Enterprises hold key to the city's businesses

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In common with many cities, Colorado Springs owns a variety of “enterprises” — entities that occupy a gray area between government and the private sector.

Some enterprises provide services that are clearly within the traditional scope of government, such as utilities, while others operate hospitals, golf courses and tourist attractions, competing against private business.

The enterprises far outstrip their municipal parent. The overall city budget for 2006 is a shade more than $400 million — less than a third of the combined budgets of the enterprises, which amount to almost $1.4 billion.

The city owns, controls, and in many cases, operates eight major enterprises: Colorado Springs Utilities, Memorial Health System, the Pikes Peak Highway, two cemeteries, Valley-Hi Golf Course, Patty Jewett Golf Course and Colorado Springs Municipal Airport.

The cemeteries, the golf courses and the highway are relatively insignificant in terms of total dollars. The 2006 city budget projected less than $11 million in combined expenditures for all five. But add utilities, Memorial and the airport to the mix, and it’s a different story.

Memorial expects revenue of $403 million in 2006. Utilities has budgeted $941.6 million to fund its operations. The airport has $25 million in projected expenditures.

The eight enterprises employ nearly 6,000 people and own real estate, buildings and other facilities worth many billions of dollars.

How did the city come to acquire so many different businesses? In some cases, there was a clear voter mandate for acquisition; in other cases, the city simply drifted into ownership.

The two major enterprises, Colorado Springs Utilities and Memorial Health System, both came into the city via popular vote.

Colorado Springs Utilities

Municipally owned water and wastewater systems were created in the 1870s. Electrical generation/distribution and gas distribution remained in private hands until 1924, when residents voted to make the city the exclusive owner/operator of all utilities.

From its earliest days, CSU has been self-supporting — its rates determined by the City Council, whose members also serve as the Board of Directors. Compared to Xcel Energy, Colorado’s largest private utility, whose rates are regulated by the Colorado Public Utilities Commission, CSU has enormous freedom of maneuver.

That freedom has enabled the company to work proactively to support local economic development, as well as to implement plans to secure adequate water and energy supplies for the future.

The 2006 city budget requires that CSU transfer $29.5 million to city coffers. Of that, $3.8 million is for “administrative and general fees.” The remainder is called a “payment in lieu of taxes.”

According to the 2006 utilities budget, “The monthly payments made to the general fund to compensate the city for the franchise, use and sales taxes that an investor-owned electric and gas utility would pay to the city …”

Denver voters just approved a franchise agreement with Xcel Energy which requires the company to pay a fee amounting to 3 percent of sales — an estimated $22 million annually.

“These (franchise) agreements give us rights to use the municipality’s alleys, streets and rights-of-way so we can, for example, run power lines along city property,” according to the company’s Web site. “Xcel Energy collects a fee from our customers and pays that money to the cities and towns.”

A franchise fee is an annual levy paid by the utility for market access. But in the case of a municipally-owned utility, market access is a given.

City Attorney Pat Kelly confirmed that the payment is in lieu of a franchise fee, while noting that CSU and the city are closely inter-related.

Asked whether other municipally-owned utilities made such payments, Kelly said that she didn’t know, but presumed that many did.

Mayor Lionel Rivera took a slightly different tack, characterizing the payment as a franchise fee that a private electric and gas provider would pay.

In that case, why not sell those two CSU divisions to a private company?

“We really couldn’t, because our bonded debt is secured by the entire company,” he said. “And no one would want (bonds secured by) water and wastewater.”

Memorial Health System

In 1943, Memorial was a small, economically marginal hospital on the brink of failure. Concerned that its closure would have severe consequences for public health, City Council acquired it.

In 1949, voters authorized the city to subsidize Memorial’s deficits, even authorizing council to impose a tax for that purpose.

To quote from Memorial’s bylaws: “The hospital board shall advise the city manager and City Council of the amount of financial support from the city, if any, deemed necessary for the hospital for each ensuing fiscal year.”

For the first 25 years of city operation, Memorial needed the city’s financial support. Since Memorial was unable to either float or repay a much-needed bond issue with its own resources, the city did so, at an eventual cost of more than $5 million.

In the early 1980s, under the leadership of then-Mayor Bob Isaac, council changed its policy toward Memorial. The council-appointed board was directed to operate Memorial as if it were a private business, and not to expect further subsidies from the city.

Memorial responded, taking advantage of slow-footed competitors, a changed national health care environment and a rapidly growing community. Far from requiring city subsidies, Memorial’s bottom line for 2005 shows $30 million in net “profits” or, as the health system calls it, “($30 million in) total revenue that will be re-invested in health care services for our community.”

Despite Memorial’s present prosperity, the city remains liable for any losses the system might incur. Should Memorial again require subsidies, council would have to choose between writing a check, or asking the voters for permission to sell or close the hospital system.

