[Senate Hearing 112-319] [From the U.S. Government Publishing Office] S. Hrg. 112-319 FEDERAL LEASED PROPERTY: ARE FEDERAL AGENCIES GETTING A BAD DEAL? ======================================================================= HEARING before the FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY SUBCOMMITTEE of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS FIRST SESSION __________ AUGUST 4, 2011 __________ Available via the World Wide Web: http://www.fdsys.gov Printed for the use of the Committee on Homeland Security and Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 68-202 WASHINGTON : 2012 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS JOSEPH I. LIEBERMAN, Connecticut, Chairman CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin CLAIRE McCASKILL, Missouri ROB PORTMAN, Ohio JON TESTER, Montana RAND PAUL, Kentucky MARK BEGICH, Alaska JERRY MORAN, Kansas Michael L. Alexander, Staff Director Nicholas A. Rossi, Minority Staff Director Trina Driessnack Tyrer, Chief Clerk Joyce Ward, Publications Clerk and GPO Detailee ------ SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY THOMAS R. CARPER, Delaware, Chairman CARL LEVIN, Michigan SCOTT P. BROWN, Massachusetts DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona CLAIRE McCASKILL, Missouri RON JOHNSON, Wisconsin MARK BEGICH, Alaska ROB PORTMAN, Ohio John Kilvington, Staff Director William Wright, Minority Staff Director Deirdre G. Armstrong, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Carper............................................... 1 Senator Brown................................................ 5 Prepared statements: Senator Carper............................................... 39 Senator Brown................................................ 41 WITNESSES THURSDAY, AUGUST 4, 2011 David Foley, Deputy Commissioner, Public Buildings Service, U.S. General Services Administration................................ 7 James M. Sullivan, Director, Office of Asset Enterprise Management, U.S. Office of Veterans' Affairs................... 9 Hon. David Kotz, Inspector General, U.S. Securities and Exchange Commission..................................................... 11 Jeff Heslop, Chief Operating Officer, U.S. Securities and Exchange Commission............................................ 13 David J. Wise, Director, Physical Infrastructure Issues, U.S. Government Accountability Office............................... 14 Alphabetical List of Witnesses Foley, David: Testimony.................................................... 7 Prepared statement........................................... 43 Heslop, Jeff: Testimony.................................................... 13 Prepared statement........................................... 79 Kotz, Hon. David: Testimony.................................................... 11 Prepared statement........................................... 55 Sullivan, James M.: Testimony.................................................... 9 Prepared statement........................................... 50 Wise, David J.: Testimony.................................................... 14 Prepared statement........................................... 87 APPENDIX Appendix 1 referenced by Mr. Wise................................ 97 FEDERAL LEASED PROPERTY: ARE FEDERAL AGENCIES GETTING A BAD DEAL? ---------- THURSDAY, AUGUST 4, 2011 U.S. Senate, Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 2:30 p.m., in room 342, Dirksen Senate Office Building, Hon. Thomas R. Carper, Chairman of the Subcommittee, presiding. Present: Senators Carper and Brown OPENING STATEMENT OF SENATOR CARPER Senator Carper. Good afternoon everyone. On behalf of Senator Brown and myself, welcome to today's hearing. I was just saying to Senator Brown that we may be the only hearing in the Senate today. I do not know, but the others are dropping like flies. But if you see the two of us, you know we are serious about saving some money and we are for our country. We are glad that our witnesses can be here today and our guests as well. Today we are going to examine the challenges that our Federal Government faces managing its real property and in particular, its reliance on spaces leased from the private sector to satisfy long-term real estate needs. I just addressed a group over in the House side a little while ago, Scott, and they come from the accounting industry, auditing industry, and actually do a whole lot of work as a firm to support the Government Accountability Office's (GAO's) efforts with respect high-risk list, high risk for using a lot of money, taxpayer money. But we have had a number of hearings here in the past about real estate, high risk, and we have literally thousands of pieces of property sitting around us. There are a thousand pieces of property that the Federal Government owns and we pay utilities for, maintenance for, security for that we are going to get rid of. We do not use them. And we also find out that there is something else that we are spending a lot of money for and that is--GAO has been riding us for a couple of years, and that is we have a lot of agencies that lease space for years, in some cases for decades, and we save a lot of money. They save a lot of money if instead of leasing we actually buy this stuff. And there are still a lot of instances where it actually makes a lot of sense to lease, like the Department of Census Office. Every 10 years you do a census. It does not make sense to buy all those pieces of property they are going to use once every 10 years. But that is a little bit of background here. There is a general consensus that our Federal Government has to get smart about the ways we manage our buildings and land. Presidents in both parties now have made doing so a top management priority and with concerns over the implication of our deficit and national debt mounting, eliminating waste, achieving cost savings in this area remains a top priority for us and I hope for the rest of our colleagues in the House and the Senate and the Administration. Between 2001 and 2009, we ran up as much debt as we did in the first 208 years of our Nation's history. Last year we ran up what may be the largest budget deficit in our Nation's history. Most of us here in Washington are united in our desire to find a solution to our Nation's fiscal problems. We are still facing an ocean of red ink as far as the eye can see, even after enactment earlier this week of the spending cuts included in the legislation to raise our country's debt ceiling. A wide variety of ideas have been put forward on how to reduce our budget deficit and begin whittling down our debt. Last fall, the majority of the bipartisan deficit commission appointed by President Obama, co-chaired by Alan Simpson, former Republican Senator from Wyoming, and by Erskine Bowles, former chief of staff to then President Bill Clinton, they provided us, along with their colleagues on the Deficit Commission, a roadmap to reduce cumulative Federal deficits over the next decade by some $4 trillion, and at the same time getting a reform of our title programs, tax reform. Pretty comprehensive, bipartisan comprehensive and would actually not be just a deal. It would actually have been a solution to the challenges that we face. Their work is reinforced by the Gang of Six, three Democrats, three Republicans, and unfortunately, in my view the President initially followed their lead too late, as it turned out, and the leaders of the House and Senate, Democrat and Republican, did not follow it at all and that is a sad thing, I think, for this country. As a result, we settled this week for a bill that reins in discretionary spending, but does little to tackle our long-term financial challenges. In short, it was a deal, not a solution, and not a very good deal as far as I am concerned. It only addresses the symptoms of our Nation's fiscal ailments, specifically the debt ceiling, but failed to cure our serious disease of debt and deficits. And unfortunately, we largely put off until tomorrow what we ought have been doing right now. And as Senator Brown has heard me say probably more times than he wants to remember now, but I said a lot, and my staff certainly feels that way, but I am going to keep saying it for as long as I am around here, a lot of Americans believe that those of us here in Washington are not capable of making or taking the difficult steps that are necessary to put our country back on the right fiscal track. And given what has happened in recent weeks, it is easy to see why they feel that way. They do not think we can do the hard work that we are hired to do, that is, to effectively manage the tax dollars that they entrust us with. They look at the spending, the tax decisions we have made in recent years and also the poor management across government and question whether the culture here is broken. They question whether we are capable of making the kind of tough decisions that American families make with their own budgets. And I do not blame folks for being skeptical, especially in light of the debate we have seen in recent months and the deal that we arrived at in recent days. Now more than ever we need to establish a different kind of culture here in Washington. When it comes to spending we need to move from what I have described here many times as the culture of spendthrift to a culture of thrift. This shift must involve looking in every nook and cranny of the Federal Government and asking this question about all kinds of programs, domestic programs, discretionary programs, entitlement programs, how do we get a better result for less money, or how do we get a better result for the same amount of money? When it comes to property management, it is clear to me and others that we can get better results and we can save money. Federal property management has been on the Government Accountability Office's high-risk list since January 2003, in part due to significant amounts of underutilized and excess property. This problem is coupled with the fact that Federal agencies depend on costly--too often depend on costly leased space to meet new space requirements, although building ownership has proven to be more cost effective over time, not always, but often times. The most recent comprehensive data available shows that Federal agencies apparently possess more than 45,000 underutilized buildings, totaling more than 340 million square feet in space. These buildings cost nearly $1.7 billion annually to secure and to maintain. Fixing that problem does not balance the budget, but it is a great step in the right direction. But in addition to the past 20 years, GAO has been telling us that we have been too reliant on leasing. Since 2008, the General Services Administration (GSA) has leased more property than it owns. In fiscal years (FY) 2011, the agency will spend over $5 billion to house Federal employees in 184 million square feet of private office space. In addition, while GSA serves as the central leasing agent for the Federal Government and is responsible for managing and obtaining space for agencies, many agencies have obtained their own leasing authority and in doing so, have chosen not to take advantage of GSA's expertise in Federal real estate. Given that many of these agencies lack experience in performing lease procurements, they often bind the government into costly, long-term lease obligations that result in millions of dollars in additional cost to the Federal Government, actually tens of millions and maybe even hundreds of millions of extra dollars in cost. For example, the U.S. Securities and Exchange Commission (SEC) is--we know this one all too well--but is an agency that has been granted independent leasing authority, along with some other agencies. In July 2010, the Commission entered into a sole source lease for 900,000 square feet of space at a privately owned building called Constitution Center in Washington. That lease would have cost taxpayers some $556 million over 10 years. Although the SEC has held independent leasing authority for more than 20 years, the Commission's inspector general has found that the agency still lacks adequate policies and procedures for managing its leasing actions. The fact, this was the second time within the past 5 years in which the SEC was involved in an unnecessarily expensive leasing arrangement. Unfortunately, this is not the only agency that operates this way. Similarly, in 2006, the Federal Bureau of Investigation (FBI) executed a 30-year operating lease to house employees in its Chicago field office that cost an estimated $40 million more than construction over a 30-year period. Fortunately, both Congress and the Obama Administration are united in their commitment to address these issues. The President's latest budget included a recommendation to form a Civilian Property Realignment Board (CPRA) to review the government's property portfolio and dispose of those deemed excess in an expedited manner. I think, if I am not mistaken, Senator Brown may have actually introduced legislation to codify that proposal. This is a proposal that my colleagues and I on the Homeland Security and Government Affairs Committee (HSGAC) had an opportunity to examine on our June 9th real property hearing. And while the proposal, folks, is primarily on assisting agencies in the disposal of excess and underutilized buildings, it does provide for opportunities to consolidate or co-locate operations, which could ultimately help to reduce the government's leasing portfolio. I have concerns about the cost and effectiveness of the President's approach, but I look forward to taking what works in his proposal and Senator Brown's legislation, along with other ideas, and introducing a bill in the fall that will help right-size the government's portfolio in a way that is advantageous for Federal agencies, for community stakeholders and the clientele served by those agencies. Clearly, the momentum is building to address a widely recognized problem, yet in all of our zeal to save, we must be intelligent in our approach. Rome, I am told, was not built in a day. The Federal Government's bloated property portfolio cannot be un-built in a day. We have an opportunity though to do this right and change the way the Federal Government manages its hundreds of billions of dollars worth of assets. That said, the agency should not be waiting for a civilian Base Realignment and Closure (BRAC) to solve their problems, or at least begin to solve their property management problems now. In an era of shrinking budgets and scare resources, it is critical that agencies come up with an innovative property management tool that will identify opportunities to right-size our real estate portfolio to reduce costs and achieve savings by eliminating unneeded assets and expensive long-term space. Before I turn it over to Senator Brown, let me just say, every now and then, and I am sure Scott has noticed this as well, we