oversight

District of Columbia: Status of the Proposed New Convention Center Project

Published by the Government Accountability Office on 1997-09-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Chairman, Subcommittee
                  on the District of Columbia, Committee
                  on Government Reform and Oversight,
                  House of Representatives

September 1997
                  DISTRICT OF
                  COLUMBIA
                  Status of the Proposed
                  New Convention
                  Center Project




GAO/AIMD-97-148
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Accounting and Information
                   Management Division

                   B-278005

                   September 25, 1997

                   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 proposed new convention center project for Washington, D.C. This
                   report, our fourth on this issue, discusses the project’s approval process,
                   building design, estimated costs, dedicated revenues, and financing plans.

                   The Washington Convention Center Authority (WCCA), an independent
                   authority of the District Government, is responsible for the management
                   and development of the new convention center.


                   WCCA  is faced with the challenge of obtaining sufficient financing for the
Results in Brief   construction of the proposed new convention center project. The total
                   cost—predevelopment and construction, including contingencies—of the
                   proposed new convention center is now estimated to be about
                   $650 million, excluding $87 million of borrowing costs and certain reserve
                   requirements. WCCA already has sufficient funds from dedicated taxes for
                   the $40 million in projected predevelopment costs of which a reported
                   $15.6 million was expended as of July 31, 1997. However, funding for the
                   entire estimated $610 million in construction cost is uncertain at this time.

                   WCCA plans to issue revenue bonds backed by dedicated taxes to finance a
                   portion of the construction cost of the project. However, WCCA would need
                   to have its authority to use the taxes currently dedicated to the
                   predevelopment costs of the project expanded to include using them for
                   construction and would have to adopt and submit for City Council review
                   a resolution authorizing the issuance of revenue bonds. The current
                   stream of existing annual dedicated tax revenues is not sufficient to
                   support the debt required to fund the project’s estimated construction
                   cost. The current earmarked tax collections are estimated to support a
                   revenue bond issuance of $423 million. WCCA estimated that if $51 million
                   of interest earnings from investment of bond proceeds as well as




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             $30 million of cash on hand from dedicated taxes as of July 31, 1997,
             which is estimated to be available for construction, are added to the
             estimated $423 million, total estimated revenues would amount to
             $504 million. However, this would leave a shortfall of approximately
             $106 million. Assuming currently estimated costs are substantially
             accurate, WCCA would need about $114 million ($106 million plus an
             additional estimated $8 million to satisfy an operation and maintenance
             reserve) if it were to enter the market in October 1997, as originally
             contemplated, to obtain bond financing. WCCA, with the assistance of
             financial advisors, has been exploring financing options such as additional
             funds from the District, federal funding, and sale of the existing
             convention center to supplement the dedicated tax revenues.

             Also, before the project can move forward, the National Capital Planning
             Commission (NCPC), the central agency for conducting planning and
             development activities for federal lands and facilities in the National
             Capitol Region, including the District of Columbia, must approve the
             concept design as well as address community concerns regarding the
             project. Since our December 1996 report, WCCA’s estimated completion
             date has slipped 1 year to December 31, 2000, and based on the delays and
             approvals required, this date is uncertain.


             Plans for the new convention center were initiated in 1993 by the District’s
Background   Hotel and Restaurant Associations, the Convention and Visitors
             Association, and the District of Columbia government. The Washington
             Convention Center Authority Act of 19941 (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 exhibit space. According to the 1997
             Market Demand Update for the Washington, D.C., Convention Center, the
             proposed new convention center is projected to rank eighth, 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.




             1
              The 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.



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In August 1994, when the District created WCCA, it also earmarked
additional revenues to finance the project. Section 301 of the 1994 Act
amended the District of Columbia Income and Franchise Tax Act of 1947
(1) to decrease the tax on the privilege of corporations, financial
institutions, and unincorporated businesses to do business in the District
from 10 percent of taxable income to 9.5 percent of taxable income and
(2) to impose a surtax of 2.5 percent on the 9.5 percent tax. Amounts
collected from the surtax are to be transferred to the WCCA.2

Sections 302 and 303 of the 1994 Act amended the District of Columbia
Sales Tax Act and the District of Columbia Compensating Use Tax Act,
respectively (1) to decrease the tax rate from 11 percent to 10.5 percent on
hotel gross receipts and to add an additional tax of 2.5 percent on hotel
gross receipts and (2) to add an additional tax of 1 percent to the 9 percent
tax on the gross receipts from the sales of food or drink (including
alcohol) to be consumed on the premises and from the rental of vehicles
and trailers. Amounts collected from the additional taxes are to be
transferred to the WCCA.3

Section 304 of the 1994 Act amended the Hotel Occupancy and Surtax on
Corporations and Unincorporated Business Tax Act of 1977 to provide
40 percent of the $1.50 tax already being collected on the occupancy of
each hotel room to the WCCA and to allocate the remaining 60 percent as
follows: 50 percent to the Washington Convention and Visitors
Association, 37.5 percent to the Mayor’s Committee to Promote
Washington, and 12.5 percent to WCCA for advertising and promotion.4

The fourth sentence of section 446 of the Home Rule Act, D.C. Code Ann.
47-304 (1981), as amended, provides that “...no amount may be obligated
or expended by any officer or employee of the District of Columbia
government unless such amount has been approved by an act of Congress,
and then only according to such act.”5 Section 101 of the District of
Columbia Convention Center and Sports Arena Authorization Act of 1995,
(Public Law No. 104-28, 109 Stat. 267 (1995), D.C. Code sec. 47-396.1 (1981,
1996 supp.)), authorized WCCA’s use of the revenues attributable to sections


2
 D.C. Code Ann. secs. 47-1807.2, 47-1807.2a, 47-1808.3, 47-1808.3a (1981, 1996 Supp.).
3
 D.C. Code Ann. secs. 47-2002, 47-2002.2, 47-2002.3, 47-2202, 47-2202.1, 47-2202.2 (1981, 1996 Supp.).
4
 D.C. Code Ann. secs. 47-3202, 47-3206 (1981, 1996 Supp.).
5
 As discussed later in this report, sections 11508 and 11509 of the Balanced Budget Act of 1997, have
authorized the District to issue revenue bonds backed by a pledge of dedicated taxes and to use such
taxes to pay the principal and interest on such bonds without further action by Congress.



