Staff Paper Prepared for the President's Commission to Study Capital Budgeting

July 21, 1998
What limitations currently exist on the use of under-used or unneeded capital assets to finance capital investments? Which are appropriate and which should be eliminated or changed?


    In recent years Federal agencies have initiated efforts, with mixed results, to find new ways to finance capital acquisitions and improvements. Many of these efforts have involved the use of receipts from outleasing or selling unneeded or under-used assets. In some instances, agencies have been able to acquire new assets by exchanging assets they no longer needed. The Appendix summarizes some of the more significant cases.

    With few exceptions, however, agencies are not authorized to sell, exchange, or outlease capital assets that are no longer suitable for supporting their missions, and to use the proceeds for new capital projects or other purposes. Current statutes generally require that assets no longer usable by Federal agencies be declared surplus and disposed of. Surplus assets must first be offered to state and local governments and certain non-profit entities and, only if not claimed by one of them, sold. With limited exceptions, agencies are not authorized to use the sales proceeds for their own purposes. This paper describes the current situation in greater detail and examines options for agencies to obtain value from capital assets that are otherwise of no further use to them.

Property Act Requirements

    The rules governing the redeployment and disposal of capital assets derive from the Federal Property and Administrative Services Act of 1949, as amended (Property Act). This Act establishes governmentwide authorities and requirements pertaining to the utilization and disposal of both real property (i.e., land and structures) and personal property (i.e., equipment). Although the specific requirements may vary considerably based on the specific property type (e.g, computers), the source of the property (e.g., law enforcement), and other characteristics, the general requirements are:

  1. When an agency determines that it no longer needs a piece of property, it must report that property excess to GSA.

  2. GSA offers the "excess" property first to other Federal agencies and arranges for the transfer of the property if another Federal agency comes forward to claim it. GSA also decides which agency will receive the property, if more than one agency claims it. In the case of real property, the receiving agency is required to reimburse the transferring agency for the property at its fair market value.

  3. If no Federal agency claims the "excess" property, GSA declares it "surplus" and offers it to a whole host of non-Federal claimants, which include homeless groups, state and local governments, and non-profit organizations. The Property Act and other statutes establish the priority in which competing claimants have access to "surplus" Federal property. The property is usually donated to the claimants with little or no reimbursement.

  4. If none of the non-Federal claimants requests the "surplus" property, it may be sold to the public. With limited exceptions, the proceeds are required by laws to be deposited either in the general fund of the Treasury (for personal property) or in the Land and Water Conservation Fund (for real property).
    The Property Act also allows agencies that want to acquire personal property to sell or exchange similar property and use the exchange allowance or sales proceeds to pay for the new property. Property that is sold or exchanged for this purpose may be unneeded or under-used, as long as it has not been declared excess.

Constraints on the Use of Federal Capital Assets to Finance Capital Investments

    The first constraint is political and results from the expectations, ratified in statute, of various non-Federal claimants that they are entitled to surplus Federal property. Each year, special interests seek new statutory authority to be added to the list of authorized claimants or to raise the priority of an existing claim to surplus property. The Property Act defines exchange/ sale authority for personal property fairly broadly. However, various claimants, notably the State Agencies for Surplus Property, have pressured GSA to issue more restrictive regulations than required by the Act in order to increase the likelihood that certain property will be available for donation. Claimants, both current and prospective, can be expected to oppose any actions that they view as likely to reduce the property available to them.

    The second constraint is the Property Act itself, which provides exchange/sale authority only for personal property. The FY 1997 Consolidated Financial Statements of the U.S. Government show real property, including land, valued at $304 billion(1) and "furniture, fixtures, and equipment" valued at $111 billion. Therefore, exchange/sale authority is not available for the greater part of Federal property. Another weakness of the Property Act is that it mainly addresses the utilization and disposal of Federal property, not the complete property life-cycle, which also includes planning, budgeting, and acquisition. Therefore, it provides no authority to establish a comprehensive, governmentwide framework for making property exchanges or reinvesting the proceeds of property sales. Such a framework is essential to define the appropriate roles of the agencies, the President, and Congress in such decisions. The Capital Programming Guide, issued by the Office of Management and Budget, provides guidance to individual agencies in making capital investment decisions, acquiring capital assets, and managing them. Given the current limitations on the uses of under-used or unneeded assets, the Guide does not address the potential reinvestment uses of these assets.