misalign incentives. We misalign incentives in the Federal Government. We incentivize the wrong kind of behavior and then we get the wrong kind of results. And what we do within the Federal Government, we incentivize a lot of Federal agencies to lease. The incentives are to lease. With the way that we call, if you ever really want to buy a building or something like that upfront, even if that makes sense long term, we incentivize them with the way that we score that expenditure in the first year, as opposed to leasing, which could be scored for 10, 20, 30 years or even more. And one of the things I hope comes out of this hearing today are some good discussion on how we change those incentives, get them properly aligned so that we not only meet the space needs of our agencies, but we meet the fiscal constraints of our country. So I look forward to this hearing, from our witnesses--we both do--as you share with us your thoughts on how to transform our asset portfolio in a way that generates significant and lasting savings to the public. And with that, I am happy to turn it over to Senator Scott Brown of Massachusetts. STATEMENT OF SENATOR BROWN Senator Brown. Thank you, Mr. Chairman. Thank you to our witnesses. I would venture to guess we are the only hearing in D.C. right now. It is interesting listening to you, Mr. Chairman, I want to thank you for holding this important hearing. Through a lot of our efforts, your efforts, we have been able to help put the spotlight on some of the programs that just are not doing it right. It is funny. Half a billion dollars for leased office space, it just blows my mind how we get in these situations. People wonder where the money is going. Well, it is very clear where it is going. It is going some places very poorly chosen, whether it is leased spaces, programs, whether it be military programs that are not working, are obsolete. We are just wasting money all over the place, and in the middle of a financial emergency, I find that very, very disturbing. That is why I was proud to put party politics aside and work with the President and Congressman Denham on the Civilian Property Realignment Act (CPRA). The bipartisan legislation that you referenced will bring private sector discipline to the management of Federal real estate. It will empower an independent commission to break through the longstanding barriers created by red tape and politics to facilitate the efficient disposal and realignment of unneeded Federal property. This bipartisan approach will address a problem GAO has designated as a high-risk area and would achieve savings of approximately $15 billion, and that is real money when we are trying to make some very real and tough decisions in the next couple of years. It is funny, time and time again, government agencies have proven they cannot properly manage their own real estate and today, as we already referenced, both of us, that half a billion dollars in leased space really will never be used efficiently or properly. And not only did they enter into this wasteful lease, but they--the SEC, as was referenced--but they did so they could spend their workdays, quite frankly, in a lavish building, complete with panoramic views of the city, limestone floors, marble walls and a landscape courtyard that was transformed into a one-acre private garden. I guess it is nice if you can get it, especially when it is at the taxpayers' expense. That being said, I came to Washington to look at the way we spend our dollars and to be a fiscal watchdog, Senator, to address our fiscal challenges so we do not have to leave young Americans with a tab that they just cannot afford anymore, Mr. Chairman. I am looking forward, as you are, to making those tough decisions. We started already. We will continue to work in that vein and hopefully gain the confidence of the American people once again. I look forward to hearing from our witnesses. Senator Carper. Thanks very much for that statement. Let me just take a moment to introduce each of our witnesses, a Hokie from Virginia Tech here to lead off. David Foley, appointed Deputy Commissioner of the Public Building Services and U.S. General Services Administration in 2010. He is responsible for the real estate acquisition operations of the agency, previously served as the Deputy Assistant Commissioner for portfolio management at GSA and worked in a number of leadership roles within GSA in offices in, get this, Dallas, Kansas City and Atlanta. Mr. Foley is a graduate of Missouri State University, has a master's in business administration from the home of the Hokies, Virginia Tech. Mr. Jim Sullivan, also known as James, is the Director of the Office of Asset Enterprise Management at the U.S. Department of Veterans' Affairs (VA). It seems like we pick on the VA a lot and we actually use them a lot of times as an example of an agency that does things well. Sometimes folks in these hearings, they like to conduct these like gotcha hearings. What we like to do is when folks are behaving in inappropriate ways, managing in inappropriate ways, we like to put a spotlight on that. When agencies are actually managing and behaving in more appropriate ways and actually serve an example, we like to put a spotlight on them and any number of times we have done that with the VA. But Mr. Sullivan assumed this new leadership role in 2009, after serving as a Deputy Director since 2000--I guess since May 2002, something like that. But you are now the Director of the Office of Asset Enterprise Management at VA. And Mr. Sullivan has over 25 years of experience in capital budgeting and planning and asset management. He plays a pivotal role in managing one of the largest portfolios of property in the Federal Government, including in Delaware. The Honorable David Kotz has served as the Inspector General for the U.S. Securities and Exchange Commission since December 2007. Prior to joining the SEC, Mr. Kotz served as the Inspector General for the Peace Corps and practiced Federal administrative law for a decade in the private sector. Inspector General Kotz is a graduate of the University of Maryland, which makes him a Terrapin, and the Cornell Law School. Jeff Heslop was named the U.S. Securities and Exchange Commission's first ever Chief Operating Officer (COO) in May 2010. He is responsible for the agency's information technology, financial reporting and record management duties. Prior to joining the SEC, Mr. Heslop was managing Vice President at Capital One, which has just acted to acquire ING Direct in Wilmington, Delaware, right in my hometown. And there, at Capital One, Mr. Heslop was responsible for the company's information and risk management operations. He received his bachelor of arts degree from Davidson College. When did you graduate? Mr. Heslop. Seventy-six. Senator Carper. Seventy-six. John Spratt, Congressman John Spratt, who is one of your bachelorettes as well. Do you know who the president is there, now? Mr. Heslop. Carol Quillen. Senator Carper. She is from Delaware. Delaware. Yes, she just became your president the 1st of this month, and I think the first woman in the history of the college. You have your master's in business administration from College of William and Mary, where our youngest son has started his senior year this fall. Great school. David Wise is Director for Fiscal Infrastructure Issues at the U.S. Government Accountability Office, affectionately known as GAO. He specializes in transportation and communication and Federal real property issues. His career at GAO dates back to 1981. Mr. Wise has a bachelor of arts in political science from the University of Pittsburgh and a master's in public administration's degree from Pitts Graduate School of Public and International Affairs. And now that the National Football Leagure (NFL) strike has been averted, or lockout has been averted, I was going to ask my first question of you. What NFL football team will you be rooting for this fall with that kind of bio? Mr. Wise. Patriots. Senator Carper. All right. Welcome one and all. Your entire statement will be made part of the record. If you like to summarize, that would be great. We are asking you keep remarks to roughly 5 minutes. If you go a little beyond that, that is OK. If you go way beyond that, that is not OK. Just go ahead and once you all are finished, Senator Brown and I will take turns just asking questions of you. Mr. Foley, please proceed. Thank you all for coming. STATEMENT OF DAVID FOLEY,\1\ DEPUTY COMMISSIONER, PUBLIC BUILDINGS SERVICE, U.S. GENERAL SERVICES ADMINISTRATION Mr. Foley. Thank you. Good afternoon, Chairman Carper, Ranking Member Brown. I appreciate being invited here today to discuss GSA's efforts to reduce our reliance on leased space, our approach to lease acquisition, and how we manage delegations of authority. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Foley appears in the appendix on page 43. --------------------------------------------------------------------------- GSA searches for the most cost-effective ways to provide space for Federal agencies to help them achieve their missions. Our first priority is to use existing government-owned space and then lease space already under contract to the government. When existing space is not available, GSA determines the best method to acquire new space, whether through leasing or new construction. We consider the size, duration, cost and complexity of the requirement. For most long-term needs, especially those with unique requirements, like courthouses or land ports of entry, it is more cost-effective for the government to build and own these facilities. For small short-term general office requirements, leasing from the private sector is typically more economical. GSA currently manages an inventory of over 370 million square feet of space, of which roughly 191 million is leased from the private sector. Approximately 80 percent of our 9,000- plus leases are for the smaller short-term needs that are less than 20,000 square feet. Our lease acquisition process entails carefully sequenced steps to ensure adequate competition and a fair rental rate for taxpayers, which are outlined in my written statement. GSA has multiple internal controls in place for our largest leases with annual rental payments that exceed $2.8 million. These leases require additional reviews within the GSA and the Office of Management and Budget (OMB), along with prospectus approval by GSA's congressional authorizing committees. This process ensures any growth and cost from staffing or space increases are supported in the President's budget and are transparent to Congress and the public. Since real property was identified as a high-risk area by GAO in 2003, GSA has worked closely with Federal agencies to maximize the utilization of leased space. At the end of fiscal year 2010, the vacancy rate in GSA's leased inventory was less than 1 percent. GSA and the Administration have also made it a priority to reduce the cost of leasing by minimizing the need for build-to- suit projects, adjusting requirements to maximize competition for existing space, purchasing leased assets to create Federal ownership, and converting costly lease proposals into Federal building renovations or new construction projects. For instance, in 2010, GSA exercised a purchase option for Columbia Plaza, a long-term lease here in Washington, DC. The fiscal year 2010 budget also provided funding for the FBI field office in Miami. This project had previously been authorized as a lease proposal. In fiscal year 2012, GSA's budget request contained funding that would retrofit the Phillip Burton Federal Building in San Francisco, California. This would satisfy an FBI requirement and avoid a costly lease proposal, saving taxpayers almost $100 million over the next 30 years. Congressional cuts to the President's budget threaten this progress. In fiscal year 2011 alone, several key projects in the President's budget were not funded, including the next phase of the Department of Homeland Security (DHS) consolidation at St. Elizabeth's and a purchase option for an Internal Revenue Service (IRS) lease in Martinsburg, West Virginia. Failing to move forward with these projects will result in the government's continued leasing of space, costing taxpayers millions more in the long run. Additional cuts in fiscal year 2012 would only make the situation worse. GSA has been aggressive with another opportunity for savings by improving the efficiency of the Federal inventory to facilitate consolidation of leases into government-owned space. Our GSA headquarters is a good example. By renovating the building and opening up the floor plan, we can increase the number of occupants from approximately 2,500 to 6,000 people. This will allow us to eliminate multiple leases, saving taxpayers millions of dollars annually. GSA, as you mentioned, is not the only agency that leases on behalf of the Federal Government. More than 25 agencies and commissions, like the VA and SEC, have their own statutory authority to hold land and acquire leasehold interest. GSA is not usually involved in these transactions. Some agencies also lease space under a delegation of authority from GSA. Agencies using this delegation must abide by the same laws and controls that govern GSA and certify that they have a properly warranted lease contracting officer to conduct the procurement and execute the lease. We are involved in these transactions to provide the appropriate levels of oversight. In conclusion, GSA strives to maximize space utilization and minimize the cost associated with leasing. We are continually looking for ways to streamline, standardize and simplify our leasing process with the appropriate controls to maximize competition and find the optimal solution for taxpayers, while helping agencies achieve their missions effectively. Thank you for inviting me to appear before you today. I appreciate the opportunity to discuss GSA's leasing practices and expertise and I welcome your questions. Senator Carper. Thanks so much for your testimony. Mr. Sullivan, please proceed. Thank you. STATEMENT OF JAMES M. SULLIVAN,\1\ DIRECTOR, OFFICE OF ASSET ENTERPRISE MANAGEMENT, U.S. OFFICE OF VETERANS' AFFAIRS Mr. Sullivan. Thank you, Chairman Carper and Ranking Member Brown. Thank you for the opportunity to appear today to discuss the Department of Veterans' Affairs' management of its capital asset portfolio, and more specifically its leased property portfolio. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Sullivan appears in the appendix on page 50. --------------------------------------------------------------------------- At the outset, let me say, VA evaluates all of its capital decisions, including leasing, based on three following critical principles. First, does it directly benefit veterans and their families? Second, does it improve the operations of the VA? And third and last, does it allow us to be a good member of the local community? VA is the operator of one of the largest healthcare real estate portfolios in the country. VA also maintains facilities for the Veterans Benefits Administration (VBA), and the National Cemetery Administration (NCA) as well. Leasing has been and continues to be an essential part of VA's capital portfolio management practice. VA is authorized to acquire facilities, including leased facilities, for medical and non-medical purposes, which include hospitals, community based clinics, cemeteries, medical research space, and other medical related functions. VA enters into leases to meet veteran needs across the Nation. One of VA's primary goals is to provide services to veterans and their families where they live, not where old hospitals are, but where veterans need the care. In many cases, leasing provides more flexibility in lieu of construction to meet demographic shifts, changing service demands, technology improvements in terms of medical care and benefit care delivery to our Nation's veterans. The need for space is supported by VA's mission as identified through the Strategic Capital Investment Planning (SCIP) process at VA. Through SCIP, VA systematically evaluates all proposed capital investments based on how well they address identified performance gaps. These gaps identify infrastructure or services needed to enhance or to meet needs of current and more importantly, future veterans. Only investments that have scored well against these performance gaps are presented to Congress for funding and authorization. VA considers the size and mission criticality when deciding between building and leasing. New construction of large inpatient and specialty care facilities that we will be in for many years, in most cases will be the most cost-effective solution to our need. Smaller facilities, such as outpatient or ambulatory care centers, can generally be acquired for more efficiently using leasing, as they provide more flexibility to meet changing demands in technology. VA does follow GSA regulation and complies with all competition and contracting act requirements and the Federal Acquisition Regulation (FAR) in conducting its lease procurements. VA's real property service has years of experience in managing the department's robust leasing program, employing skilled workers comprised of highly trained realty specialists and certified contracting officers. Oversight of VA's leasing program is provided internally through an extensive series of checks and balances in VA. Externally, all leases in excess of $1 million require congressional notification and more importantly, authorization. Congress also is notified of any significant change in the cost or scope of any authorized lease, or for that matter, authorized construction projects. In addition, VA has been granted by Congress enhanced-use leasing (EUL) authority. This tool provides VA with an innovative process to partner with public and private sector entities for up to 75 years. In return, VA receives negotiated monetary or in-kind consideration. The leased property is then developed, used and maintained for uses that support VA's mission. Enhanced-use leases allow VA to reuse properties to meet mission-related needs such as veterans' homeless housing. EUL program results have included significant cost savings and substantial private investment in the department's capital infrastructure. In the last 6 years, VA has received in consideration more than $216 million from this program. VA's authority to enter into this program will expire on December 31 of this year. Without reinstatement, VA will lose a well-needed tool to help us manage our property more effectively. Mr. Chairman, the department understands the importance of a balanced real estate portfolio to address its needs. VA has a rigorous capital planning process that takes into account current and future needs of America's veterans. VA strives to maintain the optimal mix of investments, both owned and leased assets, to achieve its strategic goals and to assure the highest level of performance of our assets. I thank you and the Subcommittee for the opportunity to be here today and will be happy to answer any questions. Thank you. Senator Carper. The pleasure is ours. Thanks so much. Mr. Kotz, please proceed. STATEMENT OF HON. DAVID KOTZ,\1\ INSPECTOR GENERAL, U.S. SECURITIES AND EXCHANGE COMMISSION Mr. Kotz. Thank you for the opportunity to testify before this Subcommittee. I appreciate the interest of the Chairman, the Ranking Member, the SEC, and the Office of Inspector General (OIG). --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Kotz appears in the appendix on page 55. --------------------------------------------------------------------------- On November 16, 2010, we opened an investigation as a result of receiving numerous written complaints concerning the SEC's decisions and actions relating to the leasing of space at the Constitution Center office building in Washington, DC. As part of our investigative efforts, we analyzed thousands of pages of documents and interviewed 29 witnesses with knowledge of facts or circumstances surrounding the SEC's leasing of the space. We also searched over 1.5 million e-mails from various time periods pertinent to the investigation. On May 16, 2011, we issued a comprehensive report of our investigation containing over 90 pages of analysis and 150 exhibits. Our investigation concluded that based upon estimates of increased funding and staffing, primarily to meet the requirements of the Dodd-Frank Act, between June and July 2010, the SEC's Office of Administrative Services (OAS), conducted a deeply flawed and unsound analysis to justify the need for the SEC to lease 900,000 square feet of space at the Constitution Center facility. We found that OAS grossly overestimated the amount of space needed for the SEC's expansion by more than 300 percent and used these groundless and unsupportable figures to justify the SEC committing to an expenditure of over $557 million over 10 years. We found that OAS used a standard of 400 square feet per person to calculate how much space would be needed for the additional positions it believed it was gaining. This standard was an all-inclusive number that included common space and amenities and an additional 10 percent for contractors, 10 percent for interns and temporary staff, and 5 percent of future growth. We found that the 400 square feet per person standard was described as a back-of-an-envelope calculation. Moreover, notwithstanding this all-inclusive number, when OAS later did its calculations to justify the lease, it added even more unnecessary space by double counting for contractors, interns and temporary staff. We also found that each one of these estimates was widely inflated and unsupported by the data being used by OAS. After the SEC committed itself to the 10-year lease term at a cost of over $556 million, it entered into a justification and approval for other than full and open competition, a document required by the Federal Acquisition Regulation. The FAR permits other than full and open competition when the agency's need is of such an unusual and compelling urgency that the agency would be seriously injured unless the agency is permitted to limit the number of sources from which it solicits bids. We found the justification and approval to lease space at Constitution Center without competition was inadequate, not properly reviewed and backdated. The OAS official who signed the justification and approval as the SEC's competition advocate, acknowledged in testimony that the SEC would in fact not be seriously injured if it lost the opportunity to rent the Constitution Center space. She further admitted that she took no substantive steps to verify that the information in the justification and approval was accurate and that when she signed the document she was unaware that the funding had not been appropriated and that she did not have an understanding of when the projected personnel were expected to be hired. The FAR also requires that the justification and approval be posted publicly within 30 days after contract award. As the letter contract for Constitution Center was signed on July 28, the deadline for publication of the justification and approval was August 27. However, the SEC did not post the justification and approval until September 3, although the document was signed by four individuals as dated August 2. The investigation found that the justification and approval was in fact not finalized until September 2, 2010, and substantial revisions were being made up to that date. We found that three of the four signatories executed the signature page on August 2, 2010, before a draft even remotely close to the final version existed. We found that the SEC's competition advocate executed the signature page on August 31, initially backdated her signature to August 27. She then subsequently whited out the 7 to make it appear that she had signed the document on August 2. The actions of the signatories for justification and approval gave the public a false impression that the document was finalized a few days after the letter contract was signed. In light of our findings, we recommended that the SEC's chief operating officer conduct a thorough and comprehensive review and assessment of all matters currently under the purview of OAS. We further recommended that the chief operating officer determine the appropriate disciplinary actions to be taken. We specified that such disciplinary actions should include, at a minimum, action up and to and including dismissal against two senior individuals and disciplinary action against a third individual. Finally, we recommended that the SEC request a formal opinion from the comptroller general as to whether the commission violated the Anti-Deficiency Act by failing to obligate funds for the Constitution Center lease. Subsequent to the issuance of our report of investigation, we received a corrective action plan with regard to the substantive recommendations we made for improvements. We will monitor the planned activities carefully to ensure that the necessary improvements are made and to ensure that the individuals who we identified as being responsible for the failures and improprieties in our report are held accountable for their actions. Thank you, and I would be happy to answer any questions. Senator Carper. Just add a comment. I leaned over to Senator Brown when you were going through that litany and I said to him, what were they thinking about? My Lord. Mr. Heslop, please proceed. STATEMENT OF JEFF HESLOP,\1\ CHIEF OPERATING OFFICER, U.S. SECURITIES AND EXCHANGE COMMISSION Mr. Heslop. Thank you for the opportunity to testify today on behalf of the Chairman of the SEC regarding the lease of office space at Constitution Center and the steps we are taking going forward. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Heslop appears in the appendix on page 79. --------------------------------------------------------------------------- The report by the Commission's Office of Inspector General concerning Constitution Center identified a number of significant flaws in the SEC's leasing process. We are extremely disappointed by the failures that have been identified and regret that they have taken us all away from our primary mission of protecting investors, facilitating capital formation, and ensuring stability in the financial markets. The fact that the SEC has not paid any rent to date for this property and that the bulk of the space has been leased to other tenants does not adequately address a situation that should never have occurred. The only appropriate response by the SEC is to resolve the remaining space issues, to correct the deficiencies in our leasing process by working with GSA and OMB with respect to future space needs, and to ensure accountability for the events surrounding this lease. By way of background, in the spring of 2010, the SEC correctly anticipated that it would receive significant new responsibilities under the Dodd-Frank Act for derivatives, hedge fund advisors, credit rating agencies and much more. This was, of course, on top of our longstanding core responsibilities. As a result, we believed--and continue to believe--that the SEC needed additional staff to fulfill its mission and help further restore investor confidence in our markets. At the time the agency was considering the leasing decisions, Chairman Schapiro indicated her preference for hiring new staff in the regions rather than in the headquarters, and she indicated to staff her preference that any new space in Washington be within walking distance of the Commission's Station Place building to eliminate the need for expensive shuttle services. In July 2010, the then executive director, who was responsible for the agency's leasing activities, informed the chairman that all of our leasing options no longer existed, that the space at Constitution Center was our only option given our space needs, that the pricing was advantageous, and that we had to move quickly as there was competition for the space. Given the previous discussions with the staff, the chairman assumed the proposal was consistent with both our budget projections, future employee growth, and her preference for the staff to be housed, where possible, in the regions. When it subsequently became clear that the SEC would not receive the funding necessary to implement its new responsibilities, we took immediate steps to release the space to others and to reduce the SEC's exposure. My written testimony details what we have learned from the flaws in our recent process and how we intend to address them. I would like to emphasize a few of these. First, we are promptly implementing the IG's recommendations and have already submitted, as he indicated, a written corrective action plan to him. Second, in light of the failure identified, the SEC recognizes the benefits of having GSA manage the Commission's future lease acquisitions. Leasing is not part of the Commission's core mission and as an agency we cannot allow it to impede that mission. GSA, by contrast, has long experience in leasing. In a recent meeting at GSA, Chairman Schapiro and I discussed with the GSA Administrator ways in which GSA could assist the Commission on our leasing efforts going forward. GSA indicated that it was open to playing a significant role in these efforts, and following that meeting, Commission staff has had further multiple discussions with the GSA staff. Earlier this week, the SEC and the GSA entered into a Memorandum of Understanding (MOU) that contemplates an immediate role for the GSA in managing upcoming SEC leasing activities, as well as all other future leasing needs as they arrive. Third, the OIG report recommended that the SEC initiate disciplinary proceedings for three individuals involved in the Constitution Center leasing process, and we have begun that process. Chairman Schapiro has expressed a desire for this process to move forward as quickly as the laws and regulations permit, consistent with fundamental fairness, to assess and implement remedial measures and discipline as appropriate. In the meantime, the individuals for whom the OIG report recommend a disciplinary review have been reassigned. Their current duties do not involve any leasing or any other authority that could bind the Commission, nor do they involve activities that relate to the expenditure of appropriated funds. As our chairman indicated, the true test of an organization is not whether things go wrong, but how an organization responds to problems and whether its leaders take such opportunities to make necessary improvements. We are committed to doing that. I would be happy to answer your questions. Senator Carper. Thanks, Mr. Heslop. Mr. Wise, you want to wrap it up and then we will go to Q and A's? STATEMENT OF DAVID J. WISE,\1\ DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE Mr. Wise. Chairman Carper, Ranking Member Brown and Members of the Subcommittee, thank you for the opportunity to testify today on our work related to real property leasing among civilian Federal agencies. The Federal real property portfolio is vast and diverse, totaling over 900,000 buildings and structures worth billions. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Wise appears in the appendix on page 87. --------------------------------------------------------------------------- My testimony today will address three topics. First, the factors that contribute to the government's reliance on costly leasing; second, how the Administration's proposed Civilian Property Realignment Act may provide an opportunity to reduce reliance on leasing; and third, Federal agencies' independent leasing authorities and GSA delegations of those authorities. One of the primary reasons we designated Federal real property management as high risk was the Federal Government's overreliance on costly leased space to meet new space needs. Our work over the years has shown that operating leases often cost more than ownership, especially for long-term needs. Increasing ownership, when appropriate, could save millions of dollars over the long term. Federal agencies rely extensively on leasing and leased buildings. At the end of fiscal year 2010, for example, GSA's leased square footage exceeded owned footage 191 million to 179 million. GSA has relied heavily on operating leases to meet new long-term needs because it lacks funds to pursue ownership. The decision to lease rather than own space for Federal operations is often influenced by factors other than cost- effectiveness, including budget issues and operational requirements. The Budget Enforcement Act of 1990 directs that the budget authority to meet the government's real property needs is to be scored, meaning, recorded in the budget in an amount equal to the government's total legal commitment. If GSA buys or constructs a building, the budget authority for the full cost must be recorded upfront to reflect the government's financial commitment. However, for operating leases, GSA is only required to record the government's commitment for an annual lease payment and any potential fees for canceling the lease. This reduces the upfront funding commitment, but generally costs the Federal Government more over time. We have raised the scorekeeping issue as a challenge that needs to be addressed in several reports and testimonies in the past. We believe that if the issue is not addressed, the reliance on leasing will likely persist. Accordingly, in 2007 and 2008, we recommended that OMB develop a strategy to reduce agencies' reliance on costly leasing where ownership could result in long-term savings. OMB agreed that a strategy was needed, but has not yet implemented one. Agency operational requirements are among the reasons why leasing is often preferred by agencies. For example, officials said that more than 200 GSA-owned and leased buildings were damaged by Hurricane Katrina, necessitating the relocation of 2,600 Federal employees from 28 Federal agencies, many of which were GSA tenant agencies. To meet this emergency need, GSA expanded its use of leases to house agencies in temporary space to fulfill a short-term need. In May 2011, the Administration proposed CPRA, which may have provided an opportunity to reduce overreliance on leasing. While CPRA does not explicitly address this issue, one of CPRA's purposes, to realign civilian real property by consolidating, co-locating and reconfiguring space to increase efficiency, could help to reduce the government's reliance on leasing. CPRA also provides for the potential co-location of Federal civilian offices and postal properties, many of which are already owned. We are currently examining the potential for consolidating leased facilities into federally owned sites for this Subcommittee. Congress has authorized many agencies independent statutory leasing authority, allowing them to acquire leased space. The authority may be for a particular type of space or for general leasing authority. Agencies with such authority and their respective authority types are listed in Appendix 1\1\ of my written statement. --------------------------------------------------------------------------- \1\ The Appendix referenced by Mr. Wise appears in the appendix on page 97. --------------------------------------------------------------------------- GSA may also delegate leasing authority to agencies. For example, all Federal agencies may acquire a specific type of space, such as antennas, depots, piers and greenhouses. Thirteen Federal agencies are authorized to lease their own special purpose space, subject to limitations. For example, the Commerce Department has delegated authority to lease space to conduct the decennial census. In November 2007, GSA amended its delegation of leasing authority to increase oversight after audits found instances in which agencies failed to meet the conditions of their leasing delegation. Although GSA's goal is to cover the administrative cost of private sector leases with fees it charges the tenant agencies, it has been unable to do so in recent years, losing more than $100 million in fiscal year 2009, raising concerns about the agency's management of its leased properties. We have an ongoing engagement examining this issue, among others, for your Subcommittee. Mr. Chairman, this concludes my statement. I will be pleased to answer questions from you and other Members of the Subcommittee. Thank you. Senator Carper. Yes, thanks, Mr. Wise, and I have asked Senator Brown if he would like to lead off and he has agreed to do so. Senator Brown. Thank you, Mr. Chairman. So Mr. Kotz, I appreciate your initial opening. During the time period where you made the recommendations of disciplining three people, what in fact has been done at this point; do you know? Mr. Kotz. I have been told that there is a process in place, but I do not believe anybody has been disciplined as of yet or any proposal for discipline has been made. Senator Brown. So it has been over a year now since they entered into this lease arrangement, and I guess my question is, what does it take to get fired or disciplined at an agency when you enter into a lease that is basically a half a billion, no half--yes, billion we are talking about, a billion dollars? And I guess I should ask you, Mr. Heslop, what does it take to get disciplined and fired at your agency when something like this happens? Mr. Heslop. Sir, the disciplinary process, essentially our IG's report was issued I believe on May 17 of this year and since that time, we have followed Mr. Kotz's guidance. We have reviewed that report. Our general counsel has analyzed it in great detail. We have conducted supplementary investigations and supplementary interviews. There was a slight hold when we-- basically when Mr. Kotz referred to the Department of Justice (DOJ) the individuals mentioned in the report. As a matter of practice, we do not complete investigations or interview the individuals named until the Department of Justice comes back to us and gives us their OK that we can, so that it does not interfere with their investigation. We received that OK. The investigation then began to proceed. As the investigation unfolded, it became apparent that in the interest of objectivity and fairness, it would be in our best interest to hire an external party to help us conduct that investigation, and we are in the process right now of employing that external party. Senator Brown. So what about fairness to the taxpayers? It is like fairness for the individual. What about fairness to the taxpayers in getting the best bang for our dollar? You were in that--you were with the SEC back then when this all happened, right? Mr. Heslop. I was hired in the SEC on May 17, 2010. Senator Brown. OK. So you had no knowledge of any of this stuff? Mr. Heslop. No, and this was not under my purview. Senator Brown. Mr. Kotz, based on these types of failures, and we seem to hear it over and over, I mean, let's just talk about the SEC, for example. Do you think that Congress should simply revoke their independent leasing authority? Mr. Kotz. I think that certainly Congress should give very serious consideration to that. I mean, I have thought previously that perhaps if the SEC completely revamped its leasing area it might be given another opportunity. But I do understand now that Chairman Schapiro and Mr. Heslop have said that they intend to get out of the leasing business, that they do not feel that there is enough competence at the SEC to handle that. So I do think at this point it would be prudent to take away the independent leasing authority, yes. Senator Brown. Thank you. Mr. Wise, thank you for your testimony as well, your introduction. As you know, I am filing and have filed a bill that basically mirrors the President's idea on how to address these issues when it comes to leasing and buying and the like. I was wondering if you could describe how one of the CPRA's purposes, which is realignment of civilian real property by consolidating, co-locating and reconfiguring space to increase efficiency, do you think that could help reduce the government's overreliance on leasing? I think you kind of hinted on it in your initial opening. Mr. Wise. Senator Brown, thank you for your question. And actually, to be perfectly honest with you, the CPRA does not explicitly discuss leasing, but as I think we point out in our testimony, it certainly has a provision in it that we think could be very useful to help alleviate some of the reliance on leasing that the government has, especially with the discussion about consolidation, co-location and realignment of the Federal footprint. So we think, as we go forward, if CPRA does become codified, that there is a very good possibility that it could be a contributing factor toward helping to reduce the government's reliance on costly leases. Senator Brown. I remember your testimony when you said it takes about $1.66 billion annually to operate and basically keep open some of the underutilized buildings. I found that really fascinating. I went back to the office. We talked about it. As a result, we are trying to come up with ways to address it and get those properties out the door and get them back on the tax rolls and the like. One of my goals in my legislation is to address these. How do you think we could unlock these savings for the taxpayers? Mr. Wise. Well, I think the--as you allude to it in your statement, the key thing for the Federal Government is to get out from under costly leases that are not really very useful for the government. Because, as you noted, the operations and maintenance costs are costs that keep recurring year after year after year. So, as we move forward and the CPRA does become a law, hopefully this will lead toward the government's ability to get out from under leases that are not useful and be able to shed property that is not being utilized in various ways. Senator Brown. I know in Massachusetts when we were having some financial difficulty, a lot of the registries and motor vehicles were actually closed and a lot of the leases were canceled at the government's convenience and we were able to find spaces that were already owned by the Commonwealth of Massachusetts to put them in, whether it would be at a city hall or a State-owned building or work out an arrangement with the Federal Government. So I would hope that we could do the same thing. There is plenty of Federal buildings around where we could co-locate and combine. And Mr. Foley, how would the GSA leverage its expertise in asset management to support the CPRA process and specifically lease consolidation, do you think? Mr. Foley. Sure, Senator Brown. Thank you for the question. GSA is a leader in asset management for the Federal Government, and as I outlined, we have a strong leasing process. I think we are already working with client agencies as a part of helping them shape---- Senator Brown. Can I just interrupt for one second? Mr. Foley. Sure. Senator Brown. So if you have such a strong leasing process, I do not understand how we get into these messes with the SEC and others. Where is the breakdown, if you could, and please finish your statement. Mr. Foley. Sure. Senator Brown. And then if you could say like where is the breakdown? Why are we even here? Why are we even having this hearing today? Because if you have such a great process, how come we are not doing it right? Mr. Foley. Let me finish. Senator Brown. Yes. Mr. Foley. And then I will come back and address that. Senator Brown. Yes. Mr. Foley. I think one of the key things is working with agencies upfront to make sure that we appropriately shape the requirement so that we know how many people--we ensure that we are getting the most utilization out of it and that we can make sure that we can fit it into existing Federal space wherever possible, or minimize the amount of space that we have to lease from the private sector. So we are working with agencies on that. I thank you for your support of the CPRA bill and we look forward to working with you on that. I think that will do several key things that can really help us with consolidation. One, it incentivizes agencies to get rid of property, and two, probably more critically, it provides a source of funding to deal with some of the upfront costs. And I know a lot of people think that is toward getting a property ready for sale, but one of the intents is also to help with existing Federal property, to let us retrofit those, make them more efficient and allow us to consolidate out of leases, or perhaps build or buy a new facility to consolidate and shrink the Federal footprint. So I think we have a real opportunity under the CPRA legislation and we look forward to working with you on that. As far as your question of if we have a solid process in place, how do we end up in these