Page 3                                               GAO/AIMD-97-148 Convention Center Project
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301-304 of the 1994 Act to financing the operation and maintenance of the
existing convention center and for the preconstruction activities relating
to the new convention center.6

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, which has about
381,000 gross square feet of exhibit space, is small compared to the
convention centers of other cities such as Atlanta, New York, Chicago, and
Philadelphia.

The original proposal from the 1993 feasibility study called for building a
new convention center in two phases with the first phase to be completed
at the end of 1997 with approximately 554,000 gross square feet of exhibit
space and the second phase to be completed at the end of 1999 with
another 254,000 gross square feet of exhibit space. Since that study was
completed, WCCA has ruled out a two-phase development project because
the first phase essentially would not provide enough exhibit space to
compete with cities with larger convention centers. The cost of both
phases was estimated at $521 million.

In addition, the 1993 feasibility study, which was projected through the
year 2003, estimated that direct and indirect economic benefits to the
District from the construction of the project would include 560 new jobs,
$4 million in increased revenue, and $260 million in other economic output
such as spending related to convention center operations and
development. For the Washington metropolitan area, the study projected
1,600 jobs, $28 million in incremental taxes, and $558 million in economic
activity. Projected long-term benefits by the fifth year of operation of the
new convention center included 2,500 permanent jobs, $44 million in
incremental taxes, and $640 million in incremental economic output for
the District. WCCA contracted with a management consulting firm to update
the 1993 feasibility study, which will include an update of the economic
benefits to the District. The study is expected to be completed by
September 30, 1997.

The current master plan calls for constructing a new convention center at
Mount Vernon Square, the legislatively7 preferred site, located at Ninth

6
 See also sec. 208(c) of the 1994 Act, D.C. Code Ann. sec. 9-809(c) (1981) (1995 Rep. Vol.).
7
 Sec. 101(12) of the 1994 Act, D.C. Code Ann. sec. 9-801(12) (1981).



Page 4                                               GAO/AIMD-97-148 Convention Center Project
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                     Street and Mount Vernon Place, North West. 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.


                     To determine the status of the proposed new convention center project,
Objectives, Scope,   we interviewed WCCA officials, contractors, regulatory agencies (National
and Methodology      Capital Planning Commission and the Advisory Council on Historic
                     Preservation), and District officials to determine and assess WCCA’s
                     progress toward meeting critical milestones.

                     We reviewed the master plan, which contains the concept design and
                     requirements for the new convention center, and compared the design to
                     the existing facility to determine if the new convention center will provide
                     additional exhibit space. We also compared the new convention center
                     exhibit space to facilities in other cities, based on the 1997 Market
                     Demand Update, to determine the ranking in terms of prime exhibit space
                     once the project is completed.

                     We analyzed the current predevelopment and construction cost estimates
                     for the project as of May 31, 1997, to determine how they compare to the
                     previous cost estimates prepared by WCCA. We reviewed documents and
                     held discussions with WCCA officials to obtain reasons for variations from
                     previous cost estimates for the proposed new convention center.

                     We reviewed financial records and current balances to determine the
                     amount of dedicated taxes reported as collected and transferred to WCCA.
                     In addition, we reviewed the lockbox procedures that were established to
                     collect the dedicated taxes.

                     We also reviewed WCCA’s plans for financing the new convention center
                     project to determine whether adequate funding is available to finance the
                     project. In addition, we reviewed alternative sources of financing
                     proposed by WCCA.

                     We conducted our review between March 1997 and July 1997 in
                     accordance with generally accepted government auditing standards. Also,



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                     we considered the results of previous work.8 While we reviewed
                     transactions to determine the reasonableness of the dedicated taxes
                     collected, deposited, and transferred to WCCA, we did not audit the
                     reported taxes collected and deposited for the new convention center
                     project to determine if the District government accurately calculated and
                     transferred all dedicated taxes to WCCA’s escrow account.

                     We requested written comments on a draft of this report from the Mayor
                     of the District of Columbia or his designee. These comments are discussed
                     in the “District’s Comments and Our Evaluation” section and are reprinted
                     in appendix I.


                     The project has reached the regulatory review phase which involves the
Status of Approval   WCCA obtaining necessary permits, reviews and approvals from federal and
Process for the      local regulatory agencies.
Proposed New
                     NCPC is reviewing the design of the project as provided by law.9 During its
Convention Center    approval process, NCPC is also considering the environmental impact of the
                     conceptual design on the construction site and neighborhood. The
                     environmental impact study (EIS) is complete and was reviewed by the
                     federal Environmental Protection Agency (EPA). According to WCCA’s
                     Manager of Contracts, NCPC did not receive comments from EPA within the
                     comment period.

