Military Housing
Management Issues Require Attention as the Privatization Program Matures Gao ID: GAO-06-438 April 28, 2006The Department of Defense (DOD) intends to privatize about 87 percent of the military-owned housing in the United States by 2010. As of December 2005, it had awarded 52 projects to privatize over 112,000 family housing units and had plans to award 57 more projects to privatize over 76,000 more units over the next 4 years. The program, begun in 1996, has become DOD's primary means to improve family housing and to meet its housing needs when communities near installations do not have enough suitable, affordable housing. Because of expressed interest related to the oversight responsibilities of several committees, GAO assessed (1) whether opportunities exist to improve DOD's oversight of awarded housing privatization projects, and (2) to what extent projects are meeting occupancy expectations.
Although DOD and the individual services have implemented program oversight policies and procedures to monitor the execution and performance of awarded privatized housing projects, GAO identified three opportunities for improvement. First, the Navy's methods for overseeing its awarded projects have not been adequate to identify and address operational concerns in some projects or to ensure accurate reporting of project information. As a result, there is less assurance that Navy management could become aware of project performance issues in a timely manner in order to plan needed actions to mitigate the concerns. For example, contrary to project agreements, funds from one project had not been deposited to a Navy reserve account to provide for future project needs, and the Navy had not been reimbursed for police and fire protection services provided to another project. Compared to the Navy, the Army and Air Force had more robust and comprehensive methods for overseeing awarded projects and GAO did not find similar oversight concerns in the Army and Air Force projects it reviewed. Second, the value of DOD's primary oversight tool--the semiannual privatization program evaluation report--has been limited because the report lacks a focus on key project performance metrics to help highlight any operational or financial concerns, has not been issued in a timely manner, and does not ensure data accuracy by requiring periodic independent verification of key report elements. Third, data collected on servicemember satisfaction with housing, which is important for benchmarking and tracking of satisfaction levels over time as well as for making service-to-service comparisons, are inconsistent and incomplete because DOD has not issued guidance to the services for standardized collection and reporting of satisfaction information for all servicemembers. Sixteen, or 36 percent, of 44 awarded privatization projects had occupancy rates below expectations with rates below 90 percent, as of September 30, 2005. In an attempt to increase occupancy and keep rental revenues up, 20 projects had begun renting housing units to parties other than military families, including 2,077 units rented to single or unaccompanied servicemembers, retired military personnel, civilians and contractors who work for DOD, and civilians from the general public. Still, rental revenues in some projects are not meeting planned levels, resulting in signs of financial stress. If lower than expected occupancy and rental revenues continue in the long term, the result could be significantly reduced funds available to provide for future project needs and renovations or, in the worst case, project financial failures. Factors contributing to occupancy challenges include increased housing allowances, which have made it possible for more military families to live off base thus reducing the need for privatized housing, and the questionable reliability of DOD's housing requirements determination process, which could result in overstating the need for privatized housing. DOD has yet to implement some previous GAO recommendations to improve the reliability of the requirements assessments supporting proposed projects.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-438, Military Housing: Management Issues Require Attention as the Privatization Program Matures
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Report to Congressional Committees:
April 2006:
Military Housing:
Management Issues Require Attention as the Privatization Program
Matures:
GAO-06-438:
GAO Highlights:
Highlights of GAO-06-438, a report to congressional committees.
Why GAO Did This Study:
The Department of Defense (DOD) intends to privatize about 87 percent
of the military-owned housing in the United States by 2010. As of
December 2005, it had awarded 52 projects to privatize over 112,000
family housing units and had plans to award 57 more projects to
privatize over 76,000 more units over the next 4 years. The program,
begun in 1996, has become DOD‘s primary means to improve family housing
and to meet its housing needs when communities near installations do
not have enough suitable, affordable housing.
Because of expressed interest related to the oversight responsibilities
of several committees, GAO assessed (1) whether opportunities exist to
improve DOD‘s oversight of awarded housing privatization projects, and
(2) to what extent projects are meeting occupancy expectations.
What GAO Found:
Although DOD and the individual services have implemented program
oversight policies and procedures to monitor the execution and
performance of awarded privatized housing projects, GAO identified
three opportunities for improvement. First, the Navy‘s methods for
overseeing its awarded projects have not been adequate to identify and
address operational concerns in some projects or to ensure accurate
reporting of project information. As a result, there is less assurance
that Navy management could become aware of project performance issues
in a timely manner in order to plan needed actions to mitigate the
concerns. For example, contrary to project agreements, funds from one
project had not been deposited to a Navy reserve account to provide for
future project needs, and the Navy had not been reimbursed for police
and fire protection services provided to another project. Compared to
the Navy, the Army and Air Force had more robust and comprehensive
methods for overseeing awarded projects and GAO did not find similar
oversight concerns in the Army and Air Force projects it reviewed.
Second, the value of DOD‘s primary oversight tool”the semiannual
privatization program evaluation report”has been limited because the
report lacks a focus on key project performance metrics to help
highlight any operational or financial concerns, has not been issued in
a timely manner, and does not ensure data accuracy by requiring
periodic independent verification of key report elements. Third, data
collected on servicemember satisfaction with housing, which is
important for benchmarking and tracking of satisfaction levels over
time as well as for making service-to-service comparisons, are
inconsistent and incomplete because DOD has not issued guidance to the
services for standardized collection and reporting of satisfaction
information for all servicemembers.
Sixteen, or 36 percent, of 44 awarded privatization projects had
occupancy rates below expectations with rates below 90 percent, as of
September 30, 2005. In an attempt to increase occupancy and keep rental
revenues up, 20 projects had begun renting housing units to parties
other than military families, including 2,077 units rented to single or
unaccompanied servicemembers, retired military personnel, civilians and
contractors who work for DOD, and civilians from the general public.
Still, rental revenues in some projects are not meeting planned levels,
resulting in signs of financial stress. If lower than expected
occupancy and rental revenues continue in the long term, the result
could be significantly reduced funds available to provide for future
project needs and renovations or, in the worst case, project financial
failures. Factors contributing to occupancy challenges include
increased housing allowances, which have made it possible for more
military families to live off base thus reducing the need for
privatized housing, and the questionable reliability of DOD‘s housing
requirements determination process, which could result in overstating
the need for privatized housing. DOD has yet to implement some previous
GAO recommendations to improve the reliability of the requirements
assessments supporting proposed projects.
What GAO Recommends:
GAO recommends that DOD take five actions to improve the oversight of
awarded housing privatization projects. In commenting on a draft of
this report, DOD generally agreed with our recommendations.
{hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-438].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barry W. Holman at (202)
512-5581 or holmanb@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Opportunities Exist to Improve the Oversight of Awarded Privatization
Projects:
Lower Than Expected Occupancy Creates Concerns in Some Privatization
Projects:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Details on 12 Housing Privatization Projects:
Appendix III: Comments from the Department of Defense:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Privatization Projects Awarded and Planned as of December
2005:
Table 2: Awarded Privatization Projects with Occupancy Rates Below
Expectations as of September 30, 2005[A]:
Table 3: Examples of Changes in Monthly Housing Allowances for
Servicemembers with Dependents[A]:
Table 4: Details on the 12 Housing Privatization Projects We Visited:
Figures:
Figure 1: Newly Constructed (left) and Older (right) Privatized Housing
at Fort Meade, Maryland:
Figure 2: Newly Constructed (left) and Older (right) Privatized Housing
at Fort Stewart, Georgia:
Figure 3: Newly Constructed (left) and Older (right) Privatized Housing
at Robins Air Force Base, Georgia:
Figure 4: Newly Constructed (left) and Older (right) Privatized Housing
at Patrick Air Force Base, Florida:
Figure 5: Newly Constructed (left) and Older (right) Privatized Housing
at the South Texas Project (Naval Air Station Corpus Christi), Texas:
Letter:
April 28, 2006:
Congressional Committees:
The Department of Defense (DOD) intends to privatize about 87 percent
of the military-owned housing in the United States by 2010. Since the
enactment of the National Defense Authorization Act for Fiscal Year
1996, which provides for private-sector financing, ownership,
operation, and maintenance of military housing,[Footnote 1]
privatization has become DOD's primary means for improving family
housing and meeting requirements when the communities near
installations do not have an adequate supply of suitable, affordable
housing. Similar to servicemembers who live in the local community,
servicemembers who choose to live in privatized housing receive a
housing allowance that they use to pay rent and utilities. According to
DOD officials, the purpose of the housing privatization program is to
help improve servicemember quality of life by improving the condition
of military-owned housing faster and more economically than would be
achieved by the use of traditional military construction funding. By
the end of December 2005, the services had awarded 52 projects to
privatize over 112,000 family housing units and had plans to award 57
more projects to privatize over 76,000 more units over the next 4
years.[Footnote 2] According to DOD, the 52 awarded projects will
provide about $13.9 billion in housing improvements, with private-
sector developers and lenders providing about $12.9 billion, or about
92 percent of the financing, and DOD providing the balance.
This report represents a continuation of our long-standing reviews of
issues related to housing privatization. We initiated this engagement
under the authority of the Comptroller General of the United States,
and the report is addressed to you because of expressed interest
related to your committees' oversight responsibilities. This report
determines (1) whether opportunities exist to improve DOD's oversight
of awarded housing privatization projects, and (2) to what extent
awarded projects are meeting occupancy expectations.
To address these issues, we summarized program implementation status
and costs, compared the status to DOD's goals and milestones, and
discussed issues affecting program implementation with DOD and service
officials. In doing so, we relied on program status data provided by
DOD and the services. We confirmed the status data for 12 projects, but
we did not otherwise test the reliability of the data. We visited
installations where 12 projects were underway to review actual project
performance and to determine whether performance information and
concerns were adequately captured and reported to top management in a
timely manner. The installations were chosen because they contained
established privatization projects, represented each of the military
services, and in some cases had reported occupancy challenges. We
compared occupancy rates in awarded projects with occupancy
expectations; and, for the 12 projects at the installations we visited,
we explored the causes, consequences, and service response when
occupancy levels were below expectations. We also examined and compared
DOD's and the services' policies, guidance, and procedures for
overseeing awarded privatization projects. We conducted our work from
July 2005 through February 2006 in accordance with generally accepted
government auditing standards. A more detailed description of our scope
and methodology is included in appendix I.
Results in Brief:
Although DOD and the individual services have implemented program
oversight policies and procedures to monitor the execution and
performance of awarded privatized housing projects, opportunities exist
for improvement. Though owned and managed by the private sector,
adequate oversight of privatized housing is essential to help monitor
and safeguard the government's interests and to help ensure the long-
term success of the housing privatization program, and its importance
has become even greater as the number of housing privatization projects
has increased. We identified three areas of concern--the adequacy of
the Navy's oversight methods, the usefulness of DOD's primary oversight
report, and the consistency of tenant satisfaction data--which offer
opportunities for enhancing the oversight of awarded privatization
projects.
* The Navy's methods for overseeing its awarded projects have not been
adequate to identify and address operational concerns in some projects
or to ensure accurate reporting of project information. As a result,
there is less assurance that Navy management could become aware of
project performance issues in a timely manner in order to plan needed
actions to mitigate the concerns. For example, we found that funds
earmarked for future project needs at one project had not been
deposited to a Navy reserve account and the Navy had not been
reimbursed for the cost of police and fire protection services provided
to another project, as specified in a project memorandum. Also, status
information for five of the eight Navy and Marine Corps projects we
reviewed was inaccurately reported to DOD headquarters management.
