April 26, 2005
SUBJECT: Proposed Increase in Golf Tournament Fees (RTC 05-118)
REPORT IN BRIEF
This report provides a review of potential changes in the approved Golf Tournament Fee for Sunnyvale Golf Course as requested by Council during its January 31, 2005, Fiscal Issues Workshop. Council approved a $2.00 fee in June 2004 for Tournament play at Sunnyvale Golf Course during the period April 1, 2005 to March 31, 2006. A fee comparison to other local courses in our Market Range has been provided as well as a general discussion of the types of fees available and their net return to the course operator.
Staff recommends that Council increase the approved fee from $2.00 to $2.50 effective May 1, 2005, for tournament players at Sunnyvale Golf Course and approve the revised Fee Resolution to reflect changed fees.
This report was presented to the Parks and Recreation Commission at the regularly scheduled meeting of April 13, 2005. The Commission recommended that Council accept staff’s recommendation Alternative No. 1, (Motion passed 4-1.)
BACKGROUND
Golf fees are set by City Council each June, in conjunction with the annual budget approval process, for the coming fiscal year. The newly adopted golf fees are not implemented on July 1st, as are most fees. Rather, they are put into place on April 1st of the following calendar year to coincide with the beginning of the “prime” golf season, as has been the practice for more than ten years.
In June 2004, Council, for the first time, adopted a Golf Tournament Fee for both Sunnyvale and Sunken Gardens Golf Courses, as part of the Fee Schedule for Fiscal Year 04/05. These fees will be collected from tournament groups that play on Fridays, weekends and holidays. Tournament Fees will not be charged for other regularly scheduled categories of play such as Reserved Weekday or Weekends, League Play, or periodic play by recognized clubs (Sunnyvale seniors, men’s and women’s clubs). Collection of fees will begin April 1, 2005 at a rate of $2.00 per tournament player at Sunnyvale Golf Course and $1.00 per tournament player at Sunken Gardens.
Projected revenue from these new fees, for the period May 1, 2005 to March 31, 2006, is approximately $17,000. Of this amount, only approximately $375 is planned revenue from Sunken Gardens. (There is little demand for Tournament play at Sunken Gardens, an “executive” 9-hole facility.) Revenue collected from these fees are to be placed into the Community Recreation Fund (525) to help offset recreation program costs for seniors, youth, and the physically challenged.
Due to the budget crisis, City Council completed a review of all program budgets and related City services in April 2004. As a result of this review, Council provided initial policy direction to reduce spending by 5% in two Activities (645410 & 645810) related to golf tournament services at Sunnyvale and Sunken Gardens Golf Courses. In response to this, staff noted that a reduction in staff time (and related expense) in these activities would create a comparatively larger reduction in revenue received from golf tournament green fees. Staff hours are recorded for these Activities based directly on the size of the tournament, therefore a reduction in expenses (work hours) would force a reduction in tournament participation (and revenue). As these Activities operate at a profit, a reduction in expenses would actually cost the City money, rather than provide the savings that was intended.
Staff noted this correlation in the preparation of the Budget Supplement Form for Services DPR-#55 & 70, Tournament Services – Sunnyvale & Sunken Gardens Golf Courses. (Please see Attachment A.) As an alternative, staff suggested a $0.50 increase from $2.00 to $2.50 in the Sunnyvale Golf Course Tournament Fee. This was intended to produce additional revenue ($4,198) approximately equal to the amount of expense savings originally intended by Council in its desired 5% reduction in the two Activities listed above. This alternative would provide the financial result desired by Council, without a further reduction in the number of tournaments and tournament related revenues at Sunnyvale Golf Course each year.
Budget Supplements #55 & 70 were presented to Council during the Fiscal Impacts Workshop on January 31, 2005 as a portion of RTC #05-038, “FY 04/05 Service and Budget Reduction Package and Budget Modification No. 24”. During presentation of that report, Council expressed concern that additional information was needed to determine an appropriate Tournament Fee amount, and suggested that $5.00 might be a more appropriate fee. Council directed staff to remove this item from consideration at that time and to bring a report back in March for final Council review and action. Staff delayed this report to facilitate opportunities for public input and review/recommendation by the Parks and Recreation Commission.
