March 3, 2004
MR. PHILIP W. GRONE
PRINCIPAL ASSISTANT DEPUTY UNDER SECRETARY OF DEFENSE
(INSTALLATIONS AND ENVIRONMENT)
BEFORE THE SUBCOMMITTEE ON
OF THE HOUSE APPROPRIATIONS COMMITTEE
Mr. Chairman and distinguished members of this Subcommittee, I appreciate
the opportunity to discuss the Military Housing Privatization Initiative.
This initiative truly transforms the quality of life for our Service
members and their families. I am pleased to provide you with testimony
on how we are using the legislative tools you have provided us - to improve
- real time - our Service member’s daily lives and housing options.
SUPPORTING OUR PEOPLE
Our main priority is to support Service members and their families engaged
in national security efforts and the war on terrorism. Our Service members
deserve the best possible living and the best possible working conditions.
At the outset of this Administration, the President identified military
housing, including housing privatization as key component of the Presidential
Management Initiative. When President Bush visited Fort Hood, Texas last
November he stated:
"In this time of war, our military is facing greater sacrifice; our
men and women are enduring long separations…Those who risk their
lives for our liberty deserve to be fairly paid and fairly treated.”
Sustaining the quality of life of our people is
crucial to recruitment, retention, readiness and morale. The FY 2005
requests $4.2 billion in new budget authority to construct, operate
and maintain military family housing, an increase of over $200 million
from FY 2004. This funding request allows the Department on to stay
on track to eliminate nearly all its inadequate military family housing
units by FY 2007, with complete elimination in FY 2009. The Department’s
family housing construction budget request of $1.6 billion, up from
the $1.2 billion requested in FY 2004, supports traditional approaches
to military housing as well as privatization
STATUS OF THE PROGRAM
In January 2001, the Department had approximately 180,000 inadequate family
housing units (out of a total of 300,000 housing units worldwide). At the
end of fiscal year 2003, through housing privatization and our military construction
program, we have reduced the number of inadequate units to about 120,000
(out of a total 256,000 housing units worldwide). By the end of FY 2005,
we will have reduced the number of inadequate housing units to roughly 61,000.
This number will continue to come down as we pursue the Secretary’s
goal of eliminating nearly all inadequate housing by 2007, using three major
1. Increasing reliance upon the private sector through privatization – Eliminating
out-of-pocket expenses is good for military personnel, but also serves
to strengthen the financial basis of the housing privatization program
by increasing the income stream associated with housing projects. The
FY 2005 President's budget continues the acceleration started at the
beginning of this Administration in FY 2001 to address nearly all the
inadequate housing by FY 2007. Our current plans are to privatize a cumulative
total of over 136,000 units by the end of FY 2005. We project by the
end of FY 2005 the Department will privatize over of 59% of its existing
Continental United States and territories (CONUS) housing inventory.
Our current plan is to privatize the majority of our CONUS family housing.
2. Maintaining military construction funding – The
combination of increased allowances and continued use of privatization
more efficient use of current military construction funding for family
housing. Increased availability of quality private sector options will
ease pressure on on-base housing, reduce the need to maintain old, costly
housing, and allow us to spend our operations and maintenance funding
more wisely. There will remain some overseas locations where military
construction may be the only alternative, or, for example where privatization
is not financially feasible.
3. Increasing housing allowances to eliminate
the out-of-pocket costs paid by Service members for private sector
housing in the United States – Higher
allowances will help members who live off base to afford good quality
housing and improve their options. The FY 2005 President's Budget request
includes necessary funding to ensure that the typical Service member
living in the private sector will have zero out-of-pocket housing expenses.
This is a remarkable achievement that has come about as a result of the
Administration’s continued commitment to supporting our Service
members, along with Congress’ strong backing.
THE HOUSING PRIVATIZATION PROGRAM
Congress, in 1996, provided the Department with significant new authorities
to use private sector expertise and capital to accelerate improvement
of government owned housing and helping the department provide quality
affordable housing for military families. Using these privatization
authorities, we can develop projects that provide higher quality housing,
both on and off base, faster and at less cost than traditional methods.
