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but Needs to Provide Congress with Information on Some Leases' which 
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Report to the Chairman, Committee on Energy and Commerce, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

September 2006: 

Federal Real Property: 

NIH Has Improved Its Leasing Process, but Needs to Provide Congress 
with Information on Some Leases: 

Federal Real Property: 

GAO-06-918: 

GAO Highlights: 

Highlights of GAO-06-918, a report to the Chairman, Committee on Energy 
and Commerce, House of Representatives 

Why GAO Did This Study: 

The National Institutes of Health (NIH) is the nation’s primary medical 
and behavioral research agency. NIH’s need for leased space has more 
than doubled since 1996 to about 3.9 million square feet in 2005. In 
1996, General Services Administration delegated leasing authority to 
NIH that includes performing budget scoring and prospectus analysis. In 
light of NIH’s increased use of leased space, GAO was asked to address 
two issues: (1) Is NIH complying with budget scorekeeping guidelines 
and Office of Management and Budget’s (OMB) requirements for 
implementing the guidelines to determine if a lease should be 
classified as operating or capital and ensure that no violations of the 
Antideficiency Act occur because of improper budget scorekeeping? and 
(2) Is NIH complying with the congressional prospectus process for both 
leases and alterations to leased buildings? To address these issues we 
interviewed leasing and financial officials, reviewed laws and reviewed 
budget scoring and prospectus analysis of 59 leases. 

What GAO Found: 

NIH has implemented a formal leasing process that, if carried out 
effectively, should comply with budget scorekeeping guidelines and 
OMB’s requirements for classifying operating and capital leases. This 
process should ensure that no Antideficiency Act violations occur due 
to leasing. The agency’s new leasing process addresses previous 
problems with inconsistent and informal implementation of the 
guidelines and requirements by properly identifying operating and 
capital leases and properly recording lease obligations for budget 
scoring purposes. In October 2005, the U. S. Department of Health and 
Human Services expressed the belief that the potential $565 million in 
unrecorded obligations from 50 active multiyear NIH leases were not 
Antideficiency Act violations. We agree that no Antideficiency Act 
violations exist because the GSA delegation of leasing authority 
included specific authority that directed NIH to obligate funds for 
multiyear leases, one year at a time, and that such actions were exempt 
from the Antideficiency Act. GSA is also modifying its guidance for 
delegated leasing authority, which would make it clear that agencies 
with delegated leasing authority can score operating leases in the same 
manner as GSA. The scoring process for capital leases would remain 
unchanged. 

As part of its leasing process, NIH has also established decision 
points for identifying any leases for which a prospectus should be 
submitted through GSA for congressional approval, under the Public 
Buildings Act of 1959, as amended. This process involves submitting 
leases and alterations to leased buildings for approval whose costs 
exceed a legislatively established threshold. In addition, NIH has 
designated the Office of Acquisitions, Office of Resource Facilities to 
review prospectus-level alterations to leased buildings to ensure that 
the contracting for alterations to leased buildings does not exceed the 
prospectus threshold for alterations to leased buildings. However, NIH 
has taken no action to address five prospectus-level leases that were 
not submitted to the appropriate congressional committees in past 
years. While there is no penalty provided in law for not submitting a 
prospectus, failure to do so hinders the ability of the appropriate 
congressional committees to fulfill their oversight responsibilities 
for all prospectus-level leases. 

What GAO Recommends: 

GAO recommends that the Director of NIH, using GSA as the proper 
channel, report to the appropriate congressional committees five 
previous NIH prospectus-level leases that did not follow the 
congressional prospectus process. In commenting on our report NIH 
concurred with our recommendation. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-918]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Mark Goldstein at (202) 
512-2834. 

[End of Sections] 

Contents: 

Letter: 

Results in Brief: 

Background: 

NIH Has Improved Its Lease Scoring Process and Believes that Its 
Unrecorded Obligations for Operating Leases Do Not Violate the 
Antideficiency Act: 

NIH Corrected Weaknesses in Implementation of Prospectus Guidance, but 
Some Past Prospectus-level Leases Remain Unreported: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments: 

Appendix I: Comments from the Department of Health and Human Services: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Abbreviations: 

GSA: General Services Administration: 

HHS: U.S. Department of Health and Human Services: 

LeMOP: Leasing Management and Oversight Program: 

NIH: National Institutes of Health: 

OBSF: Office of Business Systems and Finance: 

OMB: Office of Management and Budget: 

ORF: Office of Resource Facilities: 

