Testimony on "Federal Leased Property: Are Federal Agencies Getting a Bad Deal?"
Testimony on "Federal Leased Property: Are Federal Agencies Getting a
Bad Deal?"
by Jeffrey Heslop
Chief Operating Officer
U.S. Securities and Exchange Commission
Before the Senate Committee on Homeland Security and Governmental
Affairs Subcommittee of Federal Financial Management, Government
Information, Federal Services and International Security
August 4, 2011
Chairman Carper, Ranking Member Brown, Members of the Subcommittee:
Thank you for the opportunity to testify on behalf of the Chairman of
the Securities and Exchange Commission1 regarding the Commission´s lease of office space
at the Constitution Center building in Washington, D.C.
The report by the Commission´s Office of Inspector General (OIG)
concerning Constitution Center identified a number of significant flaws in
the SEC´s leasing processes. The fact that the SEC has not paid any rent
to date for this property and that the bulk of the space has been leased
to other tenants does not adequately address a situation that never should
have occurred. The only appropriate response by the SEC is to take all
necessary steps to resolve the remaining space issues, to correct the
obvious deficiencies in our leasing processes, to ensure accountability
for the events surrounding this lease, and to work with the General
Services Administration (GSA) with regard to future space needs.
The Chairman of the SEC has pledged to address the issues identified by
the OIG aggressively and transparently. My testimony today will outline
for the Subcommittee how we intend to make certain that resources are used
prudently, that the agency implements the recommendations of the OIG, and
that future leasing activity is managed properly.
I. Factual Background Leading To The OIG
Report
The SEC currently employs approximately 3,900 permanent staff and more
than 700 contractors. Approximately 60 percent of the permanent staff work
out of the agency´s headquarters, principally the Station Place buildings
adjacent to Union Station in Washington, DC. The agency´s remaining 1,500
employees (mainly enforcement and examination staff) work in our 11
regional offices. The SEC does not own any of its facilities, all of which
are leased. In addition to office space, these leases include space for
public meeting rooms, hearing and testimony rooms, files and records
storage, and information technology (including the agency´s data center
and alternate data center). The SEC currently maintains about 2.5 million
square feet of leased space. In the current fiscal year, the lease
payments total approximately $100 million, which is about 8 percent of the
agency´s annual budget. The Commission´s Office of Administrative Services
(OAS), through its Real Property and Leasing Branch, has been responsible
for managing the leasing program for the agency.
My understanding of what transpired in the Spring of 2010 is as
follows:2
- In the Spring of 2010, the SEC anticipated
the need not only to expand its longstanding core responsibilities but
also to implement the substantial new obligations it was likely to be
assigned under the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act). Because these efforts would require the hiring of
additional staff and space for expansion was limited under existing
leases, OAS started to consider options for additional office space.
- In June 2010, at a meeting regarding leasing
issues with the then-Executive Director of the SEC as well as staff from
OAS, Chairman Schapiro indicated her preference for hiring new staff in
the regional offices rather than at headquarters, as well as a
preference that new space in Washington be within walking distance of
our headquarters at the Station Place buildings to eliminate the need
for expensive shuttle services.
- Approximately one month later, just after
the Dodd Frank Act had passed and assigned the SEC significant new
responsibilities, on July 23, 2010, the then-Executive Director informed
Chairman Schapiro´s staff that he urgently needed to discuss obtaining
space at Constitution Center, a building located at 400 Seventh Street
in southwest Washington, DC. She was told that our other leasing options
in Washington, DC no longer existed, that the space at Constitution
Center was our only option given our space needs, that the pricing was
advantageous, and that they had to move quickly as there was competition
for the space. Given her previous discussions, Chairman Schapiro assumed
the proposal was consistent both with the then existing budget
projections for future employee growth and her preference for staff to
be housed where possible in the regions, and concurred with the
proposal.
- According to the OIG report, the budget
projections for future employee growth were improperly increased by OAS
staff, and staff also assumed – contrary to the Chairman´s communicated
position – that all new positions would be in the SEC headquarters.
