6

Budgeting: Impactful Resource Decision Making

INTRODUCTION

Previous chapters introduced the use of a facility asset management system to improve planning by quantifying facility conditions, consistent with the value the facilities add to achieving the agency mission, as an element of portfolio management, life-cycle management, and risk management. This chapter provides a different yet complementary perspective, highlighting financial challenges faced by facility managers and their leadership as they create and implement a strategy for renewal of federal facilities.

One of the toughest challenges in managing a portfolio of real property assets is allocating the funding necessary to maintain, repair, renew, and dispose of facilities on a schedule that avoids system failure; renews facilities before they become obsolete; and takes advantage of newer, more efficient and effective methods and technologies. The operations, maintenance, repair, renewal, and disposal phases of an individual facility occur episodically and often require sizable amounts of funding compared with annual operating and maintenance costs. These large, infrequent investments create “spikes” in spending when compared with annually recurring expenses and are harder to budget for in relatively level or incremental budgets. To fund these investments, agencies may need to accumulate and hold reserve funds until they need the investment. Federal agencies often view funding for facility repair, renewal, and disposal as an expense that they can defer with little or no consequences, and thus treat it as a lower priority than funding the operations of a business or program.

This presents a specific and very important use case for federal facility renewal strategies: that is, how to develop budgeting strategies that can coordinate

major, large investment spikes with ongoing maintenance and repair, while also incentivizing agencies to opportunistically invest in newer, more efficient and effective methods and technologies. This introduces the need for an investment mindset when it comes to enterprise-level budgetary decisions. This chapter establishes a basis and understanding for how to view federal facility renewal strategies through this lens in a way directly applicable to current and evolving policy.

CAPITAL BUDGETS VERSUS OPERATING BUDGETS

One specific hurdle that a federal facility renewal strategy must overcome is reconciling operating budgets with capital budgets. Expenses and investments differ in that expenses are costs that are immediate and have relatively short-term benefits. Investments provide long-term benefits or returns that often are greater than the initial cost of the investment.

To distinguish expenses from investments, businesses and many countries, states, and local governments have both an operating budget and a capital budget. The operating budget includes the expenses of operating a business or a program in the near term, and matches expenses with expected revenues to ensure that the business or program can pay its bills and generate the expected income on time. The capital budget has a longer-term focus and calculates the investments necessary to the facility portfolio, as well as equipment to replace the current inventory of assets when they reach the end of their usable lives, and increase (or reduce) the inventory of assets needed to support or grow the business. In the broadest sense, this is the definition of renewal, as used in this report.

To bridge this divide, businesses and government often finance investments by borrowing. In a capital budget, investments compete based on the long-term benefits they produce. Once a capital investment is approved, the operating budget typically funds the annual cost of the repayment of principal and debt service and maintains and repairs the investment.

The amount of debt service relative to the operating budget constrains capital budgets. Rating agencies look at the portion of the operating budget associated with the debt service payments to determine an entity’s creditworthiness. The lower the debt service as a percentage of the operating budget, the higher the creditworthiness and credit rating. The higher the credit rating, the lower the risk of default on the cost of borrowing.

The federal budget process is a cash-based budget and does not differentiate operating expenses from capital or investment costs. Under a cash-based budget, federal agencies budget all spending up front when they make commitments, regardless of when the agency will receive the benefits. This ensures that agencies consolidate all borrowing necessary to support government operations through the Department of the Treasury and guarantee debt repayment. While the federal government has a credit rating, its borrowing cost is the lowest of virtually any

entity in the United States because of the government’s ability to pay off debt by either printing money or using its tax authority. As a result, the federal government does not have the constraint on borrowing that the private sector, states, and local governments have.

FEDERAL CAPITAL INVESTMENT

In the absence of a real constraint on borrowing, Congress and the President have used the federal budget process to attempt to control overall spending. Congress first enacted legislation in 1939 to establish debt limits. These limits do not authorize new spending, but finance existing legal obligations previously authorized by Congress and the President. Failing to increase these limits would cause the federal government to default on its legal obligations, which would have a catastrophic impact on the economy. As a result, Congress has always voted to raise the debt limit—more than 78 times since 1960.

