In 1988, the City of Denver agreed with Adams County to acquire a 53-square-mile site for a new airport, to be built to replace Stapleton International Airport. At that time, in a conceptual estimate, the cost of the airport was set at $1.34 billion. In May 1989, voters in Denver approved a plan to build Denver International Airport. Site preparation and construction began in September 1989. The first formal construction budget, set at $2.08 billion, was produced in May 1990. Financing for DIA has included about $508 million from the Federal Aviation Administration (FAA) in grants and facilities and equipment funds, and about $3.8 billion in bonds sold to the public. Since May 1990, 12 airport revenue bond sales have been completed, with the most recent sale of $329.3 million of bonds in June 1995. Funds from the June 1995 sale are primarily designated for refinancing bonds sold in 1984 and 1985. Following the June 1995 bond sale, the City of Denver reported senior bonds payable totaling $3.481 billion plus subordinate bonds payable totaling $300 million. Each bond sale for DIA has been promoted by an Official Statement issued by the City of Denver containing details on the terms and conditions of the bond sale, a description of the airport project, financial and operational statistics and projections, contractual agreements with airlines, and information on risks and litigation. Appended to each official statement are (1) a report of the airport consultant, presently Leigh Fisher Associates (formerly the airport consulting practice of KPMG Peat Marwick) and (2) audited financial statements for the Denver Airport System, presently audited by Deloitte & Touche LLP. The information in these official statements is presently the subject of an SEC investigation and several lawsuits. The Denver office of the SEC is conducting an investigation to assess whether Denver made adequate disclosures of the problems with the airport baggage system. In addition, five lawsuits have been filed on behalf of investors in Denver Airport Bonds, alleging that they were not properly informed of the risks associated with their investments. DIA has attracted enormous local and national media attention, much of it focused on the various investigations that have been conducted on the airport. In addition to the work being done by the SEC, several other reviews and investigations have been undertaken, including a Federal Bureau of Investigation inquiry into contracting practices, the Department of Transportation Inspector General’s review of the possible misapplication of airport revenues, and the Denver District Attorney’s investigations of contracting and construction practices. To determine amounts and causes of cost growth in the DIA project, we reviewed construction budgets and cost reports; interviewed officials in DIA’s construction division to obtain explanations of reasons for certain scope changes in the project; examined change orders to construction contracts; and reviewed official statements issued by the City of Denver on the DIA project to identify disclosures made by Denver on construction cost increases. To reconcile annual debt service liabilities and total bonds payable from audited financial statements as of December 31, 1993, to the Leigh Fisher Associates report issued by Denver for the September 1994 bond sale, we reviewed these two reports in detail; reviewed audit workpapers prepared by Deloitte & Touche to document the methods they used to compute annual debt service and bonds payable; interviewed officials at DIA’s finance office and obtained explanations of methods used in computing debt service amounts in the Leigh Fisher Associates report; held discussions with DIA’s financial consultant, Leigh Fisher Associates, and obtained and reviewed detailed supporting schedules prepared by them; and reviewed DIA’s Plan of Finance prepared by First Albany Corporation, DIA’s bond financing consultant. Reconciliations of differences between the reports were prepared for us by DIA finance officials, and we traced the details of these reconciliations to financial records at DIA’s finance office. To address the issue of SEC jurisdiction over municipal bonds and the status and scope of the SEC investigation at DIA, we met with SEC officials at SEC Headquarters in Washington, D.C., and held discussions with SEC investigators at their Denver office. We reviewed testimony given by SEC’s Chairman before Senate and House Committees in January 1995 to obtain SEC’s formal position relative to its jurisdiction over the municipal bond markets. We also reviewed SEC’s legal foundation for jurisdiction over municipal financing and compared federal securities laws to Colorado securities laws. Our reviews of documentation noted above and our discussions with officials cited are the basis for the statements made in this report. We did not complete an investigation or a comprehensive audit of the information we are reporting. Readers of this report should be aware that investigations now under way by the SEC and others could conceivably disclose additional details that could conflict with information presented in this report. We requested comments on a draft of this report from the Director of Aviation, Denver International Airport, of the City of Denver, who provided us with written comments. In his comments, reprinted in appendix I, the Director did not disagree with the facts in this report but provided additional rationale for why the cost of completing the airport increased. The total cost of DIA is about $4.8 billion, about $3 billion of which are construction costs incurred by the City of Denver. Other major cost categories are $915 million in capitalized interest; $599 million in costs of facilities paid for by airlines, FAA, and rental car companies; and $261 million for land acquisition and project planning. Construction costs grew from a May 1990 budget of $2.08 billion to a total at airport opening of $3.004 billion, resulting from several substantial scope changes in the project. One major scope change was the decision in 1991 to build an automated baggage system costing about $290 million in direct construction costs, but which ultimately delayed the opening of DIA by about 16 months. This 16-month delay increased capitalized interest for the project by about $300 million. The earliest firm cost estimate for constructing DIA, excluding land acquisition and project planning, was $2.08 billion, and was contained in the City’s Official