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 r-o~~~~~~~~~~ ~ -I4-. I...... iUo,,10, U' ~ ~ rl I-IR oi all4 NI~" N N 041 I - -4 044 - 4 r.- ~~~ ~ ~ ~ ~ ~ ~ ~ 0 1641444 '~~~~~~~~~~~~~~~I -411 ~. ~ ~~ ~ ~ ~ ~ ~ ~ ~~3. .% C ~I~~~~~~~~~~~% '44 N - C - --41 44 4 6 4 U 0 u 0 4 U, N0 I .... .0 446, V 4 '-4 - N ~ U, . N N U~ N N N 0 0%44. % % - ~~~ Na, O~~I 0% 0 N U 44~ N N - IN 0 - IL 10 0% O NIN UAl-OI N NN C V U, L UI 0! 411, *44 c 4 MEN 4 I , 0 U 0.., N C C to t 0. 4 0.1 6% 0%NI 0 - 0 N %%4 0 OM w N 0.4 4 4,1 4401 I . 0% .,~ =~ ' ' I NI .. . 4 ( 0 1 I '41 0 NI NI I N .0 U,... 4 0% 0 0 M ,.'N '01~~~~~~~~ - N 1 4 3 t ~~~~~ ~~~~~~ * =~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ .. '0~~~~~G 6 ' (0 I . - I I o : . t c' o -I I 0 O044 C 0 0 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 NO r' ~~~I o %DrqLML kc(N'le O N 0,4 '.~~om O cN rz~~~ c~occr I' ' o ,.I I"--D m v) 4m i r,- o 0% O oq qr 00*4t %enn 0 E r1r o ,- c t I 4 r ,. i rn 0 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~I (n CD N q %C rn rn r .- gjq rvAd r- EUI ~~~~~~~~~~~~~~~~~~~~~~~~~'. .i t o,m . r-~oe o ,_ n n(. omy~~ oW ~~ 0' en fn r - co .~ o~ ~~oD 0 ,z '01 -Z LV %D, Ln4 o-I Gt 14 L4 0 "'" LA 00 (o No 00. OD nC0.- CD r o LAt .1 0 I (N -EN 0 LA~ 0Ju fo L 4. q 0041 ~.c: -,,.i O U) ~ ~ ,0 4J) 4Ju4.1 ,- uE E. C:-4 4 . O4 C 0) 0 ~~~~~r 0 ~ (N ~ 0I(N '.~~~~~~~~~~~~~~~~~) ~ ~LA ~ -.c( 4 14.4 4 * ( 0Q)QI~~~~~~~~~~~C~~~ +JC~~~~ 00 0) C N Co LA 4-ir- EU~~0 00 LA (N · >. 0 '~ 04 w ~rn4 r- 0 n .Id W C IW ?JO4J '.0 0 r 0 Q r (N .-E lco W0i ( r 4 -4-4 LA 1 0 '0IaN,.0 0 .co eq 1-4 5 0% M (N '-'LA (~~~~~~~~1 -4 C) L . (n LA en N LA -4 m 1 0 '.0 -4 ~ 4Y~ -4 LA (N E U( _4 -4. La 0% W OD C C: 00 0 4.-4 W ct Ln cu U) mco (N0 en ~~~~~~~ (N ~ ~~~~ -4aD ~~~~~~ (N ~~~~~~~~~~~ a) OD4 (N p.4 ON rr 4J CwV .4 - q ~~~~~~~~~VI EU 4) Qm I C4 : -, U~w a~~~~~~~~l -4A 0O . CL4 to~)2 o LE.C 44 V) m ro m N ~~~~~~to Q) a tN EU 94' U) 0 4) a N C ~"41 CDi'~ ~ AU 10 ~ E O rl EUOL 0EUdO 0 (, 4*,i NQCEE w.- * EUm SC U LO E Oc 4I p4 * 04 .0 4 C -~~~~~.,'00% O C(Ori*-EU-- Cu E-el -4C, CU)41e). 0 E-0 yC.0 4' 4.1414.141 4.1 C4.1 ). C 4.EUi41 041LA0~ C 4.1 0 >U w041 EU'-4 0 EU EU 4E 41 ~ 4)414J404 0.a-.V0--, 4 .C r 0 .C4J0 - 4 0 wW .4 toC U V U u U)O 0 41. 