Denver International Airport: Information on Selected Financial Issues
(Letter Report, 09/18/95, GAO/AIMD-95-230).

Pursuant to a congressional request, GAO reviewed selected financial
issues relating to the Denver International Airport (DIA), focusing on:
(1) DIA construction cost growth; (2) differences between the DIA
financial consultant's report and audited financial statements relating
to the Denver Airport System's bond debt; and (3) Securities and
Exchange Commission (SEC) jurisdiction over municipal bonds and the
status and scope of its DIA investigation.

GAO found that: (1) DIA construction costs increased from an estimated
$2.08 billion in May 1990 to $3.004 billion in February 1995; (2) the
cost increases were due to changes in the scope of DIA and capitalized
interest increased by $300 million due to the delay in DIA opening; (3)
the two financial reports on DIA differed mainly due to their different
purposes and the different time periods and scopes covered; (4) the
financial statements covered both DIA and the Stapleton International
Airport, while the consultant's report presented financial forecasts
only for DIA based on certain assumptions about future events; (5) the
differences in annual bond debt payments reflected the consultant's
assumption that certain bonds would be refinanced in 1995, bond
principal would be prepaid, lower interest rates would be paid on
variable rate bonds, and passenger facility charges would be used to
reduce annual debt service amounts; (6) the audited financial statements
included all airport system debts while the consultant's report included
only DIA construction bond debt; (7) municipal bonds are exempt from
securities registration requirements and civil liability provisions, but
they are subject to antifraud provisions; and (8) SEC is investigating
DIA disclosures of its baggage system issues under its antifraud
authority.

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

 REPORTNUM:  AIMD-95-230
     TITLE:  Denver International Airport: Information on Selected 
             Financial Issues
      DATE:  09/18/95
   SUBJECT:  Securities regulation
             Airports
             Construction costs
             Municipal bonds
             Fraud
             Financial statement audits
             Financial disclosure reporting
             Cost overruns
             Debt
             Jurisdictional authority
IDENTIFIER:  Denver International Airport (CO)
             Stapleton International Airport (Denver, CO)
             Adams County (CO)
             Denver (CO)
             Colorado
             
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Cover
================================================================ COVER


Report to the Honorable
Hank Brown, U.S.  Senate

September 1995

DENVER INTERNATIONAL AIRPORT -
INFORMATION ON SELECTED FINANCIAL
ISSUES

GAO/AIMD-95-230

Denver International Airport

(913720)


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

  DIA - Denver International Airport
  FAA - Federal Aviation Administration
  PFCs - passenger facility charges
  SEC - Securities and Exchange Commission
  Rule S-X - Form and content of financial statements
  Rule S-K - General disclosures in a bond prospectus

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


B-260619

September 20, 1995

The Honorable Hank Brown
United States Senate

Dear Senator Brown: 

Under construction since September 1989, the $4.8 billion Denver
International Airport (DIA) opened for business on February 28, 1995. 
At your request, we have reviewed (1) DIA construction cost growth,
(2) differences between DIA's financial consultant's report and
audited financial statements relating to Denver Airport System's bond
debt, and (3) Securities and Exchange Commission (SEC) jurisdiction
over municipal bonds and the status and scope of its DIA
investigation.  In addition, as you also requested, we plan to send
you a separate report at a later date on cash flows and operating
results from DIA operations. 

To respond to your request, we reviewed construction cost reports and
related information, we examined the financial consultant's report
and audited financial statements, and we reviewed legislation and SEC
regulations pertaining to municipal financing.  We held extensive
discussions with DIA and SEC officials on the issues presented in
this report. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Construction of DIA began in September 1989, and the first firm
construction cost estimate was $2.08 billion, reported by the City of
Denver in a May 1990 Official Statement prepared to promote the sale
of airport revenue bonds. 