Since the 1980s, Congress and the President, while raising the debt limit, have attempted to constrain new spending. Congress and the President have agreed to budget rules that limit or cap so-called discretionary spending. They have also limited increases in so-called mandatory spending by requiring that any new spending be paid for, or offset, with new revenues or other spending reductions, also known as “PAYGO” (pay as you go).

Despite these constraints, the federal budget continues to include significant investments intended to provide long-term benefits to the economy and the nation. Annually, the federal budget allocates more than $600 billion, or approximately 13 percent of the budget, to long-term investments. Roughly half of these investments are for major physical capital and half for research and development, education, and training. Of the major physical investments, more than 70 percent is for direct federal investment, and the remaining 30 percent is for grants to states and local governments. Of the direct federal investment, approximately $40 billion per year is invested by the government in construction and rehabilitation of the federal government’s assets. Much of this is allocated to programs that manage large portfolios of assets (see Chapter 1).

Federal Budget Formulation Process Reforms

Despite volumes of guidance to the agencies on asset planning and management as described in Chapter 2, agencies still find it difficult to maintain accurate asset inventories or effective asset management systems. Without asset management systems as described in Chapter 3, agencies will continue to find it difficult to project the funding necessary to renew facility portfolios or quantify the benefits that will accrue from the investment (see Chapter 4).

In simple terms, a budget is an estimate of revenues and expenses over a specified future period, as defined in the balance sheet analysis principle stated

in Chapter 3. Budgeting consists of allocating resources to produce expected outcomes while balancing competing demands for limited funds. The goal of budgeting is to optimize the allocation of constrained resources to maximize the return while ensuring that it can provide required functions, which is facilitated through applying the operational readiness and performance–budget integration principles also found in Chapter 3.

Notwithstanding these investments, federal agencies remain challenged by the need to balance near-term budgetary funding constraints with the long-term capital investment requirements in the real property portfolio and adequately manage the risk this creates for the operating program budget. A successful budget allocates just enough resources every year to achieve all high-priority outcomes, but not more resources than needed. Conversely, the budget needs to look beyond the budget year to forecast future needs to ensure that it can meet them within likely future budget targets. Budgets need to anticipate the cost of replacing current assets and the funding investments needed to provide for future growth and anticipated changes. This trade-off between addressing current versus longer-term needs is challenging because it is natural to maximize immediate returns and defer future needs.

Facilities (real property) have long-term benefits but include long-term costs. Facilities have considerable up-front costs for constructing or acquiring new facilities and relatively low costs for operating and maintaining them each year thereafter. Periodically over the life of the asset, however, there will be additional costs to repair and replace facility components. The determination involves risk management as discussed in Chapter 5—failing to replace components when they reach the end of their service life will cost more over time than if completed when first required. A successful budget will recognize and anticipate these future costs and limit the facility portfolio’s size to that which can be maintained, repaired, and replaced within budget limits. The budget may aggregate or reserve funding for repair and replacement in order to have the funds available when they are needed.

Budgeting for personnel includes not only the cost of annual salaries and benefits but also contributions to cover future costs such as retirement. For example, Section 32.3 of the Office of Management and Budget (OMB) Circular A-11 requires agencies to budget an additional 14 to 39 percent of an employee’s salary, depending on the job classification and employing agency, for future retirement costs. Agencies do not have the discretion to not pay or defer retirement contributions, and neither does OMB or Congress.

Budgeting for facilities should not be different. Budgeting for facilities involves not only the initial cost of acquisition but also the operating and maintenance costs, and should include contributions to the future costs of repair and replacement. In budgeting for both people and facilities, failure to contribute to future costs today leaves an unfunded liability that may cost more in the future than the cost of reserving funds today. Agency management, agency budget staff,

OMB, congressional members, and staff all share responsibility for ensuring that there are adequate funds in the budget for addressing repair and replacement of facilities, or as defined in this report, for creating and implementing a strategy for renewal of federal facilities.