0 C46w 0 O4 0 C C U) 41 I4P C E- du4141U)C t 4.'.l 4 C C4.°ii U) 40 O d 0 4) W 6u AJ a 4 C 6L I r(4 w I 0 OOE 4Jin0 4 . EUj4 t EU4C0Ai.. 4 CU 0 V) ".. ' 44 to c 0 x a~~ ~~~ uq 0 0 w U 0C i~'hCL s IV 6 a) ~ EU .01 0 m11 4 0 Ai -4 C OA M to 0Qu 60 faV I ou re .Yg~~~~z Va E w1 U 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 < r-~w~t~flo IQJ~ INO~.t1OI'JIr~ tO N LNN 0IfLto' CNON l 0N tolIltO 0 m,1.o 00 q oc 0 000oi- ,4tom .. 00 01 .0 nmtor; ~ o ~ ~ cm~o~o~~~e ~ IN tNnv I ~~ ~ ~ ~ tl 1 I1 I I lI II toCII 0 I 0 I r~~~~~3Y 1C~~~~~~mr~~~~t It tII 1 1 I"' I .11 Ito~II ........... . N I I .NI I N N N ~1I~~. a O 2 ... I~001 .. N..I... o ~ Il l W.. l . l I II II Ct ~ ~ 00 ~ It 0y P t -'- N ,I oh t'a'- VI 0 N · " H -I- ~~~~I -~· -- ~ "'U -0. -~ III' I I " U.IY 11 I . t I""I- '-I oa el '-[ , IN ' ''11 NNN 0 10 )I t~~~~l ·r · 01 I ZI o.~100010~11 III aI ~~ It U)~LT~pNY·N.:I CI ~ ,I rnl aon~~~~o~r-mr~~noc I N-~I IT I i i i 0·1l t ! C~lrI !i , i ?i r~+ i "10,I IIn INO9~ lu o-r Itorrm~~rv I'-UL I~n "N 0 I tlC - r--~ l li t l I-N ll I' r~ 'O lI Nol ti IIC I j ~~~~~~~~~~~I~ ~ ~~~~~~' ~ LI to -- .··r- tl i~ m ^r c . ~r C - ~ ~~ ~ ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~~-. ii tot It -I " lt ~ ~~ ~~ ~ ~ ~~ -i~~~~~~~~~~~t 'Ct"0 Nb -. It.- I ~ ~ ~ ~~ ~ c Ct- C0' tol ~ · r-- l 1 ,,,, ~~~~~~~~~~~ ~'to'~. 201 0' - -~C~1 tc 0 .0 oo o t ii ~~ ~ ~ Zo . ~ 1 ~ -- 'I ,., C- 0 t-'- C c tot. IL-tl. .~~ -I C -- C-I I ct I.-o '0041 0.0-0. t~ll o o.o1 -co C t C t rr o ~~ t 1 - L g - '>1--It o t t o t F- c..-otc.t I . It t-C 1 O to O . oo U t.o ' t t .I 0 C 11 0 I 1 *~~ ~ ~ ~ ~ t to r ~ ~ C 'O -'C~ t tt -- oC ol -tt 'to- .C12 U-.-, Ct Q .. to t O I O 0 I t m 0 - .ct 00 -- o, -o 1C' I toI 10 t. 'I F ~ ~ ~ ~ ~ ~ 'I~ ~ *i i, U11 to - r-r-C UI-- It --?/ItfZ-1IF-ro 't xtC' '-b - rtic t -~ -t-U't.o 'CI~t 'C 1t tot~Ito ) , LIItlO.Itooo"c. C. 1- oto.. oto-tC IOtoU~Ctto1ttoU . 1 - I ~r 0-to cc .u o ,p c Co o'C., It P to! F "0 to '-- 0 C F' o I It toI c1 E0 0 t~t 0 1 0: zri~' O~ t O.- . ~I C 0to I 'C'-~ 2i' C 22 Ii OC 0 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." 30 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 (41905) 31
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)