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The Case for a Public/Private Partnership.

Can private sector incentives help improve our federal buildings?

In March of this year, the General Accounting Office (GAO) issued its report, "Federal Buildings--Billions are Needed for Repairs and Alterations" (GAO-GGD-00-98). Sounds pretty grim. This is not a new situation. In May 1991, GAO reported that federal buildings suffered from years of neglect and that about $4 billion was needed to bring some of these buildings up to acceptable quality, health, and safety standards. It's time for a change, wouldn't you say?

Here is my favorite story about how private sector efficiency motives can drive what is perceived to be a public mission to a swift conclusion.

Donald Trump and the Wollman Memorial Skating Rink

The Wollman Memorial Skating Rink in Central Park was badly in need of repair in the late 1970s. After several years of preparation and planning, the New York City Parks and Recreation Department closed down the rink in 1980 for a rebuilding project scheduled to take two years and cost under $5 million. The project involved dismantling the old surface, then installing a new network of coolant pipes and pouring concrete over them. But for reasons that two subsequent studies failed to fully explain, the work went badly. Midproject delays left the coolant pipes exposed to the elements for a year. When the concrete was finally poured there was not quite enough, and the last batch was diluted to finish the job. The coolant system subsequently developed leaks, for many possible reasons I won't go into here. After spending six years and $12 million on the job, the city found that the work to date was essentially worthless and that the job would have to be completely redone.

Donald Trump wrote to Mayor Ed Koch in May 1986 to express his amazement at the city's failure to accomplish so simple a task during six years in which Trump had built several major Manhattan projects. Trump offered to rebuild Wollman Rink himself, at no profit, as a goodwill gesture to the city, and, he added, so that his young son could ice skate in the park before he grew up. The capital projects director for the Parks and Recreation Department conceded that Trump possessed advantages over his own agency, which was "bound by the city's rules and regulations and checks and balances." The city had to follow certain procedures for selecting contractors; Trump could choose on the basis of reputation. The city had to take the lowest bidder that met the literal terms of the contract; Trump could consider aspects of quality beyond contractual specifications. If a city contractor performed well the city could only reward him with the agreed-upon fee and a thank you. Trump could offer bonuses pegged to performance and promptness. If a contractor failed to deliver, the city could only threaten to sue for the return of progress payments; Trump could make it clear that any firm hoping for future work in his far-flung organization had better deliver on the Wollman job. Trump declared "I'm going to get good contractors and push the hell out of them." And he did. The Wollman Rink reopened months ahead of schedule and 25 percent under budget. What the city had been unable to do with six years and $12 million, Trump did in three months for $2.3 million.

Impediments to Partnering

Five years ago, when I worked on the Privatization and Financial Management Team at the National Partnership for Reinventing Government, our team visited the Public Buildings Service of the General Services Administration (GSA) to tell them about public/private partnership structures used to dispose of assets at the Resolution Trust Corporation. These were real partnership agreements, not just some form of contractual profit-sharing arrangement. Government assets were placed into a trust, which was owned by the partnership. The government was a limited partner and therefore had no voice in the management of the assets, but any losses were limited to the imputed value of the government's partnership interest. This structure also limited the government's liability. Returns generated from these partnerships were generally at least 20 percent higher than an outright sale of the assets. There were some dubious faces in the room when we finished. We were told of all the impediments--legal and otherwise--that exist ed for agencies that did not have express authority to enter into partnership agreements, as the Resolution Trust Corporation had. All of these impediments were out of the direct control of the GSA, and they are all still there. Here are just a few.

No Implied Authority for Partnering

In the absence of federal enabling/authorizing legislation to enter into a partnership agreement, there is no implied authority to do so. There is a basic distinction that must be kept in mind when comparing federal functions to those performed by private, commercial entities. Federal agencies are only authorized to take such actions and incur such costs as are authorized by law (or which are inherent or necessary to carry out an action authorized by law) and for which appropriations have been made available. Private entities, on the other hand, are free to take any actions except those prohibited by law. So, if by federal law, GSA is authorized to build a bridge over a river, then GSA is also presumed to be authorized to take any steps necessary and incident to the construction of that bridge. However, it can not be presumed that this is authorization for GSA to enter into a partnership with a private company to build the bridge. Obtaining authorizing legislation is a long, arduous, and often arbitrary proce ss. (Note: partnership--as the term is used here--means it is a legally-defined arrangement whereby two or more entities agree to pool their resources into a single enterprise and then jointly share the risks and benefits derived from that enterprise.)