ORFDO: Office of Research Facilities Development and Operations: 

Property Act: Federal Property and Administrative Services Act of 1949, 
as amended: 

United States Government Accountability Office: 
Washington, DC 20548: 

September 8, 2006: 

The Honorable Joe Barton: 
Chairman: 
Committee on Energy and Commerce: 
House of Representatives: 

Dear Mr. Chairman: 

The National Institutes of Health (NIH), a part of the U.S. Department 
of Health and Human Services (HHS), is the nation's primary medical and 
behavioral research agency. Composed of 27 institutes and centers, NIH 
provides leadership and financial support to programs designed to 
protect and improve the nation's health by conducting research in such 
areas as the causes, diagnosis, prevention, and cure of human diseases; 
the biological effects of environmental contaminants; and the 
understanding of mental, addictive, and physical disorders. At the end 
of September 2005, the agency owned or leased more than 17 million 
square feet of space for research, administration, and other needs. 
Since 1996, NIH's leased space has more than doubled--from about 1.4 
million square feet in 1996 to about 3.9 million square feet in 2005. 

In September 1996, the General Services Administration (GSA) delegated 
authority to HHS to issue leases for a term of up to 20 years and to 
perform all functions related to leasing, such as obtaining space in 
accordance with all applicable laws and regulations, budget 
scorekeeping[Footnote 1] guidelines, and the Office of Management and 
Budget's (OMB) requirements for implementing the guidelines for leases. 
Simply put, budget scorekeeping ensures that agencies comply with 
budgetary laws. There are obligational requirements[Footnote 2] that 
are meant to ensure compliance with fiscal statutes such as the 
Antideficiency Act.[Footnote 3] The budget scorekeeping rules for 
leases are consistent with the obligational requirements. Thus, failure 
to comply with budget scorekeeping guidelines could cause an 
Antideficiency Act violation. In addition to transferring this 
scorekeeping responsibility to HHS, GSA's delegation provided that, for 
each lease whose cost exceeds a legislatively established threshold, 
the agency would work through GSA to secure an approved 
prospectus[Footnote 4] from the appropriate congressional committees, 
under the Public Buildings Act of 1959, as amended.[Footnote 5] In 
December 1996, HHS redelegated its authority to its four lease-holding 
agencies, which included NIH. Currently, NIH has 59 active leases 
issued under its delegated leasing authority with a total value of 
about $1.3 billion. 

Because of NIH's increased use of leased space, you asked us to review 
certain parts of the agency's leasing process. In response, we 
addressed the following issues: 

* Is NIH complying with budget scorekeeping guidelines and OMB's 
requirements for implementing the guidelines to determine if a lease 
should be classified as operating or capital[Footnote 6] and ensure 
that no violations of the Antideficiency Act occur because of improper 
budget scorekeeping of leases? 

* Is NIH complying with the congressional prospectus process for both 
leases and alterations to leased buildings? 

To address NIH's compliance with budget scorekeeping guidelines and 
OMB's requirements, we reviewed (1) the laws and regulations relating 
to leases; (2) budget scorekeeping guidelines and OMB's implementing 
requirements; (3) the Antideficiency Act; (4) NIH's inventory of leased 
properties, its revised budget scoring of the 58 leases[Footnote 7] 
under its delegated authority in 2003, and its leasing guidance; and 
(5) HHS's views on the Antideficiency Act. In addition, we interviewed 
HHS's Deputy Assistant Secretary from the Office for Facilities 
Management and Policy; NIH's Director of the Office of Acquisitions; 
NIH's Acting Chief of the Budget Branch from the Office of Business and 
Systems Finance, who performed the revised budget scoring; other 
relevant NIH leasing and financial officials; and GSA officials. We 
also wrote to OMB concerning agencies that are considered self-insuring 
under budget scoring guidelines. 

To address NIH's compliance with the congressional prospectus process, 
we (1) reviewed the laws and regulations relating to leases; (2) GSA's 
prospectus guidance and delegation of authority to lease; (3) NIH's 
inventory of leased properties, its revised prospectus analysis of the 
58 leases under its delegated authority in 2003, and its leasing 
guidance. In addition, we interviewed HHS's Deputy Assistant Secretary 
from the Office for Facilities Management and Policy; NIH's Director of 
the Office of Acquisitions; NIH's Acting Chief of the Budget Branch 
from the Office of Business and Systems Finance, who performed the 
revised prospectus analysis; other relevant NIH leasing and financial 
officials; and GSA officials. GSA informed us that no alterations to 
leased buildings were submitted for prospectus approval between fiscal 
years 1996 and 2005. For the purposes of our review, the information we 
gathered was sufficiently reliable. We conducted our work between July 
2005 and August 2006 in accordance with generally accepted government 
auditing standards. 