Our policy requires that privatization yields at least three times
the amount of housing as traditional military construction for the
same amount of appropriated dollars. Recent projects have demonstrated
that such leveraging of appropriations is normally much higher. The
awarded projects we have analyzed thus far reflect a calculated average
leverage ratio is over 11:1 for all projects combined. Tapping this
demonstrated leveraging potential through our awarded projects to date
has allowed the Department, in partnership with the private sector,
to provide houses that would have otherwise required budgeting over
$6.2 Billion for those awarded projects, using our traditional Military
Construction approach (see Chart below).
Privatization allows us to fix our family housing much more quickly
and is still less expensive over the life of the projects when taking
account the allowances that will be paid to our service members.
At the start of this Administration, in early
2001, the housing privatization program authorities had been in effect
for roughly four and one-half
years, and over that time period nine projects were awarded, totaling
about 10,000 privatization units. In FY 2004, three years later, the
program has clearly benefited from the Services experience and knowledge
combined with greater Senior leadership support. As of February 2004,
the Department has awarded a cumulative total of 27 projects producing
over 55,081 privatized units. This reflects an acceleration of nine projects
a year. This program continues to improve and gain momentum and we expect
that by the end of FY 2005, the Department will have privatized about
136,000 housing units. This is a huge transformation of our military
family housing. We believe that we have been able to accelerate the program
due to a variety of factors – the dedicated efforts of the Military
Departments, the Administration’s support and funding, the increased
buy-in of installation stakeholders, private sector confidence that the
program will continue, and finally Congressional interest and support.
We are implementing this program in a manner that encourages high quality
construction and renovation of military family housing in an efficient
manner. Some of these efforts have included: diligent scrutiny and selection
of developers, sound legal documents, strong oversight and monitoring
procedures, and inclusion of protections to the government in the terms
and conditions of agreements with private developers. Our experience
thus far has verified our expectations:
- Privatization speeds fixing our inadequate housing in comparison to the
traditional Military Construction process.
- The private sector provides a high quality product.
According to tenant surveys administered annually by most of the Services at
projects, Service members and their families are pleased with privatized
housing – in particular, those living in new and renovated homes.
They remarked about the high quality of the new housing and the ease
of requesting home maintenance/repair and the timeliness of the service
- The program has momentum and Service’s are now planning
to privatize the majority of their family housing inventory in the Continental
States and territor
We believe our housing privatization efforts have now achieved identified success,
with installation commanders and Service members welcoming privatization efforts
to revitalize their family housing. Our accelerated schedule includes approximately
seven more housing privatization project award/closings in the March-April
2004 timeframe. These projects include:
- Fort Irwin/Moffett Field/Parks Reserve, California (3,052 housing units)
- Little Rock Air Force Base, Arkansas (1,200 housing units)
- Buckley Air Force Base, Georgia (351 housing units)
- Hickam Air Force Base, Hawaii (1,356 housing units)
- Hanscom Air Force Base, Massachusetts (784 housing units)
- Navy - Hawaii Regional (Phase I), Hawaii (1,948 housing units)
- Offutt Air Force Base, Nebraska (2,255 housing units)
In addition to these projects, we plan 17 more awards in fiscal year
2004 and over 25 awards in 2005 – bringing our cumulative total
end of year FY 2005 to about 136,000 units privatized. We project by
the end of FY 2005 the Department will have privatized about 59% of
its existing CONUS inventory. We currently plan to privatize a cumulative
total of over 160,000 family housing units in CONUS by the end of fiscal
years 2007. As noted earlier, we plan to meet the 2007 goal, with complete
elimination of all inadequate housing by 2009.
