oversight

District of Columbia: Status of the New Convention Center Project

Published by the Government Accountability Office on 1999-09-28.

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, House of
                  Representatives

September 1999
                  DISTRICT OF
                  COLUMBIA

                  Status of the New
                  Convention Center
                  Project




GAO/AIMD-99-258
United States General Accounting Office                                                     Accounting and Information
Washington, D.C. 20548                                                                           Management Division



                                    B-280908                                                                                  Leter




                                    September 28, 1999

                                    The Honorable Thomas M. Davis III
                                    Chairman, Subcommittee on the
                                    District of Columbia
                                    Committee on Government Reform
                                    House of Representatives

                                    Dear Mr. Chairman:

                                    You requested that we provide periodic status reports on the construction
                                    of the new Washington Convention Center. When we last reported to you
                                    on July 15, 1998, 1 the Washington Convention Center Authority (WCCA)
                                    was working to obtain necessary approvals, negotiate a guaranteed
                                    maximum price (GMP) construction contract, and obtain construction
                                    financing. This report highlights the status of the convention center project,
                                    changes in WCCA's estimated project costs and financing plan since our
                                    last report, and actual expenditures and collection of dedicated taxes.



Results in Brief                    Work at the new convention center site is underway. In March 1999, work
                                    started on slurry wall construction,2 site excavation, and removal of
                                    contaminated soil. Based on information provided by WCCA officials as of
                                    June 1999, total estimated project costs decreased $55 million (6.5 percent)
                                    from $846 million to $791 million. This decrease was due to reduced
                                    financing-related costs, which resulted primarily from the purchase of a
                                    surety bond covering debt servicing instead of funding the initially planned
                                    for Debt Service Reserve Fund. WCCA estimated the total construction
                                    cost of the project at $714 million−$6.3 million, or less than 1 percent, more
                                    than the June 1998 estimate. The $6.3 million increases to $24 million the
                                    estimated value of equipment that WCCA anticipates being provided by
                                    vendors at no initial cost to WCCA. However, WCCA remains at risk for the
                                    cost of the equipment until contracts are executed with vendors.


                                    1
                                     District of Columbia: Status of the New Convention Center Project (GAO/AIMD/OCE-98-
                                    238, July 15, 1998).
                                    2
                                     The slurry wall is a concrete wall around the construction site that extends below the
                                    excavation and is a barrier to underground water flowing into the site.




                                    Page 1                         GAO/AIMD-99-258 Status of New Convention Center Project
B-280908




Within the $714 million construction cost estimate, WCCA made a number
of changes, increasing the estimated cost of some project components and
decreasing others to reflect more current data. For example, because its
current estimate of the volume of contaminated soil requiring removal is
about double the 150,000 tons anticipated, the cost estimate for this work
increased $4 million to a total of $9 million. WCCA's estimates of
construction costs include changes to the $500.6 million GMP agreed to by
the construction manager (CM) and WCCA in August 1998. WCCA's
estimate of GMP costs as of June 30, 1999, was $510.7 million. As noted in
our last report, practically speaking, the GMP is only a guaranteed
maximum price if the underlying assumptions on which the contractor bid
do not change. Under the GMP agreement, WCCA must negotiate any
changes to the GMP amount with the CM. As of June 30, 1999, several of the
amounts included in WCCA's cost estimate had yet to be negotiated, and
the ultimate effect on the budget is not certain. Also, the project
contingency absorbed $16 million of costs not offset by decreases in other
project components. Of the $30 million project contingency in WCCA's
estimate last year, $14 million remains to cover unanticipated costs during
the more than 3 years remaining until scheduled project completion.

Proceeds from the September 1998 bond sale covered about 66 percent of
the $791 million June 1999 project cost estimate. WCCA's financing plan
covered the remaining cost through dedicated taxes over the 4-year
construction period, anticipated interest earnings, anticipated federal
grants, and reliance on vendors to provide without cost, equipment that
WCCA estimates would cost $24 million—an amount for which WCCA is at
risk until such time that there are executed contracts to cover these
arrangements. About $73.2 million had been disbursed on the project as of
June 1999.

Dedicated tax collections for the first 10 months of fiscal year 1999 were
$42.2 million—a little higher than the amount assumed in the bond offering
documents prorated for the same period. In addition to the amounts
already collected, WCCA may receive some portion of amounts in the
lockbox exceptions account. These amounts cannot be determined until all
collections held in the lockbox exceptions account have been
appropriately allocated by the District and appropriate amounts
transferred to WCCA. Similarly, WCCA's share of interest earnings on
amounts in the exceptions account cannot be determined until the District
determines the appropriate allocation.




Page 2                   GAO/AIMD-99-258 Status of New Convention Center Project
             B-280908




             WCCA, in general, agreed with the report's contents, and District officials
             said that they are addressing the report recommendations for improving
             the operations of the exceptions account. However, District officials did
             not commit to monthly transfers to WCCA and the District of interest
             earned in the exceptions account. We reaffirmed the need for prompt
             transfers in the “District's Comments and Our Evaluation” section of this
             report.



