Enterprise funds: A creative way to fund park and recreation services

by Terry G. Schwartz
Arlington Heights Park District

"The times, they are changing." Bob Dylan wrote these words in the early 60s. Now that we have entered the 90s, these words are still prophetic.

Prophetic in the sense that those of us providing leisure services should recognize the need for change. As times change, so must we.

California Proposition 13 and Proposition 2-1/2 in Massachusetts were taxation measures implemented to encourage the halt, and in some cases, reduction of taxation. In a sense, these measures were good for the leisure professional. They forced us to find more creative ways to fund parks and recreation services.

One form of creativity was the development of Enterprise Funds. These funds are specifically developed by the agency for a specialized program and facility accounts. The intent of the fund is for that facility or program to operate without the benefit of tax revenues. Expenses, including capitals, directly attribute to the fund supported by the revenues generated by the fund.

Enterprise funds in the public sector are a relatively new phenomena and perhaps a wave of the future. In public sector parks and recreation services, enterprise funds were developed to circumvent a growing rebellion against taxation for quality of life issues. These funds became a creative way to inform the taxpayer that if he didn't want to pay for specialized services through taxes, he would have to pay through user fees.

Through the years, the parks and recreation services agencies have become very sophisticated and proficient in the manner that these funds are being operated. Typically, enterprise funds are treated as a business operation. Most of us are responsible for budgets as little as $200,000, and as large as several million dollars.

Accountability to you as an administrator on behalf of your constituency—the taxpayer, or in some cases, the user—is paramount. In reality, the park and recreation professional is operating a business and in many cases, a very large business. Business practices must be considered when programs or facilities are operated as enterprise funds.

In a recent survey given to major park and recreation departments in California, Colorado, Florida, Illinois, Kansas, Louisiana, New Jersey, and Texas, it was determined that many agencies in these states interpret enterprise funds similarly. Overall, the fund is developed to pay for facilities that require more-than-usual maintenance and operational monies to defray the cost of the operation. The fund should be self-supporting to the point that all expenses be paid for by the fund. Expenses that need to be considered include operational costs, personnel costs, administrative costs, and capital improvements.

Some agencies felt that excess monies could be contributed back to the corporate or recreation funds to relieve some of the operational pressures that exist in those funds. Administrators and board members need to caution themselves about this practice. It could cause three counterproductive reactions such as, reducing the cash reserve for further respective capital improvements in any given enterprise fund; falsely improve the financial position of the agency; and encourage a backlash of criticism from the user of the enterprise fund.

Reducing the cash reserve of a given enterprise fund for other purposes within an agency would potentially destroy the long-term structural security that is created when the enterprise fund cash reserve is developed.

One of the major premises for engaging in enterprise funding is its strength in potentially generating excess capital. These dollars should be kept in reserve for capital improvements and changing the ambience of the facility. Building infrastructures cycle every 20 years while building decor and ambience cycle every five to six years. If these funds are spent prematurely, the members may not choose to renew their memberships if facility updates aren't completed in a timely fashion. If these funds are spent prematurely and resources are not available for periodic building updates, many times the taxpayer becomes the only source for funds through alternate bonds or General Obligation bonds.

If the reserves are used to reduce the tax rate, the financial position of the agency could be falsely improved. This is a short-term fix. Operational costs of managing agencies continues to rise with the cost of living (4.6 percent in 1989). At some point in time, revenues will be necessary to support the increasing operational costs of an agency and the eventual need to improve the infrastructure of the agency facilities.

It is a cause for poor public relations in the community. The facility user theoretically has accepted the enterprise fund philosophy. The user expects to see user fees placed back into the facility for capital improvements. To change the rules of the game and provide funds for other features of the agency wouldn't be fair play. This could cause unnecessary ill feelings. Strong fiscal managers, not unlike sound home managers, put money away for a rainy day.

In Illinois, the legal authority to conduct enterprise funds has been granted by the state legislature. Local authority is necessary, however, as this form of budgeting and operation is a change from which the standard practices that local park and recreation departments and agencies currently engage.

Enterprise funding presents many opportunities to be entrepreneurial. As indicated earlier, it is similar to operating a private business and, therefore, allows for flexibility when policy and procedure decisions are made. As a result, it is easy to become excited about the many dimensions that operating a private business has to offer such as taking calculated risks, proposing capital improvement plans and implementing them upon approval and visualizing growth from hard work.