Agency Asset Management Systems and Data

Knowing the amount of resources to budget annually for facilities requires an asset management system that recognizes the entire portfolio of assets and plans the future cost of renewal to include repairing, replacing, and disposing of each asset. As discussed in Chapter 3, reliable principles and a robust asset management system will anticipate the future growth or decline of a program and schedule the needed investments to fit within a multiyear plan.

The data and analysis from the asset management system are a critical part of building the budget. Ideally, the system will forecast future funding needs to support the inventory and will capture the unfunded backlog of repair, replacement, and disposal costs. While this backlog of unfunded repair and replacement costs may be significant, documenting these costs and developing a plan to either invest in or dispose of underutilized assets is critical. If agencies leave these requirements undocumented, they will never be a priority to receive funding, as detailed in Chapter 4. Regardless of the funding level requested in the budget submission to OMB, the budget justification should include an exhibit that shows (1) the full cost of the backlog of unfunded capital projects, (2) the request, and (3) a future 5-year budget as part of a longer planning horizon to sustainably renew the agency’s federal facility portfolio, inclusive of planned facility asset dispositions. Furthermore, agencies should address the strategy for reconciling these needs and mitigate risks through their real property capital plan as detailed in Recommendation 2.

OMB Budget Formulation Guidance

As discussed in Chapter 2, OMB has issued multiple guidance documents over the years that encourage agencies to improve asset management practices. OMB Circular A-11 is the primary guidance to agencies on how to formulate and execute budgets. Appendix J of the circular addresses “Principles of Budgeting for Asset Acquisitions,” and Appendix K provides selected OMB “Guidance and Other References Regarding Capital Assets.” Additionally Circular A-11’s Supplement—Capital Programming Guide recommends the following:

Regarding the budgeting process, the guidance recommends the following:

As noted in earlier chapters of this report, OMB has recently issued memorandums M-20-03 and M-20-10 that provide additional guidance to agencies on real property management. M-20-03 offers detailed guidance for agencies to implement the Capital Programming Guide. M-20-10 is an “Addendum to the National Strategy for the Efficient Use of Real Property.” The memorandum outlines eight actions that agencies should take to improve real property management. Support for these memorandums is the focus of this report’s second and third recommendations. Regarding budgeting, Action 4 of M-20-10 recommends improving the transparency of agency-level budget formulation and execution to allow for improved decision making by linking budget inputs to outputs and outcomes, and by integrating all phases of the budget process. This objective is highlighted in the asset management system principle performance–budget integration, detailed in Chapter 3 and Appendix F.

In many cases, agency management ignores or trades the need for capital investment in the real property portfolio for other operating expenses, and agencies do not request funding or provide any information on the unfunded capital needs to OMB or Congress. To strengthen transparency, OMB could require agencies to submit their capital asset plans—referred to in this report as real property capital plans, as it pertains to managing the agency’s real property portfolio—and explain why they do not include needed funding in the agency’s request for the budget year. This objective is highlighted in the asset management system principle of balance sheet analysis. Application of this principle would allow OMB to evaluate the rationale for not requesting needed funds. This oversight is not now occurring unless the agency requests funding.

BUDGETARY STRUCTURES FOR INCREASING CAPITAL INVESTMENT AND TRANSPARENCY

Within the structure of the federal budget, the committee identifies several ways to help allocate funding to capital investment and protect it from being traded for operating expenses. These include (1) aggregating financing for capital assets, (2) charging users of facilities to pay for renewal costs, and (3) using the Federal Buildings Fund.

Aggregation of Financing for Capital Assets

Capital investments occur episodically, as opposed to every year, and can create spikes in spending relative to the budget levels of annually recurring operating costs. These spikes in spending, also referred to as “lumps,” are a characteristic of capital investments that make them difficult to accommodate in budgets that are relatively constant. The Capital Programming Guide addresses “lumpiness” in Appendix G, titled “Principles of Budgeting for Capital Asset Acquisitions—Principles of Financing, Principle 4,” as follows:

Many agencies have separate construction or acquisition accounts that include the costs of acquisition and new construction. These accounts can also include funding for repairs and alterations. The larger the funds, the easier it is to absorb large, expensive projects. Aggregating all capital investments across an agency or department makes it easier to fund various major projects and avoid one-time spikes in funding. The Department of Defense (DoD) is an example where aggregating capital projects across the Army, Navy, and Air Force into the Military Construction Program allow DoD to fund large projects within overall, relatively stable annual funding levels.

