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

2. 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

3. 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.

4. Three Sets of Principles
Financial Reporting
Obligational Accounting
Budgetary Treatment

5. 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

6. Cook and stir?
Source: National Gallery of Art

7. Or toss together?
Source: National Gallery of Art

8. 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

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

10. 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

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

12. 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”

13. Obligation – Promise to Pay
Source: National Gallery of Art

14. 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

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

16. 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)

17. SEC – B , 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

18. 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

19. CFTC – B , 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?

20. 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.

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

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

23. Leases: Challenges for Financial Audits
Source: National Gallery of Art

24. 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

25. 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

26. 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

27. 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

28. 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