It is easy to be over zealous when first considering a changeover from traditional forms of budgeting or straight revenue programs to enterprise funding philosophies. Therefore, thorough preparation is critical. Prepare your approach to sell the idea to your board or elected representatives methodically. Accuracy when recording numbers is imperative. It will always be wise not to report revenues aggressively and over-project expenses.

A good rule of thumb to follow is, "It's okay to be a hero, but be one selectively. It is much safer to be a hero in the end of a budget cycle than to predict heroism in the beginning of the same budget cycle."

Change will be difficult to sell to your board. It is a good idea to put yourself in your board's position or frame of mind and be sensitive to its needs. It is wise to develop a plan to make your board look good. Be sure to provide it with enough data to allow it to make an educated decision.

Here are come convincing arguments that can be used to sell the concept to your board:

The activity or facility will broaden the spectrum of available recreation activities in the community which, in turn, will attract new business. Today's business community looks to quality leisure opportunities in a community for employees and their families.

The special interest groups will pay for the facility, therefore, it adds a new dimension to the community at no cost to the taxpayer.

The facility should be run with a business-like approach that mandates maximum economical efficiency.

If the facility was previously supported by tax revenues, the new approach will free tax dollars that can now be used to support low revenue producing functions.

The enterprising funding system may provide flexibility for further capital acquisition or renovations.

Many of the same arguments can be used to gain support when selling the idea to the community. Other arguments include:

It will offer a new facility to the community.

In many instances, the public would like to see more agency services become self-sustaining.

People are willing to pay for excellent services.

It will provide additional recreational opportunities, support redevelopment, yet, not increase the cost to the taxpayer.

In some instances, agency leaders are unsure about the source of revenues to purchase facilities to operate as enterprise funds or to conduct programs as enterprise funds.

If you wish to purchase a facility such as a tennis club, golf course, roller rink, etc., there are several options. The preferred options are installment contracts, revenue bonds and loans from the general fund. These options are those that, with the possible exception of a general fund loan, do not affect the tax rate in the community. A loan from the general fund should be drawn from cash reserves and not a tax levy. Terms should be a "due to/ due from'' proposition so excess revenues are returned immediately to the general fund.

Cash flow and accounting systems are the same as other funds in the agency. Cash flow implementation, however, is based on anticipated revenues. Revenue anticipation is accomplished through detailed studies of the market you wish to address, projection of revenues and expenses, and hard work to promote the facility. Admittedly, this is a very simple explanation of an intensively detailed process.

Depreciation or capitalization practices will depend on accepted accounting procedures in any given agency. Of those agencies that respond to this question in the survey, nine agencies used capitalization and nine used depreciation.

Two comments were prominent when the results were studied. It is critical to set your budget year so revenues are realized on the front end of the cycle rather than the back. For example, a golf cycle should be April through March rather than January through December. This cycle will help to avoid anticipation of revenues while paying bills. It is also very important not to underestimate your financial needs. When purchasing a facility, be sure that you accumulate enough funds to purchase the facility, restore it to the accepted standard that will help it to sell and have enough cash balance for start-up costs.

Ninety percent of the respondents felt

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that it was critical to change staffing and marketing approaches when they engaged in the enterprise fund system. It is vital to have a service oriented staff. Image can make an operation work and the image should extend from the staff to the atmosphere of the facility.

In a study conducted for the White House Office of Consumer Affairs (1986), 96 percent of unhappy customers never complain about discourtesy, but up to 91 percent will not buy again from the business that offended them. Additionally, according to the study, for every complaint received, there are in fact 26 additional customers who are dissatisfied.

When marketing, use private sector ideas and approaches. You must have a entrepreneurial vision and be willing to take calculated risks. Use unorthodox methods of advertising to stimulate the business. Place paid ads in neighbor agency brochures, develop discount programs and early registration incentives to encourage memberships and club use.

The kinds of facilities that use enterprise funds are vast and range from aquatic centers to zoos. The more popular facilities include golf courses, tennis centers, marinas, restaurants, cemeteries, and stables.

Recreation programs that are operated as enterprise funds include softball and other athletics, special events, preschool, aerobics, and other fee classes.

To initiate an enterprise fund system requires an adoption of creative ideas and a change of thinking from the traditional way of providing park and recreation services. In the end, the rewards are great and the dividends satisfying for the benefit of the staff, agency and community that you serve.