District of Columbia: Status of the New Convention Center Project (Letter
Report, 07/15/98, GAO/AIMD/OCE-98-238).
Pursuant to a congressional request, GAO reviewed the Washington
Convention Center Authority's (WCCA) efforts to arrange for financing
and constructing a new convention center in the District of Columbia,
focusing on the: (1) estimated cost of this project, including the
guaranteed maximum price (GMP) for constructing the new convention
center, and the risk exposure for both the contractor and the District;
and (2) financing plan, including proposed changes to the revenue base,
history of dedicated tax collections, projections for future revenues,
and sufficiency to cover the GMP and other project costs.
GAO noted that: (1) WCCA is proceeding with efforts to build a new
convention center at Mount Vernon Square at a cost WCCA officials
estimate to be $650 million; (2) this estimate has not changed since GAO
reported on this project in September 1997; (3) however, GAO's latest
review of the project identified an additional $58 million in project
costs which--because WCCA expects them to be funded through federal
grants or moved into future operating costs--are not included in WCCA's
total project costs; (4) these costs raise the project's cost estimate
to $708 million, excluding reserve requirements and financing costs of
$138 million; (5) the majority of the estimated project costs are
covered in a $500.6 million GMP for construction; (6) the GMP lays out
22 different cost components and sets limits on financial risks to the
construction manager, Clark/Smoot; (7) areas of risk are not included in
the $500.6 million price; (8) an estimated $207 million in other
project-related activities will be or have been contracted for
separately; (9) WCCA's current financing plan to cover predevelopment,
construction, reserves and operation of the convention center calls for
about $846 million; (10) seventy-three percent of the funds needed to
finance the project are expected to be derived from revenue bonds
supported by dedicated taxes; (11) changes from the previous financing
plan include increasing the term of the bonds as well as the dedicated
taxes to allow WCCA to borrow more money for the project; (12) WCCA
received $44 million in dedicated taxes in 1997, and WCCA has projected
collections to increase at 1 percent per year over the next several
years; (13) these and other factors will be looked at by WCCA's
consultants, rating agencies, and bond insurers who will evaluate the
financing package and determine its ability to cover the GMP and other
project costs; (14) risks associated with the financing package could
affect the rating of the bonds and accordingly, the interest rate; (15)
although, WCCA plans to address an $18 million reduction in its
construction budget by negotiating arrangements with vendors to provide
equipment and services, to date there are no executed contracts to cover
these arrangements; and (16) the site selection process for the
convention center has a long history and numerous studies have
consistently identified Mount Vernon Square a preferred site.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD/OCE-98-238
TITLE: District of Columbia: Status of the New Convention Center
Project
DATE: 07/15/98
SUBJECT: Convention facilities
Municipal taxes
Cost analysis
Facility construction
Construction costs
Financial analysis
Municipal bonds
Future budget projections
Site selection
IDENTIFIER: Washington (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
July 1998
DISTRICT OF COLUMBIA - STATUS OF
THE NEW CONVENTION CENTER PROJECT
GAO/AIMD/OCE-98-238
Status of New Convention Center Project
(916241)
Abbreviations
=============================================================== ABBREV
CDBG -
CFO -
CPI -
EIS -
GDP -
GMP -
HUD -
NCPC -
OTR -
WCCA -
WMATA -
Letter
=============================================================== LETTER
B-279554
July 15, 1998
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:
On May 18, 1998, you requested that we review the Washington
Convention Center Authority's (WCCA) efforts to arrange for financing
and constructing a new convention center in the District of Columbia.
You specifically requested that we provide the status of WCCA's
progress in the following two areas:
-- The estimated cost of this project, including the Guaranteed
Maximum Price (GMP) for constructing the new convention center,
and the risk exposure for both the contractor and the District.
-- The Financing Plan, including proposed changes to the revenue
base, history of dedicated tax collections, projections for
future revenues, and sufficiency to cover the GMP and other
project costs.
You also asked us to provide background information on the site
selection, including the WCCA's analysis of alternative sites,
particularly the Northeast No. 1 site.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The Washington Convention Center Authority is proceeding with efforts
to build a new convention center at Mount Vernon Square at a cost
WCCA officials estimate to be $650 million. This estimate has not
changed since we reported on this project in September 1997.
However, our latest review of the project identified an additional
$58 million in project costs which--because WCCA expects them to be
funded through federal grants or moved into future operating
costs--are not included in WCCA's total project costs. These costs
raise the project's cost estimate to $708 million, excluding reserve
requirements and financing costs of $138 million.
Currently, the majority of the estimated project costs are covered in
a $500.6 million GMP for construction, which WCCA is in the process
of negotiating with the construction manager, Clark/Smoot, with the
goal of minimizing risks to WCCA and taxpayers. The GMP, which is a
proposed amendment to the construction management contract, lays out
22 different cost components and sets limits on financial risks to
the construction manager. Practically speaking, the GMP is only a
guaranteed maximum price if the underlying assumptions on which the
contractor bid the job do not change. Further, areas of risk--such
as the removal of hazardous materials and remediation of any unknown
subsurface conditions--are not included in the $500.6 million price.
An estimated $207 million in other project-related activities will be
or have been contracted for separately.
WCCA's current financing plan to cover predevelopment, construction,
reserves and operation of the convention center calls for about $846
million. Seventy-three percent of the funds needed to finance the
project are expected to be derived from revenue bonds supported by
dedicated taxes. Changes from the previous financing plan include
increasing the term of the bonds as well as the dedicated taxes to
allow WCCA to borrow more money for the project. WCCA received $44
million in dedicated taxes in 1997, and WCCA has projected
collections to increase at 1 percent a year over the next several
years, a conservative stance relative to estimates by management
consultants and the District, and to our evaluation of trends in tax
collections and the national and local economic outlook. These and
other factors will be looked at by WCCA's consultants, rating
agencies, and bond insurers who will evaluate the financing package
and determine its ability to cover the GMP and other project costs.
Obviously, risks associated with the financing package could affect
the rating of the bonds and accordingly, the interest rate. Among
the major unknowns at this juncture are a WCCA assumption that the
Congress will approve $35 million in federal funding to cover
relocating utilities and upgrading the Mount Vernon Square Metro
station. In addition, although WCCA plans to address an $18 million
reduction in its construction budget by negotiating arrangements with
vendors to provide equipment and services, such as a heating and
cooling plant, communications and food services equipment, to date
there are no executed contracts to cover these arrangements.
The site selection process for the convention center has a long
history, and numerous studies over the years have consistently
identified Mount Vernon Square\1 as a preferred site. WCCA and its
predecessors in the District government have repeatedly determined
that Mount Vernon Square is a more viable location for a convention
center than the other sites, including the Northeast No. 1 site.\2
WCCA's most recent analysis of the Northeast site indicates that
costs would be higher and would likely result in opening the
convention center at a much later date than estimated for the Mount
Vernon Square site.
--------------------
\1 Located in the blocks between 7th and 9th Streets, N.W., and N
Street and Mount Vernon Place, N.W.
\2 An area bordered by K Street, 1st Street, N.E., New York Avenue,
Florida Avenue, and the railroad tracks.