Although this Military Construction Program, and similar types of funding used by non-DoD agencies, does provide a strategy for addressing the “lumpiness” problem highlighted earlier, it does not address agency needs satisfactorily to renew their facility portfolios systematically. This is because these capital funding sources are decoupled from other funding programs that support facility operations, maintenance, repair, and disposition. Applying International Organization for Standardization (ISO) 55000 standards in support of OMB Circular A-11 and A-123 policy and guidance would provide needed assurances that capital investment strategies are harmonized with agency facility operating strategies, as documented in agency real property capital plans submitted in justification of agency budgets. Furthermore, application of ISO 55000 would require agencies to document not only budget justification, but also risk mitigation strategies and plans for unfunded requirements.

Charging the Users of Facilities to Pay for the Cost of Renewing Real Property

Establishing processes that charge the users of real property the cost of operations, repair, and replacement is another approach to ensuring that agencies include these costs in the budget. Revolving or working capital funds allow agencies to collect and accumulate funds to pay the cost to repair and replace facilities as they age. Accumulating these payments in a fund allows property owners and managers to charge users the full facilities cost and allocate funds for major capital projects, reducing spikes in spending year to year. Facility users should include payments to the fund in their base budget and treat them like any current rents or other operating costs.

Federal Buildings Fund

One of the best examples of a user-pays model is the General Services Administration’s (GSA’s) Federal Buildings Fund (FBF). GSA, on behalf of the non-defense federal agencies, manages more than 9,000 buildings, encompassing 370 million rentable square feet of space that houses more than 1 million federal government employees. More than 60 percent of this space is leased from the private sector, and the remaining 40 percent is federally owned.

GSA’s FBF is a quasi-revolving fund that was created in 1972 to help GSA manage its real property inventory. Federal agency tenants pay GSA rent to occupy space, and the rent is used to pay for (1) the lease costs of space in private buildings; (2) operations, maintenance, repairs, and alterations of government-owned space; and (3) the acquisition and construction of new space. GSA charges agency tenants in private, leased space the actual cost of the lease plus an administrative fee. For agency tenants in government-owned space, GSA charges rent based on the commercial equivalent of comparable space and services.

In a true revolving fund, GSA would control both the collection and the spending of the revenues in the fund. The FBF, however, is a quasi-revolving fund; while GSA collects the revenues from the rents paid by the tenant agencies, Congress controls spending of the revenues. Specifically, the 12 congressional appropriations subcommittees appropriate rent payments to the tenant agencies. The tenant agencies transfer rent to the Financial Services and General Government (FSGG) appropriations subcommittee. The FSGG subcommittee appropriates the rent revenue to GSA. When FSGG appropriates all the rent receipts, the receipts offset the spending and the committee is scored a net spending of zero.

From 1975 to 2011, Congress regularly appropriated all the rents collected in the FBF for space and services. In many years, Congress supplemented the FBF with additional appropriations primarily to fund new construction projects. Since 2011, except in 2016, Congress appropriated an average of $1 billion per year less than revenue collected, which is $9 billion less than the FBF collected, as of

this report’s writing. Not appropriating this $9 billion to GSA has had a damaging impact on the government’s owned inventory of buildings and has deprived the tenant agencies of paid-for services. GSA has had to delay needed repairs and renovations and deny construction of new facilities.

ACTIONS TO ADDRESS THE PROBLEM

The simplest approach to resolving the funding shortfall is for the Appropriations Committee to return to the pre-2011 practice of providing the FSGG subcommittee with a funding allocation—specifically, a 302(b) allocation—that allows the FBF to spend all the proceeds from rent payments for space and services. To help accomplish this, GSA and its tenants could educate members of Congress on investing in maintaining the federal building inventory and the increased costs of deferring maintenance. Strong congressional-member support for fully funding the FBF would go a long way in convincing appropriators to allow GSA to spend all the proceeds collected in the fund.

