An Executive Order Mandates Energy Savings

Solar panels installed atop DOE’s Forrestal Building headquarters in Washington, DC.

It’s hardly news that the largest single consumer of energy in the United States is the federal government, with its stock of 360,000 buildings and 650,000 fleet vehicles. What is surprising, though, is the extent to which that consumption has implications that are both environmental and economic, not just in terms of dollars spent but also in terms of habitat loss, melting ice caps, and rising sea levels.

While President Barack Obama’s executive order “Planning for Federal Sustainability in the Next Decade,” issued on March 19, isn’t exactly a game-changer, it draws attention to all those matters. Building on several earlier executive orders, it orders federal agencies to reduce greenhouse gas emissions by 40 percent over a 2008 baseline and to increase their use of energy from renewable sources such as solar- and wind-generated electricity by 30 percent. Other provisions include the reduction of water usage, greater energy efficiencies, and the reduction of energy usage overall, to be achieved by means large and small, whether by cutting down on photocopying or by installing biomass furnaces. These improvements, overall, are expected to cut energy spending by $18 billion over the next decade.

The government’s direct contribution to greenhouse gas emissions is small: by most reckonings, it stands at less than 1 percent. Even so, given the government’s role as a driver, not just by virtue of the $445 billion it spends annually on goods and services but also because of the regulations it can enact across the economy, the order is already having cascading effects. IBM, Northrop Grumman, and General Electric, among other companies, have announced emissions-curbing plans of their own.

Of particular interest to our readers are the provisions in the order relating to building performance and energy. It requires that new federal buildings greater than 5,000 square feet be energy net zero, generating as much energy as they consume, by 2020, a requirement emblematized by the recent addition of solar panels to the roof of the U.S. Department of Energy headquarters in Washington. Additionally, it mandates that all new agency lease solicitations of buildings of more than 10,000 rentable square feet include criteria for energy efficiency, with the implication that buildings that do not meet the revised standards will not be eligible for lease.

These standards, now under the rubric “Guiding Principles for Federal Leadership in High Performance and Sustainable Buildings,” are to be developed, according to the terms of the executive order, by the Council on Environmental Quality and the Office of Management and Budget. The guiding principles are supposed to be promulgated within 150 days of the order’s issuance—by midsummer, that is. We’ll be on the lookout for specifics in the months to come.

The Pareto Principle and Federal Property Investment

Pareto Distibution 100kIn 1906, Vilfredo Pareto observed that 80% of Italy’s land was owned by 20% of its population. Eventually this observation was memorialized as the Pareto Principle or, more commonly, the “80-20 rule” because of its near-universal application to describe many phenomena, such as where 80% of a country’s wealth is held by 20% of its citizens, where 80% of a company’s sales come from 20% of its customers, where 80% of internet page views are on 20% of websites and so forth. Of course, the ratio isn’t always 80-20 but it is always lopsided such that the data highlights, as Pareto put it, “the predictable imbalance” or “the vital few and the trivial many”.

Clearly this is true in federal property ownership. In the graph below we took 3,848 owners of federal property and graphed the square footage of federal leases each of them hold in their respective inventories. When we set each of these 3,848 narrow columns cheek by jowl, an area chart in the classic Power Law shape emerges. Simply put, the Power Law shape is one that has a very tall spiked “head” at the left side and a long “tail” trailing to the right.

This is the same graph shown at the top of this article except that it is "zoomed out" to show all 3,848 property owners. The 98 property owners shown in red own as much federally leased real estate as all other owners. Note that the "tail" to this graph is very long and very thin. Two-thirds of property owners hold less than 20,000 SF of federal leases.

This is the same graph shown at the top of this article except that it is “zoomed out” to show all 3,848 property owners. The 98 property owners shown in red own as much federally leased real estate as all other owners combined. Note that the “tail” to this graph is very long and very, very thin. Two-thirds of property owners hold less than 20,000 SF of federal leases.

This is the Pareto Principle at work: the 98 largest owners (just 2.6% of all federal property owners*) control as much federally leased real estate as all other owners combined. Even Pareto would find that astonishing.