    The third constraint is the GSA regulations implementing the "exchange/sale" authorities in the Property Act. Although these regs were recently revised to increase agencies' flexibility, they still make clear that "exchange/sale" authority is limited to replacing property that is identical or in the same Federal Supply Classification group and performs substantially the same tasks as the property being sold or exchanged. The regs still prohibit certain classes of property from being acquired using exchange/sale proceeds (e.g., furniture, firefighting equipment, and hand tools). The regs also state that personal property reported as "excess" or "surplus" may not be exchanged or sold and the proceeds applied to acquiring property.

    A fourth constraint could be CBO's interpretation of the BEA scoring rules. CBO generally will not score increases in receipts for legislation that requires actions (such as asset sales) that are already authorized. Under CBO's scoring, therefore, the proceeds of an asset sale already authorized under the Property Act (or any other law) cannot be counted as an offset to spending for a replacement or new capital item. This caused a problem for the Department of Energy's Asset Management Pilot Projects, which is discussed in the Appendix.

    A fifth constraint is the lack of accurate, timely data on the ownership, nature, location, and condition of Federal capital assets, both within agencies and governmentwide. Without such data, effective decision making to support the reuse of those assets is not generally possible; it can occur only in the isolated circumstances where good data may be available.

Option -- Whether to Increase Agency Authority:

    The fundamental question is whether to increase agencies' authority to dispose of their property and use the sales proceeds or exchange authority for new property acquisitions, other purposes related to their property, or other purposes generally. For the options listed in this paper, all uses of exchange and/or sales proceeds are limited to property-related purposes; i.e., only available for reinvestment in the agencies' capital asset portfolios.

    If the reasons to increase agency authority are convincing, on balance, alternative methods can be considered in the next section. Even so, however, the reasons against increasing this authority must be considered in judging which options are desirable.

Options to Increase Agency Authority:

    These options are listed in order of relative ease and address changes that might be made to GSA's regulations and the Property Act. The Property Act changes considered are only those that deal with use of proceeds from the exchange and sale of assets. Political constraints, the probable impact on Presidential and Congressional influence, and the relationship to BEA scoring are discussed in the pros and cons of each option, where applicable. Improving data on capital assets is essential to realizing any benefits offered by expanding opportunities to reinvest the value inherent in under-used or unneeded assets, and options for better data are discussed in a separate paper.

Option 1. Revise GSA's regulations to broaden the use of exchange/sale authority to the fullest extent permissible by law. For example, "similar property" could be defined more widely, and the "prohibited list" could be limited to hazardous items such as weapons and chemicals.

Option 2. Amend the Property Act to extend exchange/sale authority to real property. The GSA regs would also be amended to implement this change in the broadest way possible. Option 3. Amend the Property Act to extend outleasing authority to all agencies that own real property. This would be based on the Enhanced-Use leasing authority provided to VA, though as mentioned earlier, receipts from these leases would have to be used for property-related purposes. Option 4. Amend the Property Act to permit agencies to retain all or part of the proceeds from selling their unneeded property. This option has been proposed for years, most recently by GSA for the Public Buildings Service's real property and by VA. For this option to offer agencies any real incentive, they would have to have the authority to sell property before declaring it excess and subject to the current Property Act requirements. As mentioned earlier, proceeds would have to be used for property-related purposes.
Agency Initiatives to Obtain Value from Capital Assets

    Agencies' frustration with their inability to obtain some value from their otherwise unneeded real and personal property assets has led to various attempts to amend the Property Act or enact separate authority, some of which have been successful. The more significant agency initiatives and their results to date follow:

Defense Base Closure and Realignment Act of 1990 (BRAC). This Act delegates to the Secretary of Defense the authority to manage the disposal of military bases that have been approved by the President after being recommended by an independent commission. The Act also authorizes the proceeds from the sale of these properties to be deposited in a special fund and used to pay for a variety of expenses incident to the base closing, including environmental cleanup and caretaker operations at closed bases. To date, 97 major bases have been closed under this authority, and hundreds of smaller installations have been closed or realigned. The majority of property involved has been either transferred to other Federal agencies or donated to local communities.