Background   The Washington Convention Center Authority Act of 1994 authorizes
             WCCA to construct, maintain, and operate the new convention center as
             well as to maintain and operate the existing convention center. 3 Since our
             last report, WCCA and the CM signed the $500.6 million GMP contract for
             construction, and WCCA received $519.5 million from bond financing
             supported by new dedicated taxes. Construction of the new convention
             center is now underway at Mount Vernon Square. 4

             The new convention center will have a total of 2.3 million gross square feet,
             including about 730,000 square feet of prime exhibit space. This compares
             with 800,000 gross square feet for the existing convention center, including
             381,000 square feet of prime exhibit space. Based on the square feet of
             prime exhibit space, the new convention center is projected to rank sixth in
             the United States when completed. Its size is expected to make it highly
             marketable far into the 21st century.

             The 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.




             3
              WCCA was created by the Washington Convention Center Authority Act of 1994, D.C. Law
             10-188, Sept. 28, 1994, 41 D.C.Reg. 5333, 6823, D.C. Code Ann. secs. 9-801 through 9-833,
             (1981, 1999 Supp.).
             4
              Located in the blocks between 7th and 9th Streets, N.W., and N Street and Mount Vernon
             Place, N.W.




             Page 3                        GAO/AIMD-99-258 Status of New Convention Center Project
              B-280908




Scope and     To determine the status of the new convention center project and its
              estimated costs and financing plan, we
Methodology
              • held discussions with and obtained information from various officials of
                WCCA and its representatives and the CM,
              • reviewed WCCA's and the CM's progress reports,
              • visited the construction site,
              • compared WCCA's June 30, 1999, unaudited cost estimates for the
                project with the June 19, 1998, estimates that were included in our
                July 1998 report to the Subcommittee, and
              • reviewed budget documents and held discussions with WCCA officials
                to obtain reasons for variations from the previous estimates.

              To review the dedicated tax collection procedures and the proper amounts
              calculated and transferred, we

              • reviewed financial records and lockbox agreements,
              • held discussions with officials of WCCA, the District, and the lockbox
                bank,
              • compared the projections of dedicated taxes for the period from
                October 1998 through June 1999 with actual collections for the same
                period, and
              • reviewed the Washington Convention Center auditors'5 workpapers of
                the reported taxes collected and deposited for the convention center
                project for fiscal year 1998.

              To determine that expenditures for the new convention center project were
              valid, complete, and properly valued, we reviewed the WCCA auditors'
              workpapers for fiscal year 1998 and examined statistically selected
              expenditures incurred for the period from October 1, 1998, through
              April 30, 1999.

              We conducted our work from August 1998 through July 1999 in accordance
              with generally accepted government auditing standards and considered the
              results of our previous work, which were reported to you last year. We
              requested comments on a draft of this report from the Mayor of the District
              of Columbia and the General Manager of WCCA, or their designees. The
              Chief Financial Officer of the District government and the Chief Financial


              5
                  Mitchell & Titus, LLP, audited WCCA's financial statements for fiscal year 1998.




              Page 4                            GAO/AIMD-99-258 Status of New Convention Center Project
                        B-280908




                        Officer and Managing Director/Development of WCCA provided us with
                        written comments. These comments are discussed in the “District's
                        Comments and Our Evaluation” section and are reprinted in appendixes I
                        and II, respectively.



Construction of New     Since we last reported, WCCA received necessary approvals to build the
                        new convention center at Mount Vernon Square, with Clark/Smoot, A Joint
Convention Center Has   Venture, serving as CM. Ground was broken in October 1998, and
Begun                   excavation of the site began in March 1999. As of June 1999, $64 million in
                        construction contracts had been let, and WCCA was preparing to obtain
                        bids on structural steel and foundation concrete, which it estimated at
                        about $150 million. WCCA officials provided the following information, as
                        of June 1999, on the status of the site work:

                        • Relocation of utilities, which started in July 1998, was 85 percent
                          complete and was expected to continue through calendar year 1999.
                        • Construction of the slurry wall, which started in March 1999, was about
                          60 percent complete and was expected to be completed in September
                          1999.
                        • Excavation of the site was about 32 percent complete with 375,000 cubic
                          yards of soil removed. Excavation work was expected to continue until
                          about August 2000.
                        • About 175,000 tons of contaminated soil had been removed from the
                          site. The total estimate of contaminated soil requiring removal has now
                          grown from 150,000 tons to between 250,000 and 300,000 tons.
                          Contaminated soil removal is scheduled to be completed in January
                          2000. The on-schedule completion of site excavation is contingent upon
                          the timely removal of the contaminated soil.

                        According to WCCA officials, the amount of water encountered at the
                        construction site was less than originally expected. WCCA officials stated
                        that the construction of the slurry wall had progressed more rapidly than
                        they anticipated, and this had reduced the amount of water that was
                        present.

