District of Columbia: Status of Sports Arena (Letter Report, 12/31/96,
GAO/AIMD-97-19).
As of October 1996, the estimated predevelopment costs for most cost
categories of the sports arena in the District of Columbia had somewhat
changed, but the overall estimated predevelopment costs had increased by
a net amount of $617,000, or about one percent, since GAO's last report.
(See GAO/AIMD-96-43R, Feb. 1996.) The District had $66.6 million
available to fund the project's predevelopment activities and establish
a debt service reserve for the arena project. On the basis of estimates
as of October 1996, GAO concludes that the District has enough money to
pay the predevelopment costs. The bond trustee has made the 1996 debt
service payment of nearly $6 million on arena bonds, and the District's
projections of arena tax revenues of $9 million annually seem sufficient
to redeem the bonds by 2002 as scheduled. Predevelopment activities for
the arena are nearing completion. All land has been acquired; however,
the final cost of the parcel of land acquired through condemnation
proceedings will be determined by the outcome of legal proceedings. The
buildings formerly on the site have been demolished, District employees
have been relocated, and construction of the Metrorail connection is
about 25 percent complete. The arena's construction began in February
1996 and the facility should open in late 1997.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-97-19
TITLE: District of Columbia: Status of Sports Arena
DATE: 12/31/96
SUBJECT: Sports
Construction costs
Municipal taxes
Real estate purchases
Municipal bonds
Facility construction
Municipal budgets
Bank loans
Interest rates
Convention facilities
IDENTIFIER: District of Columbia
Metrorail System (DC)
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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 SPORTS ARENA
GAO/AIMD-97-19
Sports Arena
(901723)
Abbreviations
=============================================================== ABBREV
DCALP - District of Columbia Arena, L.P.
FETCA - Far East Trade Center Associates, L.P.
RLA - Redevelopment Land Agency
S&P - Standard & Poor's Rating Service
WMATA - Washington Metropolitan Area Transit Authority
Letter
=============================================================== LETTER
B-275392
December 31, 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 sports arena project in the District of Columbia. This report
discusses the project's predevelopment costs, revenue collections,
financing, interest rates received on the arena bonds, and
construction status.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
As of October 18, 1996, while the estimated predevelopment costs for
most cost categories for the arena had somewhat changed, overall
estimated predevelopment costs increased by a net amount of $617,000
or approximately 1 percent--from about $55.2 million to about $55.8
million--since our last report.\1
The District had $66.6 million available to fund its predevelopment
activities and establish a debt service reserve for the arena
project. This amount consisted of $57.4 million in net bond proceeds
(after financing costs) and $9.2 million in 1995 revenue tax
collections from the dedicated Arena Tax. Of the $66.6 million, $11
million is held in reserve--$5 million for cost overruns and $6
million for debt service. Based on estimates as of October 18, 1996,
the District had sufficient funds to pay predevelopment costs. The
bond trustee has made the 1996 debt service payment of about $5.9
million on arena bonds, and the District's projections of Arena Tax
revenues of $9 million annually appear sufficient to redeem the bonds
by the year 2002 as scheduled.
Arena predevelopment activities are nearing completion. All land has
been acquired; however, the final cost of the parcel of land acquired
through condemnation proceedings will be determined by the outcome of
legal proceedings. The buildings formerly on the arena site have
been demolished and the relocation of utilities and the securing of
regulatory approvals are nearly complete. District employees have
been relocated and office improvements are underway. Construction of
the Metrorail connection is about 25 percent complete. In addition,
arena construction began on February 18, 1996, and the arena should
open in late 1997.
--------------------
\1 Sports Arena (GAO/AIMD-96-43R, February 21, 1996).
BACKGROUND
------------------------------------------------------------ Letter :2
The District of Columbia government (acting through the Mayor and the
District's Redevelopment Land Agency\2 ) and District of Columbia
Arena, L.P. (DCALP)--a limited partnership formed by the owner of
the Washington Bullets and the Washington Capitals--have agreed that
DCALP will build a sports arena (estimated to cost about $175
million) and the District will be responsible for financing certain
predevelopment costs.
