Defense Issues: Volume 11, Number 15-- Initiative Underwrites Private Sector Housing Risks
Military housing woes, using traditional construction venues, would cost taxpayers $20 billion and take up to 40 years to fix. A new authority promises quick results and major savings.
Volume 11, Number 15
Initiative Underwrites Private Sector Housing Risks
Prepared statement of Robert E. Bayer, deputy assistant secretary of defense for installations, before the Military Installations and Facilities Subcommittee, House National Security Committee, Washington, March 7, 1996.
Mr. Chairman and distinguished members of the S.ubcommittee on Military Installations and Facilities, it is a pleasure to appear before you today ... . The quality of life of our service members and their families continues to be one of [Defense] Secretary [William J.] Perry's highest priorities. Today's service members are a force of volunteers who joined the military for a career, not a two-year tour of duty. Over the past three decades, the percentage of military members who are married and the percentage of time they spend deployed away from home have steadily increased, whereas the quality of their housing -- and associated support such as schools, recreation, day care, etc. -- has failed to keep pace.
Secretary Perry recognizes the importance of housing as a key element in the quality of life of our service members and their families. He is determined to improve their living conditions to maintain high morale and a ready force.
His quality of life budget increase last fall was a significant first step. Secretary Perry added $2.7 billion over the Future-Years Defense Program for several areas of quality of life including quarters allowances, housing maintenance and recapitalization. As an integral part of this initiative, he chartered the Defense Science Board's Quality of Life Task Force -- the Marsh Task Force.
The task force members spent several months taking an independent look at the quality of life of service members. Key to this effort was extensive travel and interviews with service members and their families. In its October 1995 report, the task force confirmed disconcerting downward trends in perceived quality of life. The panel warned that readiness and morale are in jeopardy. In the panel's view, continuing to neglect these issues risks eroding the force because even the most dedicated service members may leave the service.
The task force recommended several ways the department could improve the quality of life for our service members. One of its top recommendations was to use private expertise and capital to accelerate improvement of government-owned housing, unaccompanied and family housing, and encourage the development of more affordable housing in local communities.
As the task force stated, "Well-equipped forces have the instruments to win war, and forces satisfied with their quality of life are motivated to fight." It is our job to make sure our forces are satisfied with their quality of life. We know that military deployments require service members' full attention in order to be effective and safe. We want to minimize anxieties about their families during these stressful periods that come all too often in today's world.
The department currently faces three significant housing problems. First is the condition of DoD-owned family housing. Today's military families are living in yesterday's houses. DoD currently houses about one-third of our families in over 300,000 government-owned family housing units located both on and off base. About two-thirds of these units need to be renovated or replaced because over the past 30 years, they have not been sufficiently maintained or modernized.
Using the traditional military construction approach, it would cost taxpayers nearly $20 billion to accomplish this task and it would take 30 to 40 years to solve this problem. Neither the costs nor timelines of the current system of housing construction and modernization meet the challenge we face. We cannot afford a business-as-usual approach.
The second problem relates to the other two-thirds of our service families. They live in local communities because of DoD's policy to rely first on the private sector to provide suitable family housing. We do not intend to change this overall strategy. However, we recognize that the majority of service members living in local communities are enlisted personnel whose compensation is at the lower end of the military pay scale. Their income makes it difficult for them to find quality, affordable housing within a reasonable commuting distance. Some of the communities around our installations simply do not have enough affordable, quality rental housing to accommodate our service members.
Finally, our barracks are in desperate need of improvement. Renovation or replacement of barracks is the largest single functional category within the MILCON [military construction], and the repair and maintenance portion of the Operations and Maintenance budget. This resource commitment reflects Secretary Perry's continuing five-year commitment to improving the quality of life for single military members. Additional funding by Congress for FY [fiscal year] 96 increases both RPM (by $322 million) and revitalization of barracks (by $212 million). We plan to track these expenditures to ensure that these additional funds are used to improve barracks.
In November 1995, the department established the 1+1standard for new, permanent party barracks construction. This standard prescribes an 11 square meters (118.4 square feet) standard, similar to the design the Army has been using under a waiver for several years. These quarters include two individual living/sleeping rooms with closets and a shared bath and kitchenette service area.
This module will normally house two E-1 to E-4 [enlisted] members or one member E-5 and above. Exceptions are approved so a service can modify this arrangement where mission or overall conditions dictate. This standard is optional for barracks outside the continental United States funded by other than the United States or constrained by site conditions. The services will begin to phase in adoption of this standard with the FY 96 program.