Compared to the Navy, the Army and Air Force had more robust and
comprehensive methods for overseeing awarded projects and we did not
find similar oversight concerns in the Army and Air Force projects we
reviewed. Navy officials stated that they recognized the need for
improvements to their oversight methods. As such, they informed us that
they have begun a review to upgrade their monitoring and oversight
process to ensure consistency and completeness, and the Navy says it
has taken steps to address the concerns identified at the projects we
visited. However, until improvements are implemented, the adequacy of
the Navy's oversight will continue to be questionable.
* Although primary responsibility for overseeing awarded privatization
projects rests with the individual services, opportunities exist to
improve oversight at DOD headquarters by enhancing the value of DOD's
primary oversight tool--the semiannual privatization program evaluation
report. The report consists of information submitted by the services on
each awarded project and includes data on project contract structure,
construction progress, occupancy, financial performance, and tenant
satisfaction. However, the value of the report as an oversight tool has
been limited because the report (1) lacks a focus on key project
performance metrics to help highlight any operational or financial
concerns, (2) has not been issued in a timely manner, and (3) does not
ensure data accuracy by requiring periodic independent verification of
key report elements.
* Improving the consistency of data collected on servicemember
satisfaction with privatized housing offers another opportunity to
improve program oversight. Because the overall goal of the
privatization program is to improve servicemember quality of life by
improving the condition of military housing, DOD requires the services
to report data on servicemember satisfaction with privatized housing as
an indicator of program success. However, because DOD has not issued
guidance for accomplishing this task, the services have used
inconsistent methods for collecting housing satisfaction data. As a
result, value of the data could be improved for assessments of
satisfaction levels over time, comparisons of satisfaction levels among
projects, and identification of trends among the services. Further,
because housing satisfaction information is not routinely collected on
servicemembers who do not live in privatized housing, DOD lacks
complete information on the impact of its overall housing program on
servicemember quality of life.
Sixteen, or 36 percent, of 44 awarded privatization projects had
occupancy rates below expectations with rates below 90 percent, as of
September 30, 2005.[Footnote 3] Specifically, occupancy was below
expectations and below 90 percent in 6 of the Army's 19 awarded
projects, 4 of the Navy's and Marine Corps' 13 awarded projects, and 6
of the Air Force's 12 awarded projects. Although the projects were
originally justified on the basis of meeting the needs of military
families, some projects had begun renting housing units to parties
other than military families in an attempt to increase occupancy and
keep rental revenues up. For example, 20 projects had rented 1,116
units to servicemembers who were single or unaccompanied by their
families; 662 units to retired military personnel, and civilians and
contractors who work for DOD; and 299 units to civilians from the
general public. At one Air Force project, only 29 percent of the
available privatized housing units was rented to military families.
Still, rental revenues in some projects are not meeting planned levels,
resulting in signs of financial stress. If lower than expected
occupancy and rental revenues persist in the long term, the result
could be significantly reduced funds available to provide for future
project needs and renovations or, in the worst case, project financial
failures.[Footnote 4] Factors contributing to the occupancy challenges
in some projects include increased housing allowances, which have made
it possible for more military families to live off base, thus reducing
the need for privatized housing, and the questionable reliability of
DOD's housing requirements determination process, which could result in
overstating the need for privatized housing. To help ensure that the
size of housing projects is accurately determined, we previously
reported that DOD needed to study how increased housing allowances
might affect future housing needs.[Footnote 5] Also, we previously
reported that changes were needed to improve the reliability of DOD's
housing requirements process and to ensure maximum reliance on local
community housing, as required by DOD policy.[Footnote 6] Because DOD
has yet to implement these steps, the planned size of future
privatization projects may not be based on reliable assessments, which
could result in overstated requirements and thus contribute to
occupancy and financial challenges in some future projects.
We are making five recommendations to improve the oversight of awarded
housing privatization projects and to help ensure that the size of
future projects is reliably determined. Specifically, we are
recommending that DOD require the Navy to upgrade its oversight of
awarded projects, improve the department's semiannual evaluation
report, provide guidance to help ensure consistent collection and
reporting of housing satisfaction information for all servicemembers,
determine how increased housing allowances will most likely impact
future housing requirements, and expedite issuance of guidance to
improve the reliability of housing requirements assessments. In written
comments on a draft of this report, DOD fully agreed with three and
partially agreed with two of our recommendations and stated that
shortcomings identified in our draft would be addressed. We discuss
DOD's comments in detail later in this report.
Background:
In the mid-1990s, DOD became concerned that inadequate housing
allowances and poor quality military housing were negatively affecting
quality of life and readiness by contributing to servicemember
decisions to leave military service. DOD noted that when living in
private-sector housing in the local communities, servicemembers were
paying about 19 percent of housing costs out of pocket, because housing
allowances were inadequate. DOD also noted that the quality of military-
owned housing had been in decline for more than 30 years because
military-owned housing was not considered a priority and because
earlier attempts at solutions ran into regulatory or legislative
roadblocks. DOD officials stated that much of the military- owned
family housing in the United States was old, lacked modern amenities,
and required renovation or replacement. DOD estimated that completing
this work with historical funding levels and traditional military
construction methods would take more than 20 years and cost about $16
billion.
In response, and with the approval of Congress, DOD began two major
initiatives. First, DOD began an initiative to increase housing
allowances to cover the average cost of housing and utilities in each
of the nation's various geographic areas, thus eliminating the average
out-of-pocket housing costs paid by servicemembers. This initiative was
completed at the beginning of calendar year 2005. Second, DOD began an
initiative to privatize most military-owned housing to use private
capital and construction expertise to replace or renovate inadequate
housing faster than could be achieved using traditional funding methods
at historical funding levels. At DOD's request, Congress enacted
legislation in 1996 authorizing the Military Housing Privatization
Initiative to allow private-sector financing, ownership, operation, and
maintenance of military housing.
DOD policy states that private-sector housing in the communities near
military installations will be relied upon as the primary source of
family housing. However, when communities do not have an adequate
amount of suitable housing, DOD intends to use housing privatization--
rather than military-owned housing financed with military construction
funds--as the primary means for meeting family housing requirements. As
of December 2005, the services had awarded 52 projects to privatize
over 112,000 family housing units and had plans to award 57 more
projects to privatize over 76,000 more units by 2010. Table 1 shows
implementation status by service. Also, appendix II contains more
detailed status information on the 12 projects at the installations we
visited during this review.
Table 1: Privatization Projects Awarded and Planned as of December
2005:
Service: Army;
Number of projects: Awarded: 19;
Number of projects: Planned: 16;
Number of projects: Total: 35;
Number of housing units: Awarded: 59,571;
Number of housing units: Planned: 23,813;
Number of housing units: Total: 83,384.
Service: Navy and Marines;
Number of projects: Awarded: 17;
Number of projects: Planned: 7;
Number of projects: Total: 24;
Number of housing units: Awarded: 38,106;
Number of housing units: Planned: 20,500;
Number of housing units: Total: 58,606.
Service: Air Force;
Number of projects: Awarded: 16;
Number of projects: Planned: 34;
Number of projects: Total: 50;
Number of housing units: Awarded: 14,615;
Number of housing units: Planned: 32,133;
Number of housing units: Total: 46,748.
Service: Total;
Number of projects: Awarded: 52;
Number of projects: Planned: 57;
Number of projects: Total: 109;
Number of housing units: Awarded: 112,292;
Number of housing units: Planned: 76,446;
Number of housing units: Total: 188,738.
Source: DOD.
[End of table]
The duration of the initial development period--that is, the period
when developers construct new housing units and renovate older units--
varies among privatization projects, often lasting from 5 to 10 years.
Thus, planned housing improvements resulting from privatization
normally are not completed for several years after the projects are
awarded. For all awarded projects as of September 2005, privatization
developers had completed the construction of 10,911 new housing units
and the renovation of 9,161 older housing units. Figures 1 through 5
show photographs of newly constructed and older privatized housing
units at selected installations we visited.
Figure 1: Newly Constructed (left) and Older (right) Privatized Housing
at Fort Meade, Maryland:
[See PDF for image]
[End of figure]
Figure 2: Newly Constructed (left) and Older (right) Privatized Housing
at Fort Stewart, Georgia:
[See PDF for image]
[End of figure]
Figure 3: Newly Constructed (left) and Older (right) Privatized Housing
at Robins Air Force Base, Georgia:
[See PDF for image]
[End of figure]
Figure 4: Newly Constructed (left) and Older (right) Privatized Housing
at Patrick Air Force Base, Florida:
[See PDF for image]
[End of figure]
Figure 5: Newly Constructed (left) and Older (right) Privatized Housing
at the South Texas Project (Naval Air Station Corpus Christi), Texas:
[See PDF for image]
[End of figure]
Servicemembers can choose whether or not to live in privatized housing-
-there are no mandatory assignments. Those who choose to live in
privatized housing receive the same housing allowance (which is used to
pay rent and utilities) as they would if they rented or purchased
housing in the local communities.
Within the Office of the Secretary of Defense (OSD), the Housing and
Competitive Sourcing Office, which reports to the Deputy Under
Secretary of Defense (Installations and Environment), provides
oversight of the housing privatization program, but the primary
responsibility for implementing it rests with the individual services.
OSD designed and uses the program evaluation plan report to oversee the
effectiveness of the program and the performance of awarded projects.
The report, prepared semiannually for the periods ending June 30 and
December 31, is a compilation of extensive data submitted by the
services for each awarded project and includes information on project
contract structure, construction and renovation progress, occupancy,
financial performance, and servicemember satisfaction with the housing.
This report is a continuation of a series of reports that we have
issued on matters related to DOD's housing privatization program as
well as DOD's process for determining housing requirements. The
following summarizes key issues from these reports:
* In July 1998, we reported on several concerns as the housing
privatization program began, including (1) whether privatization would
produce insignificant cost savings and whether the long contract terms
of many projects might cause the building of housing that will not be
needed in the future; (2) whether controls were adequate to protect the
government's interests if developers failed to operate and maintain the
housing as expected; and (3) whether DOD would face certain problems if
privatized housing units were not fully used by military members and
were subsequently rented to civilians, as the contracts
permit.[Footnote 7]
* In March 2000, we reported that initial implementation progress for
the privatization program was slow, the services' life-cycle cost
analyses provided inaccurate cost comparisons, and DOD lacked a plan
for evaluating the effectiveness of the program.[Footnote 8]
* In June 2002, we reported that DOD needed to (1) revise its housing
requirements determination process to take into account greater use of
community housing as well as the projected impact that the housing
allowance initiative might have on military installation housing
requirements; and (2) improve the value of the primary privatization
oversight report by completing the report on time, including
information on funds accumulated in project reinvestment accounts, and
obtaining periodic independent verification of key report
elements.[Footnote 9]
* In May 2004, we reported that DOD needed to improve its revised
housing requirements determination process to help ensure that housing
investments, whether through military construction or privatization,
were supported by consistent and reliable needs assessments. We also
reported that DOD needed to survey servicemembers with dependents to
update information on the housing preferences for family housing, given
recent changes such as the increase in housing allowances.[Footnote 10]
In response to each report, DOD officials have stated that they planned
management actions to address our concerns.
Opportunities Exist to Improve the Oversight of Awarded Privatization
Projects:
Although OSD and the services have implemented program oversight
policies and procedures to monitor the execution and performance of
privatized housing projects, opportunities exist for improvement.
