District of Columbia: Status of the New Convention Center Project (Letter
Report, 12/20/96, GAO/AIMD-97-17).
Pursuant to a congressional request, GAO reviewed the progress of the
new convention center project in the District of Columbia that will be
managed by the Washington Convention Center Authority (WCCA), focusing
on the project's estimated costs, revenue collections, and financing
plans.
GAO found that: (1) WCCA has taken steps to develop revised estimates
for the project's predevelopment and construction costs; (2) the total
predevelopment and construction costs are now estimated at about $480
million compared to $561 million, an $81-million decrease since the time
of GAO's last report; (3) in addition, WCCA has established a
contingency amount of about $70 million, which, if needed, raises the
current estimated cost of the project to $550 million, an overall
decrease of about $11 million; (4) the plans for the new convention
center are still in their early stages and thus, the cost estimates are
preliminary; (5) as of November 8, 1996, the District had transferred
about $64.3 million of dedicated tax revenues to WCCA, and WCCA had
earned approximately $1.7 million in interest income on these amounts;
(6) WCCA used approximately $14 million of this $66 million to fund
operating expenses of the existing convention center, fund expenses
relating to the predevelopment costs of the new convention center, and
repay amounts borrowed from the District's Rainy Day Fund; (7) WCCA has
the legislative authority to use revenue bonds and backed taxes to
finance the predevelopment costs of the new convention center project,
but may also use the existing tax revenue collections available; and (8)
WCCA would need congressional authorization to use dedicated taxes to
finance the construction costs of the project.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-97-17
TITLE: District of Columbia: Status of the New Convention Center
Project
DATE: 12/20/96
SUBJECT: Convention facilities
Facility construction
Construction costs
Cost analysis
Government collections
Municipal bonds
Municipal taxes
Financial management
Future budget projections
IDENTIFIER: District of Columbia Rainy Day Fund
District of Columbia Business Tax Information System
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on the District of Columbia,
Committee on Government Reform and Oversight, House of
Representatives
December 1996
DISTRICT OF COLUMBIA - STATUS OF
THE NEW CONVENTION CENTER PROJECT
GAO/AIMD-97-17
Convention Center
(901696)
Abbreviations
=============================================================== ABBREV
DFR - Department of Finance and Revenue
S&P - Standard and Poor's Rating Service
WCCA - Washington Convention Center Authority
Letter
=============================================================== LETTER
B-271116
December 20, 1996
The Honorable Thomas M. Davis III
Chairman, Subcommittee on the
District of Columbia
Committee on Government Reform
and Oversight
House of Representatives
Dear Mr. Chairman:
You requested that we monitor and periodically report on the progress
of the new convention center project in the District of Columbia that
will be managed by the Washington Convention Center Authority
(WCCA).\1 This report discusses the project's estimated costs,
revenue collections, and financing plans.
--------------------
\1 The authority was created by the Washington Convention Center
Authority Act of 1994, D.C. Law 10-188, September 28, 1994, 41 DCR
5333, 6823, D.C. Code Ann. Secs. 9-801 et seq. to assume
operation of the existing convention center and to build a new
convention center.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Since our last report on the new convention center project in
February 1996,\2
WCCA has taken steps to develop revised estimates for the
predevelopment and construction costs. The total predevelopment and
construction costs are now estimated at about $480 million compared
to $561 million--an $81 million decrease since the time of our last
report. The $480 million estimate consists of predevelopment costs
of about $64 million, an increase of about $24 million, and
construction costs of about $416 million, a decrease of about $105
million. In addition, WCCA has established a contingency amount of
about $70 million, which, if needed, would raise the estimated cost
of the project to $550 million--or only slightly less than the
earlier estimate. However, the plans for the new convention center
are still in their early stages and, thus, the cost estimates are
preliminary. WCCA officials stated that construction of the new
convention center is scheduled to begin in mid-1997 and be completed
by December 31, 1999.