BACKGROUND
------------------------------------------------------------ Letter :2
Plans for the new convention center were initiated in 1993 by the
District's Hotel and Restaurant Associations, the Convention and
Visitors Association, and the District of Columbia government. The
Washington Convention Center Authority Act of 1994\3 (1994 Act)
authorizes WCCA to construct, maintain, and operate the new
convention center, as well as maintain and operate the existing
convention center. The current design calls for a total of 2.1
million gross square feet, which includes approximately 730,000
square feet of prime exhibit space compared to the existing
convention center which has a total of 800,000 gross square feet,
including 381,000 gross square feet of prime exhibit space. The
proposed new convention center is projected to rank sixth, based on
the gross square feet of prime exhibit space, in the United States
when completed, and the size of the proposed new convention center
should remain highly marketable into the 21st century.
According to WCCA officials, the proposed new convention center is
intended to allow the District to compete for larger conventions and
trade shows. A 1993 feasibility study by Deloitte & Touche,
commissioned by the local hospitality industry, stated that even
though the District is viewed as a desirable location, the existing
convention center is small compared to the convention centers of
other cities, such as Atlanta, New York, Chicago, and Philadelphia.
The current master plan calls for constructing a new convention
center at Mount Vernon Square, the legislatively\4 preferred site,
located at Ninth Street and Mount Vernon Place, Northwest. In the
1993 feasibility study, eight potential sites were identified and
evaluated against certain criteria such as physical and location
characteristics, historic preservation, parking, and cost, including
land acquisition and construction. As a result of this analysis, the
Mount Vernon Square site was determined to be the preferred site due
to its close proximity to the District's downtown businesses and
because the District owns the majority of the land, thus minimizing
the cost of land acquisition.
On September 25, 1997, WCCA obtained site approval and preliminary
building design approval from the National Capital Planning
Commission (NCPC). NCPC approved Mount Vernon Square as the site for
the new convention center, which is about two blocks north of the
current center. However, NCPC did not grant final approval of the
building design but instead made several recommendations to improve
the aesthetics of the building. WCCA anticipates that final design
approval will be obtained from NCPC by early September 1998.
--------------------
\3 WCCA was created by the Washington Convention Center Authority Act
of 1994, D.C. Law 10-188, September 28, 1994, 41 DC 5333, 6823, D.C.
Code Ann. secs. 9-801 through 9-819.
\4 Sec. 101(12) of the 1994 Act, D.C. Code Ann. sec 9-801(12)
(1981).
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
To determine the new convention center project's estimated costs,
proposed financing arrangements, and site selection process, we held
discussions with and obtained information from various D.C. Council
members and officials of the District government, WCCA and its
consultants and advisors, NCPC, U.S. General Services
Administration, the Washington Metropolitan Area Transit Authority
(WMATA), the Committee of 100,\5 the Hotel Association of Washington,
D.C., the Washington D.C. Convention and Visitors Association, the
Restaurant Association of Metropolitan Washington, Moody's Investors
Service, Standards and Poor's, and Coopers & Lybrand LLP.\6
We compared the cost estimates for the project as of June 19, 1998,
with the estimates in our September 1997 report to the
Subcommittee.\7 We reviewed budget documents and held discussions
with WCCA officials to obtain reasons for variations from the
previous estimates. We also identified project cost components not
included in the GMP and who would be responsible for those costs. As
you requested, we asked the General Services Administration to review
the proposed GMP amendment to the construction management services
agreement\8 for the convention center project.
We reviewed financial records and current balances to determine the
amount of dedicated taxes reported as collected and transferred to
WCCA. We reviewed the legislation for the proposed new tax structure
for the convention center and obtained forecasts from the District
government of future collections under the proposed new tax
structure. We interviewed officials of WCCA, the District
government, and the lockbox trustee vendor regarding operation of the
lockbox since its inception. We obtained information on WCCA's
financing plan for the new convention center project, and we reviewed
the assumptions to determine whether they are reasonable. To
evaluate the reasonableness of the dedicated tax revenue forecast, we
reviewed the District's and Coopers & Lybrand's methodology and
assumptions for the dedicated taxes.
In addition, we reviewed the auditor's\9 workpapers of the reported
taxes collected and deposited for the convention center project to
determine whether the District government properly calculated and
transferred dedicated taxes to WCCA.
To determine how the site selection process was conducted, we
reviewed the environmental impact study that was prepared for NCPC
approval by a consultant hired by WCCA. We reviewed historical
information on studies performed on alternative site consideration by
the District and independent consultants and WCCA's comparative
analysis of costs to construct the new convention center at the Mount
Vernon Square site and the alternative Northeast No. 1 site.
We conducted our review from May through mid-July 1998 in accordance
with generally accepted government auditing standards and considered
the results of previous work.\10 We requested comments on a draft of
this report from WCCA and the District of Columbia Government.
--------------------
\5 The Committee of 100 is a citizens planning and advocacy group,
which was founded in 1923 in Washington, D.C.
\6 Coopers & Lybrand LLP was hired by Mesirow Financial Holdings,
Inc.--the primary contractor--to perform management consultant
services for the Washington Convention Center Authority. As a result
of a merger, Coopers & Lybrand LLP is now part of
PricewaterhouseCoopers.
\7 District of Columbia: Status of the Proposed New Convention
Center Project (GAO/AIMD-97-148, September 25, 1997).
\8 Construction Management Services Agreement for the Washington
Convention Center Project by and between the Washington Convention
Center Authority and Clark/Smoot, A Joint Venture, March 16, 1998.
\9 KPMG Peat Marwick LLP audited WCCA's financial statements for
fiscal year 1997.
\10 Convention Centers' Economic Benefits (GAO/GGD/AIMD/OCE-98-71R,
February 27, 1998), District of Columbia: Status of the Proposed New
Convention Center Project (GAO/AIMD-97-148, September 25, 1997), and
District of Columbia: Status of the New Convention Center Project
(GAO/AIMD-97-17, December 20, 1996).
ESTIMATED PROJECT COSTS HAVE
INCREASED
------------------------------------------------------------ Letter :4
Since we last reported to this Subcommittee, the estimated costs for
building the new convention center have increased. Table 1 compares
current cost estimates with the estimates included in our September
1997 report. Project costs increased $58 million, from $650 million
to $708 million, and nonconstruction reserves have increased the
financing-related costs by about $51 million, from $87 million to
$138 million for a current total funding requirement of $846 million.
As of May 31, 1998, WCCA had spent about $27 million, primarily for
contractual services ($22 million), such as for the program manager
and design fees, acquiring the additional land at the Mount Vernon
site ($2 million), and administrative expenses ($2 million).