                     Also, NCPC, WCCA, the Advisory Council on Historic Preservation, the
                     District of Columbia State Historic Preservation Officer, the Mayor, and
                     the Chair of the D.C. City Council, entered into a Memorandum of
                     Agreement (MOA) on September 12, 1997, following consultations under
                     section 106 of the National Historic Preservation Act.10 The MOA contains a
                     plan to mitigate a number of community, business, civic, and historic
                     preservation concerns regarding the project. As a result of the signing of
                     the MOA, NCPC has resumed consideration of the project and has scheduled



                     8
                      District of Columbia: Status of Convention Center Project (GAO/AIMD-94-191, September 15, 1994),
                     District of Columbia: Status of Sports Arena and Convention Center Projects (GAO/T-AIMD-95-189,
                     July 12, 1995), District of Columbia: Status of Sports Arena and Convention Center Projects
                     (GAO/T-AIMD-95-221), Status of Convention Center Project (GAO/AIMD-96-44R, February 21, 1996),
                     and District of Columbia: Status of the New Convention Center Project (GAO/AIMD-97-17,
                     December 20, 1996).
                     9
                      Section 5 of the Act of June 6, 1924, as amended, 40 U.S.C. sec. 71d(c) (1994) and section 16 of the Act
                     of June 20, 1938, D.C. Code Ann. sec. 5-432 (1981). See generally 40 U.S.C. secs. 71-71i (1994).
                     10
                         16 U.S.C. sec. 470f (1994) and its implementing regulations, 36 C.F.R. Part 800 (1996).



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                     hearings on the proposed convention center for September 22 and 25,
                     1997.

                     Another critical phase in the development process of the project is
                     obtaining authority to use the dedicated revenues attributable to section
                     301-304 of the 1994 Act to finance the construction of the project. Next,
                     WCCA would have to adopt a resolution to issue the revenue bonds (subject
                     to the City Council review). As part of the financing phase, WCCA would be
                     required to obtain a credit rating for revenue bond financing from rating
                     agencies. Based on WCCA’s current schedule, the financing phase is
                     scheduled for completion in late Fall of 1997, and groundbreaking is
                     planned for late 1997 or early 1998. When we last reported in
                     December 1996,11 WCCA estimated that the project would be completed by
                     December 31, 1999. The estimated completion date is now December 31,
                     2000. However, if more delays occur in the regulatory process and the
                     finalization of a financing plan, this project could be further delayed.

                     WCCA has to acquire 15 remaining parcels of land for the Mount Vernon
                     Square site. According to WCCA officials, the District does not anticipate
                     any problems in acquiring the remaining properties, either by negotiated
                     sale or, if necessary, by exercise of its power of eminent domain.12


                     According to requirements in the master plan, which WCCA officials told us
New Convention       are still the current thinking, the proposed new convention center will
Center Master Plan   almost double the exhibit space for conventions and expositions available
                     at the existing convention center. The current convention center has
                     800,000 gross square feet consisting of 381,000 gross square feet of exhibit
                     space on two levels. The upper level has three exhibit halls with 276,000
                     square feet of exhibit space; the lower level contains 105,000 square feet of
                     exhibit space.

                     The master plan for the proposed new convention center calls for a
                     partially below-ground facility with approximately 2.1 million gross square
                     feet that includes 730,000 gross square feet of prime exhibit space. The
                     master plan organizes the new facility into three buildings with the
                     approximate height ranging from 35 feet on the northern end to 130 feet on




                     11
                       See footnote 8 in this report.
                     12
                       D.C. Code Ann. sec. 16-1311 (1981).



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                                       the southern end of the complex consistent with the Building Height Act
                                       restriction.13

                                       The proposed new convention center would have four levels with a
                                       completely below ground exhibit level containing 500,000 square feet of
                                       contiguous exhibit space and adjacent loading docks. The street level
                                       would consist primarily of lobby/registration space, meeting rooms,
                                       service/support space with some retail and community space on the
                                       perimeter. The upper level has additional meeting rooms and 230,000
                                       square feet of column free exhibit space. The ballroom level (the fourth
                                       level) also includes the central kitchen.

                                       The current convention center is ranked 30th, in terms of prime exhibit
                                       space, among competing convention centers in the United States, and the
                                       proposed new convention center is expected to be ranked eighth after
                                       completion, as shown in table 1.

Table 1: Ranking of Major Convention
Centers’ Prime Exhibit Space                                                                           Prime exhibit space
                                       City/convention center                                           (gross square feet)     Ranking
                                       Chicago (McCormick Place)                                                    2,128,500         1
                                       Orlando (Orange County)                                                      1,100,600         2
                                       New Orleans (Ernest N. Morial)                                               1,100,000         3
                                       Las Vegas (Las Vegas)                                                          970,000         4
                                       Atlanta (Georgia World Congress)                                               950,000         5
                                       Las Vegas (Sands Expo)                                                         935,000         6
                                       New York (Jacob K. Javits)                                                     760,000         7
                                       District of Columbia (New Convention Center)                                   730,000         8
                                       District of Columbia (Existing Convention                                      381,000        30
                                       Center)
                                       Source: Market Demand Update for the Washington, D.C. Convention Center, Deloitte & Touche
                                       LLP, February 1997.



                                       According to WCCA officials, the current master plan contemplates a state
                                       of the art facility with technology, including fiber optics and improved
                                       telecommunications capabilities to meet future District demands for
                                       convention exhibit space. To compete with other convention centers,
                                       WCCA’s proposed plan would increase the number of loading docks,
                                       column spacing, ceiling heights, and floor loads in the exhibit space to
                                       attract some of the major trade shows.


