Leases, Courthouse Construction and the 1999 Capital Improvement Programs




SEPTEMBER 17, 1998


Good morning Mr. Chairman, and Members of the Subcommittee. My name is
Bob Peck, and I am the Commissioner of the Public Buildings Service (PBS). I am pleased to appear before you today to discuss two very important aspects of our proposed Fiscal Year 1999 budget: our Capital Improvement Program and our Courthouse Construction Program. First, I would like to give you some background on PBS in general because our funding and operations are, in many ways, unique in the Federal government and because we have initiated a number of reforms in our capital funding programs since we last appeared before you.

PBS provides workspace for approximately a million Federal employees nationwide and controls 39 percent of the Federal Government's owned and leased office space, in addition to Federal courthouses, border stations, laboratories and warehouses. We manage more than 300 million rentable square feet of space in which the Federal Government does its business on behalf of the public. Our revenues and expenses for Fiscal Year 1999 are projected to be just over $5 billion. We are the largest commercial-style real estate organization in the United States.

Most years, we fund the preponderance of our budget from the Rent payments of our tenants, the agencies of the Federal Government, which are deposited into the Federal Buildings Fund (FBF). (By law, the Rents we set must approximate commercial rates
found in the marketplace.) In the current fiscal year, our entire new obligational authority is funded out of Rents from the FBF. We propose no appropriation for FY 1999 so, once again, our revenues will support our entire budget.

We have an advantage possessed by few other agencies in government: with clearly articulated revenue and expense flows, we can identify net income, a financial bottom line by which we can measure our performance. Our net income is not a profit, of course, but it is crucial: our income, net of fixed expenses (which are comprised of building operations, leasing and installment payment costs), is the funding we depend on to carry out major repairs, renovations and new construction. We can and should operate in a businesslike manner, measuring our efficiency in terms of time and money and making our customers?eral agencies? our shareholders? American taxpayers?isfied customers.

The GSA's Public Buildings Service has responsibility for more than 1,800 government-owned Federal buildings across the nation. More than half of the buildings in the total inventory are over 45 years old. In order to maximize the value of these assets to the taxpayer we practice sound financial planning and management. Decisions on investment for construction, acquisition, and repair and alteration of our real estate assets are key elements of our financial and asset management.

Based on our decision making process we prepared the fiscal year 1999 Capital Improvement Program, which is before you today. It consists of 10 prospectus-level repair and alteration projects budgeted at approximately $257 million, 9 prospectus-level R&A designs for future projects, estimated at $16.7 million, 6 prospectus-level design and construction projects estimated at $44 million, 9 prospectus-level replacement operating leases with a proposed annual cost not to exceed $37.6 million and the ongoing chlorofluorocarbon reduction and energy-saving programs, each budgeted at $25 million.

Annual revenues of the Federal Buildings Fund - principally the Rent payments to us

from the Federal agency tenants in our buildings -- provide sufficient funds to operate

the inventory and make payments to lessors; however, it has never provided sufficient

funds to meet all of our capital requirements. It has provided enough revenue in the

past to keep up with major repair and renovation needs and to fund a modest construction


With limited resources and an increasingly aging inventory, we have developed asset management

strategies which include the following priorities for the allocation of resources:

1. Protecting the safety and health of tenants in owned and leased assets;
2. Maintaining the operational viablity of owned assets through day-to-day repairs and alterations below prospectus level;
3. Altering vacant space in owned assets to relocate client agencies from leased space into Government-owned space when available;
4. Completing planned modernization of major buildings to maintain and enhance their ability to support client agencies' missions and to enhance their value; and
5. Providing new housing solutions (construction, acquisition, and leasing) to meet the
changing requirements of client agencies.

To better select among competing projects, we have changed the way we evaluate repair and alterations projects. We are using a "return on investment" measure to determine the financial impact of each repair and alteration project. This use of ROI is similar to the way capital real estate investments are screened in the private sector. The screening will identify, among other things, if an R&A project adds or detracts from net income to the FBF when the project is completed. Using the ROI as one of the criteria for selecting a project thus strengthens the long-term fiscal health of the FBF.

We are also evaluating proposed major R&A projects to see if we can reduce the scope of work without jeopardizing the required results. By reducing the scope of a project we can often realize additional cost savings as well as reduce the time required. We often find that by scaling down planned major modernization, we are able to free up additional funds for more projects.

