United States General Accounting Office

GAO Testimony

Before the Subcommittee on the District of Columbia,

Committee on Government Reform and Oversight, House

of Representatives

For Release on Delivery

Expected at

11 a.m.

Wednesday,

July 15, 1998

DISTRICT OF COLUMBIA

Status of the New

Convention Center Project

Statement of Gloria L. Jarmon

Director, Health, Education, and Human Services

Accounting and Financial Management Issues

Accounting and Information Management Division

GAO/T-AIMD/OCE-98-239

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the results of our review of the

Washington Convention Center Authority’s (WCCA) efforts to arrange for

financing and constructing of a new convention center in the District of

Columbia. My statement highlights the information we obtained on the

following two points that you requested:

• The estimated cost of this project, including the Guaranteed Maximum

Price (GMP) for constructing the new convention center, and the risk

exposure for both the contractor and the District.

• The Financing Plan, including proposed changes to the revenue base,

history of dedicated tax collections, projections for future revenues, and

sufficiency to cover the GMP and other project costs.

You also asked us to provide background information on the site selection

process, including WCCA’s analysis of alternative sites, particularly the

Northeast No. 1 site. These issues are discussed in greater detail in our

report, which is being issued today to the Subcommittee.1

Estimated Project

Costs Have Increased

WCCA is proceeding with efforts to build a new convention center at Mount

Vernon Square at a cost WCCA officials estimate to be $650 million. This

estimate has not changed since we reported on this project in

September 1997. However, our latest review of the project identified an

additional $58 million in project costs which—because WCCA expects these

costs to be funded through federal grants or moved into operating

costs—are not included in WCCA’s total project costs. These costs raise the

project’s cost estimate to $708 million, excluding reserve requirements and

financing costs of $138 million.

Table 1 compares current cost estimates with the estimates included in

our September 1997 report. As of May 31, 1998, WCCA had spent about

$27 million, primarily for contractual services.

1

District of Columbia: Status of the New Convention Center Project (GAO/AIMD/OCE-98-238, July 15,

1998).

Page 1 GAO/T-AIMD/OCE-98-239
Table 1: Total Estimated Costs for the

New Convention Center Dollars in thousands

Project component

Estimate as of

05/31/97a

Estimate as of

06/19/98b

Increase

(decrease)

Building and site/GMP $417,500 $500,600 $83,100

Other costs

Total predevelopment

costs

39,912 79,424 39,512

Fixtures/furnishings/

equipment

40,000 22,305 (17,695)

Soil remediation and

hazardous 

materials removal

11,000 5,000 (6,000)

Section 106 mitigation

costs

7,600 12,671 5,071

Metro station upgrade 22,300 0 (22,300)

Other construction costs 35,814 0 (35,814)

Project contingency 75,874 30,000 (45,874)

Subtotal WCCA project

budget

$650,000 $650,000 $0

Additions to WCCA project budget

Vendor provided

equipment

17,695 17,695

Portion of utilities

relocation not

included in building and

site

10,000 10,000

Metro station upgrade 25,000 25,000

Project administrative

costs

5,000 5,000

Total additions to WCCA

budget

$57,695 $57,695

Estimated project costs $650,000 $707,695 $57,695

Financing related costs

Bond issuance 12,200 11,827 (373)

Reserve funds 75,100 126,399 51,299

Total financing related

costs

$87,300 $138,226 $50,926

Total estimated project

costs

$737,300 $845,921 $108,621

(Table notes on next page)

Page 2 GAO/T-AIMD/OCE-98-239
aDistrict of Columbia: Status of the Proposed New Convention Center Project (GAO/AIMD-97-148,

September 25, 1997).

bDistrict of Columbia: Status of the New Convention Center Project (GAO/AIMD/OCE-98-238,

July 15, 1998).

Source: WCCA.

While WCCA has maintained a $650 million budget, a number of changes

have been made among the budget components, with some components

increasing and some decreasing. The following estimated project costs,

when added to WCCA’s $650 million budget, results in total estimated

project costs of $708 million:

• Portion of utilities’ relocation costs that are not included in the building

and site costs for which WCCA anticipates $10 million of federal funding.

• Metro station upgrade for which WCCA anticipates $25 million of federal

funding.

• Anticipated vendor-provided equipment of about $17.7 million.

• Project administrative costs of $5 million, which have not been shown in

the budget.

As part of the prospective financing arrangements, some of the reserves

have been increased and others established for a strengthened financial

arrangement for an overall increase of $51 million.

Currently, the majority of the estimated project costs are covered in a

$500.6 million GMP for construction, which WCCA is in the process of

negotiating with the construction manager, Clark/Smoot, with the goal of

minimizing risks to WCCA and taxpayers. The GMP, which is a proposed

amendment to the construction management contract, lays out 22 different

cost components and sets limits on financial risks to the construction

manager. Practically speaking, the GMP is only a guaranteed maximum

price if the underlying assumptions on which the contractor bid the job do

not change. Further, areas of risk—such as the removal of hazardous

materials and remediation of any unknown subsurface conditions—are

not included in the $500.6 million price. An estimated $207 million in other

project-related activities will be or have been contracted for separately.

The total contingency for the project is down from $75.9 million to

$40 million, which is about 8 percent of the building and site costs.

Table 2 shows the components of the GMP. Site work, concrete, and steel

account for $233 million, which is 47 percent of the GMP. Mechanical and

Page 3 GAO/T-AIMD/OCE-98-239
fire protection, electrical and security, and design allowances2

 account for

$117 million, which is 23 percent.