Though owned and managed by the private sector, DOD maintains a strong
interest in the operational and financial performance of privatized
housing projects because it is accountable for public funds expended
and because, according to DOD officials, the military's housing
objectives can be met only if the projects remain viable. Thus,
adequate program oversight is essential to help monitor and safeguard
the government's interests and to help ensure the long-term success of
the program. However, we identified three areas of concern--the
adequacy of the Navy's oversight methods, the usefulness of DOD's
primary oversight report, and the consistency of tenant satisfaction
data--which provide opportunities for enhancing the oversight of
awarded privatization projects. Specifically, as evidenced by issues
identified in some Navy and Marine Corps projects we visited, the
Navy's oversight methods are not adequate to identify some project
operational concerns or to ensure accurate reporting of project
information. As a result, in contrast to the Army and the Air Force
which have more robust oversight methods, there is less assurance that
Navy management could become aware of project performance issues in a
timely manner in order to plan needed actions to mitigate the concerns.
Also, the usefulness of OSD's primary program oversight tool--the
semiannual privatization program evaluation report--has been limited
because the report has not focused on key project performance metrics,
has not been issued in a timely manner, and has included inaccuracies.
Moreover, data on servicemember satisfaction with housing are
inconsistent because DOD has not issued guidance to the services for
collecting and reporting satisfaction information. As a result, data
gathered to date cannot be readily tracked over time or compared among
the services, and their value could be improved as a tool to more fully
assess the impact of the privatization program, as well as the impact
of DOD's overall housing program, on servicemember quality of life.
Navy Program Oversight Did Not Identify and Address Some Project
Concerns and Reporting Inaccuracies:
The Navy's oversight program for monitoring Navy and Marine Corps
projects has not adequately identified and addressed some project
operational concerns, nor does it ensure accuracy in project
information reported to DOD headquarters. Adequate program oversight is
essential to help monitor and safeguard the government's interests and
to help ensure the long-term success of the program. However, in
contrast to the Army's and Air Force's oversight programs, the Navy's
oversight program was less comprehensive and thus provided less
assurance that Navy management would become aware of project
performance issues in a timely manner. To illustrate, we found that the
Army and the Air Force have robust, well-developed portfolio oversight
programs to help top management monitor implementation of their
privatization programs. Both of these services collected and analyzed
detailed performance information on each project including construction
progress, construction costs, occupancy levels, rental revenues,
operating expenses, net operating income, and the debt coverage
ratio.[Footnote 11] These services prepared detailed project reports,
which compared actual project performance data with expectations and
discussed reasons for significant variances. The Army and the Air Force
also prepared quarterly portfolio summary reports, which monitored
project execution, analyzed trends, highlighted current and potential
performance issues, and documented recent and planned actions to
address any project concerns.
In contrast, the Navy's oversight program was less structured, included
fewer details on project performance, and did not include summary
oversight reports on portfolio performance, even though such reports
were required by Navy guidance. Specifically, in February 2004, the
Navy established a portfolio management group and assigned the group
responsibility to oversee the Navy's and Marine Corps' housing
privatization program. Although the group's charter stated that it
would review project performance information and prepare consolidated
portfolio summary reports, Navy officials stated that no such reports
had been prepared at the time of our review in January 2006, almost 2
years after the charter was approved. Navy officials initially told us
that the required summary reports were not needed because portfolio
monitoring was performed in other ways, such as a review of monthly
status reports from each project. They further stated that the Navy
intended to eliminate the reporting requirement. Subsequently, Navy
officials told us that the summary performance reports were needed and
would be prepared in the future.
During our visits to Navy and Marine Corps privatization projects, we
found instances where Navy oversight had not been adequate to identify
and address some project operational issues and ensure accurate
reporting of project performance information to OSD. For example:
* During our September 2005 visit to the Navy's Kingsville II project
at the Naval Air Station Kingsville, Texas, we found that project funds
had not been disbursed in accordance with the project agreement.
According to the agreement, 30 percent of the project's net cash flow-
-that is, the rental revenue remaining after payment of expenses and
debt service--was to be deposited to a Navy-owned reserve account to be
available for future project needs. On the basis of the project's net
cash flow during the first and second quarters of 2005, over $42,000
should have been deposited to the Navy's account. Yet, only $314 was
deposited. When we asked about this, Navy officials initially told us
that the deposit amount was correct and consistent with original
expectations. When we again questioned the deposit amount, Navy
officials stated that the funds had not been appropriately disbursed
and that they had asked the project developer for a complete analysis
of the reserve accounts from project inception. The officials
subsequently stated that a deposit was made to correct the balance in
the Navy reserve account. Navy officials also stated that, in light of
the shortcomings identified, the project agreement would be amended to
require deposit and disbursement reports for all reserve accounts and
to ensure that the project's annual audit included a compliance review.
* During our visit to the Navy's South Texas project in September 2005,
we found that the project had not reimbursed the Navy for police and
fire protection services, as specified in a memorandum signed by the
Navy in January 2002. The memorandum stated that the project would pay
the Navy for police and fire protection services provided by the Naval
Air Station Corpus Christi beginning in calendar year 2002. The initial
annual payment was to be $84,756 with cost-of-living adjustments in
future years. However, when we asked about the payments in September
2005, we were told that no payments had been made because the Navy had
not processed the proper paperwork to bill the project for
reimbursement. When we again asked about the reimbursement status in
December 2005, Navy officials stated that they were working to resolve
the issue. As of January 2006, 4 years after the project memorandum was
initially signed, the Navy still had not billed the project for
reimbursement.
* We found that inaccurate project status information was reported to
OSD for five of the eight Navy and Marine Corps projects we reviewed in
detail. For example, data reported to OSD on the San Diego II project
showed that the project's total development cost was $304 million,
although the correct amount was $427 million. Also, data reported to
OSD for the Camp Pendleton I showed that the project's reinvestment
account balance was $725,000 although the correct balance was $104,000.
Further, data reported to OSD for the Marine Corps' Tri-Command project
showed that no net operating funds or interest would be used to help
finance the project during the initial development period even though
project closing documents in March 2003 showed that $53.6 million from
net operating funds and interest were expected to be used to help
finance the project.[Footnote 12] Navy officials stated that
corrections would be made in the information reported to OSD.
During our review, Navy officials stated that they had begun a top-to-
bottom evaluation of the privatization oversight program. They stated
that our review had been helpful in identifying items that required
attention, such as those we mentioned. The officials stated that while
they believed that their current procedures protected the government's
interests and alerted top management to project concerns, they were
conducting a comprehensive review to ensure consistency and
completeness, upgrade the monitoring and oversight process, and make
oversight responsibilities better defined and, perhaps, more
aggressive. As part of the review, the officials stated that they
intended to consider the Army's and the Air Force's oversight
procedures and reports and also intended to ensure that appropriate
portfolio performance summary reporting was completed in a timely
fashion. The officials said that they planned to complete the review
and implement oversight improvements by late spring 2006.
OSD's Primary Program Oversight Report Is of Limited Usefulness:
OSD's semiannual privatization program evaluation report is of limited
usefulness because it is unwieldy, untimely, and includes inaccurate
information on some Navy and Marine Corps projects. Established in
January 2001, the report is OSD's primary tool for overseeing the
program's effectiveness and the performance of awarded projects.
Although the report is a potentially useful tool for monitoring program
implementation, the value of the report has been limited for several
reasons.
First, as the number of awarded projects has increased from 7, when the
report was established, to 52 at the end of December 2005, the report
is not well focused, and has become unwieldy with the growing volume of
data provided. The December 2004 report contained 268 pages and, unless
changed, the report size will continue to increase as additional
projects are awarded. A streamlined report that focuses on a few key
performance metrics from each project could more readily highlight any
operational or financial concerns that might require management
attention. Both the Army and the Air Force portfolio summary reports
include such focused information and thus might provide useful insight
in restructuring the OSD report.
Second, the report's usefulness has been limited because the report is
not timely. Although the report is not intended to provide for real-
time monitoring of awarded projects--the individual services have this
responsibility--information included in the report is so dated by the
time the report is issued that its value, as a tool to highlight any
operational or financial concerns to top management in a timely manner,
is questionable. For example, the report containing project information
as of December 31, 2004, was due March 15, 2005, but it was not issued
until June 2005, 3 months late, and contained data that were about 6
months old. Similarly, the report containing project information as of
June 30, 2005, was due by September 15, 2005, but was not issued until
February 2006, almost 5 months late, making the information in it more
than 7 months old.
Third, the reports include inaccuracies because data reported by the
services are sometimes incorrect. OSD officials stated that, although
they review data submitted by the services for consistency and accuracy
compared to other information provided to OSD, reported information has
not been subjected to periodic independent verification to check
accuracy.
We previously noted similar concerns about the privatization program
evaluation report. In our June 2002 report, we recommended that DOD
improve the report's value by completing the report on time, including
information on funds accumulated in project reinvestment accounts, and
obtaining periodic independent verification of key report
elements.[Footnote 13] Although the report now includes information on
funds accumulated in project reinvestment accounts, concerns remain
about the report's timeliness and accuracy. These concerns may be of
additional importance given that the House Appropriations Committee
requested in 2005 that DOD begin submitting a summary of the results of
the program evaluation plan used to monitor the military housing
privatization initiative to the committee[Footnote 14] and that
information from the report has been cited in DOD testimony on the
housing privatization program.[Footnote 15]
Methods for Measuring Servicemember Satisfaction with Privatized
Housing Are Not Consistent:
The services have adopted different methods and time frames for
collecting and analyzing information about servicemember satisfaction
with privatized housing, largely because OSD has not issued guidance on
how or when the data must be collected. This limits the data's value
for tracking occupant satisfaction over time as well as making service-
to-service comparisons. Given that the overall goal of the housing
privatization program is to improve the quality of life for
servicemembers by improving the condition of military housing, DOD
considers that one measure of program success is whether or not
servicemembers are satisfied with privatized housing. To gauge
servicemember satisfaction, OSD requires the services to collect and
report satisfaction information from occupants at each awarded project
as part of the input to the privatization program evaluation report.
Specifically, OSD requires the services to survey occupants and to
report the occupants' responses to the question "Would you recommend
privatized housing?" Data are reported separately for occupants of
privatized housing that is newly constructed, newly renovated, and not
renovated. Similar satisfaction information is not routinely collected
from the majority of servicemembers who live in the communities
surrounding military installations.
The information required by OSD could be useful in assessing
satisfaction levels over time and for comparing satisfaction levels
among projects and the services to identify trends and factors
attributing to higher or lower satisfaction levels. However, using
satisfaction data for these purposes requires that the services collect
consistent information, and this is not the case. Largely because OSD
has not provided guidance on how or when the services should collect
servicemember satisfaction data, the services have adopted different
methods and time frames for collecting and analyzing satisfaction
information.
* The Army uses a contractor to survey privatized housing occupants
annually between April and July. The 2005 survey asked 72 questions on
various aspects of maintenance and property management services, unit
condition, and amenities. Responses to most questions were requested
using a 5-point scale--for example, where "1" represents very
dissatisfied or no agreement and "5" represents very satisfied or
extreme agreement. Prior to 2005, the Army's survey requested most
responses on a 7-point scale. Army officials stated that the change was
made to be more compatible with surveys performed by the other
services. However, the requested response to the "Would you recommend
privatized housing?" question was "yes" or "no", rather than a
requested response on a 5-point scale. Therefore, because the Navy and
the Air Force request that servicemembers respond to this question
using a 5-point scale, the Army did not achieve compatibility with the
other services in the responses to this key question.
* The Navy uses a different contractor to survey privatized housing
occupants at various times during the year. The survey asks 48
questions with responses requested on a 5-point scale, including the
question on whether the occupant would recommend privatized housing.