As of November 8, 1996, the District had transferred about $64.3
million of dedicated tax revenues to WCCA, and WCCA had earned
approximately $1.7 million in interest income on these amounts. WCCA
used approximately $14 million of this $66 million to fund operating
expenses of the existing convention center, fund expenses relating to
the predevelopment costs of the new convention center, and repay
amounts borrowed from the District's Rainy Day Fund.\3
Although WCCA has not yet decided how to finance the predevelopment
costs of the new convention center, it has legislative authority to
use revenue bonds\4 backed by dedicated taxes to finance those costs,
or it may use those existing revenues to pay the predevelopment costs
as they are incurred. WCCA does not have congressional authorization
to use the dedicated taxes to finance the construction costs of the
project.
--------------------
\2 Status of the Convention Center Project (GAO/AIMD-96-44R, February
21, 1996).
\3 The Rainy Day Fund provides funds to the District of Columbia to
be used at the discretion of the Mayor and the City Council for
mandatory and unavoidable expenses. In the case of the WCCA, Rainy
Day Funds were used to continue operations of the existing convention
center while awaiting congressional approval for the use of the
dedicated tax revenues.
\4 Revenue bonds are payable from a specific source of revenue, other
than property taxes, and are not backed by the full faith and credit
of the issuer. Revenue bonds are typically secured by a revenue
pledge, by related covenants of the issuer, to assure the adequacy of
the pledged revenue sources.
BACKGROUND
------------------------------------------------------------ Letter :2
The District is planning to construct a new, larger convention center
to generate economic development for the downtown area. The
Washington Convention Center Authority Act of 1994 created the WCCA
to operate the existing convention center and to build a new
convention center.\5 The law also increased a number of taxes to
raise revenues necessary for the WCCA to carry out its
responsibilities. The District of Columbia Convention Center and
Sports Arena Authorization Act of 1995 provides that the WCCA may use
the additional tax revenues to operate the existing convention center
and to fund the predevelopment costs for the new convention center.\6
Additional congressional approval must be obtained before the WCCA
may use the tax revenues to finance construction of the new
convention center.
We reported\7 previously that even though the District is viewed as a
desirable location for conventions and trade shows, the current
facility is small compared to the convention centers of other cities,
and it allows the District to compete for only about 54 percent of
nationwide conventions and expositions. The new convention center is
intended to allow the city to compete for larger conventions and
trade shows. The project's proposal calls for constructing a new
convention center at Mount Vernon Square, the WCCA preferred site,\8
located at Ninth Street and Massachusetts Avenue Northwest.
According to WCCA officials, the new convention center would allow
the WCCA to compete for and accommodate about 94 percent\9 of the
larger conventions nationally, create jobs, and increase revenues to
the District.
--------------------
\5 See footnote 1.
\6 Public Law No. 104-28, Sec. 101, 109 Stat. 267 (1995).
\7 District of Columbia: Status of Convention Center Project
(GAO/AIMD-94-191, September 15, 1994).
\8 There is an alternative site being considered, the New York Avenue
site, which is located in Northeast, Washington, D.C. Mount Vernon
Square is the preferred site because the District owns more than 90
percent of the land and thus it would be the least costly site for
the new convention center. The District is in the process of
acquiring the remaining property for the preferred site.
\9 According to WCCA officials, the District of Columbia cannot
compete for all of the conventions and expositions because of
logistics considerations. For example, it would be impractical to
transport heavy farm equipment to the east coast.
OBJECTIVE, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
To obtain information on the status of the new convention center
project, we reviewed financial records provided by WCCA and the
District's Department of Finance and Revenue (DFR) to determine the
amount of dedicated taxes that were collected and transferred. We
also reviewed (1) the feasibility studies and estimates supporting
the predevelopment and construction costs and (2) the activity in the
escrow accounts for taxes collected and deposited through August 1996
as documented by wire transfers and bank statements.
We conducted interviews with officials from DFR and WCCA including
the Chairperson of the Board of Directors, General Counsel, Interim
General Manager, Managing Director, Chief Financial Officer, and
Manager of Contracts. In addition, we discussed the possible use of
revenue bonds for financing the project with officials at Standard
and Poor's Rating Service, Moody's Investors Service, Inc., and
Fitch's Investors Service, Inc.