                                       13
                                         Section 5 of the Act of June 1, 1910, as amended, D.C. Code Ann. sec. 5-405 (1981).



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                    WCCA must obtain NCPC’s and the City Council’s approvals before the
                    project can move forward. In addition, WCCA’s Board of Directors has
                    determined that the “design build method” for the proposed new
                    convention center would best meet WCCA’s cost and scheduling
                    requirements for the new convention center.

                    The design/build approach combines the responsibilities for designing and
                    constructing the project in a single entity rather than separating the
                    responsibilities among a number of entities. To mitigate development
                    risks, WCCA’s design/build contract would need to include performance
                    clauses with specificity to prevent cost overruns and construction delays.


                    The estimated total predevelopment and construction costs, including
Estimated Project   contingencies, of the proposed new convention center have increased by a
Costs               net of $100 million to approximately $650 million14 from the $550 million
                    that was last reported.15 The increase is caused by several factors,
                    primarily a $118 million increase in construction cost, now estimated to be
                    about $534 million, excluding contingencies, compared to the previous
                    estimate of $416 million and offsetting declines in predevelopment costs.
                    Table 2 highlights the total estimated project costs for the new convention
                    center. The increase in the construction costs are primarily associated
                    with (1) additional steel necessary to construct the facility, (2) excavation
                    and slurry wall costs from lowering the building 50 feet below ground to
                    reduce the building height above ground, (3) shifting the building mass
                    south, (4) providing retail and community space on the perimeter,
                    (5) reducing construction across L Street which requires finished
                    elevations on both sides of the street, and (6) allowing M Street to remain
                    open for local traffic, which requires creating an overpass over the street
                    and reinforcing the street over the below ground exhibit space. The
                    majority of these revisions are in response to NCPC’s concerns, the section
                    106 mitigation plan (required by the National Historic Preservation Act),
                    and community concerns.




                    14
                      The $650 million does not include WCCA’s preliminary estimate of approximately $87.3 million in
                    borrowing costs and certain reserve requirements. These costs are $12.2 million for bond insurance,
                    underwriter’s discount, and cost of issuance; a debt service reserve of $16.7 million; an operation and
                    maintenance/marketing reserve of $46.2 million (including $16.2 million for marketing); and a capital
                    reserve of $12.2 million. According to WCCA, this information was developed as of August 28, 1997.
                    This information was provided to GAO on September 10, 1997.
                    15
                      See footnote 8 in this report.



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Table 2: Total Estimated Project Costs and Expenditures for the New Convention Center
                                                          Four-year    Revised 4-year
                                                     estimate as of     estimate as of                           Increase       Expenditures
Category                                                    10/23/96           5/31/97                         (decrease)        as of 7/31/97
Total predevelopment cost/expendituresa                      $63,531,212             $39,911,731             ($23,619,418)        $15,629,953
Construction costs
  Building and site                                          347,750,000             417,500,000               69,750,000                      0
  Other construction costs                                    41,500,000              76,714,269               35,214,269                      0
  Fixtures/furnishings/equipment                              27,000,000              40,000,000               13,000,000                      0
Total construction costs/expenditures                      $416,250,000            $534,214,269              $117,964,269                      0
Total predevelopment and construction                      $479,781,212            $574,126,000               $94,344,788         $15,629,953
costs/expenditures
Project contingency                                          $70,218,788             $75,874,000               $5,655,212                      0
Total project costs/expenditures                           $550,000,000            $650,000,000              $100,000,000         $15,629,953
                                          Source: WCCA. We did not independently verify this information.
                                          a
                                           Includes cost for land acquisition.



                                          Estimated contingencies are up approximately $6 million over the
                                          previous estimate of $70 million. The increase is due primarily to Section
                                          106 mitigation and other regulatory issues, such as the implementation of
                                          the transportation management plan.

                                          Predevelopment costs, down $24 million from the previous estimate of
                                          $64 million, fell largely because certain costs previously budgeted for bond
                                          insurance and investment banking services will now be paid from future
                                          bond proceeds.16 As of July 31, 1997, WCCA incurred predevelopment costs
                                          of approximately $15.6 million, which are primarily for program
                                          management services, architect/engineering design, environmental impact
                                          study, land acquisition, and legal services.


                                          WCCA  receives a portion of the District’s hotel sales and use taxes, hotel
Dedicated Tax                             occupancy tax, corporation franchise, and unincorporated business taxes
Revenue Collections                       to help fund operations of the existing convention center and the
                                          predevelopment costs of the proposed new convention center.17 Since

                                          16
                                              See footnote 14 for an explanation of the cost of borrowing.
                                          17
                                            A portion of the dedicated taxes are required by law to be allocated to the WCCA for advertising and
                                          promotion. In addition, a portion of the dedicated taxes are allocated for use by the Washington
                                          Convention and Visitors Association and the Mayor’s Committee to Promote Washington.
                                          Approximately $5.2 million and $5 million was allocated for these purposes in 1996 and 1995,
                                          respectively.



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                                       October 1994, taxes have been collected monthly, and based on audited
                                       financial statements,18 WCCA had received approximately $33 million and
                                       $35.5 million in tax revenues for fiscal years 1995 and 1996, respectively.
                                       The District projects tax revenues to WCCA of about $35 million for fiscal
                                       year 1997 and average annual amounts of about $36 million for fiscal years
                                       1998 to 2002.

