Fiscal Consequences of Real Property Leases For the 2017 Joint Financial Management Improvement Program Federal Financial Management Conference

Presenters U.S. Government Accountability Office (GAO) Office of the General Counsel: Omari Norman Deputy Assistant General Counsel for Appropriations Law Lisa Motley Assistant General Counsel for Financial Management and Assurance Financial Management and Assurance: Kristen Kociolek Assistant Director, Financial Management and Assurance

Objectives (1) Understand fiscal consequences that arise when agencies enter into long-term real-property leases; (2) Describe the proper obligational accounting treatment of leases including steps agencies must take to ensure compliance with appropriations law statues and principles and the bona fide needs rule; (3) Understand how appropriations law principles relate to the requirements of proprietary accounting; and (4) Understand how appropriations law principles relate to the requirements of budget scoring.

Three Sets of Principles Financial Reporting Obligational Accounting Budgetary Treatment

Art. I, § 9, cl. 7 “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” Source: National Archives and Records Administration

Cook and stir? Source: National Gallery of Art

Or toss together? Source: National Gallery of Art 1943.8.8764

Financial Reporting Budget and Accounting Procedures Act of 1950 CFO Act of 1990 Government Management Reform Act of 1994 Accountability of Tax Dollars Act of 2002

Obligational Accounting Antideficiency Act Recording Statute Bona Fide Needs Statute Miscellaneous Receipts Statute Source: U.S. Department of State, IIP Photo Archive

Budgetary Treatment Budget and Accounting Act, 1921 Congressional Budget and Impoundment Control Act of 1974 Balanced Budget and Emergency Deficit Control Act of 1985 Statutory Pay-As-You-Go Act of 2010 Budget Control Act Source: U.S. Department of State, IIP Photo Archive

Toss, don’t cook Source: National Gallery of Art 1943.8.8764

Antideficiency Act - Obligations 31 U.S.C. § 1341 May not “make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund”

Obligation – Promise to Pay Source: National Gallery of Art 1943.8.10584

Recording Statute 31 U.S.C. § 1501 If you incur obligations, write them down. Accountants and financial reports may follow different rules. Source: National Gallery of Art 1945.5.584

Bona fide needs rule 31 U.S.C. § 1502 Some statutory exceptions. Or, no-year money.

Independent Leasing Usually agencies must get space through GSA. But some, such as SEC, may obtain their own space. 15 U.S.C. § 78d(b)(3)

SEC – B-322160, Oct. 3, 2011 Was it permissible for SEC to enter into this lease? YES – SEC had independent leasing authority, AND it had no-year money. How was SEC required to record obligations for its lease? Entire amount – promise to pay; no statutory provision otherwise

Three-Step Framework Does the agency have authority to enter into real-property leases? Does the agency have authority to enter into multi-year leases? How much of an obligation does the agency need to record

CFTC – B-327242, Feb. 4, 2016 Authority for the “rental of necessary space” Does this let CFTC sign long-term leases? What would? Annual authorization to enter into multi-yer leases. Does this let CFTC record obligations annually? What would?

Scoring OMB Circular A-11 Appendix B Operating vs. Capital Leases Two Sets of Books Toss, don’t cook. False advertising – sorry. You may demand a full refund.

Bonus Material – Miscellaneous Receipts 31 U.S.C. § 3302 Motor Coach Industries v. Dole CFTC II – B-327830, Feb. 8, 2017 Source: U.S. Senate Historical Office

Bonus Material – Advance Payments 31 U.S.C. § 3324

Leases: Challenges for Financial Audits Source: National Gallery of Art 2008.115.1632

Leases: Challenges for financial audits Identifying an incorrectly recorded obligation Measuring the full amount of the agency’s obligation Interpreting the agency’s leasing authority Source: National Gallery of Art 1985.64.35

Leases in Financial Audits: GAO’s Experiences Identifying lease problems can be challenging All contracts, not just leases Designing testing Partnering with the agency’s IG Working with appropriations law attorneys Looking to GAO’s appropriations law decisions Ongoing conversations

Implications for financial accounting Considering the impact of the obligational accounting problems on financial accounting: Appropriations law perspective: The agency may need to adjust its obligations and/or seek authority from Congress to avoid Antideficiency Act violations Accounting perspective: The agency’s obligational accounting problems may constitute an error that requires restatement of its past financial statements and/or an internal control deficiency

Leases in Financial Audits: Lessons for Auditors Multiyear leases not through GSA Option year provisions Scope of leasing authority Compare to amounts obligated Risky leases Largest dollar value New program Auditors and attorneys working together Draw from your own experiences – does it look unusual? It’s about mindset more than specific steps to take

Leases in Financial Audits: Potential Solutions Talk to the agency about their controls over leasing/contracting processes Partner with OIGs Combine testing a sample with conducting limited procedures on other leases/contracts not in your sample Have heightened awareness