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Old buildings, dwindling rents: GSA faces financial crisis

Nov. 30, 2009 - 06:00AM   |  
By TIM KAUFFMAN   |   Comments
Bob Peck, commissioner of GSA's Public Buildings Service, says the fund for GSA repairs "does not have the same cushion of dollars ... that it used to."
Bob Peck, commissioner of GSA's Public Buildings Service, says the fund for GSA repairs "does not have the same cushion of dollars ... that it used to." (SHEILA VEMMER / STAFF)

The government's landlord will be unable to pay for major building repairs or upgrades within six years.

By 2016, the Government Services Administration will have only enough money coming into the Federal Buildings Fund to cover lease payments, utilities and custodial services, and to make minor repairs such as changing out windows or replacing broken elevators.

"The fund as a whole does not have the same cushion of dollars to spend on capital repairs that it used to," said Bob Peck, commissioner of GSA's Public Buildings Service.

And that will result in a huge rise in deteriorating federal buildings unless action is taken, said Delegate Eleanor Holmes Norton, D-D.C., who chairs a House subcommittee that oversees federal buildings.

The basic problem is that GSA does not collect enough rent from agencies to cover costly repairs for an ever-aging inventory of more than 1,500 federally owned buildings. Compounding the problem, GSA leases more building space than it owns.

When GSA leases space, nearly all of the rent it collects from agencies is paid to the building owners. That leaves GSA with nothing extra to deposit into the building fund to pay for major capital investments in its inventory of federally owned buildings. The result is less money for repairs for government-owned facilities.

Insufficient rent

The rent GSA charges agencies for federally owned buildings is intended to mirror private-sector rates, although GSA does not adjust rents as often as the private sector and does not charge as much as some private-sector landowners charge because of the poor condition of many federal buildings. Peck calls it "the vicious circle" that prevents GSA from generating additional income for making major repairs.

The sluggish economy also works against GSA. Costs for utilities, janitorial services and other expenses that make up GSA's rent payments aren't rising as much as they did when the economy was riding high a few years ago, meaning that rent payments won't be rising either.

"We're not going to be able to raise our rents very much in the next couple of years because rents aren't going up in the private sector and we're tied to that," Peck said. "Even if building expenses stay down, our rents are going to be down."

One advantage private building owners have over GSA is that they can take out bank loans to pay for building overhauls and then pay back those loans over a period of years with the additional rent they can charge. Without such an option, GSA can spend only what it has available in a given year through money generated by rent or appropriated by Congress.

"We don't have a bank to go to. Our only bank is the funds that we accumulate through our building rents and operations, so sometimes we find ourselves behind the eight ball when it comes to having enough money to fix the buildings up," Peck said.

The Recovery Act gave GSA some unexpected cash to use for new construction and renovation projects. However, only about half of the $5.5 billion GSA received is being spent on backlogged maintenance projects. The rest is going to installing photovoltaic panels and other energy-related items that, while good to do, won't help GSA address its growing backlog of deferred maintenance projects.

"With some of the other funds, we are spending on things that are really good things to do but we probably wouldn't have done absent the Recovery Act money because the administration and Congress designated it to help green our inventory," Peck said.

Despite the Recovery Act spending, GSA's backlog of deferred maintenance projects has shot up from $7.3 billion last year to $8.8 billion now.

A new financing scheme?

During a hearing last month, Norton admonished Peck for failing to use an alternative approach to finance building renovations and construction that Congress approved in 2004. Under the so-called Section 412 authority, GSA could enter into leases or other special financing deals with the private sector to generate additional income that could pay for building upgrades. For instance, GSA could arrange for a private developer to finance the renovation of a federal building. Then GSA could increase rents at that building from federal tenants and pay back the developer over time.

Peck said GSA has been unable to use these leasing arrangements because of opposition from the Office of Management and Budget and the Congressional Budget Office. The budget offices contend these private-sector financing schemes are too risky and more costly than if GSA built the facilities on its own.

Yet GSA is limited in how many new facilities it can build, since CBO's budget scoring rules require agencies to pay for the full cost of building purchases upfront. Lacking upfront cash, GSA increasingly has resorted to costly long-term leases with commercial property owners to provide space for growing agencies such as the FBI.

"That's really bad news for the Federal Buildings Fund because we're paying a lease without ever ... [getting] to the point where we own the asset, have the benefit of collecting rents and having it contribute to the Federal Buildings Fund so other assets can be renovated," Peck said.

He said he intends to request OMB's permission to use the private financing authority for specific projects going forward.

"We are thinking that if we go to them with specific projects, perhaps we'll get a different outcome," he said.

An OMB official told Federal Times that it would work with GSA to identify possible uses for the Section 412 authority, but concerns remain that such deals would present an unacceptable risk to taxpayers.

"That authority is designed to ensure that capital projects are performed at the lowest cost and risk to taxpayers. Shouldering additional private financing costs typically raises costs and risks to the taxpayers over the life of a project," the official said in a written response.

GSA has proposed $4.7 billion in new construction, building modernizations and infrastructure projects in the Washington area alone between 2010 and 2015, according to the National Capital Planning Commission's latest Federal Capital Improvements Program. Many of the projects have languished on GSA's to-do list for years because of funding shortfalls. Proposals to upgrade mechanical and electrical systems at headquarters buildings for the Commerce, Interior and State departments were first proposed in the early 1990s.

A problem from the start

Since the mid-1970s, all of the costs associated with operating and maintaining GSA's owned or leased facilities are paid through rents deposited into the Federal Buildings Fund. The fund is used for acquiring space for new facilities and for operating, repairing, maintaining and improving government-owned and government-leased buildings managed by GSA.

While the fund has provided a relatively stable and predictable source of revenue, historically it's been insufficient to finance both growing capital investment needs and the costs of leased space.

The fund was originally expected to generate $550 million annually for the construction or purchase of new buildings, according to the Government Accountability Office. However, it generated just $112 million annually between 1975 and 1991, which was far below the $330 million available to GSA through annual appropriations during the five years before the building fund was created.

One reason the fund has generated less money than anticipated is some agencies are exempted by Congress from paying rent to GSA. Because of a congressional exemption, the Social Security Administration, the Railroad Retirement Board and other so-called trust fund agencies are required to pay into the fund only the actual cost of maintenance performed on their buildings, to prevent them from having to pay additional overhead that would otherwise be used to fund their programs, Peck said.

And even GSA gives some agencies rent exemptions on a case-by-base basis. One of the most significant exemptions is for the Agriculture Department, which has paid nothing into the fund since 1996 for the department's three headquarters buildings. GSA granted the exemption so Agriculture could accumulate funds for making major repairs on the buildings, which it pledged to do on its own. The agreement was intended to expire in 2006 but remains in place today, diverting $52 million in payments to the fund each year, according to a 2005 GAO report.

Peck said GSA is in discussions with Agriculture to determine whether it has completed repairs to its buildings and should begin paying GSA rent again. An Agriculture spokeswoman declined to discuss the issue with Federal Times.

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