These facts, according to the OIG report, were used to justify an
increase in the amount of space needed at SEC headquarters for the SEC´s
projected expansion, an increase that the OIG report concluded was
improper.
- Shortly thereafter, on July 28, 2010, the
SEC, through its leasing group, entered into an agreement for 900,000
square feet at Constitution Center, with an ability to assign or sublet
the entirety of the space. The agreement was for a 10-year term, with
the space to be delivered to the SEC in phases and the first space
available at the start of fiscal year 2012 with rent payments to
commence in January 2012.
- Within weeks, Chairman Schapiro became
concerned that the previously anticipated increase in funding for the
SEC (both for existing programs and the new Dodd-Frank Act
responsibilities) would not come to pass, despite the Dodd Frank Act´s
authorization to double the SEC budget over five years. The Continuing
Resolution, which would ultimately remain in place for the first six
months of fiscal year 2011, would limit the Commission´s ability to hire
new staff and thus limit our need for additional space. In light of
these budgetary concerns, Chairman Schapiro met during the Fall of 2010
on multiple occasions with members of the SEC´s leasing group to discuss
options for Constitution Center that would limit the SEC´s exposure for
space it likely would not fill. The SEC worked with two non-appropriated
financial regulatory agencies (the Office of the Comptroller of the
Currency and the Federal Housing Finance Agency) that wanted to occupy
the majority of the space allotted to the SEC (558,000 square feet). The
SEC then released that space, permitting the landlord at Constitution
Center to lease the space to these other federal tenants. The releases
were conditioned on the SEC being released from all obligations for the
558,000 square feet. The other agencies entered into leases for the
Constitution Center space in January 2011. As described in more detail
below, the SEC has since been working with the GSA regarding the
remaining space.
The SEC´s OIG recently reviewed the agency´s leasing process for
Constitution Center, issuing a report on May 16, 2011. The report provides
a thorough review of the OIG´s findings and recommendations, and reveals
significant flaws in our leasing processes. We are promptly implementing
the OIG´s recommendations, and, as described in more detail below,
recently submitted to the OIG a written corrective action plan.
Specifically, the Chairman has directed me to implement the OIG´s
recommendations and to address the deficiencies in our leasing processes.
In addition, the employees recommended for possible disciplinary action by
the OIG have been reassigned to other duties pending resolution of the
disciplinary process, which we are moving forward on quickly.
II. The SEC´s Obligations Regarding The
Remaining Space At Constitution Center
As noted above, growing budget uncertainties led the SEC to seek ways
to undo or limit the obligations imposed by the Constitution Center
agreement. After successfully identifying two new lessees for the majority
of the space, the SEC retains approximately 300,000 square feet at
Constitution Center.
Chairman Schapiro, I and others at the SEC recently met with the head
of GSA to discuss, among other things, the remaining Constitution Center
space. Both this and multiple subsequent conversations between our staffs
have been very productive. GSA has informed us that it has prospective
tenants with leasing needs that may align with the available Constitution
Center space. More recently, Commission staff, working with GSA, has been
seeking to finalize the terms concerning the remaining space to move this
process forward so that the space may be used by another federal tenant.
We are urgently addressing any remaining issues regarding this lease, and
will continue to work closely with GSA. Because of the timing of the
lease, the SEC has not been required to make any lease payments to
date.
III. The Inspector General´s
Recommendations
The OIG report provides a thorough discussion of the OIG´s findings and
recommendations, and clearly reveals significant flaws in the process by
which SEC leasing decisions were made. On June 30, the SEC provided the
OIG with a written corrective action plan. While work is underway to
implement the corrective actions described below, they may be revised or
expanded as a result of the ongoing discussions with GSA. Currently the
corrective action plan includes the following:
- As an interim action, the Chairman revoked
designations of authority that previously permitted the SEC to enter
into real estate leases without her approval. As described in more
detail below, an arrangement with GSA recently was finalized, and as
such, the agency will update any other delegations and designations of
authority to ensure proper controls are in place.
