Testimony on the Budgetary Treatment of Medical Facility Leases by the Department of Veterans Affairs

Report
June 27, 2013

Testimony by Robert A. Sunshine, Deputy Director, before the Committee on Veterans’ Affairs, U.S. House of Representatives

This testimony describes CBO’s budgetary treatment of leases of medical facilities by the Department of Veterans Affairs (VA). The main points are as follows:

  • In estimating the budgetary impact of a proposed financial transaction, CBO assesses the nature and extent of the government’s financial commitment, taking into account not just the form, but also the substance of the transaction.
  • Although VA classifies its leases of medical facilities as operating leases, most of them, in CBO’s judgment, are akin to government purchases of facilities built specifically for VA’s use—but instead of being financed by the U.S. Treasury, they rely on third-party financing (that is, funds raised by a nonfederal entity), which is generally more expensive. For VA leases, the cost premium is even greater because, when the department vacates the facility at the end of the lease term, it loses the residual value of a building that it has fully or mostly paid for.
  • Because those transactions are essentially governmental purchases, the full costs of acquiring the facilities should be recorded in the budget when VA enters into the lease—as is done for other purchases that the government makes—rather than spread out over the duration of the lease.

This testimony explains why CBO reached those conclusions and how CBO’s treatment of proposed VA leases is comparable to the approach it has applied in other, similar cases.