Slicing Municipal Golf from Government Balance Sheets

(The following remarks were delivered to members of the Michigan Golf Course Owners Association at their Annual Conference and Vendor Fair on Nov. 30, 2004, at the Somerset Inn in Troy.)

I am very pleased to be here today. As has been noted, I have been managing editor of Michigan Privatization Report for eight years and have held a keen interest in privatization — and golf course privatization — throughout that time. My employer, the Mackinac Center for Public Policy, is a free-market research institute headquartered in Midland. We are what is commonly known as a "think tank," and our broad base of private funding allows us to remain independent and offer constructive ideas that you normally wouldn’t hear from within the halls of government.

I will constrain my remarks to a few general concepts about government and its proper role, why government golf courses should be sold off, and how and why officials oppose the sale of municipal courses. To begin with, let me draw an analogy.

When foreign nations subsidize their own country’s businesses so they can sell their goods in American markets below their true cost, we call it "dumping" and say it is unfair to American businesses. In trade negotiations, most nations work to prevent such behavior, often with substantial fines.

Ironically, while these fines represent an understandable impulse, they can be counterproductive. If another nation wants to subsidize our consumers by providing below-cost goods, we should probably let them. In the long run, we save money we can use for other things. We will likely benefit the same way we benefit from the sun not charging for light, even though it means fewer people employed in the candle business.

But when our state and local governments subsidize or run businesses that provide below-cost governmental competition to American businesses, they are taxing us in order to undermine our own private businesses. This is clearly different — a much worse form of "dumping" for everyone.

Yet our government does this in a long list of areas. A few examples include ski resorts, camp grounds, flower shops, broadband delivery, conference centers and hearing aid clinics. The new mayor of Flint even floated the idea of city-owned automobile aftermarket suppliers. In Dayton, Ohio, the city council a few years ago seriously entertained a proposal to get the city into the pizza business. If they had done so, it clearly would not have passed what the Mackinac Center calls the "Yellow Pages Test" — meaning, if you can find it in the Yellow Pages, it might not be a necessary function of government.

Private Goods vs. Public Goods

These activities clearly fall outside government’s proper domain — and yes, there is a clear distinction between government’s proper role and activities like those above. Government should restrict itself to providing what economists call "public goods," leaving "private goods" to the private sector.

How do we define the difference between these two things?

Economists define a "public good" as any good that is "nonexcludable" and "nonrivalrous." By "nonexcludable," we are referring to the ability to exclude people who don’t pay for a service from enjoying it. A classic example is one you are familiar with: golf. If someone refuses to pay a greens fee, they can be pretty effectively prohibited from playing on your course. If I don’t pay for national defense, on the other hand, I still have the United States armed forces and intelligence agencies standing between me and the rest of the world. National defense is nonexcludable.

The other part of qualifying as a public good is being "nonrivalrous." A good or service is "nonrivalrous" if there are few if any competing alternatives to the service. The golf industry, for instance, offers many competing options for consumers. There are more than 800 golf courses in Michigan alone. National defense, on the other hand, really isn’t going to be provided by anyone other than the federal government. Still, the government can — and I’m glad that it does — buy its planes, tanks and guns from private, competing companies, instead of its own plane, tank and gun factories.

Thus, golf is truly a private good, while national defense is a public good. A conscientious economist will presume that defense should be a domain of government, while golf should be left to the marketplace.

In practice, government involvement in the private service of providing golf courses leads to two major problems.

First, government courses are unnecessary. The private sector is already providing them; they’re in the Yellow Pages.

In fact, Governing magazine once described municipal golf as the least necessary of least necessary services. It doesn’t fit the economist’s definition of a public good, and it certainly doesn’t fall under the jurisdiction of public safety. The private sector has been providing golf services since the first golfer cursed the first slice or hook of the first ball ever hit. Michigan’s 800-plus courses place the state third-highest in the nation, and many of these courses are being sold off for lack of profitability. Some of this unprofitability is due in part to unfair competition — "domestic golf course dumping," if you will — from Michigan’s 81 government-owned golf courses.

Which brings us to the second immediate problem with government-owned golf courses: They are unfair, in two different ways.

