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Fiscal Sand Trap? Council's Dec. 2002 Deal To Float Debt For Skylinks Golf Course Revamp Laid Groundwork For Higher Fees, Arguably Uncertain Taxpayer Future
(July 25, 2004) -- LB City Hall management -- with voted City Council approval -- entered into a financial arrangement roughly a year and a half ago to float debt to pay for a major revamp of Skylinks Golf Course that effectively laid the groundwork for higher fees at Skylinks and an uncertain long-term future for taxpayers.
City Hall's Golf Commission's rates and fees committee will meet July 26, 6:30 p.m. at the Rec. Park Clubhouse, 5001 Deukmejian Dr. to hear public response and offer recommendations on fee increases. However, the Commission has no independent substantive power in deciding fee increases...a power that ultimately rests with the City Council. When the budget comes to a Council vote in September 2004, Councilmembers can -- if they wish -- override what the City Manager proposes and have the last word on the fee increases.
However city management has separately indicated that it already expects revenue from golf fee increases citywide to make up roughly $400,000 of its FY 05 steps to reduce a And the Skylinks portion of the equation was effectively structured roughly 18 months with Council approval.
On December 10, 2002, the Council gave approval to a management-proposed arrangement that effectively made LB City Hall and its golf course operator/lessee American Golf Corporation (AGC) basically financial partners in a full scale renovation of Skylinks Golf Course. The city-owned golf course abuts Long Beach Airport between Lakewood Blvd. and Clark Ave. stretching from Spring St. past Wardlow Rd. to nearly Conant St.
Under the Council approved arrangement, AGC is paid for its work by proceeds from the sale of city bonds. The bonds ensure AGC gets paid...while leaving LB City Hall (i.e. taxpayers) committed for roughly 27 years to pay back bondholders based on what City Hall assumes will be additional activity and increased rent from the Skylinks improvements.
"[A]dditional activity at Skylinks Golf Course attributable to improved facilities should increase AGC’s annual rental payments to the City after completion of the project," said a memo to Councilmembers from LB Parks, Recreation and Marine Director Phil Hester and LB's (now former) Dir. of Financial Management Robert Torrez, signed as approved by City Manager Jerry Miller.
Exactly how activity could be assumed to increase despite higher fees -- and quantified and forecast over roughly 27 years without knowing the amount of coming fee increases or future market rates competing golf courses, is unclear.
It's possible Golfers at Skylinks may pay higher fees and produce sufficient rental revenue to cover the bond payments as City Hall assumes and produce higher demand due to the improvements. Skylinks abuts LB Airport...with hotels already nearby and others on paper that might attract visitor and convention traffic, including non-residents on vacation or corporate expense accounts.
Or the fee increase might reduce demand at Skylinks to a level where rent received is less than expected, potentially leaving other LB golfers or taxpayers with the bill.
Other Council actions applied optimistic assumptions in other contexts that have invited unwelcome fiscal consequences for taxpayers. For the "Pike at Rainbow Harbor," the Council OK'd using public money to back repayment of bonds on a parking structure...and if visitors and parking revenue fails to reach the levels predicted by City Hall, LB public money could be tapped to pay the difference.
Likewise, the LB Aquarium of the Pacific, initially portrayed basically as a If the Skylinks improvements don't produce the additional rent and increased activity assumed by City Hall, the Skylinks bond payments could likewise potentially invite fee increases for LB golfers beyond Skylinks and/or otherwise hand the bill to LB taxpayers.
Under the proposed 2004 Proposed Golf Course Fee Schedule, Skylinks would be the priciest LB public course. Some examples: Weekdays, 18 holes for residents: $35 and for LBReport.com has posted the full proposed fee schedule for all LB golf courses in table further below.
On December 10, 2002, a LB city staff memo accompanied its request for Council approval to issue bonds that would pay for what city staff then described as reconstruction of the entire Skylinks Golf Course. The reconstruction project (estimated at roughly $7 million at the time) would come from roughly $9 million in bonds (includes debt and associated costs) that would be repaid from golf fees.