Property Ownership Issues

The idea that federal dollars and assets are the undivided property of the United States and the federal taxpayers suggests that placing them into a partnership, for the benefit of the other nonfederal partners, is a disposal or conveyance of federal property. This raises a lot of hurdles under the 1949 Property Act and the McKinney Homeless Assistance Act. For example, if the federal government donates property or funds for use in a partnership enterprise, who owns those assets--the taxpayers or the partnership? Who owns the proceeds derived from the use of federally-contributed assets? While many of these risk and profit sharing questions can be addressed in a formal partnership agreement, it's quite another thing to think that a partnership agreement can resolve the question of federal/taxpayer ownership of its assets.

Conflicting Missions

Because of the shared risks, in most partnerships the partners are said to owe a fiduciary duty to the partnership and to each other. If an agency attempts to become a partner in a partnership enterprise, that agency owes its duty (fiduciary and actual) and loyalty to the United States of America, and to the federal agency--not to the partnership. If the partnership (and its partners) are not created or authorized by federal statute, in all likelihood the partnership has "making a profit" as the partnership's main objective. Conversely, the federal agency involved may have as its mission advancing small business, defending the nation, helping homelessness, cleaning up the environment, or supplying the logistical and space needs of other federal agencies. Obviously, the federal agency's mission is not easily reconcilable with the partnership's objective.

Imposition of Budget Scoring Rules of the Budget Enforcement Act of 1990

These rules say that if you commit the government to a future stream of cash outflows, you must have enough budget authority in the year the commitment is made to cover the discounted value of the future stream of cash outflows. Due to a lack of available funding in the first place, these rules force GSA to seek appropriations for large construction projects. While on the surface the rules may seem unfair, they were designed to ensure that enough money was in the government coffers to cover future cash commitments made by the agencies, an amount which had previously eluded the Office of Management and Budget because of its Byzantine, cash-based accounting systems and methodologies. Further, they were intended to force agencies--when driven by budgetary constraints, rather than efficiency motives--to record the true long-term impact of their transactions.

Up-Front Financing Constraints

The inability of the Federal Buildings Fund (FBF) to generate enough revenue to finance significant new construction, purchases, major repairs, or alterations up front is another impediment to agile partnering. Even though the FBF is technically a revolving fund, it is still subject to annual enactment of new obligational authority (a limitation on the use of revenue) by the Congress. Ironically, one of the primary reasons for the creation of the FBF was to finance new construction up front from rental income receipts. It was expected to drastically reduce the time required to build new federal buildings by providing total project funding rather than incremental funding which had, in the past, resulted in delays and subsequent substantial increases in construction costs. Things certainly haven't worked out that way. In addition to having to resort to incremental funding, the lack of available construction funding has forced GSA to increasingly fulfill agency space needs by renting from the private sector. Thi s is an expensive solution when agency needs are long-term, and the leasing budget consumes more and more of the FBF revenues each year.

The Interest Rate Differential

Any time private sector capital is used to leverage a government asset, the government is paying interest--either directly or indirectly--at the rate the private sector pays. The effective cost of the transaction will always be higher than what it costs the Treasury to issue debt. Therefore, the financial analysis will never work out in the favor of privatization of government assets over direct appropriations. This differential can only be offset by the assumption of additional risk by the government (not always readily apparent--be wary), or by achieving a desired result--such as capital improvements and subsequent rental income--faster than it would take the government. While it is known that funding delays will result in increased construction costs, a discounted cash flow analysis is inherently difficult because the appropriations and the construction delay claim processes are very often arbitrary and therefore comparative cash flows cannot be accurately predicted.

