District of Columbia: Status of Convention Center Project (Letter Report,
09/15/94, GAO/AIMD-94-191).
The District of Columbia has proposed building a new, larger convention
center to better compete for larger conventions and trade shows. The
proposal is still in the early stages of development, and the District
will need more information before precise cost and benefit projections
can be made. The most recent convention center proposal indicates that
the project should be able to generate enough revenue to cover known
expenses; however, several unanswered questions could significantly
affect these projections. Construction costs are very tentative--the
project does not yet have an environmental impact study or an
architectural and engineering design. Current cost projections also do
not include needed infrastructure changes or total land costs. The
project would be financed through the issuance of revenue bonds backed
by specific District taxes. The District's high debt level makes the use
of general obligation bonds to finance this project unlikely. The
District has outlined the next steps that need to be taken to answer
various questions. One key step will be authorizing contracts for
various studies. These studies will better define the project and allow
the District to specifically assess its costs and benefits.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-94-191
TITLE: District of Columbia: Status of Convention Center Project
DATE: 09/15/94
SUBJECT: Convention facilities
Facility construction
Investment planning
Financial management
Financial analysis
Construction costs
Cost analysis
Future budget projections
Economic analysis
Urban economic development
IDENTIFIER: District of Columbia
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Cover
================================================================ COVER
Report to the Chairman, Committee on the District of Columbia, House
of Representatives
September 1994
DISTRICT OF COLUMBIA - STATUS OF
CONVENTION CENTER PROJECT
GAO/AIMD-94-191
District of Columbia's Convention Center Project
Abbreviations
=============================================================== ABBREV
Letter
=============================================================== LETTER
B-257550
September 15, 1994
The Honorable Fortney H. (Pete) Stark
Chairman, Committee on the District of Columbia
House of Representatives
Dear Mr. Chairman:
This report responds to your August 4, 1994, request that we provide
information on the proposal to build a new convention center in the
District of Columbia. Specifically, this report describes the status
of the project and discusses the cost, benefit, and financing data
contained in the proposal.
BACKGROUND
------------------------------------------------------------ Letter :1
The District of Columbia has proposed a project designed to generate
economic development for the District downtown: a new, larger
convention center. Although the Congress is not required to
specifically approve the project, the District has proposed that
financing for the project be arranged in part by a recently
authorized corporate instrumentality (enterprise). This enterprise
would issue revenue bonds backed by the pledge of specific taxes.
Such financing would require changes to the District of Columbia
Self-Government and Governmental Reorganization Act (Home Rule
Act).\1 H.R. 4888 would amend the Home Rule Act to authorize this
type of financing.
The District of Columbia is proposing a new larger convention center
to better compete for larger conventions and trade shows. Several
previous studies have cited the need for a larger facility. The
current feasibility study, prepared by Deloitte and Touche, pointed
out that even though the District is viewed as a desirable location
for conventions and trade shows, the current facility, with 381,000
gross square feet of exhibit space, is small and can compete for only
54 percent of the larger conventions and expositions. The current
proposal calls for building a new, larger convention center in two
phases at Mount Vernon Square. The first phase, which is expected to
be completed by the end of 1997, would involve constructing a new
convention center of approximately 554,000 gross square feet of
exhibit space. The second phase would add another 254,000 gross
square feet and is expected to be completed in 1999.
Current estimates put the total construction cost of the two phases
at approximately $521 million. Financing for phase I would involve
the issuance of revenue bonds backed by portions of hotel sales and
occupancy taxes, restaurant sales taxes, and a business franchise
surtax. Phase II financing would involve revenue bonds backed by the
sale or lease of the old convention center. Both the new and old
convention centers would be operated by the newly created enterprise,
the Washington Convention Center Authority.\2
The Home Rule Act confers limited autonomy to the District over its
local affairs and also provides for congressional oversight. The
District is authorized by the Home Rule Act to issue long-term debt
in the form of either general obligation bonds or revenue bonds. The
District can issue general obligation bonds to finance capital
projects or refinance existing debt. General obligation bonds are
backed by the full faith and credit of the District, including any
special tax levied to pay the principal and interest of any general
obligation bonds. The District is authorized to create a security
interest in any District revenues as additional security for payment
of the general obligation bonds. The Home Rule Act limits the amount
of general obligation debt. Specifically, general obligation bond
issuances are not permitted if total debt service in the fiscal year
exceeds 14 percent. As of August 1, 1994, this debt service percent
is 11.4 percent.