Additional criteria used for the selection of major R&A projects nationwide include the timeliness of projects (follow-on phases of multi-phase projects) and ability to award projects within the fiscal year; the effect of the project related to the overall portfolio considerations and, finally, the urgency of execution, based on imminent system failure, hazardous condition or health and safety issues, imminent tenant requirements or avoidance of duplicate costs for swing space.

By applying these criteria during the decision making process we are able to prioritize the R&A projects and ensure that the available funding is devoted to the most important ones.

In the fiscal year 1999 budget, the Administration proposed a modest new construction and acquisition program, all to be funded out of FBF revenues. It includes two border stations, the design of a new U.S. Mission to the U.N., additional funding for the remediation efforts at the Southeast Federal Center (SEFC) and the design of a new
headquarters facility for the Department of Transportation. We recognize that, since the submission of the President's budget, we have had extensive discussions with you about the DOT headquarters and that you have asked us to take a different tack on it.

Resources in the FBF are limited. Our first priority is the repair and modernization of our existing inventory. As I mentioned before, the FBF cannot support a large construction/acquisition program. At the same time, we are well aware of the needs and requirements of other client agencies, such as the Judiciary, whose needs we cannot satisfy through existing resources in the FBF.

Which brings me to the second topic you asked us to address today namely the Federal courthouse construction program.

Need for and Scope of the Program
Ten years ago, the Judicial Branch undertook a survey of its facilities and determined that one-third of courthouses were grossly inadequate for their purpose, either because the space was inadequate to accommodate expanding needs or because of serious deficiencies in security, or both. We have estimated the cost of the 160 proposed projects at about $8 billion. To date, we have completed 16 of the Judiciary's recommended 160 courthouses, with another 24 under construction or soon to be.

The Judicial Conference has produced a list of the projects in order of their priority and we have been using that priority list exclusively in determining the order in which we recommend funding and constructing the projects. Of course, our recommendations are subject to review and change as we go through the Administration's annual budget process; and the final funding decisions are up to the Congress, through this Committee, its counterpart in the House, and the appropriations process.

We are proud of the courthouses we are producing. Effective project management is allowing us to bring in high-quality buildings within the appropriated project budgets.

The program is the largest such since the 1930's. I am pleased to report that, in partnership with the Judiciary and the private design and construction industries, GSA is producing landmark Federal courthouses that are worthy of the American people and
their justified pride in the American judicial system. We are commissioning America's
best architects and are winning praise for the courthouses' designs and functionality from architecture critics, judges and other building users, and from local community

I can also report to you that we are as conscientious about budgets as we are about excellence in design. The courthouses are designed and constructed to judicious and exacting standards. We have established a sophisticated system of cost benchmarks to ensure that we maintain cost and quality parity among projects with varying functional requirements and different site conditions at locations dispersed throughout the country. If all parties hold to the fiscal discipline that the cost benchmarking system encourages, we are confident that we can bring projects in on budget.

For example, in fiscal year 1998, we have completed seven courthouses, within their aggregated budgets. In the first month of fiscal year 1999, we will complete two more courthouses, which we will bring in for $11 million under project budgets.

In determining the space requirements and layout of individual courthouses, we rely on the Design Guide produced by the Judicial Conference. Courthouses are complex buildings. To provide security, three separate circulation systems are incorporated into their design: one for judges, jurors and court personnel; another for defendants in
custody; and a third for the public. Courtrooms are high-ceilinged to provide a sense of dignity and decorum and require carefully plotted sightlines and acoustics, while other courthouse workspaces are more typical office space; and the two types of space need to be meshed.

We have found that we can achieve about a 65-70 percent ratio of occupied space to circulation and service space in the courthouses. We insist on achieving a minimum of 67 percent in each project. We continue to investigate various layouts that might increase the proportion of occupied space. We looked, for example, at "collegial floors" -- grouping judges' chambers together on designated floors, with courtrooms grouped on other floors -- but we have not found that the layout generated a cost savings. It may have another benefit, however: some judges prefer the layout because it facilitates conferring with their colleagues.

There are potential cost savings that we have not yet achieved. The most significant
determinant in the cost of a building is its overall size. This single factor outweighs such

visible items as the exterior cladding and the interior finishes. Accordingly, we would

welcome the opportunity to work with the Judiciary to evaluate further how many

courtrooms we need to build to accommodate the projected caseloads in new courthouses.

