by J. J. Keegan, Managing Principal, Golf Convergence and
author of the book The Business of Golf - What Are You Thinking?

Municipal golf courses are often viewed as the entry door to golf—their stereotype is inexpensive, affordable golf. Average course conditions, small clubhouses, and limited food service catering to season pass holders, seniors, juniors, and new golfers have been their historical brand image.

During the past decade, this stereotype has changed, as many municipal courses now offer high-quality experiences. To illustrate, within the last 15 years, 14 municipal courses were built within 30 miles of Denver. Those municipal courses are all focused on providing a “country-club-for-a-day” experience.

A few have thrived. Many are now struggling. One merely needs to create a Google Alert for “Golf Courses Losing Money” to receive a plethora of emails highlighting the challenges faced nationally.

As a result, municipalities are now unloading in bulk the operation of their golf courses. During the first seven months of 2010, 69 requests for proposals representing nearly 175 golf courses (about 8% of municipal golf courses) have been issued seeking third-party management. Detroit, Memphis, Omaha, San Francisco, Seattle, Tampa, Toledo, Virginia Beach, Georgia, Kentucky, and New York are examples of what is becoming a sweeping trend.

Why the Sudden Shift?

Up until the early 1980s, most municipal courses were managed 100% by municipalities. With the advent of management companies in the late 1980s, these firms were retained, they paid the cities a lease fee, and they benefited from the earnings with profits shared, in some cases, above certain thresholds.

With the boom in golf in the late 1990s, municipalities, witnessing the profit that could be made, opted to pay management companies a flat fee upwards of $200,000 while retaining the profits for the cities’ coffers.

Unfortunately, many municipalities didn’t fully comprehend the difficulty of creating a value-based golf experience while generating sufficient cash flow to offset the bond payments hidden within their often inefficient organizational structure. When combined with a declining tax revenue base and softness in the golf industry, municipalities are now hoping to revert to late 1980s model of leasing, one in which third parties assume the capital and operational risk.

The Inherent Challenges of Municipal Management

The management of a municipal golf course usually takes one of three forms: solely city employees, leases with concessionaires, or management companies who now manage more than 1,300 golf courses, or about 8% of all courses in the United States.

There are frequent debates as to the best structure. When using employees, the swing of quality will hit both extremes from outstanding dedicated employees to those merely “punching the clock.” Leasing to individual concessionaires often can also produce less than desirable results. Concessionaires are for-profit entities, and as such they create a natural conflict of interest between scope of services and efficiency of operations. Management companies, such as Billy Casper and Kemper Sports Management, are the leaders in providing a viable alternative for municipal management. Third- party companies can often provide the expertise and the economies of scale that may be afforded by operating multiple properties.

These discussions as to the best structure often overlook the many significant disadvantages of operating a municipal course.

First, a municipal golf course has to overcome the brand image of being a “muni.” The heyday of municipal golf construction was the Eisenhower years, and many of the buildings and courses look their age. The cost to repair the infrastructure (and the image) nearly equals the cost of building a new golf course.

Other significant disadvantages include:

1. The payroll cost structure is higher than incurred by daily-fee courses; fringe benefits and retirement packages can aggregate up to 30% of base salaries. With higher labor costs, municipalities are often forced to reduce marketing and capital investment.
2. Labor issues are far stricter. The process of hiring (job postings, interviews, testing, physical exams, etc.) is cumbersome. As for firing someone, it is nearly impossible. With the exception of drug, alcohol, or theft issues, it could take at least six months to terminate an employee for mere non-performance or tardiness.
3. Where labor unions are present, the problems are exponentially more complex. Salaries are fixed, overtime rates are often double, and work schedules are firm. Maintenance crews, for example, are often limited as to what trees they can trim, as is the case in the city of St. Paul, Minnesota. For the city of Midland, Michigan, labor union rules dictate that seasonal workers can be hired for up to six months in what is a 7 ½-month golf season. Concessions are delayed in opening or close early. Many times other departments of a municipal complex must be scheduled and charge the golf course fully absorbed rates that far exceed those of the private sector.
4. Rate adjustments take at least 45 days. Because they operate in a public forum ultimately accountable to the taxpayers, approval is required for all material decisions regarding fees and expenses that exceed a threshold ($15,000 in most cities).
5. Because of the inflexibility on rates, Directors of Golf are effectively precluded from proactively adjusting rates to match demand.
6. Politics. The influence of golfers on elected City officials, particularly Commission or Council members, should not be underestimated.
7. Golfers are taxpayers who frequently demand low-priced season passes, improved conditions, and better service. If councilmen or mayors balk, they might find themselves on the wrong end of en election with a vocal and passionate constituency (golfers) as occurred two years ago in the city of Ann Arbor, Michigan. A last minute write-in candidate almost beat an incumbent council person who oversaw the golf operations.
8. As a municipality, the course is constantly expected to provide a wide range of services that are not profitable. Golf camps, youth education programs, and the donation of the course for community-sponsored events are frequent distractions.
9. Procurement is cumbersome, requiring a lengthy bidding process, and there is no assurance that the best vendor will be selected. A municipal bid takes from 60 days to six months. Ann Arbor lost its water pump for the 10 months it took to procure a replacement, and hand watering at higher labor costs was needed in the interim.
10. The financial information of a golf course is in the public domain. One of the competitive advantages of a private business is the ability to mask your revenues and expenses from your customers. Municipalities don’t have that luxury.

The Impact of New Custodians of the Entry Door to the Game

There are many ramifications to the recent rush to privatize municipal golf management.

Due to the extent that a city attempts to transfer the risk of management, require significant investment, and seek to retain control over prices, no responsive offers may be received, as was the case recently with the County of Los Angeles, further burdening taxpayers.

As more efficient management is introduced to municipal golf courses, daily fee owners will continue to loathe their municipal brethren, citing significant cost advantages (access to capital, exempt from property taxes, lower utility costs, etc.) and continue their cry for a level playing field.

What is for sure is that the daily fee owners who lack a strategic vision, who don’t fully understand the customers they serve, and who fail to create a value-based experience that equals the fees assessed will face continued customer attrition that will threaten their survival.