Statement of Peter Sepp, Vice President for Communications
National Taxpayers Union before the Subcommittee on Transportation and Infrastructure
United States Senate Committee on Environment and Public Works
on the Proposed Patent and Trademark Office Relocation
September 23, 1998

Mr. Chairman, on behalf of the 300,000 members of the National Taxpayers Union, I am deeply grateful for the opportunity you given my organization to testify before the Committee today on our concerns surrounding the proposed Patent and Trademark Office (PTO) relocation. By holding these hearings, you have once again demonstrated your interest in seeing federal funds expended in the most fiscally responsible matter possible. Taxpayers across the country are most appreciative that you, Mr. Chairman, and the Members of this Committee have taken the time to give this issue additional exploration.

Introduction

Because of the tendency of policy to become mired in polemics, I am compelled to make one statement from the very beginning. National Taxpayers Union comes here today without any financial ties to any party with a direct interest in the PTO relocation.

While we are convinced that a reasonable upgrade of PTO's present leased facilities in Crystal City would be the most frugal and responsible of the current alternatives, we could also support additional options in other states, as well as the choice of building rather than leasing - should further study prove any of these courses to be more cost-effective.

Our only interest in this debate is to ensure the wise expenditure of federal dollars, and that the long-term interests of taxpayers are protected. Since its founding in 1969, National Taxpayers Union has analyzed and opposed numerous federal public works projects, including the Tennessee-Tombigbee Waterway, the Westway Highway, the Ronald Reagan International Trade Center, as well as wasteful courthouse spending.

In deciding to oppose the current PTO relocation plan, members of our staff were (ironically) reminded of Ronald Reagan's stirring plea, "If not us, who? If not now, when?" Although some in the Administration have claimed that PTO's plans will not affect taxpayers at large, and that the reasoning behind the plan is fiscally sound, we have come to a far different conclusion.

Why PTO Concerns Every Taxpayer - and National Taxpayers Union

Throughout this debate, PTO officials have insisted that the entire $1.3 billion lease and relocation will be "paid for by patent fees rather than general revenues from the taxpaying general public. This argument falls short in a number of respects.

1) PTO customers are indeed taxpayers.

Part of our organization's mission is to represent the concerns of all taxpayers, whether they are families, businesses, or small inventors. Our philosophy is grounded in the simple fact that every American is affected by the tax burden on his or her fellow citizens. Higher corporation income taxes, for example, are often passed along to the consumer in the form of higher prices on goods and services. Economists recognize that ultimately it is the worker who bears the "employer's share" of the payroll tax, in the form of lost wages the employer could have paid without the tax-induced overhead.

2) While we support government "user fees" to cover the cost of specific services provided to certain customers, this concept. taken to its extreme. can inflict the same sort of damage that taxes often do.

Patent fees, if levied to excess, could become a confiscatory "tax on innovation" that could very well discourage some of our nation's most important assets - small inventors - from fully contributing towards our robust private sector.

It is no secret that small businesses and entrepreneurs provide the fuel that keeps our economic engine running faster and better than most other nations in the race for economic vitality. Any policy that obstructs the flow of this fuel, however minor, can have a major impact elsewhere. If patent fees were to increase by even several hundred dollars, how many inventors would think twice about bringing their creations to market? How many links in the chain of minor discoveries that lead to major technological breakthroughs would be broken? How much would our nation's economic growth rate decline due to chances that could have been taken but weren't, opportunity costs?

Since I am not an economist by profession, I freely admit that I am not qualified to make such an estimate. But is it truly worth the risk to our economy to find out how much the fragile market of intellectual property will bear in government intrusion, after the damage has already been done? We would argue that such a risk is too great to justify a relocation that is ill-considered in the first place.

3) The federal government's historical financial management problems have frequently confounded the best-laid plans.

The Savings and Loan Industry, for example, poured billions of dollars in fees to the federal government's regulatory coffers. In the end, however, those fees did not come close to the tens of billions in general revenue spending that were required to bail out S&Ls in the 1980s and 1990s. The government's own pension system, designed to share costs through significant employee contributions to the plan, continues to rack up an unfunded taxpayer liability that has exceeded $1 trillion.

What are the chances that PTO's fee structure could go similarly awry, and leave taxpayers with a significant liability? As each day passes in this Congress, such a threat grows nearer. Legislative language authorizing new PTO fee increases is buried in a controversial bill providing for the Office's eventual privatization. If this bill fails, PTO's planned funding stream could be jeopardized, leaving lawmakers to siphon money from general revenue sources.