As of the end of 1997, only $121 million had been received from the sale of BRAC property, all of which has been spent on expenses incident to base closing. These receipts are significantly lower than the $billion+ figure that was discussed when BRAC was first authorized. The failure to achieve these goals is a result of several factors, including: private sector reluctance to pay the expected price for buildings and land that were not always maintained to local construction codes, concern about investing in a local economy damaged by the loss of the base, political pressure for quick redeployment, and political pressure to donate property for local development purposes, coupled with DoD's interest in getting rid of the costs of keeping an empty base.

Department of Energy (DOE) Asset Management Pilot Projects. DOE has long been authorized under the Atomic Energy Act to sell certain excess assets. Few sales were conducted under this authority because DOE could get no credit for the receipts other than offsetting its direct costs of preparing materials for sale and conducting the sale.

In June 1997, the Administration proposed legislation authorizing the Department of Energy to collect receipts from sales, leases, and other dispositions of assets under specific pilot projects and, to the extent provided for in advance in appropriations acts, credit the cost of the sales, leases, and other dispositions and up to fifty percent of additional receipts to offset discretionary spending. The remaining receipts would be credited toward miscellaneous receipts in the Treasury. At the same time, the Administration submitted a budget amendment requesting six specific sales. OMB scorekeepers determined that there was no PAYGO impact to the authorization legislation because it was subject to further appropriations action. OMB further determined that the sales would not occur without the appropriations legislation and, therefore, scored the full amount of the estimated receipts from the sales as offsets to discretionary spending. The amounts credited to DOE were of course scored as discretionary spending.

CBO did not agree with the OMB interpretation. CBO noted that DOE was already authorized under current law to conduct the sales and deposit the receipts in the Treasury. CBO maintained it was not relevant whether DOE would actually conduct the sales absent the additional spending authority in the proposed legislation. Therefore, CBO determined that the receipts could not be credited as a mandatory or discretionary offset, but that DOE's additional spending would count against the discretionary caps. In view of the CBO determination, both the authorizing committees and the appropriations committees substantially modified the Administration's proposal. Authorizing and appropriations legislation was eventually enacted that merely duplicated DOE's existing authority to use proceeds from asset sales, leases, and dispositions to defray the direct cost of these transactions.

Department of Veterans Affairs Enhanced Leasing Authority. A 1991 law provided the Department of Veterans Affairs (VA) authority to enter into long-term Enhanced-Use leases (up to 35 years) of VA property in return for any "fair" combination of monetary consideration, services, facilities, or other benefits that enhance departmental missions or programs. VA runs a medical care system that includes 173 hospitals. Care is dramatically shifting from inpatient to outpatient, but it has been nearly impossible to close underutilized and costly medical facilities due to local resistance. Recently, VA successfully entered into an enhanced-use lease with the state of Indiana that resulted in the disposal of a high-cost hospital in return for $15 million in financial benefits plus $5 million in annual savings. Absolutely no political backlash from interest groups occurred because funds were reinvested in the local area for veterans services. VA's Washington, DC, office used this authority to obtain an on-site $1.5 million child care center and child care services for its employees at no cost to VA. The Department also used enhanced-use leasing to acquire a building under budget, ahead of schedule, and at significant cost savings to its operations. The Department is currently working on over eighty applications, including:

1. The $22 billion reported for land includes only acquired land covered by the Property Act and does not include most Federal land, which is considered in the public domain. Public domain lands are governed by other statutes and are outside the scope of this paper.

President's Commission to Study Capital Budgeting