                        The Washington Metropolitan Area Transportation Authority (WMATA) is
                        overseeing the Metro station upgrade work at the construction site using
                        $25 million appropriated by the Congress for that purpose. Agreements
                        between WCCA and WMATA covering the construction and their operating
                        relationship after completion of the convention center were approved by
                        the D.C. Financial Responsibility and Management Assistance Authority in



                        Page 5                   GAO/AIMD-99-258 Status of New Convention Center Project
                     B-280908




                     late July 1999. The construction agreement specifies that WCCA is
                     responsible for any costs in excess of the amount appropriated. WCCA
                     would have to offset any excess costs by reducing the cost of other project
                     components, including the project contingency, or find other sources of
                     funding.

                     WCCA's June 28, 1999, status report stated that the most significant
                     schedule risks were the removal of the contaminated material from the site
                     and the preparation of the design bid packages when needed. The CM
                     identified a potential 22-day delay in the construction schedule relating to
                     the start of the foundation work. According to WCCA officials, they will
                     work with the CM to overcome any potential delays by using alternate
                     sequences and methods.



Estimated Project    Since we last reported, the estimated costs for building the new convention
                     center have increased, but financing costs were less than estimated.
Costs Have Changed   Estimated construction costs increased $6.3 million, from $707.7 million to
                     $714 million. The $6.3 million consists of an increase in the value of
                     equipment that WCCA anticipates being provided by vendors without cost
                     to WCCA. As a result of modified reserve requirements, financing-related
                     costs decreased $61.1 million, from $138.2 million to $77.1 million. These
                     changed estimates reduced the total funds required by $54.8 million, from
                     $845.9 million to $791.1 million. Of the total estimated cost, $73.2 million
                     had been disbursed as of June 30, 1999: $24.1 million for GMP costs and
                     $49.1 million for other costs.

                     Table 1 compares WCCA's cost estimates as of June 1999 with its estimates
                     in our July 1998 report. To the extent that costs increase or anticipated
                     funds do not become available, WCCA must offset the costs against other
                     project components or find other sources of funding. As shown in the last
                     column of table 1, WCCA decreased the estimated cost for some project
                     components and increased the estimated cost of others within the overall
                     total estimated project cost of $791 million. It should be noted that some of
                     the increases and decreases affect the GMP amount and have yet to be
                     negotiated with the CM. WCCA's explanations of these estimates and of
                     other increases and decreases in the estimated cost of project components
                     follow the table.




                     Page 6                    GAO/AIMD-99-258 Status of New Convention Center Project
                                                  B-280908




Table 1: Comparison of WCCA's Unaudited Estimated Costs for the New Convention Center as of June 1998 and June 1999

Dollars in thousands
                                                                    Estimate as of      Estimate as of            Increase
Project component                                                         6/19/98a             6/30/99          (decrease)
Building and site (initial GMP)                                           $500,600           $500,600                    $0
Changes to GMP amount
Change order 1 (Reserve for hazardous materials removal)                    5,000b              9,000                 4,000
Other change orders                                                              0                473                   473
 Subtotal changes to GMP amount                                             $5,000             $9,473                $4,473
 Subtotal GMP contract status                                             $505,600           $510,073                $4,473
WCCA estimate of changes to be negotiated with CM
Pending change orders                                                                             123                   123
WCCA estimate of cost increases                                                  0             16,013                16,013
WCCA estimate of cost decreases                                                  0            (15,558)             (15,558)
 Subtotal WCCA estimate of changes pending negotiation                          $0               $578                  $578
Total WCCA estimated building and site (GMP amount)                       $505,600           $510,651                $5,051
Other costs
Land cost                                                                   4,692c              5,488                   796
                                                                                    c
Program management                                                         16,632              14,232               (2,400)
Consulting and inspections                                                  4,510c             10,255                 5,745
Permits and fees                                                              400c              1,799                 1,399
Environmental impact                                                        1,550c              1,550                     0
Legal                                                                       2,900c              5,177                 2,277
Insurance                                                                  19,000c             13,100               (5,900)
                                                                                    c
Design fees                                                                29,240              39,748                10,508
Site development                                                                 0                200                   200
Fixtures/furnishings/equipment                                              22,305             22,305                     0
                                                                                    d
Other project costs                                                        12,671              14,497                 1,826
Portion of utilities relocation not included in building and site          10,000e             10,000f                    0
                                                                                    c
Community outreach                                                            500                   0                 (500)
                                                                                    e
Metro station upgrade                                                      25,000              21,972               (3,028)g
Project contingency                                                         30,000             14,026              (15,974)
 Subtotal other costs                                                     $179,400           $174,349              ($5,051)
Total WCCA project budget                                                 $685,000           $685,000                    $0
                                                                                                                 (continued)




                                                  Page 7            GAO/AIMD-99-258 Status of New Convention Center Project
                                     B-280908