Table 1
Total Estimated Costs for the New
Convention Center
((Dollars in thousands))
Estimate Estimate Increa
as of as of se
05/31/ 06/19/ (decre
Project component 97\a 98 ase)
------------------------------------------ -------- -------- ------
Building and site/GMP $417,500 $500,600 $83,10
\b 0
Other costs:
Total predevelopment costs\c, f 39,912 79,424 39,512
Fixtures/furnishings/equipment 40,000 22,305 (17,69
5)
Soil remediation and hazardous 11,000 5,000\d (6,000
materials removal )
Section 106 mitigation costs\e 7,600 12,671 5,071
Metro station upgrade 22,300 0 (22,30
0)
Other construction costs 35,814 0\f (35,81
4)\f
Project contingency 75,874 30,000\g (45,87
4)
Subtotal WCCA project budget $650,000 $650,000 $0
Additions to WCCA project budget:
Vendor provided equipment 17,695 17,695
Portion of utilities relocation not \h 10,000\h 10,000
included in building and site
Metro station upgrade 25,000 25,000
Project administrative costs 5,000\i 5,000
======================================================================
Total additions to WCCA budget $57,695 $57,69
5
======================================================================
Estimated project costs $650,000 $707,695 $57,69
5
Financing related costs:
Bond issuance 12,200 11,827 (373)
Reserve funds 75,100 126,399\ 51,299
j
======================================================================
Total financing related costs $87,300 $138,226 $50,92
6
======================================================================
Total estimated project costs $737,300 $845,921 $108,6
21
----------------------------------------------------------------------
\a GAO report, District of Columbia: Status of the Proposed New
Convention Center Project (GAO/AIMD-97-148, September 25, 1997).
\b This amount is represented in the GMP proposal submitted by the
construction manager, Clark/Smoot, Joint Venture, May 22, 1998.
\c The 1997 amount includes $5.4 million for land acquisition, and
the 1998 amount includes $4.7 million. In 1997, the District owned
87 percent of the land at the site. The market value of the land
owned by the District, according to WCCA, is about $74 million, which
is not included in the project costs.
\d WCCA did not identify soil remediation and hazardous materials
removal as a separate cost component in its May 22, 1998, budget. In
that budget, costs incurred for this purpose were to be paid from the
project contingency.
\e Section 106 of the National Historic Preservation Act mitigation
requirements were established in a September 12, 1997, memorandum of
agreement among the National Capital Planning Commission, the D.C.
State Historic Preservation Officer, the Advisory Council on Historic
Preservation, WCCA, the Mayor, and the D.C. Council. Mitigation
requirements in the 1998 estimate include: art program, marshaling
yard program, historic preservation survey, retail study, landscaping
adjacent streets, restoration of Carnegie Library, future truck
access study, transportation improvements, and community development.
The art program, truck access study, transportation improvements, and
community development were not included in the 1997 estimate.
\f In the 1998 estimate, the category, "other construction costs,"
has been shifted to predevelopment costs.
\g In addition to this contingency, the GMP contains a $10 million
construction contingency for use by the construction manager.
\h The 1997 building and site estimate reflects the total estimated
cost of utilities relocation, including this $10 million.
\i WCCA has not shown administrative costs in its project budget. It
had incurred about $2 million in administrative costs as of May 31,
1998, and estimates that an additional $3 million may be incurred
through project completion.
\j Reserves include: Debt Service Reserve Funds ($44.4 million),
Operations and Marketing Reserve Fund ($50 million), Renewal and
Replacement Fund ($22 million), and Revenue Stabilization Account
($10 million). This includes an additional $27.7 million for Debt
Service Reserve, $3.8 million for Operating and Marketing Reserve,
$9.8 million for Renewal and Replacement Fund, and $10 million for
Revenue Stabilization Account than had been indicated in our
September 1997 report.
Source: WCCA.
While WCCA has maintained a $650 million budget, a number of changes
have been made among the budget components, with some components
increasing and some decreasing. A few project components have been
taken out of the budget. The following changes have been made within
the $650 million budget:
-- Building and site estimated costs have increased by $83.1
million based on a proposed GMP amendment.
-- Predevelopment costs increased by $39.5 million largely as a
result of shifting "Other Construction Costs," estimated to cost
$35.8 million, to the predevelopment cost category.
-- Fixtures/furnishings/equipment decreased by $17.7 million in
anticipation of negotiating arrangements with vendors to provide
such equipment.
-- Soil remediation and hazardous materials removal costs decreased
by $6 million as a result of refined estimates.
-- Section 106 mitigation cost increases of $5 million reflect some
additional requirements not included in previous estimates.
-- The Metro station upgrade, previously estimated to cost $22.3
million, has been taken out of the budget in anticipation of
federal funding.
-- The project contingency decreased by $45.9 million. Considering
the $10 million contingency in the GMP, the decrease is $35.9
million.
The following estimated project costs, when added to WCCA's $650
million budget, result in total estimated project costs of $708
million:
-- Portion of utilities relocation costs that are not included in
the building and site costs for which WCCA anticipates $10
million of federal funding.
-- Metro station upgrade for which WCCA anticipates $25 million of
federal funding.
-- Anticipated vendor provided equipment of about $17.7 million.
-- Project administrative costs of $5 million, which have not been
shown in the budget.
As part of the prospective financing arrangements, some of the
reserves have been increased and others established for a
strengthened financial arrangement for an overall increase of $51
million.
GUARANTEED MAXIMUM PRICE IS
LARGEST COST COMPONENT
---------------------------------------------------------- Letter :4.1
Making up the largest portion of the 1998 estimated project costs are
the costs associated with the GMP (building and site). The $500.6
million GMP is 71 percent of the $708 million estimated project cost.
Under the terms of the construction management services agreement
between WCCA and the construction manager, the construction manager
submitted a GMP proposal to WCCA.\11 The proposal provides the basis
for WCCA and the construction manager to negotiate the final price.
Once the price and its basis (the terms, conditions, assumptions, and
related drawings and plans) are approved by WCCA, these will be set
forth in the GMP amendment to the agreement. To become final, the
amendment must be approved by the D.C. Financial Responsibility and
Management Assistance Authority (Authority).
Under the GMP proposal, the contractor is to perform all necessary
work to construct the project so that it is complete and a fully
functioning, first-class convention center. The construction
management services agreement and the GMP amendment will allocate the
costs for the project between WCCA and the construction manager. Any
increases in the cost of items allocated to the construction manager
will be the responsibility of the construction manager. Any
increases in the costs of items allocated to WCCA (or an increase in
cost items allocated to the construction manager resulting from a
change order issued by WCCA) are the responsibility of WCCA. The
contract and proposed amendment also provide an incentive for the
construction manager to complete the project for less than the GMP by
giving the construction manager 25 percent of cost savings up to $9.5
million. The percentage is adjusted up or down depending on the
construction manager's success in meeting the established goals for
using local, small, or disadvantaged business enterprises. There is
a penalty of $50,000 a day for failure to meet the completion date.
The GMP proposal (building and site costs in table 1) is $83.1
million greater, or about 20 percent more than the 1997 estimate of
$417.5 million. A WCCA official attributed the higher cost to a
175,000 increase in square footage to accommodate support and public
space, retail, and parking areas, design changes, inflation, and the
$10 million construction contingency.
Table 2 shows the components of the GMP. Site work, concrete, and
steel account for $233 million or 47 percent of the GMP. Mechanical
and fire protection, electrical work and security, and design
allowances\12 account for $117 million or 23 percent.