The department is extremely pleased with the broad new authorities provided in the National Defense Authorization Act for fiscal year 1996. They will help us attract private capital to solve our housing problems much more quickly. The new authorities in this Military Housing Privatization Initiative permit:
- Guarantees, both for loans and rental occupancy;
- Conveyance or lease of existing property and facilities;
- Differential payments to supplement service members' BAQ/VHA[Basic Allowance for Quarters/Variable Housing Allowance];
- Investments, both limited partnerships and stock/bond ownership; and,
- Direct loans.
These new authorities can be used individually or in combination. We believe they will allow us to attract private capital and leverage military construction dollars by at least 3-to-1. Establishment of the Family Housing Improvement Fund, with its initial appropriation of $22 million in fiscal year 1996 and transfer authority, provides an effective mechanism to fund the selected projects. We have requested an additional $20 million for this purpose in fiscal year 1997. As military construction projects are converted to projects financed using the new authorities, we expect to use the MILCON savings to fund additional projects. The notification and reporting requirements in the law provide congressional visibility, at key steps, as we proceed.
There is no single magic bullet to efficiently and economically revitalize our housing stock or encourage the private sector to meet DoD needs. In real estate, one size does not fit all. Each location, each project and the terms of each deal will vary according to market conditions, market penetration, land cost and availability, developer capabilities and our housing renovation or construction requirements. Approaches that work in one location may fail dismally at another. Therefore, the department needed, and received from you, a "kit bag" of tools and flexibility to take advantage of each installation's and civilian community's unique circumstances.
I believe this new housing initiative is the beginning of a mutually beneficial relationship between the Department of Defense and the private sector. For the department, it will result in faster construction of more housing built to market standards. We expect to save substantially compared to the military construction alternative process. Commercial construction and operation is not only faster and less costly than military construction, but private sector funds will also significantly stretch and leverage the department's limited housing resources -- achieving more improved housing from the same funding level.
There will also be significant investment opportunities in defense housing for developers and financiers in the private sector. The initiative opens the military construction market to a greater number of development firms. It stimulates the economy beyond traditional MILCON investments through increased private sector building activity because we can build more and in some cases put more property on local tax roles.
Because DoD wants the private sector to use more of its own funds to build or renovate housing and to work with us in leveraging our scarce funds, we must plan, program, budget and execute projects more like a private entity. That is precisely what we are in the process of doing. Based on these new authorities, we are trying to think and act more like private developers.
Secretary Perry has given his complete support to this new initiative [1996 strategy]. In October 1995, in anticipation of enactment of these authorities, he established a joint Housing Revitalization Support Office, the HRSO, representing all services and augmented with consultant support. At his instruction, the office is staffed with 13 full-time housing and real estate experts from each of the services and the Office of the Secretary of Defense.
The HRSO serves as a catalyst for our housing modernization efforts and uses consultant assistance to develop best practices and a common approach to analyzing private sector proposals. One of its near-term goals is to test as many of the authorities as possible. The HRSO is the department's focal point of knowledge and expertise necessary to implement this program. It will also manage the Housing Improvement Fund.
All relevant information and resources are shared with each of the services. Together, the HRSO and services evaluate each initial site; determine which authorities, singly or in combination, will benefit each site; and jointly lead procurement teams that will ultimately negotiate commercial agreements. Ultimately, the services will use their resources and contracting authority to execute these agreements. Lastly, we plan to gradually incorporate the HRSO authorities into the services' housing acquisition process.
The HRSO has developed a site data collection protocol and a financial feasibility model to evaluate proposals for all services, addressing all kinds of markets and requirements. It has worked with the military departments to prioritize about 40 potential sites and together with the services has selected 14 for initial evaluation. Over the past months, members of our staff, along with service representatives and DoD consultants, were in the field visiting 11 of these sites. They have accelerated this process, visiting five additional sites in the last week. Our target is to have about 8-10 projects with up to 2,000 family housing units awarded within the next year. These projects will serve as prototype sites to test the authorities, validate approaches and, frankly, learn how we can take best advantage of these powerful tools.
Two projects, one in Corpus Christi, Texas, and the other in Everett, Wash., have already gone out for bid, and the contract awards are pending. As we learn how to efficiently contract with these new authorities, we expect it will take about 21 months from the time a site is identified until families are able to move into the new or renovated housing. This represents a vast improvement over our current military construction process, which averages 36 to 48 months from project definition to beneficial occupancy.