Dollars in thousands
                                                                              Estimate as of          Estimate as of                Increase
Project component                                                                   6/19/98a                 6/30/99              (decrease)
Additions to WCCA project budget
Project administrative costs                                                             5,000                5,000h                          0
                               i
Vendor-provided equipment                                                              17,695                24,000                      6,305
Total additions to WCCA budget                                                        $22,695               $29,000                    $6,305
Total estimated construction costs                                                  $707,695               $714,000                    $6,305
Financing-related costs
Bond issuance                                                                          11,827                11,486                      (341)
Reserve funds                                                                         126,399                65,633                   (60,766)
 Subtotal financing-related costs                                                   $138,226                $77,119                 ($61,107)
Total estimated project costs                                                       $845,921               $791,119                 ($54,802)


                                     a
                                         Reported in GAO/AIMD/OCE-98-238, July 15, 1998.
                                     b
                                         In our prior report, this reserve was listed under other costs.
                                     c
                                         In our prior report, these costs were consolidated in total predevelopment costs.
                                     d
                                      In our prior report, these costs were listed as section 106 mitigation costs. National Historic
                                     Preservation Act, section 106 mitigation requirements for this project 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. The agreement requires WCCA to take a number of actions to improve the
                                     community and to mitigate adverse effects of the convention center on the community.
                                     e
                                         In our prior report, these costs were listed as additions to the WCCA project budget.
                                     f
                                         Committed costs are $10.7 million.
                                     g
                                     The WCCA estimated cost of the Metro station is $25 million. Part of the cost has been allocated to
                                     GMP estimated increases and to design fees for work relating to the Metro station upgrade.
                                     h
                                      WCCA officials did not provide an estimate of administrative costs for the project. They estimated that
                                     $3.3 million had been expended as of May 31, 1999. As stated in our last report, WCCA does not
                                     include administrative costs as part of its project costs. It stated that these costs would continue to be
                                     paid from the current center's operating budget.
                                     i
                                         WCCA anticipates that vendors will provide this equipment without cost to WCCA.
                                     Source: WCCA officials.




Changes to GMP                       Some of the estimated cost increases and decreases involved construction
                                     change orders or other costs that affect GMP. As noted in our previous
                                     report, GMP is only a guaranteed maximum price if the assumptions upon
                                     which it is based do not change.6


                                     6
                                         GAO/AIMD/OCE-98-238, July 15, 1998.




                                     Page 8                                 GAO/AIMD-99-258 Status of New Convention Center Project
                         B-280908




                         Change order number 1 covers the removal of additional contaminated soil
                         from the site. The estimate for hazardous materials removal increased by
                         $4 million due to encountering higher amounts of contaminated material on
                         the site than anticipated. These costs are based on unit rates, thus, the
                         ultimate cost is determined by the quantities removed. The other change
                         orders ($473,000) represent changes to utility relocation work caused by
                         unexpected site conditions. Estimated cost increases ($16 million) is a new
                         line item that represents WCCA's estimate of GMP cost increases for
                         identified design and construction-related issues. Potential cost decreases
                         ($15.6 million) is also a new line item that represents WCCA's estimate of
                         GMP cost decreases as a result of design changes and alternative insurance
                         arrangements. The net effect of these changes is to increase WCCA's
                         estimated GMP costs to $510.7 million. In contrast, a CM representative
                         told us on July 2, 1999, that the CM's estimate of GMP costs was about
                         $523 million. The CM's estimate does not include any GMP cost decreases,
                         such as those identified by WCCA. The actual amount of any increase or
                         decrease to the GMP depends on the outcome of negotiations between
                         WCCA and the CM.



Changes to Other Costs   WCCA also made a number of changes within the estimated costs of
                         $280.4 million7 that are not covered by GMP. The $796,000 increase in the
                         estimate for land cost is due to an increase in relocation costs for former
                         owners, rental of temporary parking lots not included in the original
                         budget, easements on adjoining property, and increased security costs.
                         Estimated program management costs decreased due to an amendment of
                         the program manager's contract. Certain services, such as accounting,
                         were obtained from other contractors. Consulting and inspections
                         increases were largely due to reimbursing the District's Department of
                         Consumer and Regulatory Affairs for the cost of inspectors and related
                         staff ($1.4 million) and hiring KPMG to provide a project accounting system
                         and services ($2.3 million). Neither of these items were included in the
                         original budget.

                         Permits and fees increases were due primarily to the District's Water and
                         Sewer Authority's declining to waive its fees ($700,000) as assumed in the
                         budget, and the District's Department of Health's requesting
                         reimbursement for its staff costs associated with hazardous materials


                         7
                          In table 1, total estimated project costs of $791.1 million minus total WCCA estimated
                         construction costs of $510.7 million.




                         Page 9                         GAO/AIMD-99-258 Status of New Convention Center Project
                       B-280908




                       monitoring ($300,000). Estimated legal costs increased with the decision to
                       have legal services provided throughout the construction phase. Estimated
                       insurance costs decreased as a result of WCCA's obtaining insurance
                       covering its contractors and subcontractors (owner-controlled insurance
                       program) rather than having each obtain necessary coverage individually.

