District of Columbia: Status of Sports Arena Project (Letter Report,
09/15/94, GAO/AIMD-94-192).

The District of Columbia has proposed building a sports arena to spur
economic development in the city's downtown. The proposal to build the
arena is in the early stages of development. The District will need more
information on the project before precise cost and benefit projections
can be made. The most recent arena proposal suggests that the project
should be able to generate enough revenue to cover known expenses;
however, several unanswered questions could significantly affect the
project. The arena's construction costs are very tentative--the project
does not yet have a formal feasibility study, an environmental impact
study, or an architectural and engineering design. Current cost
projections also do not include needed infrastructure changes and total
land costs. Also unclear are the costs to the District for police, who
would be needed for traffic control and security in the area, and the
specific relationships between the operating entities and the District.
For example, it is unclear what impact that sustained losses by the
arena would have on the District. The arena would be financed through
revenue bonds backed by specific District taxes. The District's high
debt level makes the use of general obligation bonds to finance this
project unlikely. The District has outlined the next steps that will
need to be taken to answer the various questions. One key step will be
authorizing contracts for various studies. These studies will better
define the project and allow the District to specifically assess the
project's costs and benefits.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-192
     TITLE:  District of Columbia: Status of Sports Arena Project
      DATE:  09/15/94
   SUBJECT:  Future budget projections
             Cost analysis
             Federal/state relations
             Construction costs
             Urban economic development
             Facility construction
             Convention facilities
             Sports
             Environmental impact statements
IDENTIFIER:  District of Columbia
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on the District of Columbia, House
of Representatives

September 1994

DISTRICT OF COLUMBIA - STATUS OF
SPORTS ARENA PROJECT

GAO/AIMD-94-192

District of Columbia's Sports Arena Project


Abbreviations
=============================================================== ABBREV

  NCDC - National Capital Development Corporation
  RLA - Redevelopment Land Agency

Letter
=============================================================== LETTER


B-257550

September 15, 1994

The Honorable Fortney H.  (Pete) Stark
Chairman, Committee on the District of Columbia
House of Representatives

Dear Mr.  Chairman: 

This report responds to your August 5, 1994, request that we provide
information on a proposal to build a sports arena in the District of
Columbia.  Specifically, this report describes the status of the
project and discusses the cost, benefit, and financing data contained
in the proposal. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The District of Columbia has proposed building a sports arena to
generate economic development for the District's downtown.  Although
the Congress is not required to specifically approve the project, the
District has proposed that financing for the project be arranged in
part by a recently authorized corporate instrumentality (enterprise). 
This enterprise would issue revenue bonds backed by the pledge of
specific taxes.  Such financing would require changes to the District
of Columbia Self-Government and Governmental Reorganization Act (Home
Rule Act).\1 H.R.  4888 would amend the Home Rule Act to authorize
this type of financing. 

The District is proposing to build a 23,000 seat, state-of-the-art
sports arena in the downtown area of the city at a site commonly
referred to as Gallery Place.  The total cost of the arena is
estimated to be about $200 million, and it is expected to be
completed in September 1997.  Most of the funding for the arena is
expected to be provided by revenue bonds issued by the newly created
Sports Commission\2 and backed by a new gross receipts tax assessed
on District businesses (also known as the Arena Tax), and by project
bonds issued by the National Capital Development Corporation (NCDC)
backed by non-tax revenue generated by the arena and a pledge of
additional revenue by the owner of the Washington Bullets and
Washington Capitals (franchises).  The arena would be owned by NCDC
on land leased from the District or the District's Redevelopment Land
Agency.  The feasibility of developing and constructing the arena
hinges on the owner of the franchises agreeing to designate the new
arena as the home facility of the franchises on a long-term basis. 

The Home Rule Act confers limited autonomy to the District over its
local affairs and also provides for congressional oversight.  The
District is authorized by the Home Rule Act to issue long-term debt
in the form of either general obligation bonds or revenue bonds.  The
District can issue general obligation bonds to finance capital
projects or refinance existing debt.  General obligation bonds are
backed by the full faith and credit of the District including any
special tax levied to pay the principal and interest of any general
obligation bonds.  The District is authorized to create a security
interest in any District revenues as additional security for payment
of the general obligation bonds.  The Home Rule Act limits the amount
of general obligation debt.  Specifically, general obligation bond
issuances are not permitted if total debt service in the fiscal year
exceeds 14 percent.  As of August 1, 1994, this debt service percent
was 11.4 percent. 