The District agreed to be responsible for the following
predevelopment costs:
-- acquiring land, including the purchase of property not then
owned by the District,\3
-- connecting the Gallery Place Metrorail station to the sports
arena,
-- relocating District employees from two buildings on the site to
other locations, and
-- demolishing buildings, remediating soil,\4 relocating utilities,
and securing all regulatory approvals necessary for construction
of the sports arena.
To finance the predevelopment costs of the arena, in August 1995, the
District received a $53 million loan commitment (line of credit) from
a consortium of banks led by NationsBank and Crestar Bank. In
January 1996, the RLA issued about $60 million in revenue bonds
backed by the Arena Tax and paid off the $36.6 million portion of the
line of credit used. The Omnibus Budget Support Act of 1994 (Arena
Tax Act)\5 as amended, provides for a Public Safety Fee (Arena Tax)
to be levied on businesses located in the District based upon the
annual District gross receipts of such businesses. The Arena Tax is
due on or before June 15 of each year. The Arena Tax Act also
authorized the RLA to pledge the Arena Taxes as security to repay
loans to finance predevelopment activities.
Further, the Arena Tax Act provides that if, on or before December 1
of each year, the Mayor estimates the Arena Tax revenue is less than
$9 million, the Mayor is required to raise the Arena Tax rates to
provide for an estimated revenue of not greater than $9 million. The
Arena Tax was first levied in fiscal year 1995. During the first
year of the Arena Tax, most of the Arena Tax collections were used to
fund predevelopment activities. In subsequent years, the Arena Tax
will be used to pay principal and interest (debt service) on the
bonds as required by the bond resolution.\6
As previously stated, the District is responsible for the
predevelopment costs of the arena. DCALP, the developer, is
responsible for arranging and repaying the financing needed to pay
all costs associated with the design, development, construction, and
operation of the sports arena.
--------------------
\2 The District of Columbia Redevelopment Land Agency was created and
established as an instrumentality of the District of Columbia
government pursuant to the District of Columbia Redevelopment Land
Act, 60 Stat. 793, August 2, 1946 (D.C. Code Annoted, & 5-801 et
seq.), as amended (the "RLA Act"). The purpose of the RLA is to
protect and promote the welfare of residents of the District through
the acquisition and assembly of real property and the lease of such
property for redevelopment.
\3 As of September 30, 1996, the District had acquired two properties
needed for the arena, one through condemnation proceedings. However,
according to the District's Project Manager for the sports arena, the
purchase price of the property acquired through condemnation will be
determined by pending legal proceedings.
\4 Remediating the soil encompasses any and all corrective actions
taken to clean up a site in order to meet District or federal
standards for soil quality.
\5 D.C. Code (1996 Supp.) Secs. 47-2751 through 47-2753.
\6 The bond resolution authorizes the issuance of bonds to pay for
the predevelopment costs of the arena project. It sets forth the
terms, rights, and obligations of the RLA, bondholders, and trustees.
OBJECTIVE, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
To obtain information on the status of the arena project, we reviewed
relevant contract agreements, vendor invoices, and the bond trustee's
disbursement records supporting the predevelopment costs. We also
reviewed various financial reports and bank statements for Arena
Taxes collected and deposited as of August 1996.
We interviewed District officials from the Arena Task Force, the
Office of the Corporation Counsel, the Office of the Treasurer, the
Department of Finance and Revenue, and the RLA. We also met with
trustees for the lockbox (into which dedicated tax collections are
deposited) and the bonds. In addition, we discussed the construction
progress of the arena and the Metrorail connection with officials
from DCALP and the Washington Metropolitan Area Transit Authority
(WMATA). Further, we interviewed officials from Merrill Lynch
regarding the structure and pricing of the bonds. Finally, we
interviewed officials from Standard & Poor's Rating Service (S&P) and
Moody's Investor Service (Moody's) concerning the rating of the
bonds.
We did not audit the arena's predevelopment cost estimates or
evaluate the financing to determine if the reported amounts were
correct. The amounts for the predevelopment costs and financing were
provided by District officials and, where applicable, were verified
to disbursement records maintained by third parties acting as
trustees for either tax collections or bond proceeds. Accordingly,
we do not express an opinion or any other form of assurance on the
arena's predevelopment cost estimates or its financing.
