The District of Columbia government (acting through the Mayor and the District’s Redevelopment Land Agency) and District of Columbia Arena, L.P. (DCALP)—a limited partnership formed by the owner of the Washington Bullets and the Washington Capitals—have agreed that DCALP will build a sports arena (estimated to cost about $175 million) and the District will be responsible for financing certain predevelopment costs. The District agreed to be responsible for the following predevelopment costs: acquiring land, including the purchase of property not then owned by the connecting the Gallery Place Metrorail station to the sports arena, relocating District employees from two buildings on the site to other demolishing buildings, remediating soil, relocating utilities, and securing all regulatory approvals necessary for construction of the sports arena. To finance the predevelopment costs of the arena, in August 1995, the District received a $53 million loan commitment (line of credit) from a consortium of banks led by NationsBank and Crestar Bank. In January 1996, the RLA issued about $60 million in revenue bonds backed by the Arena Tax and paid off the $36.6 million portion of the line of credit used. The Omnibus Budget Support Act of 1994 (Arena Tax Act) as amended, provides for a Public Safety Fee (Arena Tax) to be levied on businesses located in the District based upon the annual District gross receipts of such businesses. The Arena Tax is due on or before June 15 of each year. The Arena Tax Act also authorized the RLA to pledge the Arena Taxes as security to repay loans to finance predevelopment activities. Further, the Arena Tax Act provides that if, on or before December 1 of each year, the Mayor estimates the Arena Tax revenue is less than $9 million, the Mayor is required to raise the Arena Tax rates to provide for an estimated revenue of not greater than $9 million. The Arena Tax was first levied in fiscal year 1995. During the first year of the Arena Tax, most of the Arena Tax collections were used to fund predevelopment activities. In subsequent years, the Arena Tax will be used to pay principal and interest (debt service) on the bonds as required by the bond resolution. As previously stated, the District is responsible for the predevelopment costs of the arena. DCALP, the developer, is responsible for arranging and repaying the financing needed to pay all costs associated with the design, development, construction, and operation of the sports arena. To obtain information on the status of the arena project, we reviewed relevant contract agreements, vendor invoices, and the bond trustee’s disbursement records supporting the predevelopment costs. We also reviewed various financial reports and bank statements for Arena Taxes collected and deposited as of August 1996. We interviewed District officials from the Arena Task Force, the Office of the Corporation Counsel, the Office of the Treasurer, the Department of Finance and Revenue, and the RLA. We also met with trustees for the lockbox (into which dedicated tax collections are deposited) and the bonds. In addition, we discussed the construction progress of the arena and the Metrorail connection with officials from DCALP and the Washington Metropolitan Area Transit Authority (WMATA). Further, we interviewed officials from Merrill Lynch regarding the structure and pricing of the bonds. Finally, we interviewed officials from Standard & Poor’s Rating Service (S&P) and Moody’s Investor Service (Moody’s) concerning the rating of the bonds. We did not audit the arena’s predevelopment cost estimates or evaluate the financing to determine if the reported amounts were correct. The amounts for the predevelopment costs and financing were provided by District officials and, where applicable, were verified to disbursement records maintained by third parties acting as trustees for either tax collections or bond proceeds. Accordingly, we do not express an opinion or any other form of assurance on the arena’s predevelopment cost estimates or its financing. We also did not audit the reported taxes collected and deposited for the sports arena project. We, therefore, did not determine if the District government accurately identified the universe of taxpayers or reported all dedicated taxes for this project. However, we reviewed monthly statements provided by the lockbox trustee to determine the amount of taxes collected and placed in escrow for this project. Our review built on previous work, and we conducted our review from March 1996 through December 1996 in accordance with generally accepted government auditing standards. As of October 18, 1996, estimated predevelopment costs had increased from about $55.2 million to about $55.8 million or by a net amount of about $617,000 (1 percent), since our last report. The District’s predevelopment activities consist of four major categories: (1) acquiring land, (2) constructing the Metrorail connection, (3) relocating District employees, and (4) demolishing two