oversight

The John F. Kennedy Center for the Performing Arts Is Financially Troubled

Published by the Government Accountability Office on 1977-12-20.

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

                         DOCUMENT RESUSE
04563 -   B3574842
The John . Kennedy Center for the Perforsing Arts Is
Financially Troubled. GGD-78-15; b-154459. December 20, 1977. 21
pp. + 4 appendices (10 pp.).
Report to the Congress; by Elmer B. Staats, Comptroller General.

Issue Area: Accountin, and Financial Reporting (2800).
Contact: General Government Div.
Budget Function: General Government (800).
Organization Concerned: Department of the Treasury; John F.
    Kennedy Center for the Perfo=ming Arts; National Park
    Service.
Congressional Relevance: Congress.
Authority: John F. Kennedy Center Act, as amended (P.L. 94-119;
    72 Stat. 1698).

          The John F. Kennedy Center for the Ferfcrming Arts
faces serious financial problems for which there are no simple
solutions. It is aeavily in debt to the Federal Government and
otaers and probably cannot meet all of its obligations.
Independent action by either the Secretary cf the Treasury to
collect the bond interest due or by the Secretary of the
Interior to collect ore of the building maintenance costs would
affect the Centers ability to conduct its performing arts
activities. Only the Congress can make both the value judgments
and the tradeoffs required to resolve the situation.
Findings/Conclusions: The Kennedy Center has not ade provisions
to pay $10.5 million in interest owed on bonds held by the U.S.
Treasury; has not paid its full share of building maintenance
costs; and has not been able to pay all of its operating
expenses when due. The formula developed to allocate aintenance
costs coneeds to be updated because of changes in the Center's
operations. The present formula, developed before the Center
opened, calls for the National Park Service to pay 76.2% of
these costs for memorial functions and for the Center to pay
23.8% of the costs for performing functions. While changes have
occurred in the operation of the Center since the development of
the formula, no changes have been made in the cost-sharing
formula, and the Center is not paying its full share of the
maintenance cost. The Center does not believe that additional
private contributions could be raised to pay its debt or that
significant savings could be derived from wore efficient
operation. It believes that remedial legislation is needed to
achieve an appropriate long-term settlement of its financial
dilemma.   (Author/SC)
                      REPORT TO THE CONGRESS
 0   _

         -* GBY              THE COMPTROLLER GENERAL
           : 3 <OF           THE UNITED STATES
IA




                     The John F. Kennedy Center For
                     The Performing Arts Is
                     Financially Troubled
                     The Kerredy Center faces serious financial
                     Droblems for which there are no simple solu-
                     tions. It is heavily in debt to the Federal
                     Government and others and probably cannot
                     meet a of its obligations.
                  The Center

                         --has not made provisions to pay $10.5
                           million in interest owed on bonds held
                           by the U.S. Treasury;
                          has not paid its full share of building
                          maintenance costs; and
                         -has not been able to pay all of its oper-
                          ating expenses when due.
                 If Center revenues were used to pay either the
                 bond interest or the increased building mainte-
                 nance costs, less money woula be available
                 for erforming arts. Only the Congress can
                 make the value judgements required to solve
                 the dilemma.




                 GGD-78-15                                     DECEMBER 20, 1977
              COMPTROLLER GENERAL OF THE UNITED STATES
                         WtIHINGTON, D.C.   .105




B-154459


To the President of the Senate and the
Speaker of the House of Representatives

     This report on the finarcial operations of the John F.
Kennedy Center for the Perfolminq Arts points out that the
Center will be unable to meet all of its financial obliga-
tions and maintain its current level of performing arts
activities. We believe that the Congress is in a position
to make the value judgments required to resolve the dilemma.

     We made our review pursuant to Public Law 94-119, an
amendment to the John F. Kennedy Center Act (72 Stat. 1698),
requiring the General Account:ng Office to audit regularly
the accounts of te Center to determine its continuing
ability to pay its share of future operating costs, and to
assure that the cost-sharing formula between the National
Park Service and the Center fairly and accurately reflects
the use of tile building.

      We are sending copies of this report to the Acting
Director, Office of Manaqement and Budget; the Secretary
of the Treasliry; the Secretary of the Interior; the Adminis-
trator of General Services; and the Chairman, John F. Kennedy
Center for the Performinq Arts.




                                        mp troller       neat
                                     of the United States
COMPTROLLER GENERAL'S                      THE JOHN F. KENNEDY CENTER
REPORT TO THE CONGRESS                     FOR THE PERFORMING ARTS IS
                                           FINANCIALLY TROUBLED

             DIGEST

             The Kennedy Center has serious financial
             problems for which no simple solutions exist.
             GAO believes the Congress should consider
             these problems. It alone can make both the
             value judgments and trade-offs involved in
             solving the Center's difficulties.

             PAYMENT OF FUTURE OPERATING
             COSTS UNCERTAIN

             The Kennedy Center's revenues have exceeded
             expenses by about $1 million from its open-
             ing through September 30, 1976. About $5.2
             million in private contributions is included
             in these revenues. However, the Center has
             been unable to pay all its operating ex-
             penses when due. All of its excess revenue
             has been needed to pay the principal on a
             construction loan from the Center's garage
             concessionaire and payments due on lease
             purchase agreements. On occasion. the Cen-
             ter has obtained advances against future
             revenues fromn its restaurant concessionaire
             to pay bills, and it has financed the pre-
             miums on some of its insurance policies.

             As of Sept, mber 30, 1976, the Center owed
             to the General Services Administration
             about $321,000 in unpaid telephone bills
             dating back to 1972. Further, the Centr:

             -- Owed $10.5 million in interest on bonds
                held by the U.S. Treasury, as of Septem-
                ber 30, 1976. No funds have been set
                aside to meet this obligation. (See
                pp. 6 and 8.)

             -- Was not paying its full share of build-
                ing maintenance costs. For the 15 months
                ended September 30, 1976, the Center paid
                $684,000 for building maintenance, but
                under existing legislation it should have
                paid much ore. (See ch. 3.)

ITP5ea.     Upon removal, the report                        GGD-78-15
cover date hould e noted hereon.       i
The Cnter will be able to improve its
financial operations in sonme areas.   It has
repaid about $1.2 million of the $3.5 mil-
lion borrowed from its garage concession-
aire, thereby reducing the annual interest
payments. This loan is scheduled to be re-
paid by 1987, at which time the Center's
percentage share of the parking revenue will
also increase. Also, during its early years
the Center was making payments on lease pur-
chase agreements for furnishings and equip-
ment.   These payments have now been com-
pleted.   (See pp. 5 and 10.)
While financial improvement is likely to
continue in some areas, the prospects of the
Center making much of a dent in the accrued
bond interest and paying a larger share of
building maintenance costs are not right.
The dilemma is that setting aside revenues to
pay for bond interest payments or increasing
the amounts paid for building maintenance
would affect the Center's ability to conduct
performing arts activities.

CENTER HAS DIM PROSPECTS FOR PAYING
INTEREST OWED TO THE GOVERNMENT

The Center borrowed $20.4 million from the
U.S. Treasury to construct a parking garage.
The Center issued interest-bearing rvenue
bonds with maturity dates ranging from the
year 2017 to the year 2019.   The bonds pro-
vide that the interest and principal will be
payable from parking revenues.   None of the
interest has been paid, however, and as of
September 30, 1976, it totaled $10.5 million.
Legislation permits deferral of interest on
the debt through December 31, 1978, and per-
mits the Secretary of the Treasury to defer
it beyond that date. At December 31, 1978,
the deferred interest will be about $15 mil-
lion, and if the interest is deferred beyond
that date, which is probable, te annual
interest on the bonds and deferred interest
will be over $2 million.