Astonishing, yes, but what does it mean? Well, a few things:

1.  Federal real estate ownership is substantially aggregated.  The 10 largest federal property owners hold almost 16% of all federally leased properties. This, the “vital few” will, by and large, remain a pretty small group. The reason for this is that new fund investors are inevitably focused on entering the federal sector through purchases of long-term leased properties. Yet, those investments are increasingly scarce because the new lease-construct projects, which generate the longest initial lease terms, have largely dried up and each year the remaining term of those projects burns off. Instead, much leasing right now is of the short term, “kick the can” variety. This creates a barrier to entry for new investors that need to lead with long-term leased investments. It is also creating some growth in the head of the trend where many of those investors have already generated portfolios substantial enough that they are able to speculate a bit on more plentiful shorter-term leased investments.

2.  For the rest of the pack, catching up to the ever-spikier head is also complicated by the fact that the tail is so thin. If you were the 99th largest property owner and wanted to become the largest, you’d have to buy the portfolios of the next 20 owners (#100-#119). Of course, that is unlikely and those portfolios may not be appealing. Aggregating a substantial inventory requires real work and it favors investors that devote substantial resources to buying properties, often one at a time. It demands sustained focus because there are few shortcuts to the head of the pack.

3. Pareto noted that the 80-20 distribution evolves in large part because “the rich get richer”. This is true in the federal property sector as well, partly for the reasons outlined above and also because the restricted flow of new investors with solid track records provides the lead investors with a marked advantage. In a sector where pricing tends to cluster tightly for stable assets, larger investors’ track records often tip deals their way. Further, among off-market transactions the reliability of execution offered by the larger investors provides them with one of the precious few seats at the negotiating table. This may not be fair, or even rational, given the number of eager buyers out there, yet it is a dynamic that often prevails in the clubby federal sector.

The Pareto Principle is here to stay and as portfolios at the “head” of the Power Law curve continue to get larger the capital supporting them becomes more institutional. In some respects this has been good for the sector because it has improved pricing overall. But for sellers the message is this: there are plenty of qualified buyers out on that long, long tail. Don’t ignore them.

* We track most owners of federal property of all kinds in the United States but we centered this analysis largely on a 215 million SF tranche that includes all GSA-leased building owners, along with a slug of properties leased by agencies with statutory or delegated authority. Among the properties we did not include are U.S. Postal Service properties, VA medical facilities and most of the facilities leased “subject to annual appropriations”. Though, had we included these, the Paretian distribution and all of this article’s conclusions would have remained very much the same.

The Energy Savings and Industrial Competitiveness Act—Redux

In the 113th Congress last year, Senator Jeanne Shaheen (D-NH) and Senator Rob Portman (R-OR) introduced the Energy Savings and Industrial Competitiveness Act, S. 2262, a 136-page bill intended to update previous legislation on energy efficiency in commercial and residential buildings. Among other things, it would require the General Services Administration (GSA) “to develop and publish model leasing provisions and best practices for use in leasing documents that designate a federal agency as a landlord or tenant to encourage building owners and tenants to invest in cost-effective energy efficiency measures.”

S. 2262 also introduced the voluntary Tenant Star Program, which we have written about earlier. This program would “recognize tenants in commercial buildings that voluntarily achieve high levels of energy efficiency in separate spaces.” The bill would also direct the Department of Energy to gather and publish data “relevant to lowering energy consumption” in commercial and other buildings.

Conservative groups mounted a campaign against S. 2262, arguing, in the words of one, Heritage Action, that “today’s federal voluntary programs often become tomorrow’s mandates.” Some also objected that energy efficiency was being forced unfairly onto the housing finance sector, with potentially negative effects on building valuation and the appraisal process.

In any event, S. 2262 was caught in a procedural tangle when, in late June 2014, Senator Mitch McConnell (R-KY) demanded amendments on energy policy, while Senator Harry Reid (D-NV) in turn demanded a vote on the bill as written. As the record reads, “Senator McConnell objected to the modification. Senator Reid objected to the original request.” And there the matter rested—or, more precisely, died.

