we should have made otherwise.
Mr. COOKSEY. These are basic principles. I promise you there is an army of people out there that are ready to throw out the career politicians. I'm working for them, I'm not working for the career politicians or the patronage system.
Thank you, Mr. Chairman.
Mr. KIM. All right. Any other questions?
[No response.]
Mr. KIM. I'd like to ask a few questions myself.
First of all, I'd like to welcome you.
Mr. LEW. Thank you, Mr. Chairman.
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Mr. KIM. I'd like to make a brief statement.
Whenever I go back to my district in California, people are raising more hell primarily to us. Why? Because first of all, they don't trust government. I ask them why. Always number one priority is arrogance. I don't see it but they say every government agency, just arrogance is killing them.
Second, inefficient operation. While I've been the chair of this subcommittee only a few months, I was absolutely shocked at what goes on. I'm beginning to believe them now.
Let me give you a couple of examples. I read your report last night carefully and as you can see, there are all kinds of lines on it. You're trying to target two issues according to your report, the scoring system and alternative financing.
I don't want to criticize you but you did a beautiful job explaining what the problems are and how it operates without any recommendation.
The same thing with alternative financing, why you cannot do that, why have to score up front without saying what we should do, how we change this. It's madness.
You keep talking about downsizing, but so is private industry. They go through downsizing themselves. We're talking about a $680 million shortfall. Let me tell you how you describe that on page four.
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To give the Federal Building Fund time to fund and initiate previously approved projects, you put it in a kind of strange way. I wish you'd be honest with us. We made a mistake in three areas. One is certain construction schedules were delayed; second, agencies do not need additional space, so you end up paying for that additional space.
Instead of saying we've got $1.1 billion still in there previously authorized, therefore, that represents a significant construction program and we're going to wait until the fund becomes more accumulated, I don't think I appreciate that kind of arrogant explanation. Why not just tell us, look, we made a mistake, let's solve this problem together now.
Let me tell you what bothers me. Mr. Duncan mentioned the DOT building right here in Washington, D.C., not in Georgia. It cost only $35 million to build it in 1970; it costs us $440 million to lease it. I don't know how I can explain that to people in my district. It only cost $35 million but we paid $440 million to lease it with nothing to show. We still don't own the building, we're going to give it back to them.
The building is an old building. Now you're going to lease it another 10 years, yet your report says the long-term lease such as 20 years is better, it's cheaper to own it.
Mr. LEW. Absolutely.
Mr. KIM. You said that on page four, but then case after case, I see contrary to what you said.
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Let me give another example. I'm in a different building but in Washington, D.C. occupied by the Interior Department and the builder filed bankruptcy. The bank told you they will give you an additional floor at no cost at all, so go ahead and use it without any additional cost and at the end of the 7th year, we'll give you the building free, $1, and you reject it. Why, because of the scoring system. If GSA accepts that, then you're going to score them up front.
I'm going to give you this copy and I'm going to put that in the official record. You're going to read it in the official transcript. People read this kind of stuff and wonder why we have a problem.
Having said that, let's talk about a couple of things. If an agency contacts GSA, we need 1 million square feet, then later says, I'm downsizing, I don't need the space anymore, I'm going to give you back a whole floor, then GSA sort of has to eat that. I don't understand that.
In the private sector, when you lease it, I don't care whether you need it or not, you have an obligation to pay the rent every month whether you need it or not. That is stupid in my opinion. So GSA ends up with all the loss to them, a $780 million revenue loss.
Second, why up-front scoring system when you're buying or lease-option to buy? That is also stupid in my opinion. That's why GSA cannot purchase buildings or even exercise lease option to buy option.
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You've said repeatedly that's not a very good scoring system, why don't you change it? I'd like to see your recommendation, have us join together to change this scoring system.
Alternative financing, the same thing, you said again and again that private sector construction is much more expensive.
Mr. LEW. I said expensive financing.
Mr. KIM. I understand. Therefore, it's better to borrow from our own government and build it, yet if that's the case, why don't you tell us, let's do it in that direction but yet, you've got to score them up front again. I just don't understand. That's why you end up in this kind of ridiculous situation where when the building cost $35 million, you end up paying $440 million. How can you explain to taxpayers?