Alternatively, changes in legislation or how the Budget Committees, the Congressional Budget Office (CBO), and OMB score appropriations bills could be made to direct the appropriators to spend the proceeds in the FBF. Congress could enact legislation in an authorization bill, such as a budget agreement, to require the appropriators to spend all rent collections each year for FBF purposes authorized in law. Or, the 12 individual appropriations subcommittees could include language in their respective appropriations bills requiring the FSGG subcommittee to appropriate all rent payments paid by those subcommittees for authorized space and services or return the difference to the agencies. Another approach would be for the Budget Committees, CBO, and OMB to adopt a budget enforcement rule that would not give the appropriations committee the offsetting credit for any rent collected by GSA that is not appropriated to be spent for the authorized purposes of providing space and related services. These are all changes that could be made to return the FBF to its original purpose of ensuring that users pay for the cost of maintaining, repairing, and replacing the portfolio of real property assets.

CAPITAL ACQUISITION FUNDS

Another approach to budgeting for the costs of new facilities or funding major renovation is creating government-wide capital acquisition fund(s). These funds would provide borrowing authority to agencies that allow them to fund the up-front cost of a major project and repay the borrowing over years, avoiding the funding spike and flattening out the cost of the asset. An example of such a fund is the Federal Capital Revolving Fund (FCRF), which OMB has proposed in recent iterations of the President’s Budget.

GSA is not alone in needing increased resources to address new construction and repair needs. Other landholding agencies, such as the Department of Veterans Affairs, Department of the Interior, Department of Homeland Security, and Department of Energy, have significant backlogs of deferred maintenance and inadequate budgetary resources to address them. For the past several budgets, OMB has included a proposal to address the funding shortage for large-cost construction and repair projects. OMB is proposing a new revolving fund that would make $10 billion available to non-defense agencies to borrow from to finance large-cost (more than $250 million) construction projects and repay the borrowing over 15 years. This would spread the cost and lessen the burden of having to fund the full cost of the projects in the first year. As agencies make repayments, those dollars would be available for borrowing for future projects.

The FCRF would be established on the mandatory side of the budget, and agencies could borrow from the fund by seeking discretionary appropriations to pay the first year of the repayment. If funded, the agencies would then be required to pay back the fund over 15 years. For example, if GSA wants to borrow $1.5 billion to fund the construction of a new headquarters for an agency, it could request $100 million to pay for the first-year repayment. If Congress appropriates $100 million, GSA could borrow $1.5 billion and repay it over 15 years.

PRIVATIZATION

Privatization and public–private partnerships (PPPs) (which are discussed in the next section) are based on the doctrine that relatively few public functions outside the realm of national security are “inherently governmental,” and that nearly all government-owned-and-operated facilities should be candidates for privatization or PPPs, under generally accepted principles of fairness and competitiveness. The burden of proof under this doctrine rests on each agency-occupier to justify why it should not privatize or partner with existing business functions and associated facilities that meet this basic private-market test to support the public interest. As covered in Chapter 2, this was the primary impetus for the creation of ISO 55000 standards. Specifically, ISO 55000 standards provide a framework for protecting the public’s perpetual interests in built infrastructure while leveraging private industry efficiency and effectiveness in managing vast asset portfolios. Privatization is the process of transferring a public- or government-owned asset or service to private ownership and operations. In privatization, the private sector or other governmental entity can perform similar tasks in a competitive market at a lower cost. The key aspect of any privatization is that the federal government transfers the risks of ownership to the private sector, and there are no financial backstops or underwriting by the federal government.

A recent example of privatizing a federal asset is a proposal included in the 2021 President’s Budget that would authorize the federal government to sell the Washington Aqueduct (USACE 2015). The Aqueduct is the wholesale water supply system for the District of Columbia; Arlington County, Virginia; City of Falls Church, Virginia; and a portion of Fairfax County, Virginia. There is no inherent federal responsibility to distribute drinking water in a community. Therefore, there is no need for the U.S. Army Corps of Engineers to operate and maintain this system. Privatization differs from PPPs in the degree of influence retained by the former owners on the assets once conveyed. The next section discusses these partnerships.