First, they are unfair to private golf course owners. It’s one thing to go head-to-head with another business risking its own money in the golf industry, but it’s another to go up against a government that taxes you in order to build and operate the competition that may drive you out of business. To make matters worse, the operations are often cross-subsidized by other departments within municipal government. In Oakland County, the new Lyon Oaks course was expected to make a "profit" of $84,000 in 2004. But this is only an accounting fiction, because a different portion of the county budget is used to make the $400,000 annual debt service payment. The ways that counties can make their courses appear cost-effective when they are not are endless.

Second, government golf is unfair to the consumer. Only 12 percent of the American population play golf. For the 88 percent who choose not to play golf, they not only have to pay for a sport they don’t enjoy; they then have fewer resources to pay for the unsubsidized sport — such as bowling — that they do enjoy.

In the end, the fact that government golf courses are unnecessary makes them unfair. These government golf courses are based on taxes, and taxes, by definition, involve the use of force. They are not voluntary. The government might justify forcing people to pay for truly public goods that wouldn’t be provided if government didn’t create them, but it is a very questionable use of force to produce private goods that would still exist if government had no role.

What’s the Point of Government Golf?

So why do units of government get involved in golf? The reason is the same from California to Maine: They do it for the profit.

But let me hasten to add that this is not profit in exactly the sense that private entrepreneurs think of it. There is a school of thought known as "public choice" economics, and it studies how we make public, rather than individual, decisions.

It is not the sunny view of political scientists, who have told college students and the public for years that since government officials don’t make a profit, they aren’t hindered by self-interest and are inclined to simply do what is "right."

Economists take a dimmer and more realistic view. They recognize that even a civil service bureaucrat can "profit" by increasing his job security, authority and public recognition.

He can achieve all three of these ends through a basic tool known as "budget maximization." After all, large budgets promote large, stable departments; more staff; and perhaps even media interviews. Media attention is especially critical when we talk about elected officials, rather than civil servants.

In contrast, a bureaucrat who runs his or her department efficiently risks losing any money in his budget that he did not spend in the previous year. This potentially reduces his domain, while providing money that swells the ranks of other government departments.

Which brings us to a major reason that government golf is hard to kill: It expands local government’s public domain, raising government officials’ budgets, job responsibilities, job security and even prestige.

So public choice economics helps us explain an ironic, but predictable outcome: that government golf courses, which are described as "nonprofit" and meant to help low-income golfers, are often costly to run. While most government golf-course operators champion their public service as being cheaper than private alternatives, they are usually measuring their cost at the point-of-sale only. If their "cost" included the taxes that people paid on top of the service fees, it would be unlikely that the course would show a profit or exhibit cost-effective spending. A classic example of this is the Lyon Oaks golf course in Oakland County that I mentioned earlier, where the debt service on the course swamps any supposed monetary "profit."

Of course, politicians and their lieutenants don’t sell government golf to people by advertising their own self-interest. They speak of more lofty goals, such as helping poor people afford golf. But it is questionable to assert that the best use of scarce public dollars is helping low-income people play a game — or even if we conclude that this is the best use, that 15 percent of all U.S. golf courses need to be owned by different levels of government. Indeed, when America wanted to help low-income people obtain more and better food, we didn’t start government grocery stores; we developed food stamps, a type of voucher.

Privatization

This brings me to privatization — a favorite topic of mine as editor of the Mackinac Center’s biannual Michigan Privatization Report.

Privatization gained notice in the early to mid-1980s, when a sea change in attitudes was taking place both in the United Kingdom and the United States over the proper roles that government should play. Margaret Thatcher began getting government out of services that for-profit businesses could provide, and other parts of the world followed suit. In the United States, the term "privatization" made its debut, and municipalities began to look at assets and services they could either sell or contract the management of. Many municipalities discovered golf privatization. All of this was, essentially, a backlash against the costly and inefficient services produced by budget maximization among government officials.

Privatization by definition is the transfer of government assets and services from coercive possession and/or management by the state to for-profit and nonprofit entities. There are three basic forms:

"Contracting," which is by far the most popular form of privatization, and which occurs when a government unit continues to provide a service, but contracts with a private firm for the management or delivery of the service.
"Nonprofitization," where a government department that provides a service is spun off into a private, nonprofit entity separate from the government unit.
"Load shedding," or "commercialization," where government simply stops providing a service and allows the private sector to provide it to those who want it.

