STEWARDSHIP OF FEDERAL FACILITIES: A PROACTIVE STRATEGY FOR MANAGING THE NATION’S PUBLIC ASSETS
WILLIAM L. GREGORY
MEMBER OF THE NATIONAL RESEARCH COUNCIL COMMITTEE TO ASSESS TECHNIQUES FOR DEVELOPING MAINTENANCE AND REPAIR BUDGETS FOR FEDERAL FACILITIES
MANAGER OF CORPORATE FACILITIES MANAGEMENT
BEFORE THE SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY
SUBCOMMITTEE ON ECONOMIC DEVELOPMENT, PUBLIC BULDINGS, HAZARDOUS MATERIALS AND PIPELINE TRANSPORTATION
U.S. HOUSE OF REPRESENTATIVES
APRIL 29, 1999
Good morning Chairman Horn and Chairman Franks, and members of the Subcommittee on Government Management, Information and Technology, and the Subcommittee on Economic Development, Public Buildings, Hazardous Materials and Pipeline Transportation.
My name is William L. Gregory. I am the manager of Corporate Facilities Management at Kennametal, Incorporated, a global provider of industrial tooling systems with annual revenues of nearly $2 billion and 13,000 employees worldwide. At Kennametal, I am responsible for real estate, corporate building operations, strategic facility planning, corporate environmental, health and safety programs, space and construction management, and installations for all major facility projects on a global basis. I am also a past international president of the International Facilities Management Association (IFMA), in which capacity I oversaw IFMA’s operations, international development, and formation of professional alliances.
I am testifying here today in my capacity as a member of the National Research Council appointed committee that produced the report Stewardship of Federal Facilities: A Proactive Strategy for Managing the Nation’s Public Assets. The National Research Council is the operating agency of the AffiliateMarketIngtools of Sciences and the AffiliateMarketIngtools of Engineering which were chartered by Congress to advise the government on matters of science and technology. [Information re: NRC contracts and grants with the Federal Government is included on Attachment A] Jack E. Buffington, the Chairman of the NRC Committee, sends his regrets that he is not able to be here today. Ms. Lynda Stanley of the National Research Council, who provided staff support to our Committee, is here.
The Stewardship of Federal Facilities report was initiated as a follow-up study to a 1990 report of the National Research Council titled Committing to the Cost of Ownership: Maintenance and Repair of Public Buildings. That report contained the recommendation that “ an appropriate budget allocation for routine maintenance and repair for a substantial inventory of facilities will typically be in the range of 2 to 4 percent of the aggregate current replacement value of those facilities”. Almost a decade has passed since that recommendation was made. Many changes have occurred in the federal government and it was felt appropriate to revisit the issue in today’s operating environment.
Early in our study process, it became clear that the stewardship of federal facilities is more than just a matter of appropriating funds for maintenance and repair and involves a wide range of management and budgeting issues. Federal facilities embody significant investments and resources and, in essence, constitute a portfolio of public assets. These assets must be well maintained to operate adequately and cost effectively, to protect their functionality and quality, and to provide a safe, healthy productive environment for the people who work in and visit them every day.
To address the identified management and budgeting issues systematically, our Committee developed a strategic framework of methods, practices, and strategies that, if implemented, can lead to a better maintained and better managed inventory of federal facilities. In the Committee’s judgment, such an integrated and strategic approach to facilities management will result in significant cost savings both in terms of short-term operations and the long-term life cycle of facilities.
I will first review the Committee’s findings relating to federal facilities maintenance, budget and management issues. Many findings are interrelated so it is difficult to place them in clear-cut categories. Generally speaking, the findings relate to the physical condition and size of the facilities inventory; accountability for stewardship, the budget structure; and management practices. The list of findings is extensive but provides the context for the Committee’s recommendations.
Physical Condition and Size of Inventory
The U.S. government owns more than 500,000 buildings, monuments, and other structures, located in all 50 states and 160 foreign countries. These facilities have been acquired over the course of 200 years to support the conduct of the government’s business. The Federal facilities portfolio includes historically significant, easily recognized public symbols such as the White House, the U.S. Capitol, and the Monument. The vast majority of this portfolio is comprised of military installations, embassy compounds, libraries, museums, hospitals, housing, research laboratories, office buildings, courthouses, prisons, warehouses, depots, and parks.