Status of Privatized Projects
To date, out of our 27 awarded projects, 10 have completed their Initial
Development Phase – which is the time period we use in each project
to eliminate all inadequate housing. A completed Initial Development
Phase means all renovation and new construction, including the deficit
build out (additional new housing) has been completed. The Initial
Development Phase usually last 3-4 years for most Air Force, Navy and
Marine projects and can extend to 5-10 years for larger Army projects.
The 10 completed projects include:
- Naval Air Station Corpus Christi/Kingsville I, Texas
(404 units privatized)
- Naval Station Everett I, Washington (185 units privatized)
- Lackland Air Force Base, Texas (420 units privatized)
- Dyess Air Force Base, Texas (402 units privatized)
- Robins Air Force Base, Georgia (670 units privatized)
- Naval Station Everett II, Washington (288 units privatized)
- Marine Corps Base Camp Pendleton, California (712 units
- Naval Air Station Kingsville II, Texas (150 units privatized)
- Elmendorf Air Force Base, Alaska (828 units privatized)
- Naval Air Station New Orleans, Louisiana (935 units
During fiscal year 2005, we expect several other bases to complete their
renovations and construction or be close to completion, including the
first Army project, Fort Carson, Colorado. In addition, renovations and
new construction is ongoing at our other privatization projects.
Post Award Management
Because decent, affordable and quality housing is such an important component
to our Service member and their families lives, we are taking steps
to ensure that the privatization projects we have already awarded remain
fiscally and physically in good shape – and are well managed – for
the long term. To that end we oversee these projects through our internal
oversight document called the Program Evaluation Plan (PEP) that provides
key information on the Service’s portfolio management. The PEP
is a formal mechanism for analyzing and monitoring privatization projects
on an ongoing operational basis. PEP data is collected from each Service
and reviewed semi-annually.
The PEP includes information on project deal structure, project performance
and program execution. The information is tracked from one period to
the next in order to ascertain any development trends and/or potential
issues with individual projects. In addition, the Department uses this
information to compare and contrast projects across the Services. On
a quarterly basis, the Department is also engaging the Services in formal
meetings in order to share lessons learned, identify potential areas
for improvement and training, as needed. Currently the program reviews
have focused on developer performance and financial solvency; project
occupancy rates, tenant satisfaction, debt coverage ratio, and renovation
and construction progress.
Since implementation of the PEP three years ago, the Department has
continued to refine the process in order to ensure the quality of information
collected is relevant and timely. Based on the performance of each project
to date, we are confident in reporting that the program is meeting expectations
and that projects are fiscally and financially sound. As we continue
to gain greater experience and knowledge, the Department recognizes that
the key to continue to success will depend on a variety of factors the
least of which is allowing the private sector to bring forth best practices.
Major financial highlights from our recent PEP data include:
In addition, the PEP requires the Services to regularly
report on customer satisfaction. Standard surveys are used by the Services.
Of the 20 installations
included in our last PEP reporting installations, the responses and informal
feedback we’ve received from the privatized tenants has been positive.
- All projects are financially sound.
- For the 27 awarded projects there has been one change in project ownership.
- For the installations where transferred, renovated or newly constructed
MHPI units are available to military family member tenants, the occupancy for
majority of our privatized units is in the range of 90-100 percent, although
three projects are in the 82-87% level, and one project is at 70 percent.
We use the PEP to review the areas for improvements and changes in future
projects. In particular, we want to improve the deal structures to provide
effective private sector incentives while maintaining sufficient government
USE OF AUTHORITIES
Our 27 projects have considerably increased our understanding of how
best to employ the Military Housing Privatization Initiative authorities.
Use of these authorities must be understood in context of how housing
privatization projects are structured. When developing housing privatization
projects, experience has shown that the total funds available combining
developer equity and available private sector financing is normally
less than the total development cost. This dynamic creates a development
gap, which must be filled by various uses of our authorities. Since
the cost of using these authorities (scoring) is much less than the
cost of budgeting for military construction, significant leveraging
of funds is realized. However, we recognize that allowances must be
paid to the service members who did not draw allowances when occupying
government housing. We then compare all costs over the life of the
project to ensure that individual privatization projects are less costly
than its military construction equivalent. Life cycle analyses have
shown privatization to be less costly than military construction for
all projects so far. Our most recent data reflects for the 20 projects
we’ve analyzed thus far, a life cycle advantage for privatization
of about 10-15 percent.