The District can also issue revenue bonds, notes, or other
obligations to finance or refinance undertakings in certain areas.
Such revenue obligations are not general obligations of the District
nor can they be backed by the full faith and credit or the taxing
power of the District. Instead, they are payable from earnings of
the respective projects and may be secured by mortgages on real
property or creation of a security interest in other assets. The
amount of revenue bonds that the District may issue is not limited by
the Home Rule Act.
The District is proposing to finance the construction of the
convention center by authorizing the Washington Convention Center
Authority to issue revenue bonds that would include as security a
pledge of dedicated taxes. This proposed method of financing
requires amending the Home Rule Act. Thus, the District is seeking
an amendment to the Home Rule Act to authorize District enterprises
to issue revenue bonds backed by dedicated taxes. H.R. 4888 would
authorize the District (1) to issue such revenue bonds and (2) to
delegate authority to District enterprises to issue the bonds and to
collect and expend the dedicated tax revenues.
--------------------
\1 Public Law 93-198, 87 Stat. 744 (1973).
\2 The Authority was created by the Washington Convention Center
Authority Act of 1994, DC Act 10-314, signed by the Mayor on August
2, 1994 (Act 10-314: 41 DCR 5333).
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2
To develop information for this report, we analyzed feasibility
studies that were prepared by consultants for the project. However,
we did not independently validate information in these proposals
because the proposals were very tentative and we were requested to
complete our analysis in a short time frame. We met with the various
consultants, including those who prepared the economic projections
and developed the financing arrangements. We also held discussions
with various consultants who were involved in similar projects in
other jurisdictions. We met with District of Columbia officials in
the Mayor's Office, Office of Financial Management, and the
Department of Finance and Revenue, and analyzed District information
on the project. We also met with staff of the Council of the
District of Columbia. We met with and obtained information from
officials of the Washington Convention and Visitors Association, and
the Hotel Association of Washington, D.C. We obtained information
and discussed general financing arrangements with the National
Association of State Treasurers, Standard and Poor's, and Moody's
Investor's Service. We did our work in August and September 1994, in
accordance with generally accepted government auditing standards.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :3
The proposal to build a new convention center is in the early stages
of development. The District will need additional information before
more precise cost and benefit projections can be made. As a result,
certain revenue, expense, and economic benefit projections in the
current proposal could be significantly affected by additional
information as the development process progresses. Based on the
experiences of other jurisdictions, the level of detail contained in
the District's convention center project proposal is fairly typical
for a project at this stage of development.
The most recent convention center proposal indicates that the project
should be able to generate sufficient direct revenue to cover
currently known expenses; however, a number of unanswered questions
could significantly affect these projections. The construction costs
are very tentative--the project does not yet have an environmental
impact study or an architectural and engineering design, all of which
will more specifically define projects costs and time frames. The
current cost projections also do not include needed infrastructure
changes or the cost of all the land that may be required.
The proposed financing of the project involves revenue bonds backed
by specific District taxes. Although this type of financing is new
to the District of Columbia, such financing is routinely used for
similar projects in other jurisdictions. The District's high level
of general obligation debt makes using general obligation bonds to
finance both this project and other needed capital improvements to
other District programs unlikely. As with the costs and benefits,
further development of the project will be needed before detailed
financing arrangements can be identified.
The District has outlined the next steps that need to be taken to
provide answers to the various questions. Following these steps
should put the District in a position to make key decisions about how
or whether to proceed with this project. One key step will be
authorizing contracts for various studies. These studies will better
define the project and allow the District to specifically assess its
costs and benefits.