The District can also issue revenue bonds, notes, or other
obligations to finance or refinance undertakings in certain areas. 
Such revenue obligations are not general obligations of the District
nor can they be backed by the full faith and credit or the taxing
power of the District.  Instead, they are payable from earnings of
the respective projects and may be secured by mortgages on real
property or creation of a security interest in other assets.  The
amount of revenue bonds that the District may issue is not limited by
the Home Rule Act. 

The District is proposing to finance the construction of the sports
arena by authorizing a District enterprise (the Sports Commission) to
issue revenue bonds that would include as security a pledge of
dedicated taxes.  This proposed method of financing requires amending
the Home Rule Act.  Thus the District is seeking an amendment to the
Home Rule Act to authorize the Sports Commission to issue revenue
bonds backed by dedicated taxes to finance part of the cost of
constructing the sports arena.  H.R.  4888 would authorize the
District (1) to issue such revenue bonds, and (2) to delegate
authority to District enterprises to issue the bonds and to collect
and expend the dedicated tax revenues. 


--------------------
\1 Public Law 93-198, 87 Stat.  744 (1973). 

\2 The Sports Commission was created by the Omnibus Sports
Consolidation Act of 1994, DC Act 10-265, signed by the Mayor on June
30, 1994 (Act 10-265:  41 DCR 4636). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

To develop information for this report, we analyzed studies that were
prepared by consultants for the project.  However, we did not
independently validate information in these studies because the
proposal was very tentative and we were requested to complete our
analysis in a short time frame.  We contacted the consultant who
prepared the economic projections.  We also held discussions with
various consultants who were involved in similar projects in other
jurisdictions.  We met with District of Columbia officials in the
Mayor's Office, Office of Financial Management, and the Department of
Finance and Revenue, and analyzed District information on the
project.  We also met with staff of the Council of the District of
Columbia.  We met with and obtained information from officials of the
National Capital Development Corporation.  We obtained information
and discussed general financing arrangements with the National
Association of State Treasurers, Standard and Poor's, and Moody's
Investor's Service.  We did our work in August and September 1994, in
accordance with generally accepted government auditing standards. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :3

The proposal to build a sports arena is in the early stages of
development.  The District will need additional information on the
project before more precise cost and benefit projections can be made. 
As a result, certain revenue, expense, and economic benefit
projections in current proposals could be significantly affected by
additional information as the development process progresses.  Based
on the experiences of other jurisdictions, the level of detail
contained in the District's sports arena project proposal is fairly
typical for a project at this stage of development. 

The most recent sports arena proposal indicates that the project
should be able to generate sufficient direct revenue to cover
currently known expenses; however, a number of unanswered questions
could significantly affect the projection.  The construction costs of
the sports arena are very tentative--the project does not yet have a
formal feasibility study, an environmental impact study, or an
architectural and engineering design, all of which will more
specifically define project costs and time frames and better quantify
project benefits.  The current cost projections also do not include
needed infrastructure changes or the cost of all the land that may be
required.  Unanswered questions involving operations include the cost
to the District for police, who would be needed for traffic control
and security in the area, and the specific relationships between the
operating entities and the District.  For example, it is unclear what
impact, if any, sustained losses by NCDC would have on the District. 

The proposed financing for the project involves revenue bonds backed
by specific District taxes.  Although this type of financing is new
to the District of Columbia, such financing is routinely used for
similar projects in other jurisdictions.  The District's high level
of general obligation debt makes using general obligation bonds to
finance this project and needed capital improvements to other
District programs unlikely.  As with the costs and benefits, further
development of the project will be needed before detailed financing
arrangements can be identified. 

The District has outlined the next steps that need to be taken to
provide answers to the various questions.  Following these steps
should put the District in a position to make key decisions about how
or whether to proceed with this project.  One key step will be
authorizing contracts for various studies.  These studies will better
define the project and allow the District to specifically assess the
costs and benefits of the project. 


   PROPOSED COSTS AND BENEFITS OF
   THE PROJECT
------------------------------------------------------------ Letter :4

Recent studies and other information developed by the District
indicate that projected revenues will exceed currently known
projected expenses for the sports arena.  However, unanswered
questions on both the cost and operations of the facility will affect
the projection.  For instance, a formal feasibility study, an
environmental impact study, and an architectural and engineering
study need to be completed, and certain operating expenses need to be
defined to better identify the economics of the project. 

The District's current initiative to build a sports arena began when
the President of the Federal City Council\3 alerted the city that the
owner of the Washington Bullets and Washington Capitals was
considering relocating the franchises and was interested in a
downtown location.  The Federal City Council joined with the D.C. 
Chamber of Commerce to create NCDC, a nonprofit civic organization. 
NCDC was formed to negotiate a deal to relocate the franchises from
their current location outside of the District to a new downtown
arena. 