IMPROVED HOUSING REQUIREMENTS PROCESS
We recognize that a key element in maintaining the support of the Congress
and of the private sector is the ability to define adequately the housing
requirement. The Department’s longstanding policy is to rely primarily
on the private sector for its housing needs. Currently, 60% of military families
reside in private sector housing, and that number will increase as we privatize
the existing inventory of housing units owned by the Military Departments.
Only when the private market demonstrates that it cannot provide sufficient
levels or quality of housing should we step in and provide housing either
through use of the privatization authorities or through traditional military
An improved housing requirements determination
process, approved by the Deputy Secretary of Defense released in January
2003, combined with
increased privatization, is allowing us to focus resources on maintaining
the housing for which we have a verified need rather than wasting those
resources duplicating private sector capabilities. The improved housing
requirement process is being used by the Department to better determine
the number of family housing units needed on installations to accommodate
military families. It provides a solid basis for investing in housing
for which there is a verified need – whether through direct investment
with appropriated funds or through a privatization project.
Further, as housing out-of-pocket expenses decrease for the average member,
we expect more military families will choose to live in the local community.
This migration should permit the Services to better apply scarce resources
to those housing units they truly need to retain. We are also concentrating
on aligning the housing requirements determination process more closely
with the analysis utilized to determine basic allowance for housing rates.
This improves our ability to predict our housing needs and to make sound
investment decisions necessary to meet the Secretary’s goal to
eliminate nearly all inadequate housing by 2007. The Department is aggressively
pursuing a comprehensive initiative to improve and transform the living
conditions of all Service members, thereby enhancing their quality of
The Department has achieved privatization successes by simplifying the
process, accelerating project execution, and institutionalizing best
practices in the Services deals with the private sector. As described
earlier in the testimony, many projects require use of appropriated
funds when subsidies are provided to the projects, especially as investments,
loans and limited loan guarantees. The amount of such appropriated
funds was limited in Section 2883 of Title 10, United States Code,
to $850 Million for military accompanied (family) housing and $150
Million for military unaccompanied housing. Due to the rapid acceleration
of the program over the last three years, we are now in position where
almost 70% (about $600 M) of the $850 million cap has been used. We
project the remaining 30% of the Cap will be used up by the beginning
of FY 2005; thus impeding the full implementation of the President’s
Management Agenda initiative to eliminate all inadequate military family
housing by 2007. We intend to work with Congress to ensure that we
provide our Soldiers with good quality housing.
This recommendation to increase our budget authority has generated
conceptual discussions with the Congressional Budget Office. The Congressional
Office has stated that the Department’s housing privatization program
is governmental in nature, and that the total development cost should be accounted
for in the federal budget. In implementing the MHPI, DoD has ensured that “privatization” – in
concept and in fact – characterizes all housing projects developed under
this initiative. This commitment to private sector participation, in which
the private sector accepts both the risks and rewards of developing military
housing, is embodied in the five principles of privatization developed by OSD
to guide the services’ implementation of the MHPI:
- Project scope and government subsidy – The government receives the
best value for its up-front contribution, a sufficiently certain scope of rental
housing, and preferred occupancy at specified rents for its service members.
- Government risk management – The government protects its interests
without participating in the day-to-day management of the project. Agreements
are structured to sufficiently protect the interests of the government while
minimizing both government control and liability.
- Private sector ownership and control – The development entity owns
the property with all the attributes, benefits, and risks of that ownership.
Service members are private tenants who choose where to live and pay rent.
- Private sector bears financial risk – The development entity is responsible
for all risks common in the market, including insuring its property against
fire, flood, and other acts of God; and the development entity does not shift
that liability to the government.