PROPOSED COSTS AND BENEFITS OF
PROJECTS
------------------------------------------------------------ Letter :4
Recent feasibility studies and other information developed by the
District indicate that projected revenues will exceed currently known
projected expenses for the new convention center. However,
unanswered questions on both the cost and operations of this facility
will affect these projections. For instance, environmental impact
studies and architectural and engineering studies need to be
completed, and certain operating expenses need to be defined to
better identify the economics of the project.
Several studies document the need for a larger convention center in
the District of Columbia. Although the existing convention center
has operated at 80 to 90 percent of capacity, which is above the 75
percent industry average, District officials believe the District has
not been able to compete for larger events that require more space.
According to information from the current proposal, the existing
convention center can compete for just 54 percent of the national
event market, while a facility of 750,000 gross square feet of
exhibit space could compete for 93 percent of the market. According
to information in the current feasibility study by Deloitte and
Touche, convention planners viewed Washington, D.C., as a desirable
convention location because it is the nation's capital, is the
national headquarters for many associations, and has a quality
transit system. District officials said that these positive traits,
coupled with a larger convention center, would allow the District to
favorably compete for larger conventions.
In August 1994, the Council of the District of Columbia authorized
the creation of the Washington Convention Center Authority. The
Authority would construct, maintain, and operate the new convention
center, as well as maintain and operate the existing convention
center. Plans call for the existing convention center to operate
until the first phase of the new center is complete in 1997. At that
time, the existing convention center would be sold or leased to fund
construction of the second phase of the new center, which is expected
to be completed in 1999.\3
Estimates of revenues and expenses for the new and existing centers
indicate that direct revenues from increased taxes and sales in the
hotel and restaurant industry would cover the expenses of operating
the existing and new convention centers. These most recent
estimates, dated August 25, 1994, are based on projections by
Deloitte and Touche, which worked with other consultants, as well as
the District's Department of Finance and Revenue. A summary of the
projected annual expenses and revenues for the proposed authority for
fiscal years 1995 through 2002 are shown in table 1.
Table 1
Projected Revenues and Expenses of New
and Existing Convention Center
(Dollars in thousands)
1995 1996 1997 1998 1999 2000 2001 2002
---------------- ------ ------ ------ ------ ------ ------ ------ ------
Revenues
Taxes $33,78 $34,65 $35,67 $36,66 $37,74 $38,82 $39,94 $41,10
8 3 3 3 0 6 7 6
Lease on 6,753 13,506 13,506 13,506 13,506
existing site
Interest on 1,922 1,922 2,209 2,100 2,118 2,118 2,118
reserve
================================================================================
Total revenues 33,788 36,575 37,595 45,625 53,346 54,450 55,571 56,730
Expenditures
Operating 7,949 8,242 8,772 11,674 11,294 12,647 12,140 11,351
subsidy
Debt service 23,660 23,660 23,660 23,660 23,660 23,660 23,660
phase I
Debt service 5,492 10,984 12,931 12,931 12,931
phase II
================================================================================
Total expenses 7,949 31,902 32,432 40,826 45,938 49,238 48,731 47,942
================================================================================
Proceeds $25,83 $4,673 $5,163 $4,799 $7,408 $5,212 $6,845 $8,788
Available for 9
Reserves or
General Fund
--------------------------------------------------------------------------------
Note: Various officials pointed out that these estimates are
tentative and, as such, could change significantly.
Source: Estimates prepared by M.R. Beal based on information and
assumptions by Deloitte and Touche and the District of Columbia
government.
About 80 percent of the taxes that are proposed to be dedicated to
the Washington Convention Center Authority (shown in table 1) will be
generated from rate increases of existing taxes. The other 20
percent of the taxes would be diverted from taxes that previously
went to the District's general fund. The District's Department of
Finance and Revenue estimated this reduction in general fund taxes
will be about $11.5 million in fiscal year 1995, increasing to $13.5
million in fiscal year 2002. The reduction in general fund taxes
will be offset because the proposal calls for the District's general
fund to no longer subsidize the Washington Convention Center Fund.