We did not audit the reported taxes collected and deposited for the
new convention center project to determine if the District government
accurately calculated and transferred all dedicated taxes to this
project's escrow account. Furthermore, we did not audit the
convention center predevelopment and construction cost estimates to
determine their reasonableness. Accordingly, we do not express an
opinion or any other form of assurance on the amount of the
District's taxes collected, revenue projections, or the cost
estimates for the new convention center project. Our review was
conducted between June 1996 and November 1996 in accordance with
generally accepted government auditing standards and considered the
results of our previous work.\10
--------------------
\10 District of Columbia: Status of Convention Center Project
(GAO/AIMD-94-191, September 15, 1994), District of Columbia: Status
of Sports Arena and Convention Center Projects (GAO/T-AIMD-95-189,
July 12, 1995), and Status of the Convention Center Project
(GAO/AIMD-96-44R, February 21, 1996).
ESTIMATED PROJECT COSTS
------------------------------------------------------------ Letter :4
Based on information received from WCCA on October 23, 1996, as shown
in table 1, the total predevelopment and construction costs of the
new convention center project are now estimated at approximately $480
million, which is a reduction of about $81 million from the previous
$561 million estimate. The reduction is primarily attributable to
lower construction costs, now estimated to be about $416 million or
about $105 million lower than the previous estimate of $521 million.
The predevelopment costs are now estimated to be about $64 million,
which represents a $24 million increase over the previous estimate of
$40 million. In addition to the total predevelopment and
construction costs, about $70 million is estimated for contingencies
for the project, which, if needed, raises the total estimated cost of
the project to $550 million, or roughly the same as the earlier
estimate.
Table 1
Total Estimated Project Costs of the New
Convention Center
Revised
Four-year four-year
estimate estimate
as of 2/ as of 10/ Increase
Category 21/96 23/96 (decrease)
---------------------------------- ---------- ---------- ----------
======================================================================
Total predevelopment costs\a $39,650,25 $63,531,21 $23,880,96
0 2 2
Construction costs:
Building and Site \b 347,750,00
0
Other construction costs \b 41,500,000
Fixtures/furnishing/equipment \b 27,000,000
======================================================================
Total construction costs $521,000,0 $416,250,0 ($104,750,
00 00 000)
======================================================================
Total predevelopment and $560,650,2 $479,781,2 ($80,869,0
construction costs 50 12 38)
======================================================================
Project contingency \b $70,218,78 $70,218,78
8 8
======================================================================
Total project costs $560,650,2 $550,000,0 ($10,650,2
50 00 50)
----------------------------------------------------------------------
Note: We did not independently verify the estimates listed on this
table. The prior 4-year period predevelopment estimates were
developed by representatives from the Orange County Convention
Center, National Institute of Governmental Purchasing, General
Services Administration, and D.C. Department of Administrative
Services. The prior construction estimates of $521 million were
developed by Deloitte & Touche in association with Carmona, Motley &
Company. The current estimates were developed by WCCA in conjunction
with the program management firm--D.C. Convention Center Associates.
\a The predevelopment cost estimate includes an amount for acquiring
land that is not owned by the District at the preferred site--Mt.
Vernon Square.
\b The prior estimates did not attempt to identify costs by category.
In our February 1996 report, the predevelopment and the construction
cost estimates reported were preliminary; and recently, WCCA has
developed more specific, though not final, estimates with the
assistance of a program management firm. WCCA officials attributed
the increase in the estimate for predevelopment costs to increases in
specific cost estimates developed for activities such as consulting
and inspection, financing, and concept designs.
Since our last report, WCCA has hired a program management firm, D.C.
Convention Center Associates,\11 to provide overall direction and
support services for the new convention center project, including the
project's schedule, budget, final design approval, construction
planning, and disposition of the existing convention center. In
addition, WCCA has hired an environmental impact services firm to
develop an environmental impact statement study of the preferred and
alternate sites being considered for the new convention center.
Further, according to WCCA officials, they have hired a managing
director who has an architectural and engineering background to
oversee the project, as well as a chief financial officer to handle
the accounting and financial management for the existing convention
center and the proposed new convention center.