As for who would approve fee increases, the Council effectively took that decision out of its own hands, approving an escalator clause in the City's contract with AGC that automatically applies the Consumer Price Index and sends any increases beyond the CPI first to City Hall's appointed Golf Commission for recommendations...while leaving the actual decision to the City Manager.
It appears that under the Council approved arrangement, if fees paid by golfers are not sufficient to produce revenue repaying the bonds, City Hall's General Fund (i.e. LB city taxpayers) could theoretically have to cover the bond payments.
A copy of the City Hall-AGC contract (amended in July 2003 based on the Council's Dec. 2002 action), obtained by LBReport.com, states in pertinent part:
...To fund the Skylinks Construction Project, Landlord [City of LB] shall issue certain revenue bonds ("the 'Bonds'), the repayment of which...shall provide for debt service payments every six (6) months in an amount not to exceed $260,000.00
...On the 20th day of each month, beginning on the 20th day of the calendar monthly immediately following the date that the Bonds are issued, Tenant [AGC] shall deposit with the Trustee [selected by LB City Hall] ten percent (10%) of gross monthly greens fees (including but not limited to monthly tickets and 12-play tickets), tournament surcharge fees, SCGA membership sales, and miscellaneous fees (relating to such things as returned checks and credit card charges) collected from all golf courses ('Greens Fees Revenues') during the immediately preceding month...Trustee shall deposit the Greens Fees Revenues first into the Debt Service Account, until amounts on deposit...are equal to 1.5 times the maximum annual debt service on the Bonds, not to exceed $780,000.00 ('Debt Service Amount'), and after the Debt Service Amount has been funded, then into the [Capital] Improvement Fund...
...Fee Schedule and Changes
Tenant [AGC] may, but is not required to, annually increase fees and charges by the increase in the Consumer Price Index (All Consumers) for the Los Angeles-Riverside-Orange County Metropolitan Area ('CPI'), rounding the result down. If Tenant desires an increase that is greater than the CPI, Tenant shall request that increase in writing to the Director [of Parks, Recreation and Marine, subordinate to the City Mgr. who works for the Council]. The request shall name the fee and identify the new amount of that fee. The Director will present the request to the City's Golf Commission for review and recommendations. The Director will review the recommendations of the Golf Commission, if any, and then forward his/her recommendations to the City Manager, who may accept or reject any recommendations..." In a Dec. 10, 2002 public memorandum to Councilmembers explaining the arrangement, city staff stated in pertinent part:
The improvements to Skylinks Golf Course are estimated to cost approximately $7
million and will entail the reconstruction of the entire course. Funding is proposed to be
made available through bonds to be issued by the City; however, the debt will be paid
from monies generated and deposited by AGC. Debt payments will be made from
revenue AGC is currently required, through their lease, to reserve for the explicit
purpose of making improvements to the City’s golf courses. Staff proposes to amend
the lease with AGC to enable substantial course renovation improvements, to enhance
maintenance standards for all five courses, and to make certain operational changes
that will respond to concerns raised by the golfing community, the Municipal Golf
Commission, the City Auditor‘s Office, and AGC.
Financing Plan
In order to finance the improvements contemplated for the Skylinks Golf Course, the
City is proposing to issue approximately $8 million of fixed-rate taxable lease revenue
bonds with a term of 27 years. A total bond size, not to exceed $9 million, is being
requested to allow for possible changes in market conditions at the time the bonds are
sold. The bond issue will generate approximately $7 million of construction proceeds and approximately $1 million for bond reserves, underwriter fees, bond insurance fees,
and costs of issuance. Although the City’s General Fund will be the legal security for
the bonds and primary source of payment for the bonds, the underlying source of
repayment for the debt will be revenues pledged by AGC to the City. In the event that
AGC defaults on their lease and fails to meet its obligations to fully fund the annual
bond payments, the operation of the golf courses would revert to the City and debt
would be retired through golf course revenue.