PUBLIC–PRIVATE PARTNERSHIPS

A PPP—a model for a public infrastructure project, such as a new telecommunications system, airport, or power plant—offers governments another approach to asset management that considers all key stakeholder needs, such as a public desiring that the federal government make efficient and effective use of its real property assets (Hanna 2022). PPPs are collaborations between private enterprises and public agencies that fuse private-sector resources and capabilities with public-sector purposes and authorities to plan, finance, build, deliver, and operate large, complex community facilities, projects, and services.

PPPs have been used by states, municipalities, and national governments to finance and manage public infrastructure and services. The public partner is

represented by the government at a local, state, and/or national level. The private partner can be a privately owned business, public corporation, or consortium of businesses with a specific area of expertise. PPP is a broad term that can be applied to anything from a simple, short-term management contract (with or without investment requirements) to a long-term contract that includes funding, planning, building, operation, maintenance, and divestiture (Hanna 2022).

PPP arrangements are useful for large projects that require highly skilled workers and a significant cash outlay to get started. They are also useful in countries that require the state to legally own any infrastructure that serves the public interest (Hanna 2022). They are defined by (1) long time horizons, from 30 years to a century or more; (2) comprehensive scope, encouraging cross-functional strategies and silo-busting structures; (3) large scales, to justify the heavy investments required for facilities, equipment, and staff, and to enlist interest from established, best-in-class market and industry leaders; (4) qualifications-based selection, based on the prospective partner’s vision and capabilities, not the government’s requirements and specifications; and (5) outcome-driven oversight, based on the partnership’s actual accomplishments and results, not on personalities, politics, and procedural savvy.

Different models of PPP funding are characterized by which partner is responsible for owning and maintaining assets at different stages of the project. Examples of PPP models include the following, as articulated in Public-Private Partnership (PPP):

• Design-build (DB). The private-sector partner designs and builds the infrastructure to meet the public-sector partner’s specifications, often for a fixed price. The private-sector partner assumes all risk.
• Operation and maintenance contract (O&M). The private-sector partner, under contract, operates a publicly owned asset for a specific period of time. The public partner retains ownership of the assets.
• Design-build-finance-operate (DBFO). The private-sector partner designs, finances, and constructs a new infrastructure component and operates/maintains it under a long-term lease. The private-sector partner transfers the infrastructure component to the public-sector partner when the lease is up.
• Build-own-operate (BOO). The private-sector partner finances, builds, owns, and operates the infrastructure component in perpetuity. The public-sector partner’s constraints are stated in the original agreement and through ongoing regulatory authority.
• Build-own-operate-transfer (BOOT). The private-sector partner is granted authorization to finance, design, build, and operate an infrastructure component (and to charge user fees) for a specific period of time, after which ownership is transferred back to the public-sector partner.

• Buy-build-operate (BBO). This publicly owned asset is legally transferred to a private-sector partner for a designated period of time.
• Build-lease-operate-transfer (BLOT). The private-sector partner designs, finances, and builds a facility on leased public land. The private-sector partner operates the facility for the duration of the land lease. When the lease expires, assets are transferred to the public-sector partner.
• Operation license. The private-sector partner is granted a license or other expression of legal permission to operate a public service, usually for a specified term. It is noted that this model is often used in information technology projects.
• Finance only. The private-sector partner, usually a financial services company, funds the infrastructure component and charges the public-sector partner interest for use of the funds (Hanna 2022).

These models are tools that can be implemented through an agency facility renewal strategy, although it can be challenging for federal agencies to understand the various models, compare their advantages and disadvantages, and determine how to reflect them in a budget. The Antideficiency Act of 1982 requires agencies to have enough budgetary resources to cover any commitments in the year in which agencies make the commitment. Determining how much to budget for a PPP ultimately depends on the level of commitment the agency is making in the transaction.

