Military Housing Privatization: DOD Should Take Steps to Improve Monitoring, Reporting, and Risk Assessment

GAO-18-218 Published: Mar 13, 2018. Publicly Released: Mar 13, 2018.
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Highlights

What GAO Found

The Department of Defense (DOD) has regularly assessed the financial condition of its privatized housing projects; however, it has not used consistent measures or consistently assessed future sustainment (that is, the ability to maintain the housing in good condition), or issued required reports to Congress in a timely manner. Specifically:

  • Some data used to report on privatized housing across the military services are not comparable. For example, there are inconsistencies among the projects in the measurements of current financial condition (for example, the ability to pay debts and maintain quality housing).These differences have not been identified in reports to Congress.

  • The military departments vary in the extent to which they use measures of future sustainment, and information regarding the sustainment of each of the privatized housing projects has not been included in the reports to Congress.

  • DOD's reporting to Congress has not been timely. DOD is statutorily required to report to Congress the financial condition of privatized housing projects on a semiannual basis, but it has not reported on any fiscal year since 2014.

By taking steps to improve the consistency of the information provided and meet the reporting requirement, DOD would provide decision makers in Congress with useful, timely information about the financial condition of the privatized housing projects as they provide required oversight.

DOD has not fully assessed the effects of reductions, relative to calculations of market rates for rent and utilities, in servicemembers' basic allowance for housing payments on the financial condition of its privatized housing projects. In August 2015, DOD required the military departments to review their privatized housing portfolios and outline any effects of the reductions. Each military department reported that the reductions would decrease cash flows to their long-term sustainment accounts. However, the reports did not specify the significance of the reductions on each project's future sustainment or identify specific actions to respond to shortfalls at individual projects. If DOD fully assesses the effects of the basic allowance for housing reductions on privatized housing and identifies actions to respond to any risks, DOD and Congress will be better informed to make decisions affecting the projects.

DOD has not defined when project changes require prior notice to the Assistant Secretary of Defense for Energy, Installations, and Environment or its tolerance for risk relative to its goal of providing servicemembers with quality housing, including the risk from reduced sustainment funding. Specifically, the military departments had different understandings of when project changes, such as financial restructurings, required prior notice. Additionally, DOD has not required the military departments to define their risk tolerances—the acceptable level of variation in performance relative to the objectives—regarding the future sustainability of the projects. By clearly defining the conditions that require advance notification and developing risk tolerance levels, DOD would have consistent information that would improve its oversight of privatized housing and inform its response to any future sustainment challenges.

Why GAO Did This Study

In 1996 Congress provided DOD with authorities enabling it to obtain private-sector financing and management to repair, renovate, construct, and operate military housing. DOD has since privatized 99 percent of its domestic housing.

The Senate Report accompanying a bill for the National Defense Authorization Act for 2017 included a provision that GAO review privatized military housing projects and the effect of recent changes in the basic allowance for housing on long-term project sustainability. This report examines the extent to which DOD has (1) assessed and reported the financial condition of each privatized housing project; (2) assessed the effects of recent reductions in the basic allowance for housing on privatized housing; and (3) defined notification requirements for project changes and risk tolerances relative to privatized housing goals. GAO reviewed policies, project oversight reports, and financial statements, and interviewed DOD officials and privatized housing developers.