situations, as I mentioned in my testimony, there are multiple agencies with multiple different authorities. The SEC lease was done outside of GSA's authority under their own independent authority, and so we were not involved in that transaction. We are working closely with them moving forward and willing to lend our expertise. And as Mr. Heslop indicated, we signed an MOU with them earlier this week where we will then be doing their leasing action for them moving forward and following the transparent process that we currently use at GSA. Senator Brown. Great. Thank you, Mr. Chairman. Senator Carper. Thank you for those questions. Thanks for the responses as well. I spent a little bit of time this week talking, in light of the deal to avoid default on the Nation's debt, I spent a fair amount of time talking with my colleagues and to the American people and the people of Delaware through the press, about how we have a tendency around here to focus on addressing symptoms rather than addressing underlying, if you would, using a health analogy, underlying cause of disease. In a situation where the Federal Government, the symptom is the debt crisis, debt ceiling crisis, the cause, and that is the sick patient. The cause of the illness, the sickness is the fact that we do not spend money wisely, we do not collect, frankly, all the money that is owed, and so what we ended up doing is not addressing the underlying cause, unfortunately. But we addressed the symptom by raising the debt ceiling and leave to another day addressing the real underlying cause. In reading through the testimony, especially GAO's testimony, I came back to the question--let me just back up. One of the things that when we look at Federal agencies, some of whom do a pretty good job at disposing of surplus properties, unneeded properties, I think VA does an especially good job, but there are others as well. One of the reasons why some agencies do a better job than others is because we actually incentivize them not to keep underutilized, unused property around. We actually allow them to sell them, keep some of the proceeds to actually fund their operation. Here we have, looking now at the situation with lease versus purchase, if you look at the way the Congressional Budget Office (CBO), scores a lease versus a purchase, we incentivize agencies to lease even when they ought to be purchased. You only know they are going to save money. And I would ask you, Mr. Wise, I am going to ask you to walk us through why we have this incentive, I think a misincentive, disincentive? Why do we have the wrong incentive? How do we actually fix it? What would it take to fix it? Does it take CBO changing their scoring approach? Is it something that we need to do legislatively to empower, direct CBO to change the way that they score lease versus purchase? Please. Mr. Wise. Senator, thanks for the question. You bring up a really important point and we have recommended a couple different times and we have also discussed in other testimonies the really important--OMB is really a key player here because they are kind of the orchestrator of the whole Federal property environment and we have recommended that they really need to work within the Federal Real Property Council to come up with a strategy to take a look at how the entire Federal property portfolio is managed. While they have agreed that is a good idea that needs to be done to kind of rationalize the entire process, they have yet to implement such a strategy because as you mentioned in your opening remarks and subsequent remarks--the issue having to do with the scoring is a major issue for agencies to be able to come up with the needed capital in order to take a look at a rational process. Another really important point is the necessary analyses that need to be done in order to make sure that you are making the right kind of decision. While, as you mentioned earlier, generally building is a less expensive option in the long run than is leasing, it is not always the case. But you need to do the economic analyses in order to do that. And so it is important to do the 30-year net present value analysis so you see how things will play out over time, and the scoring, and do the comparisons so that we can make the right decisions. You look at the commercial real estate market. It maybe makes sense to lease something where the real estate market is say relatively soft compared to a Boston or a New York or a Chicago versus a Dallas or Atlanta perhaps. So it is a pretty complex formula that goes into making these kinds of decisions, but in order to come up with the right decision, you really need to approach it in a multi- faceted way so that at the end of the day you are making the best call for the taxpayer. Senator Carper. Let me just ask you to cut through all that. I appreciate what you said. What do we need to do? What needs to be done so that CBO in the future will not say almost routinely that even when it makes economic sense to purchase, we are not going to score it that way, instead, we are going to score it in a way that almost mandates that agencies lease? How do we change that? Mr. Wise. Well, it gets into a policy area that is really not so much our purview, but as we have discussed, or as we noted, we make recommendations to OMB that they need to come up with a strategy in order to rationalize this process and so agencies can make the right kind of decision of whether to lease or to build. And we really believe that OMB is the key player that needs to address this scorekeeping issue, otherwise, the reliance on leasing, as we noted in our testimony, is likely to persist. Senator Carper. All right, let me turn to others on the panel. Same question. What I would like for you to do is give Senator Brown and me and others on our Subcommittee, our colleagues in the Senate, give us a to-do list. Put something on our to-do list. Is there something we ought to be doing to change this? It is really to change the culture. We are always looking for a culture. Anybody have a good idea? Mr. Sullivan. Mr. Chairman. Senator Carper. Go ahead, Mr. Sullivan. Mr. Sullivan. Mr. Chairman, I will maybe swim a little up river here. VA's position is a little bit different, I think, than other Federal agencies. Part of our portfolio, only about 11 percent is leasing, so out of 165 million square feet, we lease about 12 million square feet. Three of it GSA does for it. The rest we do it ourselves. Our real problem is our existing infrastructure, not leases. What do we do to consolidate? What do we do to get rid of the old infrastructure that cannot be fixed easily? In some places we do not need it. Right now we have an estimate to fix our current portfolio based upon the needs projected for veterans in 2020. We will need $60 billion to invest in our infrastructure. Clearly, that is not going to be able to be provided for in direct appropriation. I think the key to unlock that problem is to be able to tap private sector financing in working with public/ private ventures or joint ventures or with localities or other non-profits to be able to find uses for the repurposing for Federal property, to get it off the Federal rolls, to put it potentially back on the tax rolls and to relieve agencies of the large operation and maintenance (O&M) costs. The biggest drag for VA is, and I imagine for some other agencies, is the O&M costs that we have to maintain facilities that could be made more efficient, and/or consolidate. So I think it is a little bit different and the big issue about third-party financing or private sector money is the other side of the score. CBO's scoring treatment of the use of third-party funds, even if it is for non-profits or for non-government entities, they scored as if it was direct Federal spending, which basically turns off the third-party spigot of trying to utilize them to unload unneeded inventory. Senator Carper. All right, I am going to go back to Senator Brown. Before I do, one of the things that I may ask this in our next round of questions, but I spoke earlier of a need for a comprehensive bipartisan approach on deficit reduction along the lines of that recommended by the Deficit Commission co- chaired by Erskine Bowles and Alan Simpson. My sense in listening to your testimony and earlier hearings that we have had is that we also need a comprehensive approach with respect to real property management, not just to deal with the lease versus purchase issue, but to deal with all this underutilized or unutilized Federal properties that we do have. One of the things that I want to do maybe at this hearing, if not we will certainly do a followup in writing, is get your input on what should be the components of that comprehensive approach. And to the extent that we can craft a comprehensive approach where we harness market values, we change incentives which I think are misaligned toward more appropriate alignment. I would appreciate your input on that. Senator Brown. Senator Brown. Thank you, Mr. Chairman. Mr. Sullivan, just to followup, I remember your hearing--actually, as a result of your testimony telling about some of the challenges with some of the prime VA properties that potentially could be sold and taken off your rolls and put you back having more money for the veterans that need our help, instead of using it to keep buildings open and the like, you testified as to how CPRA was a welcome addition to the toolkit that you would need in reducing unneeded assets. Could you just elaborate on that, as to how that will compliment your existing tools? And also, what role does politics, do politicians have in interfering with you doing your job? I mean, if you have some assets and you want to sell them, how often does State or local--State or Federal Government come up and kind of put a monkey wrench in the plan? Mr. Sullivan. Senator, I will try and answer that in a couple of different ways. The first way would be our toolkit right now is to use our enhanced lease authority and in those cases where we can develop, if you will, a win-win strategy with the local community, the veterans, the veteran service organizations and the private interest in that area we can forge outlease with a public/private venture under that authority. We have done that in many places and it works where we can reach consensus. Where we cannot reach consensus at the local level with all the interested parties, especially local communities, the CPRA process would be a welcomed addition to be able to deal with those hard-to-do properties around the country. So I think we should use both of these approaches where we have something that works and can continue to flourish and shrink our footprint and deal with our underutilized properties we want to maintain, that authority but there are some places that CPRA would assist us in addressing those issues. There are a lot of stakeholders involved in real property in VA. As other agency and GSA has experienced, stakeholders have different interests and when we cannot align those interests, that is when things stop. So those are constant challenges in dealing with them and we face it every day. And as we move down this track, there needs to be a way to deal with those interests. Senator Brown. So getting back to my final question, I think you kind of answered it without wanting to really say it, but what role does State or Federal politicians and politics affect it? Do they specifically call and/or stop your efforts when you are trying to do some things for the benefit of the VA? Mr. Sullivan. In some cases, yes. When we cannot get alignment of interests, we have local interests that may not have the same interests that VA has, and in cases that happens and things come to a grinding halt. Senator Brown. Very smooth. It was a good answer. Very, very nice. And that is unfortunate, because Chairman Carper just asked for recommendations. I mean, I would think one of the recommendations is to let--you leave the politics out of it and let us do our jobs based on fact and based on the necessity to deal with these issues without any type of outside influence. And I would hope if you make that recommendation you would include that, very frankly, so we do not really beat around the bush in that regard. Mr. Wise, generally in larger prospectus level projects over 2.7 million and lasting over 10 years, the net present value analysis indicates it is more advantageous to purchase rather than lease. So I was wondering in the CPRA legislation that I am filing, it requires a net present value analysis of the cost of the lease compared to the cost of constructing new space. How important is it to provide this information to Congress, do you think? Mr. Wise. I think it is very important, Senator, because through using analyses like net present value and scoring, you can then be comparing basically apples to apples, because this is something that GSA had done previously and it then enables you to--it enables the agency or enables the decisionmakers to be able to come up with a decision based on where the dollar value is today versus what it will be 30 years onwards, including any potential inflation returns and other factors that get put into the mix. So we believe that a net present value analysis is certainly a key aspect of the entire economic analysis picture in order to make these kinds of decisions. Senator Brown. Thank you. Mr. Foley, what steps does GSA take to ensure that the leases contracted on behalf of the Federal clients achieve the best value for the taxpayer while also supporting the mission critical requirements? Mr. Foley. Sure. We do a couple of things and we do perform a net present value analysis, so we compare the cost of building a new Federal facility, renovating an existing facility and the cost of leasing, so we do the 30-year net present value analysis to evaluate the financial aspects. Again, as I mentioned earlier, one of the key things is making sure that we have a firm understanding of the requirements and we work with the agencies to understand how they may be able to adjust their requirements slightly to get a better deal for the taxpayer. So for instance, instead of having to be in one building of a particular size, might drive construction of a new building or limit competition to one or two buildings that have a certain amount of space available. If they can be in two proximate buildings within a block of each other or right next door or perhaps on the same campus, that opens up the competition and drives down the cost of leasing. So there are a lot of simple things that we can do working with client agencies to make sure that we can still find a way to meet their mission requirement, but leverage our expertise in the real estate market to make sure we get the best value for the taxpayer. Senator Brown. In previous testimony, I note you said that you are continually assessing your performance against other rental rates in same