                       The estimate for design fees increased by $10.5 million because the
                       complexity and scope of services required of the architect and engineering
                       (A&E) team have been greater than anticipated. Multiple (15 to 20) bid
                       packages will be required, rather than the 4 to 5 originally predicted.
                       Increases are also attributable to the more complex nature of the final
                       design and the A&E team's participation in value engineering and
                       subcontractor purchasing. Also, design costs of $1.3 million relating to the
                       Metro station upgrade have been reallocated to the design fees component.

                       Other project cost changes resulted from reclassifying various items. Site
                       development costs is a new line item related to costs for fencing, site
                       cleanup, and rodent abatement. Community outreach costs have been
                       reclassified and are now included in other project costs. The utilities
                       relocation costs not covered in GMP increased because field conditions
                       differed from what was expected. Metro station upgrade costs of $3 million
                       were reclassified to building and site/GMP costs and design fees.

                       The estimate for vendor-provided equipment increased by $6.3 million.
                       WCCA anticipates that a central heating and cooling plant and
                       telecommunications, food service, and audiovisual equipment will be
                       provided by vendors without cost. WCCA officials indicate that
                       arrangements whereby vendors provide such equipment have been used at
                       convention centers in other cities. WCCA is considering the technical
                       aspects of several proposals by vendors to provide a central plant. As the
                       project progresses, WCCA anticipates soliciting proposals from vendors to
                       provide telecommunications, food service, and audiovisual equipment. As
                       we noted in our prior report, WCCA is at risk for these costs until contracts
                       have been executed with vendors and for any costs that may be necessary
                       in connection with installation of the vendors' equipment.


Contingency to Cover   In addition to the cost increases that were offset by decreases in the
Project Risks          program management and insurance line items, WCCA offset $16 million of
                       cost increases by reducing the project contingency. This offset reduced the
                       project contingency amount from $30 million to $14 million—4 months into




                       Page 10                   GAO/AIMD-99-258 Status of New Convention Center Project
                        B-280908




                        the 4-year construction schedule. Currently, several unknowns put
                        additional pressure on the remaining contingency funds:

                        • The uncertain outcome of negotiations with the CM on changes to the
                          GMP amount.
                        • The risk that additional costs—for hazardous materials removal and
                          other work—will be incurred in the more than 3 years remaining until
                          estimated project completion.
                        • The risk that vendors do not fund all or part of the $24 million in
                          equipment costs as anticipated by WCCA or that WCCA has to incur
                          additional costs to accommodate the installation of vendors' equipment.


Changes to Financing-   A modified arrangement for meeting reserve requirements for bond
Related Costs           financing significantly reduced the financing-related costs and the total
                        required funds from prior estimates. An anticipated Debt Service Reserve
                        Fund of $44.4 million was not required due to the purchase of a surety bond
                        for $633,000 to cover debt servicing. Also, the Operations and Marketing
                        Reserve fund required $10 million less and the Renewal and Replacement
                        fund required $7 million less than anticipated.



WCCA's Financing        On September 29, 1998, WCCA issued bonds with considerably better terms
                        than it anticipated at the time of our last report. Specifically, no
Plan Covers Estimated   subordinate bonds were issued, the term was 30 years instead of 34, the
Costs But Contains      interest rate was 5.2 percent instead of 5.6 percent, and financing and
                        reserve costs were $77.1 million instead of $138.2 million. As of June 1999,
Some Uncertainties      the bond proceeds provided about 66 percent of the $791 million estimated
                        project costs. However, the financing plan covering the remaining
                        34 percent of estimated project costs contains some uncertainties,
                        including the equipment anticipated to be provided by vendors without
                        initial cost and the federal grants being provided through the District
                        government. These uncertainties are discussed after table 2, which
                        compares the current financing plan with the plan in our prior report.8




                        8
                            GAO/AIMD/OCE-98-238, July 15, 1998.




                        Page 11                         GAO/AIMD-99-258 Status of New Convention Center Project
                                                B-280908




Table 2: Comparison of WCCA's May 1998 and June 1999 Unaudited Financing Plans

Dollars in millions
Funding sources                                                                     Financing plan as of 5/98a          Financing plan as of 6/99
Senior lien bonds                                                                                          $487.4                              $519.5
Junior/senior subordinate lien                                                                               128.2                                  0.0
 Subtotal                                                                                                  $615.6                              $519.5
Dedicated tax collections for pre-construction activities (at bond issuance)                                  37.2                                 37.2
Dedicated tax collections for reserves or construction (at bond issuance)                                     72.8                                 77.3
Estimated construction fund earnings                                                                          62.7                                 53.1
Projected excess dedicated tax collections through 2002                                                         0.0                                40.0
Anticipated federal funds                                                                                     35.0                                 55.0
Anticipated vendor participation                                                                              17.7                               24.0b
Funds for administrative costs                                                                                  5.0                                5.0c
 Subtotal                                                                                                  $230.4                              $291.6
Total funding sources                                                                                      $846.0                              $811.1
Interest rate (percent)                                                                                         5.6                                 5.2
Term of debt (years)                                                                                            34                                  30
Dedicated annual taxes to back bonds                                                                           $44                               $50.3
Dedicated taxes growth assumption (percent)                                                                       1                           3.6-4.5d
Average annual debt service                                                                                  $42.6                               $34.9


                                                a
                                                    Reported in GAO/AIMD/OCE-98-238, July 15, 1998.
                                                b
                                                 We adjusted this amount from $25 million to $24 million to agree with WCCA's cost estimate in
                                                table 1.
                                                c
                                                  WCCA reflects funds for the administrative cost (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
                                                  PriceWaterhouseCoopers in the Final Pricing Information report dated Sept. 29, 1998, projected
                                                dedicated tax growth between 1999 and 2007 to range between 3.6 percent and 4.5 percent.
                                                Source: WCCA officials.