Table 2
Proposed Components of the GMP
((Dollars in thousands))
Component Amount
------------------------------------------------------------ --------
General conditions/requirements $26,500
Utilities relocation 6,500
Site work 50,500
Concrete 50,500
Masonry 16,500
Steel/metals 132,000
Carpentry 1,000
Moisture protection 17,000
Fenestrations 17,000
Finishes 29,000
Specialties 4,000
Loading dock equipment 79
Window treatment 400
Conveyances 8,800
Mechanical and fire protection 45,000
Electrical work and security 36,700
Design allowances 35,113
Construction contingency 10,000
Insurance 808
Performance and payment bonds 3,400
Preconstruction fee 300
Construction management fee 9,500
======================================================================
Total GMP $500,600
----------------------------------------------------------------------
Source: WCCA.
--------------------
\11 The construction manager submitted a GMP proposal on May 22,
1998, totaling $500.6 million for building and site. The proposal is
valid until August 22, 1998.
\12 The design allowance covers a number of relatively small items,
such as light fixtures, site and street lighting, signage, various
finishes, etc.
POSSIBLE BUILDING AND SITE
COSTS IN EXCESS OF THE GMP
---------------------------------------------------------- Letter :4.2
The GMP proposal specifies that WCCA is responsible for the following
costs:
-- WCCA is responsible for costs associated with soil remediation
and hazardous materials removal. WCCA officials told us that it
could assume the liability for soil remediation and hazardous
materials removal at less cost than including it in the GMP
because the construction manager would require a significant
contingency amount for this line item. Since the time of our
last review, WCCA has had testing performed at the Mount Vernon
Square site. Based on the results to date, WCCA officials
expressed confidence that soil remediation and hazardous
materials removal costs will not significantly exceed their
estimates. WCCA has decreased the 1997 estimate of such costs
from $11 million to $5 million. They have informed us that the
$11 million estimate was an attempt to make an adequate estimate
before the site tests were completed. If costs exceed the
budgeted $5 million, WCCA plans to offset this increase with
funds from the project contingency.
-- WCCA is responsible for the additional costs incurred if the
construction manager encounters subsurface or soil conditions
that materially differ from those indicated in information
provided by WCCA.
-- The GMP proposal is based on certain lump sum allowances and
quantity and unit price assumptions. WCCA is responsible for
the additional costs that may be incurred if actual costs exceed
the allowances and assumptions specified in the proposal. For
example, the proposal contains 24 design allowances, including
light fixtures, street lighting, signage, and various finishes,
totaling $35.1 million. The GMP amount will be adjusted upward
if actual costs exceed the allowances.
-- WCCA is responsible for additional costs resulting from any
change orders to the contract.
RISKS EXTERNAL TO THE GMP
---------------------------------------------------------- Letter :4.3
In addition to the potential for incurring building and site costs in
excess of the GMP amount, WCCA is responsible for the remaining
project costs that are not covered by the GMP, which are noted in
table 1. The $207 million estimated costs for these components
decreased $25 million from the 1997 estimates, offsetting some of the
increased 1998 estimate of the building and site costs.
-- WCCA has omitted from its project budget estimated costs of $25
million for the Mount Vernon Square-UDC Metro station upgrade
and $10 million for the utilities relocation work in
anticipation of these costs being paid from federal grants. In
the case of the Metro upgrade, the President's fiscal year 1999
budget to the Congress includes $25 million to be paid directly
to the Washington Metropolitan Area Transit Authority, which
would be responsible for the work. The utility relocation work
would be financed with Community Development Block Grants (CDBG)
funds made available to the District by the U.S. Department of
Housing and Urban Development (HUD).\13 Until these initiatives
are approved, there is a financial risk to the project budget.
-- WCCA has reduced the project costs for the fixtures,
furnishings, and equipment component by about $17.7 million in
anticipation of negotiating arrangements with vendors to provide
certain equipment and services, such as a heating and cooling
plant, communications, and food services equipment. This
arrangement technically takes the costs out of the budget
without reducing project costs. According to WCCA officials,
this arrangement has been done at other convention centers.
WCCA is at risk for these costs until contracts have been
executed with vendors.
--------------------
\13 WCCA has provided us with a copy of a draft grant agreement
between WCCA and the District's Department of Housing and Community
Development. According to WCCA's Managing Director of Development,
this is not a new CDBG federal allocation but is inclusive in the
District of Columbia HUD/CDBG annual allocation.
CONTINGENCY TO COVER PROJECT
RISKS
---------------------------------------------------------- Letter :4.4
The project budget includes two contingency amounts: (1) a $10
million construction contingency contained in the GMP earmarked for
cost increases that are the responsibility of the construction
manager and (2) a $30 million project contingency earmarked for cost
increases both inside and outside the GMP for which WCCA is
responsible.\14 The $40 million contingency is a decrease of $35.9
million from the $75.9 million in the 1997 budget although it now
covers a larger project cost. According to WCCA's Managing Director
of Development, given that WCCA has successfully negotiated a GMP
with the contract manager and has completed many preconstruction
activities, an 8 percent ($40 million)\15 contingency is considered
reasonable.
--------------------
\14 For example, approved change orders, soil remediation, and
hazardous materials removal.
\15 WCCA computes the 8 percent by using the $10 million contingency
in the GMP plus the $30 million project contingency to the GMP amount
of $500.6 million. If WCCA were to apply the $40 million against the
total project cost of $708 million, the contingency amount would be
about 6 percent.
WCCA'S PROPOSED FINANCING PLAN
------------------------------------------------------------ Letter :5
WCCA's current financing plan for the project calls for total funds
of about $846 million. About $616 million, or 73 percent, is
expected to be derived from revenue bonds supported by dedicated
taxes. In addition, WCCA anticipates using $110 million from
dedicated tax revenue collections through July 1, 1998; about $62.7
million from interest earned on the bond proceeds; $35 million from
the federal government to fund the Metro upgrade and utility
relocation; $18 million from vendors to fund furniture, fixtures and
equipment; and $5 million from the operating subsidy to cover
administrative costs. Assuming the estimated project costs are
substantially accurate, the financing plan projections, including the
projected growth in dedicated tax revenues, seem reasonable; however,
until the federal funding is approved in an adopted 1999 budget, and
until WCCA signs contracts with vendors, there is a risk to the
financing plan of about $53 million. WCCA's CFO stated that any
additional funding needs would require a reevaluation of the budget
and financing plan assumptions. If WCCA were to seek additional
funding from the District, it would require approval by the
District's City Council, the Mayor, and the Authority.
NEW FINANCING PLAN SUPPORTS
INCREASED DEBT
---------------------------------------------------------- Letter :5.1
Table 3 shows the May 1997\16 and the current (May 1998) financing
plans. Since May 1997, WCCA has proposed several changes to its
financing plan. As the table indicates, the current financing plan
assumes a lower interest rate, an increase\17 in the annual dedicated
tax revenues to support the bond financing, and an increase in the
term of the bonds from 30 to 34 years. These changes would allow
WCCA to borrow more money to finance the project. In addition, since
the amount of cash available from dedicated taxes and bond proceeds
has increased, the amount estimated for construction fund earnings
has also increased from the original plan. Finally, the current
financing plan includes funding for financing costs and reserve
requirements.