Courtroom sharing and other strategies might allow us to reduce the building volumes
and square footage, and thus the costs, that we need to provide in some locations. We
need to clarify the options available to meet the Judiciary's needs for more courtroom

space in a tight budget climate.

Cost Benchmarking
GSA has a well-established, successful cost benchmarking process for new courthouse construction. A cost benchmark is a reference cost estimate which we use to evaluate the appropriateness of a proposed project's budget. In addition, benchmarks help unify our construction program nationwide by providing a method to compare project costs. Since 1995, benchmarking analyses have resulted in approximately $31 million in avoided expenditures for new courthouse construction.

The courthouses we are building today are being constructed within the budgets which were established based on the cost benchmark. Benchmarking provides for adequate, but not excessive, budgets following court design guide criteria.

We are now exploring ways to refine the cost benchmarking process. Currently, benchmarks account for the specific characteristics of individual buildings such as building height, geographic location, seismic design costs, and the amount of indoor parking. The process does not allow us to distinguish between courthouse projects with
varying ratios of office space to more expensive special purpose space such as
courtrooms. Consequently, a courthouse project with many courtrooms would have a cost benchmark identical to a project of the same size, in the same location, with fewer
courtrooms and a higher proportion of office space. We are evaluating possible
refinements to the benchmarking process which will allow us to calculate cost benchmarks according to the mix of office and special purpose space in a proposed
building. Of course, if we decide to revise the current benchmark system, we will brief the Committee before any new methodology is implemented.

Courthouse security continues to be of critical importance to all of us. GSA is now conducting risk analyses during the design and construction of new courthouses and identifying appropriate security measures for each location. In Hammond, Indiana, for instance, the building is designed so that windows in judges chambers are not exposed to the nearby street.

Other creative and subtle measures, such as landscaping and street furniture, are being used to keep unauthorized vehicles away from the building. In Minneapolis, artwork commissioned for the project includes earthen mounds which separate the building from the street, while allowing easy pedestrian access to the courthouse. Many of our
courthouse designs incorporate a plinth, a raised plaza, between the street and the

building. This allows us to maintain an accessible, open presence in the community,

while increasing building security.

The buildings need to be open and accessible, as courthouses traditionally have been, but they also need to be consistent with our security requirements. We estimate that security concerns, increased since the Oklahoma City bombing in 1995, have added between 5 and 10 percent to the costs of the buildings we have in design.

Approximately $5 billion remains to be funded for the 120 courthouses in the program remaining to be designed and constructed. At the rate of $500 million per year, which is the rate at which the Judiciary had anticipated, ten years will be required to complete funding for the program.

As I noted earlier in my statement, our projections of income to the Federal Buildings Fund (FBF) over the next several years indicate that the Fund will have adequate resources to fund the capital repairs and modernizations necessary to keep our existing real property inventory functional and productive. Like any prudent real estate owner, our first priority out of operating funds is to maintain and improve the income-producing properties that we already have. However, this leaves little or no internally-generated funds for new construction.

In the past, recognizing this limited availability of revenues to fund new construction, Congress has appropriated funds to the FBF to provide for a construction program of the
magnitude anticipated by the Judiciary. Appropriations to the FBF for new construction between fiscal years 1990 and 1997 amounted to over $2.8 billion.

Given the cost of the Judiciary construction program, the Administration believes that we must redouble our efforts to ensure that these new landmark public buildings are
designed and built as efficiently and cost-effectively as possible. Only by examining
ways to reduce the overall number of courtrooms and the amount of ancillary space we

need to build, by refining our benchmarks, and by holding firm to project budgets once

they are set, can we assure the taxpayers that these needed buildings have taken

advantage of every realistic opportunity to save costs. Towards this end, we look

forward to working with the Judiciary to perform an appropriately-designed courtroom-

utilization study and to seek other opportunities to ensure that these much needed public

buildings are designed and built in the most cost-effective manner possible as we proceed

with the construction program.

As you probably know, GSA's fiscal year 1999 appropriations bill in the House and Senate includes funding for approximately $500 million in courthouse construction for the fiscal year 1999 part of the plan. This would provide funding for site, design, and/or construction of 15 projects.

Mr. Chairman, I am pleased to have had this opportunity to discuss our Capital Improvement Program as well as the Courthouse Construction Program with you. We appreciate the Subcommittee's continuing interest in our capital program. I would be pleased to answer any questions the Subcommittee may have.

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