                                                The major differences in funding sources between the two plans are a
                                                $96 million decrease in bond proceeds, a $9 million decrease in interest
                                                earnings, the use of $40 million of dedicated tax receipts for construction
                                                during the 4-year construction period, and a $20 million increase in
                                                anticipated federal funds. The anticipated federal funds in the June 1999
                                                financing plan were a $25 million appropriation for the Metro station
                                                upgrade, which the Congress appropriated since our last report, a
                                                $10 million grant for utilities relocation from Community Development




                                                Page 12                            GAO/AIMD-99-258 Status of New Convention Center Project
                  B-280908




                  Block Grants (CDBG) funds made available to the District by the U. S.
                  Department of Housing and Urban Development, and a $20 million grant in
                  federal highway funds.

                  Although the District informed WCCA with a letter dated April 19, 1999,
                  that the $10 million CDBG grant would not be provided, WCCA continues
                  to carry the grant in its financing plan. The District informed WCCA with a
                  letter dated July 2, 1999, that at this time it would provide $8.5 million of
                  the anticipated $20 million in federal highway funds from the District's
                  Federal-Aid Highway program to help fund the road work at the convention
                  center. The District has indicated that additional highway funds may be
                  available for specified aspects of the road work during future years of the
                  project. While additional highway funds may be forthcoming at some time
                  in the future, WCCA is at risk until they become available.

                  If the remaining anticipated federal funds of $21.5 million9 do not
                  materialize, total estimated funding sources would decrease from
                  $811.1 million to $789.6 million, which is $1.5 million less than the current
                  $791.1 million estimated project cost.



Collections of    Certain District sales and use taxes (dedicated taxes) are to be transferred
                  to WCCA to construct and operate the convention center and redeem the
Dedicated Taxes   bonds. These taxes consist of a 4.45 percent hotel sales tax and a 1 percent
                  restaurant tax.10 These taxes, along with several other District sales and use
                  taxes that are reported on the same tax form, are collected through what is
                  referred to as a lockbox arrangement. Under this arrangement, the relevant
                  District businesses file their tax returns along with their tax payments
                  directly with a designated local bank (lockbox bank). Any such payments
                  received by the District are forwarded directly to the lockbox bank without
                  further processing. The bank then makes appropriate distribution of the
                  tax payments.




                  9
                   The $21.5 million consists of the $10 million CDBG grant and the remaining $11.5 million in
                  highway funds.
                  10
                   The taxes identified for WCCA make up a portion of the District's 14.5 percent hotel sales
                  and use tax and 10 percent tax on restaurant meals, alcoholic beverages consumed on
                  premises, and rental vehicle charges.




                  Page 13                        GAO/AIMD-99-258 Status of New Convention Center Project
                              B-280908




                              The purpose of the lockbox is to provide bond holders with assurance that
                              dedicated taxes for the convention center are provided to WCCA for use as
                              specified in the bond agreements. The lockbox arrangement for collecting
                              dedicated taxes for WCCA, as well as other taxes for the District, operates
                              pursuant to the provisions of a number of agreements among the parties
                              involved. The agreements include

                              • a master trust agreement between WCCA and a trustee bank that is the
                                depository for the bond proceeds and the dedicated tax collections,
                              • a memorandum of understanding between WCCA and the District,
                              • a collections agreement among WCCA, the trustee bank, the District,
                                and the lockbox bank, and
                              • a lockbox agreement between the District and the lockbox bank.

                              In general, the lockbox bank uses four bank accounts for collecting District
                              sales and use taxes and making appropriate transfers to the District and
                              WCCA. If the tax payment agrees with the amount shown on the tax return,
                              the receipts are deposited in a transfer account. Where there is not
                              agreement, tax receipts are deposited in an exceptions account. Funds in
                              the transfer account are transferred to a WCCA-dedicated account and a
                              District account in the appropriate amounts through the use of a
                              computerized program that calculates the amount of the transfers.

                              Funds in the WCCA-dedicated account are transferred daily to the trustee
                              bank for use by WCCA as specified in the master trust agreement. Funds in
                              the exceptions account are held by the lockbox bank until the District's tax
                              office determines their proper disposition and provides the lockbox bank
                              with instructions on appropriate distribution of the funds.