Table 3
Comparison of Financing Plans for
Proposed New Convention Center
((Dollars in millions))
Financing Financing
plan plan
as of 5/ as of 5/
Funding sources 97 98\a
--------------------------------------------- ---------- -----------
Senior lien bonds $343 $487.4
Junior/senior subordinate lien $80 $128.2
======================================================================
Subtotal $423 $615.6
Cash for reserves $30 $72.8
Construction fund earnings $51 $62.7
Cash for preconstruction activities $40 $37.2\b
Federal funds 0 $35
Vendor participation 0 $18
Funds for administrative costs 0 $5\c
======================================================================
Subtotal $544 $846
======================================================================
Total funding required $650\d $846
Estimated shortfall ($106) 0
Interest rate 6.3%\e 5.6%\f
Term of debt 30\g 34
Dedicated annual revenues to back bonds $27.5\h $44
Revenue growth assumption 1% 1%
Avg. annual debt service $26.0 $42.6
----------------------------------------------------------------------
\a Apart from this financing plan, WCCA's underwriter and financial
adviser developed several other financing structures: (1) final
maturity of 30 years with a 1.50 times coverage on the senior lien
bonds, (2) final maturity of 34 years with 1.35 times coverage on the
senior lien bonds, and (3) final maturity of 30 years with 1.35 times
coverage on the senior lien bonds. However, this plan is WCCA's
preferred because it provides a better level of coverage (1.50 on the
senior lien bonds), a longer maturity (34 years), and more funding
for the project.
\b This money reflects dedicated tax collections available of which
about $27 million had already been spent on predevelopment activities
as of May 31, 1998.
\c WCCA reflects funds for administrative costs (salaries and wages)
of the proposed new convention center as part of the operating
subsidy it receives through dedicated tax collections for the
existing center.
\d The $650 million did not include WCCA's preliminary estimate of
$87.3 million needed for financing costs and reserve requirements.
\e The interest rate was based on prevailing interest rates as of May
21, 1997, and a projected bond issuance date of October 1997.
\f The interest rate was based on prevailing interest rates as of May
6, 1998, and a projected bond issuance date of July 1, 1998.
\g Subsequent to our September 1997 report, WCCA had proposed a
financing strategy that would lengthen the maturity of the bonds from
30 to 40 years. See our report, Convention Centers' Economic
Benefits (GAO/GGD/AIMD/OCE-98-71R, February 27, 1998).
\h This amount did not include the operating subsidy and the 60
percent Hotel Occupancy Tax contribution to the marketing entities,
which are now being assumed in the May 1998 Plan.
Source: WCCA.
Since WCCA is exposed to rising interest rates until the bond
financing is finalized, WCCA considered a scenario with a higher bond
interest rate of 5.85 percent, or 25 basis points higher than its
preferred financing plan interest rate assumption of 5.6 percent.\18
Based on this scenario, the increased interest rate does not
materially change the financing plan.
--------------------
\16 This financing plan was developed in May 1997 and was discussed
in our September 1997 report, GAO/AIMD-97-148, District of Columbia:
Status of the Proposed New Convention Center Project.
\17 Based on the Washington Convention Center Authority Financing
Amendment Act of 1998, WCCA will now use the existing convention
center's operating subsidy ($5.6 million) and the subsidy ($5.2
million) to the Washington Convention and Visitors Association, the
Mayor's Committee to Promote Washington, and the D.C. Chamber of
Commerce to support the bond financing.
\18 As of July 10, 1998, the 30-year Treasury yield was 5.62 percent
versus 6.56 percent at the same time last year.
FRAMEWORK FOR EVALUATING
DEDICATED TAX FINANCING
---------------------------------------------------------- Letter :5.2
Since the majority (73 percent) of the funds to finance the project
are expected to come from bonds supported by dedicated taxes, our
review of the financing plan considers some of the key factors rating
agencies use to rate dedicated tax financing for convention center
projects: (1) breadth of the tax base, (2) historical performance of
the revenue stream, (3) the underlying strength of the economy, and
(4) the absence of legislative risk.\19
Breadth of the tax base. According to the rating agencies, taxes
levied on a broader range of goods, services, and population are
stronger and less volatile than those derived from narrower bases.
The current tax structure that was established in fiscal year 1995 to
provide financing for predevelopment activities for the proposed new
center is comprised of the hotel occupancy tax, hotel sales tax,
corporate franchise, unincorporated franchise, restaurant meals,
alcoholic beverages, and automobile rental taxes.\20 \, \21
On June 16, 1998, the D.C. City Council approved a change to the
dedicated tax structure that will be available effective October 1,
1998, to guarantee the repayment of revenue bonds issued to finance
the construction of the new center.\22 After the Council changes
become effective, WCCA will essentially rely on taxes levied on
hospitality industries to finance the construction costs of the
project. The District's hotel sales tax rate was increased from 13
percent to 14.5 percent, of which WCCA will receive 4.45 percent.
WCCA's existing rate is 2.5 percent. WCCA will continue to receive 1
percent of the 10 percent tax rate on restaurant sales, alcoholic
beverages, and automobile rentals. WCCA will no longer receive a
portion of the corporate franchise and the unincorporated business
taxes. The hotel occupancy tax will be repealed. The Council change
requires the Mayor to impose a surtax on the hotel sales tax if
additional funds are required to cover debt service and operations
costs.\23
Under the current tax structure, about 79 percent of the revenue WCCA
has received comes from the hotel sales, and restaurant and
automobile rental taxes. As a result of the change to the dedicated
tax structure, 71 percent of WCCA's total dedicated tax revenues are
expected to come from the hotel sales tax and the remaining 29
percent from the restaurant sales and automobile rental taxes.
Convention centers in Dallas, Baltimore, and New Orleans have been
funded primarily by a hotel sales tax.\24
Historical performance of the revenue stream. The rating agencies
analysis also includes a review of multiyear historical data for
collections of the dedicated revenues. According to the rating
agencies, 5 years of historical data are usually a good indicator of
how the tax is likely to perform in the future. Table 4 shows the
collection history of the taxes currently dedicated to the project.
Table 4
Current Tax Structure Including
Dedicated Tax Cash Collections
(Dollars in thousands)
Fiscal year
----------------------------------------------------
Avg. annual
growth rate
Tax 1993 1994 1995 1996 1997 1998 93-97\b
------------ ------- ------- ------- ------- ------- ------- ------------
Restaurant\
and
automobile
rental
Total\ $109,82 $110,64 $120,97 $126,30 $134,52 $137,00
6 6 0 0 0 0
WCCA's $12,097 $12,630 $13,452 $13,700
portion \
================================================================================
Percent of 0.7% 9.3% 4.4% 6.5% 1.8% 5.2%
change\
Hotel sales
Total\ $66,037 $65,629 $74,100 $79,451 $92,160 $98,300
WCCA's $14,260 $15,279 $17,723 $18,900
portion \
================================================================================
Percent of -0.6% 12.9% 7.2% 16.0% 6.7% 8.7%
change\
Hotel
occupancy
Total\ $8,991 $9,245 $9,045 $8,861 $8,917 $9,000
WCCA's $3,673\ $3,560\ $3,481 $3,600
portion
(40%)\c
================================================================================
Percent of 2.8% -2.2% -2.0% 0.6% 0.9% -0.2%
change\
Corporate
franchise
Total\ $86,885 $112,40 $122,86 $127,75 $144,68 $155,40
2 8 5 0 0
WCCA's $2,959\ $3,052\ $3,531 $3,700
portion
================================================================================
Percent of 29.4% 9.3% 4.0% 13.2% 7.4% 13.6%
change\
Unincorp.
franchise
Total\ $31,795 $34,731 $35,570 $34,700 $42,147 $43,040
WCCA's $853\ $832\ $1,034 $1,040
portion
================================================================================
Percent of 9.2% 2.4% -2.4% 21.5% 2.1% 7.3%
change\
================================================================================
Total taxes $303,53 $332,65 $362,55 $377,06 $423,38 $442,74
4 3 3 7 8 0
================================================================================
Total WCCA $33,842 $35,353 $39,221 $40,940
tax
receipts
================================================================================
Percent of 9.6% 9.0% 4.0% 12.3% 4.8% 8.7%
change\
--------------------------------------------------------------------------------
\a Fiscal Year 1998 projections were provided by the District's Tax
and Economic Policy Administration.