No doubt the Secretary o the Treasury will
have to defer payment of most if not all of the


                     ii
          interest owed by the Center. The Center has
          not set aside funds to pay the interest and
          has no plans to do so. If things continue un-
          changed, the Center's future ability to pay
          the internist s doubtful. Deferment "without
          strings atLdched," h ,ever, merely postpones
          the day of reckoning.

          COST-SHARING FORMULA
          NEEDS REVISION

          As bad as the Center's financial situation is,
          it should be worse. The formula developed to
          allocate maintenance costs needs to be updated
          because of changes in the Center's operations.
          The formula, developed in 1971 before the Cen-
          ter opened, calls for the Nat:.onal Park Service
          and the Center to share most of these costs.
          On the basis of the estimated hours for per-
          forming and nonperforming (memorial) functions,
          the cost-sharing formula was set at 23.8 per-
          cent to the Center for performing functions
          and 76.2 percent to the National Park Service
          for memorial functions.

          Changes have occurred in the operation of the
          Center since the development of the formula,
          but no changes have been made in the formula.
          As d result, the Center is not paying its full
          share of the building maintenance costs. (See
          ch. 3.) The principal changes have been:

          -- Theater use in calendaL year 1976 shows a
             larger percentage of performing time than
             allocated in the formula.   (See p. 16.)
          --New activities of a performing arts nature
            such as organ recitals and symposiums have
            been added. In addition, the formula has
            not taken backstage activities into account
            in establishing the hours of performing and
            nonperforming use.  (See p. 16.)
          -- There has been an increase in the Center's
             space devoted to performing arts and to
             third-party occupants not involved in the
             use of the Center as a memorial.  (See
           p. 17.)

Ieaallh

                                 iii
Further, the Center collects and retains
about $179,000 a year in utility payments
from its garage and restaurant concession-
aires.  However, the Park Service pays for
the utility services.  The Park Service
does not share in the garage or restaurant
income, and is reimbursed only at the over-
all cost-sharing formula rate.  (See p. 18.)

The formula needs revision, but any increase
in the Center's share of the building main-
tenance costs would decrease the money
available for payments on the bond interest
and/or reduce the amount available for per-
forming arts.

AGENCY COMMENTS AND
UNRESOLVED MATTERS

It is the Center's view that any increases
in payments for operation of the building
and any payment of interest on the U.S.
Treasury bonds would make it impossible to
pay off the balance due on the funds advanced
by the garage concessionaire and would impair
the Center's programing and public service
activities required by the John F. Kennedy
Center Act.  The Center does not believe
that additional private contribu-ions could
be raised to pay its debt nor significant
savings be derived from more efficient opeL-
ation.

The Center has considered several steps that
might be taken to achieve an appropriate long-
term settlement of its financial dilemma.    It
believes that remedial legislatior is needed
and might be founded on (1) consideration by
the Congress of whether the Center should be
responsible for any part of the maintenance
cost for a living memorial to a President
and  2) lifting the burden of the interest on
the U.S. Treasury bonds.   If the Congress
finds it  appropriate to maintain and repair
the entire building with Federal funds and
to lift the interest burden, the Center    s
confident that it could repay the $20.4 mil-
lion principal on the U.S. Treasury bonds
at the rate of $1 million a year.   (See
app. II.)

                      iv
MATTERS FOR CONSIDERATION
BY THE CONGRESS

Clearly, the Center cannot meet all of its
financial obligations.    Independent action
by either the Secretary of the Treasury to
collect the bond interest or the Secretary
o£ the Interior to collect more of the
building maintenance cost would affect the
Center's ability to conduct its performing
arts activities.   (See p. 21.)   Cnly the
Congress can mke both the value judgments and
trade-offs required to rsolve the situation.




                    v
                         C o n t e    t s

                                                        Page
DIGEST

CHAPTER

       1    INL 3DUCTION                                  1
                Building use                              2
                Cost of construction                      3
                .Major building repairs                   3
                Scope of review                           4
       2   THE CENTER PROBABLY CANNOT PAY ITS
             SHARE OF FUTURE OPERATING COSTS             5
               Center hampered by limited funds          5
               No provision made for interest
                 on bonds                                6
               RP .ults of operations                    7
                    Theater operations                   7
                    Girage operations                   10
                    income from other sources           12
                    Public suppcrt                      12
               Conclusions and agency comments          12
   3       COST-SHNRTNG FORMULA NEEDS REVISION          14
               Costs to maintain the Center
                                                        15
               Cost-sharing formula needs up-
                 dating                                 16
               Use of space                             17
                   Utility reimbursements retained
                     by the Center                      18
               Conclusion and agency comments           18
   4       MATTERS FOR CONSIDERATION BY THE
             CONGRESS                                   21
APPENDIX

   I       Schedule of norfunded programing expenses
             for the 15 months ended September 30,
             1976                                       22
  II       September 22, 1977, letter from the Chair-
             man, John F. Kennedy Center for the Per-
             forming Arts                               23
III        September 1, 1977, letter from the Assis-
             tant Secretary, Policy, Budget and Ad-
             ministration, Depar:me.t of the Interior   29
APPENDIX                                      Page

      IV   Letter from the Fiscal Assistant
             Secretary of the Treasury         30

                         ABBREVIATIONS

GAO        General Accounting Office

GSA        General Services Administration
                          CHAPTER 1

                        INTRODUCTION

     The John F. Kennedy Center Act (72 Stat. 1698) estab-
lished the Center as a bureau within the Smithsonian Institu-
tion and provided a Bard of Trustees to administer it.    The
Board is required by the act to (1) present music, opera,
drama, dance, and poetry; (2) provide lectures and other
programs; (3) develop programs for children, youth, and the
elderly and for other age groups in such arts designed
specifically for their participation, education, and recrea-
tion; (4) provide facilities for other civic activities at
the Center; and (5) provide a suitable memorial in honor
of President Kennedy within the Center.

     The act authorizes the Secretary of the Interior, actinq
through the National Park Service, to provide janitorial,
maintenance, security, information, interpretation, and all
other services necessary to the nonperforming arts functions
at the Center.  The Park Service pays all normal security,
information, and grounab maintenance costs.  The rest of the
costs to operate and maintain the Center are shared by the
Center and the Park Service under a formula developed in
1971, before the Center opened.

     In a report to the Senate Committee on Public Works
dated April 11, 1975, we recommended that the Secretary of
the Interior

     -- require that the allocation formula be reviewed
        periodically and revised as necessary to insure the
        proper allocation of costs and

     -obtain the authority to make audits   to verify the
       costs incurred.

     No action was taken on our recommendations, but in a
report dated July 31, 1975, on a bill to authorize appro-
priations to Interior for the Center, the Senate Committee
on Public Works stated that since Interior was a party to
the cost allocation agreement, it was more appropriate to
have the review oi costs and audit function performed by
the General Accounting Office, an independent party. The
Committee also expressed its concern that the Center might
be unable to meet its debt service as well as other costs
to maintain the buildin,. As a result, the act was amended
by Public Law 94-119, dated October 21, 1975, to require the
General Accounting Office to review and audit regularly the
accounts of the Kennedy Center to determine its continuing


                              1
ability to pay its share of future operating costs, and to
assure that the cost-sharing formula between the National
Park Service and the Center fairly and accurately reflected
the use of the building.

BUILDING USE

     The building was opened for use in September 1971.   It
is located on a 17-acre tract in the District of Columbia
and contains about 1.5 million square feet of floor space,
consisting of these principal areas:

    -- The three major theaters are the Concert Hall,
       Opera House, and Eisenhower Theater, which con-
       tain seating capacity for 2,750, 2,200, and
       1,130 persons, respectively.

    -- The grand foyer runs the full 630-foot ength
       of the building and provides a central lobby
       for the three theaters.

    -- Two major hallways traverse the 310-foot width
       of the building and lead from the grand foyer to
       the entrance of the building.