Actual construction costs to the date DIA opened totaled $3.004
billion, close to $1 billion over the original estimate.  Most of the
cost increases were due to changes in the scope of the airport, such
as the addition of an automated baggage system and widening and
lengthening concourses.  In addition to the $1 billion growth in
construction costs, a 16-month delay in opening DIA due to automated
baggage system complications increased capitalized construction
interest by about $300 million. 

Comparing data presented in the September 1994 bond prospectus by
Leigh Fisher Associates, DIA's financial consultant, to audited
financial statements, raised two differences you asked us to
research.  First, annual amounts payable on bond debt for the years
1995 to 2000 were $69 million to $118 million a year lower in the
Leigh Fisher Associates report than in the financial statements. 
Second, total bond debt shown in the Leigh Fisher Associates report
was $3.464 billion, whereas audited financial statements, adjusted
for the September 1994 bond sale, reported bonds payable of $3.872
billion. 

A major reason for the differences in the two financial reports is
that the reports had different purposes and covered different time
periods and scopes.  The financial statements were audited as of
December 31, 1993, and were designed to present the financial
position at that date of the Denver Airport System (including both
DIA and Stapleton International Airport) in accordance with generally
accepted accounting principles.  The Leigh Fisher Associates report
was prepared as of August 18, 1994, and was designed to present
financial forecasts solely for DIA based on certain assumptions about
future events. 

Major differences in annual payments due on bond debt reflect Leigh
Fisher Associates' assumptions that certain bonds would be refinanced
in 1995 (which was accomplished in June 1995), principal would be
prepaid on bonds, and lower interest rates would be paid on variable
rate bonds.  In addition, estimated revenues from passenger facility
charges (PFCs) of about $40 million to $45 million a year were
subtracted from annual debt service amounts in the Leigh Fisher
Associates report, but not in the financial statements. 

For total bonds payable, the primary difference between the financial
statements and the Leigh Fisher Associates report was that the
financial statements included all debt of the airport system, while
the Leigh Fisher Associates report showed only bond debt that was
used for the DIA construction project.  Thus, the Leigh Fisher
Associates report did not include about $293 million in bonds sold in
1984 and 1985 for Stapleton International Airport improvements and
DIA land acquisition and project planning, or certain other bonds
used for purposes other than DIA construction. 

While municipal securities are exempt from the registration
requirements and civil liability provisions of the Securities Acts of
1933 and 1934, they are not exempt from the antifraud provisions of
those acts.  SEC's Rule S-X covers the form and content of financial
statements required for corporate bond issues, but does not apply to
municipal bond issues.  The SEC is currently investigating DIA's
disclosures of baggage system issues, using the Commission's
authority under the antifraud provisions. 


   BACKGROUND
------------------------------------------------------------ Letter :2

In 1988, the City of Denver agreed with Adams County to acquire a
53-square-mile site for a new airport, to be built to replace
Stapleton International Airport.  At that time, in a conceptual
estimate, the cost of the airport was set at $1.34 billion.  In May
1989, voters in Denver approved a plan to build Denver International
Airport.  Site preparation and construction began in September 1989. 
The first formal construction budget, set at $2.08 billion, was
produced in May 1990. 

Financing for DIA has included about $508 million from the Federal
Aviation Administration (FAA) in grants and facilities and equipment
funds, and about $3.8 billion in bonds sold to the public.  Since May
1990, 12 airport revenue bond sales have been completed, with the
most recent sale of $329.3 million of bonds in June 1995.  Funds from
the June 1995 sale are primarily designated for refinancing bonds
sold in 1984 and 1985.  Following the June 1995 bond sale, the City
of Denver reported senior bonds payable totaling $3.481 billion plus
subordinate\1 bonds payable totaling $300 million. 

Each bond sale for DIA has been promoted by an Official Statement
issued by the City of Denver containing details on the terms and
conditions of the bond sale, a description of the airport project,
financial and operational statistics and projections, contractual
agreements with airlines, and information on risks and litigation. 
Appended to each official statement are (1) a report of the airport
consultant, presently Leigh Fisher Associates (formerly the airport
consulting practice of KPMG Peat Marwick) and (2) audited financial
statements for the Denver Airport System, presently audited by
Deloitte & Touche LLP. 