We also did not audit the reported taxes collected and deposited for
the sports arena project. We, therefore, did not determine if the
District government accurately identified the universe of taxpayers
or reported all dedicated taxes for this project. However, we
reviewed monthly statements provided by the lockbox trustee\7 to
determine the amount of taxes collected and placed in escrow for this
project. Our review built on previous work,\8 and we conducted our
review from March 1996 through December 1996 in accordance with
generally accepted government auditing standards.
--------------------
\7 As was done in 1995, taxpayers were directed to send their
payments to a lockbox. The trustee of the lockbox in turn forwards
the tax payments to the bond trustee--who then makes payments to the
bondholders.
\8 District of Columbia: Status of Sports Arena Project
(GAO/AIMD-94-192, September 15, 1994); District of Columbia: Status
of Sports Arena and Convention Center Projects (GAO/T-AIMD-95-189,
July 12, 1995); Sports Arena (GAO/AIMD-95-209R, July 26, 1995); and
GAO/AIMD-96-43R, February 21, 1996.
PREDEVELOPMENT PROJECT COSTS
------------------------------------------------------------ Letter :4
As of October 18, 1996, estimated predevelopment costs had increased
from about $55.2 million to about $55.8 million or by a net amount of
about $617,000 (1 percent), since our last report.\9 The District's
predevelopment activities consist of four major categories: (1)
acquiring land, (2) constructing the Metrorail connection, (3)
relocating District employees, and (4) demolishing two buildings,
remediating soil, relocating utilities, and using consultants to
secure regulatory approvals.
All land has been acquired for the arena site. However, the final
cost for one of the parcels of land acquired will be determined by
the outcome of legal proceedings. Construction of the Metrorail
connection is about 25 percent complete as of October 18, 1996. All
District employees have been relocated; however, office improvements
on the new space have not been completed. Finally, the two old
buildings have been demolished and relocating utilities and securing
regulatory approvals are nearly complete as of October 18, 1996. The
District is awaiting final bills for these activities.
The District's Project Manager for the sports arena stated that based
on the project's current status and known estimates for
predevelopment costs, as of September 30, 1996, the District does not
expect to exhaust the $5 million capital reserve fund established to
cover cost overruns. We verified that no funds had been expended
from the capital reserve fund. The changes to the predevelopment
costs are highlighted in the following table.
Table 1
The District of Columbia's Estimated
Predevelopment Costs To Be Financed for
the Sports Arena Project
(Dollars in thousands)
Increase
Revised Revised (decrease)
budget as of budget as of since Completion
Predevelop Original January 24, October 18, January 24, Status of
ment costs budget 1996 1996 1996 Work\a
---------- ------------ ------------ ------------ ------------ ------------
Land acquisition
--------------------------------------------------------------------------------
Appraisal/ $34,250 $34,268 $18 \b
purchase
price
Appraisal 33 50 17 100%
fees
================================================================================
Total $28,000 $34,283 $34,318 $35
Metrorail connection
--------------------------------------------------------------------------------
Constructi $7,000 $17,000 $19,360\c $2,360 25%
on costs
Less: (12,000) (12,000)
Capital
Assistanc
e Grant
(after $3
million
District
cost)
Less WMATA (2,000) (2,360) (360)
contribut
ion
Less DCALP (2,000) (2,000)
contribut
ion
================================================================================
Total $7,000 $3,000 $3,000
Relocation of District employees
--------------------------------------------------------------------------------
Lease $1,986 $1,922 ($64) 100%
commitmen
ts and
rent
advances
Lease 70 70 100%
appraisals
and space
consultan
ts
Leasehold 972 1,344 372 75%
improveme
nts
Furniture 638 638 100%
and
equipment
move
Telecommun 875 875 85%
ication
equipment
move
================================================================================
Total $7,000 $4,541 $4,849 $308
Building demolition, soil remediation, relocations; legal, environmental, and
consultant fees
--------------------------------------------------------------------------------
Building $1,000 $1,000 100%
demolition
Soil $940 $3,521 $2,581 98%
remediati
on
Less (569) (569)
FETCA\d
contribut
ion for
soil
remediati
on
Utility 4,616 2,770 (1,846) 90%
relocation
Business 25 25 100%
relocation
Legal, 2,483 2,533 50 98%
environme
ntal, and
consultan
t fees
D.C. 3 02 3 02 9 0%
Sports
Commissio
n
reimburse
ment
================================================================================
Total $11,000 $9,366 $9,582 $216
Bank fees $1,257 $1,315 $58 100%
and costs
================================================================================
Total $1,257 $1,315 $58
Reserve $2,750 $2,750
for
unanticip
ated
increases
================================================================================
Total $53,000 $55,197 $55,814 $617
Costs To
Be
Financed
by the
District
--------------------------------------------------------------------------------
\a Per the District's Project Manager for the sports arena, the
completion status of work represents his estimate of the percentage
of work completed for which the District may or may not have received
final bills.