    -- A film theater operated by the American Film In-
       stitute has a seating capacity for 224 persons.

    -- A children's theater (the Chautauqua Tent) is
       located on the roof. The Alliance for Arts Educa-
       tion, a joint project of the Kennedy Center and
       the Department of Health, Education, and Welfare,
       sponsors programs for children such as folksinging,
       puppet shows, and storytelling each weekend in the
       tent.

    -- A music theater lab, organized jointly with the
       Stuart Ostrow Foundation, Inc., and used to produce
       musicals on an experimental basis.  The theater ac-
       commodates about 100 persons.

    --Two restaurants and a cafeteria are operated by a
      private concessionaire.

    -- A privately operated three-level underground parking
       garage contains space for about 1,403 cars.

    -- About 59,000 square feet of office space are occupied
       by the Center, the Park Service, and 15 other orqan-
       izations.


                             2
     Plans have been approved to add a studio theater to
be used for experimental productions.  The theater will be
constructed in the near future using $3 million given by
the Japanese Government and private Japanese organizations
as a Bicentennial commemorative gift.  it will have a
seating capacity of about 500 persons.

     The Friends of Kennedy Center, the Center's official
volunteer auxiliary, conducts daily public tours of the
building.  The Friends provide about 11,000 staff-hours
annually without pay.

COST OF CONSTRUCTION

     The cost to construct and equip the building was about
$77.9 million, of which $23 million was provided in direct
appropriations by the Congress for the construction of the
building, $20.4 million borrowed from the U.S. Treasury,
and $3.9 million paid from an appropriation to pay claims
against  he Government. 1/ The remaining funds were pro-
vided primarily by private contributors.

     Pending legal suits could affect the cost of the build-
ing.  The Center's architect has filed a claim of $295,799
against the United States for alleged unpaid services.  The
Department of Justice has filed a counter-claim of $1,975,000
citing several instances of alleged inadequate and erroneous
design which caused water damage to the building.

MAJOR BUILDING REPAIRS

     Gradually increasing water leaks have occurred from the
time the building neared completion in the fall of 1971.
These leaks have affected all horizontal surfaces including
the roof, terraces, and entrance plaza roadway.  For several
years the National Park Service took stopgap maintenance
measures.  As the problems grew worse, the Park Service in-
sisted that it had no responsibility to repair conditions
arising from what it considered faulty construction or design
and that it had no legislative authority or funds to make the
repairs.



1/The claims were filed by the Center's general contractor,
  acting for himself and 35 subcontractors for alleged de-
  lay damage claims and unpaid construction costs.




                             3
     In an effort to halt the continuinq deterioration, the
Center requested funds from the Congress.  In the 94th Con-
gress the House and Senate passed bills authorizing $3.3
million for the repairs.  Legislation was not passed because
differences in the House and Senate bills could not be re-
solved before adjournment, but in the 95th Congress $4.5
million for the repair work was appropriated.

SCOPE OF REVIEW

     We reviewed the Center's financial statements, account-
ing and operating records, and the records of the National
Park Service relating to the cost-sharing formula. We re-
viewed the Center's public accounting firm's audit reports
for all years and related workpapers for fiscal years 1975
and 1976.  We also made tests of the records maintained by
the restaurant and paLking garage concessionaire,.




                              4
                          CHAPTER 2

             THE CENTER PROBABLY CANNOT PAY ITS

              SHARE OF FUTURE OPERATING COSTS

      The Center's theater operations have lost money every
year.   However, revenues from garage, restaurant, and other
income-producing activities have more than offset the theater
losses, and cumulatively the Center's revenues have exceeded
operating expenses by about $1 million through September 30,
1976, exclusive of interest expense on revenue bonds.

     The Center, however, has been unable to pay all of its
operating expenses when due.   Its excess revenues have been
used to pay the principal on an advance from the garage con-
cessionaire and the payments due on lease purchase agreements
for furnishings and equipment.

     The Center has not made interest payment' to the Treasury
on the revenue bonds issued to finance the construction of the
garage, and the deferred interest as of September 30, 1976,
amounted to about $10.5 million.  It has also deferred payment
to the General Services Administration (GSA) of about $321,000
for telephone services.  Some improvements in the Center's
financial position are likely, but not enough to meet its
debt to the Federal Government.

CENTER HAMPERED BY LIMITED FUNDS

     The Center has been hampered from the beginning by a
lack of funds foL both construction and operating needs.    In
order to complete the building, the Center obtaine   an advance
of $3.5 million from its garage concessionaire.   It is cur-
rently repaying this advance.

     To furnish the building the Center had to sell and lease
back the theater seats, enter into a lease-purchase arrangement
for some of the carpeting and wallcovering, and obtain an ad-
vance from the restaurant concessionaire.  The Center has com-
pleted its payments on these items, ending this drain on its
operating funds.

    The Center has deferred the payment of some expenses,   and
in order to pay others it obtained advances during 1975 amount-
ing to $175,000 from its restaurant concessionaire.  The Center
has also financed the premiums on some of its current insurance
policies.  Additionally, it has accumulated unpaid debts to
GSA, primarily for Federal telecommunication (telephone)



                              5
 services.  Unpaid bills have been accumulating
 June 30, 1974, the Center's debt to GSA amountedsince 1972.   On
 One year later it was $284,069; and as of March    to $191,374.
                                                  1976, the
 Center owed about $436,000, including $316,000
                                                 for telephone
 service, about $83,000 for supplies, and about
 construction costs.                             $37,000 for

     In April 1976, the Center proposed payment
                                                 arrangements
to GSA on the amounts owed for telephone services
including a monthly $8,500 payment starting        and supplies,
on the telephone debts.                     in  October 1976
                         The Center's proposal was accepted by
GSA in May 1976.  As of September 30, 1976, the unpaid tele-
phone charges amounted to about $321,000.

NO PROVISION MADE FOR
INTEREST ON BONDS

     The Center has not provided for the payment
                                                  of interest
or principal on Treasury bonds.  As authorized by law, the
Center borrowed $20.4 million from the Treasury
                                                 by isuing
21 interest-bearing revenue bonds between July
                                                1, 1968, and
April 30, 1970.  Maturity dates range from December 31, 2017,
to December 31, 2019.  Interest rates range from 5-1/8 to
6-5/8 percent.

     The Knnedy Center Act provided that the $20.4
would be used                                       million
               o finance the Center's garage and would be
repaid from the Center's revenues.  The bonds state that the
interest and principal are to be paid from
                                           parking revenues.
However, the Center has not set aside any funds
                                                or made any
provision to pay the interest or amortize the
                                              principal of
the bonds.

     All interest may be and, according to current
will be deferred until December 31, 1978.            conditions,
                                            Also, under the
act, the Secretary of the Treasury can continue
crued interest after 1978.                        to defer ac-
                             All deferred interest bears in-
terest after June 30, 1972, and by December
accrued interest will be about $15 million. 31, 1978, the
                                               It probably will
not be paid in full at that time.   If no payments are made
by December 178, the total debt will be about
                                                 $35.4 million
and the future annual interest will be more
                                             than $2 million.
If things contir:ie unchanged, the Center will
                                                be unable to
pay the interest.

      Undoubtedly the Secretary of the Treasury will
defer payment of most if not all of the interest     have to
                                                  owed by the
Center.   Deferment "without strings attached," however,
postpones the day of reckoning.                           erely
                                  One option available to the



                              6
Secretary is requiring the Center to set aside its garage
revenues tc pay the interest as a condition of further defer-
ment of interest payments.  However, this course of action
would affect the Center's ability to meet its other costs.

      The Department of the Treasury does not believe that the
Center should be required to set aside the garage revenues
as a condition of further deferment.   (See app. IV.)  The
Treasury stated that because of the Center's financial situa-
tion and status as a national memorial, it would be incon-
gruous for it to press its claim to the limit.   Moreover, the
Department believes such a course of action would further
impair the Center's overall financial condition without ma-
terially enhancing the probability of recovering the Treasury's
investment.