Navy officials stated that the Navy strives to survey each project once
a year. However, surveys were not conducted at some Navy and Marine
Corps privatized housing projects in 2004 or 2005, and for six
projects, the Navy reported no satisfaction information to OSD for
inclusion in the December 2004 privatization program evaluation report.
* Air Force officials stated that until 2005 each privatized project
conducted a local survey of occupants. However, due to disparities in
the ways the survey was administered from one installation to another
and because of the difficulty in achieving statistically significant
response rates (for example, only nine responses were obtained from 382
tenants at the Patrick Air Force Base project in 2004), the Air Force
decided to adopt a centralized approach. In June 2005, the Air Force
used the same contractor as the Navy and surveyed occupants at all Air
Force privatized projects. The survey asked 54 questions--mostly the
same questions that the Navy asked--with responses requested on a 5-
point scale, including the question on whether the occupant would
recommend privatized housing.
With different survey methods, questions, and time frames, the
information being collected cannot be readily used for the purposes of
benchmarking, tracking, or comparing servicemember satisfaction levels.
Thus, the value of the information to help measure whether or not the
privatization program is succeeding in its goal of improving
servicemember quality of life could be improved. Further, because
housing satisfaction information is not routinely collected on
servicemembers who do not live in privatized housing, DOD lacks
complete information on the impact of its overall housing program on
servicemember quality of life.
Lower Than Expected Occupancy Creates Concerns in Some Privatization
Projects:
Sixteen projects, or 36 percent, of 44 awarded privatization projects
had occupancy rates below expectations with rates below 90 percent, as
of September 30, 2005, raising concerns about project performance.
Although the projects were justified on the basis of meeting military
family housing needs, 20 projects have begun renting housing units to
parties other than military families, including unaccompanied military
personnel and the general public, in an attempt to keep rental revenues
up. Still, rental revenues in some of the projects we visited have not
met expectations, resulting in signs of financial stress such as having
months where project revenues were insufficient to pay all project
expenses. In the long term, if lower than expected occupancy and rental
revenues persist, the result could be significantly reduced funds
deposited into reserve accounts, which provide for future project needs
and renovations. Or, in the worst case, there could be project
financial failures. Factors contributing to occupancy challenges
include poor condition of existing housing that has not yet been
renovated in some projects, significantly increased housing allowances,
which have made it possible for more military families to afford off-
base housing thus reducing the need for privatized housing, and
continued problems in DOD's housing requirements determination process,
which could result in overstating the need for privatized housing.
Although deployments can also contribute to occupancy challenges, they
were cited as a contributing factor to lower than expected occupancy
rates in only 1 of the 12 projects we reviewed. The services are
monitoring occupancy and revenue concerns, and in some cases, have
taken or planned steps to address the concerns. However, without
additional steps to help ensure that the size of future privatization
projects is reliably determined, future projects could face similar
occupancy and financial challenges.
Occupancy Was Below Expectations in Some Projects:
We found that some awarded projects, as shown in table 2, were not
meeting occupancy expectations. According to service officials, the
expected occupancy rate during a project's initial development period,
when many housing units are being constructed or undergoing renovation,
is usually around 90 percent of the units available for rent. After
completion of the initial development period, most projects expect
occupancy rates of about 95 percent. As of September 30, 2005,
occupancy was below expectations and below 90 percent in 6 of the
Army's 19 awarded projects, 4 of the Navy's and Marine Corps' 13
awarded projects, and 6 of the Air Force's 12 awarded projects.
Although most of these projects were in their initial development
periods, 1 Navy and 2 Air Force projects were not. In total, of 85,590
privatized housing units available for rent, 77,355 units or 90 percent
were occupied and 8,235 units or 10 percent were vacant.
Table 2: Awarded Privatization Projects with Occupancy Rates Below
Expectations as of September 30, 2005[A]:
Service/Project: Army: Fort Meade;
Expected occupancy rate (percent): 94;
Actual occupancy rate (percent): 80;
Housing units: Available: 2,778;
Housing units: Occupied: 2,230;
Housing units: Vacant: 548.
Service/Project: Army: Fort Stewart;
Expected occupancy rate (percent): 94;
Actual occupancy rate (percent): 79;
Housing units: Available: 3,089;
Housing units: Occupied: 2,433;
Housing units: Vacant: 656.
Service/Project: Army: Fort Hamilton;
Expected occupancy rate (percent): 94;
Actual occupancy rate (percent): 70;
Housing units: Available: 286;
Housing units: Occupied: 199;
Housing units: Vacant: 87.
Service/Project: Army: Fort Shafter/Schofield;
Barracks;
Expected occupancy rate (percent): 94;
Actual occupancy rate (percent): 78;
Housing units: Available: 7,074;
Housing units: Occupied: 5,520;
Housing units: Vacant: 1,554.
Service/Project: Army: Fort Leonard Wood;
Expected occupancy rate (percent): 94;
Actual occupancy rate (percent): 83;
Housing units: Available: 2,229;
Housing units: Occupied: 1,853;
Housing units: Vacant: 376.
Service/Project: Army: Fort Bliss;
Expected occupancy rate (percent): 94;
Actual occupancy rate (percent): 83;
Housing units: Available: 3,001;
Housing units: Occupied: 2,491;
Housing units: Vacant: 510.
Service/Project: Navy/Marine Corps: South Texas;
Expected occupancy rate (percent): 80;
Actual occupancy rate (percent): 78;
Housing units: Available: 398;
Housing units: Occupied: 311;
Housing units: Vacant: 87.
Service/Project: Navy/Marine Corps: Kingsville II[B];
Expected occupancy rate (percent): 97;
Actual occupancy rate (percent): 89;
Housing units: Available: 150;
Housing units: Occupied: 133;
Housing units: Vacant: 17.
Service/Project: Navy/Marine Corps: Tri-Command;
Expected occupancy rate (percent): 93;
Actual occupancy rate (percent): 83;
Housing units: Available: 1,680;
Housing units: Occupied: 1,393;
Housing units: Vacant: 287.
Service/Project: Navy/Marine Corps: Pendleton II/Quantico;
Expected occupancy rate (percent): 93;
Actual occupancy rate (percent): 89;
Housing units: Available: 3,656;
Housing units: Occupied: 3,261;
Housing units: Vacant: 395.
Service/Project: Air Force: Dyess Air Force Base[B];
Expected occupancy rate (percent): 97;
Actual occupancy rate (percent): 86;
Housing units: Available: 402;
Housing units: Occupied: 344;
Housing units: Vacant: 58.
Service/Project: Air Force: Hanscom Air Force Base;
Expected occupancy rate (percent): 88;
Actual occupancy rate (percent): 84;
Housing units: Available: 722;
Housing units: Occupied: 607;
Housing units: Vacant: 115.
Service/Project: Air Force: Kirtland Air Force Base;
Expected occupancy rate (percent): 90;
Actual occupancy rate (percent): 85;
Housing units: Available: 1,078;
Housing units: Occupied: 919;
Housing units: Vacant: 159.
Service/Project: Air Force: Little Rock Air Force Base;
Expected occupancy rate (percent): 90;
Actual occupancy rate (percent): 86;
Housing units: Available: 1,320;
Housing units: Occupied: 1,141;
Housing units: Vacant: 179.
Service/Project: Air Force: Patrick Air Force Base;
Expected occupancy rate (percent): 90;
Actual occupancy rate (percent): 73;
Housing units: Available: 592;
Housing units: Occupied: 433;
Housing units: Vacant: 159.
Service/Project: Air Force: Robins Air Force Base[B];
Expected occupancy rate (percent): 97;
Actual occupancy rate (percent): 83;
Housing units: Available: 670;
Housing units: Occupied: 559;
Housing units: Vacant: 111.
Source: DOD.
[A] Our analysis excluded seven projects awarded as of September 30,
2005, because six projects had been privatized for less than 2 months
and one had no units yet available for rent. Also, the table includes
only projects with occupancy rates below 90 percent. Six additional
projects were not meeting occupancy expectations but had occupancy
rates of 90 percent or more.
[B] The initial development period was completed at these projects.
[End of table]
Occupancy rates would have been lower if 20 projects had not rented
units to nontarget tenants--that is, tenants other than military
families. Although the projects were justified on the basis of meeting
the needs of military families, project managers are allowed to offer
units for rent to nontarget tenants, when occupancy rates fall below
expected levels for a designated period of time, such as 2 or 3 months.
Normally, project managers follow a priority list, referred to as a
tenant waterfall, when renting units to nontarget tenants. In a typical
tenant waterfall, vacant family housing units are first offered to
single or unaccompanied active duty military servicemembers; then to
DOD-related individuals, such as retired military personnel and
civilians and contractors who work for DOD; and finally to civilians in
the general public. As of September 30, 2005, of 44 awarded projects,
20 projects, or 45 percent, had rented units to individuals other than
military families. More specifically, 20 projects had rented 1,116
units to single or unaccompanied military personnel; 662 units to
retired military personnel and civilians and contractors who work for
DOD; and 299 units to civilians from the general public. In all, 2,077
family housing units were occupied by parties other than military
families.
Although renting vacant units to nontarget tenants increases rental
revenue, the practice includes some associated concerns. For example,
although background checks are performed on prospective general public
civilian tenants, several service officials stated that additional
concerns exist when civilians live on military installations, such as
whether they should have access to on-base amenities available to
military families. Also, when units are rented to unaccompanied
servicemembers, the rental revenue is usually less than with military
family occupants because the rental rate is normally based on housing
allowance rates, and the allowance rates for unaccompanied
servicemembers are less than the rates for servicemembers with
families. Therefore, although occupancy rates increase, the increase in
rental revenues usually falls short of the revenue expectations for the
units.
Lower Than Expected Occupancy Causes Financial Stress and Could Reduce
Funds for Future Reinvestment:
When project occupancy levels are less than expected, project rental
revenues are less than expected, which can cause financial stress, such
as having periods when revenues are insufficient to pay all expenses.
If revenue shortfalls persist in the long term, the result can be
reduced or no funds remaining after payment of operational expenses,
debt service, and developer returns to be deposited into the reserve
accounts established to pay for future project needs and renovations.
In a worst--case scenario, there could be insufficient funds to make a
project's loan payments, which could lead to a financial
default.[Footnote 16]
Although the housing privatization program is relatively young and the
majority of the projects awarded through September 2005 appeared
financially healthy, lower than expected occupancy rates and rental
revenues in some projects were causing financial stress in some of the
projects we visited. The examples below illustrate the occupancy and
financial challenges facing some projects, the reasons for the
challenges, and steps taken or planned in response. While many
vacancies involved older housing units not yet renovated, we also found
vacancies involving newly constructed and renovated units.
* At Fort Meade in July 2005, 2,044 units, or 81 percent, of the
available units were occupied, compared to an expected occupancy of
2,332 units, or 92 percent. Army officials stated that the project's
491 vacant units were older units that had not been renovated.
Occupancy would have been lower if the project had not rented units to
nontarget parties. Of the occupied units, 205 units, or 10 percent,
were occupied by nontarget tenants, including unaccompanied military
servicemembers, military retirees, and DOD civilian employees. The
shortfall of 288 expected occupants had caused financial stress for the
project. For example, the project's net operating income was 33 percent
below expectations for the quarter ending June 30, 2005. Army officials
stated that lower than expected revenues had slowed the project's
construction progress because funds remaining after payment of project
expenses were to be used to help pay for construction costs during the
initial development period. The officials stated that lower than
expected occupancy was caused by three main factors. First, the poor
condition of much of the privatized housing that had not yet been
improved made it unattractive to military families. Second, increased
housing allowances made more local community housing affordable and
caused many military families to decide to rent or buy housing off
base. Third, recent private-sector housing development in the local
communities surrounding Fort Meade increased the availability of local
housing. In response to the occupancy and financial concerns, Army
officials stated that plans were underway to restructure the project
and reduce the project's planned number of units. Army officials were
optimistic that occupancy would increase as more units were renovated
and additional new units were constructed, making the project more
appealing to military families.
