GSA financial situation worse than predicted

Financial shortfalls at the General Services Administration are worse than anticipated, according to internal financial documents obtained by Government Executive.

As of June 30, the Federal Technology Service reported a $104 million deficit for this fiscal year, the documents stated. Originally, the beleaguered agency had predicted that FTS would lose only about $80 million by June 30, according to the same set of documents. A write-off of GSA Preferred, a failed agency information technology project, accounted for $71.4 million of the losses, the documents stated.

The agency forecasted that FTS losses will add up to almost $110 million by the end of this fiscal year on Sept. 30. Even that number, which would depend on only $6 million in losses during the fourth quarter, may prove overly optimistic, said former GSA officials who have seen the internal documents.

GSA is "banking on a really good end of year," said Neal Fox, a former GSA Federal Supply Service assistant commissioner who is now a consultant. Although the annual fourth-quarter spending spurt by agencies usually treats GSA well, it will unlikely prove as lucrative as in years past, Fox said. "They've made it hard to do well because the lawyers have slowed down the process so much," he added.

The agency is largely a self-sustaining contracting shop that supports its operations independently of congressional appropriations. A GSA spokesman declined to comment on the agency's financial picture.

As of June 30, total FTS revenue stood at almost $3.7 billion, 30.3 percent less than the $5.3 billion in business volume GSA thought it would collect by then. GSA "keeps missing their own projections, which means they don't have a handle on the problem," said Bob Woods, a former FTS commissioner, now president of Topside Consulting Group.

The decrease in business volume clearly is a chief reason behind the shortfall. Within GSA's regional IT centers, for example, total revenue through June 30 is $1.6 billion, 16 percent below the $1.96 billion GSA thought the centers would have earned by that date. Losses, excluding the regional centers' portion of the GSA Preferred write-off, amounted to almost $52.4 million, far more than the projected loss of $42.8 million, according to the documents.

At GSA's National IT Solutions operation, raw revenue through June 30 was actually up by 15 percent compared with the anticipated figure of about $976 million. But losses (again excluding the GSA Preferred write-off) actually amounted to $11.6 million, about double the expected loss of $5.7 million.

An internal GSA analysis cited continuing bad relations with the Defense Department as one cause of the IT fund's decline. Defense is one of the regional IT centers' largest customers, but orders from the department have decreased by about $1 billion since last year, a drop of 30 percent.

Things began to go especially sour between the two agencies in fiscal 2005, when GSA abruptly reversed a long-standing practice of using FTS as an off-the-books savings account that allowed agencies to deposit money from one fiscal year and spend it in another. The Defense Department lost between $1 billion and $2 billion when it was forced to return most of its parked money to the Treasury Department.

Matters have not improved with a second round of fighting over an arcane bit of fiscal law that governs when the clock starts counting on the time remaining on contracts for services purchased on an annual basis -- so-called "severable services" contracts. If the Defense Department succeeds in imposing its interpretation of the law on GSA retroactively, the cash-strapped agency would be forced to refund money to the Pentagon -- perhaps hundreds of millions of dollars.

The federal telecommunications business, usually a steady source of GSA revenue, was also lower than expected, although it did not put those accounts in the red. Regional telecom returned $348.1 million in revenue by June 30, $40 million and 10.3 percent less than anticipated. GSA long distance came out slightly ahead of its projected June 30 revenues, making $548.7 million, which is $12.7 million and 2.4 percent more than anticipated.

GSA sources said a reserve fund meant to ease agencies' transition to Networx, GSA's next-generation governmentwide telecom contract, is not being drained to pay for FTS losses.

In contrast to the FTS side of GSA, the Federal Supply Service is producing a surplus of revenue, although an agency analysis stated that the main reason is aggressive cost-cutting measures. FSS carried a positive balance of $99.1 million, $25.7 more than anticipated as of June 30, the data indicated. FSS includes IT Schedule 70, which by the end of June, had racked up more than $13 billion in sales.

GSA has tried without success for more than a year to combine the FTS and FSS funds as part of a merger of the two operations into the Federal Acquisition Service. The most recent roadblock was a hold by Sen. James Jeffords, I-Vt., which he placed in June in connection with a bill he sponsored aimed at improving environmental efficiency in the federal government.

The drastically different financial pictures at the two organizations provide an argument against consolidation, Fox said. Were the two funds to be combined, GSA could prop up its unhealthy FTS businesses with FSS-earned surpluses, he said. FTS "will be insolvent for years to come," he added. A merger of the two funds would "hide a serious problem for as long as it can be hidden."

The data also showed that cost cutting at the GSA corporate level has not gone far enough, said John Okay, a former assistant FTS commissioner and now a Topside Consulting partner. For example, FTS corporate expenses as of June 30 were $32.4 million, 13 percent higher than the anticipated $28.5 million. "People in [the] central office are not doing their part to contribute," Okay said.