Now reintroduced, the Energy Efficiency Improvement Act of 2015, to quote from Senator Portman’s web page, “includes four simple but effective provisions that have been scored by the Congressional Budget Office to be budget neutral.” The bill includes four titles: –

  • Title I establishes a voluntary, market-driven approach to aligning the interests of commercial building owners and their tenants to reduce energy consumption.
  • Title II exempts certain electric resistance water heaters used for demand response from pending Department of Energy regulation.
  • Title III requires federal agencies to coordinate with OMB, DOE, and EPA to develop an implementation strategy—that includes best practices, measurement, and verification techniques—for the maintenance, purchase, and use of energy-efficient and energy saving information technologies.
  • Title IV requires that federally-leased buildings without Energy Star labels benchmark and disclose their energy usage data, where practical.

These titles are elaborated in the text of the bill. Among other things, for instance, the bill requires improvements in energy efficiency and building codes, involving the Department of Energy in providing technical and material assistance, including data. The Better Buildings provision of the bill also authorizes the Tenant Star Program and requires DOE “to complete a study on feasible approaches to improving the energy efficiency of tenant-occupied spaces in commercial buildings.”

In a separate section, DOE is also required to “conduct an ongoing review into private sector green building certification systems and to work with other agencies to determine which certification system would encourage the most comprehensive and environmentally sound approach to certifying buildings.” And, as before, the bill includes several provisions to improve energy efficiency in federal buildings and “requires federal mortgage agencies to include energy efficiency as a factor in determining the value and affordability of a home.”

According to proponents, the Portman-Shaheen bill is projected to create 192,000 jobs and save $16.2 billion annually while reducing CO2 emissions substantially by the year 2030. It has found numerous cosponsors in both parties, among them Senator Kelly Ayotte (R-NH), Senator Michael Bennet (D-CO), Susan Collins (R-ME), Lisa Murkowski (R-AK), Mark Warner (D-VA), and Roger Wicker (R-MS). Numerous national energy groups have voiced support for the bill as well. We will report on developments as the bill moves through the Senate.

Notes From GSA’s Annual “Lease Turnover Analysis”

At the end of each fiscal year GSA produces an analysis of its leasing activity that provides an interesting glimpse into the federal real estate sector. This spreadsheet report, the Lease Turnover Analysis, seeks to address many of the questions lessors commonly ask about the probability that GSA will renew leases, vacate them or even terminate them. I imagine that, tired of fielding endless calls from property owners, GSA began publishing this analysis as a proactive measure to battle the onslaught of inquiry.

That inquiry, of course, includes my own. Recently, I’ve spent some time reviewing the study and talking to GSA, and here are five observations:

1. The Shift into Federally Owned Space is No Longer Just Talk
In each of the past two fiscal years, GSA has moved more than a million SF of leases into federal buildings. In the nine years prior (GSA tracks this stat back to FY 2014), that figure averaged a little less than 350,000 SF.

One reason for the sudden increase probably relates back the passage of the American Recovery and Reinvestment Act of 2009 (aka the Stimulus). GSA received $5.55 billion in Stimulus funds that were mostly used for building energy efficiency retrofits and renovations of federal buildings and courthouses. Now many of those projects are completed and they are pulling tenants in from leased space.

Another reason would be the 2005 Base Closure and Realignment (BRAC). The BRAC process resulted in an estimated military spending increase of $35 billion to close bases across the United States and to build new federal facilities to accommodate the consolidated and realigned military structure. By law, the BRAC process was meant to be fully completed by September 2011 but, as a practical matter, many of the affected DoD leased buildings were not completely vacated until 2013.

Both the Stimulus and BRAC are one-time or intermittent events, so the pace of this shift to federally owned space could slow. Yet we expect it to persist so long as GSA receives improved funding for new construction and alterations as it has recently.

2.  Most Leases Simply Extend
It’s unusual that GSA lease extensions are far more common than new leases. In fact, lease extensions account for two-thirds of all of the GSA “renewals” across the inventory.

To understand this better, one must first recognize that GSA’s analysis categorizes all “renewals” by three types, those that are: 1) Extended; 2) Renewed, or; 3) Replaced. By GSA’s definition, an Extension is any lease action that extends the term of a current lease. This is done through some form of amendment and it can include changes to other terms too, including rent. A Renewal, in GSA parlance, is meant to describe the specific instance where GSA exercises a previously contracted renewal option. Finally, a Replacing Lease is a new lease, written on a fresh lease form and provided with a new lease number.

