30 January 2008

Senators Urge Changes to Air Force Housing Privatization Oversight and Management Process

This is from back in December, but thought it was worth posting:

Senators Urge Changes to Air Force Housing Privatization Oversight and Management Process

Pryor, Chambliss introduce legislation to require more vigorous process in vetting project bidders, developers and lenders

A bipartisan group of U.S Senators led by Mark Pryor, D-Arkansas, and Saxby Chambliss, R-Georgia, both members of the Senate Armed Services Committee, today sent a letter to Secretary of the Air Force Michael Wynne criticizing the Air Force’s oversight of housing privatization projects in Arkansas, Georgia, Florida, and Massachusetts and urged the Air Force to explain how they plan to quickly restore the current failing projects as well as how they will change their privatized housing oversight and management processes. The letter was also signed by U.S. Senators Blanche Lincoln, D-Arkansas, Johnny Isakson, R-Georgia, Bill Nelson, D-Florida, Mel Martinez, R-Florida, Edward Kennedy, D-Massachusetts and John Kerry, D-Massachusetts, and is in response to failing privatized housing projects at Little Rock, Moody, Patrick, and Hanscom Air Force Bases in the lawmakers’ home states.

The senators said in the letter, “We are alarmed and extremely disappointed at the level of failure at these four projects, all of which have been under work stoppages for months, are years behind schedule, and are tens of millions of dollars over-budget. The failure of these projects has traumatized the local communities and resulted, in some cases, in lost homes and businesses by persons unable to re-coup their expenses. The failure of these projects also continues to jeopardize the Air Force’s strong relationship with four very supportive local communities, and these situations, if not corrected, will have ramifications far beyond the local businesses that have been directly affected.”

“Due to lax contracting rules, the Air Force awarded a questionable company a multi-million dollar contract to build housing at the Little Rock Air Force Base. Instead of the quality and affordable housing our military families deserve, there are rows of cement floors, unfinished housing and unpaid bills to subcontractors,” Pryor said. “It’s time for the Air Force to take responsibility for its mistakes and prevent these types of problems in the future.”

“I am disappointed that the Air Force was not more proactive in addressing and fixing these projects,” said Chambliss. “The housing privatization process is overseen and managed by the military services, with the Air Force being the proactive agent for the projects in question and determining which projects to pursue, what legal and financial mechanisms to use, which consultants to employ, which project owners and developers to select, as well as being responsible for implementing a centralized oversight program. For this reason, the Air Force is ultimately responsible for the failure of these projects and we expect the Air Force to develop and implement a plan to salvage the housing programs at these four installations and ensure proper oversight is conducted in the future.”

In their letter, the senators highlighted the following conclusions:

1) Either the Air Force did not have adequate mechanisms in place to monitor and ensure adequate performance by the parties to these transactions, or the mechanisms the Air Force relied upon were unsuccessful, or both.

2) In theory, project owners and developers for the projects were accountable to bond-holders, trustee representatives, and third party consultants, but in practice, they were accountable to no one.

3) The sole Air Force representative on site was not a Government employee but a contractor hired by the Air Force Center for Engineering and the Environment who had no authority and who was not responsible to anyone at the local military installation.

4) The Air Force had no direct control of any financial payments to the developer, and any indirect control or leverage the Air Force may have had was either not exercised or ineffective.

5) The amount of payment and performance bonds for all of these projects was substantially less than is standard in private sector construction and was not sufficient for subcontractors to recoup their expenses in the event of default.

American Eagle Communities, LLC, created under the parent company Carabetta, was awarded a $127 million contract to build 468 new homes and remodel 732 homes by 2011 for the Little Rock Air Force Base. Only 25 homes were completed and occupied, and an estimated 70 concrete slabs were poured before the company stopped construction in May due to unpaid bills. As a result of the company’s financial problems, at least 25 Arkansas subcontractors and suppliers have not been paid and the housing project is now stalled.

The Moody project in Georgia was initiated in March 2004. Carabetta, the Property Manager, created Moody Family Housing, LLC, to be the developer and project owner. 400 new homes were to be constructed and 206 homes were to be remodeled as stated by the terms in the project. To date, only two homes have been completed. The estimated cost of the project has exceeded available funding by $25 million, and the project lenders stopped funding in March 2007 to prevent all funds from being expended.

In a separate action, Senators Pryor and Chambliss will introduce legislation this week to enhance oversight of housing privatization projects. Specifically, the bill:

Mandates that DoD establish and adhere to a robust, effective oversight plan to successfully manage and maintain project performance and schedule.

Requires a more vigorous process in vetting project bidders, developers, and lenders before selecting awardees and approving transactions.

Mandates increased communication between bondholders and DoD to ensure that the bondholders act more rapidly when project performance is inadequate.

Requires DoD to ensure bidders’ guaranteed maximum price proposals are reasonable.
Requires a higher level of bonding to protect the rights of subcontractors and ensure they can re-coup expenses in the event of project default.

Ensures that developers or project owners that create LLC’s to execute specific projects receive unsatisfactory performance ratings if the LLC itself fails to perform according to standards.

“It’s unfortunate that resolving these problems requires an act of Congress, but that’s what it’s come to,” Pryor said. “This legislation establishes the proper oversight and safeguards to prevent the waste of tax dollars in the future.”

“I look forward to hearing from the Air Force regarding how they will change their oversight and management of these projects,” said Chambliss. “I believe that this process can work. But in these cases, it didn’t work, and we need assurances that it will not happen again.”

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