EXISTING POLICY
From the Recreation Sub-Element
Policy 6.1C.2: Identify revenue sources and, where possible, increase revenues that can be allocated to recreation programming, facilities, and services.
Action Statement 6.1C.3a: Utilize market-based pricing in the establishment of fees, and continually evaluate the effectiveness of pricing strategies.
City of Sunnyvale, Fiscal Year 2004/2005 Fee Schedule: Municipal Golf Course Green Fees – Tournament Fee: Sunnyvale G. C. $2.00, Sunken Gardens G. C. $1.00. To be implemented on April 1, 2005.
DISCUSSION
Council has approved a $1.00 increase in the daily green fee rates for Sunnyvale Golf Course effective April 1, 2005. Fees for optional golf cart rentals will also move higher by $0.50 per player at that same time. Based on these rates and on the approved Tournament Fee, tournament golfers will pay $3.00 ($3.50 with cart rental) more per round than was charged for the previous golf season.
To date, no tournament fees have been collected in Sunnyvale. Currently approved fees were scheduled for implementation on April 1. The tournament booking process for calendar year 2005 was completed last September and all affected tournaments were notified of the approved $2.00 per person fee. Tournament groups were also informed of the planned review of Budget Supplements #55 & 70, and the related potential $0.50 increase in that fee to $2.50. As a result of our notice of the planned fee, four tournaments chose to cancel their tournament at Sunnyvale Golf Course, reflecting a loss of approximately 200 players. Staff believes that normal “open” play will back-fill the cancelled events to assist overall play, reducing this negative financial impact to Golf Program revenues. The ability to absorb additional cancelled tournament play and receive planned revenues is limited by the soft golf market regionally.
Overall golf play in Silicon Valley has been declining since 2001. Current economic conditions in the Bay Area, a reduced number of golf players and an increasing supply of reasonably priced facilities do not suggest immediate improvement in this trend. Staff believes that additional tournament cancellations would result in a reduction in overall golf play and associated golf revenues. In this current market, it is especially important to retain customers who have already expressed an interest in paying to use our facility. In setting golf fees, care must be taken to balance the added revenue with the added risk of alienating current or prospective tournament business.
Golf Tournament fees provide a potential stream of revenue for golf course operators. Tournament participants pay this fee in addition to a required full rate green fee, and optional fees for cart rentals and merchandise purchases. Tournament fees can be charged to provide for cost recovery related to the tournament booking and operations process, and in exchange for the privilege of securing a golf reservation far in advance of the regular golfer. These fees, however, account for only a very small portion of overall golf related revenues. In the case of the two Sunnyvale Golf Courses, the current Council approved Tournament Fees are estimated to generate approximately $17,000 annually, as compared to a total golf income exceeding $4,300,000 (FY 03/04).
Throughout the industry, there are a number of different types of fees that are commonly charged under the “Golf Tournament Fee” heading. A “Reservation” fee is simply a charge per person to secure an advance reservation. Fees of this type have no direct expense and, as such, return 100% of the revenue to the course operator. Sunnyvale’s current Tournament Fee is this type of fee. “Merchandise Gift Certificate” fees, also known as “Prize Funds”, require tournament groups to purchase gift certificates redeemable for golf merchandise at the host course golf shop. With this fee there is an underlying expense for the cost of the sold merchandise. Only the profit (approximately 30% of gift certificate face value) from the transaction is returned to the operator. That is, a $5.00 certificate would generate approximately $1.50 of profit for the course operator, in this case the City of Sunnyvale.
Additional fees associated with golf tournaments include required food & beverage purchases, golf cart use and/or required use of driving range facilities. These types of fees are somewhat common in the industry, but are not used extensively in our area by courses in our Market Range. Sunnyvale Golf Course does not presently have a driving range, and our food and beverage concession is a licensed operation, therefore income from required food and beverage purchases would have limited value to the City.
Periodically staff completes a Golf Tournament Fee survey of Market Range II golf courses in our area (Please see Attachment C.). Course operators surveyed require either a Reservation fee or a Merchandise Gift Certificate fee, and in two instances, a combination of the two. It should be noted that the average net return per tournament golfer is $2.30 for the seventeen courses in Market Range II. Excluding fee data for Spring Valley Golf Course, as it is significantly out of range for this market group, the average return is $2.07 per tournament player. Sunnyvale’s current fee of $2.00 already returns more than the amount returned to the operator at 11 of the 17 courses.