Moreover, PTO's existing fee structure reportedly contributes over $100 million per year towards reducing the federal deficit. If this structure is renewed and these revenues are simply shifted to pay for the PTO relocation, the federal budget surplus available to cut taxes will shrink, thus reducing potential tax relief for all Americans.

On the spending side, federal public works projects have long run into fiscal pitfalls that ensnare taxpayers. The recently christened Ronald Reagan Building experienced cost overruns exceeding 200 percent. Before Congress terminated the project, the Superconducting Super Collider's price tag had risen by a well over 50 percent. From roads to courthouses to scientific research facilities, an all-too-familiar pattern has emerged. Optimistic spending projections give way to spiraling price tags as the projects are constructed. leaving Members of Congress with the flimsy excuse to their constituents that "too much has been spent to pull the plug now." Congress throws good money after bad, leaving taxpayers to make up the difference between fiscal fantasy and hard reality.

4) Even more important than past history are the future consequences that PTO's plan may have on other federal projects.

The PTO relocation has been properly billed as one of the largest federal construction undertakings of this century. The lessons learned, or not learned, from this project will have a tremendous impact on every subsequent initiative that addresses federal office space. To name just one agency, the Department of Transportation is currently considering its future office needs and options. Such a facility, whether remodeled or relocated, leased or owned, will without a doubt be paid for largely through general revenues. Each and every American taxpayer will therefore have a direct stake in ensuring that PTO's relocation serves as a fiscally responsible model for the federal government to follow in all of its future blueprints.

Specific Problems with PTO's Plan

Having explained National Taxpayers Union's significant interest in the PTO relocation proposal, I shall now expand upon our greatest areas of concern. These points are based on our observation of federal building and procurement policies from the taxpayer's perspective, rather than the technical viewpoint of a civil engineer or administrator.

1) The PTO buildings could set new records for extravagance.

"Interior build-out costs" - the price we pay for making the empty new building into a useable office - could, on a square foot basis, be more than double the standard rate for the rest of the federal government. It's not hard to see why, given the project's lavish granite, hardwood and marble surfacing materials. Other amenities include exercise facilities and trails, in-house cafeterias, expensive decor such as fountains and sculptures, and open-air amphitheaters.

The Commerce Department argues that many of these amenities, including "park~ like settings," already exist at its present complex. Absent from this explanation is whether or not additional amenities should be built just because they can be provided under the existing cap. No one would suggest that a U.S. government building with an important mission should look like a Soviet-style blockhouse. But is a "Taj Mahal" the only alternative? Taxpayers and PTO customers seem to believe that a more appropriate balance between form and function, often found in many private sector buildings, can apply here.

2) The federal government would spend at least $1.3 billion to lease. not own. this facility.

Members of the Committee will no doubt recall the Ronald Reagan Building, the over-budget, behind schedule facility that made embarrassing headlines throughout the eighties and nineties as a "White Elephant." Even this palatial pachyderm cost about half as much to build for the same amount of space as the PTO complex - and it's built to last for 200 years, not just for a proposed 20-year lease.

PTO has long argued that a leasing option is more cost-efficient than renovating existing space. But this argument is becoming less and less compelling.

A detailed examination of PTO's blueprint seems to suggest that earlier cost analyses were biased towards a predetermined conclusion - that a new facility was the goal of top PTO officials in the first place. For example, the Deva & Associates report comparing relocation versus renovation assumes that many features of the new buildings would have to be grafted onto a remodeled space. This methodology reduces many issues to absurdity. Perfectly functional restrooms in the existing facilities are assumed to be physically uprooted in order to comply with new specifications that offices must be within 200 feet of a restroom. Elevators may be retro-fitted in a similar fashion.

I would contend that any plan with such contortions is likely to conclude that a new building is a better option. What it will not determine is whether such needs were realistic to begin with. In the Deva study, add-on cafeterias and pantries (the present site is within one mile of dozens of restaurants), day care centers, state-of-the-art fitness centers, and health care facilities have all been "deemed essential" by PTO. Their costs are added on to the present site for comparison purposes. Taxpayers and customers may have a different idea of what is "essential" for PTO facilities to serve their functions.

In addition, the September 17, 1998 Economic Review of a Potential Relocation of the Patent and Trademark Office, prepared by Arthur Andersen, strongly supports our contention that the proposed move may not be the most cost-effective choice. After study of both the Jefferson Solutions and the Deva & Associates reports, Arthur Andersen concluded:

Deva's key assumptions significantly understate the costs of a PTO relocation.

Using prudent assumptions and accounting for some of the risks noted ... results in a $121 million reversal in the Deva result, from a $72.4 million savings if PTO relocates to a cost increase of $47.7 million if PTO relocates.