RESULTS OF OPERATIONS

     The schedule on page 8 shows the results of the Center's
operations through the end of September 1976.

Theater operations

     The Center uses several different types of contractual
arrangements in dealing with performing attractions.

     --In some cases the Center licenses the use of the
       theater to an attraction, which generally retains the
       box office receipts (booking contract).  The Center
       has established standard  ates for the use of the
       theaters, but the rates used in the contracts are
       often negotiated.  The National Symphony Orchestra,
       the resident concert orchestra, is provided a special
       rate which includes the use of the Concert Hall for
       performances and rehearsals as well as office space.

    --In other cases the Center invests funds to produce or
      coproduce an attraction and shares in the profit or
      loss.

    -- For operas and ballets the Center often pays the attrac-
       tion a negotiated fee and expenses for the performances,
       and the Center retains the theater receipts.

    -- In other cases the Center receives a negotiated fee,
       and the attraction receives the rest of the box office
       receipts.




                             7
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                                                                                                                                      C,~~~~~~~~~~~~~,
       In use and attendance the Center's
                                           theaters have been
 operating at close to optimal expectations.
 year 1976 there were 1,170 performances       During calendar
 ters, 856 evening and 314 daytime.       at  the  three thea-
 the theaters did not have scheduled  There  were  few days when
                                      attractions.     Total at-
 tendance at the performances averaged
                                        over  80  percent   of
 capacity.   Considering scheduling requirements
 ter's attempts to present performing              and  the  Cen-
                                       arts attractions diverse
 in appeal and high in artistic merit,
                                        much higher attendance
 is improbable.

      Many of the theater losses in recent
 presentations which the Center classifies  years have been on
                                            as "programing."
 This includes attractions such as
                                   operas and ballets which
 the Center is required by its authorizing
 present.                                   legislation to
           Many of these attractions
 the likelihood of sustaining losses, are presented despite
                                       even with sellouts.
       Some of these presentations
 but many result in major losses. result in a small profit,
 are offset by public contributions.In some cases such losses
                                       A schedule of the pro-
 graming presentations for the 15 months
 1976, listing the receipts, expenses,    ended September 30,
 and net surplus or deficit resulting   public contributions,
                                       from each attraction
 is shown in appendix I.

       Another major source of losses
 has been the writeoff of production on theater operations
                                        investments. While
 booking presentations in which the
                                      Center has no financial
 interest before or after their run
 in a profit, such profits are more at the Center can result
                                       than offset by the net
 losses on the "programing" attractions.
 general manager of the Center's theaters, According to the
 hope of financial success is to produce        the Center's best
 ful attractions which will be presented    or   coproduce success-
 cities as well as at the Kennedy Center     in  theaters in other
 tain some revenue from television          and   perhaps to ob-
                                     or the movies.     Of course
a greater financial risk is involved
producing such presentations, because    in producing   or co-
                                          the Center's investment
could not be recovered during a relatively
Center.                                          short run at the
           Through the end of September 1976,
presentations in which the Center                 most of the
vestment have not been successful, has had a production in-
                                      and the Center has lost
$930,720 on its investments in such
                                       productions.     The major
part of this was the musical "Odyssey,"
                                            which lost $647,459.
      Tickets are priced separately for
                                           each attraction, tak-
ing into consideration such factors
                                       as the type of attrac-
tion and its cost.    The Center's general
15 percent of the tickets to performances policy is to offer
                                               other than those


                                9
on Saturday evening at half-price to students, senior citizens,
the handicapped, lower-graded military personnel, and low-
income groups.

     The Kennedy Center entered into an agreement in December
1974 to provide management services and direction for the
operation of the National Theater located in Washington,
                                                          D.C.
The Center receives a fee, plus its expenses for providing
these services.

     In addition to its performance programing, the Center
provides free educational and pulic service programs financed
primarily by private funds and f -   from Federal agencies.
Garage operations

     The Center awarded the parking garage concession to the
Airport Parking Company of Americ-Was;.ington, Inc.   The Com-
pany agreed to advance the Center $3,500,000, to be repaid
from profits over a 15-ycar period beginning in 1972.   These
funds were used to help pay construction costs.

     The agreement with the parking concessionaire provides
that after deductions for interest on the advance and
tion o the principal, profits are split evenly between amortiza-
                                                         the
concessionaire and the Center.   For a 10-year option period
after the advance is repaid, the Center will receive /0
cent of the net income when the recripts are under $1.5 per-
                                                         mil-
lion and 80 percent of the net income when receipts exceed
that amount.  After the option period, the Center can eithr
award a new contract, whereby it could receive all profits
after paying the concessionaire expenses and a management
fee, or operate the garage itself.

     For calendar years 1972-76, the Center's share of park-
ing revenues was $1,055,698 after amortization of principal
totaling $1,166,660 and payment of interest of $1,214,500,
as shown in the following schedule.




                             10
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     The garage is currently operating at close to maximum
potential.  A monthly parking rate for daytime parking has
attracted many persons who work  n the area.  At the time
of our field work, 546 of the 609 monthly parking spaces
were sold.  The rate charged to evening theatergoers is
comparable to the rates charged by other garages in the area.

Income from other sources

     The primary source of the Centet's other income is the
restaurant concessionaire.  It pays the Center 5 percent of the
gross sales, exclusive of tax, of the restaurants and vending
machines and 10 percent on the sales at the foyer bars.  In
addition the concessionaire pays the Center $106,544 annually
for utilities.

     Other sources of income include:

     -- Rents from organizations occupying space at the Center,
        principally the American Film Institute.  The Institute
        is paying for use of office space occupied, but has not
        paid for the space occupied by its small theater because
        no agreement has been reached on that matter.

     -- Rents received from special events held at the Center.

     -- Payments from the coat check concessionaire.

     -- Investment income, some of which is earned on donated
        securities.

Public support

     Public contributions amounting to $5.2 million received
through September 1976 have been important to the Center's
operations.  Past practice has been to solicit sponsors for
specific artistic presentations such as operas and ballets.
In addition, some support has been provided through nonear-
marked contributions.  Contributions are tax deductible under
provisions of the Internal Revenue Code.

     A 1977 corporate fund drive to attract $1 million from
the business community is underway.

CONCLUSIONS AND AGENCY COMMENTS

     Prospects are dim that the Center can make much of a dent
in the accrued interest on the revenue bonds.  While the Cen-
ter will likely be able to improve its financial operations in



                             12
some areas, the interest on the revenue bonds and
terest will be about $2 million annually if all of deferred in-
                                                    the interest
owed is deferred by the Secretary of t   Treasury.
     The Center said that it could not meet all of its
                                                         financial
obligations to the Federal Government and continue
                                                     to conduct
the activities it was created to present.   (See app. II.)
Center's board of Trustees has reached several conclusions The
concerning the Center's fin3ncial dilemma which are
                                                      discussed
in chapter 4.

     The Treasury Department does not believe that the
                                                        Center
should be required to set aside the garage revenue
                                                    as a con-
dition of further deferment. It said that because
                                                    of the
Center's financial situation and status as a national
                                                       memorial
it would be incongruous for the Department to press
                                                     its claim
to the limit.  Moreover, it believes such a course of action
would further impair the Center's overall financial
                                                     condition
without materially enhancing the probability of recovering
Treasury's investment.                                      the

     With respect to the amount owed GSA, the Center objected
to the implication that its obligation was overdue.
                                                      As mer-
tioned earlier, in April 1976 the Center and GSA
                                                 entered into
an agreement for payment on accounts for telephone
and supplies dating back several years.             services
                                         The Center cited
its dispute with GSA over amounts owed during construction
and maintained that it was not delinquent in its
                                                 payments
under the April 1976 settlement.