* At the Navy's South Texas project, Navy officials stated that lower
than expected occupancy had been a concern since the project's
beginning in February 2002. At the time of our visit in September 2005,
the occupancy rate was 78 percent, with 311 units occupied and 87 units
vacant. Navy officials stated that a key reason for low occupancy was
that the project was still in its initial development period, and
progress in improving housing conditions had proceeded much more slowly
than planned. As a result, much of the privatized housing was in poor
condition and unattractive to military families. However, of the 87
vacant units, Navy officials stated that only 11 were awaiting
renovation or replacement, and the remaining 76 units consisted of
newly constructed or renovated housing units. Other causes for low
occupancy included reduced housing requirements caused by reductions in
military personnel assigned to the area and increased housing
allowances, which made more local community housing affordable for
servicemembers. With reduced occupancy, the project had experienced
signs of financial stress. For example, in July 2005, the project's
rental income was 26 percent below budget and was insufficient to pay
the project's operating expenses. Also, the project's debt coverage
ratio was a negative number, meaning that net operating income was
insufficient to cover the project's debt payment. Navy officials stated
that the project faced little risk of financial failure during its
initial development period because accounts were established at the
project's inception to provide for debt service payments during this
period. Nevertheless, Navy officials expressed concern about the
project and had taken actions to address the situation. In August 2004,
an agreement was reached to reduce the project's scope by 80 units, and
Navy officials stated that further project scope reductions might be
considered in the future.
* At Robins Air Force Base, 559 units, or 83 percent, of 670 available
units were occupied in September 2005 compared to the expected
occupancy rate of 97 percent. This project had completed its initial
development period and consequently all available units are newly
constructed or renovated. Of the occupied units, 109 units were
occupied by nontarget tenants, including 42 civilians. Air Force
officials stated two reasons for the low occupancy. First, increased
housing allowances and attractive mortgage interest rates had caused
some servicemembers to decide to purchase homes in the local community.
Second, the project's design, which included many two-bedroom units,
was less appealing to some military families. As a result of the low
occupancy rates, Air Force officials stated that the project faced
significant financial challenges. The Robins project was one of three
Air Force projects rated as unsatisfactory in the Air Force's September
2005 portfolio summary report because of financial weakness and
concerns about meeting developmental and/or financial obligations. Air
Force officials stated that alternatives were being explored, which may
require renegotiation of the project agreement with the developer to
improve the project's long-term financial viability.
* At Patrick Air Force Base, military families occupied 172, or only 29
percent, of the 592 available units. Nontarget tenants, including 135
unaccompanied servicemembers and 126 civilians, occupied 261 additional
units to make the overall occupancy rate 73 percent compared to an
expected occupancy rate of 90 percent. Air Force officials attributed
the low occupancy to the poor condition of the project's units, where
planned improvements were far behind schedule. The project, which will
consist of all new units when completed, had no new units ready for
occupancy at the time of our visit in early December 2005. The
officials also said that increased housing allowances had caused many
military families to decide to obtain housing in the local community.
Although the project's nontarget tenants had significantly reduced the
financial challenges that would have occurred if only military families
occupied the housing, the project still faced financial stress. For the
quarter ending September 30, 2005, the project's net operating income
was 28 percent below expectations. Largely because of financial issues,
the project was restructured in April 2005 to increase debt and provide
additional funds needed to complete the initial development period. As
part of the restructuring, some funds that had initially been required
to flow into the project's reserve account for future project needs and
renovation were allowed to be used for construction funding. Air Force
officials stated their belief that, as housing improvements are
completed, both occupancy rates and the number of military family
tenants will increase and the project's financial performance will
improve.
* At the time of our visit to the Marine Corps' Tri-Command project in
early October 2005, the expected occupancy rate was 93 percent.
However, the actual rate was 83 percent, with 1,393 of 1,680 available
units occupied and 287 units vacant. Service officials stated that most
vacant units were older units that had not been renovated. According to
installation officials, the lower than expected occupancy rate was
caused by increased housing allowances, which had led some
servicemembers to decide to rent or buy housing in the local community.
Also, although the project was awarded in March 2003, the project was
still undergoing initial development and, with many of the planned
housing improvements not yet completed, much of the on-base housing was
in poor condition and unattractive to military families. With lower
than expected occupancy, the project showed signs of financial stress.
In September 2005, the project reported that rental revenues were 14
percent below expectations and the net operating income was 30 percent
below expectations. Also, the project's debt coverage ratio was .66,
meaning that the project's operations did not produce sufficient funds
to cover the debt payment. Marine Corps officials stated that the
project faced little risk of financial failure during its initial
development period because accounts were established at the project's
inception to provide for debt service payments during this period.
Still, the officials expressed concern about the project's finances. In
an effort to improve occupancy and financial performance, the project
revised its revitalization strategy in August 2005 and obtained $44.1
million in additional private loans to finance upgrades to more housing
units than originally planned to make the units more appealing to
potential renters. Marine Corps officials stated that the revised
strategy should result in improved project performance.
Increased Housing Allowances and Unreliable Needs Assessments
Contribute to Occupancy Concerns:
Increases in monthly housing allowances and unreliable estimates of
housing requirements contribute to occupancy concerns in some
privatization projects by reducing the need for privatized housing or
possibly overstating the required size of some projects. Some causes of
occupancy concerns, such as changes in personnel assignments and
deployments, often cannot be predicted and are beyond the control of
the services. While deployments can contribute to occupancy challenges,
they were cited as a contributing factor to lower than expected
occupancy rates in only 1 of the 12 projects we reviewed. Also, as the
condition of privatized housing at some installations improves with the
construction of new housing and the renovation of older housing units,
the projects may attract more military families and the occupancy rates
may improve. However, other factors, such as the impact of DOD's zero-
out-of-pocket housing allowance initiative and the reliability of DOD's
overall housing requirements assessment process, can also affect
occupancy rates and are important considerations in planning for future
housing privatization projects. To help ensure that the size of housing
projects is accurately determined, we previously reported that DOD
needed to study how increased allowances might affect future housing
needs and to make improvements in its requirements process to maximize
reliance on local community housing, as required by DOD policy. Yet,
because DOD has yet to implement these recommendations, the planned
size of future privatization projects may not be based on reliable
needs assessments, which could contribute to occupancy and financial
challenges in some future projects.
For example, in June 2002, we noted that uncertainties existed in the
future need for military-owned and privatized housing because of DOD's
initiative to increase housing allowances.[Footnote 17] Prior to the
initiative, servicemembers with families living in community housing
received, on average, an allowance that covered about 81 percent of
housing costs, including utilities. Servicemembers paid the remaining
19 percent of housing costs out of pocket using other sources of
income. Under the initiative begun in 2001, housing allowances
increased each year over a 5-year period, progressively eliminating the
average out-of-pocket costs. By January 2005, the average housing
allowance fully covered the average costs of housing and utilities in
each geographic area with the typical servicemember paying no
additional out-of-pocket costs. Table 3 illustrates the increase in
housing allowances for selected military paygrades in five locations
before the initiative in 2000 and after the initiative in 2006.
Table 3: Examples of Changes in Monthly Housing Allowances for
Servicemembers with Dependents[A]:
Location: Fort Meade, Maryland;
Paygrade (E=enlisted and O=officer): E- 3;
Monthly allowance in 2000: $774;
Monthly allowance in 2006: $1,259;
Increase in allowance (percent): 63.
Paygrade (E=enlisted and O=officer): E-6;
Monthly allowance in 2000: 1,148;
Monthly allowance in 2006: 1,605;
Increase in allowance (percent): 40.
Paygrade (E=enlisted and O=officer): O-3;
Monthly allowance in 2000: 1,245;
Monthly allowance in 2006: 1,785;
Increase in allowance (percent): 43.
Location: Naval Air Station Corpus Christi, Texas;
Paygrade (E=enlisted and O=officer): E-3;
Monthly allowance in 2000: 592;
Monthly allowance in 2006: 979;
Increase in allowance (percent): 65.
Paygrade (E=enlisted and O=officer): E-6;
Monthly allowance in 2000: 715;
Monthly allowance in 2006: 1,333;
Increase in allowance (percent): 86.
Paygrade (E=enlisted and O=officer): O-3;
Monthly allowance in 2000: 857;
Monthly allowance in 2006: 1,393;
Increase in allowance (percent): 63.
Location: Robins Air Force Base, Georgia;
Paygrade (E=enlisted and O=officer): E-3;
Monthly allowance in 2000: 540;
Monthly allowance in 2006: 898;
Increase in allowance (percent): 66.
Paygrade (E=enlisted and O=officer): E-6;
Monthly allowance in 2000: 673;
Monthly allowance in 2006: 967;
Increase in allowance (percent): 44.
Paygrade (E=enlisted and O=officer): O-3;
Monthly allowance in 2000: 807;
Monthly allowance in 2006: 1,237;
Increase in allowance (percent): 53.
Location: Patrick Air Force Base, Florida;
Paygrade (E=enlisted and O=officer): E-3;
Monthly allowance in 2000: 506;
Monthly allowance in 2006: 1,027;
Increase in allowance (percent): 103.
Paygrade (E=enlisted and O=officer): E-6;
Monthly allowance in 2000: 662;
Monthly allowance in 2006: 1,437;
Increase in allowance (percent): 117.
Paygrade (E=enlisted and O=officer): O-3;
Monthly allowance in 2000: 817;
Monthly allowance in 2006: 1,531;
Increase in allowance (percent): 87.
Location: Marine Corps Air Station Beaufort, South Carolina;
Paygrade (E=enlisted and O=officer): E-3;
Monthly allowance in 2000: 502;
Monthly allowance in 2006: 961;
Increase in allowance (percent): 91.
Paygrade (E=enlisted and O=officer): E-6;
Monthly allowance in 2000: 701;
Monthly allowance in 2006: 1,271;
Increase in allowance (percent): 81.
Paygrade (E=enlisted and O=officer): O-3;
Monthly allowance in 2000: 853;
Monthly allowance in 2006: 1,345;
Increase in allowance (percent): 58.
Source: DOD.
[A] Changes in the housing allowance amounts reflect the impact of the
zero-out-of-pocket initiative as well as changes in cost of housing at
each location since 2000.
[End of table]
Our report further noted that increased housing allowances from the
zero-out-of-pocket initiative would make a significant impact on the
military housing program. First, increased allowances should decrease
the requirement for military-owned or privatized houses by making local
community housing more affordable to servicemembers. Second, over time,
the supply of community housing available to military families could
increase and reduce the requirement for military-owned or privatized
housing as private developers construct new housing near military
installations to profit from renting to servicemembers at market rates.
Third, increased allowances should allow DOD to better satisfy the
preferences of most servicemembers to live off base and reduce demand
for on-base housing.[Footnote 18] For these reasons, we recommended
that DOD take into account the projected impact that the housing
allowance initiative might have on military housing requirements. Yet,
as of January 2006, DOD had not conducted detailed analyses to consider
the effects of increased allowances on requirements, nor had the
department provided guidance to the services on how these effects
should be considered in their housing requirements assessments.