The information in these official statements is presently the subject
of an SEC investigation and several lawsuits.  The Denver office of
the SEC is conducting an investigation to assess whether Denver made
adequate disclosures of the problems with the airport baggage system. 
In addition, five lawsuits have been filed on behalf of investors in
Denver Airport Bonds, alleging that they were not properly informed
of the risks associated with their investments. 

DIA has attracted enormous local and national media attention, much
of it focused on the various investigations that have been conducted
on the airport.  In addition to the work being done by the SEC,
several other reviews and investigations have been undertaken,
including a Federal Bureau of Investigation inquiry into contracting
practices, the Department of Transportation Inspector General's
review of the possible misapplication of airport revenues, and the
Denver District Attorney's investigations of contracting and
construction practices. 


--------------------
\1 Subordinate bonds are secured by a pledge of the net revenues of
the Denver Airport System subordinate to the pledge of net revenues
securing senior bonds. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

To determine amounts and causes of cost growth in the DIA project, we

  reviewed construction budgets and cost reports;

  interviewed officials in DIA's construction division to obtain
     explanations of reasons for certain scope changes in the
     project;

  examined change orders to construction contracts; and

  reviewed official statements issued by the City of Denver on the
     DIA project to identify disclosures made by Denver on
     construction cost increases. 

To reconcile annual debt service liabilities and total bonds payable
from audited financial statements as of December 31, 1993, to the
Leigh Fisher Associates report issued by Denver for the September
1994 bond sale, we

  reviewed these two reports in detail;

  reviewed audit workpapers prepared by Deloitte & Touche to document
     the methods they used to compute annual debt service and bonds
     payable;

  interviewed officials at DIA's finance office and obtained
     explanations of methods used in computing debt service amounts
     in the Leigh Fisher Associates report;

  held discussions with DIA's financial consultant, Leigh Fisher
     Associates, and obtained and reviewed detailed supporting
     schedules prepared by them; and

  reviewed DIA's Plan of Finance prepared by First Albany
     Corporation, DIA's bond financing consultant. 

Reconciliations of differences between the reports were prepared for
us by DIA finance officials, and we traced the details of these
reconciliations to financial records at DIA's finance office. 

To address the issue of SEC jurisdiction over municipal bonds and the
status and scope of the SEC investigation at DIA, we met with SEC
officials at SEC Headquarters in Washington, D.C., and held
discussions with SEC investigators at their Denver office.  We
reviewed testimony given by SEC's Chairman before Senate and House
Committees in January 1995 to obtain SEC's formal position relative
to its jurisdiction over the municipal bond markets.  We also
reviewed SEC's legal foundation for jurisdiction over municipal
financing and compared federal securities laws to Colorado securities
laws.  Our reviews of documentation noted above and our discussions
with officials cited are the basis for the statements made in this
report.  We did not complete an investigation or a comprehensive
audit of the information we are reporting.  Readers of this report
should be aware that investigations now under way by the SEC and
others could conceivably disclose additional details that could
conflict with information presented in this report. 

We requested comments on a draft of this report from the Director of
Aviation, Denver International Airport, of the City of Denver, who
provided us with written comments.  In his comments, reprinted in
appendix I, the Director did not disagree with the facts in this
report but provided additional rationale for why the cost of
completing the airport increased. 


   CONSTRUCTION COST GROWTH AT DIA
------------------------------------------------------------ Letter :4

The total cost of DIA is about $4.8 billion, about $3 billion of
which are construction costs incurred by the City of Denver.  Other
major cost categories are $915 million in capitalized interest; $599
million in costs of facilities paid for by airlines, FAA, and rental
car companies; and $261 million for land acquisition and project
planning. 