     It should be noted that only $37,000 of the $436,000
owed was in dispute; the rest was overdue bills.
                                                  The dispute
was not settled by the April 1976 agreement, and
                                                 was still
unresolved as of the end of fiscal year 1977.




                             13
                             CHAPTER 3

                      COST-SHARING FORMULA

                          NEEDS REVISION

       The cost-sharing arrangement
                                      for maintaining the Center
 does not accurately reflect
                               its use.    As a result, the Center
  is not paying its full share
                                of maintenance costs.    The cost
 of operating and maintaining
                                the Center is shared by the
 National Park Service and the
                                 Center.    The Park Service,
 restricted by legislation to
                                participating only in mainte-
 nance costs unassociated with
                                 performing functions, pays all
 normal security, information,
                                 and grounds maintenance costs.
 The rest of the costs are shared
 1971:                              under a formula developed in
         On the basis of the estimated
                                         hours for performing and
 nonperforming (memorial) functions,
                                        the shared costs were al-
 located 23.8 percent to the
                              Center for performing functions
 and 7.2 percent to the National
                                    Park Service for memorial
 functions.

     Chanqes have occurred in the
                                   operation of the Center
since the formula was developed,
revised to recognize the increasedbut the formula has
                                    use of the Center not  been
                                                      for per-
forming arts.  The principal changes have
                                           been:
     -- More hours of theater use
                                  in calendar year   1976 than
        allocated in the formula.

     -- New activities of   performing arts n.ture, such
        organ recitals and symposiums.                    as
                                        In addition, the
        formula has not taken backstage
                                        activities into ac-
        count in establishing the hours
                                        of per  rming and
        nonperforming use.

     -- Increased space devoted to
                                   performinC arts and to
        third-party occupants not involved
                                            in the memorial
        function.

     Further, the Park Service pays
                                     for the utility service
furnished to the garage and
                            restaurants but does not share
in the income from these operations.
                                       The Center collects
utility reimbursements from
                            these concessionaires which
does not return to the Park                              it
                            Service.




                              14
COSTS TO MAINTAIN THE CENTER

     The Congress has appropriated a total of $11,786,000
through September 1976 for the Park Service's cost of main-
taining the Center, as follows:

                     Fiscal year

                                                            (000 omitted)

                     1972                                         $ 1,500
                     1973                                           2,000
                     1974                                           2,400
                     1975                                           2,500
                     1976                                           2,645
               Transition quarter                                     741

                      Total                                       $11,786

These funds covter both the Park Service's share of the joint
costs and the amount it pays for normal security, information
services, and grounds maintenance.

     Through September 1976, the total costs shared according
to the formula have totaled about $10 million, computed and
shared as follows:



                        - ------------                 Fiscaly ea   ----t -a
                                                                                     transition
                           1~72            1973            1974         1975          quarter      Total

Building maintenance
  and repair           $ 476,628 $    712,748 $           793,811 $   870,651 $1,417,069 $4,270,907
Utilities                 588,305     616,298             705,025     872,950  1,014,576 3,797,154
Janitorial services       293,429     395,431             290,803     322,856    444,368  1,746,887
Work done by construc-
  tion contractors      _184,800      _-                                  ........    __ _         18400

    Total              $1,543,162   $1,724,477 $1,789,639 $2,066,457 $2,876,013 $9,999,748

Government's share
  (76.2 percent)       $1,175,889 $1,314,051 $1,363,705 $1,574,640 $2,191,522 $7,619,800
Center's share
  (23.8 percent)         $367,273     $410,426           $425,934     $491,817         $684,491 $2,379,940




                                                  15
  COST-SHI.RING FORMULA
  NEEDS UPDATING

       Because the Center's operations
                                        have changed, the formula
 developed to allocate maintenance
                                    costs needs updating.   The
 agreement between the Park Service
 an hours-of-use method developed    and the Center is based on
                                   by an accounting firm in
 July 1971, before the opening
                                of the Center.   That agreement
 expired June 30, 1973.   The fiscal year 1974 agreement
 taining the same cost-sharing                            con-
                                formula as the initial agree-
 ment has been extended, pending
                                  development of a new agree-
 ment.   As of October 1, 1977, no new
                                       agreement had been
 negotiated.

      The formula was based on the
                                    hours that the building was
 expected to be used for memorial
                                   and performing arts func-
 tions.  The accounting firm recommended
 the joint costs be allocated              that 76.2 percent of
                               to memorial functions on the
basis o   estimates that the Center would
day (105 hours a week) and that             be open 15 hours a
                                  tte theaters would be used
25 hours a week, including rehearsals
a day).                                 (5 days a week, 5 hours
          On this basis, 80 hours (76.2
to the memorial function and             percent) were allocated
cent) to the performing arts  the remaining 25 hours (23.8
                              function.                      per-
                                          In its report the
accounting firm stated that
tions and estimates relating the formula was based on assump-
                              to events that had not taken
place.

      According to the Center's records
1976, actual hours of theater            for calendar year
                                operations, including onstage
rehearsals, averaged 1,897 hours
                                   for each of the three thea-
ters for that year, an average
                                 of 36.5 hours each week com-
pared to the 25 hours used in
use includes time before and    the formula.  Theater
                              after performances and hours   of
                                                      rehearsals
to prepare and secure the theaters.
to the public only 98 hours            Also, the Center is open
                             a week, rather than the 105
in the formula.   Based on actual theater use,             stated
the joint costs should be allocated             37.2 percent of
                                      to the performing arts and
62.8 percent to the memorial
                              function.
     We noted other factors not
                                  considered in the present
formula which have resulted
                             in further overstating the
the Center for memorial purposes.                          use of
the theaters were used for organ     During 1976,  for example,
                                   demonstrations,   erforming
arts symposiums, national town
                                hall meetings sponsored by
oil cmpany, and other activities                              an
and backstage activities, such      totaling over 100 hours;
                                as taking equipment in and out
for the performances, required
                                over 1,000 hours.    Further,
the formula presumes that the
                               theaters, before or after their



                              16
use for performing arts, are available for memorial purposes.
But this is not the case.  The Chairperson of the Friends of
the Kennedy Center told us that the public tours of the build-
ing which start at 10:00 a.m. are ended at about 2:00 p.m.
because the theaters are not available after that time for
public viewing.

USE OF SPACE

     The Kennedy Center functions as a center for the perform-
ing arts, a memorial in honor of the late President Kennedy,
and a facility for lectures, meetings, and civic activities.
The first two functions are primary.

     In fulfilling these functions the building's space has
been assigned to joint performing arts and memorial uses (the
grand foyer, the halls, and the three main theaters), exclu-
sive uses (rehearsals halls, theatrical storage space, and
offices), and supportive uses (restaurants and parking garage).
Concessionaires and other third parties use a large part of
the space assigned to exclusive and supportive uses.

     At the time the formula was developed, there were in
addition to the Park Service and the Center only two other
organizations--the garage and restaurant concessionaires--
occupying space at the Kennedy Center.  In contrast, in April
1977, 15 organizations occupied space, including the American
Film Institute, which has both offices and a small theater,
the Musical Theater Lab, the National Symphony Orchestra, the
National Opera Institute, the Opera Society of Washington, a
coat-checking concessionaire, and a photographer.  Also, addi-
tional areas have been assigned to performing arts activities,
such as the children's theater and the soon-to-be-constructed
studio theater.