GSA’s volume of lease extensions seems suspiciously high, but in an article last year we noted that much of GSA’s leasing activity has been lately comprised of short term extensions. Add to that long term extensions and perhaps the preponderance of lease extensions should not be surprising.

Going forward, we don’t expect much change.  GSA is facing a huge pile-up of lease expirations such that one-fourth of all GSA leases expire in the next two years. GSA will struggle to manage the load and probably continue to extend leases as a strategic measure to work through the backlog.

3. Renewal Probability is Lower Than You’d Expect (except that it really isn’t)
To me, one of the most striking statistics in GSA’s study is the “renewal” probability (which we define here as the total of all leases where the government extended, exercised a renewal option or signed a replacing lease in the same building). For leases expiring in FY2014, the incidence of renewal was just 77%. In fact, in the 14 years GSA has performed this analysis, renewal probability (weighted by square footage) has averaged at about this figure, though it has ranged as low as 65% and as high as 84%.

The 77% renewal factor is deceiving because it represents the average for the entire portfolio. Therefore, it includes leases that are known, for example, to be subject to future consolidations. In those instances renewal probability may be near zero, so the likelihood of renewals in the remainder of the inventory would be much higher. Further, as we’ve often discussed with property investors, the probability of renewal in newer, purpose-built buildings is probably higher still.

Unfortunately, GSA’s study does not seek to explore renewal probabilities by tranche, but it’s a project that has been on our team’s back burner for quite a while.  Maybe we’ll get to that this year.

4. Unexpected Terminations are Probably Rare
In FY 2014, 1.3% of GSA leases were terminated during the soft term (as measured by square footage). Another 0.3% were terminated during the firm term, presumably through buyout negotiations or, possibly, default. We concern ourselves mostly with the former number as it reflects GSA’s propensity to exercise its termination rights.

A 1.3% rate of termination isn’t that high but it seems a little more ominous when one considers that GSA is reporting the annual rate of termination. So, if your lease has five years of soft term that indicates a probability of termination closer to 6.5% (calculated roughly as 1.3% x 5 years). Figure also that about one-quarter of GSA’s leases have no termination right at all then, back-of-the-envelope, it’s starting to look like your lease could be exposed to almost a 9% probability of termination during its soft term.

However, as with renewal probability, looking only at the broad measure can be deceiving. This is primarily because most terminations are by design. For example, our team is working on three lease actions right now where we are expecting the Government to terminate its lease and vacate. We have have purposely provided a window of soft term in which the Government can do that. In light of the fact that most terminations are expected, typically in the extended term at the end of a lease when it is in its final death throes, we can feel confident that unexpected terminations are very rare.

5.  Big Leases are “Stickier”
For investors of GSA-leased properties, an intriguing section of GSA’s analysis is the table (recreated below) that projects the number of years GSA can be expected to remain in its leased buildings based upon the turnover probability in the year of analysis. As we noted in an earlier article, turnover probability is not renewal probability. Rather, it is a figure that reflects the percentage of all leases in GSA’s inventory that remain active from one year to the next, regardless of their expiration dates. Normally, turnover in the GSA lease portfolio is 95%, plus or minus a couple percentage points. Using the turnover probability one can project the anticipated number of years GSA will maintain its leased space.

GSA’s analysis concludes that, on average, its leases have an overall life of 14.6 years. Yet, when you weight turnover instead by square footage, that figure leaps to 23.3 years (though the projected years figure has been more subdued since the Global Financial Crisis). The obvious conclusion is that larger leases tend to stay in-place longer and, we’d bet, bigger leases in buildings predominantly leased and controlled by federal tenants are especially sticky. The implications of this tend to support the strategy of many of the fund buyers focused on purchasing federal properties for long-term stable cash flow.

CPI Has Declined, and So Has Your Rent

CPI-W IndexThe Bureau of Labor Statistics recently posted the January 2015 Consumer Price Index (CPI) figures and the results show that the measure declined 0.1% from a year ago*. This would be of little consequence to most non-economists but federal landlords must take note because the decline in CPI–for most GSA-leased properties–means a decline in rental income.