                                Table 1
                
                  Cost of Denver International Airport

                         (Dollars in millions)

Category                                                          Cost
------------------------------------------------------------  --------
Cost to Denver Airport System
 Construction                                                   $3,004
 Airport planning and land                                         261
 Capitalized interest                                              915
 Bond discounts                                                     43

 Total cost to Denver Airport System                             4,223
Cost to others
 FAA's facilities and equipment                                    199
 United Airlines' special facilities                               261
 Continental Airlines' special facilities                           73
 Rental car facilities                                              66

 Total cost to others                                              599
======================================================================
Total costs of Denver International Airport                     $4,822
----------------------------------------------------------------------
Source:  Based on information from the City and FAA. 

Construction costs grew from a May 1990 budget of $2.08 billion to a
total at airport opening of $3.004 billion, resulting from several
substantial scope changes in the project.  One major scope change was
the decision in 1991 to build an automated baggage system costing
about $290 million in direct construction costs, but which ultimately
delayed the opening of DIA by about 16 months.  This 16-month delay
increased capitalized interest for the project by about $300 million. 

The earliest firm cost estimate for constructing DIA, excluding land
acquisition and project planning, was $2.08 billion, and was
contained in the City's Official Statement for the May 1990 bond
issue.  In June 1991, the City entered into an agreement with United
Airlines which included, among other things, the City agreeing to
design and construct Concourse B in accordance with United's
facilities requirements.  By February 1992, the construction estimate
was up to $2.7 billion, driven up largely by the agreement with
United Airlines.  This $620 million construction cost increase
resulted from widening and lengthening concourses ($250 million); the
initial costs for the automated baggage system ($200 million); and
other changes including completion of the terminal, electronic
upgrades, apron improvements, and partial grading of a sixth runway
($170 million). 

By February 1994, DIA construction cost estimates had risen another
$220 million, raising the total to $2.92 billion.  The largest single
factor in this round of cost increases was a decision to move the
cargo area from the north side of DIA to the south side, primarily to
satisfy the demand by cargo carriers for better access to Interstate
70.  This cargo area move cost about $59 million.  The balance was
primarily for numerous airport improvements made under agreements
with United and Continental Airlines, additional airport fire and
maintenance equipment, a commuter airline fueling facility, and
upgraded lighting to conform to new FAA regulations. 

At the date of DIA's opening, February 28, 1995, construction costs
totaled $3.004 billion, about $80 million over the February 1994
amount.  This $80 million was principally for modifications to the
automated baggage system and for a back-up baggage system. 

In addition to growth in DIA construction costs, delays caused by
problems with the automated baggage system cost an additional $300
million in capitalized interest.  Capitalized interest is similar to
construction interest on a home building project.  Before ground is
broken, the borrower signs for a construction loan.  As months pass
during construction of the home, interest is charged on the
construction loan.  If a project runs over by several months,
thousands of dollars of additional interest costs are absorbed into
the cost of the home.  In the case of DIA, about $300 million was
absorbed into the cost of the project due to the 16-month delay in
opening the airport because of problems with the baggage system.  All
told, capitalized interest for the entire construction period was
$915 million. 


   RECONCILIATION OF AIRPORT BOND
   DEBT
------------------------------------------------------------ Letter :5

Your office compared data in Leigh Fisher Associates' report
supporting the September 1994 bond sale to Denver Airport System's
financial statements as of December 31, 1993, and raised two
questions.  First, annual amounts payable on bond debt were lower in
the Leigh Fisher Associates report compared to the audited financial
statements by $69 million to $118 million a year for the years 1995
through 2000.  Second, total bond debt was lower in the Leigh Fisher
Associates report ($3.464 billion), than in the audited financial
statements, adjusted for the September 1994 bond sale ($3.872
billion). 

It is important to note that these two financial reports, while
closely related, had different purposes and covered different time
periods and scopes.  The financial statements were audited as of
December 31, 1993, and were designed to present the financial
position at that date of the Denver Airport System, including both
DIA and Stapleton, in accordance with generally accepted accounting
principles.  The Leigh Fisher Associates report was prepared as of
August 18, 1994, and was designed to present financial forecasts for
1995 through 2000 for DIA based on certain assumptions about future
events. 