This subsidy has been and was projected to be approximately $13
million annually. The District will continue to pay about $11
million annually in debt service on the existing center.
In addition to the revenues shown in table 1, the feasibility study
projects a substantial number of other direct and indirect benefits
to the District from the construction and operation of a new
convention center. For example, construction of both phase I and
phase II of the new convention center will generate an estimated $3.3
million in additional tax revenues for the District. The feasibility
study also estimates growing indirect economic benefits to the
District and the overall metropolitan area. For example, consultants
estimate that by 2003 the new facility could add nearly $1 billion in
economic output, 3,000 new jobs, and $65 million in new tax revenues.
Even though there is considerable information on the cost and
benefits of a new convention center, the projections are still
tentative and could change as additional studies are completed.
Other cost and economic benefit estimates that are unknown or are
subject to change include the specific cost of the facility; the cost
of infrastructure improvements, including access to METRO; various
municipal support costs, including traffic control and security; and
the specific benefits that will accrue to other parts of the
metropolitan area rather than the District.
--------------------
\3 Current projections show the property could be leased for an
estimated $13.5 million annually. District officials and consultants
also said that the property could be sold. The estimated value of
the property, as outlined in the feasibility study, was from $130
million to $266 million.
PROPOSED FINANCING ARRANGEMENTS
------------------------------------------------------------ Letter :5
The District currently plans to use revenue bonds backed by dedicated
taxes to finance the convention center. These bonds will not be
backed by the full faith and credit of the District.\4 Such financing
is commonly used in other jurisdictions. Forty-nine states allow
this type of financing. Moreover, many recently developed convention
centers were financed by bonds backed by dedicated taxes. For
example, although financing arrangements varied substantially,
convention centers in Atlantic City, Austin, San Francisco,
Philadelphia, and New Orleans were all financed with bonds backed by
dedicated taxes.
Another method of financing this type of project involves using
general obligation bonds backed by the full faith and credit of the
jurisdiction. Convention centers in Atlanta and Boston were financed
in part by state general obligation debt. Although the District
theoretically could use general obligation bonds for this project,
its current high level of general obligation debt, when added to
additional debt to finance the convention center, would approach its
general obligation debt limit and, according to District officials,
could affect its general obligation bond rating.
The District Home Rule Act specifies that general obligation bond
issuances are not permitted if total debt service in any fiscal year
exceeds 14 percent of the District's revenues. As of August 1, 1994,
the District had $3.65 billion in long-term general obligation debt.
The District projects that with additional planned capital borrowing
of $250 million annually from fiscal years 1995 through 1998 and $190
million in each of fiscal years 1999 and 2000, the District's debt
service will climb to 13.0 percent of revenues by 2000 even without
the additional debt associated with the convention center. The
District estimates that, based on estimates of revenue and planned
capital project borrowing, the debt service percent would be 13.9
percent in 2000 if it uses general obligation debt instead of the
planned revenue bonds backed by dedicated taxes for the new
convention center. District officials said that this high level of
debt could affect its general obligation debt rating.
A critical component of financing costs involves the level of risk
associated with the bond. Higher risk bonds generally have higher
interest rates, may require insurance, or may require the issuer to
set up large debt service reserves. Officials at bond rating
agencies have indicated that a number of factors are important in
their assessment of bonds that are backed by specific revenues.
First, if the bond is backed by a tax, the collection history of the
tax is important. Bonds backed by taxes that have a solid collection
history are less risky than those backed by new or unproven taxes.
Second, the tax backing for a bond is less risky if it is assessed on
a broader range of goods, services, or population. Third, revenue
streams that have some legislative risk (that is, revenues based on
an appropriation) make the bond higher risk. Finally, the general
economic strength of the area is critical to the bond assessment.
The planned financing for the new convention center involves two
types of bonds. Both would be issued by the Washington Convention
Center Authority. Plans call for phase I to be financed with $364.4
million in revenue bonds backed by the following taxes:
2.5 percentage points of the 13.0 percent hotel sales tax,
40 percent of the $1.50 daily hotel occupancy tax,
1 percentage point of the 10.0 percent restaurant sales tax, and
one-quarter of 1 percent increment of the business franchise
surtax.