     To identify the operation and maintenance costs of the
joint-use areas of the building, the costs incurred by the
Park Service for the exclusive and supportive use areas
should be identified and subtracted from the total costs.
Costs should be assigned where possible to the exclusive and
supportive use areas before an allocation, under the cost-
sharing formula, is made.  This is particularly appropriate
at the Center because of the increased use of the building
by third-party occupants and performing arts activities since
the formula was developed.  In part, the current agreement
recognizes this principle and includes this provision:




                             17
             "The Board shall fully reimburse
       Secretary for all maintenance,           the
       security costs incurred by       janitorial   and
                                   the
       suant to his responsibilities    Secretary   pur-
                                       hereunder and
       attributable to private activities
       of third parties authorized          and uses
                                    by the Board and
       not oen to the general public,
       able to activities and use        or attribut-
                                   of space  by con-
       cessioners or other parties
       the Board 'not including thisunder  contract   to
                                      agreement or
       usual performing drts agreements)."

       The Park Service
 and maintenance costs pays  all of the utility, janitorial,
                        associated with the 13 other
 of the Center.   In August 1973, the Center          occupants
 Park Service for janitorial                 agreed  to pay the
 Symphony Orchestra and the services provided to the National
                             American Film Institute.
 these third-party organizations                        Both of
 Center, and the Institute        maintain offices in the
                            operates a small film theater.
 The amounts paid are based
                             on estimates submitted by
 janitorial contractor.                                 the

 UTILITY REIMBURSEMENTS
 RETAINED BY THE CENTER

      The garage and restaurant
                                 concessionaires pay their
 expenses except for utilities.                              own
 ity, is not separately metered    Utility use, mainly electric-
 the Park Service pays all       for the concessionaires,
                            utility bills for the Center. and
November 1971, the restaurant                                In
the Center $26,636 each quarter,concessionaires agreed to
                                                           pay
                                    or $106,544 annually, for
utilities.   In January 1975 the parking
agreed to pay the Center $6,000            garage concessionaire
for the utilities.                a month, or $72,000 annually,
                     Since these amounts were agreed
Center has received $178,544                           upon the
                               annually.
not received any of the payments           The Park Service has
                                    for utilities made by the
concessionaires.

CONCLUSION AND
AGENCY COMMENTS

      The cost-sharing formula between
Center does not fairly ana              the Park Service and
                            accurately reflect the use
building.   The formula                                 of the
in July 1971 and fails has  not been updated since its
                        to recognize the increased      adoption
building for performing arts                        use of the
                              activities and by third-party
occupants.




                              18
     The Center elieves it is paying more than its share
for maintaining the building.  (See app. II.)  Compared to
the costs to maintain the National Theater and other insti-
tutions in the Wasnington area, the Center believes it is
paying substantially more than fair value for the maintenance
services.

     The Center also believes that the entire building is a
memorial and that it would therefore be appropriate that the
Park Service pay all costs of maintenance and repair, as it
does in the case of other Presidential memorials.

     The Center believes that the utility payments made by
the garage and restaurant should not be reimbursed to the
Park Service.   It is the Center's position that the Congress
was aware of he presence of the concessionaires at the time
the cost-sharing formula was adopted and that it was never
contemplated that the Center would reimburse the Park Serv-
ice for other than the Center's share of the joint costs.
We do not believe the present arrangement is equitable.    The
Center's contracts with both the garage and restaurant opera-
tors provide that the expense of operation be paid by the
concessionaire.   If the electricity costs were separately
metered, the concessionaires would pay the utility company
directly and there would be no cost to the Park Service.

     The Center believes that this report is misleading about
the increased number of organizations occupying space in the
building.  (See app. II.)  The Center explained that

     --some activities, although not in the building at the
       time the fomula wa. developed, were contemplating
       moving in;

     -- the Musical Theater Lab was a 2-year program to foster
        the development of musical productions jointly spon-
        sored by the Center and the Stuart Ostrow Foundation;

     -- various other nonprofit organizations were provided
        small amounts of space; and

     -- it had provided space to two of its contractors whose
        operations were directly related to the Center's per-
        forming arts activities.

     The Department of the Interior agreed with our position
on cost-sharing.   (See app. II.) The Department said that a
new agreement should:



                             19
     --Include a cost-sharing formula which would fairly and
       accurately give effect to the use of the building.

     -- Provide for identification and reimbursement to the
        Park Service of all costs attributable to the con-
        cessionaires and other third-party occupants of the
        Center.

     --Use the hours-of-use concept on an updated basis.

     We recognize that any change made in the cost-sharing
formula requiring the Center to increase its contribution
toward the building's maintenance would reduce its ability
to pay the interest and principal on the revenue bonds as
well as its ability to maintain its current programing level.




                            20
                           CHAPTER 4

          MATTERS FO   CONSIDERATION BY THE CONGRESS

     The Kennedy Center cannot meet all of its financial
obligations to the Federal Government and continue to conduct
the full range of performing arts and public service activi-
ties which it was created to present.   The Center advised us
that in consultation with the Administration, interested
Congressmen, and appropriate congressional committees, it
had considered several steps that might be taken to achieve
an appropriate long-term settlement of its financial dilemma.
It believes that remedial legislation might be founded upon
the following principal considerations:

     -- Its Board of Trustees has performed well in raising
        funds for the Center's operations.  The Board has
        raised more than its original commitment in con-
        structing the building.

     -- Raising more funds than are now being raised in order
        to make significant payments to the Government for
        the construction debt is virtually impossible.

     -- The Center is being run efficiently, and there are no
        areas of its operations in which substantial savings
        could be made.

     -- Unlike other major performing arts centers, the
        Kennedy Center does not receive direct Federal sub-
        sidies for its performing arts.

     -- The Congress should reconsider whether performing
        arts functions should be asked to carry part of the
        cost of maintaining a living memorial to a President.
        If the Government were to pay to maintain and repair
        the building and waive the interest on the Treasury
        bonds, the Center could conduct its performing arts
        activities, carry on extensive free public service
        programing, and repay the principal of the Treasury
        bonds at the rate of $1 million a year.

     In our view, the Center clearly cannot meet all of its
financial obligations and maintain its current levels of
performing arts attractions.  Independent action by either
the Secretary of the Treasury to collect the bond interest
or the Secretary of the Interior to collect more of the
building maintenance costs would affect the Center's ability
to carry out its performing arts functions.  Only the Congress
can make both the value judgments and trade-offs required
to resolve this situation.



                             21
APPENDIX I
                                                                                                                                                                                                                                                                                        APPENDIX I




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                                                                                                                                                           22
 APPENDIX II                                                         APPENDIX II


                        1111111 1111ii iiiiil
                 (1N K NN 1   I 11' I W W   I'm
                                            81RI   I\'EI'   e, \k1


                              September 22, 1977


Mr. Victor L. Lowe
Director
General Government Division
United States General Accounting Office
Washington, D.C.   20548

Dear Mr. Lowe:

     In response to your request, this letter will set forth
the views of the John F. Kennedy Center for the Performing Arts
concerning tne draft Comptroller GeneLal's Report to the Congress,
Audit of the Kennedy Center for the Performing Arts.


Necessity To Resolve Revenue Bond
And Operating Cost Problems

     The Kennedy Center concurs in the conclusion of the Report
that it cannot meet all of its financial obligations to the
Federal government and continue to conduct the full range of per-
forming arts and public service activities which i was created
to present.  If the Center were to make provision for payment
of interest on its $20.4 million borrowing from the Treasury,
or if it were to increase its payments to the Park Service to
reflect what the report refers to as a larger-than-anticipated
use of the Center by performing arts activities, the unavoidable
consequence would be to reduce the scope and quality of its public
service programming, including the free events and children's
concert and theater productions which it now regularly mounts.