Circular A-11, Appendix B—Budgetary Treatment of Lease-Purchases and Leases of Capital Assets differentiates operating leases (the temporary use of an asset that is readily available in the private sector) from capital leases, lease-purchases, and construction or acquisitions. Operating leases require the agency to budget up front the first year’s cost of a lease plus the potential cost to terminate the lease early. Capital leases, lease-purchases, and acquisitions commit the government to acquiring the asset and therefore require the full cost of the asset to be available at the outset of the lease.

If the PPP involves the financing and acquisition/construction of an asset that is ultimately transferred to the government, the PPP is a government entity, and OMB will score the full cost of the government’s commitment as an acquisition. If a PPP (with the federal government as a partner) includes a leaseback to the government of space, the leaseback would be considered a capital lease. A capital lease would require the full cost of the lease to be budgeted up front.

Five of the models listed above (DB, DBFO, BOOT, BLOT, and Finance Only) are acquisitions as defined in the circular and would require the agency to budget for all costs of the transaction up front. The asset owner’s interests—in this case, the federal government—are strengthened using a disciplined asset management system, as made clear in the Chapter 2 example discussing the UK government’s railroad privatization. The federal government currently uses operating and maintenance contracts and operating licenses and, depending on their

terms, may limit the commitment by the government and not require full, up-front funding. It is unclear what the government’s commitments would be under the BOO and BBO structures; therefore, it is not possible to determine the amount of funds needed at the contract’s outset without further clarification. These structures most closely align with privatizing a government asset or service, which transfers the risk and cost to the private sector and does not require up-front funding.

An example of the use of PPPs in the federal government is the National Park Service and the U.S. Forest Service providing lodgings and visitor services in the national parks and forests. For more than 100 years, these national services have partnered with private firms to construct, operate, and maintain recreation facilities for public use. The key features of these PPPs include (1) the presence of a nonfederal revenue stream to pay for the costs associated with providing visitor services, (2) agreement with the federal government over the expenses and investments required to provide the services, (3) an expected internal return on investment, and (4) sufficient time to amortize the investment over the contract term. In addition, the military departments have divested many housing and utility-system assets to private ownership with success, albeit with lessons learned in the process.

Federal agencies can consider PPPs as an approach to operating and managing services to the public or providing grant funds to leverage other public and private resources. Still, agencies need to be careful to limit the federal government’s commitment to only those resources available within the budget needed to cover the commitment.

DISPOSAL

When developing a real property capital plan, agencies need to right-size their asset portfolio by identifying assets that are unnecessary, are underutilized, or cannot be adequately maintained. When this is determined, agencies need to make plans to dispose of them. Agencies must proactively seek to renew their facility inventories in order to avoid asset portfolios that are too large or antiquated and cannot be properly maintained, repaired, or replaced with available resources. Recognizing and accounting for the financial commitment necessary to manage a portfolio is a function of federal facility renewal strategies.

The Federal Property and Administrative Services Act of 1949 (Property Act), as amended, governs the process of disposing of most federal real property unless an agency has independent disposal authority. Although DoD and the

U.S. Postal Service are 2 of the largest landholding agencies with independent disposal authorities, 4 other departments, 4 major independent agencies, and 11 departmental components have similar authorities. The Property Act prescribes a process for disposing of federal real property that begins when an agency determines it no longer needs a property. The agency will declare the property excess to its needs and turn it over to GSA for disposal. GSA will then offer the property to other federal agencies. If another federal agency has a need for the property, GSA transfers the property to that agency. The Property Act requires agencies acquiring excess property to pay the agency disposing of the property full fair market value. If funds are not available or there are extenuating circumstances, OMB may waive reimbursement.

If no agency indicates it needs the property, GSA declares the property government surplus and may sell the property to a state or local government or qualified nonprofit for the fair market value. Alternatively, GSA may transfer the property to the state or local government or nonprofit entity for up to a 100 percent discount, provided they use it for one or more legally enumerated public purposes. If the property is neither sold to a government or nonprofit nor transferred, it is sold to the public.