We also previously reported on changes needed to increase the
reliability of DOD's housing requirements determination
process.[Footnote 19] In May 2004, we noted that, although DOD had
revised its process and made improvements, additional steps were needed
to ensure consistency, accuracy, and maximum reliance on private
housing in the communities surrounding military installations.
Specifically, we noted that (1) DOD had not provided the services with
timely detailed guidance for implementing the revised requirements
process; (2) in the absence of detailed guidance, the services used
inconsistent methods and sometimes questionable data sources and
assumptions when determining family housing needs at various
installations; and (3) as a result, DOD could not know with assurance
how many housing units it needed and whether its housing investment
decisions were justified. The report also noted that DOD's revised
requirements process provided exceptions to the use of available,
suitable local community housing at each installation. We noted that
one exception--military mission requirements--appeared clearly
justified, but the other exceptions did not and could result in the
services identifying more on-base family housing requirements than were
actually needed. For example, DOD's process allows installations to
include in its military-owned or privatized housing requirement a
quantity of housing to accommodate up to 10 percent of the projected
number of families at those installations, regardless of the
availability of local housing.
To address these matters, we recommended that DOD provide the military
services with more detailed guidance on implementing the revised
housing requirements process to help ensure that housing investments,
whether through military construction or privatization, were supported
by consistent and reliable needs assessments. We also recommended that
DOD review the rationale supporting the exceptions to using local
community housing in an effort to reduce or narrow the scope of the
exceptions and help maximize use of available community housing. In
response, DOD stated that it planned to include detailed guidance on
implementing the requirements process in a forthcoming revision to the
DOD housing management manual. DOD officials stated that the revised
manual would also include guidance narrowing the scope of the
exceptions provided to the services in the use of available community
housing. Although the revised manual was originally scheduled for
issuance in December 2004, the manual had not been issued at the time
of our review in January 2006. DOD officials stated that they were
still revising the manual and that the final version should be issued
during 2006.
Upcoming changes in personnel assignments at some installations
resulting from Base Realignment and Closure decisions, the return of
forces from overseas bases, and the implementation of the Army's
modularity program will increase the importance of reliable housing
assessments. In particular, some installations stand to gain
substantial numbers of military families, which could increase
requirements for privatized housing and increase occupancy in current
projects. Conversely, implementation of the Army's force stabilization
initiative may result in reduced requirements for privatized housing
because more service members may choose to purchase homes if they know
that they will be assigned to the same installation for a longer period
of time. However, until improvements are implemented in the housing
requirements assessment process, the assessments for planned
privatization projects at some installations may indicate a need for
more housing units than required, which could lead to future occupancy
and financial concerns. In its September 2005 portfolio summary report,
the Air Force highlighted this concern. The report noted that:
The fact is that the [project] scopes are currently based on static
housing requirements and market analysis. Markets are not static, as is
evidenced by the speed at which the private sector has provided housing
thereby reducing subsequent [housing] requirements—The Air Force should
carefully consider expectations for future (2 to 5 years) housing needs
when establishing the scope of new projects—.Because of the delays
between the date of the housing requirements and market analysis and
the delivery of units, the Air Force may be building too may homes.
Overbuilding in any project could pose a significant risk.
Conclusions:
Adequate privatization program oversight is essential to help monitor
and safeguard the government's interests and ensure the long-term
success of the program. Unless the Navy follows through with its plans
to improve its policies and procedures for overseeing its housing
privatization program, Navy management will continue to lack assurance
that it can become aware of project performance issues in a timely
manner. Also, unless DOD streamlines its privatization program
evaluation report to focus on key project performance metrics,
completes the report on time, and obtains periodic independent
verification of key report elements, the report's value as an oversight
tool will continue to be limited. Further, until DOD provides guidance
to the services to help ensure consistent collection and reporting of
housing satisfaction from all servicemembers, the value of the
information to help measure this aspect of the privatization program's
success, as well as the impact of DOD's overall housing program on
quality of life, will also continue to be less useful than it could be.
In the long term, if lower than expected occupancy rates and rental
revenues at some privatization projects persist, the result could be
significantly reduced funds flowing into reserve accounts that were
established to provide for future project needs and renovations. In the
worst-case scenario, the program could see project financial failures,
which could affect the quality of housing available to military
families. Such concerns may occur in future privatization projects
unless DOD fully considers the impact of increased allowances on
housing requirements and implements improvements to its requirements
determination process so that the planned size of future projects is
reliably determined.
Recommendations for Executive Action:
We recommend that the Secretary of Defense direct the Deputy Under
Secretary of Defense (Installations and Environment) to take the
following five actions:
* Require the Navy to upgrade the monitoring and oversight of its
housing privatization program to ensure consistency, completeness, and
preparation of appropriate portfolio summary performance reports.
* Improve the value of DOD's privatization program evaluation report by
streamlining the report to focus on key project performance metrics,
completing the report on time, and obtaining periodic independent
verification of key report elements.
* Provide guidance to the services to help ensure consistent collection
and reporting of housing satisfaction information from all
servicemembers, which would allow for benchmarking and tracking of
tenant satisfaction over time as well as for making service-to-service
comparisons.
* Determine how increased housing allowances from the zero-out-of-
pocket initiative will most likely impact future family housing
requirements and provide guidance on how the impacts should be factored
into the services' housing requirements assessments.
* Expedite issuance of the revised DOD housing management manual and
ensure that the revision includes guidance to improve the reliability
of housing requirements assessments and reduce the scope of the
exceptions provided to the use of available community housing.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, the Director for Housing
and Competitive Sourcing within the Office of the Under Secretary of
Defense for Acquisition, Technology and Logistics fully agreed with
three and partially agreed with two of our recommendations and stated
that shortcomings identified in the report would be forthrightly
addressed. Noting that our report was an important contribution to
DOD's oversight of the housing privatization program to date, DOD
stated that steps were already underway to streamline the privatization
program evaluation report and improve the report's accuracy. Also, DOD
intends to closely observe project vacancy rates in view of the
increased housing allowance rates and ensure that the revised housing
management manual, now scheduled for completion by the end of calendar
year 2006, addresses the housing requirements issues identified in our
report. DOD also stated that its privatization program evaluation
report was not intended to provide real-time project oversight and that
this was the role of the services' portfolio management systems. Our
report does not imply that the evaluation report should provide for
real-time project oversight. Nevertheless, because the evaluation
report is the department's primary tool for evaluating the program's
effectiveness, we continue to believe that such a report which focuses
on key performance metrics and contains accurate and timely information
is important for OSD in carrying out its oversight and effective
stewardship of the program.
DOD partially agreed with our recommendation that the Navy be required
to upgrade the monitoring and oversight of its housing privatization
program to ensure consistency, completeness, and preparation of
appropriate portfolio summary performance reports. DOD stated that it
disagreed with our assumption that, because the Navy did not prepare
summary portfolio briefings and the Navy's input to the privatization
program evaluation report contained errors, the Navy was at risk of not
being aware of potential problems with projects. DOD also stated that a
review of other projects conducted by the Navy and a Navy consultant
did not identify issues such as those we identified at the Kingsville
II and South Texas projects. However, DOD stated that additional
guidance was being developed for internal reviews of audits and
financial data from general partners to ensure accurate monitoring and
oversight of distributions. Finally, DOD stated that the cost of fire
and police services at the South Texas project was not invoiced or
reimbursed for 2 years, not for 4 years, as stated in our report.
We disagree with DOD's description of the Navy's oversight of its
housing privatization program and continue to believe that, without
improvement, the Navy is at risk of being unaware of potential problems
with projects. First, our report notes that in contrast with the Army
and the Air Force, the Navy's oversight program was less structured,
included fewer details on project performance, and did not include
summary oversight reports on portfolio performance, even though such
reports were required by Navy guidance. Also, as noted in our report,
the Navy agreed that oversight improvements were needed and had begun
conducting a comprehensive review to ensure consistency and
completeness, upgrade the monitoring and oversight process, and make
oversight responsibilities better defined and, perhaps, more
aggressive. Further, we continue to believe that inaccurate project
status information reported to OSD for five of the eight Navy and
Marine Corps projects we reviewed indicates a lack of adequate
oversight and attention to detail. Second, while the Navy and its
consultant apparently did not identify issues at other projects, the
Navy was developing additional guidance for internal reviews of audits
and financial data from general partners to ensure accurate monitoring
and oversight of distributions. We believe that this action indicates
the Navy has recognized the need for better oversight and also raises
the question of why such guidance was not already in place given that
the housing privatization program began in 1996. Third, regarding the
reimbursement for the cost of fire and police services at the South
Texas project, our report contains information provided by top
management in the Navy's housing privatization program and which we
revisited with the Navy officials several times over the duration of
this review. For example, we posed a written question to the Navy
headquarters housing officials in mid-November 2005 in which we
reiterated a statement they had previously made to us earlier that Navy
never billed the South Texas project for fire and police services, and
asked for the status of the issue. On November 22, 2005, an official on
the staff of the Assistant Secretary of the Navy for Installations and
Environment, without stipulating a set number of years, provided the
following written response, "Navy Region South East and the
installation are working to resolve this issue. As of November 15,
2005, the project had not been billed for the services." Subsequently
in a December 13, 2005, meeting with Navy privatization program
officials, we again discussed this issue and were told that they were
working to resolve the issue. On January 25, 2006, a senior Navy
housing official told us that the installation had billed the project
and had received payment within the last month. When we asked about the
month in which the billing occurred, the same official responded 2 days
later that "The billing has not yet occurred." In view of these
statements from the top Navy management officials responsible for
overseeing the housing privatization program, we believe that DOD's
comment that cost of fire and police services at the South Texas
project were not invoiced or reimbursed for 2 years, rather than 4
years, only helps to illustrate our point--that the Navy should be
required to upgrade the monitoring and oversight of its housing
privatization program.
DOD partially agreed with our recommendation that DOD provide guidance
to the services to help ensure consistent collection and reporting of
housing satisfaction information from all service members, which would
allow for benchmarking and tracking of tenant satisfaction over time as
well as for making service-to-service comparisons. DOD stated that
tenant survey guidance already exists and that it would not be suitable
to overlay a programwide directive because of differences among the
services in the data they need to help support their specific,
negotiated business structures. However, DOD also stated that it would
revise its guidance to require consistent use of a 5-point numerical
system to measure tenant satisfaction across the services. DOD also
agreed that (1) housing preferences should be surveyed for all service
members, not simply those occupying privatized housing; (2) it is
important to reevaluate servicemember housing preferences driven by
increased allowances and housing revitalization; and (3) a panel at the
Office of Secretary of Defense has been studying how to best implement
such a survey. The intent of our recommendation was not to require the
services to use identical questions when assessing tenant satisfaction,
but rather to ensure that the services' methods, questions, and time
frames were of sufficient consistency to allow for benchmarking,
tracking, or comparing servicemember satisfaction levels. Ensuring that
the services use a consistent 5-point numerical system for measuring
tenant satisfaction is a step in the right direction. However, we
continue to believe that DOD needs to ensure that the services use
consistent time frames in order to make maximum use of satisfaction
information as a tool to help measure whether or not the privatization
program is succeeding in its goal of improving servicemember quality of
life.
DOD's comments are reprinted in their entirety in appendix III.
We are sending copies of this report to other interested congressional
committees; the Secretaries of Defense, Army, Navy, and Air Force; and
the Director, Office of Management and Budget. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please call
me at (202) 512-5581 or email at holmanb@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. The GAO staff members who made key
contributions to this report are listed in appendix IV.