Results in Brief: 

NIH has developed a formal leasing process that, if implemented 
effectively, should comply with budget scorekeeping guidelines and 
OMB's requirements for classifying operating and capital leases. NIH's 
process should also ensure that no Antideficiency Act violations occur 
due to leasing. NIH was prompted to formalize its leasing process after 
it reviewed all its leases in 2003 and discovered problems with its 
budget scoring and prospectus analysis. The agency's new multistep 
leasing process, which was developed in 2003 and updated in 2005, now 
addresses previous problems with inconsistent and informal 
implementation of the guidelines and requirements by properly 
identifying operating and capital leases, so the lease obligations may 
be properly recorded for budget scoring purposes. Furthermore, to 
address the improper classification of eight operating leases 
identified in its 2003 review, NIH reclassified or renegotiated leases 
to make them comply with the budget scoring rules. In October 2005, HHS 
expressed its belief that the potential $565 million in unrecorded 
obligations from 50 active multiyear NIH leases identified in the 2003 
review were not considered to be Antideficiency Act violations. We 
agree that no Antideficiency Act violations exist. According to a GSA 
official, GSA is modifying its guidance for delegated leasing 
authority, which would make it clear that agencies with delegated 
leasing authority can score operating leases in the same manner as GSA. 
The scoring process for capital leases would remain unchanged. 

As part of its leasing process, NIH has also established decision 
points for identifying any leases for which a prospectus should be 
submitted for congressional approval under the Public Buildings Act of 
1959, as amended. In addition, NIH's Office of Acquisitions, Office of 
Resource Facilities (ORF) is now responsible for ensuring that the 
contracting for alterations to leased buildings does not exceed the 
prospectus threshold for alterations to leased buildings. To enforce 
this threshold, a warranted real estate contracting officer from the 
Office of Acquisitions begins reviewing an alteration to a leased 
building project as early as the concept stage. However, there is an 
unresolved issue involving some prior NIH prospectus-level leases. Five 
leases from past years were not submitted to the appropriate 
congressional committees for review and approval, as provided for in 
the Public Buildings Act of 1959, as amended. While there is no penalty 
provided in law for not submitting a prospectus, failure to do so 
hinders the ability of the appropriate congressional committees to 
fulfill their oversight responsibilities for all prospectus-level 
leases. We are recommending that the Director of NIH, using GSA as the 
proper channel, report to the appropriate congressional committees the 
five previous NIH prospectus-level leases that did not follow the 
congressional prospectus process. We provided a draft of this report to 
NIH, HHS and GSA. HHS, responding for NIH and itself, concurred with 
our findings and recommendation and provided some technical comments, 
which we have incorporated where appropriate. HHS stated that, as a 
matter of policy, it does not object to voluntarily complying with the 
GSA prospectus requirements for the five leases dealt with in our draft 
report. GSA informed us orally that it had no comments. 

Background: 

In 1996, GSA began a program called "Can't Beat GSA Leasing" that 
offered federal agencies the choice of (1) using GSA as their leasing 
agent, (2) assuming responsibility for their own leasing, or (3) using 
a combination of both options. The program was an outgrowth of GSA's 
commitment to streamline its leasing operations, respond to the 
government's changing needs, and address recommendations from client 
agencies. GSA delegated leasing authority to HHS in September 1996, and 
HHS redelegated this authority to NIH, one of its four lease-holding 
agencies, in December 1996. GSA's original delegation consisted of six 
conditions, which included the requirements that federal agencies 
acquire and utilize leased space in accordance with all applicable laws 
and regulations[Footnote 8] and --prior to finalizing lease contracts 
and alterations to leased buildings that exceed a legislatively 
established threshold--work through GSA to secure an approved 
prospectus from the appropriate congressional committees. Since 1997, 
NIH has elected to rely on GSA for some of its leasing needs, but it 
has issued a majority of its leases on its own. 

NIH Has Improved Its Lease Scoring Process and Believes that Its 
Unrecorded Obligations for Operating Leases Do Not Violate the 
Antideficiency Act: 

In response to past problems identified in a 2003 internal review of 
its leases, NIH developed a formal leasing process in 2003 that 
includes decision points for budget scoring. The process was updated in 
2005, and if implemented effectively, it should ensure that NIH leasing 
complies with OMB's scorekeeping guidelines for classifying leases. 
This new process should also ensure that no violations of the 
Antideficiency Act occur due to improper scorekeeping. 