With municipal golf courses, contracting has grown dramatically. According to The Mercer Group, contracting for golf course management increased by 67 percent between 1987 and 1995, which brought the total number of government golf courses managed privately in the United States to 25 percent. Unfortunately, these are the only nationwide numbers we have on privatized golf. The Mercer Group is preparing another survey on the subject, but isn’t able to say when it will be done.

While outsourcing has saved taxpayers money and improved municipal golf course services, it is probably cold comfort for private golf course owners who now have to compete against an efficiently run taxpayer-subsidized golf course, rather than a typical government project. The same kind of problem can occur with nonprofitization.

This is why load shedding, or commercialization, is so important. Load shedding is the most promising form of privatization for taxpayers and golf course owners, but it is also the hardest to persuade municipal leaders to try. Why? As I noted earlier, it conflicts with their self-interest. The governments that run these courses would see their influence and domains diminished. (Of course, some may also legitimately believe golf courses are a necessary public service — but compared to what? Police and fire services?)

The issue of golf privatization has taken on added importance for the Mackinac Center because of financial pressures municipalities are facing due to the last recession, state revenue-sharing cuts and other government spending pressures. But in addition, we recognize the additional pressures that you as golf entrepreneurs are facing, including regulatory threats and the willingness of some government units to treat your golf courses as their "green" or "open" spaces. This latter concept is something to worry about.

Ending a Bad Practice

So how should golf course owners work to turn back unfair competition from municipal golf? I’ll provide the following list of suggestions, not all of which are original with me. I obtained some of these ideas by working with the National Golf Course Owners Association.

Work to shift the window of political possibility by changing the climate of public opinion. This is not something that can be done overnight. It takes a concerted effort to educate the public about how their tax dollars are wasted on municipal golf. It’s a task the Mackinac Center undertakes every day.
Improve your data collection. You may wish to ask your association to establish a centralized database on municipal golf courses that complements information that they might get from the National Golf Foundation and National Golf Course Owners Association.

Let me add that for years now, the Mackinac Center has wanted to econometrically estimate the impact that municipal golf has on the bottom line of for-profit owners, but a dearth of data has made such a study cost-prohibitive. My model would include variables for at least one Michigan county on the number of privately owned courses, the number of municipal courses, number of holes, rounds played per season, fees charged per round, distance between municipal courses and their private-sector rival, and a variable indicating when new courses have opened or closed over about 10 years.
Establish a point person on the municipal golf issue who can, at the very least, collect anecdotal evidence about municipal golf initiatives and ensure that their members not only know about the latest government golf developments, but can help organize opposition to it. This individual may wish to handle all press inquiries on the subject.
Ask the MGCOA to draw up a strategic plan for opposing new municipal golf courses and fighting existing ones. If the industry speaks with a single voice, it is more likely to be heard.
Publicly compare a community’s cry of poverty with its ownership of golf courses. In June, The Ann Arbor News called me about mayors across the state complaining of fiscal woes. I asked the reporter how many of these units own golf courses that are bleeding the city. As it turned out, Ann Arbor’s two courses had worked themselves into a $1 million deficit over the last several years. My single question changed the tone of the article that was written.
Do your homework on privatization. The nonprofit Reason Public Policy Institute has published a study on the subject of how to overcome municipal employee objections to privatization, and the study can be found on their Web site. The Mackinac Center has also published "how-to" studies that will be useful. They can show you how to develop a privatization program and how to precisely determine the true cost of public services. The latter study will be useful for teasing out government golf costs that are otherwise hidden in bureaucratic budgets.
Build alliances. Taxpayer groups and environmentalists may not often see eye-to-eye, but if a new municipal golf course is on the cusp of construction, they’re both likely to oppose it, though for different reasons. Adopt these strange bedfellows; there is strength in numbers.
Identify opportunity costs and share them with the public. Will the municipality have to lay off police and fire personnel in order to continue subsidizing its golf courses? Even people sympathetic to municipal golf would see the folly in protecting recreation at the expense of public safety.

Michigan’s private golf courses provide a tremendous private and public benefit. They are responsible business enterprises that offer employment, recreation and scenic beauty. There is every reason they should continue to prosper — and every reason you should organize to ensure that the bad idea of government golf courses doesn’t kill your business.

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Michael D. LaFaive is director of fiscal policy for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.