Signed by:
Barry W. Holman, Director:
Defense Capabilities and Management:
List of Congressional Addressees:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Kay Bailey Hutchison:
Chair:
The Honorable Dianne Feinstein:
Ranking Minority Member:
Subcommittee on Military Construction and Veterans' Affairs, and
Related Agencies:
Committee on Appropriations United States Senate:
The Honorable Duncan L. Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable James T. Walsh:
Chairman:
The Honorable Chet Edwards:
Ranking Minority Member:
Subcommittee on Military Quality of Life and Veterans Affairs and
Related Agencies:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To determine whether opportunities exist to improve the Department of
Defense's (DOD) oversight of awarded housing privatization projects, we
summarized program implementation status and costs, compared the status
to DOD's goals and milestones, and discussed issues affecting program
implementation with DOD and service officials. We relied on program
status data provided by DOD and the services and confirmed the status
data for 12 privatization projects, but we did not otherwise test the
reliability of the data. We also obtained, reviewed, and compared DOD
and service policies, guidance, and procedures for monitoring
implementation and measuring progress in the housing privatization
program. We questioned DOD and service officials responsible for the
program about how they oversee project performance, how they compare
performance with expectations, and what actions they take when
performance does not match expectations. We obtained and reviewed
applicable oversight reports and assessed the extent to which the
reports included key project performance data, trends, and discussion
of any performance concerns. We also compared the issue dates of DOD
and service oversight reports with the due dates to determine the
timeliness of the reports; reviewed and compared the services' methods
and time frames used to measure servicemember satisfaction with
privatized housing; and reviewed the results of DOD and service efforts
to assess servicemember housing preferences.
Further, we visited selected military installations with housing
privatization projects to review oversight at the local level, to
examine project performance, and to determine whether performance
information and concerns were adequately captured in oversight reports
and provided to top management in a timely manner. Specifically, we
visited Fort Meade, Maryland; Fort Stewart, Georgia; Naval Air Station
Corpus Christi, Texas; Naval Air Station Kingsville, Texas; Naval
Station San Diego, California; Patrick Air Force Base, Florida; Robins
Air Force Base, Georgia; Marine Corps Base Camp Pendleton, California;
and Marine Corps Air Station Beaufort, Georgia. These installations
were chosen because they contained established privatization projects,
represented each of the military services, and a balance of some with
and without challenges. Together, the installations contained 12
separate privatization projects.
To determine to what extent awarded privatization projects are meeting
occupancy expectations, we interviewed DOD and service officials to
discuss project occupancy expectations, the factors that contribute to
lower than expected occupancy rates, the financial and other impacts
that result from lower than expected occupancy rates, and the responses
normally taken when occupancy is below expectations. We obtained,
reviewed, and analyzed project occupancy rates and trends for all
projects awarded as of September 30, 2005, and compared these data to
occupancy expectations. We relied on occupancy data provided by the
services and did not otherwise attempt to independently determine
occupancy rates. Also, for the 12 projects at the installations
visited, we reviewed project justification and budget documents to
determine each project's occupancy expectations and compared actual
occupancy rates with the expectations. When occupancy rates were below
expectations, we reviewed project performance reports and interviewed
local officials to determine the causes, consequences, and any actions
taken or planned in response. We also reviewed information on the
number of privatized family housing units rented to parties other than
military families and discussed the associated impacts with service
officials. Further, we determined the status of steps taken by DOD in
response to previous GAO recommendations to address concerns in the
reliability of the services' housing requirements assessments.
We conducted our work from July 2005 through February 2006 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Details on 12 Housing Privatization Projects:
Table 4 provides details on the 12 housing privatization projects at
the installations visited during this review.
Table 4: Details on the 12 Housing Privatization Projects We Visited:
Service, project, location, and award date: Army, Fort Meade, Maryland,
May 2002;
Total housing units after initial development period: 3,170;
Total estimated initial development cost (in millions): $461.2;
Estimated completion date for initial development period: 2012;
Project description: Government conveyed existing units and leased
land. Developers to construct 2,748 new units, renovate 422 units, and
own, operate, and maintain all units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: No;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: Yes.
Service, project, location, and award date: Army, Fort Stewart and
Hunter Army Air Field, Georgia, Nov. 2003;
Total housing units after initial development period: 3,702;
Total estimated initial development cost (in millions): $353.4;
Estimated completion date for initial development period: 2011;
Project description: Government conveyed existing units, leased land,
and contributed $37.3 million. Developer to construct 1,868 units,
renovate 1,597 units, and own, operate, and maintain all units for 50
years;
At the time of our visit, was project: Development progress: on
schedule?: No;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Navy, South Texas, Texas,
Feb. 2002;
Total housing units after initial development period: 585[A];
Total estimated initial development cost (in millions): $75.4;
Estimated completion date for initial development period: 2007[ A];
Project description: Government conveyed existing units, leased land,
and contributed $29.4 million. Developer to construct 470 units,
renovate 114 units, and own, operate, and maintain all units for 50
years;
At the time of our visit, was project: Development progress: on
schedule?: No;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Navy, Kingsville II, Texas,
Nov. 2000;
Total housing units after initial development period: 150;
Total estimated initial development cost (in millions): $14.5;
Estimated completion date for initial development period: Completed;
Project description: Government conveyed units and land, contributed
$4.3 million, and provided $2.5 million loan. Developer provided land,
constructed 150 units, and will own, operate, and maintain the units
for 30 years;
At the time of our visit, was project: Development progress: on
schedule?: Initial development completed;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: Yes.
Service, project, location, and award date: Navy, San Diego I,
California, Aug. 2001;
Total housing units after initial development period: 3,248;
Total estimated initial development cost (in millions): $328.8;
Estimated completion date for initial development period: 2006;
Project description: Government conveyed units, leased land, and
contributed $20.9 million. Developer to construct 1,400 units, renovate
1,058 units, and own, operate, and maintain all units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: Yes;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Navy, San Diego II,
California, May 2003;
Total housing units after initial development period: 3,217;
Total estimated initial development cost (in millions): $427.0;
Estimated completion date for initial development period: 2007;
Project description: Government conveyed units and leased land.
Developer to construct 460 units, renovate 1,072 units, and own,
operate, and maintain all units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: Yes;
At the time of our visit, was project: Meeting occupancy expectations?:
Yes;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Marine Corps, Camp
Pendleton I, California, Nov. 2000;
Total housing units after initial development period: 712;
Total estimated initial development cost (in millions): $88.3;
Estimated completion date for initial development period: Completed;
Project description: Government conveyed units, leased land, and
provided $29.4 million loan. Developer constructed 512 units, renovated
200 units, and will own, operate, and maintain the units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: Initial development completed;
At the time of our visit, was project: Meeting occupancy expectations?:
Yes;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Marine Corps, Camp
Pendleton II and Quantico, California and Virginia, Oct. 2003[B];
Total housing units after initial development period: 4,534;
Total estimated initial development cost (in millions): $590.3;
Estimated completion date for initial development period: 2008;
Project description: Government conveyed units, leased land, and
contributed $70.7 million. Developer to construct 2,040 units, renovate
2,394 units, and own, operate, and maintain all units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: No;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Marine Corps, Camp
Pendleton III and Yuma, California and Arizona, Oct. 2004[B];
Total housing units after initial development period: 897;
Total estimated initial development cost (in millions): $85.5;
Estimated completion date for initial development period: 2006;
Project description: Government conveyed units, leased land, and
contributed $18.6 million. Developer to construct 253 units, renovate
257 units, and own, operate, and maintain all units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: Yes;
At the time of our visit, was project: Meeting occupancy expectations?:
Yes;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Marine Corps, Tri-Command,
South Carolina, Mar. 2003;
Total housing units after initial development period: 1,718;
Total estimated initial development cost (in millions): $175.9;
Estimated completion date for initial development period: 2007;
Project description: Government conveyed units, leased land, and
contributed $26.5 million. Developer to construct 491 units, renovate
1,227 units, and own, operate, and maintain all units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: Yes;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: No.
Service, project, location, and award date: Air Force, Robbins Air
Force Base, Georgia, Sept. 2000;
Total housing units after initial development period: 670;
Total estimated initial development cost (in millions): $56.5;
Estimated completion date for initial development period: Completed;
Project description: Government conveyed units and land, provided $22.3
million loan, and provided a guarantee on the private loan. Developer
constructed 370 units, renovated 300 units, and will own, operate, and
maintain the units for 50 years;
At the time of our visit, was project: Development progress: on
schedule?: Initial development completed;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: Yes.
Service, project, location, and award date: Air Force, Patrick Air
Force Base, Florida, Oct. 2003;
Total housing units after initial development period: 552;
Total estimated initial development cost (in millions): $120.6;
Estimated completion date for initial development period: 2008;
Project description: Government conveyed units and land. Developer to
construct 552 units and own, operate, and maintain the units for 50
years;
At the time of our visit, was project: Development progress: on
schedule?: No;
At the time of our visit, was project: Meeting occupancy expectations?:
No;
At the time of our visit, was project: Renting units to parties other
than military families?: Yes.
Source: DOD.
[A] The original scope for the South Texas project was 665 units and
the original completion date for the initial development period was
February 2005. The project agreement was modified in August 2004.
[B] We did not visit the Quantico or Yuma portions of these projects.
[End of table]
[End of section]
Appendix III: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
3000 Defense Pentagon:
Washington, DC 20301-3000:
Acquisition, Technology And Logistics:
April 10, 2006:
Mr. Barry Holman:
Director, Defense Capabilities and Management:
U.S. General Accounting Office:
Washington, D.C. 20548:
Dear Mr Holman,
This is the Department of Defense (DOD) response to the GAO draft
report GAO-06-438, "MILITARY HOUSING: Management Issues - Require
Attention as the Privatization Program Matures," dated March 1, 2006.
Thank you for allowing us to comment on your draft report. I consider
the report a important contribution to our oversight of the 58 projects
and 121,000 units that have been privatized to date. These projects
have allowed us to tap private sector resources and initiative to
eliminate over 91,000 inadequate housing units. In these projects over
$1 billion dollars of government contribution has generated over $14
billion in housing development. The report undertook an assessment of
whether opportunities exist to improve our oversight of awarded housing
privatization projects and to what extent projects are meeting
occupancy standards.
On the issue of oversight, the Program Evaluation Plan (PEP) and report
is the Department's primary tool for evaluating the program's
effectiveness in leveraging appropriations, reducing housing deficits,
eliminating inadequate housing, and appropriately implementing the
legislative authorities. It is not intended to provide real time
project oversight. That is the role of the portfolio management systems
of the military services. We are generally pleased with your assessment
of how the services are implementing their systems. Where you have
identified shortcomings, we will act forthrightly to address them.
Occupancy rates in privatized housing is also an issue worth
addressing. The revitalization of housing through privatization and the
five-year increase in housing allowances (enactment of the
privatization program preceded the initiative to increase allowances)
should bring about a tremendous improvement in the quality of life of
military service members. It has also expanded their housing options
significantly and given them more opportunity to "vote with their
feet," in choosing housing. As we transition from models of government
ownership of largely inadequate housing, to private ownership of
largely inadequate housing, to private ownership of excellent housing,
our housing requirements determination process must be informed by the
actual housing preferences of the service members. A housing survey of
all service members can assist this understanding. More important
though is an understanding that the housing is being transferred to
private ownership. Private sector landlords and the lenders that
finance them respond quickly to vacancies. Our requirements
determination process must continue to understand the effects of the
housing revitalization and increase in allowances and it must adjust
accordingly.