      ANNUAL AMOUNTS PAYABLE ON
      BOND DEBT
---------------------------------------------------------- Letter :5.1

Annual debt service requirements in the audited financial statements
were based on the legal liabilities that existed on each of Denver's
bond issues at the financial statement date.  Annual debt service
amounts, $69 million to $118 million a year lower, were reported in
the Leigh Fisher Associates report based on certain assumptions about
future events including (1) successful refinancing of the 1984/85
bonds, (2) prepayment of certain bonds with the proceeds of FAA
grants, and (3) lower than maximum interest rates on variable rate
bonds.  Two of these assumptions have been realized:  (1) bonds were
refinanced in June at 5.7 percent interest and (2) interest of about
5 percent has been paid on variable rate bonds during 1995. 

Another primary reason for lower annual debt service amounts in the
Leigh Fisher Associates report was the assumption that estimated
passenger facility charge (PFC) revenues would be used to reduce debt
service amounts.  During its first 3 months of operations, DIA
collected PFCs at amounts meeting or exceeding projections.  Figure 2
and associated notes provide a detailed reconciliation and further
explanation of the reasons for differences in annual debt service
amounts reported in the audited financial statements dated December
31, 1993, and the annual debt service amounts reported in the Leigh
Fisher Associates report dated August 18, 1994. 


   Figure 2:  Reconciliation of
   Annual Debt Service
   Requirements

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


      RECONCILIATION OF TOTAL
      BONDS PAYABLE
---------------------------------------------------------- Letter :5.2

Total Denver Airport System bonds payable, on the December 31, 1993,
audited financial statements as adjusted for the September 1994 bond
sale, were $3,871,950,000.  (See figure 3).  Bonds payable reported
in Exhibit B of the Leigh Fisher Associates report totaled
$3,464,019,000.  Information in these financial reports differed
because the financial statements included all debt of the Denver
Airport System (including DIA and Stapleton debt), whereas the Leigh
Fisher Associates report was using Exhibit B to present only those
bonds that provided funds to cover DIA construction and capitalized
interest costs.  Figure 3 and its accompanying notes present details
on the differences between the two financial reports. 


   Figure 3:  Reconciliation of
   Total Bond Debt Amounts: 
   Audited Financial Statements
   Reconciled to City of Denver
   Official Statement

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   SEC ISSUES
------------------------------------------------------------ Letter :6

While municipal securities are exempt from the registration
requirements and civil liability provisions of the Securities Acts of
1933 and 1934, they are not exempt from the antifraud provisions of
those acts.  When allegations of fraud associated with a municipal
bond issue are made, the SEC, at its discretion, may launch an
investigation, as it has in the case of DIA.  The SEC is currently
investigating DIA's disclosures of information related to baggage
system issues, to include all Official Statements and supporting
documentation covering the period 1990 to the present.  The SEC has
not released any information on the results of its work because its
investigation is ongoing. 

In response to your request for information on the potential
applicability of the SEC's Rule S-X to DIA revenue bonds, we reviewed
Rule S-X and met with SEC officials to discuss their application of
Rule S-X and its companion, Rule S-K.  These are the primary criteria
SEC uses in regulating issuers of corporate bonds, but they are not
requirements imposed on issuers of municipal bonds.  Rule S-X covers
the form and content of financial statements and requires that a
corporate bond prospectus include 2 years of audited balance sheets
and 3 years of audited income statements and cash flow statements. 
Rule S-K covers qualitative issues in a bond prospectus such as
adequacy of disclosures, legal matters, and corporate general
management issues. 

SEC officials told us that their review of corporate debt issuances
applies a standard of whether disclosures were made in good faith on
a reasonable basis when they were made.  Further, this standard is
applied principally to those disclosures of a material nature that
could reasonably be presumed to affect an investor's decision.  Also,
omission of material information is an important consideration.  SEC
officials emphasized that it is not possible to speculate if SEC
jurisdiction over approval of DIA Official Statements would have
resulted in different disclosures. 