The executive and legislative branches formulated the budget 
scorekeeping rules in connection with the Budget Enforcement Act of 
1990. The purpose of these rules is to ensure that scorekeepers adhere 
to scorekeeping conventions and specific legal requirements when they 
measure the effects of legislation. They are also used by OMB for 
determining amounts to be recognized in the budget when an agency signs 
a contract or enters into a lease. The rules are reviewed annually by 
the scorekeepers and revised, as necessary, to achieve their 
purpose.[Footnote 9] According to scorekeeping guidelines, a lease is 
classified as either operating or capital, based on six 
criteria.[Footnote 10] If a lease meets all six criteria, then it 
qualifies as an operating lease; otherwise, it must be treated as a 
capital lease for purposes of budget scoring. For operating leases for 
agencies other than GSA, budget authority is required for the estimated 
total payment that is expected to arise under the full term of the 
contract or, if the contract includes a cancellation clause, for an 
amount sufficient to cover the lease payments for the first fiscal year 
plus an amount sufficient to cover the costs associated with 
cancellation. For GSA operating leases, only the budget authority 
needed to cover the annual lease payment is required.[Footnote 11] For 
a capital lease, budget authority is required for the net present value 
of the total cost of the lease and property taxes (but not for imputed 
interest costs and identifiable annual operating expenses). 

In 2003, NIH's Assistant Director for the Chief Financial Officer and 
Central Services asked the Acting Director of the Office of Research 
Facilities Development and Operations (ORFDO) to certify that all 
leases were operating leases for the purposes of the annual NIH 
financial statements, according to an NIH official. To address this 
request, the ORFDO Acting Director conducted an internal risk 
assessment. This resulted in a review of all NIH's leases, which 
identified problems with implementing budget scorekeeping guidelines 
and OMB requirements, as well as identifying prospectus leases. More 
specifically, this review identified eight leases that had been 
improperly classified as operating leases instead of capital leases and 
potential unrecorded obligations from 50 active multiyear operating 
leases that totaled $565 million, as of September 30, 2005. According 
to the Director of the Office of Acquisitions, NIH's lease scoring 
process had been inconsistent and informal from 1996 to 2003, which may 
explain the improper lease classifications and unrecorded obligations 
identified in the 2003 review. Due to staff changes at the agency in 
past years, we were not able to determine why the budget scoring 
process was inconsistent and informal from 1996 to 2003. 

In 2003, NIH attempted to address its problems in complying with 
scorekeeping guidelines by developing the Leasing Management and 
Oversight Program (LeMOP), a new multistep leasing process that 
includes budget scoring. LeMOP is a means for NIH to exercise stronger 
oversight in the leasing process than it had done previously. The 
process consists of a business case[Footnote 12] that goes through the 
following five critical decision points: 

1. Initial approval that there is a justifiable need, 

2. Approval of a general strategy on how the need will be met, 

3. Approval of a detailed strategy for meeting the need, 

4. Signing of the lease and obligation of the funds, and: 

5. Documentation that the agency has reviewed the action and the space 
requirement is being met. 

As part of the third decision point, the Office of Business Systems and 
Finance (OBSF) uses the budget scoring process for leases that it 
developed during NIH's 2003 review to conduct an independent test of 
the planned lease contract against OMB's budget scorekeeping 
requirements. The test is based on estimates of the lease rate, the 
lease term, and other factors. As part of the fourth decision point, 
OBSF tests the final lease price against OMB scoring requirements to 
determine if the proposal conforms to applicable rules for budget 
scoring. In effect, the process establishes a specific requirement that 
ensures that NIH leases undergo budget scoring. 

In addition to implementing LeMOP, NIH corrected its improper 
classification of the eight operating leases identified in the 2003 
review. Two of these leases were reclassified as capital leases, and 
the remaining six were renegotiated by eliminating the option-to-renew 
clauses from the lease so that they could properly qualify as operating 
leases. By deleting the option-to-renew clauses, NIH reduced the terms 
of the leases, which impacted budget scoring. This allowed the leases 
to meet the scoring criteria for an operating lease--that the present 
value of the minimum lease payments over the life of the lease not 
exceed 90 percent of the fair market value of the asset at the 
beginning of the lease term. Leases exceeding this 90 percent level are 
to be identified as capital leases. 