The Potential for Breakthrough

Any privatization proposal must take into account the above-mentioned impediments and deal with them. There have been numerous partnership proposals dealing with public buildings over the years, most of them defeated via one or more of the above impediments. There has been one recent success, however.

The Southeast Federal Center Public/Private Development Act of 2000

H.R. 3069 was passed on May 8, 2000 via voice vote and has been referred to the Senate. The bill deals with the mixed-use development of the Southeast Federal Center (SEFC), a 55.3 acre site located just five minutes from the Capitol. It is considered to be one of the most valuable undeveloped parcels on the East Coast. The bill provides broad latitude to GSA. It expressly waives several laws pertaining to real property management such as the Economy Act of 1932 (prohibits GSA from accepting in-kind payments in lieu of money for rental payments), the Property Act of 1949, the Public Buildings Act of 1959, and the McKinney Homeless Assistance Act. It also grants GSA the authority to enter into virtually any type of agreement as long as the value of the SEFC is enhanced.

The funding history for the property is long and involved. To illustrate how arbitrary the appropriations process can be, I will go into it in some depth. In 1989, GSA commissioned a master plan to accommodate five million square feet of office space, 5,000 parking spaces, and onsite retail development. GSA requested and received over $88 million in planning and infrastructure funding. All but $12 million has been rescinded. In 1992, GSA received $148 million to construct a new headquarters for itself. The funds were rescinded or reprogrammed to other projects. In FY 1993, GSA received $50 million to construct a new headquarters for the Corps of Engineers, and all but $300,000 was rescinded. The SEFC represents an astonishing denial of productive use of the federal government's assets and of revenue to the taxpayers. Efforts to develop the land exclusively for federal uses have consistently failed.

In evaluating the government's options for the site, it was determined that the land was too valuable to sell, and the sale of federally-owned land would never have been tolerated by Congress when GSA is leasing space throughout the District of Columbia at a cost of almost a billion dollars. (For years, Congress has not allowed cost-free transfers of federal land.) And Congress would clearly not have funded a pass-through to the District government. Leasing the land was also unworkable and has at least two major drawbacks. First, GSA lacks mixed-use authority through leasing. Second, leasing a government-owned site would have required the sale of the site first. A sale of federal assets is subject to a host of other laws such as the 1949 Property Act and the McKinney Homeless Assistance Act. The solution arrived in the form of a public/private partnership--combining the government's value in ownership with the private sector's ability to develop land quickly.

Other Agency Authorities

Other agencies have employed similar kinds of authority to achieve development objectives of under-utilized federal assets. The Department of Veterans Affairs, the Department of the Interior, and the Department of Defense have this general authority--not on a one-time basis as provided by H.R. 3069. The extensive experience from these agencies demonstrates conclusively that public-private partnerships involving the federal government are cost effective.

H.R. 3069 represents an important breakthrough in achieving the highest and best use of a wasted federal asset, securing revenue for the federal government, contributing to the local DC economy, and reviving the surrounding neighborhood. It is a thoughtful piece of legislation...a win-win. Can it be just the start of the solution to our problems with repair and alteration of our public buildings? My vote is an unequivocal yes! We need a lot more proposals like this one.

Cynthia Rheaume is currently budget director for the Public Buildings Service (PBS) of the US General Services Administration. The opinions expressed in this article are exclusively those of the author and do not represent those of the General Services Administration, the Office of Management and Budget, or the current administration.

REFERENCES

The Federal Property and Administrative Services Act of 1949, as amended (40 U.S.C. 471 et seq.), is the law of general application governing real and personal property acquired to carry out federal missions and programs. The act focuses primarily on procedures for the disposition of property at the end of its utility to the government. It lacks adequate procedures for effective real property management.

The Stewart B. McKinney Homeless Assistance Act was enacted to ensure that the homeless receive priority preference when the government disposes of excess, surplus, unutilized, and underutilized federal real property. Although well intentioned, if an asset transfer is classified as a sale, it is subject to the requirements of the act and can therefore become a barrier to consummation of a real estate transaction such as the SEFC proposal.
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Author:RHEAUME, CYNTHIA
Publication:The Public Manager
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Jun 22, 2000
Words:2566
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