First a little background on the CPI’s role in federal leasing. Most GSA leases–nearly all, in fact–include a clause that ties operating cost reimbursements to the change in CPI. This is one of those many GSA lease clauses that are foreign to property investors new to the federal sector. In GSA leases, an operating cost base is established based on budgeted operating expenses but GSA does not reimburse actual cost increases above that base. GSA’s operating cost reimbursement (paid as “adjusted rent”) is calculated simply on the change in CPI. If, for example, your actual operating expenses increase 2% in a given year but the CPI decreases 0.1%, you’re out of luck.

A 0.1% reduction computed on the operating cost base (which itself is only a portion of the full-service rent) causes a negligible rent reduction. So, why do we care? The reason is that it highlights a disconnect between the Government’s reimbursement method and the actual costs of operating commercial buildings.

The recent decline in CPI is driven primarily by the plummeting price of oil. The price of oil is a major component of CPI and it also has pass-through effects on other elements of the CPI (lower oil prices reduce the costs to produce and distribute other goods). However, oil price reductions don’t necessarily translate to operating cost reductions in commercial properties, primarily because their impact is largely indirect: oil is rarely used to generate the electricity utilities provide to commercial buildings. Oil is also rarely used to heat commercial buildings. Though oil prices may drive down CPI, both directly and indirectly, they do not reduce building operating costs to the same degree so property owners must face dreaded “NOI leakage”, where costs are increasing faster than reimbursements.

Polling our property management team this appears to, anecdotally, be the case. Our Colliers Government Solutions team manages more than 40 properties leased by the federal government and we haven’t seen negative growth in operating costs, nor are we budgeting for it.

That leads us to wonder how long CPI will remain in decline. So far, only the January CPI has decreased from the year prior. Therefore, rent reductions will occur only in those GSA leases with February anniversary dates (GSA establishes the CPI Index base as the month prior to the month of lease commencement). However, if history is any guide, the trend will ultimately affect most property owners. Since the end of World War II there have been only three periods in which CPI declined year-over-year. All three periods were roughly a year in duration, suggesting that declining CPI could cause most GSA leases to suffer some reduction in net rent.

That said, this is a uniquely confusing time and, predictably, there is a lot of disagreement over whether we are really headed into a prolonged period of deflation or whether the CPI index is simply experiencing a oil price-induced blip on a path towards a more healthy rate of inflation. In support of the latter argument, the Core CPI Index (net of energy and food prices) has remained positive. Further, there is now solid job growth in the United States and the Fed is (so far) holding interest rates down in its quest to spur economic growth. On the other hand, CPI generally has been declining since the mid-1980s, wage growth is anemic, oil prices may stay low for some time and the strengthening dollar might actually hinder inflation.

Who really knows? All we can advise is that GSA-leased property owners watch their nickels and dimes this year.

*Throughout this article I refer specifically to the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). The CPI-W is the CPI index utilized by GSA to calculate operating cost adjustments. The CPI-U (Consumer Price Index for all Urban Consumers) is more often cited by economists and the press, and it also decreased.

Tenant Star: A New Program for Energy Efficiency—in Limbo

On January 20, 2015, by a vote of 94 to 5, the U.S. Senate authorized the Environmental Protection Agency to create a voluntary “Tenant Star” program whose mission is, with the use of market incentives and other considerations, to encourage tenants of leased space to work with the owners to design, build, and maintain new energy-efficient buildings, as well as retrofit old ones to that end.

The overarching idea is to use tenant demand to drive energy efficiency—a market solution, in other words, over yet another regulation—as well as to draw on tenant-driven initiatives to reduce energy usage and realize other efficiencies. That idea met with a friendly reception on the floor of the U.S. House of Representatives, which approved its own version of the bill a year ago, on March 5, 2014. The “better buildings” provision of HR 2126, the Energy Improvement Act of 2014, stipulates that the act

“establishes a voluntary, market-driven approach to aligning the interests of commercial building owners and their tenants to reduce energy consumption. It establishes a Tenant Star program—a voluntary certification and recognition program—within Energy Star to promote energy efficiency in separate spaces. [The Department of Energy] would also be required to complete a study on feasible approaches to improving the energy efficiency of tenant-occupied spaces in commercial buildings.”