                                       As of July 31, 1997, WCCA had received about $97 million in dedicated tax
                                       revenues. WCCA had invested approximately $67.6 million of the $97 million
                                       in Fannie Mae and Freddie Mac discount notes, which are earning an
                                       average of about 5.5 percent annually. Table 3 highlights the receipts and
                                       disbursements from the dedicated tax revenues collected since inception
                                       in fiscal year 1995.

Table 3: Washington Convention
Center Authority Dedicated Tax         Revenues
Revenues, October 1, 1994 - July 31,   Dedicated taxes received by WCCA                                                       $97,081,948
1997                                   Interest received from investments                                                       3,491,899
                                       Interest on bank account balances                                                          421,105
                                            Total revenues                                                                  $100,994,952
                                       Expenditures
                                       Predevelopment expenditures                                        $15,629,953
                                       Operating subsidy                                                    8,225,000
                                       Repayment of loan from Rainy Day Funda                               4,200,000
                                       Bank charges                                                             6,955
                                            Total expenditures                                                                $28,061,908
                                       Funds available end of period                                                          $72,933,044
                                       Investments                                                                            $67,579,640
                                       Cash balance                                                                            $ 5,353,404
                                       a
                                        The Rainy Day Fund provides funds to the District of Columbia to be used at the discretion of the
                                       Mayor and the City Council for mandatory and unavoidable expenses. In the case of WCCA,
                                       Rainy Day Funds were used to continue operations of the existing convention center while
                                       awaiting congressional approval on the use of the dedicated tax revenues.

                                       Source: WCCA. We did not independently verify this information.



                                       In our December 1996 report,19 we stated that WCCA is considering the use
                                       of revenue bonds, backed by the dedicated taxes, to finance the
                                       construction cost of the project. Also, during our discussions with rating
                                       agencies officials, they informed us that the rating might be improved if


                                       18
                                        Washington Convention Center Authority, Financial Statements, September 30, 1996 and 1995,
                                       audited by KPMG Peat Marwick LLP.
                                       19
                                           See footnote 8 in this report.



                                       Page 11                                            GAO/AIMD-97-148 Convention Center Project
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                  the collection process for the dedicated taxes were separated from the
                  District’s tax collection process. Since that time, the District has separated
                  the dedicated taxes from the District’s tax collection process by having
                  businesses send the dedicated tax payments directly to lockboxes under
                  the control of the banks. As of February 1997, lockboxes have been
                  established at Signet Bank and First Union Bank for the collection of all
                  the dedicated convention center taxes, and the banks will now be
                  responsible for transferring these tax revenues to WCCA.

                  Further, based on a report by the District of Columbia Auditor,20 which
                  discusses the convention center dedicated tax revenues, WCCA was entitled
                  to approximately $1 million in additional dedicated tax revenues from the
                  District. The District subsequently transferred the $1 million to WCCA. The
                  dedicated tax revenues became effective as of fiscal year 1995, and,
                  according to the District of Columbia Auditor, the shortfall in tax revenues
                  transferred to WCCA occurred primarily in the early months of fiscal year
                  1995. Based on the audit, the underpayment occurred primarily due to the
                  Department of Finance and Revenue’s (DFR) failure to calculate the
                  additional dedicated taxes owed the WCCA based upon reconciliations of
                  sales and use tax payments that were completed 60 to 90 days after DFR’s
                  initial reporting period. Based upon these reconciliations, additional
                  dedicated taxes should have been transferred to the WCCA. Thus, the
                  establishment of lockboxes for the collection of the dedicated tax
                  revenues could result in more timely and accurate receipt of revenues as
                  well as improve the likelihood for an investment grade rating should WCCA
                  decide to issue revenue bonds to finance the construction cost of the
                  project.


                  WCCA plans to issue revenue bonds backed by dedicated taxes to finance
Financing Plans   the construction cost of the project.21 Section 490 of the Home Rule Act
                  (Public Law No. 93-198, as amended) was recently amended to authorize
                  the District to issue revenue bonds backed by a pledge of dedicated taxes
                  to finance various capital projects or other undertakings, including



                  20
                   Washington Convention Center Authority, Accounts and Operations for Fiscal Years 1995 and 1996,
                  June 24, 1997.
                  21
                    Generally, District revenue bonds may be financed by a pledge of available revenues (including
                  dedicated taxes and fees), assets or property (or security therein), or by a mortgage on real property.
                  Otherwise, they do not involve the pledge of or involve the full faith and credit or taxing power of the
                  District (other than with respect to any dedicated taxes) and are not debts of the District. D.C. Code
                  Ann. § 47-334 (1981) as amended by section 11508 of the Balanced Budget Act of 1997 (1997 Act), set
                  forth in 143 Cong. Rec. H6165-67 (daily ed. July 29, 1997).