The total inventory of facilities represents the investment of more than $300 billion taxpayer dollars. Upwards of $20 billion is spent annually to acquire new facilities or substantially renovate existing ones. Yet, it is difficult, if not impossible, to determine how much money the federal government as a whole appropriates and spends for the maintenance and repair of these facilities after they are acquired. This is attributable, in part, to a lack of consistency across agencies in tracking maintenance and repair expenditures. Agencies use several different methods to define and calculate facilities-related budget items, such as current replacement value. Agencies also use varying methodologies for developing budgets and different systems to account for and report expenditures.
Evidence is mounting that the physical condition, functionality, and quality of federal facilities is deteriorating. The General Accounting Office has reported that many federal buildings require substantial repairs to bring them up to acceptable standards of health, safety and quality. In addition, the GAO has reported that some agencies have excess, aging facilities and insufficient funds to maintain, repair, or update them.
The number of excess facilities is increasing as agencies realign their missions. One of every five military bases is already slated to be closed and the closure process may continue in the future. The Department of Energy reports having surplus nuclear facilities that require deactivation and the State Department has identified over 100 overseas properties for potential sale.
The closure of facilities does not automatically translate to lower maintenance and repair costs. The GAO found, for instance, that the overall costs to maintain military bases closed in the 1988 and 1991 rounds was approximately $290 million through fiscal year 1996 because the Department of Defense has attempted to keep the facilities in a reusable condition in response to the demands of the surrounding communities. Transferring the ownership of a federal facility to another public or private organization brings with it the responsibility to meet environmental regulations, which can be costly. Demolition of excess facilities could be cost-effective in the long term but requires a significant up-front investment of funds. The military services estimate that demolition costs for facilities other than World War II era wooden barracks range from $8 to $12 per square foot. In a 1997 report, GAO calculated that it will take the Army alone about 13 years to eliminate its excess space at a cost of about $1.3 billion. The disposition of former nuclear sites and their associated facilities present unique situations that are not easily resolvable through any of the aforementioned strategies.
Accountability for Stewardship
The NRC Committee found that Federal government processes and practices are generally not structured to provide effective accountability for the stewardship of federal facilities. Congress, the Office of Management and Budget, federal agency senior executives, facilities program managers, and field staff all make decisions that affect maintenance and repair programs. Because decision-making authority is so widely dispersed, no single entity can be held responsible or accountable for the results.
Inadequate funding for the maintenance and repair of public buildings at all levels of government and academia is a long standing and well documented problem. Although we can’t state exactly how much money is spent on maintenance and repair, agencies that briefed the Committee consistently reported that they received less than 2% of the aggregate current replacement value of their inventory. This level of funding is below the 2-4% guideline that is widely quoted in facilities management literature.
Several factors contribute to the lack of adequate funding. Maintenance and repair expenditures generally have less visible or less measurable benefits than other operating programs. There is the tacit assumption that maintenance and repair can always be deferred one more year or 5 more years in favor of more visible projects. However, in the short term, deferring maintenance diminishes the quality of building services. In the
long term, it can lead to a shorter service life and reduced asset value.
The scope of the problem is evident in the magnitude of deferred maintenance backlogs reported by agencies. The costs of eliminating these backlogs are estimated to be in the tens of billions of dollars. The total dollar amounts and the methods for arriving at these figures can be argued. However, the existence of deferred maintenance implies that the quality or reliability of service provided by the infrastructure is less than it should be to adequately serve the public.
The Committee also found that the type of information that decision-makers find compelling to support maintenance and repair budget requests is not available. A report by the Urban Land Institute concluded that public officials and decision-makers want to know “How much money will be saved in the future by spending money today on maintenance and repair?” However, only a limited amount of research has been done on the deterioration/failure rates of building components or the nonquantitative implications of building maintenance (or lack thereof). This research is necessary to identify effective facilities management strategies for achieving cost savings, identifying cost avoidances, and providing safe, healthy, productive work environments.