These are just limited cases. You've got dozens and dozens of them like this.
Mr. LEW. Mr. Chairman, I'd like to try to respond to a number of the issues you raised. If you'll permit me to respond to them in reverse order, I think it would be easier to answer the question.
With regard to the two buildings you pointed out, the Transportation Department building and I believe the other building is in Herndon, Virginia, let me start with the Transportation Department building. That obviously is an older transaction that predated the scoring rules. It predated the Budget Enforcement Act, so it has nothing to do with the scoring rules before us.
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But I think that case proves my fundamental point: the scoring rules are not the problem, the problem is some of the policy decisions we make together as the two branches of government.
The Transportation Department is a case where we have recommended the construction of a building and Congress did not approve it. We have, as Congressman Traficant noted, an obligation to house Federal facilities. We can't just say the Department of Transportation—
Mr. KIM. Excuse me a second. You recommended to purchase the building and Congress denied it? Somebody didn't do a good job to convince Congress members.
Mr. LEW. Not to purchase the Nassif Building, the building that they're in now. You're right that is an old building. We had a recommendation to construct the building using Union Station air rights for the Transportation Department.
I apologize for entering the budget world with these answers, but we return to the problem I mentioned earlier. The Treasury Postal Appropriations Committee doesn't have the resources in its 602(b) allocation to go forward with some of these projects, or these projects are a lower priority than other things in the subcommittee and they don't get funded.
It's not the scoring rules that prevent it. It's how we allocate resources and how we make these judgments.
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Mr. KIM. Excuse me once again. The amount of a lease is going to be the same, a monthly payment will be exactly the same, except the end of the 7th year we're going to get the building back for $1.
Mr. LEW. You're switching now to the building in Virginia. In the case of the Virginia building, I can't disagree with you. Purchasing the building might make sense. The question is how that purchase stacks up against other priorities. When GSA looked at its choices using the Public Building Fund, it was not their highest priority.
It's quite possible that we should purchase the building. The points you make are not without merit. But we don't have the resources to purchase every building, and it is a question of priorities.
Going back to the question you raised about the shortfall, I personally would like to apologize for anything that's come out of our responses that may have seemed to you to be arrogant. While we can disagree, there should be nothing that is perceived as arrogant.
Mr. KIM. Excuse me. As late as last year, GSA through your agency, OMB, requested our approval for the additional 15-year lease on the same building which we originally paid $35 million to build. If we add this additional 15-year lease, we're talking about paying $1 billion and it only cost $35 million and we're going to end up paying $1 billion which about a 40 years lease with nothing to show. I wish I owned the building.
Mr. LEW. Mr. Chairman, we approved a lease prospectus only after two requests to purchase the building were denied. Our most recent proposal is that we should own the building.
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I don't disagree with you on the question of how we should handle it, but we don't get unilateral power to make these decisions.
Mr. KIM. I understand that's what everyone is saying, I don't have any power.
Mr. LEW. It's shared power.
Mr. KIM. Why don't you eliminate GSA? Why don't we have another agency that does the same thing. Why don't you just consolidate it and you do the whole thing? What do you need GSA for?
Mr. LEW. With due respect, GSA has its hands full managing a lot of transactions that I think our relatively small, but hearty, band at OMB couldn't handle.
Mr. KIM. Either you stay out of it and let GSA do it or eliminate GSA. I don't see why you do the same thing. When GSA makes a recommendation, you overrule it and back and forth and end up with these kind of ridiculous kinds of decisions.
Mr. LEW. Would you like me to respond to the questions about the shortfall and the options? I'd be happy to if you'd like me to.
Mr. KIM. I'm going to have to go vote right now.
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Mr. LEW. I'd be happy to respond for the record.
Mr. KIM. We have a general vote.
I'd like to thank you very much for coming this morning and thank you very much for your excellent presentation.
Mr. LEW. You're welcome.
Mr. KIM. The subcommittee is adjourned.
[Whereupon, at 10:08 a.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]
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