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convention facilities.22 In addition, the fourth sentence of section 446 of
the Home Rule Act was recently amended to, among other things,
authorize the District to disburse dedicated tax revenues to pay the
principal of, interest on, or premium for any authorized revenue bond
without further action by the Congress.23 However, the 1997 Act did not
expand the authority to use the tax revenues attributable to sections
301-304 of the 1994 Act to construct the new convention center. In
addition, section 204 of the 1994 Act24 provides that WCCA may not adopt a
resolution to authorize a bond issuance without submitting the resolution
to the City Council for a 30-day review period during which the Council
may adopt a resolution disapproving the bond issuance. Assuming that
WCCA receives authority to use the revenues attributable to sections
301-304 of the 1994 Act for constructing the project and that the City
Council does not disapprove the bond issuance, current projections of
future dedicated tax revenues are not sufficient to support debt service
costs for the full amount of the estimated construction cost.25

In March 1997, WCCA engaged a financial advisory services firm26 to provide
various financial services related to the convention center finances. In its
proposal dated May 15, 1997, as well as subsequent proposals since May,
the financial advisory services firm outlined several financing options for
WCCA such as the issuance of revenue bonds, federal grants, lease
arrangements, sale of the existing convention center, vendor
participation/naming rights, and reallocation of a portion of the hotel
occupancy tax. Table 4 depicts a financing option that WCCA is considering,
assuming that all necessary approvals are granted regarding the use of
currently dedicated revenues. As stated previously, the total cost of the
project is estimated at $650 million—$610 million is estimated


22
 D.C. Code Ann. sec. 47-334 (a)(1), (c), as amended by section 11508 of the 1997 Act, 143 Cong. Rec.
H6165 (daily ed. July 29, 1997). Prior to the 1997 Act’s amendment, section 490(c) precluded the
District from pledging taxes to pay the principal, interest, or other charges due on revenue bonds. D.C.
Code Ann. sec. 47-334(c) (1981).
23
 Section 446 of the Home Rule Act, as amended by section 11509 of the 1997 Act, set forth in 143
Cong. Rec. H6167 (daily ed. July 29, 1997). See also section 490(f)(3) of the Home Rule Act as amended
by section 11508 of the 1997 Act.
24
  D.C. Code Ann. sec. 9-805(a) (1995 Rep. Vol.).
25
  The D.C. Auditor is required to annually audit the accounts of the WCCA and determine whether the
revenues from the dedicated taxes are sufficient to meet the projected expenditures and reserve
requirements for the upcoming year. If they are not sufficient, Section 305 of the Washington
Convention Center Authority Act requires the mayor to impose a surtax on convention center
dedicated taxes, excluding the tax on the sale of restaurant meals and alcoholic beverages to eliminate
the projected deficit.
26
  Columbia Equity Financial Corporation and Evensen Dodge Incorporated.



Page 13                                              GAO/AIMD-97-148 Convention Center Project
                                      B-278005




                                      for construction costs, including contingencies, and $40 million is
                                      estimated for predevelopment costs. WCCA already has sufficient funds
                                      from dedicated taxes for predevelopment activities. However, the funding
                                      for the construction cost is uncertain at this time. Based on WCCA’s
                                      estimate, table 4 shows a financing gap of $106 million that must be
                                      addressed before WCCA can enter the bond market. We have projected the
                                      estimated shortfall to be about $114 million since WCCA will need an
                                      additional $8 million to satisfy a $30 million operation and maintenance
                                      reserve, which is required by the rating agencies before WCCA can enter the
                                      bond market.27

Table 4: A Financing Option for the
Construction Cost of the New          Dollars in millions
Convention Center
                                      Estimated construction cost to be financed
                                      (including contingencies):                                                                $610
                                      Funding sources:
                                           Senior and junior lien bonds                                              $423
                                           Interest earnings from construction fund                                     51
                                           Cash on hand (WCCA)                                                          30        504
                                      Shortfall                                                                                            $106
                                      Source: WCCA. This table does not include $40 million of dedicated tax revenue, which is already
                                      available to fund predevelopment costs. The senior and junior lien bonds are based on a 30-year
                                      term.



                                      The following information describes the above financing option in more
                                      detail.

                                      Senior and Junior Lien Bonds. The foundation of WCCA’s financing plan is
                                      to generate the maximum amount of revenue bond funding for the
                                      construction cost of the new convention center project, which, according
                                      to the financial advisors, could be accomplished by using a senior lien and
                                      junior lien bond structure.28 As previously stated, WCCA collects
                                      approximately $35 million annually from the dedicated tax revenues. Of




                                      27
                                       This does not include $16.2 million in an additional reserve for marketing that was subsequently
                                      disclosed in information presented in footnote 14.
                                      28
                                        Senior lien debt has first priority on the revenue pledged to the bonds. Junior lien debt has priority
                                      claims on residual dedicated revenue.



                                      Page 14                                               GAO/AIMD-97-148 Convention Center Project
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this amount, approximately $7.529 million is needed annually for operating
expenses of the existing convention center, which leaves approximately
$27.5 million as collateral for the issuance of revenue bonds. According to
WCCA’s financial advisors, the $27.5 million in annual revenue would
support approximately $423 million in bond proceeds, assuming an
average interest rate of about 6.3 percent.30

Senior lien bondholders will be provided higher coverage,31 and this
financing will be based on historical tax collections of the dedicated tax
revenues. Junior lien bondholders will accept some of the credit risk of
projected growth in the dedicated revenues, and this financing structure
will be predicated on a 1 percent growth per year in the dedicated tax
revenues.

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

Since the majority of the funds, 69 percent ($423 million of $610 million),
for the financing of the convention center is expected to come from bonds
backed by the dedicated tax revenues, we have attempted to determine the

29
  Operation and Maintenance (O&M) expenses have historically exceeded revenues derived from
operations. In 1997, the deficit is projected to be about $7 million. According to the financial advisors,
this is not unusual for a convention center. Based on industry standards of performance, it has been
estimated that O&M expenses will stabilize at a modest $1 million deficit in the year 2008. In the
interim, the deficit has been projected to increase to $9 million per year as the WCCA increases
expenditures to market the new convention center and then gradually decline from that level as WCCA
operations stabilize.
30
 This interest rate assumption was based on the prevailing interest rate as of May 21, 1997, and the
projected issuance date of the bonds was October 1997.
31
  The senior lien bonds are structured based on 1.50 times coverage of historical collections of the
dedicated revenues. The junior lien bonds are structured based on a 1.25 times coverage based on a
projected growth in dedicated revenues of one percent per year. The junior lien bonds carry an interest
rate 50 basis points higher than the senior lien securities. The bonds are assumed to be sold in
November of 1997 and proceeds are drawn down over an 18-month draw schedule commencing in
January 1998.


