Military Housing:

Analyses of Overseas Housing Costs Are Misleading to Decisionmakers

NSIAD-86-82: Published: Jun 13, 1986. Publicly Released: Jun 13, 1986.

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GAO evaluated Army, Navy, and Air Force economic analyses issued between December 1982 and January 1984 to identify the most cost-effective alternative for satisfying military family housing requirements in Europe.

GAO found that the quality of the economic analyses was poor because of the large variety of problems they contained, the high frequency of problem occurrence, and the effects of these problems on the analyses' major conclusions. GAO determined that: (1) even though the Navy study concluded that straight leasing was the least expensive alternative, lease with purchase was actually the least expensive alternative; (2) although the Army study concluded that using housing manufactured in the United States and erected in West Germany would cost more than leasing, U.S.-manufactured housing was less expensive than build-to-lease housing; and (3) either the rent was substantially less than the mortgage payment in the build-to-lease alternative or the lessor had to be able to build housing at a lower cost than the Air Force estimated for the military construction alternative.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The Department of Defense (DOD) will not request a waiver from OMB Circular A-104, but it will implement the revised circular upon issuance.

    Recommendation: The Secretary of Defense should require all future economic analyses involving the use of the present-value technique to discount only: (1) current dollar expenditures; and (2) with the average rate of interest on the Department of Treasury obligations which mature during the period of anticipated expenditures. GAO understands that the Office of Management and Budget (OMB) is currently revising Circular A-104 to require this type of discounting procedure. Until this revised guidance is effective, the Secretary of Defense should request a waiver from the current version of Circular A-104 to allow the department to immediately begin using this recommended discounting technique.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: A tri-service committee is developing guidance to ensure that economic analyses are accomplished in accordance with OMB Circular A-104.

    Recommendation: The Secretary of Defense should issue additional guidance on conducting economic analyses of foreign housing that: (1) expands instructions for sensitivity tests; (2) requires full explanation of the special circumstances present when build-to-lease is found to be less expensive than military construction; (3) gives explicit directions on when and how to calculate political risk considerations in estimates of residual value; (4) requires the use of expected inflation and exchange rates which are representative of those accepted by professional economic forecasters unless there are convincing reasons for not using them; (5) requires that housing alternatives be evaluated for financial viability; (6) requires a good rationale with supporting data for assuming maintenance of utility expenses in build-to-lease significantly different from military construction of approximately the same square footage; and (7) gives explicit directions for estimating the rental and sale prices of land.

    Agency Affected: Department of Defense


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