\b The District did not reach a purchase agreement with the
Unification Church on the second parcel of land. On November 30,
1995, the District obtained the property through a "Declaration of
Taking," which required the District to deposit about $5.3 million in
escrow with the Superior Court of the District of Columbia according
to the District's Project Manager for the sports arena. The purchase
price of the property will be determined by the outcome of pending
legal proceedings. The plaintiff asked $8.6 million for the
property. The District offered about $8 million.
\c Included in the Metrorail connection cost estimate is a $1.1
million reserve for cost overruns for transportation expenses only.
\d Far East Trade Center Associates, L.P., were part owners of the
parcel of land that the District purchased to build the sports arena.
--------------------
\9 GAO/AIMD-96-43R, February 21, 1996.
METRORAIL CONNECTION
---------------------------------------------------------- Letter :4.1
As of October 18, 1996, the total cost for the Gallery Place
Metrorail connection was estimated at about $19.4 million, a $2.4
million increase from our last report; but the District's cost
remains the same--$3 million. The majority ($2 million) of the
increase reflects the cost of needed construction changes to the
station because of the sports arena. For example, new vent shafts
will be added in order to accommodate the construction of the sports
arena. This increase was offset by the developer's contribution\10
of $2 million to the cost of the Metrorail connection. The other
$360,000 increase reflects a decision by WMATA to upgrade the station
elevators from hydraulic elevators to traction elevators. The
funding for this upgrade is being provided by WMATA.
As of October 18, 1996, the Metrorail connection budget contained a
$1.1 million reserve for contingencies (as shown by note c to table
1)--a decrease of $400,000 since our last report. WMATA officials
stated that their maximum responsibility to the project is limited to
their $2.4 million contribution. They also stated that they will not
absorb any unanticipated costs. WMATA officials stated that an
example of unanticipated costs is the discovery of asbestos in
sections of the duct work running through the station's mezzanine.
According to the District's Project Manager for the sports arena, the
$50,000 approximate cost for the removal of the asbestos is being
funded out of the Metrorail connection contingency reserve.
--------------------
\10 This contribution was made pursuant to a December 29, 1995,
Memorandum of Understanding between the District and DCALP.
BUILDING DEMOLITION AND
ENVIRONMENTAL SOIL
REMEDIATION
---------------------------------------------------------- Letter :4.2
The demolition of the two buildings formerly located on the arena
property has been completed, and final bills are forthcoming. The
budget of $1 million has not changed.
Costs to remove hazardous and contaminated soil have increased as
excavation progresses. The revised budget for soil remediation was
$3.52 million as of October 18, 1996, an increase of about $2.58
million from the $940,000 reported in our last report. In a
testimony before the RLA board, the District's Deputy Corporation
Counsel stated that the District will take legal action against the
source of the contaminants if compensation is not made to the
District by the source.
The property on which the arena is being built contains contaminated
and hazardous soil based on archeological digs, tests performed for
the environmental impact statement, and tests performed by the
developer. The extent of the amount of contaminated soil was
underestimated by the original tests, which estimated that the site
contained about 7,400\11 tons of petroleum contaminated soil and
hazardous waste. As discussed below, the actual amount of
contaminated soil was almost 15 times the original estimate.