Page 15                                              GAO/AIMD-97-148 Convention Center Project
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collection history of the taxes and the District’s assumptions regarding
future collections. As previously stated, the dedicated taxes are derived
from portions of the District’s hotel occupancy, the corporation franchise,
the unincorporated business franchise, and sales and use taxes (restaurant
meals, rental cars, and hotel rates). These taxes are not new. The majority
of the taxes was generated from rate increases of existing taxes
(corporation franchise and unincorporated business franchise and sales
and use taxes), and the rest (hotel occupancy tax) was diverted from taxes
that previously went to the District’s general fund.

The majority of the dedicated revenues that WCCA receives, approximately
79 percent in fiscal year 1996, is derived from sales and use taxes
(restaurant and rental cars and hotel rates), which are parts of the
District’s general sales and use tax. Based on the District’s Comprehensive
Annual Financial Report (CAFR), in fiscal year 1996, the District collected
$467.5 million in total general sales and use taxes, and WCCA received
$27.9 million, or about 6 percent, of this total. The District is unable to
disaggregate the specific taxes that are dedicated to WCCA from the general
sales and use tax category, and as a result, the District could not provide
us with audited historical data for these specific taxes. Based on
information received from the District, we compared information from the
District’s Business Tax Information System to information reported in the
District’s CAFR, and that information reflects different amounts for the
taxes for the same reporting periods. For example, in fiscal year 1995, the
District’s CAFR showed total general sales tax of $485.6 million and the
Business Tax Information System showed $468.8 million, a difference of
approximately $17 million. Therefore, it is difficult to discern how these
specific taxes have performed over the past 5 years.32 In addition, the
District could not provide us with projections for these specific taxes for
the next 5 years.

Construction Fund Earnings. WCCA’s financial advisors project that WCCA
could generate about $51 million in interest earnings from bond proceeds
between 1997 and 2001. The bond proceeds would be deposited in a
construction fund. During the construction period, funds that are not
drawn from the account would be invested to generate the $51 million.




32
 Based on the CAFR, the District’s total general sales and use tax receipts averaged $453 million
annually for the past 5 years (fiscal year 1992 to 1996), or an average annual growth of about 1.4
percent. The general sales and use taxes peaked in fiscal year 1995 at about $486 million, declined to
about $468 in fiscal year 1996, and, based on District’s forecast, are expected to surpass the 1995 level
until fiscal year 1999.



Page 16                                               GAO/AIMD-97-148 Convention Center Project
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WCCA  Cash-on-Hand. As of July 31, 1997, WCCA has on hand approximately
$72.9 million in dedicated tax revenues, with $24.4 million earmarked for
the remaining predevelopment costs, and about $2.5 million budgeted for
additional operating subsidy of the existing convention center for the
remainder of fiscal year 1997, leaving $46 million. WCCA plans to use
$30 million of this money to help finance the construction cost of the
project. The remaining $16 million as well as a projected $5.8 million in
additional collection for the remaining months (August and September) of
fiscal year 1997 is needed to establish an operation and maintenance
reserve (O&M), which is required, by the rating agencies, to be available
before WCCA enters the bond market. WCCA’s financial advisors estimate
that about $30 million would be required for the O&M reserve. It is
projected that about $22 million would be available at the end of fiscal
year 1997 to be applied toward the reserve. Thus, assuming currently
estimated costs are substantially accurate, WCCA needs about $114 million
($106 million plus an additional $8 million for O&M reserve) if it were to
enter the market in October, as originally planned, to obtain bond
financing.

WCCA is considering several financing options to close the shortfall, such as
reallocation of the total amount of hotel occupancy tax from the District,
sale of the existing convention center, and federal grants. However, it is
uncertain at this time as to the outcome of these options. For example, the
disposition of the existing convention center would not occur for some
time, and it is uncertain how much WCCA would benefit from its
disposition/sale, especially since there is an outstanding debt of
$75 million on this center. In addition, section 304 of the 1994 Act, D.C.
Code Ann. sec. 47-3206 (1981, 1996 Supp.), makes 40 percent of the
dedicated hotel occupancy tax available to WCCA for financing the project
while the remaining 60 percent (about $5 million annually) is allocated for
other purposes. WCCA is actively seeking to gain control of the 60 percent
allocated for other purposes to assist it in closing a portion of the funding
gap of the project. Table 5 highlights some of the financing options that
WCCA is considering to close the funding gap.