Reservation type fees are less expensive to the golf tournament customer, are easier to implement given their relative low cost, and provide the City a higher rate of return. Tournament directors may balk at a new $5.00, $6.00 or $8.00 fee. A lesser amount, $2.00 or $2.50, is generally more palatable to these golf customers. Additionally, some tournaments already purchase merchandise at the golf shop. The City, in that instance, may generate no additional revenue from these groups by requiring a merchandise gift certificate purchase. Reservation fees, on the other hand, generate a 100% return to the City on each tournament golfer.
Presentation of this Report to Council was delayed to allow staff to provide public input opportunities at the regularly scheduled Parks and Recreation Commission meeting held on April 13, 2005. Therefore, any changes to the approved Tournament Fee would be enacted after the usual fee adjustments (April 1 of each year). Changes to fees previously approved by City Council also require revision of the current Fee Resolution. While a change to fees after April 1st is unusual, it could be implemented with a few weeks notice to affected Tournament Directors. Adequate notice could be provided as early as May 1, 2005.
FISCAL IMPACT
Fiscal Impact of Increasing Tournament Fee from $2.00 to $2.50
All impacted tournament groups scheduled for play during 2005 at Sunnyvale Golf Course have been apprised of the Council approved $2.00 Tournament Fee. They have also been made aware that a proposal to increase that fee to $2.50 was to be considered. With that knowledge, all tournament groups (with four exceptions) returned signed contracts confirming their events. Based on the number of signed and returned tournament agreements, staff is confident that a $2.00 or $2.50 Tournament fee will return the planned revenues ($17,170 or $21,368, depending on the fee) to the Community Recreation Fund over the “golf” season, with little downside risk.
Fiscal Impact of Increasing Tournament Fee from $2.00 to $5.00
The potential for negative impact to the bottom line increases as the Tournament Fee exceeds $2.50. Downside risks are involved when tournament groups decide the fee is excessive and choose not to play at Sunnyvale Golf Course. At risk are the Tournament Fee, Green Fee, and Cart Fee for each player in the tournament group. As of April 1, 2005 this amount will be $34 to $57 per person depending on the day and the choice of walking or riding in carts. In fact, an average, 40 player, weekend tournament presents a potential loss or gain in revenue of up to $2,280 in green, cart, and tournament fees.
To date, we have not charged a Tournament Fee at Sunnyvale Golf Course, so staff has no hard data to suggest how many tournament groups will play at the various fee levels. We have had face-to-face conversations with most of our current Tournament Directors, and as a result staff would estimate a 30% cancellation rate at a Reservation Fee approaching $5.00 per player. This fee would more than double the local Market Range II average return to operator of $2.30. A 30% cancellation rate would cost the City approximately $106,000 in lost tournament green fee and cart rental revenue annually. While some of this loss would be offset from golf and cart fees collected from non-tournament golfers (open play), the dollars would not be completely recovered by the additional Tournament Fee revenue and by open play “back-fill.” The net result could be an estimated decrease of revenue in the Community Recreation Fund of $10,000 to $40,000 if information received from Tournament Directors proved correct.
Fiscal Impact of a Merchandise Gift Certificate Type Fee
Merchandise gift certificates return some value to the tournament golfer, in the form of the goods purchased with the certificate. However, for the City to receive a return equivalent to the proposed fee of $2.50, the certificate value must be set near $8.50 per player. This would place our fee as the second highest of its type in our Market, and would surely cause a significant number of Tournament Directors to reconsider their choice in golf courses. While staff has no historical data to support this position, a required certificate purchase of $8.50 (designed to return $2.50 in profit to the City) would likely result in the cancellation of a significant number of our tournament bookings for 2005, reduce our ability to attract new tournament business, and negatively impact the Community Recreation Fund.
Conclusion
· Higher Tournament fees are accompanied by a higher risk of revenue loss due to tournament cancellations.
· The current, Council approved Golf Tournament Reservation fee of $2.00 for Sunnyvale Golf Course falls within the range of fees charged by local courses in our market group (Please see Attachment C.).