As a final measure in response to the 2003 review, NIH sought HHS's 
advice on whether it had $565 million in unrecorded obligations that 
violated the Antideficiency Act. The unrecorded obligations occurred 
because NIH scored its operating leases without cancellation clauses 
similar to GSA--that is, it scored only the budget authority that was 
needed to cover the annual lease payment.[Footnote 13] This was done 
instead of following scorekeeping guidance for an operating lease for 
agencies other than GSA--that is, budget authority is required for the 
estimated total payment expected to arise under the full term of the 
contract or, if the contract includes a cancellation clause, for an 
amount sufficient to cover the lease payments for the first year plus 
an amount sufficient to cover the costs associated with the 
cancellation clause. 

NIH asked HHS whether it thought that the $565 million in unrecorded 
obligations was an Antideficiency Act violation. This act states that 
an officer or employee of the United States is prohibited from making 
expenditures or incurring obligations in advance of available 
appropriations unless otherwise authorized by law. HHS stated that it 
did not believe the potential $565 million in unrecorded obligations 
from scoring operating leases to be Antideficiency Act violations. 

We concluded that no Antideficiency Act violation exists. Under the 
Federal Property and Administrative Services Act of 1949, as amended 
(Property Act), GSA is authorized to enter into a lease agreement for a 
term of up to 20 years to accommodate the federal government.[Footnote 
14] In addition, GSA is authorized under the Property Act to delegate 
to the head of another federal agency most of its authorities, which 
includes leasing authority.[Footnote 15] When GSA delegated its leasing 
authority to the Secretary of HHS, who then redelegated this authority 
to NIH, the GSA leasing delegation signed by the Administrator 
specifically stated, "I hereby delegate authority to the heads of all 
federal agencies to perform all functions related to the leasing of 
general purpose space for a term of up to 20 years regardless of 
geographic location." 

GSA has specific statutory authority to obligate funds in advance of 
available appropriations. This authority provides that, when entering 
into multiyear leases, "the obligation of the amount for a lease is 
limited to the current fiscal year for which payments are due without 
regard to the Antideficiency Act."[Footnote 16] Accordingly, GSA is 
directed by law to obligate funds for multiyear leases one year at a 
time, and it is exempt from the general prohibition in the 
Antideficiency Act against obligating the government in advance of 
appropriations for GSA leases. Since GSA delegated all of its leasing 
authorities through HHS to NIH, the provision in the Property Act 
relating to the obligation of multiyear leases also applies to NIH. 
This delegation authorizes NIH to enter into multiyear leases without 
recording the entire amount of the lease in the first year. Therefore, 
the fact that NIH entered into multiyear leases without having an 
appropriation for the entire amount of each lease did not constitute a 
violation of the Antideficiency Act. 

GSA is drafting a modification to its guidance for delegated leasing 
authority which, according to a GSA official, will clarify that 
agencies with delegated leasing authority can score operating leases in 
the same manner as GSA does. GSA and agencies with delegated leasing 
authority are expected to continue to score capital leases according to 
OMB's requirements. 

NIH Corrected Weaknesses in Implementation of Prospectus Guidance, but 
Some Past Prospectus-level Leases Remain Unreported: 

As part of its leasing process, NIH has established decision points for 
identifying leases whose costs exceed a legislatively established 
threshold and for which a prospectus should be submitted for 
congressional review and approval prior to finalizing contracts. In 
addition, all alterations to leased buildings are reviewed by an NIH 
leasing official. These changes should ensure that NIH identifies 
leases that need to be submitted for review. However, five prior leases 
that should have been submitted for review still remain unreported. 

The Public Buildings Act of 1959, as amended, provides for GSA to 
submit a prospectus for review by the appropriate Senate and House 
authorizing committees when the cost of a proposed construction, lease, 
or alteration project exceeds the legislatively established dollar 
threshold for leases or alterations to leased buildings, which is 
indexed and revised each year. For an agency with delegated leasing 
authority, GSA, working in consultation with the agency, prepares a 
prospectus for any lease involving a net annual rental--excluding 
services and utilities--in excess of the prospectus threshold. For 
alterations to leased buildings, the prospectus threshold is one-half 
of the lease prospectus threshold. After the prospectus is prepared, 
GSA submits it for approval to the appropriate congressional 
committees. 