Page 17                                GAO/AIMD-97-148 Convention Center Project
                                        B-278005




Table 5: Other Construction Financing
Options for the New Convention                                                                              Estimated/potential
Center                                  Options                            Proposed revenue source          funding
                                        Third lien bonds/cash flow salea   Bond proceeds                    $24 million
                                        Additional funds from debt         Bond proceeds                    $20 million
                                        extensionb
                                        Reallocation of existing           Dedicated taxes of               $80 million in bond
                                        dedicated taxesc                   $5 million                       proceeds
                                        Debt service/DSRF investment       Accelerated interest earnings    $12 million
                                        agreementd
                                        Federal assistance:
                                          Direct grante                    Department of Transportation     $45 million
                                          Direct loanf                     and other federal agencies,
                                          Contingent guaranteeg            e.g., Department of
                                                                           Commerce, Department of
                                                                           Treasury, & Environmental
                                                                           Protection Agency
                                        Lease of the existing convention General Services                   $20.5 million
                                        centerh                          Administration (GSA)               (annual GSA lease
                                                                                                            payments)
                                        Private sector participation in    Naming/vending rights; vendor $25 million
                                        new facilityi                      financing
                                        Sale/disposition of existing       Sale/lease proceeds              $40 million
                                        convention centerj
                                        Special tax/development district Leveraging of future tax           $50 million
                                        on existing sitek                revenues

                                                                                                           (Table notes on next page)




                                        Page 18                                      GAO/AIMD-97-148 Convention Center Project
                      B-278005




                      a
                       WCCA would sell third lien debt supported by the pledged revenues at a coverage of
                      110 percent. Revenues remaining after the payment of the senior and junior lien debt would be
                      used to pay principal and interest on this third lien.
                      b
                          The term of the bond would be extended from 30 years to as many as 40 years.
                      c
                       The Washington Convention and Visitors Association and the Mayor’s Committee to Promote
                      Washington receive a portion of the hotel occupancy tax.
                      d
                       Debt Service/Debt Service Reserve Fund (DSRF) Investment Agreement. A trust account would
                      be established to receive dedicated revenues to pay bondholders. Under the terms of an
                      investment agreement, WCCA would enter into an agreement with a third party giving that party
                      the right, into the future, to invest these funds. In exchange for the future right to invest these
                      funds, a third party will make an upfront payment to WCCA.
                      e
                       Certain portions of the project may be eligible for conventional federal grant assistance (mass
                      transit and certain environmental remediation costs). WCCA is currently researching whether this
                      project may qualify for federal grants and loans.
                      f
                       Long-term loan made for gap funding which would be repaid from negotiated sources of
                      revenue.
                      g
                       Interim financing vehicle to bridge time gap between project approvals and realization of later
                      funds.
                      h
                       GSA leases the existing site with guaranteed nonappropriation annual payments or GSA may
                      seek private sector development partner and subleases.
                      i
                      Vendors of certain services (such as communications and catering) may be willing to pay a lump
                      sum for the rights to provide these services.
                      j
                          The existing site could be sold at some point over the next 4 years.
                      k
                       A tax increment district is developed on the existing site and/or its environs, and the revenues
                      generated would be collected from assessments on any taxable real estate developed within this
                      area.




                      On August 29, 1997, we provided the Mayor of the District Government
District’s Comments   with copies of a draft of this report for review and comment. In a
and Our Evaluation    September 9, 1997 meeting, WCCA officials, including the Project Director,
                      General Counsel, and the Chief Financial Officer, generally concurred with
                      our report and provided additional information. Written comments from
                      the Mayor are reprinted as appendix I. We have incorporated changes as
                      appropriate throughout the report.

                      WCCA provided updated information concerning its progress in obtaining
                      the necessary regulatory approvals and developing a financing plan.
                      Specifically, WCCA stated that it appears to have obtained consensus on an



                      Page 19                                                GAO/AIMD-97-148 Convention Center Project
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MOA that will be signed by the necessary regulatory agencies. Since the
Mayor commented on this report, all parties have signed the MOA, and NCPC
has scheduled hearings on the proposed convention center for
September 22 and 25, 1997, to consider site and design approval for the
new convention center at Mount Vernon Square, alley and street closings,
as well as the urban renewal plan amendments necessary to allow
construction to begin at Mount Vernon Square. These are key issues that
must be resolved before WCCA can proceed with the project.

WCCA told us that it has a financing plan to eliminate the funding gap for
the proposed convention center. This plan proposes to reallocate the Hotel
Occupancy Tax revenues imposed by D.C. Code Section 47-3206—and
now available to the Washington Convention and Visitors Association and
the Mayor’s Committee to Promote Washington—for the payment of debt
service for the new convention center. In addition, the term of convention
center bonds would be authorized to mature in up to 40 years. Current law
limits bond maturity to 30 years from issuance. WCCA is drafting legislation
to authorize the above changes. Approval of these or alternative steps are
key issues in moving ahead with the convention center project.

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate and House Committees on Appropriations
and their subcommittees on the District of Columbia; and the Senate
Committee on Governmental Affairs, Subcommittee on Oversight of
Government Management, Restructuring and the District of Columbia, and
the Ranking Minority Member of your Subcommittee. Major contributors
to this report are listed in appendix II. If you or your staff need further
information, please contact me at (202) 512-4476.

Sincerely yours,




Gloria L. Jarmon
Director, Civil Audits




Page 20                               GAO/AIMD-97-148 Convention Center Project
Page 21   GAO/AIMD-97-148 Convention Center Project
Appendix I

Comments From the District of Columbia




              Page 22       GAO/AIMD-97-148 Convention Center Project
Appendix I
Comments From the District of Columbia




Page 23                                  GAO/AIMD-97-148 Convention Center Project
Appendix II

Major Contributors to This Report


                       Hodge Herry, Assistant Director
Accounting and         Barbara Shields, Audit Manager
Information            Johnny Bowen, Audit Manager
Management Division,
Washington, D.C.
                       Richard Cambosos, Senior Attorney
Office of General
Counsel




(901752)               Page 24                             GAO/AIMD-97-148 Convention Center Project
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