The site originally had residential and commercial buildings.
According to the District's Project Manager for the sports arena and
an official from DCALP, when the land was cleared some 20 years ago,
oil storage tanks in buildings and in the ground were not removed.
As a result of the demolition of the buildings, contaminants were
leaked into the soil. Both contaminated (petroleum) and hazardous
(cleaning fluid) substances have been found in the soil. As part of
its agreement to purchase the parcel of land owned by WMATA and the
Far East Trade Center Associates, L.P. (FETCA), the District
received a credit of about $569,000 from FETCA for the removal of
contaminated material.\12
As of October 1996, according to the District's Project Manager for
the sports arena, 13 underground oil tanks and 4 water separators
were removed from the site, along with 109,000 tons of contaminated
soil and approximately 5,100 tons of hazardous soil. Most of the
excavation of the hazardous and contaminated soil has been completed.
According to a DCALP official, in the spring of 1997, it will be
necessary to remove a temporary dirt ramp from the site to complete
the excavation process. Tests done on the soil on both sides of the
ramp show the soil to be contaminated. Therefore, the District's
final cost for soil remediation will not be known until the spring of
1997. The District has hired a firm, Environmental Consultants and
Contractors, Inc., to monitor the removal of all contaminated and
hazardous material.
--------------------
\11 The original estimate was prepared by Peer Consultants, Inc.,
under contract to EDAW, Inc., the District's preparer of the
environmental impact statement.
\12 The amount of the credit was agreed to by the District, WMATA,
and FETCA. This amount relieves WMATA and FETCA of any additional
responsibility for the removal of contaminants from the soil.
UTILITY RELOCATION
---------------------------------------------------------- Letter :4.3
Our last report showed a budget of $4.6 million for utility
relocation--$4.3 million for Bell Atlantic to relocate utility lines
under G Street and $300,000 for the relocation of other utilities.
Included in the $4.3 million budget was an estimate of $1.4 million
for overtime costs to meet the revised November 30, 1995, deadline to
relocate Bell Atlantic utility lines. As of October 18, 1996, the
budget for Bell Atlantic utility lines has been reduced from $4.3
million to $2.5 million or by $1.8 million;\13 while the amount of
$300,000 for the relocation of the other utilities has remained the
same. The revised budget for total utility relocation is now about
$2.8 million. According to the District's Project Manager for the
sports arena, Bell Atlantic was able to accomplish the relocation of
the utility lines within the scheduled time frame without having to
use premium time (overtime) as originally estimated. If Bell
Atlantic had had to use premium time to relocate the utility lines,
the hourly charges would have been one and a half to twice the cost
of normal time.
--------------------
\13 In addition to the $1.4 million reduction in the budget for
overtime costs, an additional $400,000 in material and labor costs
reductions for Bell Atlantic utility lines was achieved.
LEASEHOLD (OFFICE)
IMPROVEMENTS
---------------------------------------------------------- Letter :4.4
To begin construction of the arena project, the District demolished
two office buildings that previously provided office space for its
employees. The employees were relocated into District-owned and
leased office buildings. To pay for office improvements, a budget
was established at $5 per square foot or about $972,000. Since we
last reported, this budget for leasehold improvements has increased
by $372,000 and, as of October 18, 1996, totaled about $1.34 million.
According to the District's Project Manager for the sports arena, the
increase in the budget for office improvements is attributable to
increases in improvements at the leased space at 800 9th Street, SW,
which were not provided for in the original budget but were requested
by the agency occupying the space--the Department of Human Services.
The District leased four floors of office space at 800 9th Street SW
and is required by the lease to pay for the renovation to the new
space.
According to the District's Project Manager for the sports arena,
this cost is considered a qualifying predevelopment cost of the arena
project. However, we found that this cost was funded from the
District government's appropriated funds rather than from funds
available to pay allowable arena predevelopment costs. We informed
the District's Chief Financial Officer of this matter, and he agreed
to recoup the funds from the arena project's predevelopment funds.