Statement for the May 1990 bond issue. In June 1991, the City entered into an agreement with United Airlines which included, among other things, the City agreeing to design and construct Concourse B in accordance with United’s facilities requirements. By February 1992, the construction estimate was up to $2.7 billion, driven up largely by the agreement with United Airlines. This $620 million construction cost increase resulted from widening and lengthening concourses ($250 million); the initial costs for the automated baggage system ($200 million); and other changes including completion of the terminal, electronic upgrades, apron improvements, and partial grading of a sixth runway ($170 million). By February 1994, DIA construction cost estimates had risen another $220 million, raising the total to $2.92 billion. The largest single factor in this round of cost increases was a decision to move the cargo area from the north side of DIA to the south side, primarily to satisfy the demand by cargo carriers for better access to Interstate 70. This cargo area move cost about $59 million. The balance was primarily for numerous airport improvements made under agreements with United and Continental Airlines, additional airport fire and maintenance equipment, a commuter airline fueling facility, and upgraded lighting to conform to new FAA regulations. At the date of DIA’s opening, February 28, 1995, construction costs totaled $3.004 billion, about $80 million over the February 1994 amount. This $80 million was principally for modifications to the automated baggage system and for a back-up baggage system. In addition to growth in DIA construction costs, delays caused by problems with the automated baggage system cost an additional $300 million in capitalized interest. Capitalized interest is similar to construction interest on a home building project. Before ground is broken, the borrower signs for a construction loan. As months pass during construction of the home, interest is charged on the construction loan. If a project runs over by several months, thousands of dollars of additional interest costs are absorbed into the cost of the home. In the case of DIA, about $300 million was absorbed into the cost of the project due to the 16-month delay in opening the airport because of problems with the baggage system. All told, capitalized interest for the entire construction period was $915 million. Your office compared data in Leigh Fisher Associates’ report supporting the September 1994 bond sale to Denver Airport System’s financial statements as of December 31, 1993, and raised two questions. First, annual amounts payable on bond debt were lower in the Leigh Fisher Associates report compared to the audited financial statements by $69 million to $118 million a year for the years 1995 through 2000. Second, total bond debt was lower in the Leigh Fisher Associates report ($3.464 billion), than in the audited financial statements, adjusted for the September 1994 bond sale ($3.872 billion). It is important to note that these two financial reports, while closely related, had different purposes and covered different time periods and scopes. The financial statements were audited as of December 31, 1993, and were designed to present the financial position at that date of the Denver Airport System, including both DIA and Stapleton, in accordance with generally accepted accounting principles. The Leigh Fisher Associates report was prepared as of August 18, 1994, and was designed to present financial forecasts for 1995 through 2000 for DIA based on certain assumptions about future events. Annual debt service requirements in the audited financial statements were based on the legal liabilities that existed on each of Denver’s bond issues at the financial statement date. Annual debt service amounts, $69 million to $118 million a year lower, were reported in the Leigh Fisher Associates report based on certain assumptions about future events including (1) successful refinancing of the 1984/85 bonds, (2) prepayment of certain bonds with the proceeds of FAA grants, and (3) lower than maximum interest rates on variable rate bonds. Two of these assumptions have been realized: (1) bonds were refinanced in June at 5.7 percent interest and (2) interest of about 5 percent has been paid on variable rate bonds during 1995. Another primary reason for lower annual debt service amounts in the Leigh Fisher Associates report was the assumption that estimated passenger facility charge (PFC) revenues would be used to reduce debt service amounts. During its first 3 months of operations, DIA collected PFCs at amounts meeting or exceeding projections. Figure 2 and associated notes provide a detailed reconciliation and further explanation of the reasons for differences in annual debt service amounts reported in the audited financial statements dated December 31, 1993, and the annual debt service amounts reported in the Leigh Fisher Associates report dated August 18, 1994. Total Denver Airport System bonds payable, on the December 31, 1993, audited financial statements as adjusted for the September 1994 bond sale, were $3,871,950,000. (See figure 3). Bonds payable reported in Exhibit B of the Leigh Fisher Associates report totaled $3,464,019,000. Information in these financial reports differed because the financial statements included all debt of the Denver Airport System (including DIA and Stapleton debt), whereas the Leigh Fisher Associates report was using Exhibit B to present only those bonds that provided funds to cover DIA construction and capitalized interest costs. Figure 3 and its accompanying notes present details on the differences between the two financial reports. While municipal securities are exempt from the registration requirements and civil liability provisions of the Securities Acts of 1933 and 1934, they are not exempt from the antifraud provisions of those acts. When allegations of fraud associated with a municipal bond issue are made, the SEC, at its discretion, may launch an investigation, as it has in the case of DIA. The SEC is currently investigating DIA’s disclosures of information related to baggage system issues, to include all Official Statements and supporting documentation covering the period 1990 to the present. The SEC has not released any information on the results of its work because its investigation is ongoing. In response to your request for information on the potential applicability of the SEC’s Rule S-X to DIA revenue bonds, we