Stately living: how to lose money in real estate Uncle Sam's way.

HAMILTON THE TINY CAPITAL CITY of the Bermuda islands, boasts waterfront vistas and historic charm. Tucked between the hillside and the sea, the town is home to immaculate harbors, bustling boutiques, and Chelston, the residence of the U.S. consul general to Bermuda. The main house measures nearly 10,000 square feet and occupies a 14-acre estate, complete with beach house. Valued at $12 million, the estate is maintained--to the tune of $100,000 a year--courtesy of the U.S. State Department.

In fact, the State Department, through its Office of Foreign Buildings Operations (FBO), manages 11,000 leased properties and 3,000 U.S.-owned posts valued at about $12 billion. It operates 260 locations worldwide, at a cost of about $2 billion per year, according to a 1996 report by the General Accounting Office. The list of sites includes embassies and consulates, office buildings, residential units and undeveloped land--all of which theoretically work to protect American political interests, advance the nation's economy, provide border security, and help citizens in distress.

In reality, FBO resources all too often go toward maintaining lavish or superfluous facilities that do more to drain U.S. coffers than to serve the national interests. According to a report released in April by the GAO, the State Department may have at least $50 million tied up in unneeded overseas real estate, ranging from closed or vacant posts in Tanzania and Egypt to excessive sites in the Czech Republic and Hungary. The Bermudian property is far from the most egregious offender.

In Rabat, Morocco, the department owns an eight-acre lot intended for an embassy and ambassador's residence. Since the land was purchased in 1988, the King of Morocco has used the lot for an orange grove. (Apparently citrus fruit plays a vital role in our national security.) There are no current plans to build or sell.

The department also owns a 43,000-square-foot mansion in Buenos Aires that has served as the ambassador's residence since 1929. By some estimates, the property is worth $20 million, with annual operating costs hovering at $500,000. The GAO has recommended selling the place since 1969. The embassy has opposed the sale for just as long, noting that the mansion serves as a symbol of the U.S. presence in Argentina. (All too true.) The FBO plans to restore the estate.

In Alexandria, Egypt, the consulate general closed in 1993. State Department officials retained the residence, valued at more than $1 million, in case the post reopened. (State says the property is currently on loan to the U.S. Information Agency.) According to the GAO, the State Department's own Inspector General said maintaining the property showed an "apparent lack of concern for the financial loss being incurred by the U.S. government."

State responded to the criticisms with a "thorough" review of the Alexandria property, which concluded that (surprise!) the facility's retention was in the "national interest": "The house has proven invaluable for lodging the Ambassador and others when local hotel space is unavailable?' Now, even assuming diplomatic convenience is a matter of national interest, the house was reportedly used for only 14 events in all of 1995, only one of which was hosted by the ambassador.

Courtside Diplomacy

With the State Department already facing budget cutbacks, the GAO's April 1996 report met with a less than favorable reception. Embarrassing his colleagues, department spokesman Nicholas Burns confidently declared: "[W]e don't have any `beachfront resorts.'" (Bermuda must have slipped his mind.) "We don't have any vacant ambassadorial residences in our inventory of overseas property?' (Ditto Alexandria.) "[The GAO] facts are wrong, and I challenge them to tell us otherwise." Other State Department officials were less emphatic, saying they agreed with the "thrust" of the findings but contested four out of five of the GAO's policy recommendations. A response submitted by the department's Chief Financial Officer claimed the report overlooks complex political realities: "In making decisions to buy or sell property we must not limit our focus... entirely to the financial merits of a transaction?' Quality of life was among the competing concerns cited. Of course, quality of life means different things to different people. To a U.S. ambassador in Santo Domingo, for instance, it meant using more than $10,000 in routine-maintenance funds to resurface his tennis court. In fact, a May 1995 GAO report found that every overseas post it reviewed had used maintenance funds for similarly questionable purposes.

The State Department claims that much of what the GAO considers inefficiency and excess is actually the result of complicated diplomatic realities. For example, although State's inspector general has repeatedly recommended selling the Bermuda facilities, other department officials insist Chelston was a gift from the Bermudian government, which would make selling the property diplomatically sensitive.

The GAO looked into the matter and discovered that the property was originally owned by an American citizen. Upon his death, the trustees transferred ownership to the Internal Revenue Service to pay for back taxes, and the State Department, through discussions with the Bermudian government, acquired the property. How exactly this constitutes a "gift" is unclear--even, apparently, to the State Department. Most recently, in an August 19 letter, Assistant Secretary of Legislative Affairs Barbara Larkin said Chelston was "donated" to State.

In the department's defense, international negotiating dynamics are complicated. But complexity does not exempt the State Department from accountability--from doing its best to explain its expenses to the public. During the GAO inquiry; however, State refused investigators access to many of the relevant files. The GAO's Diana Glod, who headed the inquiry, said the department wouldn't relinquish data involved in ongoing negotiations. But, she added, "they had so many things `in-process' it made it difficult to do our work?'

The department's refusal to be up front about the challenges it's facing makes suspect even its legitimate claims of "diplomatic constraints?' With all of the alleged sensitivity surrounding Chelston, the department has been unable to document Bermuda's objection to the sale. Far from being concerned about their credibility, department officials treat outsiders with an adolescent sense of distance, as if to say, "You can't possibly understand us and you never will."

A Bad Sign

Beneath the rhetoric, the department is covering up a bigger problem: institutional weakness. The FBO has no systematic way to determine when property is unnecessary or too expensive to maintain (though a $10,000 bill for tennis court maintenance might be a good clue). The Foreign Affairs Manual requires each post to report periodically on properties that are excessive, underutilized, or unaffordable to maintain, but the FBO has failed to document whether embassies have been fulfilling these requirements.

Parochial self-interest serves to compound the problem. The GAO found that State often will not close a sale without the affected embassy's agreement. Shockingly enough, few diplomats are lining up to swap their beach houses for a fiscally responsible alternative. Still, in the department's opinion, this policy does not represent a conflict of interest. In her letter to the GAO, Larkin asserted: "Parties to any decisionmaking process must be expected to have particular views, to express them, and indeed, to champion them?'

Even when a sales decision is clear, the government is predictably slow to take action. For example, a Tokyo residence formerly used by the Treasury Department's financial attach was worth an estimated $15 million in 1991. (The property had deteriorated and was no longer usable.) But Treasury and State officials could not reach an agreement on its sale, and by 1994 the estimated value of the property had dropped by $10 million. The residence still has not been sold.

Problems within the FBO are not new. In 1992, the GAO placed the FBO's handling of overseas property on its list of federal programs most vulnerable to waste and mismanagement. The list cited "insufficient maintenance of facilities, lax oversight of overseas post operations, inadequate information systems, and poor planning?' In 1995, after making "significant progress" in other areas, the FBO dropped off the list. But the problem of retaining excessive and unnecessary property has proved harder to shake.

Even more troubling than the millions being wasted by the FBO is the thought that the situation is indicative of how the State Department is run overall. Are all of its accounting systems so well monitored? Are reporting regulations typically adhered to this scrupulously? Are spokesmen like Nicholas Burns normally so well informed? If so, State has a lot more to worry about than a few extra palazzi--as do the taxpayers supporting the department's bad habits.