\b The percentage change reflects total taxes collected by the
District, not WCCA's portion.
\c The other 60 percent goes to the marketing entities.
Source: Unaudited tax cash collection data provided by the
District's Office of Tax and Revenue.
Table 4 shows that during fiscal years 1993-1997, total tax
collections grew by an average annual rate of about 8.7 percent. The
hotel sales, restaurant, and automobile rental taxes' combined annual
rate of growth averaged 6.6 percent over the same period.\25 These
taxes experienced rate increases in fiscal year 1995. According to
the District, the increase in collections also reflects improvement
in the District's economy, including the increase in the number of
tourists to the District. WCCA's tax receipt data for fiscal year
1998 shows receipts being about $4.6 million higher through May 1998
than for the same period of time last year.\26
Underlying economic strength. Since economic conditions are an
important factor for the future stream of dedicated taxes, rating
agencies evaluate the underlying strength of those parts of the
economy most relevant to the dedicated taxes. For example, if the
dedicated tax is mainly generated by local residents, such as the
restaurant tax, the evaluation would focus on the strength of the
local economy. If the tax is mainly generated by visitors, such as
the hotel sales tax, the evaluation would include the economies of
the areas from which visitors come. In cities like Washington, D.C.,
which attracts visitors from all over the country and the
international community, the future stream of hotel sales tax is
likely to be influenced by the strength of the national economy.
WCCA's financing plan assumes 1 percent growth in dedicated tax
revenues under the new dedicated tax structure beginning in fiscal
year 1999. According to WCCA's chief financial officer, the 1
percent growth assumption is conservative when compared to historical
trends in collections. To evaluate the reasonableness of WCCA's tax
projection, we reviewed the historical trends, as discussed above,
the underlying strength of the economy most relevant to the dedicated
taxes and the District of Columbia government's and Coopers &
Lybrand's methodologies and assumptions used in projecting the future
stream of revenues.
The U.S. economy is projected to grow at a moderate rate over the
next decade. For example, the Congressional Budget Office estimates
the average annual growth in real gross domestic product (GDP) will
be 2.2 percent during 1998-2008, and over the same period, the
consumer price index (CPI) is projected to increase at an average
rate of 2.7 percent. The WEFA Group, a macroeconomic forecasting
firm, expects real GDP to grow at 2.3 percent per year during
1998-2007 and the CPI to be at 2.6 percent during this period.
The projections for the Washington, D.C., population and economy
reflect improvements over the next 3 to 5 years. Standard & Poor's
DRI\27 projects that the population during 1998-2007 will remain
virtually unchanged. This contrasts with a decline of an average
annual rate of over 2 percent per year during the previous 3 years.
Standard & Poor's DRI projects that, during 1998-2007, the District's
personal income\28 will increase at an inflation adjusted average
annual rate of 0.9 percent. During 1995-1997, personal income annual
average growth rate was close to zero.
Figure 1: Dedicated Taxes:
Projected Annual Percentage
Change
(See figure in printed
edition.)
Figure 1 shows combined annual percentage change for the hotel,
restaurant, alcoholic beverages, and automobile rental taxes based on
the District's and Coopers & Lybrand's forecast under the new tax
structure from fiscal year 1999 through fiscal year 2007. The
District forecasts average annual growth in revenues for the hotel
and restaurant taxes combined over fiscal years 1999 to 2007 to be
about 2.1 percent, while Coopers' forecast reflects combined average
annual growth of about 3.4 percent. These estimates are
substantially less than the combined average annual growth rate of
6.6 percent in these same taxes between fiscal years 1993 and 1997.
To evaluate the reasonableness of Coopers' projected revenues from
the hotel tax, we reviewed its key assumptions and its U.S. lodging
industry forecast model. The model estimates future hotel room
demand, hotel room starts, and hotel room rate inflation. Key
predictors for these variables are real GDP, the inflation-adjusted
average daily rate, and the lagged occupancy level, respectively.
Based on the WEFA forecasts discussed above, the Coopers' report
assumed that the U.S. economy will continue to grow at about 2.3
percent. It also assumed that the District's lodging market will not
experience significant demand or supply shocks during this period.
The Coopers' lodging industry forecast model for the District is
driven by the U.S. forecast model.\29 Coopers estimates that hotel
room demand between 1999-2001 in the District will increase at or
slightly above the U.S. industry trend growth. Beyond the year
2001, hotel room demand growth is expected to decrease to levels at
or slightly below those for the U.S. lodging industry as a whole.
The growth in total hotel room revenue to the District during
1998-2007 is expected to average 4.7 percent annually.
Based on an analysis of historical data, Coopers determined that the
number of District households and the District's gross income can
predict restaurant taxable sales. They estimate that during
1999-2007, restaurant sales will increase at an annual rate of about
1.6 percent, lower than the projected rate of inflation. The
estimate is based on the assumption that the District's gross income
will grow slightly in nominal terms. Coopers assumed that the number
of households will continue to decline but at a lower rate than the
previous years.
Coopers' assumptions are generally consistent with the outlook
provided by independent sources discussed above. Accordingly, the
projected rate of growth in dedicated taxes appears to be reasonable.
The District's Office of Tax and Revenue (OTR) projections are
derived from a time-series forecasting model.\30 Using a standard
time-series model, OTR estimates future hotel and restaurant tax
revenues using monthly historical tax collection data. These
estimates were then fine-tuned using projected inflation and personal
income under the assumption that these variables will influence the
future trend of tax revenues. Based on the DRI forecasts, OTR
assumed an annual inflation of 2.4 percent and an annual growth in
personal income of 2.5 percent during 1997-2002. OTR assumed no
major changes in the District's economic circumstances and in the
future success of collection practices. Overall, OTR's methodology
and assumptions appear to be conservative as reflected in their
estimated projected growth rates of the hotel and restaurant taxes
discussed above.
Based on our analysis of trends in collections of hotel sales,
restaurant and automobile rental taxes, the national/local economic
outlook, the District's and Coopers & Lybrand's assumptions, WCCA's
growth assumption of 1 percent to support the bond financing seems
conservative. Assuming that the District's forecast of annual
average growth of about 2 percent holds true, WCCA stands to gain an
additional $63 million for fiscal years 1999 through 2007, which
could be used to retire the bonds earlier than their stated maturity
dates.