     As found by the General Accounting Office, the Kennedy Center
has conducted its activities during the 6-1/2 vears since it has
been open to the public without a performing arts subsidy, and with
operating receipts, including substantial private contributions,
exceeding operating expenses by the average amount of approximate-
ly $210,000 per year.   The entire amount of such excess has, how-
ever, been required to be applied to the rather substantial indebt-
edness the Center incurred from private sources prior to its
opening.   (At the opening of the Kennedy Center, current liabil-
ities -- primarily arising fro- construction of the building under
GSA supervision (for which GSA received $1 million) and totalling
$2,366,318 -- exceeded current assets by $1,422,078.)   In addition,
the excess has also been needed to reduce the $3.5 million advanced
prior to the Center's opening by its garage concessionaire, and
required in order to complete construction of the Center.




                                      23
 APPENDIX II                                              APPENDIX II




       For the future, the Center will continue
 any excess revenues t:o pay off the balance     to require use of
                                             of this privately
 incurred indebtedness.   Any increase in payments for operations
of the memorial building and any payment
owing to the United States Treasury will against the interest
                                           make it impossible to
meet these obligations.    Further, as stated above, any such
commitment of funds will impair the programming
activities required by the Act, and will           and public service
on raising funds from donors -- who are have a disastrous impact
                                          interested in contributing
funds for programming and public service
not indicated a willingness to contribute  activities, but who have
                                            funds for paying off
United States Treasury bonds and for paying
costs.
                                              building maintenance

     The Board of Trustees, i consultation
and interested members and the appropriate with the Administration
                                            committees of the House
and Senate, has considered several possible
taken to achieve an appropriate long-term    steps that might be
                                           settlement of the financial
dilemma confronting the Center.  The following are the principal
conclusions upon which the Board considers
might be founded:                           that remedial legislation

            First, the Board considers that it has
                                                   performed
           well in raising funds for the Kennedy Center's
           operations. When the National Cultural
                                                    Center
           was altered legislatively in 1964 to make
                                                      it a
           living memorial in honor of the late President,
           the fundamental concept was that federal
                                                     dollars
           would match $21 million in private dollars
           construct this federal building.            to
                                              To date, the
           Board has been able to go far beyond this
           gation.                                    obli-
                     This fiscal year, substantial additional
           funds are being raised by the Corporate
                                                    Fund
           for Performing Arts at the Kennedy Center.
                                                         A
           description of this program, funds from
                                                    which
           will be used for public service activities,
                                                         is
           enclosed.

           Second, experience shows that it is virtually
           impossible to raise sufficient additional
                                                     funds
           from contributors, over that now being raised,
           to make significant payments to the Government,
           in order to repay previously incurred construction
           debt.  Corporate, foundation and individual contri-
           butions are now being solicited in a sustained,
           integrated manner.

           Third, the Board believes that the Kennedy
                                                      Center
           today is being run efficiently and that
                                                   there
           are no areas of its operations where substantial
           savings could be derived.  Indeed, its performance




                                24
 APPENDIX II
                                                        APPENDIX     II




             compares favorably with that of any similar
             institution in the United States. This is
             not to say that no improvement can be made;
             but, as your report states, no funds in the
             amounts required could be attained from a
             change or improvement in operations by the
             Board.

             Fourth, the Board takes pride that the Kennedy
             Center's performing arts activities are con-
             ducted without direct subsidies from the
             Government.  Virtually every other major
             performing arts center in this country and
             abroad has operated with the benefit of sub-
             stantiai public monies to sustain their
             programming.  Unlike these institutions, the
             Kennedy Center has drawn no federal funds
             to sponsor performing arts attractions.

             Fifth, the Board believes that the Congress should
            reconsider whether performing arts functions --
             including, in the case of the Kennedy Center, some
             1,000 to 1,500 free events annually -- should be
            asked to carry part of the cost of maintaining
            a living memorial to a President.   If Congress
            finds it appropriate for Federal funds to maintain
            and repair the building, and if it lifts the burden
            of interest (including compound interest) owing
            to the Treasury, the Board is confident that it can
            conduct the performing arts activities of the Center,
            carry on extensive free public service programming,
            raise the funds from private contributions to
            meet deficits, and repay the principal of the Treasury
            bonds, at the rate of $1 million a year.


Cost Allocation Formula

     The following comments are addressed to specific conclusions
in the Report, which are based on the current relationship
                                                           between
the Center and the Federal government.

     The Report concludes that the cost allocation formula
                                                            developed
in 1971 is not being applied properly. While the Kennedy
agrees that the percentages used in the formula have       Center
                                                     not been chang-
ed since 1971, it considers that it is paying more than
                                                        its
appropriate share of the costs of operation of the building.




                                 25
  APPENDIX II
                                                            APPENDIX   II



  The Trustees, conscious of their
                                   obligation to operate a "living
  memorial", havemade every effort to keep the Center's
 major halls and other facilities                       three
                                  constantly active.  Ironically,
 this has caused the Center to bear
 under the present cost-sharing     a disproportionate burden
                                formula.
       Furthermore, because the building
                                            is a memorial building,
  the Kennedy Center believes it is
                                      right
  Service pay for all costs of maintenance that the National Park
  building, as it does in                      and repair of the
 memorials, lzaving to thethe  case of all other presidential
                            Center the responsibility it already
  is carrying of finding and presenting
 service activities, and of raising        performing arts and public
                                        the necessary funds to meet
 the inevitable deficits that stem
                                      from such activities.
       In addition, certain of the functions
 refers to support a greater per                 to which the Report
 improperly included public serviceweek usage by the Kennedy Center
                                       functions, such as the Town
 Meeting, sponsored by Mobil, which
                                       are not performing arts functions
 at all.   They are open to tourists and other
 building without charge.                          visitors to the
                            More importantly, even assuming
 the Kennedy Center's increased use                             that
 in the Kennedy Center's bearing       of the theaters should result
                                   a greater percentage share of
 allocable costs under the existing
                                       formula, that formula, as
 already pplied requires that the
 level o costs for operation of      Board   pay more than an appropriate
                                   the building.
      During the fifteen month period
                                       ending September 30, 1976,
the Kennedy Center paid the National
Annualized, the amount was $506,729. Park Service $633,411.
                                        For this sum, the Kennedy
Center was provided electricity,
                                   janitorial, and a portion of the
total maintenance required
and office space (including for  operation of its three theaters
                             that of other organizations in
memorial building).   Electricity was also provided for       the
garage and restaurant areas.                             the Center's
                                A comparison of the costs for similar
services provided to The National
                                    Theater and other institutions
in the Washington area indicates
                                   that the fees actually paid by
the Kennedy Center for those services
their fair value.                       substantially exceeded

      Firnally, the Board considers that
 there should be any allocation at        the question of whether
                                    all of joint costs between perform-
ing arts and non-performing arts
                                   functions should be reconsidered.
Although direct federal subsidy
                                  of the performing arts activities
of the Board is not necessary, it
                                    is appropriate that the United
States pay the cost of all electricity,
regular operation, maintenance and         janitorial services,
                                     repair of this memorial build-
inq.   If
to repay this   were accomplished, the Board would
           the principal amount of the revenue bondsbe over
                                                        in a position
                                                            a term
of years and would be able to continue
ing arts and public service activities.  the  present level of perform-




                                 26
 APPENDIX II
                                                          APPENDIX II



 Sharing Of Concession Reimbursements

      The Kennedy Center objects to the suggestion
 that payments of the garage and restaurant          in the Report
                                             concessioners for
 electricity and other services should be paid
                                                over to the National
 Park Service.  In the first place, the Congress was fully
of the presence of these concessioners when                  aware
                                              the cost sharing
 formula first was adopted and presented prior
                                                to the passage
of the 1972 amendments to the John F. Kennedy
                                                Center Act.    It
was never contemplated that separate reimbursement
was to be made, apart from the Kennedy Center's       of these  costs
National Park Service of 23.8 percent of          payment to the
                                          joint costs.
importantly, however, the payments by the concessioners More
the Report suggests should be turned over                  which
part of the basic receipts of the Kennedy to the Park Service are
                                            Center from their use
of the Center facilities.   They constitute receipts derived from
necessary support activities which the Center
performed itself, but which it instead chose might properly have
by                                             to have performed
     .oncessioners. Any receipts derived therefrom
                                                    properly belong
to the Center, and are critically needed
                                          both to pay for operations
costs incurred by the Kennedy Center and
                                          to reimburse the Park
Service for costs attributable to performing
                                               arts functions in the
building.