To address previous problems with inconsistent and informal 
implementation of prospectus guidance, NIH has incorporated into its 
leasing process several decision points for identifying any leases for 
which a congressionally approved prospectus should be submitted. As 
part of the third decision point of LeMOP--approval of a detailed 
strategy for meeting the need--OBSF will use the prospectus analysis 
formula, which it developed during NIH's 2003 review of all leases, to 
conduct an independent test of the planned lease contract against the 
annual prospectus threshold. NIH plans to have GSA issue any lease that 
exceeds the prospectus limit, with NIH providing the appropriate 
information and support. As part of the fourth decision point--signing 
of the lease and obligation of the funds, OBSF will test the final 
lease price against prospectus thresholds to determine if the proposal 
conforms to applicable rules for the prospectus process. This prevents 
the agency from issuing a prospectus-level lease without a 
congressionally approved prospectus, even though the lease was 
initially identified as nonprospectus as part of the third decision 
point. 

Furthermore, according to NIH's Office of Acquisitions, ORF, it is now 
responsible for ensuring that the contracting for alterations to leased 
buildings does not exceed that prospectus threshold. To prevent any 
delay in the process, reviews of an alteration project in a leased 
building begin as early as the concept stage to determine whether a 
prospectus is required. The Office of Acquisitions also takes into 
account all other approved alterations to the leased building for the 
given year to ensure that the total cost of all alterations to that 
leased building does not exceed the prospectus threshold. 

As part of the 2003 review of all its leases, NIH identified five 
leases that had not been sent to the appropriate congressional 
committees for approval, under the Public Buildings Act of 1959, as 
amended.[Footnote 17] GSA is to provide a lease prospectus to the 
appropriate congressional committees for approval prior to signing a 
lease. This process involves agencies with delegated leasing authority, 
which must identify prospectus level leases to GSA for submission. 
According to the Director of the Office of Acquisitions, NIH had not 
established a formal prospectus analysis for leases or alterations to 
leased buildings from 1996 to 2003. As a result, NIH did not notify GSA 
of the five prior prospectus-level leases that should have been 
submitted to the committees. While there is no legal penalty for not 
following the congressional prospectus process, failure to do so 
hinders the ability of the appropriate congressional committees to 
fulfill their oversight responsibilities for all prospectus-level 
leases. Although these five leases have been in effect for several 
years, GSA officials told us that it would still be appropriate for NIH 
to work with GSA to notify the committees of their existence. The 
officials noted, for example, a past instance where GSA reported, after 
the fact, a prospectus level lease that was issued without approval of 
the appropriate committees. NIH officials stated that they want to 
clear up any unresolved issues concerning their prospectus and budget 
scoring problems. 

Conclusions: 

NIH has taken actions to formalize its processes of lease scoring and 
prospectus analysis by developing and implementing LeMOP, its new 
leasing process. The specific decision points in this process should 
address the problems NIH had with consistently complying with OMB's 
scorekeeping guidelines and the congressional prospectus process. 
Because only one lease has been issued under the new process, it is too 
early to assess the effectiveness of NIH's implementation of LeMOP. 

An issue remains with five prior leases that were not submitted to the 
appropriate congressional committees for review under the Public 
Buildings Act of 1959, as amended. Although these leases have been in 
effect for several years, it is nonetheless important that information 
on them be submitted to the appropriate committees in order to maintain 
NIH's accountability to Congress in this area and allow the committees 
to exercise their oversight responsibilities. NIH has expressed its 
desire to resolve any remaining issues concerning its prospectus and 
budget scoring processes. 

Recommendation for Executive Action: 

We are recommending that the Director of NIH, using GSA as the proper 
channel, report to the appropriate congressional committees the five 
previous NIH prospectus-level leases that did not follow the 
congressional prospectus process. 

Agency Comments: 

We provided a draft of this report to NIH, HHS and GSA for comment. In 
response, HHS provided written comments for itself and NIH. HHS 
concurred with our findings and recommendation and offered some 
technical comments that we have incorporated in this report. HHS stated 
that, as a matter of policy, it does not object to voluntarily 
complying with the GSA prospectus requirements for the five leases 
dealt with in the draft report. A letter from HHS commenting on our 
report is included as appendix I. GSA informed us orally that they had 
no comments. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after the date of this letter. At that time, we will send copies of 
this report to the appropriate congressional committees, the Director 
of the National Institutes of Health, the Secretary of Health and Human 
Services, the Administrator of the General Services Administration and 
the Director of the Office of Management and Budget. We will make 
copies available to others upon request. In addition, this report will 
be available at no cost on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. 

If you have any questions about this report, please contact me at (202) 
512-2834 or goldsteinm@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in appendix II. 