Table 2: Proposed Components of the

GMP Dollars in thousands

Component Amount

General conditions/requirements $26,500

Utilities relocation 6,500

Site work 50,500

Concrete 50,500

Masonry 16,500

Steel/metals 132,000

Carpentry 1,000

Moisture protection 17,000

Fenestrations 17,000

Finishes 29,000

Specialties 4,000

Loading dock equipment 79

Window treatment 400

Conveyances 8,800

Mechanical and fire protection 45,000

Electrical work and security 36,700

Design allowances 35,113

Construction contingency 10,000

Insurance 808

Performance and payment bonds 3,400

Pre-construction fee 300

Construction management fee 9,500

Total GMP $500,600

Source: WCCA.

New Financing Plan

Supports Increased

Debt

WCCA’s current financing plan to cover predevelopment, construction,

reserves, and operation of the convention center calls for about

$846 million. Seventy-three percent of the funds needed to finance the

project are expected to be derived from revenue bonds supported by

dedicated taxes. Changes from the previous financing plan include

2

The design allowance covers a number of relatively small items, such as light fixtures, site and street

lighting, signage, various finishes, etc.

Page 4 GAO/T-AIMD/OCE-98-239
increasing the term of the bonds as well as the dedicated taxes to allow

WCCA to borrow more money for the project.

WCCA received $44 million in dedicated taxes in 1997, and WCCA has

projected collections to increase at 1 percent a year over the next several

years. These projections are conservative relative to estimates by

management consultants and the District and to our evaluation of trends

in tax collections and the national and local economic outlook. These and

other factors will be looked at by WCCA’s consultants, rating agencies, and

bond insurers who will evaluate the financing package and determine its

ability to cover the GMP and other project costs.

Table 3 shows the May 19973

 and the current (May 1998) financing plans.

Since May 1997, WCCA has proposed several changes to its financing plan.

As the table indicates, the current financing plan assumes a lower interest

rate, an increase4

 in the annual dedicated tax revenues to support the bond

financing, and an increase in the term of the bonds from 30 to 34 years.

These changes would allow WCCA to borrow more money to finance the

project. In addition, since the amount of cash available from dedicated

taxes and bond proceeds has increased, the amount estimated for

construction fund earnings has also increased from the original plan.

Finally, the current financing plan includes funding for financing costs and

reserve requirements.

3

This financing plan was developed in May 1997 and was discussed in our 1997 report, District of

Columbia: Status of the Proposed New Convention Center Project (GAO/AIMD-97-148, September 25,

1997).

4

Based on the Washington Convention Center Authority Act of 1998, WCCA will now use the existing

convention center’s operating subsidy ($5.6 million) and the subsidy ($5.2 million) to the Washington

Convention and Visitors Association, the Mayor’s Committee to Promote Washington, and the D.C.

Chamber of Commerce to support the bond financing.

Page 5 GAO/T-AIMD/OCE-98-239
Table 3: Comparison of Financing

Plans for Proposed New Convention

Center

Dollars in millions

Funding sources

Financing plan

as of 5/97

Financing plan

as of 5/98

Senior lien bonds $343 $487.4

Junior/senior subordinate lien $80 $128.2

Subtotal $423 $615.6

Cash for reserves $30 $72.8

Construction fund earnings $51 $62.7

Cash for preconstruction activities $40 $37.2a

Federal funds 0 $35

Vendor participation 0 $18

Funds for administrative costs 0 $5b

Subtotal $544 $846

Total funding required $650c $846

Estimated shortfall ($106) 0

Interest rate 6.3%d 5.6%e

Term of debt 30 34

Dedicated annual revenues to back bonds $27.5 $44

Revenue growth assumption 1% 1%

Avg. annual debt service $26.0 $42.6

aThis money reflects dedicated tax collections available, of which about $27 million had already

been spent on predevelopment activities as of May 31, 1998.

bWCCA reflects funds for administrative costs (salaries and wages) of the proposed new

convention center as part of the operating subsidy it receives through dedicated tax collection for

the existing center.

cThe $650 million did not include WCCA’s preliminary estimate of $87.3 million needed for

financing costs and reserve requirements.

dThe interest rate was based on prevailing interest rates as of May 21, 1997, and a projected

bond issuance date of October 1997.

eThe interest rate was based on prevailing interest rates as of May 6, 1998, and a projected bond

issuance date of July 1, 1998.

Source: WCCA.

Obviously, risks associated with the financing package could affect the

rating of the bonds and accordingly, the interest rate. Among the major

unknowns at this juncture are a WCCA assumption that the Congress will

approve $35 million in federal funding to cover relocating utilities and

upgrading the Mount Vernon Square Metro station. In addition, although

WCCA plans to address an $18 million reduction in its construction budget

Page 6 GAO/T-AIMD/OCE-98-239
by negotiating arrangements with vendors to provide equipment and

services, such as a heating and cooling plant, and communications and

food services equipment, to date there are no executed contracts to cover

these arrangements.

Site Selection Process

Has Long History

The site selection process for the convention center has a long history and

numerous studies over the years have consistently identified Mount

Vernon Square5

 as a preferred site. WCCA and its predecessors in the

District government have repeatedly determined that Mount Vernon

Square is a more viable location for a convention center than the other

sites, including the Northeast No. 1 site.6 WCCA’s most recent analysis of

the Northeast site indicates that costs would be higher and would likely

result in opening the convention center at a much later date than

estimated for the Mount Vernon Square site.

Mr. Chairman, this concludes my statement. I will be happy to answer any

questions that you or Members of the Subcommittee may have.

(916259)

5

Located in the blocks between 7th and 9th Streets, N.W., and N Street and Mount Vernon Place, N.W.

6

An area bordered by K Street, 1st Street, N.E., New York Avenue, Florida Avenue, and the railroad

tracks.

Page 7 GAO/T-AIMD/OCE-98-239
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