Use Of The Building By Other Organizations

      The Report is misleading when it states that
occupy space in the building at the present           15 organizations
                                               time, whereas only
two organizations (apart from the garage
                                           and parking concessionaries)
were in the building at the time that the
was developed.                              cost sharing formula
                 The only new activity in the building which
not there, or contemplated to be there, at                      was
                                             the time of the develop-
ment of the cost sharing formula is The American
 (The National Symphony was in the process          Film Institute.
                                            of preparing office
space in 1972.   The coat checking concessioner
in the building in 1972, having been provided was in fact located
activities inextricably related to the theater ith space to conduct
                                                  operations.)   The
Musical Theater Lab, referred to as a separate
Rather, it is a two year program located          organization,  is not.
                                           in the multipurpose room
area, to foster the development of musical
                                             productions, open to
the public at no charge, which is being sponsored
Stuart Ostrow Foundation and the Kennedy             jointly by the
                                           Center as a public service.
     Various other nonprofit organizations are
                                                provided a minimum
of space at the Kennedy Center, generally
                                           no more than a small
room, to conduct activities.  There are also several contractors
of the Kennedy Center, such as the company
                                            producing programs,
which are performing services for the Kennedy
rather than employee basis and which require Center on a contractual
                                              some space for
operations, that are required for the Kennedy
operations.                                    Center's theater
             Because the operations of both such organizations
are directly related to Kennedy Center performing
                                                   arts operations,




                                 27
APPENDIX II                                            APPENDIX II




the Board feels that the cost attributable to these organizations
hardly needs to be separately accounted for.


General Services Administration Obligation

     The Report makes reference to funds owing to the General Services
Administration for telephone and other services.  These services
were provided primarily during the construction period and the
amount of the Kennedy Center's obligation for them was in dispute
over several years. The dispute was resolved b an agreement of
April 1976, which provides for payment of an agreed amount over
a period of years.  Since April 1976 the Kennedy Center has in fact
made payments under that agreement totalling $183,500. Accord-
ingly, the implication that the Kennedy Center's obligation is
overdue is not correct.


Conclusion

      In conclusion, the Kennedy Center appreciates the seriousness
and fairmindedness with which the Comptroller's staff approached
this study.   The Center agrees with the central findings of the
Comptroller General that there is an essential dilemma in the
present relationship between the Federal government and the Center.
An institution that was established by Congress to produce the
full range of performing arts, including costly opera; that main-
tains a half-priced ticket program for the elderly, students, the
military, and the handicapped; and, that puts on over a thousand
free events each year, including music festivals and children's
productions, cannot be expected at the same time to carry the
financial load of compound interest on its construction loan,
and increased maintenance costs for a Presidential memorial bulld-
ing.   The Center has been an unparalleled success insofar as
it has fulfilled its Congressional mandate, and raised the funds
needed to achieve that end.   It can continue to do so if the
reality of its situation is understood and acted upon.

                              Sincerely,



                              Ro r L. Stevens
                              Chairman




                                28
APPENDIX III                                                             APPENDIX III


       -~        United States I)epartmen             t of the Interior
       A x*r.~             ( ))1 1'F~(. ( )1 I Il. 1t,(:RI.
                                                         F .\R Y
                            \ASIIN'(;I')N,       ).C(:. 20240

                                                                   SEP   1 1977


    Mr. Henry Eschwege, Director
    Community and Economic Development Division
    U.S. General Accounting Office
    Washington, D.C.   20548

    Dear Mr. Eschwege:

    We have reviewed the GAO draft report, "Audit of the Kennedy Center for
    the Performing Arts."

    Overall, we are in agreement with the report, particularly with respect to
    negotiating a new agreement that will include a cost-sharing formula which
    fairly and accurately gives effect to the use of the building. The new
    agreement will provide for identification and reimbursement to the National
    Park Service of all costs which are attributable to the concessioners and
    other third-party occupants of the Center. The hours of use concept will
    be used on an updated basis.

    We agree with the legal conclusion expressed in the report that the
    authorizing legislation limits Park Service participation to bearing costs
    associated with the nonperforming arts functions.

    We appreciate the opportunity to comment on this draft report.

                                                    Sincerely,



                                                     ichard R. Hite
                                                    Assistant Secretar - Policy,
                                                      3udget, and Administration




'     CONSERVE
       ENERGY




                                           29
         APPENDIX IVIV


                                      DEPARTMENr OF THE TREASURY
                                             WASHINGTON, D.C. 20220

FISCAL ASSISTANT SECRFrARY


       Dear Mr. Lowe:

            This responds to your letter of
                                            July 22, transmitting
       copies of a draft report to the
                                       Congress covering an audit
       of the Kennedy Center for the
                                     Performing Arts.
            The proposed report makes reference
       in                                       to $20.4 million
          revenue bonds of the Center purchased
                                                by the Department
      oi' the Treasury between July
                                    1968 and April 1970 under
      section 9 of the Kennedy Center
                                       Act, and makes these
      observations-

                 --    Under an agreement between the
                                                      Center and the
                       Secretary, interest payments
                                                    on the indebtedness
                       have been deferred until December
                                                         31, 1978;
                 --    The revenues from the Center's
                                                       parking concession
                       have not been sufficient to pay
                                                        the interest on
                       the bonds and will not be in the
                                                         near term; and
                --     The Chairman of the Center's Board
                                                          of Trustees
                       and his staff are considering
                                                     proposing legislation
                       requiring the Secretary to waive
                                                        all interest on
                       the indebtedness.
     The report recommends that the
                                     Secretary require the Center,
     as a condition of any further
                                    deferment of interest beyond
     December 1978, to apply net revenues
                                           from the parking
     facility to reduction of the
                                  deferred interest.
                         [See GAO note below.]
          If the Kennedy Center could be
                                           considered a conven-
    tional business-type operation,
                                      we would concur in this
    recommendation.   However, it cannot in our view
                                                       be considered
    in this light.   While it is true that the implication
    section 9 of the Kennedy Center                          of
                                      Act is that the parking
    revenues should provide the funds
                                        to repay principal and
    inte:est on the bonds (and the
                                     instruments so provide), the
    revenues were not, in fact, dedicated.
                                               And the substantial
    diversion of those revenues to
                                     the Center's parking

   GAO note:                 The reco.,i.endation in our draft
                                                               report was replaced
                             by "Matters for Consideration
                                                             by the Congress."

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 APPENDIX IV                                          APPENDIX IV




concessioner (to repay a construction loan of $3.5 million)
makes it highly unlikely that parking revenues will ever be
sufficient to repay the Treasury for both principal and
interest.

     Given the outlook for the Center's interest obligations
to continue to accumulate at a      far greater rate than its
share of the parking revenues; given the fact that the
Center is being subsidized by other parts of the Federal
Government, has received numerous gifts from foreign
governments, and needs private contributions to keep
its arts programs in the black; and given the Center's
status as a national memorial and cultural center, it would
be incongruous for the Treasury to press its claim to the
li'mit. As with any lender, the Department occasionally
has to accommodate a bad loan situation and refrain from
extracting every possible penny from a financially impaired
borrower or imposing conditions that may aggravate the
situation. In my judgment, the condition that you proposed
would further impair the overall financial condition of the
Center without materially enhancing the probability of
recovering the Treasury's investment.

                          incerel



                          avia Mosso

Mr. Victor L. Lowe
Director, General Government
  Division
General Accounting Office
Washington, D.C.  20548




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