Building on the established Energy Star framework, the act also requires the General Services Administration (GSA) to develop and publish a set of uniform guidelines establishing performance baselines and other standards so that all parties will know what goals to reach for. Moreover, the Senate bill would effectively amend the existing Energy Independence and Security Act of 2007 to mandate greatly improved standards of energy efficiency in commercial buildings, and it would require the Department of Energy to prepare and publish a report to Congress detailing energy efficiency in those buildings.

The House bill was introduced in 2013 by David B. McKinley (R-WV), an engineer with extensive experience working on government-funded construction and renovation projects, including rebuilding the historic Capitol Theatre in Wheeling. After clearing the Committee on Energy and Commerce, McKinley’s bill, which drew heavily on input from the U.S. Green Building Council, passed easily through the House. In the Senate, the lead sponsors were Rob Portman (R-OH) and Jeanne Shaheen (D-NH), building on legislation also introduced in the 113th Congress by Michael Bennet (D-CO) and Kelly Ayotte (R-NH).

It did not hurt matters that both the House bill and its Senate counterpart require no funding on the part of any authority beyond those agencies, and that the Tenant Star program is indeed voluntary, requiring no fee or cost on the part of anyone who participates. What now remains, assuming that it is signed into law, is for the program to spread into the marketplace.

Assuming that it is signed into law: There’s the rub. The Senate version of the Tenant Star program was part of a bundle of legislation that includes construction of the controversial Keystone XL pipeline, which met with a presidential veto on February 24. Deliberating on March 4, the Senate failed to override the veto, and the House has said that it will not take the matter up. For the moment, that leaves the Tenant Star program in limbo.

Recently Closed Sales

If you are a GSA leased property owner, have you considered that now may be an excellent time to sell? Among other trends, we are noticing that GSA investors are pursuing acquisitions of shorter lease term deals with increasing frequency where the renewal story is strong. As expected, pricing for these shorter lease term deals is also increasingly competitive. Two of our recent completed transactions, a U.S. Immigration and Customs Enforcement (ICE) facility in Rapid City, SD and a U.S. District Courthouse in Alpine, TX illustrate this trend and are profiled below. Both deals had approximately 7.5 years firm lease term remaining at the time of sale. The ICE Rapid City facility sold at an 8.0% cap rate, while the Alpine Courthouse traded at an 8.2% cap rate.  We contend that all things being equal, 18-24 months ago these deals would have sold at cap rates 50-100 basis points higher.

Saving Energy and Tax Dollars: A New Report from the CBO Wrestles with Accounting for Both

FD-FDA-Research-Center-White-Oak-Maryland-02-GAL

At FDA’s White Oak campus in suburban Maryland, Honeywell has been awarded Energy Savings Performance Contracts totaling $195 million. Improvements designed and implemented by Honeywell over the past several years include heating, ventilation and lighting upgrades and a more efficient central utility plant to power the 1.2 million-square-foot expansion of the Center for Biologics Evaluation and Research.

In 2012, Reps. Peter Welch (D-VT) and Cory Gardner (R-CO), bridging the partisan divide in Congress, created the House Energy Savings Performance Caucus, a group within the House that advocates for federal service contracts that emphasize energy savings.

Gardner moved to the Senate in January, his place at the head of the HESPC taken by Adam Kinziger (R-IL). Noting that the federal government is the single largest user of energy in the country, Kinziger immediately announced redoubled efforts to push an ESPC program, even as President Obama has outlined a goal of $4 billion in energy-cost savings by the end of 2016, when he leaves office.

Under the terms of the present Energy Savings Performance Contract (ESPC) system, to quote the Department of Energy (DOE), “a private party agrees to pay to design, acquire, install, and, in some cases, operate and maintain energy-conservation equipment—such as new windows, lighting, or heating, ventilation, and air conditioning (HVAC) systems—in a federal facility. In return, the federal agency agrees to pay for those services and equipment over time, as well as for the vendor’s financing costs, on the basis of anticipated and realized reductions in the agency’s energy costs.”

Put another way, an energy service company (ESCO) would pay for a new energy-saving installation—say, retrofitting an existing office complex with a geothermal heating and cooling system—and then would be repaid with most of the energy savings thus realized. The DOE assures vendors that “if the installed equipment is effective and is used at anticipated levels, and if energy prices remain close to projections, the value of the energy saved over the life of the equipment will more than cover the costs of the contract.”

