GAO to scrutinize financial solvency of DoD’s privatized housing programs

The U.S. military’s program to privatize the living quarters on its bases — contentious and controversial at its inception 1996 — is now universally regarded as a great idea. Of on-base homes, 94 percent meet the Defense Department’s housing standards, compared to 22 percent when the government was in charge.

But Congress and the Government Accountability Office are asking new questions about the long-term viability of the Military Privatized Housing Initiative (MHPI), particularly with regard to how it’s financed: Developers and investors were promised a steady income stream from each home they built, tied directly to military members’ basic allowances for housing (BAH) which are calculated to match leasing and utility rates in a given community. But Congress has since gone along with a DoD proposal which cuts those allowances by 5 percent, and occupancy rates are falling as the military shrinks in size.

“There are a couple of clouds on the horizon,” said Brian Lepore, GAO’s director of Defense infrastructure issues, last week at a defense infrastructure forum hosted by the Center for Strategic and International Studies. “As we see reductions in the force structure, there’s the potential for reductions in the rate of occupancy, and we’re already seeing that at some locations. And to the extent housing allowances get reduced, there’s the potential that service members start looking at other off-base housing options depending on competition in that particular market.”

Lepore said GAO will soon begin work on a new audit of each military service’s privatized housing projects, based on language the Senate suggested in its version of the 2017 Defense authorization bill.

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Although that bill has not yet passed, it tasks GAO to assess the financial solvency of each project because, in the Senate’s words, the BAH reductions “were implemented without an appropriate level of consideration on the impact such changes would have on the military housing privatization initiative.”

Specifically, the changes have already begun reducing allowances by 1 percent per year so that they’ll only cover 95 percent of the estimated housing costs in a given geographic location when the cuts are fully phased-in in 2019.

Katherine Hammack, the assistant secretary of the Army for installations, energy and environment, said private housing providers had not felt much of a financial squeeze thus far, partially because the cuts include a grandfathering clause: no military member will see the BAH reductions until their next permanent change of station, and consequently, neither will their MHPI landlords.

But with most military members moving in two-to-three year intervals, it won’t take long before the cuts begin to apply to a majority of BAH recipients, and the Army has previously signaled that it might ask service members to help make up housing providers’ losses out of their own base pay.

“It looks like we might reach a challenging point in two-to-three years,” she told reporters earlier this month at the Association of the U.S. Army’s annual conference in Washington. “And so, yes, we are having conversations to determine what our options are. One of the options, for instance: If you live on base, you have things like swimming pools and community centers provided to you at no additional cost. So could we charge an HOA fee? Right now we’re considering those things, but have not made any decisions.”

Until then, the Army is encouraging housing providers to offset any of their financial losses by cutting back on non-critical services — mowing lawns less frequently, for example — but Hammack said none of the Army’s housing providers have yet come forward with a case that the cuts are putting them in dire financial straits.

Underutilized base housing is another concern. All of the military services are smaller than they were at the start of MHPI; the Army in particular is in the midst of a drawdown that will bring it to its lowest active duty level since midway through the last century.

MHPI’s creators planned for that possibility: through a “waterfall” mechanism, developers are allowed to rent out on-base housing to other groups if there aren’t enough active-duty servicemembers to fill the homes. Generally, National Guard and reserve personnel are next in line, followed by federal civil servants, retirees and DoD contractors. If those groups don’t provide sufficient tenants, developers are allowed to rent the on-base homes to the general public.

At several bases, a shortfall of military tenants has already caused the final stage of the waterfall to kick in, causing opposition in some cases from local officials and residents who are wary of letting just anyone live on a base that houses sensitive military facilities and materiel.

In theory, the military services are supposed to run extensive background checks against any general public tenants who are approved to live on-base as part of the waterfall process, but an April DoD inspector general report found that wasn’t happening as it was supposed to.

The audit, which looked at several installations that had reached the bottom of the waterfall — Fort Detrick, Maryland; Naval Station Mayport, Florida and Barksdale Air Force Base, Louisiana — found installation officials had failed to conduct appropriate security checks: Of 128 tenants the IG sampled, only eight had been run through all of the proper databases and several were given installation passes for longer than their lease terms.

“DoD officials assumed a higher security risk to military personnel, their dependents, civilians, and installation assets,” the IG wrote. “For example, Fort Detrick is home to the Chemical Biological Medical Systems Joint Project Management Office and elements of the Naval Medical Research Center. The consequences of unauthorized access to these types of facilities could be catastrophic.”

All three military services responded to the report by promising to improve their security processes.

“I do think there are concerns, and we have to watch those,” Peter Potochney, the deputy assistant secretary of Defense for basing said at the CSIS forum. “Our deals have to be flexible. The private sector takes on some risk, but so do we: that means having non-DoD people living on our bases if we have a force structure change. As managers, if we fail to exercise our intellects and adapt to changes within these privatization deals, then shame on us. We wind up doing nothing if we worry about those kinds of changes.”

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