The market for municipal securities has been largely unregulated at
the federal level, basically due to broad exemptions in both the
Securities Act of 1933 and the Securities Exchange Act of 1934. 
However, some changes began to occur in the 1970s in response to
abusive practices by dealers in municipal securities and to
increasing numbers of retail investors in this market.  The
Securities Acts Amendments of 1975 established a limited regulatory
scheme for the municipal securities market through provisions for the
mandatory registration of municipal securities brokers and dealers. 
Other actions taken by SEC in recent years have strengthened its
stance on the quality of disclosures demanded of municipal bond
issuers. 

Year      Action taken
--------  ------------------------------------------------------------
1989      SEC adopted Exchange Act Rule 15c2-12, requiring
          underwriters to obtain and review issuers' Official
          Statements prior to selling bonds, and to provide copies of
          Official Statements to customers.

1993      SEC published a Staff Report on the Municipal Securities
          Market which underscored the need for improved disclosure
          practices in the primary and secondary municipal securities
          markets.

1994      SEC published the Statement of the Commission Regarding
          Disclosure Obligations of Municipal Securities Issuers and
          Others wherein it formalized its position regarding
          obligations of municipal securities issuers under the
          antifraud provisions of federal securities laws. Further,
          this document emphasized the importance of using audited
          financial statements and established procedures for
          disclosing material events subsequent to the initial
          offering.
----------------------------------------------------------------------
In response to your request, we compared the 1933 Securities Act's
and the 1934 Securities Exchange Act's standard of liability for
professionals involved with the preparation and issuance of Official
Statements with standards imposed on professionals by Colorado law in
the same regard.  We found that Colorado, like a majority of the
states, has substantially adopted section 101 of the Uniform
Securities Act as a basic fraud provision.  The antifraud provision
in Colorado's statute mirrors the federal antifraud provisions.  Both
make it unlawful for any person, in connection with the offer, sale,
or purchase of any security, directly or indirectly, to defraud or
"to make any untrue statement of a material fact or to omit to state
a material fact necessary in order to make the statements made, in
light of the circumstances under which they are made, not
misleading."

In addition, we note that with respect to corporate, as opposed to
municipal securities, section 11 of the 1933 act, as well as Colorado
law, makes accountants civilly liable for material misstatements or
omissions in corporate registration statements.  Further, the SEC may
bar any professional from appearing or practicing before it if the
Commission finds that the professional has willfully violated any
provision of the securities law, including both the antifraud
provisions and the prohibition on material misstatements.\2

We performed our work between January and July 1995 in accordance
with generally accepted auditing standards.  We have discussed the
contents of this report with officials of the City of Denver and they
agree with its contents.  Written comments from the Director of
Aviation, DIA, of the City of Denver, are included in appendix I. 


--------------------
\2 17 C.F.R.  subsections 201.2(e)(1)(iii) and 201.2(e)(3)(i). 


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

As arranged with your office, unless you announce its contents
earlier, we plan no further distribution of this report until 7 days
after the date of this letter.  At that time, we will send copies of
this report to the Secretary of Transportation; the Director, Office
of Management and Budget; the City of Denver; and interested
congressional committees.  We will also make copies available to
others on request. 

Please contact me at (202) 512-9542 if you or our staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix II. 

Sincerely yours,

Lisa G.  Jacobson
Director, Civil Audits




(See figure in printed edition.)Appendix I
COMMENTS FROM THE CITY OF DENVER
============================================================== Letter 



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

DENVER REGIONAL OFFICE

Lowell Hegg, Assistant Director
Frank Sutherland, Senior Evaluator
John Furutani, Evaluator

OFFICE OF THE GENERAL COUNSEL

Thomas H.  Armstrong, Assistant General Counsel
Barbara Timmerman, Senior Attorney