--------------------
\11 The D.C. Convention Center Associates is a joint venture which
includes the JBG Companies, Turner Construction Company, and HNTB
Corporation, as primary members, with five other firms as
participating members.
REVENUE COLLECTIONS
------------------------------------------------------------ Letter :5
WCCA receives a portion of hotel sales and occupancy taxes,
restaurant sales taxes, and a business franchise tax to help fund the
operations of the existing convention center and the predevelopment
costs of the proposed new convention center. As of November 8, 1996,
the District had transferred $64.3 million of dedicated tax revenues
to WCCA. Of this amount, $33.7 million\12 was the reported tax
collections for fiscal year 1995. The remainder, $30.6 million, is
the reported first 11 months tax collections for fiscal year 1996,
which is the same amount WCCA reported receiving during the first 11
months of fiscal year 1995. If the collection pattern for the last
month of fiscal year 1996 is comparable to fiscal year 1995, WCCA
would receive about $33.7 million for fiscal year 1996. While this
is the same as in fiscal year 1995, it is about $2 million, or about
6 percent less than the District's projected amount for fiscal year
1996.
As of November 8, 1996, WCCA had invested approximately $51.5 million
of the $64.3 million in Fannie Mae, Freddie Mac, Farm Credit Bank,
and Federal Home Loan Bank discount notes, which are earning an
average of 5.4 percent annually. As of November 8, 1996, WCCA
officials reported that they had received approximately $1.4 million
in interest from these investments as well as approximately $320,000
in interest on bank account balances. Therefore, approximately $66
million ($64.3 million in tax revenues and $1.7 million in interest)
was available to fund convention center needs. According to WCCA
officials, approximately $14 million of the $66 million available to
WCCA was used to (1) fund $6.5 million in operating expenses of the
existing convention center, (2) fund $3.5 million in expenses
relating to the predevelopment costs of the new convention center,
and (3) repay about $4 million WCCA borrowed from the District's
Rainy Day Fund for the convention center operations.
--------------------
\12 Of this amount, $32.9 million was included in the District's
Comprehensive Annual Financial Statements for the fiscal year ended
September 30, 1995, which were audited by KPMG Peat Marwick LLP. The
District received a qualified audit opinion on these financial
statements. One of the two reasons for the qualified opinion was
related to the auditor's inability to obtain sufficient evidence to
support General Fund Business Tax Receivables, such as hotel sales
and occupancy taxes and restaurant sales taxes. For example, in some
cases, the Business Tax Information System's data did not agree with
DFR's tax revenue records. The other reason for the qualification
did not impact WCCA. According to WCCA officials, an additional
$804,000 of late payments was received after the audit was completed,
bringing the reported fiscal year 1995 collections to $33.7 million.
FINANCING PLANS
------------------------------------------------------------ Letter :6
WCCA has the legislative authority to issue revenue bonds\13 or use
the existing dedicated tax revenue collections available to fund the
predevelopment costs of the new convention center project. As of
October 23, 1996, WCCA had not decided how to fund the predevelopment
costs of the new convention center. In addition, to use the
dedicated taxes to fund the construction costs of the project, WCCA
would need congressional authorization. WCCA has not yet developed
plans as to how it will finance the construction costs of the new
convention center.
To fund the predevelopment costs and construct the new facility, WCCA
would need additional funding. One source of funding is to issue
revenue bonds through the municipal bond market. In general, revenue
bonds have been used to enable state and local governments to finance
a wide range of projects. For example, toll bridges, airports,
health-care facilities, and convention centers have been generally
financed by revenue bonds.
Large issuances of revenue bonds are influenced by credit ratings
provided by various rating agencies. Because of the large number of
different issues in the marketplace, bond ratings often play a great
role in the municipal bond market. A bond rating ranks each security
according to what the rating agencies believe is its
creditworthiness; such a rating is considered obligatory for the sale
of any major issue. Rating agencies have several different
classifications which categorize the creditworthiness of a security.
However, ratings are separated into two major
components--investment\14 and non-investment grade. The bond rating
affects the bonds' desirability by investors and accordingly, the
price. The lower the credit risk (risk of default), the higher the
bond rating and price of the bonds.