or similar markets to a lease cost relative to market measure. So how is the GSA doing in comparison to the commercial market in various sectors? Mr. Foley. We continue to lease at a cost below the market. I believe at the end of last year it was somewhere around 10 percent below the private sector benchmarks we were using. Senator Brown. And is that geographically driven? Is this just overall? Mr. Foley. Yes, we do it based upon a geographic market and a submarket. So we look at where we are leasing and then we find comparable rental rates from the private sector in that particular market. Senator Brown. I will just defer to you, Mr. Chairman. Senator Carper. OK, we will have a third round, so feel free. I have been jotting down some questions as you all testified and responded to questions from Senator Brown and myself. I just want to kind of walk through this list briefly if I could. One of the areas of jurisdiction that we also have is the U.S. Postal Service. We face a situation with the Postal Service literally running out of money, running out of cash later this year, if not later this year, then next year. It will be unable to make payroll. It will create a huge mess, economic mess in our country. I think about eight million jobs that depend on the mailing industry. So we are looking hard for ways to help the Postal Service right itself in a twitter, e-mail, Facebook age, to be able to meet our needs, mailing needs, but do so in a way that they cover their costs. There has been some discussion here today about consolidation, consolidating property and consolidating activities in ways that make sense. We do that through the Base Realignment and Closure Commissions and Department of Defense (DOD) about every half dozen years. Think out loud for me. Think out loud for us, about how the U.S. Postal Service might play a role here that would enable us to kill two birds with one stone. One is to meet the property needs of a number of Federal agencies that have nothing to do with the Postal Service, and yet, help the Postal Service with--to better meet its revenue obligations in order to free themselves of support from the Federal Government, Federal taxpayers. OK, whoever wants to take a first shot at that, go right ahead, please. Mr. Foley. Mr. Foley. I will start first. GSA, we worked with the Postal Service for a number of years. They are a tenant in many of our Federal buildings and we also lease space from the Postal Service. So we have many Federal agencies that are located in Postal Service Buildings. We have worked with them closely as they have been disposing of properties to identify where it makes sense for us to acquire those where we have existing Federal needs, as well as we worked with them to figure out where we are disposing of properties or where we have available underutilized properties where they might be able to utilize that. Several years ago, going back as far as 1985, we set up an MOU at the Postal Service that allowed for an exchange of properties and basically a netting of the fair market value of that. And it has been very effective, I think, for both agencies. Another area where we have been able to partner with them, Mr. Sullivan mentioned sort of the enhanced use leasing authorities. They have some authorities that we do not at GSA and so we have been able to lease from them and develop properties too specific for the IRS for service centers in Philadelphia and Kansas City, where we have been able to use a former Postal Service facility, renovate that and use their authority to create modern, efficient space for the IRS and help find a good value for the taxpayer. Senator Carper. Well, that is very encouraging. Anyone else on this? That is good stuff. Thank you. Anybody else? Mr. Sullivan. I am sure Senator, if the Post Office had sites that become available due to a downsizing and they were available and for us what would be key, would they be located in the place where we need space? That would be the critical point, of how close they would be to where veterans' needs are. And if they could be easily adapted to deliver healthcare, I am sure we would look at those and see if there was a match and take advantage of any economies that were there. Senator Carper. Oh, good. Thanks. I will just ask our staffs, both Democratic and Republican staff, to please note that. I think this is a scenario where we could help the Postal Service help themselves and if we are smart about it, could help the Federal agencies get better value for their space needs. Anybody else have a comment before I ask another question? OK. We have had some discussion, delegation of lease authority, some instances where it is done well and some instances, most certainly SEC, was not done well. Let me just ask Mr. Heslop, you used to work at Capital One, correct? Mr. Heslop. That is correct. Senator Carper. If you had employees at Capital One who were, I will use the term ``guilty'' for the kind of gross bad judgment in terms of preparing the SEC for meeting its space needs going forward, how would those employees be dealt with; what kind of accountability would have been brought to them? Mr. Heslop. I think in a relatively similar manner. Obviously, there are not the same level of rules and regulations that the Federal Government has as it relates to their employment practices, but there definitely are rules and procedures that apply. And so employees in a situation like that would be--they would have some availability of due process and it would not be an arbitrary summarial dismissal, if you will. But there would be an investigation and upon the conclusion of that investigation, appropriate disciplinary action would be taken. Senator Carper. I would hope at the end of the day appropriate disciplinary action--I think I speak for both of us--that appropriate disciplinary action be taken. One of the things that really frosts citizens of this country, taxpayers, and those of us who are privileged to represent them, is when we have bad behavior, grossly bad behavior, on the part of Federal employees or others who are using Federal--contractors, and there is just little, if any, accountability. And that is not right. I would just ask you keep that in mind. We want to be fair, but we also want--it is tough love. It is like a tough love situation. I think we need to be tough. We need to provide the example. At the beginning, I think, of your testimony, Mr. Sullivan, I think you may have asked, there were three questions that the VA asked. Would you just say those questions again for us, please? I looked through your testimony to see if I could find them. I did not see them. Mr. Sullivan. Sure. When we make capital decisions, real property decisions whether to keep something, to renovate it, to sell it, to do whatever, our primary priority is how will that impact that decision to affect veterans and veteran families, first, and we will not be doing anything that will negatively impact them. Our second priority is to make sure that decision improves the operational efficiency and cost-effectiveness of VA operations, whether it is consolidating, whether it is building a new building or whether it is buying a piece of property. The third one is we want to be a good neighbor. We are located in 165 communities around this country with major presence and sometimes we are the largest presence in that community and we do to the extent possible want to be a good neighbor to the community and reach a decision that helps us, but helps the local community. We take them in that priority, first for veterans and families, efficiency and then to try and be a good neighbor. Senator Carper. All right. Let me just ask your other panelists, are those three pretty good questions that we could use, not just in the VA, but with a little bit of modification, use outside of the VA? Mr. Foley. It is very similar to the process GSA uses and we have a broad range. But first we consider is there--what is the requirement? Is there a Federal need for the asset? And so if it is the VA, it is looking at how does it serve the VA and their customers? If it is the IRS, how does it serve the IRS and their customers or Social Security? And so the first consideration is the operational piece. The second piece that we look at is again the efficiency, the cost-effectiveness, as Mr. Sullivan said. And then the third, we do look at being a good neighbor in the community. We are in over 2,000 communities in all 50 States and 6 U.S. territories with government-owned or leased facilities and so we have a critical role across the country that we play, and particularly are focused on transit-oriented development and sustainability as well. Senator Carper. OK. Any other thoughts? Please. OK. I want to go back to the issue of delegation of lease authority, some instances where it is done well, some instances where it is done badly. As I understand it, correct me if I am wrong, but in your testimony, have you asserted that we actually lease more-- through GSA we actually lease more space than we own; is that correct? Mr. Foley. Yes, that is correct. Senator Carper. And has that always been the case or is that something that has happened in recent years? Mr. Foley. It is relatively recent. I believe 2008 was the first year where we crossed over to having more leased space than government-owned. Senator Carper. Why do you think that changed? Mr. Foley. I think a couple of things. Some of it is just purely shifting demographics and where we had Federal buildings, populations have shifted. Agency missions and needs to serve the public have moved and for a lot of the smaller locations, leasing has become the default mechanism to meet those requirements, because you would not build a 5,000-square foot building in a small community with Federal construction dollars. We put our focus toward building land ports of entry, courthouses, the major headquarters agencies and consolidations, like the Food and Drug Administration (FDA) at White Oak, the St. Elizabeth's for the Department of Homeland Security here in Washington, DC. And so it is about prioritizing the limited dollars and then for the more generic requirements that are basic vanilla office space, they often do end up in leased space instead of Federal buildings. Senator Carper. All right, thanks. Thanks very much. Senator Brown. Senator Brown. Thanks Chairman. Just a couple more. So Mr. Heslop, can you explain--I am still having trouble wrapping my arms around the whole concept of having the SEC in kind of a--I mean, here the SEC is being used to regulate Wall Street, and in fact it looks like Wall Street with the lavish surroundings, the fact that they would even take up in an area like this. Gosh, I would think they would want to go to a blighted area in Washington and bring some economic development, get a good value for the taxpayers and kind of it is a win-win-win all around. So I guess I know you were not there per se, but I mean, you are still there now, right? Mr. Heslop. I am there now, yes, sir. Senator Brown. I mean, how do you explain those kind of lavish surroundings when we are in a period of austerity? Mr. Heslop. It is my understanding that the situation that occurred was this. I do not believe that the lavish surroundings was as much of a motivator as a very flawed process to develop a space estimate and then a very flawed process to get the decision made to take the building. You have to remember that at the time, Dodd-Frank had just passed. The SEC was given a significant amount of new responsibilities, derivatives oversight of a trillion dollar industry, registration of hedge funds, as I mentioned in my testimony, a number of new responsibilities. It was going to drive the hiring of a significant number of new employees, and those new employees needed space to be housed. There is a housing versus hiring mismatch. We typically can bring employees on in about 90 days. As you know, it takes significantly longer to house them and so I think, it is my understanding, but I believe the people at the time felt very much under the gun to try to obtain space sufficient for the resources we were bringing in. Because they used a flawed space estimate, we were originally looking at four properties in the D.C. area, oh by the way, against the chairman's guidance. She wanted them to look in the regions for housing for our enforcement---- Senator Brown. What chairman? Mr. Heslop. Chairman Schapiro. She wanted them to look in the regions for both our enforcement and our examination staff, because that is where a lot of the activity occurs. For whatever reason in this broken process, the staff and the facilities group disregarded that directive and then tried to look for space and when they went through the estimate process that Mr. Kotz has described and it was grossly inflated, they arrived at a number of 900,000 square feet. Once they hit that number and landed on that, the other three properties that were being considered were suddenly out of the equation. And so they believed they were left with one and only one property. It was an emergency situation and they felt at the time, I think, that they were getting a good deal because the rental rate received was below the market rate at the time. And so that is the way it was presented. Senator Brown. OK. I am just wondering if that type of office space is appropriate for a Federal agency, quite honestly. That is top-of-the-line space and I guess I am wondering, I think it would be probably Mr. Foley then, what is the square footage rent for the clients that I guess are now subletting? Are we subletting with clients in there now? How does it work, because they are in the space, but they are not obviously, occupying it? So you have other Federal agencies in that space, right? Mr. Foley. We are working with the SEC to take that on, but we have not come to agreement on a lease and a term with them. We are still trying to figure out which agencies we might align. I understand that they have subleased some space directly with other agencies, but we were not a party to that. Senator Brown. Other Federal agencies. What are you getting for rent on those? Mr. Heslop. I do not know what they are getting. I do know it is at a higher rent than we had originally been on the hook for. Senator Brown. So another Federal agency is paying a higher rent? Mr. Heslop. Yes. It is not a sublease. Yes, another Federal agency, as I understand it, is paying a higher rate. Senator Brown. So you guys are paying basically a half a billion dollars and then you are subletting it. Mr. Heslop. We are not subletting it, sir. We have been completely released from two-thirds of the space. Senator Brown. OK, so that entity is now paying the landlord a higher rent, has nothing to do with you. Another Federal agency is now paying a higher rent that you are ultimately paying; is that right? Mr. Heslop. That is my understanding, yes, sir. Senator Brown. So