If you have any questions regarding the attached report please contact
me at (703) 602-3669.
Signed by:
Joseph K. Sikes:
Director, Housing and Competitive Sourcing:
GAO-06-438:
"Military Housing: Management Issues -Require Attention As The
Privatization Program Matures"
Department Of Defense Comments To The Recommendations:
RECOMMENDATION 1: The General Accounting Office (GAO) recommended that
the Secretary of Defense direct the Deputy Under Secretary of Defense
(Installation and Environment) to require the Navy to upgrade the
monitoring and oversight of its housing privatization program to ensure
consistency, completeness, and preparation of appropriate portfolio
summary performance reports.
DOD RESPONSE: Partially concur. We recognize the need to improve the
system to ensure accurate reporting. The Navy is striving to achieve a
balance between the appropriate levels of government oversight while
maintaining limited governmental involvement. The Navy had begun a
comprehensive review of potential enhancements to portfolio management
prior to initiation of the GAO review. Navy representatives have met
with their counterparts in the Army and Air Force to review their
portfolio management approaches and are working to incorporate best
industry practices.
However, we disagree with the assumption that, because summary annual
portfolio briefings were not prepared or that Program Evaluation Report
(PEP) input contained errors, the Navy was at risk of not being aware
of potential problems with projects. Senior leadership within both the
Navy and Marines are frequently briefed on ongoing potential issues.
The following information is provided regarding some of the specific
findings cited in the draft report.
The Navy's privatized portfolio average occupancy rate for the first
quarter of fiscal year 2006 was 93%. With the exception of the
Northeast Region and South Texas, with occupancy rates of 88% and 78%
respectively, all Navy privatization projects' occupancy rates were
above 90% during this time period. The Marine Corps' privatized
portfolio average occupancy rate for the first quarter of fiscal year
2006 was 92%. With the exception of Tri-Command, with an occupancy rate
of 81 %, all Marine Corps privatization projects occupancy rates were
at or above 90%.
The GAO finding that Kingsville II project funds in the amount
$50,282.49 were not properly distributed was corrected in September
2005. The Navy's general partner has agreed to audit revisions that
will permit early detection of any issues, and will provide Navy
additional data in the future to ensure correct financial
distributions.
The Navy's South Texas limited partner was not invoiced for fire and
police services for 2004 and 2005 until February 10, 2006, and the
general partner paid the full amount March 2, 2006. The GAO draft
report incorrectly states that services were not invoiced or reimbursed
for services provided in 2002 and 2003. The Navy's installations and
regions have worked to ensure that provisions have been established to
properly invoice the general partner for all reimbursable services.
A review conducted by the Navy, and their Military Housing
Privatization Initiative (MHPI) business consultant, of their remaining
projects noted that the issues identified at Kingsville II and South
Texas were isolated incidents and not a systemic problem. Additional
guidance is being developed for internal reviews of audits and
financial data from general partners to ensure accurate monitoring and
oversight of distributions. Further, while we agree that PEP reports
should be accurate, and will aggressively seek to improve accuracy in
its reports, we believe those errors did not subject Navy projects to
increased risk.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Deputy Under Secretary of Defense (Installations and
Environment) to improve the value of DOD's privatization program
evaluation report by streamlining the report to focus on key project
performance metrics, completing the report on time, and obtaining
periodic independent verification of key report elements.
DOD RESPONSE: Concur. In 2001, we initiated the semi-annual PEP report
to monitor overall MHPI program performance. It has evolved over time
to meet the needs of the accelerating MHPI program, as it has matured.
While the PEP is intended to oversee broad program performance, the
service portfolio management systems oversee the well-being of
individual projects. In the summer of 2003, we implemented a work plan
which improved the PEP process used to identify issues and validate
observations_ Under that work plan methodology, key report elements are
reviewed and evaluated by consultant support. The services are asked to
respond to our questions and observations via the PEP Memorandum of
Observations. In 2005, with an overabundance of data we decided to
streamline the PEP report and respond to a new Congressional semi-
annual reporting requirement. We reduced the PEP report from over 300
pages to a PEP Executive Report of 19 pages to focus on key project
performance metrics. The first PEP executive report (draft) was
provided to GAO on February 8, 2006 and a final version was submitted
to Congress on March 31, 2006.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
direct the Deputy Under Secretary of Defense (Installations and
Environment) provide guidance to the services to help ensure consistent
collection and reporting of housing satisfaction information from all
service members, which would allow for benchmarking and tracking of
tenant satisfaction over time as well as for making service-to-service
comparisons.
DOD RESPONSE: Partially Concur. Tenant survey guidance already exists
in the PEP instructions. We will revise that guidance to include a five-
point numerical system, which will be consistent across the Services.
The military services collect tenant satisfaction data which supports
their specific, negotiated business structures. That data is suited to
their specific incentive structures and would not be suitable to
overlay a program-wide directive on the individual projects.
However, we concur with the recommendation to collect information on
the housing preferences of all service members, not simply those
occupying privatized housing. We believe it is important to re-evaluate
member housing preferences driven by increased allowances and housing
revitalization; it makes sense to consistently collect housing
preferences of all service members. An Office of Secretary of Defense
Housing panel has been studying how to best implement such a survey.
RECOMMENDATION 4: The GAO recommended that the Secretary of Defense
direct the Deputy Under Secretary of Defense (Installations and
Environment) determine how increased housing allowances from the zero-
out-of-pocket initiative will most likely impact future family housing
requirements and provide guidance on how the impacts should be factored
into the services' housing requirements assessments.
DOD RESPONSE: Concur. The five-year initiative (2000-2005) to increase
housing allowances has been implemented. Every housing requirements and
market analysis (HRMA) since 2003 has used the projected five-year
basic allowance for housing (BAH) as the maximum allowable housing cost
(MAHC), thus accounting for the zero out-of-pocket initiative. The
examples cited in the report are for projects which preceded full
implementation of that guidance. With more money in their pockets,
military service members base their housing choices upon many factors,
including their household income, the condition and affordability of
available housing, the ratio of military to civilian population, and
commute time. Further, member housing choices during the initial
development phases of privatization projects, while housing is still
inadequate, likely do not reflect actual demand. With increased housing
allowances in place and housing being revitalized every day, we will
closely observe vacancy rates. If vacancy rates rise, their impact
could, for example, be captured by an increase in the MAHC in the
requirements determination process which would tend to reduce project
scope. The trend over the last two years has been a decrease in the
number of units included in MHPI projects,
RECOMMENDATION 5: The GAO recommended that the Secretary of Defense
direct the Deputy Under Secretary of Defense (Installations and
Environment) to expedite issuance of the revised DOD housing management
manual and ensure that the revision includes guidance to improve the
reliability of housing requirements assessments and reduce the scope of
the exceptions provided to the use of available community housing.
DOD RESPONSE: Concur. Policy for conducting requirements assessments
was issued by Deputy Secretary in January 2003 and has been applied to
every housing project since issuance. Housing manual revisions are
underway which will address the exceptions identified by the report.
Due to the increasingly important role of privatization in DOD housing,
we found it necessary to do a broader revision of the manual than we
had originally planned. We expect to complete the manual and issue it
by the end of calendar year 2006. Notwithstanding final issuance of the
manual, regular interim improvements have been made to the original
housing policy. These improvements are applied in reviewing the HRMAs
for every housing privatization project.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contact:
Barry W. Holman, (202) 512-5581 (holmanb@gao.gov).
Acknowledgments:
In addition to the person named above, Mark A. Little, Assistant
Director; Janine M. Cantin; Susan C. Ditto; Gary W. Phillips; and
Sharon L. Reid also made major contributions to this report.
(350718):
FOOTNOTES
[1] National Defense Authorization Act for Fiscal Year 1996, Pub. L.
No. 104-106, § 2801-2841 (1996).
[2] This report does not include two Navy projects approved under a
prior legislative authority which gave only the Navy authority to test
the use of limited partnerships in order to meet the housing
requirements of naval personnel and their dependents (Pub. L. No. 103-
337, § 2803 (1994)).
[3] According to service officials, the expected occupancy rate during
a project's initial development period, when many housing units are
being constructed or undergoing renovation, is usually around 90
percent of the units available for rent. After completion of the
initial development period, most projects expect occupancy rates of
about 95 percent. Three of the 16 projects had completed the initial
development period. Also, our analysis excluded 7 projects awarded as
of September 30, 2005, because 6 had been privatized for less than 2
months and 1 project had no units yet available for rent. Of the 44
projects included in our analysis, 6 additional projects were not
meeting occupancy expectations but had occupancy rates of 90 percent or
more.
[4] According to DOD officials, because privatization projects are
privately owned, it is a project's developer and private lender--not
the government--who would bear most of the consequences from a project
financial failure. Still, DOD has an interest in each project's
financial success because it has made investments in each project and,
according to DOD officials, the military's housing objectives can be
met only if the projects remain viable over the long term.
[5] GAO, Military Housing: Management Improvements Needed As the Pace
of Privatization Quickens, GAO-02-624 (Washington, D.C.: June 21,
2002).
[6] GAO, Military Housing: Further Improvement Needed in Requirements
Determinations and Program Review, GAO-04-556 (Washington, D.C.: May
19, 2004).
[7] GAO, Military Housing: Privatization Off to a Slow Start and
Continued Management Attention Needed, GAO/NSIAD-98-178 (Washington,
D.C.: July 17, 1998).
[8] GAO, Military Housing: Continued Concerns in Implementing the
Privatization Initiative, GAO/NSIAD-00-71 (Washington, D.C.: Mar. 30,
2000).
[9] See GAO-02-624.
[10] See GAO-04-556.
[11] The debt coverage ratio is computed by dividing a project's net
operating income by its debt service payment. Ratios above 1.0 indicate
that net operating income from a project is sufficient to cover its
debt service payments. Ratios below 1.0 indicate that a project's net
operating income is insufficient to cover its debt service payment,
requiring the use of funds from some other source, if available, to
cover the debt payment to avoid default. Thus, higher ratios equate to
lower risk of default while lower ratios typically signify increased
default risk. According to Army officials, private-sector lenders often
require that housing privatization projects maintain a minimum positive
debt coverage ratio, such as 1.2.
[12] The Tri-Command project includes family housing at the Marine
Corps Air Station Beaufort, the Marine Corps Recruit Depot Parris
Island, and the Beaufort Naval Hospital.
[13] See GAO-02-624.
[14] H.R. Rep. No. 109-95, at 25 (2005).
[15] Hearing on Military Quality of Life and Veterans Affairs Before
Subcommittee on Military Quality of Life of the House Appropriations
Committee, 109th Congress (2005) (Statement of Mr. Philip W. Grone,
Deputy Under Secretary of Defense, Installations and Environment).
[16] According to service officials, it is a project's developer and
private lender--not the government--who have provided the majority of
each project's development funds and, consequently, who would bear most
of the consequences from a project financial failure. According to
service officials, the primary remedy to lenders in case of a default
is to replace the project's property manager with one who could better
market the rental property and thus increase financial results. At the
same time, however, DOD has an interest in the financial success of
each project because it has made an investment in each project and,
according to DOD officials, the military's housing objectives can be
met only if the projects remain viable over the long term.
[17] See GAO-02-624.
[18] A 2005 Army survey showed that 80 percent of enlisted personnel
and 76 percent of officers reported that they would prefer to live off
base, if costs were the same. These results are similar to a previous
DOD housing preference survey.
[19] See GAO-04-556.
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