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Cities that operate golf courses don’t intend for them to drain resources, but because of the state revenue-sharing system, municipalities can see state payments lowered as a result of golf course operations. Earlier this year, the city of Ann Arbor narrowly escaped this predicament.
Ann Arbor owns two golf courses, Leslie Park and Huron Hills. The courses’ financial situation is dire. The city essentially lost money on the courses every year for the past decade. Last year was the worst yet — course-related expenses were $1,101,702 while revenues collected amounted to $858,126, for a loss of $243,576. Over the decade, the number of rounds played at the courses decreased by 60 percent.
Golfers may not have noticed, but Lansing did. To ensure that cities balance their budgets each year, the state requires them to send their annual financial report to the state treasurer. When the state saw that Ann Arbor’s golf course fund was operating at a deficit, a treasury official sent a letter to the city threatening to withhold 25 percent of its revenue sharing until a plan was filed to eliminate the deficit. While the Department of Treasury sent out 53 similar letters to local units of government for 2007 audit reports, it is worth noting that more than a quarter of them — 15 — were because of enterprise funds like golf.
Ann Arbor hired a golf consultant — Golf Convergence — to study the city’s options. It found many areas for improvement. "The combination of being overpriced and underfunded is a perilous mix that will lead to long-term losses," the consultant wrote (available at www.a2.gov/parks). But even with proper implementation of the recommendations, the consultant added, "there is no assurance of success" and predicted that "losses will inevitably occur over the next three to five years." And while the courses have room for improvement, the consultants determined that only 22 percent of the decrease in rounds played is attributable to "internal and correctable factors."
The consultant also recommended that the city obtain liquor licenses for the courses, which are a commodity in this state. There are only so many that are allocated for each community and they are typically apportioned by population. A municipality or business can buy an existing license, but that can be costly. If a business doesn’t pay the annual fee to renew its license, the city government ultimately decides who should get it.
When a liquor license became available in Ann Arbor, the city saw it as an opportunity. Rather than recommend that the license be given to the business that has been waiting the longest or made the best case for it — or using any other criteria to judge fairly — the city council voted 6-5 to recommend the license be given to the Leslie Park course.
Theoretically, a government golf course can offer lower rates than private courses because of the absence of property taxes and the lack of a profit necessity. No one goes hungry if a government course fails to make money. But that has not been the case in Ann Arbor. According to its consultant, plenty of competitors offer lower rates for the same or better quality of course.
In Ann Arbor’s case, there are no public welfare gains from the city owning and operating these courses. There are already 14 other golf courses in the area that are open to the public. The city considers seven of them to be direct competitors in terms of quality and price. Indeed, the golf consultant found that the Ann Arbor area has an overcapacity of golf facilities.
The city’s deficit elimination plan calls for increasing the number of rounds played at the courses by 36.5 percent over three years. With an overcapacity of courses in the area and the market expected to be stagnant, this expansion comes at a cost to the local course owners. "Basically, they’re trying to take golfers from us," said Gilda Johnson, owner of the local Lake Forest Golf Club.
It’s usually not a matter of public concern whether one business gains at another’s loss, but these aren’t competing businesses. This is a case of government versus private business owners, and government plays on an uneven field. "It’s very hard to compete with people that don’t have to pay taxes," said Kathy Aznavorian, co-owner of the Fox Hills Golf & Banquet Center in Plymouth.
Cities can unduly burden specific individuals or businesses — in this case, business owners who weren’t awarded the liquor license or owners of competing private courses. And if the city-owned courses continue to fail, they become a bigger drain on city finances. In fact, the consultant concluded that the courses were caught in what they termed a "death spiral." The golf courses have not been keeping up with payments to the city for the services received (the courses "owe" the city $1.1 million, according to the city’s latest financial report). Ann Arbor may determine this liability unrecoverable, which could lead to cuts in other areas of city services.
This is likely to occur. The golf consultant stated that the city could not turn around the courses "without substantial risk" and "significant investment." Since the city council is continuing city operation of the courses, the risk is borne by Ann Arbor taxpayers.
Government simply should not be in the golf business. Golf is a pastime that is already adequately provided by the private sector, especially in Ann Arbor. Taxpayer-funded competition is unfair to private course owners. Government golf promotes a private good to only a small segment of the population, but is a liability on the entire population. And, as Ann Arbor’s courses show, they can be a drain on government finances.
This is an edited version of a Current Comment that first appeared on April 15, 2008.
James M. Hohman is fiscal policy research assistant.
