SG Scottsdale Gives the PGA a Mulligan - Scottsdale Trails

Scottsdale Gives the PGA a Mulligan

by John Washington on December 5, 2012

The history and various theories about the origin of the “Mulligan” (in essence, a do-over) are very interesting. The Scottsdale City Council and Mayor Jim Lane have honed the use of the Mulligan to a fine art, as evidenced by Tuesday night’s amendment to the lease of city-controlled land to the Professional Golf Association (PGA) and their affiliated Tournament Players’ Club (TPC).

First, a little history. The land where the two adjacent courses (the “Stadium Course” and the “Champions Course”) are located is actually owned by the federal Bureau of Reclamation. BoR leases the land to the City, which actually owns only the land where the TPC clubhouse is located.

The City has, in turn, leased the clubhouse land and essentially sub-leased the golf course land to the PGA/TPC.

The construction of this premier golf facility was financed primarily by the taxpayers of Scottsdale via issuing municipal bonds. The repayment of that debt was serviced in large part by the lease of a different parcel of city-owned land to the adjacent Princess Resort, constructed at about the same time. The original intent of the TPC lease was to create an enterprise that would ultimately be self-sustaining and a major tourist attraction and destination marketing opportunity.

The main event held at “the TPC” (as the facility is known) is hosted by the Phoenix Thunderbirds and now known as the Waste Management Phoenix Open, with the Waste Management corporation as the title sponsor. The Open has the largest attendance of all events on the PGA Tour.

So the city’s investment has certainly fulfilled the goals of attracting tourists and marketing Scottsdale to the golfing world through television coverage of the Open. However, the “self-sustaining” part of the proposal has fallen a little short of the goal.

The TPC lease has been amended five times previously. I won’t get into the details of those earlier changes, but the one this week is a big one.

The current lease requires the TPC to provide for “capital maintenance and replacement costs.” Yet, the amendment to the lease approved by council this week is giving the TPC $15 million in taxpayer money to build a new clubhouse and other rebuilding and maintenance of the course.

Scottsdale’s City Charter (our “constitution,” if you will) says (according to the Arizona Republic) that the

…city cannot commit public funds as a subsidy to a developer or other interests unless there is a clear public purpose. The city must receive value that is “substantially equal” to the payments or it provides assistance to the needy.

While this is clearly a reflection of the “gift clause” in Article IX, Section 7 of the Arizona State Constitution, it was codified as part of Scottsdale’s City Charter a couple of years ago via ballot Proposition 412.

Ironically, Prop 412 was advanced and supported primarily by Mayor Jim Lane, and council members Lisa Borowsky and Bob Littlefield. Mayor Lane’s chief of staff JP Twist said 412 would stop city politicians from

…squandering taxpayer money by giving it away to developers and other politically connected insiders through subsidies.

Lane, Borowsky, and Littlefield all voted for the $15 million subsidy to the PGA. In fact, the vote was unanimous.

City staff and the city council have told us that we, the taxpayers, are getting “substantial and direct benefit” worth $15 million in exchange.

So, golf is good for Scottsdale, right? And this is a good deal, right? What’s wrong with giving a little taxpayer money to the PGA? Let me count the ways:

  1. This wasn’t supposed to be a perpetually taxpayer-funded enterprise.The TPC was supposed to manage this effort in a businesslike manner, including setting aside funds from revenues to pay for maintenance and improvements. That requirement is in the lease.
  2. Two of the three supposed taxpayer benefits for this “good deal” would have happened regardless of whether we gave them the money: TPC will continue to host the Open in Scottsdale, and they will guarantee television coverage. They’d be foolish to host the Open elsewhere, and television coverage is vital to sponsorship. The Open wouldn’t happen without it.
  3. The other justification is a minimal temporary increase in lease payments, which are a percentage of gross revenue (remember the word “gross”), from 10% to 12.5% for the next 19 years. However, this represents a return on investment so small as to be ridiculous.
  4. After all that, probably the most egregious aspect of this lease amendment is that much of the funding for the debt service for the improvements is going to come from bed tax. That bed tax is generated in part by visitors to all the other golf courses in town. So, we are in effect taxing all the golf courses and giving a significant portion of that tax revenue to only a couple of courses (including Phil Mickelson’s White Bear, LLC, operator of the City’s McDowell Mountain Golf Course, which received a $2 million subsidy a couple of months ago). That is at its core, anti-competitive and unfair.

You can see the discussion of this item via streaming video from the city’s website at time index 02:36:00, with my comments following at about 02:45:00. The ensuing discussion and rationalization from the council was very instructive.

Councilman Ron McCullagh said,

“We are spending this money to maintain our golf course.”

I have no disagreement with Ron on that. However, we aren’t SUPPOSED to be spending OUR money. The TPC is supposed to maintain the course. That was ‘the deal’ to which the PGA/TPC agreed, and off which they’ve made substantial profit over the years.

Mayor Lane characterized my objections as,

“…misinterpretation and misunderstanding of how this contract is structured.”

Hmm. No, I think I understand it just fine. I think Lane does, too. The difference is that he’s ignoring how the contract is structured and just choosing to assert that it says something other than what it actually says.

The comment from Councilwoman Linda “This is not taxpayer money” Milhaven is most instructive of all:

“[It] makes more sense to me to say that the Princess [Resort] lease is paying for improvements to the TPC.”