- In response to the recommendation that the
SEC conduct a comprehensive assessment of OAS operations, the SEC
retained the services of outside consultants to assess OAS´s
organizational structure, including decision-making processes, reporting
relationships, and quality controls.
- All leasing operations now report to me as
Chief Operating Officer.
- A senior executive-level facilities
management oversight committee is being created to provide oversight and
guidance to the SEC leasing process and serve as a forum for
executive-level discussion of the agency´s leasing decisions.
- The directors of our national enforcement
and examination programs are leading a review of the SEC´s regional
office presence, which will include an assessment of the agency´s
location strategy and associated office space needs.
- A new leasing project approval process is
being developed that will address, among other things: coordination with
GSA; estimation accuracy; the approval process for non-competitive
leasing acquisitions; cost/benefit and business case analysis; funding
availability; clear identification of hiring needs with the requisite
geographic match; and external government agency requirements.
Although the SEC is engaged in the implementation of the corrective
action plan, additional requirements and details are likely to be
established consistent with the relationship established with GSA.
IV. The Commission´s Leasing Efforts Going
Forward
In light of the problems identified the SEC recognizes the benefits of
having GSA manage the Commission´s future lease acquisitions. Leasing is
not part of the Commission´s core mission and we cannot allow it to impede
that mission. GSA, by contrast, has long experience and expertise in
leasing.
In her recent meeting at GSA, in addition to discussing the
Constitution Center space, Chairman Schapiro discussed with the GSA
Administrator ways in which GSA could assist the Commission on our leasing
efforts going forward. GSA indicated it was open to playing a significant
role in those efforts. Following that meeting, Commission staff has had
multiple further discussions with GSA staff. On August 1, 2011, the SEC
and GSA entered into a Memorandum of Understanding (MOU) with each other
that contemplates an immediate role for GSA in managing upcoming SEC
leasing activities, as well as all other future leasing needs as they
arise. Ultimately, we anticipate that GSA will be responsible for, among
other things, assessing the space needs of the Commission including
requirements development; planning for the acquisitions, including
preparing preliminary cost estimates; drafting information lease
prospectuses, conducting market surveys, and establishing negotiation
goals and objectives; soliciting, receiving, assessing and negotiating the
offers, which will cover the competition process; executing all required
lease documents; and administering the lease, including responsibility for
tenant improvements, construction, and any necessary moves. The
arrangement with GSA also should permit the SEC to pare down its leasing
program solely to function as liaison to GSA. In addition to the leasing
activities at the core of the MOU, we will be exploring other avenues of
administrative services that GSA may be able to assist us with that will
permit us to scale back further our administrative functions in the
relevant areas.
V. Status Of The Disciplinary Proceedings
Recommended By The OIG
The OIG report recommended that the SEC initiate disciplinary
proceedings for three individuals involved in the Constitution Center
leasing process. Accountability is critical because, without it, there is
neither fairness nor reform. This process has begun, and Chairman Schapiro
has expressed a desire for this process to move as quickly as the laws and
regulations permit, consistent with fundamental fairness, to assess and
implement remedial measures and discipline as appropriate. In the
meantime, the individuals for whom the OIG report recommended a
disciplinary review have been reassigned. Their current duties do not
involve leasing or any other authority that could bind the Commission, nor
do they involve activities that relate to the expenditure of appropriated
funds.
VI. Conclusion
There is no doubt that the OIG report identified substantial failures
in the SEC´s leasing process, and we are making every effort to address
those failures and ensure no reoccurrence in the future. These efforts
include items specific to Constitution Center, including actions to
eliminate the remaining space obligations and to conduct the disciplinary
process for the relevant individuals. In addition, we are moving quickly
to make more programmatic reforms that are incorporating GSA into our
future SEC leasing needs.
I would be happy to answer any questions you may have.
Endnotes
1 The views expressed in this testimony do not
necessarily represent the views of the full Commission.
2 My understanding is based both on my review of
the OIG report and recent testimony of Chairman Schapiro.
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