While selected agencies have the authority to manage and maintain real property, technically, they do not own the property. Generally speaking, all federal real property is “titled” to the U.S. government. Landholding agencies view the authority to possess real property as the equivalent of ownership and have cited the lack of incentives to dispose of excess real property. Agencies note a resource shortage for disposing of unneeded properties and a lack of reimbursement for the property’s value once disposed. While agencies may be reimbursed if a property is transferred to another agency, if the property is declared surplus and sold the agency will not be reimbursed for its value. Except for agencies with delegated authority to retain disposal proceeds, those proceeds are deposited in the Treasury, and are not available to be spent, unless otherwise provided for by law.

Federal Assets Sale and Transfer Act of 2016

Recently, Congress enacted the Federal Assets Sale and Transfer Act of 2016 (FASTA), which authorizes an expedited process for identifying and disposing of non-defense¹ federal real property. FASTA authorized the creation of an oversight board, the Public Buildings Reform Board (Board). The Board identifies unneeded and underutilized properties that should be disposed of and reports these properties to OMB and Congress. Once OMB approves, agencies are required to declare the properties as excess and transfer them to GSA. The law

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¹ DoD uses the Base Realignment and Closure processes to divest excess real property capacity, when requested by the administration and authorized by Congress. See DENIX, “Base Realignment and Closure,” www.denix.osd.mil/brac/overview.

waives various authorities for GSA to transfer these properties to state and local governments and qualified nonprofits and directs GSA to sell these properties to the public. FASTA authorizes the Board to utilize proceeds from the sale of these properties to pay for costs associated with preparing the property for disposal and selling it. Moving forward, FASTA will also allow agencies to keep proceeds from future sales of surplus property.

LEASING

For activities requiring physical space currently located on underutilized or inadequately maintained properties, agency facility renewal strategies should consider leasing as an alternative to ownership. While leasing is not a solution for housing many special-purpose activities, it offers an alternative that will ensure that agencies can provide a well-maintained, quality space. Since leasing includes all the costs of ownership, it can appear to be costlier than government ownership when compared with only the cost of acquisition and operations. When agencies need an asset in a specific location for a long-term period (30 years or more), government ownership is likely cheaper than leasing, but only if the government repairs and replaces the asset before it fails. However, the cost of failing to maintain the asset may cost more over time than leasing. Methodology supporting this determination is detailed in OMB Circular A-94 (OMB 1992).

Agencies should use leasing to house activities in spaces and locations where there is a competitive, private-sector market for the size and type of space being leased. As mentioned, OMB Circular A-11, Appendix B—Budgetary Treatment of Lease-Purchases and Leases of Capital Assets differentiates operating leases (the temporary use of an asset that is readily available in the private sector) from capital leases, lease-purchases, and construction or acquisitions. OMB Circular A-11 defines an operating lease as follows:

Agencies should not attempt to lease space they cannot acquire through an operating lease. Unless there is a private-sector market for an asset, the private sector will build-to-suit almost any space needed. However, the lessor will likely have to charge the government its full cost of ownership in the lease, which may cost more than the government’s cost to build and own the asset itself.

Leasing affords the government flexibility to reduce, move, or change the location of an activity, flexibility that is not available in government-owned space. Lease costs for operating leases are spread throughout the lease and are easier to include in the budget than the up-front costs of significant capital investments. Many landholding agencies resist the use of leases because they may not perfectly meet the agencies’ needs, or they may incur additional costs, such as transportation. With technology and the increased use of teleworking, however, location may not be as critical as it used to be. While leasing is not for every need, it offers an alternative to ownership when the budgetary resources are not enough to provide for the needed repair, replacement, and ultimate disposal of an owned asset.

The committee observed the challenges of prioritizing facility needs within the larger organization’s budget needs. As the annual budget is finalized, agency senior leaders have a list of requirements, some of which will fall below the “cut line.” One chief financial officer stated to the committee:

CONCLUSION

This chapter identified funding strategies that could be employed by federal agencies through facility renewal strategies for improving the amount of funding received for facility renewal. The next chapter will identify communication strategies necessary to ensure that these funding opportunities are realized.

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² Jeffrey S. DeWitt, chief financial officer, District of Columbia Government, meeting with the committee on November 5, 2019.