At potential sites our teams visit with a variety of people to get a good portrait of the housing market and opportunities. These people include military housing personnel, lenders, community development agency staffs, state housing finance agency staffs who could issue bonds and implement publicly supported housing programs, and staff of associations that represent real estate professionals, developers and property managers. Specifically, these site investigations are used to:
- Inform installation commanders about the new authorities and discuss opportunities to satisfy military housing requirements;
- Open lines of communication with local governments and the business community;
- Gather and verify information about the local housing market and the installation housing situation;
- Identify the nature of and reasons for the local housing shortage; and,
- Determine which authorities, if any, are most relevant and potentially most effective for providing quality, affordable housing for military families.
Site visits also determine major potential obstacles to the government in pursuing development, issues such as financial, organizational or political risks; or community and neighborhood concerns. The visits also identify how these risks might be mitigated or otherwise overcome to create a viable project. Finally, the site evaluations result in a "go, no-go" recommendation and, if appropriate, provide the foundation for initial solicitation plans.
Although the new authorities are flexible, no single authority is likely to be effective for every housing requirement or market condition. We are working with the services to decide which authorities are likely to best satisfy specific housing requirements so that solicitations can focus on the avenues likely to achieve best value for the government. On-site visits by experts from the public and private sector will determine the least costly tool or tools to best accomplish our goal. In some situations, there may not be a better alternative than traditional MILCON.
For example, each authority has a different cost to the government. When we use the financial feasibility model, we estimate the income that would be generated in the form of service members' rent and determine whether this sum is enough to cover the cost of construction, maintenance and financing. We will look at the reasons why the private sector has not met the needs of the military. Is it because the local economy is too dependent on the base and that lenders are fearful of downsizing?
If service members' income is enough to cover the cost of the project, the only tool we may need to offer might be a mortgage guarantee against risks associated with base closure. Therefore, we would use our guarantee tool, rather than funding up to 45 percent of the development cost with our joint partnership tool. In this particular example, the guarantee tool would save the taxpayers' money because the guarantee would be scored as an outlay based upon an anticipated default rate, not on the amount of the mortgage guarantee itself.
Ultimately, the HRSO approach requires a basic cultural change in our own business practices. DoD is working diligently to find our way in this new culture. We are learning how to act more like a commercial entity to take advantage of opportunities when they present themselves. Of course, this is not easy. We are not accustomed to delegating authority and relying on consultants. However, we are beginning to do so.
We can succeed, and when we do, the rewards can be enormous. With our new authorities, we are working to remedy our housing deficiencies faster and less expensively than would ever be possible under the traditional military construction process. We appreciate that this new approach has also called for changes in your committee's oversight mechanisms. You have met us halfway, and we appreciate that.
I have three points which I would like to address before I conclude my testimony.
First, we need to maintain at least the same level of military construction funding as we are currently receiving. Our primary goal in establishing the Military Housing Privatization Initiative and in developing our new authorities is to solve a 30-year problem in about 10 years within the resource levels currently planned for housing during that 10-year period.
This goal is difficult, even with these new authorities, but the more quickly we act, the more quickly we benefit. By acting quickly, we will improve the quality of life of our service members and their families, the department will retain more of our quality service members, and that in turn will sustain a ready force while reducing recruiting and training expenses.
We need our current level of funds in order to successfully implement these projects with the private sector. If our current level of funding is not maintained, we will not speed the improvement of our housing. Rather, we will more likely solve a 30-year problem in 30 years or longer because we will limit funds available for the private sector to leverage. Key to service plans to solve their housing shortfalls is their commitment to continue to program resources at about the fiscal year 1996 level of $784 million. The fiscal year 1997 budget request totals $734 million.
Second, as you know, Secretary Perry intends that the privatization tools be applied to solving the serious housing modernization needs of our unaccompanied personnel. While this may prove more challenging, we want to use these authorities to improve our barracks. We are proposing a technical modification to the appropriations committees that will allow us to carry out the intent of last year's authorization act to apply the privatization authorities to unaccompanied as well as family housing.
Finally, the Marsh Panel recommended that the department seriously consider transferring its housing operations to a military housing authority. At Secretary Perry's direction we are determining how we could broaden our current housing privatization "kit bag" and improve our housing situation even more rapidly by enabling each military department or service to create its own military housing corporation. We are examining this option and hope to provide you a legislative proposal in this area in a few weeks. ...
Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission. Defense Issues is available on the Internet via the World Wide Web at http://www.defenselink.mil/speeches/index.html.