OK, Linda, let’s reexamine the Princess lease revenue. It represents about $1.5 million in revenue per year. When the original construction costs for the TPC facilities were eventually paid off, the Princess lease payments were directed into the City’s “General Fund.”

The General Fund is the ‘account’ from which the city pays its regular bills, payroll, etc., and (until four or five years ago) made contributions to the Capital Improvement Projects (CIP) Fund to pay for new infrastructure and maintenance, i.e., roads, facilities, and other ‘public works.’

Earlier this year, the city council voted to create a “Special Revenue Fund” and to divert the Princess lease payments into it rather than the General Fund. That way they could spend the money on things other than those of direct benefit to the taxpayers, without appearing to rob the taxpayers’ infrastructure funds.

As I referenced in quoting Milhaven’s comment, “It’s not taxpayer money,” I have previously objected to this creative mis-characterization of revenues generated by the bed tax. You can see my comments to this effect on the video of the City Council meeting on October 2, 2012 (time index 00:20:54).

This massive public subsidy to the private, for-profit TPC and PGA occurred in spite of an $8 million structural budget deficit, $1.3 billion in debt, and $87 million in annual debt service. There has lately been great consternation about employee compensation; and in further irony, Lane, McCullagh, and Borowsky have publicly (and illegally) flogged the chief of public safety over a $500,000 budget overrun.

Furthermore, as I said in an email follow-up to one of our city council members on this lease amendment, if this is a “tourism project” (as rationalized during the council’s discussion) then we can rationalize amending virtually any city lease or and other city contract so as to directly, unilaterally benefit the other party.

Then it becomes, in JP Twist’s words, a matter of political connections as to who gets favorable relief and who does not.

The voters absolutely did NOT vote for this paradigm and they would not have voted for it if they had known it was going to be abused like this, especially in light of our known-but-denied budget deficit, crumbling infrastructure, and erosion of city employee compensation (to the extent that it affects retention and continuity of efficient service delivery).

I also raised a question with staff prior to the meeting: At what threshold dollar value are we required to look at these types of deals as more than just amendments? In other words, at what point are we required by the Procurement Code (city law regarding purchasing and contracting) to entertain bids for the contract? $15 million is certainly well-beyond the threshold for new contracts.

Every one of our city council members and Mayor Lane are registered Republicans. I am outraged that they have rationalized this massive taxpayer subsidy of a private, for-profit business. You should be, too.

This isn’t a ‘fiscal cliff,’ but it’s darned sure the road leading to such a cliff.

Update: 7 Dec 2012.

After some additional research, it is now clear to me that the council can basically do whatever it likes with regard to real estate transactions that don’t involve an outright sale to a party other than one owning adjoining property.

Even though the Procurement Code establishes a limit of $25,000 of value beyond which any transaction to which the city is a party must go through a formal procedure (for example, public bid, request for proposal, etc.), real estate transactions apparently do not have to follow those procedures…regardless of value.

According to Scottsdale City Code; Article IV Financial Affairs; Division 5, Sale of Real Property; Section 2-221, Disposition and Use of Real Property;

Paragraph (c) The city manager or designee shall have the authority to enter into temporary licenses or similar agreements for the use of city-owned property, including but not limited to, land, buildings, office space, rooms and other interior and exterior space, but not city rights-of-way. Such agreements shall be in a form approved by the city attorney. Such agreements shall have a term of one (1) year or less and a unilateral termination clause in favor of the city that does not require the city to give more than thirty (30) days notice of cancellation. Any license or other such agreement not meeting these criteria requires approval by the city council.

But, being legal doesn’t make it financially prudent…or proper.

[Update 7/25/13]: And being “legal” (complying with the procurement code) doesn’t constitute being in compliance with the Scottsdale City Charter Anti-Subsidy Charter Amendment (it appears the procurement code was never updated to reflect the Charter change) or the Gift Clause of the Arizona State Constitution.

 

{ 4 comments… read them below or add one }

drstrangedale December 5, 2012 at 10:19 PM

Thanks for the history and perspective … and the work that went into providing both.

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Norm Seeley Jr. December 6, 2012 at 8:44 AM

As a former Small Business Owner/Operator in Scottsdale, that rented Wheelchair Vans to the Public, I have never benefited from such expenditures from Scottsdale or Phoenix for that matter.

We the Public very rarely are consider by the Mayor or Council except when they want us to paid MORE Taxes.

Reply

Jim Haxby December 6, 2012 at 8:16 PM

John, it is about time you got back, excellent issue.

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John Washington December 26, 2013 at 11:06 AM

Clarification: The “anti-subsidy” City Charter amendment that was promulgated by Mayor Jim Lane and ratified by the voters in 2010 was intended to be MORE restrictive than the AZ Constitution’s “Gift Clause.” The Charter amendment is codified in Article 1, Section 3, Paragraph O:

“The city shall not give or loan its credit in aid of, nor make any donation, grant or payment of any public funds, by subsidy or otherwise, to any individual, association, or corporation, except where there is a clearly identified public purpose and the city either receives direct consideration substantially equal to its expenditure or provides direct assistance to those in need.”

Source: http://www.scottsdaleaz.gov/council/charter/article1

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