As mentioned in our September 1994 report, rating agencies consider a
number of factors in their assessment of revenue bonds which include:
-- the general economic strength of the municipality;
-- the collection history of the tax supporting the bond. Bonds
backed by taxes that have a solid collection history are usually
deemed less risky than those backed by new or unproven taxes;
-- the diversification of the tax backing the bond;
-- the legislative risk of the revenue streams. For example,
revenues based on appropriations make the credit risk higher;
and
-- the debt service coverage, legal provisions in the bond
resolution, and the maturity rates of the bonds.
At the request of your office, we asked officials from rating
agencies--Standard and Poor's Rating Service (S&P), Moody's Investor
Services, Inc. (Moody's), and Fitch's Investor Services--what type
of rating might be provided for revenue bonds issued for the new
convention center project. According to the rating agencies, the
type of rating that would be provided for revenue bonds issued for
the new convention center project would be influenced by the
District's overall financial condition. The rating agencies advised
us that based on the District's current financial condition, its
general obligation bonds presently would be rated non-investment
grade.\15 The District's general obligation bond rating was
downgraded in 1995 to non-investment grade, primarily due to the
District's severe cash flow problems, unreliability of financial
information, and loss of investor confidence. Because of the
non-investment grade rating of the District's general obligation
bonds, it is unlikely at this time that any bond issued by the
District or its related entities would be investment grade unless the
security is structured in a manner acceptable to investors that
reduces credit risk. Without significant improvement in the
District's overall financial condition or a structure that
significantly reduces credit risk, rating agency officials indicated
that convention center revenue bonds would receive a non-investment
grade rating because they would be unable to separate the District's
financial condition from the credit risk of the revenue bonds.
We also asked rating agency officials what type of bond structure
could improve the likelihood for an investment grade rating. They
stated that the rating might be improved if the collection process
for the dedicated taxes was separated from the District's tax
collection process, similar to the structure established for the
sports arena project where tax payments are sent directly to a
lockbox under the control of a trustee.\16 For example, Moody's was
satisfied with the sports arena revenue bonds'\17 structure and
provided an investment grade rating of "Baa" because the sports
arena's revenues were insulated from the District's financial
condition by strict legal provisions, which included the lockbox
arrangement.
In the case of the WCCA, the District collects the dedicated taxes
and then remits the proceeds to WCCA. Thus, according to the rating
agencies, the District's current financial condition and the present
structure of the revenue collection process would prevent WCCA from
receiving an investment grade rating.
--------------------
\13 See footnote 4.
\14 Investment grade is the broad credit designation given bonds
which have a high probability of being paid and minor, if any,
speculative features.
\15 General obligation bonds are bonds that are secured by the full
faith, credit, and taxing power of the governmental unit issuing
them.
\16 Taxpayers are directed to send payments to a lockbox under a
bank's control. The bank in turn forwards the tax payments to the
bond trustee, who will then make payments to the bond holders. See
Status of Sports Arena and Convention Center Projects
(GAO/T-AIMD-95-189, July 12, 1995).
\17 In January 1996, the District's Redevelopment Land Agency issued
revenue bonds to pay for certain predevelopment costs of the new
sports arena.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
We obtained oral comments from the Mayor of the District of Columbia
and the Chairperson of WCCA on a draft of this report. They
concurred with the information presented.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate and House Committees on Appropriations
and their Subcommittees on the District of Columbia; and the Senate
Committee on Governmental Affairs, Subcommittee on Oversight of
Government Management and the District of Columbia, and the Ranking
Minority Member of your Subcommittee. If you or your staff need
further information, please contact me at (202) 512-9510. Major
contributors to this report are listed in appendix I.
Sincerely yours,
Gregory M. Holloway
Director, Governmentwide Audits
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I
ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.
Hodge Herry, Assistant Director
Phyllis Anderson, Senior Audit Manager
Johnny Bowen, Auditor-in-Charge
Barbara Shields, Senior Financial Analyst
OFFICE OF GENERAL COUNSEL
--------------------------------------------------------- Appendix I:1
Richard Cambosos, Senior Attorney
*** End of document. ***