Rent Shortfall




MARCH 4, 1997


Mr. Chairman and Members of the Committee:

I am pleased to appear before you today to discuss the PBS program
for Fiscal Year 1998, and the revenue shortfall in the Federal Buildings Fund.

PBS has requested New Obligations Authority of $4,864.2 million for FY 1998. The chart, which you have, outlines the sources and uses of this authority. Approximately $3,700 million will finance our Rental of Space, Building Operations, and Installment Acquisition Payments operating accounts. Four hundred thirty-four million dollars ($434 million) is requested for Repairs and Alterations, including $50 million to continue our chloroflourocarbon (CFC) replacement program and $84 million for the third and final phase of the modernization of the Interstate Commerce Commission. Connecting Wing, and Customs Building complex in Washington, D.C., which will house a large part of the Environmental Protection Agency (EPA).

There are ten prospectus-level leases that are also included in our proposed fiscal year 1998 program. You will receive our lease prospectus package in the next few days.

We are also requesting $680.5 million in New Obligations Authority to fund projects and programs authorized in prior years. This is an unusual request for the Federal Buildings Fund that I will briefly explain.

New Obligations Authority funding levels for the Fund in fiscal years 1996 and 1997 were based on GSA estimates of anticipated revenues provided in the President's Budget. Actual Rent revenues for fiscal year 1996, and projected revenues for fiscal year 1997, will be less than the amount necessary to fund all of the projects and programs authorized in those years. In order to bring revenues and obligations back into balance, we are requesting that New Obligations Authority for the shortfall amount be funded from part of our projected fiscal year 1998 Rent revenues or $680.5 million.

There are several main causes of the revenue shortfall. First, we misjudged the impact of Federal downsizing on our space inventory, in terms of both timing and degree. The requirement for new leased expansion space has been smaller and slower than projected, and the cancellation of existing leases has been greater and sooner than projected. Second, in fiscal year 1995, GSA adjusted rental rates in 18 metropolitan areas downward to comport with prevailing commercial rates, but did not apply the impact of this action to the Rent estimates in the fiscal year 1997 Budget. And third, our technical assumptions as to when new Government-owned space would enter the inventory, and when the Rent income from this space would begin to flow into the Federal Buildings Fund, were overly optimistic in assuming earlier delivery of space than in fact occurred.

This shortfall is a serious matter, and we have taken aggressive action to improve the accuracy of our future Rent revenue estimates. For example, we are now using a second complementary estimating method. We will use the results of the two methods to establish a "range of possibility" and, ultimately, issue an estimate that represents the conservative end of the range. In addition, project specific occupancy schedules and Rent rates are now being used in the estimation process, rather than averages. Other technical improvements to our estimating methodology recommended by our National Asset Advisor, the firm of Ernst and Young, have also been adopted.

Although we are not requesting any new authority for construction projects in fiscal year 1998, GSA will continue to move forward with numerous construction and major repair efforts authorized and funded in prior years. $1.2 billion in previously authorized projects remains available for design and /or construction award in fiscal years 1997 and 1998. In fiscal year 1999 and future years, we anticipate that Rent revenue will be sufficient to fund a normal level of operations, as well as a new construction and modernization program.

Thank you again for inviting me to appear before the subcommittee today. I will be pleased to answer any questions about our fiscal year 1998 program.

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