The DOE is finalizing IDIQ (indefinite delivery/indefinite quantity) contract standards incorporating ESPC guidelines. It notes that since the contractors are providing funding, the program allows some relief from the limits of annual appropriations. Financing costs would naturally be higher under the ESPC system, since the contractor is assuming the risk and burden and may not be able to attain the most favorable borrowing rates, as the government would.

The savings may well be realized long after the typical cost estimate framework has expired. Whereas the Congressional Budget Office (CBO) measures costs on a ten-year horizon, the savings in an energy-efficient system may not come until several years later, after the system has been paid for. Measuring costs and savings is further complicated by the fact that they are split into two categories, mandatory and discretionary spending, that are governed by two sets of rules. A new report from the CBO notes that for the time being, “projected savings in energy costs and related costs are shown as potential future reductions in agencies’ discretionary appropriations.”

The ESPC concept is not new. In the 1980s, working under the rubric of shared energy savings (SES), the US Postal Service awarded a contract to the Co-Energy Group to retrofit the lighting at the 1.7-million-square-foot General Mail Facility in San Diego, California. San Diego Gas & Electric, the local ESCO, provided energy rebates to reduce the installation cost, while the contractor invested $164,714. Over seven years, the facility saved nearly $600,000 in lighting costs alone, a good return on investment that led the Post Office to develop other SES projects of several kinds.

Recently, the Food and Drug Administration White Oak Campus, near Silver Spring, Maryland, the General Services Administration (GSA) partnered with Honeywell under an ESPC to construct a heat and power plant that will cost some $71 million—but will also save $5.8 million a year in energy costs and $6.5 million in operating and maintenance costs. Similarly, reports the DOE, Camp Pendleton, the huge Marine Corps base in southern California, reduced its energy consumption by 44 percent even as it added 2 million square feet in facility spaces.

Camp Pendleton achieved this with a program of ESPCs, as well as a range of energy-savings measures including retrofitting light fixtures and adding roof-mounted solar energy systems to the mix. At another military base, the large naval station at Guantanamo Bay, Cuba, a contractor built a $12 million wind turbine project under the terms of an ESPC. The direct annualized savings are $1.2 million, meaning that payback will take ten years, just at the end of the CBO horizon. But, notes the Navy, other cost savings come into play as well, not least by removing more than 40 tons of pollutants from the atmosphere each year.

The savings from ESPCs are very real. Measuring and accounting for them remain matters of discussion.

Cutting the Federal Workforce

The federal government is big. That is something about which few people of whatever political stripe would disagree. Excluding members of the armed services (but including Postal Service workers), there are about 2.7 million federal employees—as many people as live in Chicago.

Yet, as the Wall Street Journal reports, this is the smallest number since 1966, and the federal government represents the only job sector to decrease in 2014—one reason, as we noted last week, that President Obama’s FY 2016 budget includes provisions to hire another 34,000 employees.

For some in Congress, however, that 2.7 million count is still far too large. Last month, Cynthia Lummis, a Republican U.S. Representative from Wyoming, joined with Mick Mulvaney, a colleague from South Carolina, to introduce a bill entitled the Federal Workforce Reduction Through Attrition Act. It demands that the federal workforce be reduced by 10 percent by September 30, 2016. As the Congressional abstract states, it “requires that compliance with such workforce limitation be made through attrition, or through both attrition and a freeze on appointments if the total number of federal employees exceeds the applicable maximum for a quarter.” It also requires that the Office of Management and Budget certify that this requirement has been met, though at the same time it allows the President to waive the limitation as necessary in “(1) a state of war or for reasons of national security; or (2) an extraordinary emergency threatening life, health, safety, or property.”

Lummis adds in a statement, “Instead of blindly filling empty desks, this bill forces agencies to take a step back, consider which positions are crucial, and make decisions based on necessity rather than luxury.” Her bill also requires that contractor jobs be cut in proportion to workforce reductions, presumably to avoid a kind of stealth, under-the-radar restaffing to make up for lost positions.

Whether any federal agency operates on a basis of luxury is a subject for debate, but this is not the first time that Lummis’s bill has been aired. Under the same title, she proposed it early in the 113th Congress—and two years ago, in February 2013, her colleagues referred it to the House Committee on Oversight and Government Reform, where it quietly languished and then expired.