buildings, remediating soil, relocating utilities, and using consultants to secure regulatory approvals. All land has been acquired for the arena site. However, the final cost for one of the parcels of land acquired will be determined by the outcome of legal proceedings. Construction of the Metrorail connection is about 25 percent complete as of October 18, 1996. All District employees have been relocated; however, office improvements on the new space have not been completed. Finally, the two old buildings have been demolished and relocating utilities and securing regulatory approvals are nearly complete as of October 18, 1996. The District is awaiting final bills for these activities. The District’s Project Manager for the sports arena stated that based on the project’s current status and known estimates for predevelopment costs, as of September 30, 1996, the District does not expect to exhaust the $5 million capital reserve fund established to cover cost overruns. We verified that no funds had been expended from the capital reserve fund. The changes to the predevelopment costs are highlighted in the following table. As of October 18, 1996, the total cost for the Gallery Place Metrorail connection was estimated at about $19.4 million, a $2.4 million increase from our last report; but the District’s cost remains the same—$3 million. The majority ($2 million) of the increase reflects the cost of needed construction changes to the station because of the sports arena. For example, new vent shafts will be added in order to accommodate the construction of the sports arena. This increase was offset by the developer’s contribution of $2 million to the cost of the Metrorail connection. The other $360,000 increase reflects a decision by WMATA to upgrade the station elevators from hydraulic elevators to traction elevators. The funding for this upgrade is being provided by WMATA. As of October 18, 1996, the Metrorail connection budget contained a $1.1 million reserve for contingencies (as shown by note c to table 1)—a decrease of $400,000 since our last report. WMATA officials stated that their maximum responsibility to the project is limited to their $2.4 million contribution. They also stated that they will not absorb any unanticipated costs. WMATA officials stated that an example of unanticipated costs is the discovery of asbestos in sections of the duct work running through the station’s mezzanine. According to the District’s Project Manager for the sports arena, the $50,000 approximate cost for the removal of the asbestos is being funded out of the Metrorail connection contingency reserve. The demolition of the two buildings formerly located on the arena property has been completed, and final bills are forthcoming. The budget of $1 million has not changed. Costs to remove hazardous and contaminated soil have increased as excavation progresses. The revised budget for soil remediation was $3.52 million as of October 18, 1996, an increase of about $2.58 million from the $940,000 reported in our last report. In a testimony before the RLA board, the District’s Deputy Corporation Counsel stated that the District will take legal action against the source of the contaminants if compensation is not made to the District by the source. The property on which the arena is being built contains contaminated and hazardous soil based on archeological digs, tests performed for the environmental impact statement, and tests performed by the developer. The extent of the amount of contaminated soil was underestimated by the original tests, which estimated that the site contained about 7,400 tons of petroleum contaminated soil and hazardous waste. As discussed below, the actual amount of contaminated soil was almost 15 times the original estimate. The site originally had residential and commercial buildings. According to the District’s Project Manager for the sports arena and an official from DCALP, when the land was cleared some 20 years ago, oil storage tanks in buildings and in the ground were not removed. As a result of the demolition of the buildings, contaminants were leaked into the soil. Both contaminated (petroleum) and hazardous (cleaning fluid) substances have been found in the soil. As part of its agreement to purchase the parcel of land owned by WMATA and the Far East Trade Center Associates, L.P. (FETCA), the District received a credit of about $569,000 from FETCA for the removal of contaminated material. As of October 1996, according to the District’s Project Manager for the sports arena, 13 underground oil tanks and 4 water separators were removed from the site, along with 109,000 tons of contaminated soil and approximately 5,100 tons of hazardous soil. Most of the excavation of the hazardous and contaminated soil has been completed. According to a DCALP official, in the spring of 1997, it will be necessary to remove a temporary dirt ramp from the site to complete the excavation process. Tests done on the soil on both sides of the ramp show the soil to be contaminated.