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Recommendations

GAO is making eight recommendations, including that DOD improve the consistency and timeliness of the information reported on the financial condition of its privatized housing projects, fully assess the effects of the reductions in basic allowance for housing on the projects, clarify when project changes require notice, and define tolerances for project risks. DOD concurred with each of our recommendations and identified actions it plans to take to implement them.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment provides additional contextual information in future reports to Congress on privatized military housing to identify any differences in the calculation of debt coverage ratios and the effect of these differences on their comparability. (Recommendation 1)
Closed – Implemented
DOD concurred with this recommendation in its response to our report. Subsequently, in September 2018 DOD issued its report to Congress on the financial condition of privatized housing covering fiscal years 2015 and 2016. This report included additional information on the calculation of debt coverage ratios, including addressing their comparability by noting that these ratios vary from project to project depending on the private-sector lender's requirements and transaction-specific circumstances such as the project's priority of payments. This information was also included in the May 2019 report to Congress, covering fiscal year 2017, and an official from the Office of the Assistant Secretary of Defense for Sustainment stated in May 2019 that DOD intends to continue providing this information in future reports. As a result, Congress has additional information about debt coverage ratio calculation and their lack of comparability.
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment revises its existing guidance on privatized housing to ensure that financial data on privatized military housing projects reported to Congress, such as debt coverage ratios, are consistent and comparable in terms of the time periods of the data collected. (Recommendation 2)
Closed – Implemented
DOD concurred with this recommendation in its response to our report and stated it would revise its reporting guidance to the military departments to ensure that the financial data being collected and reported to Congress was consistent and comparable in terms of the time periods of data collected starting with the reporting period covering October 2016 through September 2017. Subsequently, in August 2018, DOD issued revised instructions to the military departments for data submissions for subsequent congressional reports to clarify how debt coverage ratios should be calculated and to clarify the instructions regarding reporting periods. These revised instructions should result in more consistent and comparable financial data being reported to Congress.
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment revises its guidance on privatized military housing to include a requirement that the military departments incorporate measures of future sustainment into their assessments of privatized housing projects. (Recommendation 3)
Closed – Implemented
DOD concurred with this recommendation in its response to our report. In its response, the department stated that it was working with the military departments to determine appropriate measures of future sustainment and would revise its guidance to require the military departments to incorporate measures of future sustainment into their assessments of privatized housing projects. DOD subsequently issued instructions to the military departments effective January 2021 that required quarterly programmatic reviews of their privatized housing projects. A template for these programmatic reviews included a measure of future sustainment; specifically, a measure of project funds available to reinvest in housing improvements over time. By including such a measure in its reviews of privatized housing projects, DOD will be better positioned to evaluate the future sustainability of the projects.
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment takes steps to resume issuing required reports to Congress on the financial condition of privatized housing in a timely manner. (Recommendation 4)
Open
DOD concurred with this recommendation in its response to our report and stated that it was working to further streamline the reporting format and data collection process to ensure more timely reporting to Congress. Subsequently, in September 2018 DOD issued its report to Congress on the financial condition of privatized housing covering fiscal years 2015 and 2016, and in May 2019 DOD issued the report covering fiscal year 2017. In September 2020, DOD issued the report covering fiscal year 2018, and in March 2022 DOD issued the report covering fiscal year 2019. Therefore, as of April 2022 DOD had not yet resumed issuing the reports in a timely manner. We will continue to monitor DOD's actions to implement this recommendation.
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment reports financial information on future sustainment of each privatized housing project in its reports to Congress. (Recommendation 5)
Closed – Implemented
DOD concurred with this recommendation in its response to our report and stated that it would ensure that financial information on future sustainment of each privatized housing project would be included in the report to Congress on privatized housing covering fiscal year 2017. In its report to Congress dated March 2022, DOD included information on the future sustainability of privatized housing projects, including the methods by which military departments oversee measures of projects' future sustainability, and a list of projects rated as having significant challenges that threaten long-term sustainability. As a result Congress will have more information about future sustainability of the housing projects to assist in conducting oversight.
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment provides guidance directing the military departments to assess the significance of the specific risks to individual privatized housing projects resulting from the reductions in the basic allowance for housing and identify courses of action to respond to any risks based on their significance. (Recommendation 6)
Closed – Implemented
DOD concurred with this recommendation in its response to our report. In its response, the department stated that it would issue guidance to the military departments to annually report on their assessment of the specific risk of changes in the basic allowance for housing to individual privatized housing projects and identify any courses of action to respond to the risks based on their significance. In February 2022, DOD issued a memorandum requiring the military departments to implement the provisions of the fiscal year 2019 National Defense Authorization Act pertaining to privatized housing. These provisions included a requirement for DOD to provide guidance to the military departments to assess the risks to privatized housing projects from reductions in basic allowance for housing and identify methods to mitigate those risks based on their significance. In January 2021, DOD issued guidance to the military departments on conducting quarterly reviews of privatized housing programs, and included basic allowance for housing as a special topic to be reviewed. These actions met the intent of our recommendation and will help ensure that DOD takes action to assess and respond to any risks from basic allowance for housing reductions on its privatized housing projects.
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment finalizes guidance in a timely manner that clearly defines the circumstances in which the military departments should provide notification of project changes and which types of project changes require prior notification or prior approval. (Recommendation 7)
Closed – Implemented
DOD concurred with this recommendation in its response to our report. In its response, the department stated that DOD has coordinated draft guidance with the military departments which it expected to issue in fiscal year 2018. However, in January 2021, the Assistant Secretary of Defense for Sustainment issued a memorandum outlining its approval and notifications policy for changes to privatized housing projects. The memorandum included detailed instructions for different notification and approval requirements depending on the type of project change being sought. By issuing this guidance, DOD will help ensure that privatized housing changes are notified in the appropriate manner to the Office of the Secretary of Defense, and when necessary, to the Office of Management and Budget, thereby facilitating appropriate oversight of the projects.
Department of Defense The Secretary of Defense should ensure that the Assistant Secretary of Defense for Energy, Installations, and Environment revises its guidance on privatized military housing to require the military departments to define their risk tolerances regarding the future sustainability of their privatized housing projects. (Recommendation 8)
Closed – Implemented
DOD concurred with this recommendation in its response to our report. In its response, the department stated that it would revise its privatized housing guidance to require the military departments to define their risk tolerances regarding future sustainability of privatized housing projects. In February 2022, DOD issued a memorandum directing the military departments to implement provisions of the fiscal year 2019 National Defense Authorization Act pertaining to privatized housing. These provisions included a requirement that the military departments define risk tolerances for the future sustainability of privatized housing projects. As a result, the military departments will be better prepared to evaluate risks to the future sustainability of their privatized housing projects and determine when further action may be required.

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