The federal government has a real problem.
The government’s inventory of “real property” (buildings, structures and land) is as large and diverse as the federal mission. However, the budgetary rules that govern investment in these assets are a blunt instrument that does serious collateral damage. Reforming these rules would allow the government to shrink its real estate footprint, modernize its legacy infrastructure for the 21st century and save billions of dollars.
The federal government owns or leases about 360,000 buildings and 3.3 billion square feet of space — six times more than all the commercial office space in Manhattan. The federal real property inventory includes as well some 485,000 “structures” — everything from national monuments to dams and levees.
Like our nation’s crumbling roads and bridges, the federal government’s buildings and structures suffer from age and neglect. The Government Accountability Office includes federal real property management on its “high risk” list because of the deteriorating condition of many federally owned facilities and the government’s resulting overreliance on costly leased space.
A major culprit in this crisis is the federal government’s budgetary treatment (“scoring”) of leases and public-private ventures, as laid out in a technical document that is unknown outside of federal real estate circles. The Office of Management and Budget issued Appendix B of Circular A-11 in 1991 in response to a perfect storm of conditions in the 1980s that led federal agencies to abuse their leasing authority; most notable, the Defense Department used leases to acquire noncombat ships and aircraft. A-11 sets criteria for distinguishing a capital lease, for which the net present value of the total cost of the lease must be recorded (scored) in an agency’s budget in the year the lease is entered into, from an operating lease, which can be scored on a year-by-year basis.
Circular A-11 has had a dramatic impact on federal real property management. First, it ended the long-standing use of “lease-purchases” by the General Services Administration. Under A-11, any lease that results in government ownership is treated as a capital lease, making it unaffordable (because the cost must be booked all at once). Second, OMB and the Congressional Budget Office have gradually extended the reach of A-11 to preclude most public-private ventures aimed at financing federal acquisition of capital assets.
OMB and CBO defend the A-11 scoring rules on two grounds. One is cost: lease-purchases and public-private ventures are forms of third-party financing, and they are invariably more expensive for the federal government because even the best private interest rates exceed the rate at which the Treasury can borrow. The other justification for A-11 is transparency: Like an installment plan, lease-purchases and public-private ventures “hide” the government’s real long-term cost commitment.
The scorekeepers’ cost argument is narrowly correct, but their premise that federal agencies could cover the large, single-year funding spikes that such purchases require has proved false over a 23-year period of unrelenting budget pressure. The result has been a textbook example of unintended consequences: Lacking the budgetary resources to meet genuine facility requirements, federal agencies have resorted to practices more costly — and no more transparent — than the ones A-11 was designed to combat.
One such practice is reliance on short-term operating leases to meet long-term federal facility requirements. Since 1990, GSA’s inventory of federally owned space has increased only slightly, while its leased inventory has doubled in size (measured by the number of square feet). Leasing is generally more expensive than ownership, and short-term leases are more expensive than long-term leases. GSA Administrator Dan Tangherlini recently told Congress that it costs the federal government twice as much to lease as to buy or build a facility.
Consider the new (2008) Transportation Department headquarters, which GSA sited on the Anacostia River in Southeast D.C. in part to spur development there. GSA leases the 1.35 million square foot building for $45 million a year under a 15-year operating lease (a 20-year lease would have been scored as a capital lease). Under A-11, GSA was not allowed to negotiate a lease that would have given the government ownership of the building at the end of, say, 25 years or that would have included a major discount on the building’s end-of-lease market price (another arrangement that is common in the private sector). Thus, at the end of 15 years, having spent some $675 million for a building that cost far less than that (around $400 million) to build and having no equity to show for it, GSA will have to extend the operating lease or re-compete the requirement. Even if the owner is willing to sell GSA the building at that point, the price will be far higher than the equivalent 2008 price because of all the federally anchored development that has occurred around it.
In addition, A-11 has led agencies to postpone capital investment in their [owned] facilities. Although postponement has reduced federal expenditures and deficits in the short run, deferred investment is a bad strategy, as any homeowner knows: Not only is it more expensive to operate a poorly maintained building, but the cost to fix the problems multiplies over time.
With agencies desperate to address their facility needs, a cottage industry has emerged in search of ways to get around the A-11 rules. Enough with that! It is time for policymakers and scorekeepers to debate first principles. The stakes are high.
Dorothy Robyn headed the Public Buildings Service in the General Services Administration from September 2012 to March 2014. This commentary is excerpted from the Brookings Institution’s Fixgov blog.