Cities weigh services that don't pay their way

With money tight, conflicts arise over parks and other amenities.

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Adrian Ramirez, 17 months, played with his grandmother Iris Sanchez at Edinborough Park in Edina Friday, November 4, 2011.

Photo: Kyndell Harkness, Star Tribune

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Increasingly, the "fun stuff" owned and run by cities -- art centers, golf courses, community centers and swimming pools -- are no laughing matter.

Some cash-strapped cities have started pulling money from funds intended to sustain these amenities to pay for other city needs, causing a cash crunch when a golf course or ice arena needs updating. Making matters worse, many of the amenities that are supposed to pay for themselves are losing money, leaving city officials debating what kind of financial standards those community assets should meet.

Edina has hired a consultant to examine the operations of the city's Art Center and the indoor Edinborough Park, both of which recoup less than 80 percent of their cost. Richfield leased its mini-golf course to a private firm. Brooklyn Park is examining the future of golf operations, including Edinburgh USA, because course income is dropping along with interest in golf.

"It's a question of whether the model still works," said Edina City Council member Josh Sprague. "I'm quite sure a business couldn't run at 75 percent efficiency."

But Edina Mayor Jim Hovland said that view holds community features like art centers and pools to an unfair standard.

"Business is designed to make a profit; government is designed to deliver a service," he said. "These were never designed to make a profit; they were intended as a benefit to residents."

From golf to cemeteries

By definition, city "enterprise operations" are usually expected to be self-sustaining through fees and charges. Those ventures can include municipal liquor stores, water and sewer funds and ice arenas. But cities across Minnesota also are running senior developments, nursing homes, fitness centers, and even laundromats and cemeteries as enterprise operations.

Records collected by the state auditor's office show those operations are under increasing pressure from cities with tight budgets. Since 2006, large cities in the state have been pulling more of the profits from enterprise operations to spend on other city needs. In 2009, large cities transferred 71 percent of net income, or more than $151 million, out of enterprise operations.

But profits can be hard to come by at ice arenas and art centers. Bloomington prohibits use of enterprise funds for other city needs.

Lori Economy-Scholler, the city's finance director, said that's because places like ice gardens will someday need repairs. Income from things like sale of city water, she said, can soar or plummet depending on the weather.

"If they have fund balances, they won't need any subsidy," she said. "Why would you drain that for a one-time property tax fix?"

A few years ago, the Brooklyn Park City Council pulled money from its golf enterprise fund to help pay debt service on an ice arena. City Finance Director Cory Kampf said golf operations have been covering their own costs, "but it's been tighter in the last two years or so." Golf employees were laid off in 2008 and equipment purchases were delayed.

The City Council decision seemed sound at the time, Kampf said.

"Hindsight is 20/20," he said. "They were trying to watch taxes. ... If we'd retained those earnings, we'd be drawing on them to deal with the current downturn."

In Richfield, the city's 18-hole golf course once supported other enterprise operations. When the course was lost to airport expansion, the city was compensated with $880,000. That money is used to support operations like the city ice arena.

The city also had an aging mini-golf course that needed updating and repair. Last spring, the city contracted those operations out to a private vendor. The vendor has most of the responsibility of running the course and city officials expect to go from losing $20,000 a year on the operation to making a tiny profit -- but a profit -- of $16.

"It's a big improvement to our bottom line," said Jim Topitzhofer, recreation services director.

Chaska has been able to keep most of its enterprise funds going without subsidies, partly because the city has its own electric utility that helps support other ventures. But the golf courses and the community center are aging and may soon need improvements.

That means balancing value with quality, said City Administrator Matt Podhradsky.

"We have to face the reality that ... if we don't have a top-notch amenity, people have choices with where they go to get their recreation," he said.

Setting financial standards

Indeed, cities are acutely aware that continuously raising fees will lead residents to visit the golf course or art center next door. Edina is wrestling with those issues now.

Edina's liquor stores cleared more than $1 million last year and its aquatic center also made money. But Braemar Arena, the golf courses, Centennial Lakes and Edinborough parks and Edina Art Center all lost money. The Art Center recouped just 71 percent of its cost, losing $221,000. Money from liquor store operations filled the gap.

Sprague, the City Council member, believes operations that were intended to be self-supporting should have a set goal for cost recovery.

"If they can't achieve 90 percent of cost recovery, then perhaps they should not be in operation or they should be merged with others," he said.

If all enterprise operations met that standard this year, he said, the city could have shifted municipal liquor store profits to the city's general fund to avoid a tax increase. Sprague said he wants the enterprises to be successful, but that a more creative approach than just raising fees and cutting staffing needs to be taken.

"Once we get the consultants' evaluation, we can break out of this box we've been in and the path will be clearer," Sprague said. "But in the interim, we cannot continue to subsidize these at this level. It's not sustainable."

Hovland agrees that enterprise operations need to be more efficient. But he bristles at the idea that they should function as businesses do. He said cities run things like ice arenas at a loss because residents want them but businesses can't make a profit from them.

"We need to figure out reasonable performance expectations," Hovland said. "But what do we do if they don't make a profit? Are you going to shut down Braemar, or the Art Center?

"These are the things that people think are important to the fabric of the community."

Mary Jane Smetanka • 612-673-7380 Twitter: @smetan

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