District officials believe the new downtown sports arena will benefit
the District because it will (1) have a positive economic impact on
the area surrounding the arena, as well as the District as a whole,
which would contribute to the continued revitalization of downtown,
(2) generate jobs for the District, (3) expand the District's tax
base, and (4) foster a sense of civic pride among District residents. 

Under an agreement negotiated with the franchises' owner, NCDC would
build and own the arena and oversee its operations.  NCDC and the
District's Sports Commission would issue bonds to help finance the
arena.  NCDC would issue project bonds backed by arena revenues and
the Sports Commission would issue revenue bonds backed by dedicated
taxes.  The franchises' owner would operate the arena under contract
for a term concurrent with the franchises' leases. 

Under the current proposal, the District will (1) provide most of the
land required for the project, (2) exempt the arena from real
property taxes, (3) provide a portion of the financing for the
development and construction of the arena, and (4) establish a Sports
Commission to consolidate the District's efforts in promoting,
managing, and coordinating sporting events. 

The current proposal outlines the expected revenues and expenses of
NCDC as owner of the arena.  Any excess revenues over expenses are to
be provided to the District to cover the lease payment on land owned
by the District.  The proposal does not indicate who would cover
potential NCDC losses.  Table 1 shows NCDC's projected revenues and
expenses in the first year of operation. 

NCDC hired the public accounting firm of Coopers & Lybrand to assist
them in developing preliminary estimates of costs and benefits.  In
addition, the District hired Sportscorp, Ltd., (a sports facilities
development consulting firm based in Chicago) to analyze Coopers &
Lybrand's initial estimates and to develop additional information. 



                           Table 1
           
            NCDC First Year Projected Revenues and
                           Expenses

                    (Dollars in thousands)

                                                      Amount
--------------------------------------------------  --------
Revenues
Rent from franchises' owner                           $3,500
Percentage of executive suites revenue                 3,100
Percentage of club seats revenue                       3,500
Naming rights annual fee                               1,000
============================================================
Total revenues                                        11,100
Expenses
Project bonds debt service                             8,800
NCDC operating expenses                                  700
Capital replacement fund                                 400
============================================================
Total expenses                                         9,900
============================================================
Net Revenues (Land Lease Payment $ to District)\a      1,200
------------------------------------------------------------
Note:  These are tentative estimates based on information available
in August 1994 and could change substantially. 

\a The amount of the land lease payment to the District is based on
the net revenue of NCDC in a fiscal year and therefore may vary. 

Source:  National Capital Development Corporation

Economic justification proposals from these consultants, NCDC, and
other information from the District indicate that the District can
expect to realize sufficient revenues to cover the annual debt
service on the revenue bonds backed by dedicated taxes.\4 While the
justifications vary, even the most conservative estimate shows a net
gain to the District.  Table 2 shows the estimated District annual
revenues and expenses that will be generated from the sports arena
from 1995 to 2002. 



                                     Table 2
                     
                     Projected District Revenues and Expenses
                                 of Sports Arena

                              (Dollars in thousands)

                    1995    1996    1997    1998    1999    2000    2001    2002
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Revenues
Arena Tax\a       $10,00  $10,00  $10,00  $10,00  $10,00  $10,00  $10,00  $10,00
                       0       0       0       0       0       0       0       0
Direct tax                                 4,762   4,929   5,101   5,280   5,465
 revenues
Debt service                 583     583     583     583     583     583     583
 fund interest
Preconstruction            6,000
 cost
 reimbursement
Land lease                                 1,119   1,350   1,589   1,836   2,093
 payment
================================================================================
Total revenues    10,000  16,583  10,583  16,464  16,862  17,273  17,700  18,141
Expenditures
Debt service               9,641   9,641   9,641   9,641   9,641   9,641   9,641
Debt service               9,700
 reserve\b
Preconstruction    6,000
 costs
Employee                     500
 Relocation\c
================================================================================
Total expenses     6,000  19,841   9,641   9,641   9,641   9,641   9,641   9,641
================================================================================
Net Revenues      $4,000  ($3,25    $942  $6,823  $7,221  $7,632  $8,059  $8,500
                              8)
--------------------------------------------------------------------------------
Note:  These are tentative estimates based on information available
in August 1994 and could change substantially. 

\a The specific amount of the Arena Tax that will be collected is
unknown.  Originally, the District estimated that annual collections
would be $31 million.  However, actual collections of a similarly
based tax have been less than expected.  This estimate is based on
information from the District's Department of Finance and Revenue. 