Mulvaney, too, has introduced similar bills, including HR 3029 in 2011, which would have directed agencies to hire only one new employee for every three who retired or left government service. That was but one of a dozen federal-workforce-reduction acts before the 112th Congress, most aiming at a 10 percent reduction. None survived committee. Nonetheless, a report issued in that year from the office of Sen. Ron Johnson (R-WI), “$1.4 Trillion in Savings,” has remained influential—and now that Johnson heads the Senate Homeland Security and Governmental Affairs Committee, which oversees the federal workforce, proposals to make further cuts are likely to find a sympathetic ear.

Indeed, Lummis and Mulvaney’s latest effort arises in a time of increased antifederal sentiment on the Hill. At the same time that Lummis reintroduced it before the 114th Congress, a Republican colleague, Ken Calvert of California, introduced a bill that would cut the civilian defense workforce by 15 percent by 2023. Calvert argues that cuts in the civilian workforce should mirror those suffered by the military side of the Department of Defense, though he has not specified whether they would be accomplished principally by attrition or instead by layoffs.

How far both bills will travel in the 114th Congress remains to be seen. But critics of the proposed reduction, noting the historically low level of federal employment and the added burden it would place on already beleaguered agencies, have been quick to voice their opposition to the Federal Workforce Reduction Through Attrition Act. Said J. David Cox, president of the American Federation of Government Employees, “If Reps. Lummis and Mulvaney believe the federal government can afford to lose another 200,000 employees in the span of a single year, then they should explain to the American public where they think these cuts should occur and what services they think we can do without.”

Obama’s FY 2016 Budget: Higher Wages, More Spending, Less Real Estate

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There’s good news if you’re a federal employee, assuming that President Obama’s proposed 2016 budget is enacted intact: It will come with a 1.3 percent pay increase.

Now, 1.3 percent isn’t a big hike, but it’s better than the 1 percent that came in FY 2015, and certainly better than the years that were leaner than that.

There’s good news, too, for several beleaguered agencies: the FY 2016 budget allows for hiring increases totaling some 34,000 jobs. About a third of those jobs will fall under the aegis of the Department of Veterans Affairs, and another 3,800 will be within the Department of Homeland Security, with other increases going to Health and Human Services.

All that may be a bright spot for the construction and property sectors. In the immediate term, this centers on Washington, where many of these jobs—especially those at DHS—will be located. Even allowing for the ever smaller office space allotted for federal workers, which now ranges from 80 to 150 square feet, these new workers will need to be housed somewhere.

But reading the tea leaves, within the budget is bigger good news for construction nationwide in the longer term. That news lies in its strong emphasis on infrastructure spending. Remarks a senior administration official, “The President goes very big on infrastructure in the budget to repair roads, bridges, freight, and our rail systems. . . . It’s $480 billion, which allows us to fund at about 40 percent above the current level of spending.” That amount of money will allow for some significant projects and development, and there seems to be a stirring of bipartisan support for the notion of long-overdue infrastructure improvement.

At the same time, it’s worth noting that the President’s commentary on the budget offers a long side note on “shrinking the federal real property footprint,” as the report puts it. Observing that more than $21 billion annually is spent on upkeep of the government’s 300,000-plus properties and that lease costs amount to another $6.8 billion, the Administration “proposes to use $200 million in annual rental payments collected from agencies, $130 million over the 2015 enacted level, to execute additional office space consolidations.” The goal is to reduce the federal footprint by about 500,000 square feet over the fiscal year.

Additionally, the budget includes a proposed $57 million to enact the Civilian Property Realignment Act (CPRA), which would create an independent board to review the government’s property portfolio and recommend to Congress properties to dispose of or reconfigure. It is estimated that this will save more than $1.2 billion over ten years.

Congress can always kill the pay raise, though it will have to do so by directly imposing a pay freeze, never a popular move among the best of circumstances. (Government workers vote, and there are a lot of them.) But Congress can also thwart President Obama’s budget plans in any number of ways, especially given the reigning antitaxation climate—and the infrastructure spending package hinges on business tax reform, especially on taxing assets that are now parked overseas. Observers on the Hill are expecting a fight. We’ll let you know as specifics develop.