Lockbox Collections in Line   Pricing information for the bond issuance assumed dedicated tax
With Projections              collections of $50.3 million annually in depicting debt service ratios.11 Tax
                              receipts deposited in WCCA's dedicated account for the first 10 months of
                              fiscal year 1999 totaled $42.2 million. This amount is a little higher than the
                              $41.9 million estimate prorated for the first 10 months of 1999. It is
                              $6.1 million (17 percent) higher than comparable deposits for the first
                              10 months of fiscal year 1998.


                              11
                                Final Pricing Information, $524,460,000 Washington Convention Center Authority Senior
                              Lien Dedicated Tax Revenue Bonds, Series 1998, September 29, 1998, PaineWebber
                              Incorporated.




                              Page 14                       GAO/AIMD-99-258 Status of New Convention Center Project
                                   B-280908




Operations of the                  When the collections agreement covering dedicated taxes for WCCA
Exceptions Account Have            became effective on October 1, 1998, the District continued to use an
                                   exceptions account that it had been using since early 1997 during
Been Problematic                   preconstruction on the convention center. At September 30, 1998, the
                                   account had a balance of $55.3 million in exceptions that needed to be
                                   resolved. Amounts continued to accumulate in the account, and in
                                   December 1998, the unresolved balance reached $70.1 million. The District
                                   is responsible for resolving the problems with tax receipts recorded in the
                                   exceptions account and initiating monthly transfers of the amounts to the
                                   District and WCCA accounts as appropriate. The records indicate that the
                                   accumulation of funds in the account was due to delays in (1) resolving the
                                   exceptions and (2) making transfers out of the account after the exceptions
                                   have been resolved.

Transfers to the District on the   To gain access to funds in the account, beginning in December 1998, the
Basis of Estimates                 District made estimates of its share of tax receipts in the account and
                                   initiated several transfers to the District account based on those estimates.
                                   From October 1998 through June 1999, transfers from the exceptions
                                   account to the District were $98.8 million and transfers from the
                                   exceptions account to WCCA were $2.9 million. Of the amounts transferred
                                   to the District, $95.5 million was based on estimates of the amounts that
                                   were due the District. None of the transfers to WCCA were based on
                                   estimates. At June 30, 1999, the balance in the exceptions account was
                                   $14.1 million.

                                   As of August 1999, the District had not reconciled the $95.5 million in
                                   transfers made on the basis of its estimates with actual amounts due and
                                   made appropriate adjustments. A District official told us that the District
                                   was in the process of reconciling the estimated amounts with actual
                                   amounts due and that additional transfers on the basis of estimates would
                                   not be made.

                                   The collections agreement specifies that the District shall not have access
                                   to amounts in the exceptions account until they are transferred to the
                                   District account. The agreement further specifies that the District will
                                   resolve the amounts in the exceptions account and initiate transfers out of
                                   the account no less often than monthly. In addition, the District is to
                                   resolve amounts in the exceptions account before any monies are allocated
                                   to either WCCA or the District, according to a description of the lockbox
                                   arrangement in the bond's Final Pricing Information.




                                   Page 15                   GAO/AIMD-99-258 Status of New Convention Center Project
                                   B-280908




Transfers to WCCA and the          The exceptions account should contain only the unresolved amounts from
District Have Not Kept Pace With   prior months plus the current month's exceptions, which average about
Resolved Exceptions                $6 million a month. Summary information on the exceptions account as of
                                   June 1999, prepared by the District's Office of Tax and Revenue, showed
                                   that while the exceptions account had a balance of $14.1 million, all but
                                   about $1 million of the funds in the exceptions account had been resolved.
                                   Of the $1 million, about 62 percent dated back to 1997 and 38 percent back
                                   to 1998. District officials told us that they are having difficulty locating the
                                   documents necessary to allocate the remaining amounts. District and
                                   WCCA officials stated that if these amounts are not resolved in the near
                                   future, they will agree on an appropriate distribution. District officials
                                   indicated that they are now resolving the exceptions on what is essentially
                                   a month-to-month basis. This means that at June 30, 1999, the exceptions
                                   account included $13.1 million that had been resolved and should have
                                   been distributed to the District and WCCA, as appropriate. A District
                                   official attributed the backlog in making transfers after exceptions have
                                   been resolved to several factors, including the time required to prepare the
                                   necessary paperwork for the adjustments, obtaining the necessary
                                   approvals, and the District's conversion to a new accounting system.

Interest Earnings on Amounts in    At the end of each day, the amount in the exceptions account is transferred
the Exceptions Account Not         into an interest-bearing investment account, and at the beginning of the
Recognized or Transferred          next day, a lump-sum amount including earned interest is transferred back
                                   into the exceptions account. Based on the amounts transferred out of the
                                   exceptions account each afternoon and the increased amount transferred
                                   back into the account the following morning, we computed that over
                                   $1.2 million in interest had been earned from October 1998 through June
                                   1999. Additional amounts may have been earned from origination of the
                                   account to September 1998.

                                   The collections agreement and the memorandum of understanding
                                   between the District and WCCA is silent on the disposition of such interest.
                                   As of June 1999, the District had not determined the amount of interest
                                   earnings on the exceptions account and transferred appropriate amounts
                                   to WCCA and the District. WCCA and District officials stated that they
                                   would resolve disposition of the interest.