City cemeteries

The two city cemeteries, Evergreen and Fairview, which have been owned and managed by the city for many decades, might enjoy favored status over every other city enterprise or department. That’s because the city guarantees “perpetual care” of the gravesites.

So, although the city doesn’t guarantee its residents perpetual access to roads, or police protection or water to drink, it might be bound by its deal with the dead. To confirm this suspicion, Stacey Gatto, a lawyer at the City Attorney’s office, was asked just how long is perpetual?

“Until the sun goes supernova and extinguishes all life on Earth, thereby relieving the city of its obligation to water the lawns at the cemeteries,” said Gatto, tongue firmly in cheek.

To put it another way: “It’s as if the dead have a first mortgage on Colorado Springs”, said attorney Mike Duncan, with a chuckle. But, pausing, Duncan mused, “If the city defaults, can the dead foreclose?”

Springs Municipal Airport

In 1927, the same year that Charles Lindbergh flew solo across the Atlantic, Colorado Springs purchased 640 acres of grassland seven miles east of the city for $17,500. The city constructed a pair of gravel runways and, at an additional cost of $16,000, installed lights.

Only 38 passengers used the airport in 1938.

But after 1941, everything changed. Thanks to World War II and the city’s subsequent growth, 5 million passengers passed through the city’s then-new terminal by 1996.

Forecasts predicted that passenger traffic would rise to 10, 12, even 15 million by 2006.

However, due in part to the demise of Western Pacific Airlines, a Springs-based discount carrier, traffic collapsed. Today, about 2 million passengers use the airport annually, and even that level is threatened by Denver International Airport’s successful wooing of Southwest Airlines, whose low fares are attractive to Springs travelers.

Thanks to land acquisitions in the 1950s, the airport covers more than 7,200 acres — enough for expansion and development.

Today, the airport, recognizing that its core transportation business is flat, is doing what any private business in a similar situation might do — redeploying assets for better returns.

More than a thousand acres along the airport’s periphery are being developed by a private/public partnership as a business park, which will include 500 acres of green space, a golf course, trails, hotels and, of course, businesses.

The links

The city’s golf courses are funded by greens fees, club memberships and other sales revenue. Patty Jewett, which opened as a private course in 1898, was transferred to the city in 1919, subject to restrictions which prohibit the city from selling it or changing its use. Valley Hi, a private course which opened in 1954, was purchased by the city in 1975.

If owned privately, Valley-Hi and Patty Jewett would be managed very differently, according to Bill Ruskin of the Economic Development Corp.

“The fees would go up — they’re real bargains now,” he said. “And the clubhouse and pro shop at Patty Jewett would be a lot more commercial — they’d expand it to increase their income.”

And would private operators try to develop upscale housing along Patty Jewett’s periphery?

“I’d hate to see that,” Ruskin said. “Patty Jewett is such an oasis in the middle of town. But maybe to the north and east there’s some opportunity. If you look at new golf course developments, like Appletree down south, that’s what they do.”

But, he added, the deed of gift, not to mention political realities, would probably prevent the city from implementing such revenue enhancements.

Mountain highway

The city’s ownership of the Pikes Peak Highway has been as rocky as the mountain itself.

Originally built as a privately owned toll road in the 19th century, by the late 1940s it was operated by the U.S. Forest Service. Lightly used, and expensive to maintain, it was scheduled for closure, until the city intervened.

Believing that the highway was a crucial part of the region’s tourist infrastructure, the city leased the highway corridor from the federal government, and has operated it since.

Maintaining a heavily used gravel road at altitude is an expensive proposition. Although tolls and concession revenue bring in $2.7 million annually, the largely unpaved road, kept open year-round, requires a work force of 21 full-time employees, and labor costs top $1.5 million.

For the past several years, city taxpayers have kicked in another $800,000 annually, a subsidy which will continue for years to come. The funds are used to pave the highway and install drainage structures, actions mandated by the city’s violations of the Clean Water Act, which a Sierra Club lawsuit exposed.

The total cost of the multi-year project is estimated to exceed $15 million.

Extensive and typical

John Nalbandian, chairman of the School of Public Administration at the University of Kansas, said that while Colorado Springs’ municipal enterprise system is extensive, it isn’t atypical.

Pointing out that most municipalities own their water and wastewater services, and that many own hospitals, golf courses, parking structures and the like, Nalbandian suggested that residents should look at such enterprise systems just as they look at the municipalities themselves.

“Ask yourselves: Is there a record that warrants trust? Are they disciplined by professional norms? Is it really a business enterprise, following established business practices?” he said.

And divesting itself of its enterprises might not be the best idea for Colorado Springs, or any municipality, Nalbandian said.

“At the state and national levels, decisions can be very ideological, but not at the local level, where you see the results right away, so decisions are very pragmatic — regardless of trends, pragmatics will tell you what’s working,” he said. “So, for example, if you decide you want to sell your municipal hospital, you’d better make darn sure that’s really what you want to do — because once you’ve sold it, you’ll never get it back.”