By Scott Pierce, CPA, CFP, MBA, RIA (retired), for Island Eye News
Isle of Palms has another multi-million-dollar drainage challenge, not related to water in our streets and yards – it’s called the Marina Enterprise Fund.
Unfortunately for Isle of Palms taxpayers, the Marina has been a complete bust, resulting in a subsidized entity for the primary benefit of the Marina tenant businesses. It has required over $8 million in taxpayer cash commitments to subsidize tenant operations, in just the past 15 years – or about $1,500 per day, every day. This information was derived from the Isle of Palms audited financial statements and recent posted budgets – they are posted back to fiscal year 2008.
For those that may not be familiar with municipal structures, municipalities establish separate Enterprise Funds for segregation of revenue and surplus generating entities for the benefit of the community. The Marina Enterprise Fund is the only IOP Enterprise fund and was established when the Marina was purchased in 1999. Best practice benefits of establishing a separate Enterprise fund include:
- Identifies a total cost of service and related revenues for a service.
- Provides management information to analyze the extent revenues are covering expenditures.
- Retains and maintains investment income and surplus.
- Provides useful information to make decisions on user charges and financing items.
- Provides the value of the enterprise fixed assets and infrastructure and recognizes the cost of the annual depreciation of these assets.
- Provides long-term liabilities in the financial statements thus provides both short and long-term financial perspectives.
A key objective of an Enterprise Fund and the original intention of the Marina purchase, was to benefit the Isle of Palms residents, provide free access to the waterway, offer amenities for Marina visitors, and generate income for the community – or at least not generate losses.
What happened? Prior Councils, including two current members – Jimmy Ward, Ryan Buckhannon – voted to lease the entire Marina, and/or supported extensions as far as 2045, to three service providers at terms that placed all risk and cost of the facility squarely on the IOP taxpayers, while relinquishing all management, access and inbound revenues to tenants. It eliminated free water access at the Marina, for all – a primary objective of the purchase. In addition, residents and visitors have to pay for parking, with all the revenue going to a tenant.
What could possibly go wrong? Well, just about everything. Over the two decades since purchase, aside from published financial statements, there was no outward communication of just how egregious the costs, subsidies and lack of compliance practices have been at the Marina, or just how unbalanced the terms of the leases were/are. This has mostly been made public over the past 4 years by the Mayor and IOP Real Property Committee, who have attempted to right the ship by performing the necessary due diligence, adhering to procurement practices, holding representatives and tenants accountable. Prior Councils
allowed the IOP taxpayer money drain out of the coffers with little oversight, transferred management to a tenant, neglected basic compliance practices and accountability, while IOP’s gem asset (docks, buildings, etc.) was actively depleted during the lease term, causing millions of dollars in required repairs, with no sinking fund.
Result: The IOP taxpayer has absorbed over $8 million in cash and debt for the past 15 years to cover operating expenses, repairs, financing and to replace the depleted capital cost (docks). Over $4 million of those funds to cover cash deficits, have come from other IOP government funds, that could have been spent on other services and infrastructure for the community. Another $4 million has been borrowed to repair years of deterioration of the docks, caused by the tenant businesses. IOP surrendered management control of its own asset, and relinquished a primary intention of the original purchase – free waterway access.
The IOP taxpayer has been taken to the financial cleaners. Next time someone tells you how profitable the Marina is, or how desperate IOP is for revenue, remember, if a dollar of revenue under a bad lease causes $10 of asset depletion and cash deficits, IOP should pass. Future IOP city representatives must be capable, experienced and responsible stewards over all IOP assets.
I believe the forward path with the two remaining anchor tenants, plus optimizing the existing leases to 2045 (manage, compliance), will be the best way to minimize future loss. This will require significant change to lease audit and compliance procedures, an IOP legal right to exercise within the remaining lease structures. It will also right size the footprint at the Marina with two tenants, finally open free access to the waterway and provide quality services for all.
It should be noted that the new restaurant lease, with IOP resident owners, is a tremendous improvement and represents a shared investment/risk model for taxpayers.