ARENA TAX REVENUE COLLECTIONS
------------------------------------------------------------ Letter :5
According to the District's Debt Manager, Arena Tax collections for
1995 totaled approximately $9.3 million, exceeding the original
projection of $9 million. The District forecasts Arena Tax
collections of $9 million for each year the bonds are outstanding.
We verified that the $9.3 million was collected for 1995 and
transferred by the lockbox trustee to the escrow account.
Between May 15 and May 23, 1996, notices were sent to District
taxpayers informing them that the 1996 Arena Tax was due on June 15,
1996. According to the District's Debt Manager, approximately $9.4
million had been collected for the 1996 Arena Tax through November
30, 1996. We also verified that this amount was transferred from the
lockbox to the bond trustee. In contrast to the 1995 tax
collections, most of which were used to pay the arena's
predevelopment costs before the RLA bonds were issued, the 1996 tax
collections, as required by the bond resolution, were used to make
the payment--principal and interest of $5.9\14 million--due November
1, 1996, on the RLA bonds.
The bond resolution requires that any additional tax collected over
the required payment be placed in a fund\15 and be used to redeem the
term bonds earlier than their due date. As mentioned, $9.4 million
in Arena taxes were collected through November 30, 1996. In
addition, interest of $165,337 was earned on deposits in the Debt
Service Accounts. Of these amounts, about $5.9 million paid the debt
service due on November 1, 1996, $2.2 million was deposited into the
Super Sinker fund,\16 and the remaining $1.5 million will be applied
toward the May 1997 debt service payment. The District's projections
of Arena Tax revenues at the current level of $9 million annually
appear sufficient to redeem the bonds by the year 2002.
--------------------
\14 Principal and interest payments over the term of the bonds--until
the year 2010--vary from $5.91 million to $5.99 million.
\15 Such a fund which permits early redemption of term bonds is
commonly referred to as a Super Sinker fund.
\16 See footnote 15.
FINANCING PREDEVELOPMENT COSTS
------------------------------------------------------------ Letter :6
In August 1995, the District secured a $53 million loan commitment
from a syndicate of banks led by NationsBank and Crestar Bank to
finance predevelopment costs for the arena project. This loan was
subsequently paid off in January 1996 from the proceeds of an
approximate $60 million bond sale arranged by the RLA.
The funds originally available to pay the arena's predevelopment
costs and establish a debt service reserve totaled $66.6 million.
The make up of these funds consisted of (1) $57.4\17 million in net
bond proceeds (after financing costs) from the sale of RLA Revenue
Bonds in January 1996 and (2) $9.3\18 million in 1995 tax collections
from the dedicated Sports Arena Tax. Of the $66.6 million available,
$11 million is held in reserve in two parts. A mandatory $5 million
capital reserve\19 required by the bond resolution was established to
pay for cost overruns. In addition, a $6 million reserve was
established for debt service. As shown in table 1, the current
estimate of total predevelopment costs is $55.8 million. The
unreserved\20 amount of $55.6 million and the $5 million capital
reserve for cost overruns are available to pay this current estimate.
As of September 30, 1996, we verified that no funds have been used
from the mandatory capital reserve. In addition, barring unforeseen
cost increases over established reserves, the District has sufficient
funds to pay its estimated predevelopment costs.
--------------------
\17 Of the approximately $60 million in bond proceeds, $2.6 million
was used to cover various fees associated with the bond offering.
\18 In 1995, Arena Tax collections totaled approximately $9.3
million. Of that amount, about $9.2 million was used for
predevelopment costs, and the remaining $119,000 was used for debt
service.
\19 Any funds over $1 million in the capital reserve fund after
September 1, 1997, are to be used for bond redemption. In addition,
as of September 1, 1998, any remaining portions in the capital
reserve must be used for bond redemption.
\20 Of the $55.6 million, the District has reserved $2.75 million for
unanticipated cost increases.