Sincerely yours, 

Signed by: 

Mark L. Goldstein: 
Director, Physical Infrastructure Issues: 

[End of section] 

Appendix I: Comments from the Department of Health and Human Services: 

Department Of Health & Human Services: 
Office of Inspector General: 
Washington, D.C. 20201: 

AUG 14 2006: 

Mr. Mark Goldstein: 
Director, Physical Infrastructure Issues: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Goldstein: 

Enclosed are the Department's comments on the U.S. Government 
Accountability Office's (GAO) draft report entitled, "Federal Real 
Property: NIH Has Improved Its Leasing Process, but Needs to Provide 
Congress with Information on Some Leases" (GAO-06-918), before its 
publication. These comments represent the tentative position of the 
Department and are subject to reevaluation when the final version of 
this report is received. 

The Department appreciates the opportunity to comment on this draft 
report before its publication. 

Sincerely, 

Signed by: 

Daniel R. Levinson: 
Inspector General: 

Enclosure: 

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for U.S. Government 
Accountability Office reports. OIG has not conducted an independent 
assessment of these comments and therefore expresses no' opinion on 
them. 

Comments Of The Department Of Health And Human Services On The U.S. 
Government Accountability Office's (GAO) Draft Report "Federal Real 
Property: NIH Has Improved It's Process, But Needs To Provide Congress 
With Information On Some Leases" GAO 06-918: 

A significant issue addressed in the draft GAO report is whether NIH 
must provide Congress with certain information regarding five existing 
but not specifically identified leases, pursuant to the General 
Services Administration (GSA) prospectus submittal requirements 
applicable to leases and alterations of leased buildings established by 
40 U.S.C. 3307. GAO frames that issue as follows, "Is NIH complying 
with the congressional prospectus process for both leases and 
alterations to leased buildings?" With regard to that issue, the draft 
GAO report states on page 2 that, "GSA's delegation (of its long-term 
leasing authority) provided that, for each lease whose cost exceeds a 
legislatively established threshold, the agency would work through GSA 
to secure an approved prospectus from the appropriate congressional 
committees, so as to be in compliance with the Public Buildings Act of 
1959, as amended." (The GSA prospectus requirements now found at 40 
U.S.C. 3307 originated in section 7 of the Public Buildings Act of 
1959). The draft GAO report found that, "NIH has taken no action to 
address five prospectus-level leases that were not submitted to the 
appropriate congressional committees in past years." Based on that 
finding, the draft GAO report recommends "that the Director of NIH, 
using GSA as the proper channel, report to the appropriate 
congressional committees five previous NIH prospectus-level leases that 
did not comply with the congressional prospectus process." 

While, as a matter of policy HHS does not object to voluntarily 
complying with the GSA prospectus requirements for the five leases 
dealt with in the draft GAO report, HHS maintains that as a matter of 
law the GSA prospectus requirements that are generally applicable to 
alterations of leased space would not be applicable to instances in 
which HHS intends to finance such alterations with funds previously 
appropriated to HHS. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Mark L. Goldstein (202) 512-2834 or goldsteinm@gao.gov: 

Staff Acknowledgments: 

In addition to those named above, John Finedore, Tom Keightley, Susan 
Michal-Smith, Chris Bonham and Tamera Dorland made key contributions to 
this report. 

FOOTNOTES 

[1] Budget scorekeeping, of which lease scoring is a part, is the 
process of estimating the budgetary effects of pending and enacted 
legislation and comparing these effects with limits set in the budget 
resolution or legislation. Scorekeeping tracks such data as budget 
authority, receipts, outlays, the surplus or deficit, and the public 
debt limit. Scorekeeping guidelines for leases require that an agency 
first determine if a lease is an operating or capital lease; OMB 
requirements describe how to calculate the budget authority that is 
required to cover the government's legal obligations and how outlays 
are to be recorded in agency budgets. In addition, OMB interprets the 
scorekeeping guidelines to determine the cost that should be recognized 
and recorded as an obligation at the time an agency signs a contract or 
enters into a lease. The scorekeepers are the House and Senate Budget 
Committees, the Congressional Budget Office, and OMB. The budget 
scorekeepers determine the rules, and OMB issues guidance to the 
agencies on implementing them. 

[2] 31 U.S.C. § 1501. 

[3] The Antideficiency Act prohibits an officer or employee of the 
United States from making expenditures or incurring obligations before 
appropriations become available, unless otherwise authorized by law. 31 
U.S.C. § 1341. 

