Military Housing Privatization Authorities and Project Structures

The military housing privatization initiative provided DOD with various  authorities to obtain private-sector financing and management to repair,  renovate, construct, and operate military housing. DOD Regularly Assesses Projects’ Financial Conditions but Has Not Consistently Assessed Future Sustainment Needs or Issued Required Reports to Congress

DOD regularly assesses the financial condition of its privatized housing  projects through recurring internal reporting by the military departments  on each of their projects; however, key data on current financial  conditions are not mutually comparable. Data on Current Financial Condition of Privatized Housing Projects Reported to the Office of the Secretary of Defense and Congress Are Not Comparable

Based on our analysis, data on the current financial condition of privatized  housing projects that have been reported by the military departments to  ASD (EI&E) and Congress have not been comparable because (1) there  are inconsistencies in the calculation of the reported debt coverage ratios,  and (2) the data requested have not followed consistent time periods. DOD Has Not Met the Requirement for Financial Oversight Reports to Congress in a Timely Manner and Has Not Included Sustainability Information on Each Privatized Housing Project

DOD has not consistently provided required reports to Congress in a  timely manner, and as a result Congress does not have up-to-date  information on the financial condition of privatized housing. If DOD does not take steps to comply with statutory  time frames for reporting on the financial condition of privatized housing  projects moving forward, decision makers in Congress will not have up-to- date information about financial conditions of projects as they provide  oversight of a program that represents a long-term commitment for the  department. DOD Has Not Fully Assessed the Effects of the Basic Allowance for Housing Reductions but Has Identified Other Privatized Housing Challenges and Options to Address Them

DOD has completed some analysis of the projected effects of recent  reductions in the basic allowance for housing on its privatized housing  portfolios, but it has not fully assessed the significance of the effects on  the future sustainment of each of its privatized housing projects. For example, generally, the reports did not include certain  information for the full term of all projects, as detailed below:  two of the reports did not include information on when deficits related  to reductions in the basic allowance for housing will occur per  project;  two of the reports did not include information on the decrease in the  sustainment accounts due to reductions in the basic allowance for  housing versus the amount that the project requires for planned  sustainment per project; and none of the reports included information on the likely effects of  particular sustainment funding deficits (for example, how many units  will forgo needed renovations or rebuilds). Risk tolerance is the acceptable level of variation in  performance relative to the achievement of objectives. At the request of ASD (EI&E), the  military departments have provided analysis on the effects of the  reductions on their portfolios, but they have not been required to fully  assess the significance of the effects of the reductions on the future  sustainment of each of their projects, or identified specific actions to  respond to the reductions, as detailed by federal internal control  standards related to risk assessment. In addition, DOD has not required  the military departments to define their tolerances for risk to the goal of  providing quality housing to servicemembers in line with community  standards, including its ability to fund future sustainment needs. (Recommendation 7)
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. In written comments, DOD  concurred with each of our recommendations and identified actions it  plans to take to implement them. Appendix I: Objectives, Scope, and Methodology

Senate Report 114-255 accompanying a bill for the National Defense  Authorization Act for Fiscal Year 2017 included a provision for us to  assess the solvency of each privatized military housing project in the  United States and the effect of recent changes in basic allowance for  housing on long-term project sustainability. This report examines the  extent to which the Department of Defense (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 identified any other challenges and  options to address challenges; and (3) defined notification requirements  for project changes and risk tolerances relative to privatized housing  goals. To determine the extent to which DOD has defined notification  requirements for project changes and risk tolerances relative to privatized  housing goals, we reviewed DOD guidance on oversight and  management of privatized military housing, interviewed DOD and  developer officials responsible for privatized housing, and reviewed DOD  documentation.
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.

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.

What GAO Recommends

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.