As shown in table 1, these taxes are expected to generate revenues
increasing from $33.8 million in fiscal year 1995 to $41 million in
2002. These taxes would be dedicated to the Washington Convention
Center Authority for debt service on the new convention center and
other expenses. As proposed in H.R. 4888, which would amend the
Home Rule Act, these dedicated tax revenues would not be part of the
District's appropriation process. The current anticipated annual
debt service for the phase I debt is approximately $23.7 million. A
change in the interest rate of 1 percent would change the annual debt
service by approximately $3 million.
The District plans to finance phase II with a $156.9 million revenue
bond. This bond will be backed by an estimated $13.5 million in
lease revenue from the existing convention center. The anticipated
total annual debt service is about $12.9 million. A change of 1
percent in the interest rate would adjust the annual debt service by
approximately $1.3 million.
--------------------
\4 The District intends to limit its liability to the taxes pledged
to the bonds by not pledging its full faith and credit to payment of
the bonds.
NEXT STEPS TO BE TAKEN BY THE
DISTRICT
------------------------------------------------------------ Letter :6
The District needs additional information before more precise cost
and benefit projections can be made. The project needs an
environmental impact assessment and architectural and engineering
design to further define the proposal. Such studies are typically
needed before bonds can be authorized.
Both consultants involved in the convention center and other
officials familiar with similar projects in other jurisdictions told
us that firm costs and benefits of projects are often not determined
until environmental impact and architectural and engineering studies
are completed. These officials pointed out that, in general, the
level of detail contained in the District's convention center project
proposal is fairly typical for a project at this stage of
development.
These officials also noted that jurisdictions typically need to spend
resources prior to obtaining project bond revenue to fund up-front
costs. For example, such costs for one jurisdiction came from an
infrastructure budget, while another jurisdiction used a variety of
funding sources, including a parking fund, a state grant, a low
interest state loan, and mass transit funds, for its up-front costs.
The officials also pointed out that these up-front funding sources
are frequently repaid with the project bond proceeds.
The District plans to begin collecting the increased taxes for the
convention center in October 1994 and anticipates using these
revenues for up-front costs of both projects. However, even though
the taxes will be collected, they cannot be spent without a
congressional appropriation or amendments to the Home Rule Act (such
as those in H.R. 4888). The District estimated that it needed to
spend about $8.8 to $12.0 million for studies and other items for the
convention center prior to obtaining revenue from the proposed bonds.
District officials said this estimate included $6.3 to $9.0 million
for design and engineering, $1.5 to $2.0 million for special studies
(such as environmental, traffic and transportation), and $1.0 million
for project structuring and feasibility work.
The District has laid out timetables to complete the numerous steps
necessary to implement the project. Some of the key steps are
outlined in figure 1. Following these steps should put the District
in a position to be able to make key decisions about how or whether
to proceed with this project.
Figure 1: Timeline for
Completion of Convention Center
(See figure in printed
edition.)
Source: District of Columbia Government
---------------------------------------------------------- Letter :6.1
As you requested, we did not obtain official comments from the
District of Columbia on this report. We did, however, discuss the
report's contents with District officials, who agreed with the facts
presented.
We are sending copies of this report to the Mayor of the District of
Columbia, the Chairman of the City Council, and other interested
parties. Copies will also be made available to others upon request.
Please contact me at (202) 512-8549 if you or your staff have any
questions concerning this report. Major contributors to this report
are listed in appendix I.
Sincerely yours,
John W. Hill, Jr.
Director, Audit Support and Analysis
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I
ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION,
WASHINGTON, D.C.
--------------------------------------------------------- Appendix I:1
Edward H. Stephenson, Assistant Director
Don R. Neff, Audit Manager
Laura B. Triggs, Audit Manager
OFFICE OF GENERAL COUNSEL
--------------------------------------------------------- Appendix I:2
Richard T. Cambosos, Senior Attorney