Absence of legislative risk. According to the rating agencies, for
dedicated tax-secured debt to be rated investment grade, the revenues
must not be subject to annual appropriation and the authority to levy
the tax must not be subject to revocation by the legislature within
the life of the debt.
Section 212 of the Washington Convention Center Authority Act of
1994, as amended,\31 provides that the District pledges to the
Authority that the District will not limit or alter rights vested in
the Authority to fulfill agreements made with holders of the bonds,
or in any way impair the rights and remedies of the holders of the
bonds until the bonds, together with interest and all costs and
expenses in connection with any action or proceedings by or on behalf
of the holders of the bonds, are fully met and discharged. Also,
Section 490 (f) of the Home Rule Act, as amended,\32 makes dedicated
tax revenues pledged to secure revenue bonds generally available
without requiring further appropriations.
While the financing plan does not reflect legislative risks
associated with the dedicated taxes, WCCA assumes one-time federal
funds of about $35 million for Metro expansion and utility relocation
at the Mount Vernon Square site. The President's fiscal year 1999
budget to the Congress includes $25 million for WMATA to expand the
Mount Vernon Square-UDC Metro station. The $10 million anticipated
for utility relocation work is expected to be financed with a
Community Development Block Grant made available to the District by
the U.S. Department of Housing and Urban Development. However,
until the federal budget is adopted, it is uncertain whether federal
funds will be available. Therefore, there is a legislative risk to
the financing plan of about $35 million. If these grants are not
received, WCCA's $30 million project contingency outside of the GMP
would not be sufficient to cover these estimated costs.
--------------------
\19 On Entertainment and Tourism, "Moody's Approach to Rating
Stadium, Arena, and Convention Center Bonds," February 13, 1995.
Standard & Poor's Public Finance Criteria 1998, "Special Tax and
Recreation Facility Bonds."
\20 Based on the Washington Convention Center Authority Act of 1994,
the existing dedicated taxes to WCCA include the following: 2.5
percent of the 13 percent sales and use tax on hotel room charges;
1.0 percent of the 10 percent sales and use tax on restaurant meals,
alcoholic beverages consumed on premises, and automobile rental
charges; $1.50 hotel occupancy tax per hotel room per overnight stay.
(WCCA receives 40 percent of the $1.50 per hotel room per overnight
rate and the D.C. Committee to Promote Washington and the Washington
Convention and Visitors Association receives 60 percent); 2.5 percent
surtax on the 9.5 percent corporate franchise tax; and 2.5 percent
surtax on the 9.5 percent unincorporated business franchise tax.
\21 According to the District, the automobile rental tax comprised a
small portion since most of the car rental companies are located in
Virginia and Maryland, near the airports.
\22 The Washington Convention Center Authority Financing Amendment
Act of 1998 was passed by the Council and was signed by the Mayor.
It was approved by the Authority on July 13, 1998, and will now be
sent to the Congress where it will be subject to a 30-day
congressional review period before becoming law.
\23 In addition, the 1998 Act repealed the direct dedication of tax
revenue to the marketing entities and established the Washington
Convention Center Marketing Fund. This fund would be held by the
trustee for the Authority's bonds and shall receive monthly deposits
equal to 17.4 percent of WCCA's share of the hotel sales and use tax
collected. This provision replaces the designation of the 60 percent
of the hotel occupancy tax.
\24 Convention Centers' Economic Benefits (GAO/GGD/AIMD/OCE-98-71R,
February 27, 1998).
\25 The District's Comprehensive Annual Financial Report provides
data for the last three taxes shown on table 4, but does not provide
the information separately for the hotel sales, restaurant, and
automobile rental taxes because they are component parts of the
general sales and use tax. According to the District, for the
restaurant and hotel sales taxes, data subject to an audit process is
available beginning only in fiscal year 1995, the year when the
dedicated taxes were earmarked for the convention center project.
\26 In addition, the table reflects WCCA's total receipts for the
past 3 fiscal years, which does not include $5.2 million given
annually to the Washington Convention and Visitors Association, the
D.C. Committee to Promote Washington, and the D.C. Chamber of
Commerce for marketing activities. WCCA's financing plan assumes
that this $5.2 million, combined with the $39.2 million in fiscal
year 1997, shown in table 4, will be used as the base year revenue to
support the bond financing.
\27 DRI is a commonly used source of economic forecasts.
\28 As defined by the U.S. Department of Commerce, personal income
consists of wage and nonwage income received by city residents, with
the wage component accounting for a little over half of the total.
\29 Local hotel room demand is a function of real GDP. The local
average daily rate is a function of the U.S. average daily rate.
Local hotel room inventory is a function of the U.S. hotel room
supply level.
\30 In time-series models, future values of a variable are estimated
solely based on the historical behavior of the variable.
\31 D.C. Code Ann. Sec. 9-813 (1981).
\32 D.C. Code Ann. Sec. 47-334.
OTHER COMPONENTS OF THE
FINANCING PLAN
---------------------------------------------------------- Letter :5.3
The other components of the financing plan include cash-on-hand from
dedicated tax collections, construction fund earnings, and reserve
requirements.
WCCA Cash-on-Hand. WCCA's financing plan includes $110 million from
dedicated tax collections. WCCA's financing plan was predicated on
entering the bond market on July 1, 1998; therefore, WCCA expects
that it would have already used $37 million of dedicated tax
collections on preconstruction activities and have about $73
million\33 of the collection on hand to satisfy reserve requirements
at that time. WCCA now anticipates entering the bond market in
September 1998. Due primarily to the delay in entering the market
and because tax revenue collections through May 1998 had been higher
than anticipated, WCCA's available cash for use could be about $15
million higher than the $110 million assumed in the financing plan.
Based on dedicated tax collections and expenditures as of May 31,
1998, if WCCA's projected expenditures are substantially accurate, by
September 1, it would have spent an additional $15 million--for a
total of about $52 million--on preconstruction activities and would
have $73.6 million cash-on-hand to satisfy the reserve requirements.
Construction Fund Earnings. Based on a preliminary construction draw
schedule, the financing plan assumes that about $62.7 million can be
generated in interest earnings on bond proceeds of about $550
million. The bond proceeds would be deposited in a construction
fund. During the construction period, funds that are not drawn from
the account would earn interest at a rate of 5 percent. The interest
rate assumption appears reasonable when compared to the rate of
earnings on WCCA's dedicated tax revenue investments over the past 3
years.\34 When analyzing this type of funding mechanism, the rating
agencies' primary concerns are whether the construction estimate is
reasonable and what source of funds would be used to address the
shortfall should the earning assumption fall short. According to
WCCA's underwriter, at the time of bond issuance, WCCA plans to
obtain a fully flexible investment agreement,\35 which will include
guaranteed investment earnings and conditions that stipulate that
there would be no penalty should additional funds be required to
satisfy project needs.