\b Debt reserves are frequently required by bond underwriters.  The
amount is based on the likelihood of the collection of the tax
revenues that are backing the bond.  Given the uncertainty of the
Arena Tax collections, this amount could be increased substantially. 

\c These are costs to relocate District agencies currently located in
buildings on G Street between 6th and 7th Streets.  Additional
continuing costs could be incurred if new office space for these
employees costs more than the current office space. 

Source:  This table is based on information from a July 27, 1994,
analysis by Sportscorp, Ltd, which used assumptions from NCDC and
Coopers & Lybrand.  In addition, we added the District's most current
estimates of the revenues from the new Arena Tax to the analysis. 

The arena proposal also outlines a number of indirect economic
benefits that could accrue to the District.  These benefits include
indirect tax benefits of $3.1 million in 1998 to $8.4 million in
2027, the creation of 500 jobs during the construction phase, and the
creation of an additional 540 jobs annually from arena operations. 
In total, the studies estimated the net present value of economic
benefits to the District over 30 years to be from $70 million to $130
million. 

Although the arena proposal forecasts benefits, a number of unknown
costs and factors could affect this projection.  For example, unknown
construction-related costs include the cost of additional land
needed, utility relocation expenses, and demolition costs.  Various
infrastructure cost improvements are also unknown, such as the costs
associated with METRO access and the cost of rerouting G Street.  The
costs of security and traffic control are also unknown.  The land
lease payment that the District is to receive from NCDC is based on
net NCDC revenues.  If there are no net revenues, the District would
receive nothing for the land lease.  In addition, the specific
relationship among the entities involved--NCDC, the Sports
Commission, and the District--has not been spelled out.  Finally, the
role of the District in exercising oversight and control over NCDC is
also unknown. 


--------------------
\3 The Federal City Council, a nonprofit organization that carries
out activities designed to improve Washington, D.C, is composed of
and financed by business, professional, educational, and civic
leaders. 

\4 The District, as used here, refers to both the District and the
Sports Commission.  The Sports Commission would issue the revenue
bonds backed by dedicated taxes and pay the debt service on the
bonds.  Other tax revenues would be generated for the District's
general fund as a direct result of the sports arena. 


   PROPOSED FINANCING ARRANGEMENTS
------------------------------------------------------------ Letter :5

The District currently plans to use revenue bonds backed by dedicated
taxes to partially finance the sports arena.  These bonds will not be
backed by the full faith and credit of the District.\5 Such financing
is commonly used in other jurisdictions.  Forty-nine states allow
this type of financing.  Moreover, many recently developed sports
arenas were financed by bonds backed by dedicated taxes.  For
example, although financing arrangements varied substantially, sport
arenas in Cleveland and Phoenix were financed in part with bonds
backed by dedicated taxes. 

Another method of financing these types of projects involves using
general obligation bonds backed by the full faith and credit of the
jurisdiction.  Although the District theoretically could use general
obligation bonds for this project, its current high level of general
obligation debt, when added to additional debt to finance the arena,
would approach its general obligation debt limit and, according to
District officials, could affect its general obligation bond rating. 

The District Home Rule Act specifies that general obligation bond
issuances are not permitted if total debt service in any fiscal year
exceeds 14 percent of the District's revenues.  As of August 1, 1994,
the District had $3.65 billion in long-term general obligation debt. 
The District projects that with additional planned capital borrowing
of $250 million annually from fiscal years 1995 through 1998 and $190
million annually in fiscal years 1999 and 2000, the District's debt
service will climb to 13.0 percent of revenues by fiscal year 2000
even without the additional debt associated with the arena.  Based on
estimates of revenue and planned capital project borrowing, the
District estimates that the debt service percent would be 13.2
percent in fiscal year 2000 if it uses general obligation debt
instead of the planned revenue bond backed by dedicated taxes. 
District officials said that this high level of debt could affect its
general obligation debt rating. 

A critical component of financing costs involves the level of risk
associated with the bond.  Higher risk bonds generally have higher
interest rates, may require insurance, or may require the issuer to
set up large debt service reserves.  Officials at bond rating
agencies have indicated that a number of factors are important in
their assessment of bonds backed by specific revenues.  First, if the
bond is backed by a tax, the collection history of the tax is
important.  Bonds backed by taxes with a solid collection history are
less risky than new or unproven taxes.  Second, the tax backing for a
bond is less risky if it is assessed on a broader range of goods,
services, or population.  Third, revenue streams that have some
legislative risk (that is, revenues based on an appropriation) make
the bond higher risk.  Finally, the general economic strength of the
area is critical to the bond assessment. 

