Many municipal golf courses are running huge deficits, are in poor condition, and face competition from better-maintained private courses. With no resources to improve the courses, many local governments are considering privatization. For example, Cincinnati is considering privatization of city-owned golf courses that lost $790,000 in 1996 and $702,000 in 1995.

As Charles Mahtesian wrote in a recent Governing magazine article on golf privatization, city "officials are increasingly looking to contract out what is perhaps the most non-essential of the non-essential public services." According to a survey of 120 municipalities conducted by the Atlanta consulting firm Mercer Group, between 1987 and 1995 the percentage of local governments that contracted out management of their golf courses grew from 16 percent to 24 percent. And with a median gross annual revenue of $820,000, according to the National Golf Foundation, the 2,500 existing municipal courses represent a potential $2 billion-plus market for golf management companies.

The goal of privatization is to make the golf course operation more efficient, provide higher-quality service, and generate higher revenues. The three most common types of golf course privatization are contract management, long-term lease, and asset sale. Which of these is used depends on the municipality.

Contract management occurs when a golf course is contracted out to a private operator on a relatively short-term (five years or less) management contract. The benefit of a short-term lease to the contractors is that they are not responsible for the financial liability of the course and do not bear the same level of risk associated with other types of privatization. The contractor receives a management fee, which may be based in part on the contractor's performance, from the government agency.

Under a long-term lease, the contractor assumes the operating risk for the property and enjoys the benefits of profits generated by the leased golf course. The aim of a long-term lease is to shift a significant portion of the risk away from the taxpayers and to the private contractor. The term of the lease is often related to the length of time needed by the private operator to recover investments in the golf course.

In Allegheny County, Pennsylvania, for example, a proposed long-term lease arrangement to operate the county's golf courses would have provided an immediate $1 million in capital improvements for the courses. The county commissioners were also requiring that the contractor provide additional improvements to the courses in each year of the contract. By having a contractor rather than the county fund the capital improvements, the county avoids incurring future interest expenses. The long-term lease gives the contractor the opportunity to recover these capital costs over a number of years and also decreases the incentives for the contractor to raise green fees dramatically to recoup the costs.

The most complete form of privatization occurs when a municipality sells the golf course outright. Governments can sell golf courses as part of a general program of divesting themselves of noncore services. They can use the proceeds either to reduce outstanding debt or for investment in needed infrastructure. The city of Portland, for example, sold the city-owned Bath Country Club to B B Golf Holdings for $1.6 million. The city's ownership of the golf course had been controversial for several years, as city officials had invested more than $1 million in the course. The $1.6 million sale price allowed the city to recoup all of the money it had invested.

According to National Golf Foundation statistics, municipal golf courses spend 13 percent more of their revenue on payroll than privately owned courses. And other government rules also drive up costs. For example, some municipalities have work rules that impose extra expenses. One municipality had a rule that allowed only 53 days of temporary employment per year. This rule proved very expensive since most golf courses rely primarily on seasonal employees. And at a municipal course in Warren Valley, Michigan, the city provided a foreman with no experience in the golf industry; when the course suffered a water break, it took a county work crew of 45 people one week to fix it, costing $30,000. The course manager commented that he could have fixed the water break more quickly at a lower cost if he had been allowed to use a private contractor.

Golf course management companies often have purchasing arrangements that allow each course to participate in volume discounts. And the companies are able to consolidate many administrative services, including insurance, employee benefits, data processing, and accounting. These economies of scale result in higher gross margins for the individual golf courses.

Private companies are also more likely to contract out functions that can be performed more cost-effectively by other firms. For example, golf course operators are likely to contract out food service or advertising to the most competitive vendors in order to increase sales. Thus, the single decision to privatize the golf course (via management contract, lease, or sale) can serve to depoliticize a potential host of smaller-scale contracting-out decisions, each of which might have involved a political wrangle if it had been made by a government department. A private contractor may also institute entrepreneurial programs that increase revenues from programs that speed up play to better food concessions.

A significant problem for municipalities running golf courses is the weather. Harsh off-season weather increases maintenance costs on greens and fairways, and foul weather during the golf season can cause large revenue losses. In Cincinnati, for example, hot weather in the summer of 1995 and heavy rains in the spring of 1996 led to 90,000 fewer rounds of golf and $1.5 million in losses. Shifting risk to the private sector is one reason why Cleveland is considering privatization. "If nothing else, it is a better way to manage the risk. The city gets a guaranteed rate of return even if it rains every single day of the year," says John Sobecki, regional manager for American Golf Corporation, a company vying for Cleveland's two courses.

Editor's Note: This article is reprinted from the January issue of Privatization Watch, a publication of the Reason Public Policy Institute in Los Angeles (310/391-2245.) Part II, Structuring a Successful Golf Course Privatization, will run in a future issue of the Cal-Tax Digest.