Reserve Requirements. The financing plan assumes that about 15
percent, or $126 million of the $846 million funds identified, will
be used to establish the following reserves: debt service,
operations and marketing, renewal and replacement, and rate/revenue
stabilization.\36 Reserves are established to strengthen the bond
transaction. We spoke with rating agencies' officials regarding the
adequacy of WCCA's reserves. There appear to be no established
guidelines regarding the level of funding for each reserve. The
actual character and amount of each reserve is shaped by several
factors: the quality of the dedicated tax revenues, anticipated
ongoing needs of the facility, economic projections, availability of
funds, and bond insurers and rating agency concerns. WCCA's
underwriter states that the estimated reserve requirements are more
than adequate and necessary to achieve the lowest possible cost of
borrowing.
--------------------
\33 Operating and Marketing ($50 million), Renewal and Replacement
($12.8 million), and Revenue Stabilization ($10 million).
\34 The dedicated tax revenues are being invested in discount notes
such as Fannie Mae and Freddie Mac, which have been earning an
average of 5.5 percent annually.
\35 Under the terms of an investment agreement, WCCA would enter into
a contract with a third party, such as a bank, giving that party the
right to invest these funds. In exchange for the future right to
invest these funds, the bank will make periodic payments to WCCA.
\36 See table 1, footnote J for the estimated amount of each reserve.
SITE SELECTION PROCESS HAS LONG
HISTORY
------------------------------------------------------------ Letter :6
Discussion about building a larger convention center was underway at
the time the existing convention center opened in 1983. The site at
Mount Vernon Square was identified as a preferred site as early as
1986. Since that time, a number of studies have examined alternative
sites in various parts of the city, with the Mount Vernon Square site
repeatedly being selected as the most viable site, given its location
in the downtown core, amidst the kind of amenities that make possible
a thriving convention center, with its associated economic benefits.
Research results included in our February 1998 report\37 demonstrated
that convention centers generally cannot earn enough direct revenues
to cover all of their recurring operating costs or their construction
costs. However, cities sponsor convention centers with the
expectation for significant direct and indirect economic benefits to
the area, from spending by out-of-town convention delegates, that
will increase local tax revenues to offset operating losses and
construction costs of convention centers. In addition, based on
Coopers & Lybrand's Analysis for the Proposed Washington Convention
Center, the proposed convention center is estimated to generate
approximately $1.1 billion of total output\38 in year 2002 within the
metropolitan D.C. area, increasing to about $1.4 billion in 2006.\39
Further, results indicated that the most important factor to a
convention center's success in attracting a large number of
out-of-town delegates who spend a significant amount of money is
location in a desirable city and near hotels, restaurants, and
shopping.
WCCA determined that Mount Vernon Square was the most advantageous
site selected because it offered a variety of favorable attributes:
proximity to existing hotels, restaurants, and museums, the presence
of an existing Metrorail station, and entertainment venues and other
tourist points of interest.
Section 215 of the Washington Convention Center Authority Act of 1994
(1994 Act),\40 states that Mount Vernon Square was where the new
convention center "should be located." In the same section, it says
that the Mayor "may evaluate" other sites and "should specifically
evaluate 2 sites:" Northeast No. 1 and the site located at the
Anacostia Metro.\41
When the 1994 Act was passed, the latter two sites had already been
evaluated (along with nine others) in a financial feasibility study
conducted between 1991 and 1993 by Deloitte and Touche.\42 In 1996,
Northeast No. 1 and the Anacostia Metro were again evaluated by WCCA
along with 14 other sites when it prepared a study regarding the
project. WCCA determined that both the Northeast site and the
Anacostia Metro site did not compare favorably with Mount Vernon
Square, largely because of their isolated locations, distance from
hotels, and other amenities. When a final Environmental Impact
Statement (EIS) was prepared for the National Capital Planning
Commission in April 1997,\43 it rated the Mount Vernon Square site as
more acceptable.
In June 1997 the federal Commission of Fine Arts gave its preliminary
approval to a design for the convention center at Mount Vernon
Square. Such approval is a requirement for public buildings sited in
the District. In September 1997, the following additional approvals
were granted.
-- The federally appointed Advisory Council on Historic
Preservation approved the preservation/neighborhood
revitalization plan for the Mount Vernon Square site.
-- A Memorandum of Agreement outlining specific historic
preservation mitigation measures at Mount Vernon Square was
signed by the D.C. Mayor, the D.C. City Council, the D.C.
State Historic Preservation Officer, NCPC, and WCCA.
-- The Mount Vernon Square site, building footprints, and
preliminary design were approved by NCPC.
Before NCPC issued its approvals for building the convention center
at Mount Vernon Square, it heard public testimony on the issue.\44 At
that time, some community members requested that the District
reconsider Northeast No. 1 as a possible site for the new convention
center. WCCA then performed an additional study of the Northeast
site, including a cost comparison. WCCA concluded that building the
convention center at the Northeast site would increase the cost much
higher above the cost of building it at Mount Vernon Square and would
delay the project substantially.
--------------------
\37 District of Columbia: Convention Center's Economic Benefits
(GAO/GGD/AIMD/OCE-98-71R, February 27, 1998).
\38 Total output includes total direct, indirect, and induced
spending. Of the $1.1 billion, Coopers estimates that approximately
$618 million, or 55 percent, would occur in the District.
\39 Coopers' study is dated December 30, 1997. Based on recent
information from WCCA's officials, the center is expected to be
completed in March 2003.
\40 D.C. Code Ann. sec. 9-816 (1981) (1995 repl.). See also
section 101(12) of the 1994 Act, D.C. Code Ann. sec. 9-801 (12)
(1981) (1995 repl.).
\41 Located Southeast of Frederick Douglas Memorial (South Capitol
Street) Bridge, north of Howard Road and the Anacostia Freeway, S.W.
\42 This study, Financial Feasibility Study of a New Convention
Center in the District of Columbia, was funded by the Hotel
Association of Washington, D.C., the Washington, D.C., Convention and
Visitors Association, and the District of Columbia Government. Mount
Vernon Square was determined to be the best site for the new
convention center.
\43 This EIS was required under the National Environmental Policy
Act.
\44 NCPC held a Special Commission Meeting, Open Session No. II, on
September 22, 1997.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
In commenting on this report, the Chief Financial Officer, the
General Counsel, and the Managing Director of Development of WCCA as
well as the District of Columbia Government's Chief Economist
generally agreed with our presentation of their progress and the data
presented concerning construction and financing for the proposed
convention center.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to the Ranking Minority Member
of your Subcommittee and 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 Subcommittee on
Oversight of Government Management, Restructuring and the District of
Columbia, Senate Committee on Governmental Affairs. Copies will be
made available to others upon request. Major contributors to this
report are listed in appendix I. If you or your staff need further
information, please contact me at (202) 512-4476.
Sincerely yours,
Gloria L. Jarmon
Director, Health, Education, and Human
Services Accounting and Financial
Management Issues
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I
ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.
Hodge Herry, Assistant Director
Barbara Shields, Project Manager
Roy Hutchens, Senior Auditor
Fred Evans, Senior Auditor
Linda Elmore, Senior Evaluator
Angela Samblanet, Auditor
Maria Zacharias, Communications Analyst
Mel Mench, Senior Assistant Director
OFFICE OF CHIEF ECONOMIST
Yesook Merrill, Senior Economist
OFFICE OF GENERAL COUNSEL
Richard Cambosos, Senior Attorney
*** End of document. ***