RLA'S BONDS RECEIVED INTEREST
RATES SIMILAR TO INVESTMENT
GRADE SECURITIES
------------------------------------------------------------ Letter :7
During the July 1996 testimony before your subcommittee,\21 concerns
were raised regarding the interest rates to be paid on the bonds
issued to finance the sports arena's predevelopment costs. We
analyzed relevant information regarding this matter.
The RLA was advised by a number of investment bankers, as part of its
financing strategy, that in order to improve the desirability of the
bonds to investors, the bonds must be structured in a way to reduce
default risk. Specifically, the bonds had to have:
-- a dedicated revenue stream, with the legal requirement to
increase the Arena tax, if revenues at any time did not cover
debt service,
-- a lock-box mechanism under the direct control of a trustee who
directly collects dedicated revenue receipts pledged for debt
repayment, and
-- a Super Sinking fund to allow the District to redeem bonds early
at par.
When the bonds were issued in January 1996, the bond resolution
reflected the advice of the investment bankers as described above.
At that time, the RLA sold $44.5 million of term bonds redeemable on
November 1, 2010, at an interest rate of 6.05 percent and about $15.4
million of serial bonds redeemable between the years 1996 and 2000 at
interest rates ranging from 4.5 percent to 5.4 percent.
Prior to the bond sale, the bonds received a split rating from two
rating agencies--Moody's and S&P. Moody's rated the bonds as
investment grade (Baa) and S&P rated the bonds as noninvestment grade
(B). An official of S&P told us that it did not give an investment
grade rating to these bonds because they were unable to separate the
District's financial condition and its credit from this transaction.
Moody's rating of "Baa" is its lowest rating of four ratings for
investment grade bonds. According to officials from Moody's, the
rating was based upon legal provisions insulating the Arena Tax
revenues from the District's financial difficulties and pledged arena
revenues offering adequate debt service coverage.
Even though one of the two ratings the bonds received was
noninvestment grade, Merrill Lynch officials stated that relative to
prevailing market conditions at the time of the bonds issuance and
the split rating, the bonds were well received by investors. This
was indicated by strong demand from investors which resulted in
various bond series being oversubscribed between 2 to 10 times the
amount of bonds being sold. Given this demand, the Merrill Lynch
officials stated that the RLA bonds were repriced.\22
In addition, Merrill Lynch officials stated that the bonds were
priced (carried interest rates) based primarily upon (1) their
structure rather than the District's financial condition and (2) the
prevailing conditions in the bond market at the time the bonds were
sold. Consequently, they said that they believed the bonds' interest
rates were similar to interest rates on investment grade rated
securities.
--------------------
\21 Testimony before the Subcommittee on the District of Columbia,
Committee on Government Reform and Oversight, House of
Representatives, District Government: Information on Its Fiscal
Condition (GAO/T-AIMD-96-133, July 19, 1996).
\22 Prior to the sale of bonds, the underwriter samples the market to
test investor interest. Based upon investor interest and the
underwriter's judgment, the underwriter sets a preliminary price for
the bonds. On the day of sale, orders for the bonds are received.
When demand exceeds supply, the underwriter increases the price of
the bonds which decreases the bonds' effective interest rates.
CONSTRUCTION STATUS
------------------------------------------------------------ Letter :8
As of December 10, 1996, according to a DCALP official, the erection
of structural steel beams for the roof of the arena had started.
DCALP officials expect the roof to take about an additional 4 months
to complete, depending on weather conditions. The roof is expected
to be in place by summer of 1997. DCALP stated that the arena should
open in late 1997.
AGENCY COMMENTS
------------------------------------------------------------ Letter :9
We obtained oral comments from the Mayor of the District of Columbia
and the Chief Financial Officer on a draft of this report. They
concurred with the information presented.
---------------------------------------------------------- Letter :9.1
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate and House Appropriations Committees'
Subcommittees on the District of Columbia; 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 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.
--------------------------------------------------------- Appendix I:1
Hodge Herry, Assistant Director
Phyllis Anderson, Senior Audit Manager
Louis Fernheimer, Senior Evaluator
OFFICE OF GENERAL COUNSEL
--------------------------------------------------------- Appendix I:2
Richard T. Cambosos, Senior Attorney
*** End of document. ***