· The current Tournament Fee provides a nominal increase in revenue at a low risk.
· An increase in the Tournament Fee from $2.00 to $2.50 would be accompanied by manageable risk. All tournament groups have been made aware of this situation and most have completed their 2005 reservations.
· An increase in the Tournament Fee from $2.00 to $2.50 would provide additional revenues approximately equal to an expenditure reduction in Tournament Service Activities (645410 & 645810) previously requested by Council.
· Based on an informal survey of Tournament Directors, an increase of the Tournament Fee from $2.00 to $5.00 could present an increased risk of revenue loss.
· A Merchandise Gift Certificate Fee would provide an equivalent return to the Reservation Fee at a significantly greater risk of cancelled tournaments (due to the much higher price).
· Any changes to the current Council approved Tournament Fee would require revision of the current year Fee Resolution.
PUBLIC CONTACT
Flyers (Please see Attachment D.) noticing the appropriate Parks and Recreation Commission and City Council meetings and requesting public input were posted at the Golf Shops and on the Information Boards at Sunnyvale Golf Course and Sunken Gardens Golf Course beginning on March 30, 2005.
Notice of Commission and Council meetings regarding this report was also distributed to the “Friends of Parks and Recreation” mailing list (a list of organizations and individuals who have expressed an interest in Parks and Recreation issues).
Public contact was made through posting of the Parks and Recreation Commission and Council agendas on the City’s official notice bulletin board, posting of the agendas and report on the City’s web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the City Clerk’s office, Library, Parks and Recreation Administration, Community Center, and Senior Center.
ALTERNATIVES
- Consistent with Budget Supplements #55 & 70, revise current Fee Resolution to increase Tournament Reservation Fee at Sunnyvale Golf Course from $2.00 to $2.50 for the period May 1, 2005, to March 31, 2006, as noted in Attachment B.
- Retain previously approved $2.00 Tournament Reservation Fee at Sunnyvale Golf Course for the period April 1, 2005 to March 31, 2006.
- Revise current Fee resolution to increase Tournament Reservation Fee at Sunnyvale Golf Course from $2.00 to $5.00 for the period May 1, 2005 to March 31, 2006.
- Implement an alternative Tournament Fee for Sunnyvale Golf Course as deemed appropriate by Council. This fee may contain a Reservation Fee only, a Gift Certificate Fee Only, or a combination of the two fee types.
- Take other action(s) as deemed appropriate by Council.
RECOMMENDATION
Staff recommends Alternative No. 1: Consistent with Budget Supplements #55 & 70, revise current Fee Resolution to increase Tournament Reservation Fee at Sunnyvale Golf Course from $2.00 to $2.50 for the period May 1, 2005, to March 31, 2006, as noted in Attachment B.
This report was presented to the Parks and Recreation Commission at the regularly scheduled meeting of April 13, 2005. The Commission recommended that Council accept staff’s recommendation Alternative No. 1: Consistent with Budget Supplements #55 & 70, revise current Fee Resolution to increase Tournament Reservation Fee at Sunnyvale Golf Course from $2.00 to $2.50 for the period May 1, 2005, to March 31, 2006, as noted in Attachment B. (Motion passed 4-1 with Commissioner Pole dissenting.) Commissioner Pole noted concern that an increase of the Golf Tournament Fee, as proposed, could have a negative affect on golf play and revenues, especially if a number of groups cancelled their tournaments.
Reviewed by:
Curtis Black, Interim Director
Parks and Recreation Department
Prepared by: Mark Petersen, Supervisor, Golf Division
Reviewed by:
Mary J. Bradley, Director
Finance Department
Approved by:
Amy Chan
City Manager
Attachments
A. Budget Supplement Form – Fiscal Year 2004/05, DPR-55 & 70, Tournament Services – Sunnyvale & Sunken Gardens Golf Courses
B. Resolution Amending Resolution No. 120-04, the City’s Fees, Rates and Charges Resolution, Pertaining to Golf Tournament Fees
C. Golf Course Market Range II Survey, Special Tournament Fees, February 2005
D. Flyer to Golfers – Notice of Meetings & Request for Public Comment