Overall, the proposed PTO relocation project encompasses significant risk and would result in higher occupancy costs for the PTO.

The $1.6 billion PTO relocation would be one of the most expensive and complex federal programs ever - the Ronald Reagan Building and Portals projects demonstrate the adverse impact that unforeseen events can have on the cost and timing of huge federal projects.

The risks associated with remaining in and improving existing facilities are considerably less.

Thus, Jefferson Solutions' conclusion that the proposed relocation would result in lower direct lease costs to PTO is incorrect.

Based on the data presented in the report, a PTO relocation from its existing space to a consolidated facility would, in fact, result in higher direct lease costs.

3) The price of moving PTO ought to be able to buy a whole new building.

PTO's costs just for relocating into the new headquarters could run more than $130 million. One proposed moving plan would purchase $65 million in brand new furniture, with price tags often higher than those found in the poshest Beverly Hills boutiques: $250 shower curtains, $750 cribs, $309 ash cans, $562 stools, and $1,000 coat racks. Such outrageous proposals are perfect grist for radio talk show hosts.

PTO Commissioner Bruce Lehman recently told ABC news that these plans were "absurd" and "we're not going to do that." Such assurances are somewhat comforting, but taxpayers may be forgiven for remembering previous spending boondoggles on other projects that were supposedly cost-controlled:

Taxpayers shelled out $218 million for a courthouse in Boston, MA, including $1.5 million for a Marina and $100,000 for a spiral staircase for judges and their staffs. This was in addition to a $370,000 elevator system already reserved for judges connecting the same floors.

After agreeing to pay some $6 million to construct and lease Louisiana's George Arceneaux courthouse, the federal government held only two trials in the facility during its first three years of operation.

Pennsylvania's Delaware Water Gap National Recreation Area recently came under scrutiny for an outhouse that sported a $78 per-gallon paint job, a foundation with 29-inch thick walls, and a slate-gabled roof. After government auditors decried media reports that the project cost some $445,000, their own subsequent investigation discovered that the price tag was nearly twice as high.

Furthermore, PTO's explanation that the costs represented a"worst-case scenario" from a "consultant's study" are puzzling. If such costs appeared in an official proposal prepared for a private-sector firm seeking to relocate, would they not also raise eyebrows among accountants - and shareholders --concerned with the bottom line? Would they not raise questions about the judgment of those who would retain such a consultant and publish such a report? Business leaders may have their perks, but good public relations dictate limits to these practices.

4) The government's own waste-watchers are waving red flags over PTO.

Just six months ago, the Commerce Department's own Inspector General issued a comprehensive 44-page report concluding that the PTO plan is "flawed because the lease development project lacks a defined cost ceiling." The IG ominously warned, "PTO's build-out process needlessly exposes the government to increased cost risk." If the past is prologue the risk is real indeed. For eight months in 1997, PTO mistakenly paid $1.5 million to rent 73,000 square feet of space that was later determined to be vacant.

Furthermore, analysis of the General Services Administration's Draft Impact Statement shows that environmental clean-up costs of possible PTO relocation sites could be as high as $194 million - some may contain carcinogens or even unexploded ordnance. And these costs are based only on limited investigations of the sites. Who knows what else could be lurking beneath the soil?

5) Many employees and customers oppose the move.

An impartial survey taken by the Patent Office Professional Association found that by a 3 to 1 margin, PTO employees represented by the association oppose the move to a new complex. Meanwhile, even high-profile inventors like Ross Perot are calling on Congress to stop the tax on innovation that this costly building will cause. When both the workers and the customers are saying 'No to PTO,' lawmakers should listen more carefully.

Conclusion

Recently, the Senate narrowly voted down an amendment to the Commerce/State/Justice Appropriations Bill from Sen. John McCain (R-AZ) that would have prompted serious reexamination of the PTO project. Although an amendment sponsored by Sen. Sam Brownback (R-KS) and Jim Inhofe (R-OK) to establish tighter cost controls on the PTO proposal did prevail, a wholesale reconsideration of the flawed project is still in order.

All too often, wasteful or low-priority spending projects are completed because Congress lacks either sufficient notice or the political will to stop the wheels of bureaucracy before they grind up our wallets. In the case of the new PTO facilities, however, Congress has adequate warning before any serious fiscal damage has been done. Unlike Nero's "Oedipus complex," Washington's "edifice complex" can be cured without costly therapy. All it takes is a little dose of common sense.

Once again, I thank you, Mr. Chairman, and the Committee for your generous and thoughtful deliberation of this critical policy matter.