reviewed Rule S-X and met with SEC officials to discuss their application of Rule S-X and its companion, Rule S-K. These are the primary criteria SEC uses in regulating issuers of corporate bonds, but they are not requirements imposed on issuers of municipal bonds. Rule S-X covers the form and content of financial statements and requires that a corporate bond prospectus include 2 years of audited balance sheets and 3 years of audited income statements and cash flow statements. Rule S-K covers qualitative issues in a bond prospectus such as adequacy of disclosures, legal matters, and corporate general management issues. SEC officials told us that their review of corporate debt issuances applies a standard of whether disclosures were made in good faith on a reasonable basis when they were made. Further, this standard is applied principally to those disclosures of a material nature that could reasonably be presumed to affect an investor’s decision. Also, omission of material information is an important consideration. SEC officials emphasized that it is not possible to speculate if SEC jurisdiction over approval of DIA Official Statements would have resulted in different disclosures. The market for municipal securities has been largely unregulated at the federal level, basically due to broad exemptions in both the Securities Act of 1933 and the Securities Exchange Act of 1934. However, some changes began to occur in the 1970s in response to abusive practices by dealers in municipal securities and to increasing numbers of retail investors in this market. The Securities Acts Amendments of 1975 established a limited regulatory scheme for the municipal securities market through provisions for the mandatory registration of municipal securities brokers and dealers. Other actions taken by SEC in recent years have strengthened its stance on the quality of disclosures demanded of municipal bond issuers. SEC adopted Exchange Act Rule 15c2-12, requiring underwriters to obtain and review issuers’ Official Statements prior to selling bonds, and to provide copies of Official Statements to customers. SEC published a Staff Report on the Municipal Securities Market which underscored the need for improved disclosure practices in the primary and secondary municipal securities markets. SEC published the Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others wherein it formalized its position regarding obligations of municipal securities issuers under the antifraud provisions of federal securities laws. Further, this document emphasized the importance of using audited financial statements and established procedures for disclosing material events subsequent to the initial offering. In response to your request, we compared the 1933 Securities Act’s and the 1934 Securities Exchange Act’s standard of liability for professionals involved with the preparation and issuance of Official Statements with standards imposed on professionals by Colorado law in the same regard. We found that Colorado, like a majority of the states, has substantially adopted section 101 of the Uniform Securities Act as a basic fraud provision. The antifraud provision in Colorado’s statute mirrors the federal antifraud provisions. Both make it unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly, to defraud or “to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading.” In addition, we note that with respect to corporate, as opposed to municipal securities, section 11 of the 1933 act, as well as Colorado law, makes accountants civilly liable for material misstatements or omissions in corporate registration statements. Further, the SEC may bar any professional from appearing or practicing before it if the Commission finds that the professional has willfully violated any provision of the securities law, including both the antifraud provisions and the prohibition on material misstatements. We performed our work between January and July 1995 in accordance with generally accepted auditing standards. We have discussed the contents of this report with officials of the City of Denver and they agree with its contents. Written comments from the Director of Aviation, DIA, of the City of Denver, are included in appendix I. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies of this report to the Secretary of Transportation; the Director, Office of Management and Budget; the City of Denver; and interested congressional committees. We will also make copies available to others on request. Please contact me at (202) 512-9542 if you or our staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Thomas H. Armstrong, Assistant General Counsel Barbara Timmerman, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Summary: Pursuant to a congressional request, GAO reviewed selected financial issues relating to the Denver International Airport (DIA), focusing on: (1) DIA construction cost growth; (2) differences between the DIA financial consultant's report and audited financial statements relating to the Denver Airport System's bond debt; and (3) Securities and Exchange Commission (SEC) jurisdiction over municipal bonds and the status and scope of its DIA investigation. GAO found that: (1) DIA construction costs increased from an estimated $2.08 billion in May 1990 to $3.004 billion in February 1995; (2) the cost increases were due to changes in the scope of DIA and capitalized interest increased by $300 million due to the delay in DIA opening; (3) the two financial reports on DIA differed mainly due to their different purposes and the different time periods and scopes covered; (4) the financial statements covered both DIA and the Stapleton International Airport, while the consultant's report presented financial forecasts only for DIA based on certain assumptions about future events; (5) the differences in annual bond debt payments reflected the consultant's assumption that certain bonds would be refinanced in 1995, bond principal would be prepaid, lower interest rates would be paid on variable rate bonds, and passenger facility charges would be used to reduce annual debt service amounts; (6) the audited financial statements included all airport system debts while the consultant's report included only DIA construction bond debt; (7) municipal bonds are exempt from securities registration requirements and civil liability provisions, but they are subject to antifraud provisions; and (8) SEC is investigating DIA disclosures of its baggage system issues under its antifraud authority.