Federal Budget Structure
Inadequate funding can also be attributed to the federal budget structure. When Congress appropriates funding to the agencies, funding for maintenance and repair activities is not earmarked but is subsumed in the larger operations budget. This budget structure provides agencies with some flexibility in allocating funding to operations or to maintenance to respond to changing conditions. However, budgetary pressures on federal agency managers encourage the diversion of potential maintenance and repair funds to current operations, to meet new legislative requirements, or to pay for operating new facilities coming on line.
The current budget structure places the emphasis on design and construction costs, the so-called first costs of facilities versus total or life cycle costs. Studies show that design and construction costs account for 5-10% of the total cost of a building over its service life. In contrast, operations and maintenance accounts for 60-85% of the total costs of ownership. Yet, when Congress and the agencies review requests for new facilities, the budget process is structured such that the first costs of facilities receive the primary attention by Congress and the agencies, not life cycle costs.
The relationship of facilities to agency missions is not recognized adequately in federal strategic planning and budgeting processes. Agencies and Congress consider how facilities support a mission when allocating funds for new facilities. Once built, the relationship between facilities and mission is generally taken for granted even though facilities in deteriorating condition can negatively impact agencies’ missions and changing mission needs can negate the need for some facilities.
Performance measures to determine the effectiveness of maintenance and repair expenditures have not been developed within the federal government. Thus, it is difficult to identify best practices for facilities maintenance and repair programs across or within federal agencies.
There are few rewards or incentives for facilities program managers to act in a cost-effective, fiscally responsible manner, to be innovative or to take risks that might result in better management practices. In fact, current management, budgeting, and financial processes contain disincentives and institutional barriers to cost-effective facilities management and maintenance practices. The GAO has reported that there is a certain budget bias against capital projects because no distinction is made between an outlay for a capital asset that produces a future stream of benefits and an outlay for current operations. Because of the magnitude of capital outlays in the short term, they may be foregone to meet short-term budget restraints despite their long-term benefits. Furthermore, it is currently not in any manager’s interest to admit to “savings” for fear that future budgets will be reduced. The carryover of funds from one fiscal year to the next is not generally allowed, even if it may be cost-effective to do so.
Based on the available information, the Committee found that programs to assess the physical condition of federal buildings are labor intensive, time consuming, and expensive. Agencies have not been able to make effective use of the data they gather through condition assessments for timely budget development or for the ongoing management of facilities.
In response to these issues and downsizing, facilities program managers are looking increasingly to technology solutions to provide facilities-related data for decision-making and for performing condition assessments. The Committee found that existing sensor and microprocessor technologies offer the potential to monitor and manage a range of building conditions and environmental parameters but, for economic and other reasons, have not been widely deployed. In the Committee’s opinion, adequate training for staff is a key component in fostering effective decision making in performing condition assessments and developing and reviewing maintenance and repair budgets.
After identifying and reviewing all of these issues, the NRC Committee came to two overriding conclusions:
To plan strategically for maintenance and repair, the Committee made the
following five recommendations:
The Committee also recommended six strategies for creating greater accountability for stewardship, as follows:
The total cost of facilities is the key concept underlying the illustrative template. The template includes 6 categories of facility costs: Routine maintenance, repairs, and replacements; Facilities-related operations; Alterations and capital improvements; Legislatively mandated activities; New construction and total renovations; and Demolition. The template differs from current practices in that it accounts for full range of facilities management costs in one place. It allows decision-makers and others to have a much clearer understanding of the long-term costs of a new facility rather than just the first costs. It also shows which items should be included within the 2-4% guideline and those that should not.
Performance measures are now required under the Government Performance and Results Act of 1993. Unlike budgeting practices that have developed over several decades, performance measures are not yet ingrained into agencies’ procedures. For that reason, a significant opportunity exists to develop facilities management-related performance measures that can be used throughout the government. Over time, results of facilities management practices could be compared across and within agencies and best practices could be identified.
In summary, the Federal government has a significant opportunity to strategically redirect federal facilities management and maintenance practices for the 21st Century. This will require long-term vision, commitment, leadership, and stewardship by decision-makers and agency managers. The results will be a significant improvement in the quality and performance of federal facilities, lower overall maintenance costs, and protection of the public’s investment.
Thank you for the opportunity to review the findings and recommendations of the Stewardship of Federal Facilities report.