AGC has agreed to pledge, and deposit with the bond trustee, capital improvement
funds generated through its amended lease with the City. This pledge will remain in
place through the term of the bonds and the amended lease with AGC. Currently these
funds are used by AGC, with City approval, to make certain capital improvements
across all City golf courses under AGC management. These funds are not used for
normal maintenance costs. Normal maintenance costs will continue to be the
responsibility of AGC through the amended lease. Amounts deposited with the bond
trustee, and not required for the payment of debt service on the bonds, will be made
available to AGC to fund, with the consent of the City, capital improvements for all City
golf courses.
The capital improvement funds pledged for debt service are derived from 10 percent of
green fee revenues. The capital improvement funds will be deposited monthly by AGC
with the City’s bond trustee bank to ensure funds are available to pay debt service.
Based on current green fee revenues, it is anticipated that AGC will collect
approximately $800,000 per year in capital improvement revenues. Based on current
market conditions, the estimated annual debt service for the lease revenue bonds will
be $600,000.
The lease revenue structure of the bonds requires that the City pledge non-golf course
assets. The City will structure the financing to allow for the flexibility to substitute or
reduce the pledged City assets over the term of the bonds.
It is contemplated that fixed-rate bonds will be issued. However, all or a portion of the
fixed rate bonds could be converted to a lower variable rate through the use of a short-
term swap transaction at or after bond issuance. A swap transaction is a commonly
used tool to manage cash flow related to bond payments. A fixed to variable rate swap
agreement can be used at a time when conditions in the swap market are
advantageous to the City...
TIMING CONSIDERATIONS
The nine-month closure of Skylinks Golf Course for complete renovation must occur
before January 15, 2003. This timing is imperative in order to provide sufficient warm
season weather to fully establish a durable, playable course prior to re-opening.
FISCAL IMPACT
Because rent from AGC is based on revenue generated by the golf courses, the nine-
month closure of Skylinks Golf Course should result in a reduction of approximately
$640,000 in rent in Fiscal Year 2003. Reduced revenue to the General Fund from AGC
was anticipated in the Fiscal Year 2003 budget. The lost revenue will be replenished by
CPI increases in fees for all golf courses, which are anticipated to be approximately
$200,000 per year. Also, additional activity at Skylinks Golf Course attributable to
improved facilities should increase AGC’s annual rental payments to the City after
completion of the project.
Annual debt service will total approximately $600,000, and will be paid by AGC from
monies generated and deposited by AGC. In the event that AGC defaults on their lease
and fails to meet its obligations to fully fund the annual bond payments, the operation of
the golf courses would revert to the City and debt would be retired through golf course
revenue. Below is the proposed Golf Course Fee Schedule for 2004:
The Golf Commission consists of 13 non-elected members appointed by the Mayor with Council approval...and is comprised of 10 representatives selected by LB men and women golf clubs and three at large members selected by the Mayor. The Commission offers recommendations to the Mayor, Council and City Manager on the operation, maintenance and fee structure of the municipal golf courses...but has no independent substantive power to make changes.
A written FY 05 summary, distributed by city staff at a public July 2004 "budget summit," indicates that as part of city management's Three Year Financial Strategy to deal with the City Council created deficit (ongoing spending exceeding ongoing revenue), management already anticipates that fee increases -- including "Golf Revenue Adjustments" -- will contribute $400,000 in deficit reduction.
The FY 05 city budget will be voted on by the City Council in September 2004...when the Council could (if it wishes) change management's proposals.
City Hall's Golf Commission members are listed on a Parks, Recreation & Marine web page that can be accessed by clicking Golf Commission.
The ambitious Skylinks/Legend revamp is described on a web page of the LB Dept. of Parks, Recreation and Marine.
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