how does that happen? Have you been working with those other agencies if it is a higher rent? Mr. Foley. We have not. As I mentioned, for large leases, we have a number of controls in place and particularly for the District of Columbia and the National Capital Region, we actually have prospectus rent caps that we put in place for all of our leasing actions to ensure that we get a good deal and we stay at or below the market. Senator Brown. Right. So let me just make sure I understand this. So you entered into a lease. I understand all the background. You have been released from two-thirds and now that two-thirds is now being rented to another Federal agency, at now a higher amount than the half a billion dollars that you ultimately were paying. Are we just repeating what we just went through with other agencies? Do we need to find out who those are? I mean, this is like Groundhog Day, you guys. I mean, really, thank you for laughing, because I do not even know how to respond. I did not even realize that in my line of questioning, but I guess if you keep digging like we are doing, we find more and more and more. I would like to find out, Mr. Chairman, whether we do it--I do not know who to ask here. Like who is the new entity? Did they go through the process that we have been talking about here? Are we doing the same exact thing that the SEC did? I mean, I would love to have those answers, because it is just not passing the smell test today. Maybe because we are the only hearing here today that we are on top of this, because I think that is so critical. If you are developing and you have in place appropriate leasing guidelines based on all the formulas and everything and you are entered into an MOU with the SEC, correct? Mr. Foley. The MOU is for all leasing actions going forward. Senator Brown. Right, going forward on other things that they may want to lease? Mr. Foley. Yes. Senator Brown. So basically I understand that. Mr. Foley. Yes. Senator Brown. How about the entities that are now taking over; you do not even know who they are, right? Mr. Foley. That was done under their own independent authorities, I believe. Mr. Heslop. Senator Brown, if I might. The Federal Housing Finance Agency (FHFA) and the Comptroller of the Currency (OCC), both self-funded agencies, are in that property now. Senator Brown. Oh. Mr. Foley. So we are working with them to take, I believe, it is 350,000 square feet and we are working through our typical process to find a tenant and make sure that the rent is appropriate. Senator Brown. Great. Well, listen, thank you, Mr. Chairman, for holding this. Again, it is another area--I mean, every time you hold a hearing, I learn more and more about where we are wasting money and I am hopeful that the President and both houses are listening to what we are doing, because we have given them great, great things to just go and fix. Executive Order (EO) No. 1, fix it. Senator Carper. As I have said before, GAO gives us a to-do list and you do it through your high-risk list and it is not just a high risk for this Subcommittee or for the Senate or the House. It is a high risk for all of us, including OMB, including the President, his folks, Federal agencies and certainly all of us. I want to just followup on Senator Brown's line of questioning and just ask, for the space that I guess the SEC is now occupying or about to occupy at Constitution Center, it sounds like they are going to be occupying about one-third as much space as was originally thought; is that correct? Mr. Heslop. Senator, we are on the hook for one-third of the space. We have no intent to occupy that space. Senator Carper. At all? Mr. Heslop. At all. Senator Carper. If you look at the---- Mr. Heslop. Rent will be due in January 2013, and we firmly believe and are very optimistic in terms of our partnership with GSA that we will be able to find a tenant between now and January 2013. Senator Carper. That is good. Give us some idea what the cost per square foot of that space would be if the SEC were occupying the space on January 1, 2013; what would we be talking about? Mr. Foley. At the time we were talking about cost per square foot of $44, which would have jumped to $47 per square foot 6 years later. Senator Carper. Somebody here at the table has better than--I know what $44 and $47 per square foot, how that would be regarded in Wilmington, Delaware. It would be pretty steep, maybe not so much here. But give us some idea how does that number jive with the rest of the real estate industry around here, real estate, the market, particularly in this area, this area of---- Mr. Foley. I mean, all real estate is local and there are a number of submarkets in the Washington, DC. area and so rent is fairly extreme. But our rent cap for the District of Columbia is $49 a square foot, so $44 is below the prevailing market rates. That said, there are some submarkets and locations within the District where you can get rents below that. Senator Carper. So for the other agencies, which OCC, what was the other one? Mr. Heslop. FHFA. Senator Carper. OK--that are going to come in and lease space at Constitution Center, if they come in at the same rate, $44 or $47, are you saying they would be under the overall rate for this kind of office space in D.C.? Mr. Foley. For the governmentwide prospectus rent cap yes. Now, we have seen deals that are below that, as I said, in some locations, north of Massachusetts Avenue and some of the developing areas we have received better rates than that. But for that part of town, it is---- Senator Carper. All right, a different question and one that deals with the corrective activities. Mr. Heslop you outlined for us on the corrective activities that have taken place at the SEC in light of this, what I would say is scandalous behavior on the part of some employees there. But what, if any, is the applicability of the corrective action the SEC has taken; how does that apply potentially to other Federal agencies. Mr. Foley. Mr. Foley. I mean, I think it is an example of how important it is to get the checks and balances correct. One of the advantages we have at GSA is we work with the Office of Management and Budget and so I think one of the big issues that SEC had in hearing their testimony and working with them was in developing that upfront requirement, figuring out how many people they had, what the right utilization rate for the space should be and were they going to be fully funded for all of that. And so for all of our leasing actions, we not only work with the agency to make sure we understand that, but we also work with our budget examiner and their budget examiner, as I mentioned in my opening testimony, to make sure that the staffing levels are supported and the rental payment will be supported in the President's budget so we know that the people are going to materialize and the funding will be there to pay for it before we proceed on a acquisition like this. Senator Carper. Thank you. Mr. Heslop, the SEC was granted, I believe, independent leasing authority in 1990. However, as the IG has pointed out, it took the SEC 19 years to establish a centralized asset management office to handle its leasing activities; is that correct? Mr. Heslop. That is my understanding, yes, sir. Senator Carper. The SEC established a leasing branch within its Office of Administrative Service in, I believe, April 2009 and did not put into place leasing policies and procedures until August 2010. Let me just ask you, if I could, sir, how many leases do you think might have been awarded over that 19-year period of time? You can do this with 20/20 hindsight, be a Monday morning quarterback, but why did it take the SEC so long to put a system in place that would allow the organization to effectively manage its leasing activity? Mr. Heslop. Yes, sir. To the first question, it is my understanding that we have entered into 32 total leases over the course of the last 20 years. I really cannot speculate as to why they would not put one in place. I suppose because 32 leases in 20 years might cause some to say ``do you need a full-time leasing staff, a dedicated leasing staff? '' But again, I cannot really speculate. What I can say, sir, it is very apparent to us that this is not a core competency that the SEC needs to be engaged in, and that is exactly why we are moving into a partnership with GSA. I would say to my---- Senator Carper. You are the master of understatement. That sure is not the---- Mr. Heslop. The GSA, by the way, sir, has just been terrific in terms of partnering with us and helping us out of the situation, so I would like to thank them for that. Senator Carper. Good. That is good to hear. Mr. Heslop, do you have any idea how many leases the SEC currently manages? Mr. Heslop. We currently have 15 in the portfolio. We have 11 regional offices. We have the Constitution Center space that, as we know, we are still on the hook for. And we have the Station Place facility, which is where our headquarters is. We have an operation center in Northern Virginia, and then we share space with other Federal agencies in a very small COOP site. It is in Southern Virginia. Senator Carper. How long did you work at Capital One? Mr. Heslop. I worked at Capital One for approximately 12 years. Senator Carper. Taking your private sector experience at Capital One and then putting it sort of side by side with your--what are you in about a year or so now with the SEC? Mr. Heslop. It is about 14 months. Senator Carper. It probably seems longer. But what kind of lessons learned would you like to impart to the rest of our Federal Government given what you have seen at the SEC in terms of real property management? Mr. Heslop. In terms of real property management, I would say the lesson learned, I think, for small agencies, especially like ours--we are a very small agency, 3,900 people and on any given day 700 contractors in a very limited real estate footprint. But I would say it is about determining what your core competencies are and what they are not and divesting yourself of those that are not. I was hired to be a change agent, similar to your remarks earlier today. I am a taxpayer at heart and I was brought in to try to create change and move the SEC to a more well-managed environment, and one of the things that I have tried to do is move us out of those areas that are not our core competencies and giving those to agencies that can do them better. We are doing the same thing with our financial management reporting system, moving them to the Department of Transportation (DOT) as a Federal shared service provider, and I would say going in directions like that for small agencies, at least, I think is good advice. Senator Carper. Thanks for those comments. Given the size of the Constitution Center lease, both in terms of square footage and funding, why didn't the SEC seek assistance from GSA before entering into the lease? You mention they have a pretty good partnership now with GSA. Why do you suppose they did not seek the consultation or assistance from GSA in the first place? Mr. Heslop. Sir, I wish I could answer that. I really cannot Monday morning quarterback that one. Senator Carper. Mr. Wise, in your testimony, I think you indicated the roughly 36 agencies that have independent leasing authority. Generally do some of these other agencies with independent leasing authority have adequate expertise and internal controls to ensure that they are not--that they are getting the best possible terms for themselves and for their clients who they serve and for taxpayers? Mr. Wise. Senator, we do not have a large body of work looking at exactly that question, but we did have a look at where the National Transportation Safety Board (NTSB), had some issues with a lease for its training facility out in Dulles where they mischaracterized or misconstrued a lease as an operating lease when it should have been a capital lease, which resulted in an anti-deficiency issue and caused some real issues with the agency in terms of its accounting and getting its fiscal house in order. That leads to the larger point that Mr. Heslop has talked about, as well as what you mention in your opening remarks, is that for smaller agencies, especially that are not heavily engaged in real estate activities, as you know better than anyone, I guess, it is a very complicated environment to deal with leases and construction and if it is not a core mission or it is not even a significant one for a small agency, I think it is logical that they need to tread very carefully in this area because it is easy to fall into problems when you have capacity issues or it is a challenge for the administrative side of an agency to deal with these things. Senator Carper. On the one hand, agencies can purchase space. On the other hand, they can get this designation, independent designation that some have and then they can lease or they can go through GSA and lease. How prevalent is the notion of lease purchase and is that something that agencies do from time to time? Is it rare? Is it more common? Is it a smarter approach in certain instances? Anyone? Mr. Foley. I will jump in with that. Lease purchase is something that GSA has done in the past, but that was prior to the Budget Enforcement Act. It is one of those things that triggers capital lease treatment if you have a bargain purchase option. So in essence, leasing to own is prohibited because all the funds get scored upfront. That said, some of our leases done prior to 1990, like the Columbia Plaza example that I mentioned, we were able to acquire that. We had a purchase option in the lease for $100 million. As it turned out at the time we exercised it, the building was worth about $200 million and we are saving rent of somewhere in the ballpark of $45 to $50 a square foot that we are no longer going to have to pay once we take ownership of the building. So there are a lot of advantages to being able to do something like that, but it is an area where similar to what Mr. Sullivan said, that the Budget Enforcement Act and the budget scorekeeping rules limit some of the flexibility that we have had in the past. Senator Carper. That is good to know. Not actually good that it exists, but it is good to know. That is helpful. Couple more. Senator Brown, do you want to jump in here? I think you said you only had those others. Senator Brown. Just one more. Mr. Heslop, I do not want to beat a dead horse, but I just want to understand. So when you say we are on the hook for this space, but we are not using it, so you are not physically in the space, right? Mr. Heslop. That is correct; we are not in the space. Senator Brown. When you say we are on the hook, you mean the taxpayers are on the hook? Mr. Heslop. The SEC is funded by fees. However, we get our appropriation from Congress and basically there is a mixed tradeoff. So it is not direct taxpayer dollars, but---- Senator Brown. Someone is paying. Mr. Heslop. There