- Competition – Optimal projects are obtained through competition on
price and quality for the duration of the project.
In addition, our projects are each reviewed by the Office of Management
and Budget (OMB) and cash subsidies are scored in accordance with rules
set up for the program in 1997. We continue to comply with OMB circulars
as the program progresses.
The Department provides housing for our military
families only when the local housing market is unable to do so. Our
Program Evaluation Plan
monitors how well housing privatization is achieving that purpose, as
well as protecting other government interests such as repayment of loans
we have made in the projects. We have worked hard to limit our involvement
to only essential protection of the government’s interest. At every
step we have shifted responsibility to own and manage the housing on
the private partner. We have put the risk of attracting member tenants
on the private sector. By requiring service members to pay their own
utilities, we have placed responsibility for usage on the resident user.
We insist that day-to-day management to be handled between our tenants
and the private sector landlord.
The Department recognizes that maintaining and operating family housing
is not a core competency and that, historically, we have not done it
well. These projects allow us to get out of those ownership responsibilities
and the last thing we want to do is take them back over in the future.
I mentioned earlier that we have had one
project that has had a change in ownership…at Fort Carson, Colorado. That process is instructive
to those who believe our program is creating some future contingent liability
for the Department. In September 2003, the parent company of the general
partner (J.A. Jones Community Development) in the Fort Carson Family
Housing LLC filed for Chapter 11 reorganization. Fort Carson Family Housing
LLC, which runs the housing at Fort Carson with the Army as a limited
partner, remained a valuable operating entity and was not part of the
bankruptcy filing. However, as a part of the bankruptcy settlement, the
general partner proposed to sell its interest in Fort Carson Family Housing
LLC since it was a valuable asset. In November 2003, the partnership
interest was sold to GMH Family Housing LLC, who became the new general
partner. The Army had no involvement in this bankruptcy action except
to exercise its right to approve its new general partner in Fort Carson
Family Housing LLC. The project never skipped a beat and continues to
provide affordable, quality housing to the military families at Fort
Carson with no change in the Army’s status as limited partner.
I believe this example demonstrates that we have the right financial
and legal structures in place to walk the fine line of maintaining private
sector risk while still protecting government interests.
The FY 2004 Military Construction Appropriation Report 108-82 included
Senate Appropriation Committee language which directed the Secretary
of Defense to report to “Congressional defense communities…on
the impact of privatization of military family housing on local school
districts, and options for addressing local school requirements resulting
from the privatization.” We are in the process of preparing the
Department’s report to Congress. In addition, the General Accounting
Office has been asked to prepare a follow–on report to evaluate
the Department’s report. We have been working closely with GAO
on this issue, and have met with the Fountain – Fort Carson School
District Assistant Superintendent; additionally we have conducted an
on-site meeting with the Killeen Independent School District (KISD)
Superintendent and his staff, who are responsible for providing Fort
Hood, Texas schools. These two Local Education Districts have been
very supportive and flexible in accommodating some of the student load
shift/changes, and increases that our projects have caused. The Fort
Carson-Fountain School Superintendent Office is dedicated to serving
the installations needs; and they along with the Fort Hood privatization
team and Killeen Independent School District Superintendent’s
Office are doing an exemplary job. We are committed to communicating
the timetable for the project; the size and scope of the project, any
change is scope –surplus/deficit, changes in housing locations
and renovation and demolition and replacement schedule. We believe
the Department has the responsibility to provide data in a consistent
manner to Local Education Districts throughout the life of these projects.
In terms of future school impacts – we have instituted a rigorous
housing requirement process and in most cases we do not foresee any
additional projects including large deficit build-outs.
In closing Mr. Chairman, I would like to sincerely thank you, Ranking
Member Edwards, and the Subcommittee for your strong support of our
military housing privatization program. I look forward to working with
you in the future on our legislative issues and any program improvements
suggested by the Subcommittee.