[4] A prospectus is a justification for a proposed construction, lease, 
or alteration project (which includes an alteration to a leased 
building). A prospectus for a proposed lease is submitted when the cost 
exceeds a legislatively established threshold, which is $2.41 million 
for fiscal year 2006, and includes information on the project's size, 
cost, location, and other features. For alterations to leased 
buildings, the prospectus threshold is one half the prospectus 
threshold for a lease. An agency with delegated leasing authority 
analyzes each lease to determine whether it needs a prospectus. GSA 
then prepares a prospectus in consultation with the agency and submits 
the prospectus to the appropriate House and Senate authorizing 
committees. 

[5] 40 U.S.C. § 3307. 

[6] An operating lease is a lease that meets the six criteria listed in 
the scorekeeping guidelines in OMB Circular A-11 appendix A. A capital 
lease is any lease other than a lease purchase that does not meet all 
six criteria. 

[7] One of the 59 leases was issued in January 2006, this report 
discusses the remaining 58 leases that were in NIH's 2003 review of all 
its leases; therefore, we refer to only 58 leases in this report. In 
addition, NIH has 16 active leases that were contracted for through 
GSA. 

[8] The conditions included, but were not limited to, the Competition 
in Contracting Act, Executive Order 12072, Executive Order 13006, Davis 
Bacon Act, the GSA Acquisition Regulations, and GSA Federal Property 
Management Regulations (FPMR). When the delegation was issued to NIH in 
1996, the FPMR stated that delegated leasing authority shall be 
exercised in accordance with the Budget Enforcement Act of 1990 and OMB 
Bulletin 91-02, Part B (41 C.F.R. § 101.18.104-1). In 2003, GSA revised 
its regulations to provide that all agencies are required to follow the 
budget scorekeeping guidelines and OMB's requirements for leases, 
capital leases, and lease purchases identified in appendixes A and B of 
OMB Circular A-11. (41 C.F.R. § 102-73.130). 

[9] We previously reported that the budget scorekeeping rules favor 
leasing and that one option for scorekeeping would be to recognize that 
many operating leases are used for long-term needs and should be 
treated on the same basis as purchases. This would entail scoring up 
front the present value of lease payments covering the same time period 
used to analyze ownership options. Applying the principle of up-front 
full recognition of long-term costs to all options for satisfying long- 
term space needs--purchases, lease purchases, or operating leases--is 
more likely to result in selecting a more cost-effective alternative 
than using the current scoring rules. GAO, Budget Scoring: Budget 
Scoring Affects Some Lease Terms but Full Extent Is Uncertain, GAO-01-
929 (Washington D.C.: Aug. 31, 2001). 

[10] The six criteria are (1) ownership of the asset remains with the 
lessor during the term of the lease and is not transferred to the 
government at or shortly after the end of the lease term; (2) the lease 
does not contain a bargain-price purchase option; (3) the lease term 
does not exceed 75 percent of the estimated economic life of the asset; 
(4) the asset is a general purpose asset, it is not for a special 
purpose of the government, and it is not built to unique specifications 
of the government lessee; (5) there is a private sector market for the 
asset; and (6) the present value of the minimum lease payments over the 
life of the lease does not exceed 90 percent of the fair market value 
of the asset at the beginning of the lease term. 

[11] According to scorekeeping guidelines, for funds that are self- 
insuring under existing authority, only the amount of budget authority 
needed to cover the annual lease payment is required to be scored. In 
November 2005, OMB clarified its requirements by stating that the only 
funds that are considered self-insuring are certain revolving funds in 
GSA. 

[12] The business case consists of the need for the lease action, the 
reason it cannot be met within current space, the Space Justification 
Document, and a general estimate of the range of life-cycle costs. 

[13] As previously noted, GSA is considered by OMB to be self-insuring 
and, as such, is required to score only the amount of budget authority 
needed to cover annual lease payments for an operating lease. 

[14] 40 U.S.C. § 585. 

[15] 40 U.S.C. § 121 provides that the GSA Administrator may delegate 
authority under the act except for the (1) authority to prescribe 
regulations on matters of policy applying to executive agencies, (2) 
the authority to transfer functions and reallocated amounts from one 
component of GSA to another under certain situations; and (3) other 
authority for which delegation is prohibited under the act. The 
Property Act does not prohibit the delegation of leasing authority. 

[16] 40 U.S.C. § 585. 

[17] GSA informed us that several prospectus level leases were 
submitted to the appropriate committees and were approved and issued by 
GSA for NIH space between 1996 and 2005. NIH's 2003 review of all 
leases did not include reviewing alterations to leased buildings. 

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