The current plan calls for the use of two different types of bonds to
finance the sports arena--an $80 million project bond and a $92
million revenue bond backed by dedicated taxes.  The project bond
would be issued by NCDC and would be backed by arena revenue and a
$7.3 million pledge from the operator of the arena.  NCDC would pay
the estimated $8.8 million annual debt service with revenues from the
arena.  A change of 1 percent in the interest rate would change the
annual debt service by about $700,000.  The other bond would be
issued by the new Sports Commission.  The bonds will be a $92 million
revenue bond backed by the Arena Tax and would have an estimated
annual debt service of $9.6 million. 

The planned Arena Tax is similar to the current one-time Public
Safety Fee that is to be collected in fiscal year 1994.\6 The
District originally estimated that the Public Safety Fee would raise
a total of $34 million and the Arena Tax would raise $31 million. 
The District estimated that $25 million of the $34 million Public
Safety Fee would be collected by September 30, 1994.  However, as of
September 1, 1994 collections of the Public Safety Fee totalled just
$10 million.  On the basis of that experience, District officials now
estimate that the original Arena Tax projections could be too high. 
Although Arena Tax collections should be sufficient to cover the
bond's debt service, the uncertain collection future of the tax may
require the District to pledge additional taxes or other security to
back the bonds, or require the District to substitute another
existing tax with a better collection history for the Arena Tax.  As
noted in table 2, the uncertain collection history of the Arena Tax
could also require the District to establish a larger debt reserve. 
These factors add to the list of uncertainties regarding the sports
arena. 


--------------------
\5 The District intends to limit its liability to the taxes pledged
to the bonds by not pledging its full faith and credit to payment of
the bonds. 

\6 The Public Safety Fee is a gross receipts tax on all profit and
nonprofit organizations.  Nonprofit organizations would not be
assessed the Arena Tax. 


   NEXT STEPS TO BE TAKEN BY THE
   DISTRICT
------------------------------------------------------------ Letter :6

The District needs additional information on the sports arena project
before more accurate cost and benefit projections can be made.  The
project needs a formal feasibility study, an environmental impact
assessment, and an architectural and engineering design to further
define the proposal.  Such studies are typically needed before bonds
can be authorized. 

Consultants involved in the sports arena and other officials familiar
with similar projects in other jurisdictions that we met with said
that firm costs and benefits of projects are often not determined
until environmental impact and architectural and engineering studies
are completed.  These officials pointed out that the level of detail
contained in the proposal for the sports arena project is fairly
typical for projects at this stage of development. 

These officials also noted that jurisdictions typically need to spend
resources prior to obtaining project bond revenue to fund up-front
costs.  For example, such costs for one jurisdiction's arena came
from an infrastructure budget, while another jurisdiction used a
variety of funding sources, including a parking fund, a state grant,
a low interest State loan, and mass transit funds, for their up-front
costs.  The officials also pointed out that these up-front funding
sources are frequently repaid with the project bond proceeds. 

The District plans to begin collecting the Arena Tax for the sports
arena in January 1995 and anticipates using this revenue for up-front
costs.  However, even though the taxes will be collected, they cannot
be spent without a congressional appropriation or amendments to the
Home Rule Act (such as those in H.R.  4888).  The District estimated
they needed to spend from $5 million to $8 million for studies and
other items for the sports arena prior to obtaining revenue from the
proposed bonds.  District officials said this estimate included $2.5
to $4.5 million for design and engineering, $1.5 to $2.0 million for
special studies (such as environmental, traffic and transportation),
and $1.0 to $1.5 million for project structuring and feasibility
work. 

The District has laid out timetables to complete the numerous steps
necessary to implement the project.  Some of the key steps are
outlined in figure 1.  Following these steps should put the District
in a position to make key decisions about how or whether to proceed
with the project. 

   Figure 1:  Timeline for
   Completion of the Sports Arena

   (See figure in printed
   edition.)

Source:  District of Columbia Government


---------------------------------------------------------- Letter :6.1

As you requested, we did not obtain official comments from District
of Columbia officials on this report.  We did, however, discuss the
report's contents with District officials, who agreed with the facts
presented. 

We are sending copies of this report to the Mayor of the District of
Columbia, the Chairman of the City Council, and other interested
parties.  Copies will also be made available to others upon request. 

Please contact me at (202) 512-8549 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix I. 

Sincerely yours,

John W.  Hill, Jr.
Director, Audit Support and Analysis


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

Edward H.  Stephenson, Assistant Director
Don R.  Neff, Audit Manager
Laura B.  Triggs, Audit Manager


   OFFICE OF GENERAL COUNSEL
--------------------------------------------------------- Appendix I:2

Richard T.  Cambosos, Senior Attorney