Conclusions                        Except for an increase in the estimated value of equipment that WCCA
                                   anticipates will be provided by vendors, WCCA estimates show that the
                                   construction cost has remained unchanged overall. WCCA indicates that




                                   Page 16                    GAO/AIMD-99-258 Status of New Convention Center Project
                  B-280908




                  the project is within budget. Financing-related costs have decreased
                  substantially, resulting in an overall $55 million (6.5 percent) decrease in
                  total estimated project costs.

                  WCCA has made numerous changes to the estimated costs of the various
                  project components within the overall estimate by increasing the estimated
                  cost of some components and decreasing the estimated cost of other
                  components. Only 4 months into the 4-year construction project, WCCA
                  offset $16 million in costs against the project contingency, reducing the
                  contingency for covering unexpected costs to $14 million. As discussed in
                  the report, there are currently several uncertainties regarding the cost
                  estimates, such as the pending increases and decreases in GMP.

                  Dedicated tax receipts under the lockbox arrangement for the first
                  10 months of fiscal year 1999 were a little higher than the estimates
                  supporting the bond issuance. These receipts did not include WCCA's share
                  of taxes in the exceptions account, which has not been resolved promptly
                  and appropriate amounts transferred to WCCA. These receipts also do not
                  include WCCA's share of interest earnings in the account, which cannot be
                  determined until the District resolves the differences in the account.



Recommendations   We recommend that the District's Chief Financial Officer

                  • restrict further transfers out of the exceptions account on the basis of
                    estimates,
                  • determine actual amounts due to the District and make appropriate
                    adjustments to the estimated amounts transferred from the exceptions
                    account,
                  • resolve the remaining older amounts in the exceptions account and
                    make appropriate transfers to the District and WCCA,
                  • establish and enforce procedures for clearing the exceptions account
                    and transferring funds to the appropriate accounts monthly, and
                  • determine interest income on the exceptions account to be allocated to
                    the District and WCCA, make appropriate transfers of the interest
                    previously earned, and make future transfers of interest no less often
                    than monthly.




                  Page 17                   GAO/AIMD-99-258 Status of New Convention Center Project
                      B-280908




District's Comments   The District agreed with all five recommendations with the exception of
                      the timing of transfers of interest earnings on the exceptions account to the
and Our Evaluation    District and WCCA. We reaffirm our recommendation that from a business
                      perspective, it would be prudent to transfer such amounts at least monthly.
                      The underlying premise of an exceptions account is that it is a temporary
                      account and that amounts resolved and accrued interest should be
                      transferred promptly. The timely transfer of these amounts would provide
                      access to these funds for the District—which is due the vast majority—as
                      well as WCCA. WCCA, in general, agreed with the report's contents and
                      provided additional information on some matters discussed in the report.

                      We are sending copies of this report to Senator Robert Byrd, Senator
                      Richard J. Durbin, Senator Kay Bailey Hutchison, Senator Joseph I.
                      Lieberman, Senator Ted Stevens, Senator Fred Thompson, and Senator
                      George V. Voinovich and to Representative Dan Burton, Representative
                      Ernest Jim Istook Jr., Representative James P. Moran, Delegate Eleanor
                      Holmes Norton, Representative David R. Obey, Representative Henry
                      Waxman, and Representative C. W. (Bill) Young in their capacities as Chair
                      or Ranking Minority Member of Senate and House Committees and
                      Subcommittees. Copies will be made available to others upon request. If
                      you have any questions regarding this report, please contact me at (202)
                      512-4476. Key contributors to this assignment were Arkelga Braxton,
                      Steven Haughton, and Roy Hutchens.

                      Sincerely yours,




                      Gloria L. Jarmon
                      Director, Health, Education, and Human
                      Services Accounting and Financial
                      Management Issues




                      Page 18                   GAO/AIMD-99-258 Status of New Convention Center Project
Page 19   GAO/AIMD-99-258 Status of New Convention Center Project
Appendix I

Comments From the District of Columbia                                        Appendx
                                                                                    Ii




              Page 20   GAO/AIMD-99-258 Status of New Convention Center Project
Appendix I
Comments From the District of Columbia




Page 21                      GAO/AIMD-99-258 Status of New Convention Center Project
Appendix II

Comments From the Washington Convention
Center Authority                                                              Appendx
                                                                                    Ii




              Page 22   GAO/AIMD-99-258 Status of New Convention Center Project
Appendix II
Comments From the Washington Convention
Center Authority




Page 23                    GAO/AIMD-99-258 Status of New Convention Center Project
                   Appendix II
                   Comments From the Washington Convention
                   Center Authority




(916262)   Leter   Page 24                    GAO/AIMD-99-258 Status of New Convention Center Project
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order made
out to the Superintendent of Documents, when necessary, VISA and
MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any list
from the past 30 days, please call (202) 512-6000 using a touchtone
phone. A recorded menu will provide information on how to obtain
these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. GI00
Official Business
Penalty for Private Use $300

Address Correction Requested