is an obligation that will come due in January 2013 if we are unable to find a tenant. However, I think our conversation with GSA is they are very optimistic that between now and then we will---- Senator Brown. So you are not in that space, but you are already in another space which you are paying for right now, a couple of spaces you indicated, throughout the region; is that right? Mr. Heslop. Right. We have 11 regional offices, our headquarters. Senator Brown. I just want to make sure I understand that. OK, that is it, Mr. Chairman. Thank you. Senator Carper. Mr. Kotz, in your May 2011 report you indicated the SEC grossly overestimated the amount of office space it needed. It might have violated Federal law when it signed a $556.8 million 10-year lease last year at Constitution Center. Based on your findings, what internal controls did the SEC have in place to ensure that it was leasing the appropriate amount of space in the most advantageous location and at the best rate? Mr. Kotz. Yes, I do not think they had any significant internal controls. I think that was part of the problem. I know that they are making efforts to put controls in now. Senator Carper. Let me just ask, what were they thinking? Mr. Kotz. I do not know. I do not know exactly what they were thinking, but---- Senator Carper. Did you ever ask? Did you ever ask---- Mr. Kotz. Yes. Senator Carper [continuing]. What are you guys thinking? Mr. Kotz. No, we did and I think what it came down to was they had a misunderstanding of whether they needed this space. I think some folks did fall in love with the space and decided that was where they wanted to be. They wanted to make sure that they could all be in one building and they wanted to have as much of the building as possible. It was a process that moved forward in relatively quick time without a lot of thorough review or analysis. It ended up with a very flawed process. Senator Carper. Let me followup to that if I could. As part of the authorization process for new leasing proposals, agencies are required to receive congressional approval for releases, I think, valued at about $2.8 million or more. How is the SEC able to enter into the Constitution lease without Congress being aware of the potential problems associated with the lease of this magnitude and did the SEC's independent leasing authority preclude them from having to receive congressional approval prior to executing the lease? Mr. Kotz. Yes, I believe that there were a couple reasons. One is the independent leasing authority. I think the other issue is the one that you have mentioned several times, the so- called scoring issue. So when you have a lease, you can sort of allocate a certain amount for each year. If you allocate a certain amount for the first year, you do not get over a particular threshold, while if you purchase, you allocate the whole thing in one year and you get over thresholds. So by using a lease, you cannot be subject to certain notifications and I think in this case, that was a very big negative factor because had there been notifications to OMB, Congress, there have been communications with GSA, I think somebody would have looked at this more carefully and come to a different conclusion. Senator Carper. And two more questions, Mr. Kotz, if I could, of you. What would be the consequences if the SEC were required to go through GSA for all future lease acquisitions? Mr. Kotz. I think there would be someone looking at the leases who was competent, ensured that the taxpayer got the most value, I think would be a very good thing. Senator Carper. OK. And was the Constitution Center lease an anomaly or does the SEC lack the necessary expertise and internal controls to ensure they are getting the best possible term when it leases space? I think I know the answer to the question. You do not have to answer it. Mr. Kotz. OK. Senator Carper. Mr. Foley, when GSA acquires a leased space for many Federal agencies, as you have testified, has delegated that authority to many others, how many agencies do you think have delegated authority to enter into lease agreements, any idea? Mr. Foley. Delegated from GSA? Senator Carper. Hmm-hmm. Mr. Foley. I have that list here. Just a second. It looks like it is probably 15. The largest user is USDA and they have probably two-thirds of the lease delegations from GSA. Many of the others are much smaller in terms of one or two specific transactions. Senator Carper. All right. What criteria does GSA use to determine whether an agency should have delegated authority? Mr. Foley. Sure. We have a number of different criteria. The first is we look at the size of the requirement and for the most part, we do not delegate anything over 20,000 square feet that comes into our agency. For the smaller requirements, we look at their management plan. We make sure that they have a warranted contracting officer, as I mentioned, who can execute the lease in the procurement. We make sure that they have a plan to follow all the appropriate procurement rules and regulations that would be under GSA's, and then we provide oversight to make sure that they are following through with that. Senator Carper. What type of oversight does GSA perform after agencies with delegated authority enter into lease contracts and that said, how does GSA verify that an agency did not lease more space than it needed? Mr. Foley. That is an issue for us and so we do work with the agencies post-award and we look at the lease contract to make sure that it is in line with what we delegated. Senator Carper. One of the things I like to do when we come to the end of a hearing, sometimes and I am going to do it today--I do not always do this, but today I would like to do it--is just to ask--you have all had the opportunity to prepare for today, had the opportunity to present your testimony, to respond to our questions, to hear what your fellow panelists have to say. Let me just ask you to take maybe a minute a piece and just give us any concluding remarks. We always ask you to do opening remarks. Sometimes I find the most valuable input that we receive is actually sort of the retrospect and concluding remarks. Let's see, if you do not mind doing this, we will just start with Mr. Wise, please. Mr. Wise. Senator, thank you. Senator Carper. What I focus on around here is how do we build, how do we develop consensus? How do we develop consensus within the Executive, Legislative Branch, bipartisan, how do we do that in order to get better results for less money? I am just interested in getting things done. I think you are as well. But keep that in mind. That is what my goal is, consensus, how do we get things done? How do we do it in a way that gets better results for less money? Please. Mr. Wise. Senator, I would conclude with two points. One, when you talk about building consensus and bipartisanship, I think CPRA is a promising start in that direction that will hopefully lead to some efficiencies and some cost savings for the taxpayers. So I think that is a good start moving, or a good thought process to be developing as this moves toward--the legislation moves forward and the differences are reconciled between the sort of three different versions. And the second point is that we think it is very important that in terms of looking at the whole issue of leasing, purchasing and score keeping that OMB continues to work toward developing and implementing the strategy that will help rationalize this process. Senator Carper. OK, thanks. Mr. Heslop. Mr. Heslop. Thank you, Senator, for the opportunity. I would say two things. One, as a taxpayer, I would certainly be supportive of the CPRA type approach as well. As a previous former Army officer, I can tell you, I have seen BRAC work its way through and seen the benefit that has added. I also would come back to the comments I made earlier, at least for small agencies, determining what your core competencies are and what they are not and finding a home for those things that are not and hopefully that would hit your agenda about savings tax dollars. Senator Carper. Good. What did you do in the Army? Mr. Heslop. I had a variety of assignments. I had an eclectic career as an Army officer. It ranged from a troop leader through an operations research analyst through working as the chief of staff to the chief of staff for the Army at one time, so I had a wide variety. Senator Carper. How long did you serve? Mr. Heslop. Twenty-two years. Senator Carper. Twenty-two. Thanks for that service as well. Mr. Kotz. Mr. Kotz. Yes, I think the one thing that struck me was what you, Mr. Chairman, were saying about disincentives in the beginning of the hearing. There should not be an incentive in place to lease versus purchasing. The incentives should be with respect to maximizing value for the taxpayer. I mean, that is where the incentive needs to be, whether it is purchasing or leasing, and perhaps we have gone away from that by focusing on one particular type of effort. So if something was done to put the appropriate incentives in place, I think we would all be in better shape. Senator Carper. Good. There might be an exception when leasing actually does make more sense. And a classic example Census need a lot of space every 10 years, but not before 10 years. Mr. Kotz. Right. So if the incentive was to maximum value, the incentive in that case would be to lease. In other cases it would be to buy. Senator Carper. All right, thanks. Mr. Sullivan, please. Mr. Sullivan. Sure. A couple items, Mr. Chairman. No. 1, I think we heard today is the critical nature, having good internal controls on a professionally groomed, if you will, contracting and project management staff. VA is spending significant amount of effort, time and resources to make sure our leasing staff is fully trained, meets all the requirements and also has strict internal controls. Every lease at VA more than 10,000 square feet is reviewed by numerous offices, including our general counsel, including our secretary personally signs them all. I can assure you that if anything, at VA most of the folks think there is too much review. I do not agree with that, but that is the groundswell. We have strict internal controls. The other item is in terms of leasing for providing medical services, is very different from providing office space. Medical leases really work well because No. 1, the population may shift of who we provide services to. And No. 2, which has become more apparent over time is the technology of providing medical services changes. So if we do a 10-year lease, the way we provided magnetic resonance imaging (MRIs) 10 years ago, radiology, oncology treatment, all of those things have changed. The building needs to be updated for the latest medical technology and radiology and other telemedicine, teleradiology as well. Leasing works well for that. And No. 3, I think is the key to this in the end is to find some way to incentivize the scoring process to be more rational on leases, but also to help us disinvest where we need to disinvest. Senator Carper. OK, thanks. Mr. Foley, you get the last word, well the next to last. Mr. Foley. Thank you, Senator. I appreciate your comments about consensus. And like the VA, GSA has a well-trained professional staff of leasing folks across the country. I think the area where everyone seems to be in agreement, there is a little--varying approaches on how to deal with this, but it is clear there needs to be some reform in terms of real property. I think we need to give agencies the tools to manage their property effectively. The Administration's proposal for CPRA, we estimate as much as $15 billion in potential savings that could be achieved. So by giving agencies an incentive to get rid of property they do not need by finding a way to help them fund some of those upfront costs to better utilize existing space or dispose of property they do not need, and by creating an independent panel that sort of offsets some of those competing stakeholder interests that you yourself mentioned and that we spoke about here in the hearing today, I think there are ways to streamline the process and make it much more effective for the taxpayers and help save those billions of dollars. Senator Carper. All right, thanks. Let me ask a question of our staff over here. How long do Members have to submit questions for our witnesses? Two weeks, all right. And what period of time is there for submitting additional like statements or materials for the record? All right, maybe 2 weeks. We will double check that. All right, let me say to our Republican staff, anything else you guys have for our witnesses? How did they do? Pretty good, huh? These guys grade on a curve; so do we. Anything else here? All right, well, on behalf of Senator Brown and myself and those who have fled our Nation's Capital and did not join us today, were unable to, we appreciate your testimony. I was talking with our staff yesterday about this hearing. We actually were talking on Tuesday about whether actually to go forward with the hearing since a lot of Members, House Members, Senators had left. I think the House left us on Monday. Some Senators are still around, but a lot are gone. But the questions, this is not the sexiest topic to be holding a hearing on. We are delighted to have the kind of media coverage that is demonstrated here today, appreciate that. We are talking about a lot of money here. We are talking about a lot of money that is not being spent wisely. And going forward, we are going to have to--and almost everything we do in this government of ours, we got to find ways to get better results for less money. And whether in this case the leases are paid for by user fees or whether they are paid by appropriated dollars, we just got to find ways to do almost everything, whether it is defense or non-defense, discretionary, entitles, all that stuff, got to find ways to get better results for less money. And this is an area that has cried out to be addressed for years. And for one reason or the other, we have not risen to the occasion and addressed it. Maybe we talk about being on watch and I am on watch here for at least until the end of next year as the Chairman of this Subcommittee that a number of colleagues serve on. But on my watch, we are going to fix this. We are going to fix this problem. We are going to put in place a comprehensive solution to fixing this problem. And we appreciate your help today toward maybe getting us heading in the right direction. We appreciate your willingness to help us going forward to make sure we get to the destination the taxpayers would have us arrive at. And with that having been said, thank you all for joining us today, for your testimony, for your preparation, for your responses and for your willingness to help make sure we get that ship headed to the right port. And that is what we are going to do. Thanks so much. 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