Feb 6 2011

PIedmont Swim Club Lease – Where do Negotiations Stand?

A News Release from Tim Rood, on behalf of the Piedmont Swim Club:

What Piedmont Swim Club Has Agreed to:

1.  We have agreed to a 15 year lease, which gives the city two buy-out rights.  First, if the city builds a new pool facility, it can terminate the lease, provided it gives each member of the club at the time of termination a pass to use the new pool free for one year.  Second, after five years, the city has an annual right to terminate the lease, if it gives each then member of the club a one-year free pass to continue to use the pool and it makes each then member who paid an initiation fee after January 1, 2011 whole, based on a formula, for the cost of that fee so that people won’t refrain from joining the club for fear of losing the value of their initiation fee.  (The formula subtracts $100 from the $1500 initiation fee for each year of membership and reimburses the member for the difference between that number and the cost of the one-year pass the member was given for free.)

2.  We have agreed that the club will contribute $33,333 per year to a Capital Improvement Fund (“CIF”), which will be used for maintenance of and capital improvements to the facilities.  Any money remaining in the fund at the end of the lease will go to the city.

What the Piedmont Swim Club Disagrees With:

1.  The Capital Improvement Fund.  The city wants the right of prior approval, in its absolute discretion, for any expenditure from the CIF.  The club has said that the city cannot have both the right to veto use of the funds and the right to keep the money it won’t let the club use.  That is a classic conflict of interest.  Since the CIF includes the club’s maintenance budget, it is also unworkable: the club would be required to get the city’s prior approval every time it called a plumber.  (Under a separate provision discussed below, the city has prior approval rights over projects in excess of $25,000.)  The club has said it is willing to give the city an annual accounting for the CIF so that the city can question any expenditure it thinks is improper and, if the parties can’t agree, have a neutral arbitrator decide.  That protects the city’s concern that the funds might be misused, without requiring an unworkable, prior-approval procedure or letting the city veto use of the funds so it can keep them and force the club to replace those funds by raising dues beyond the amount the club feels the market will bear.  The club has said, alternatively, it is willing to take the maintenance funds out of the CIF, use them separately, in its own discretion, as it has in the past, and contribute $13,333 annually to the CIF for capital improvements.  It would agree to let the city have prior approval over the use of those funds, provided that approval was not unreasonably withheld.

2.  Lease Language.  The new city attorney completely rewrote the general language of the lease that had been drafted and approved by his predecessors and had been effectively working for the last 46 years.  The club has five basic problems with the new language.

  1. The new language on construction covers “any work” and would require the club to get the city’s prior approval and submit proof of the contractor’s insurance, plans and budgets, before it had a new water heater installed or had a plumber fix a drain or broken pipe.  It would have added weeks or months to last summer’s fiasco with the county over reconfiguring the drains (which was a $13,000 project).  The club said the new language was completely unworkable and it needed exceptions for routine maintenance, emergencies and projects that don’t exceed $25,000.  The city agreed to those exceptions as they relate to its prior approval, but not as they relate to anything else (submission of proof of insurance, plans and budgets).  The club continues to want the exceptions to apply to everything so it doesn’t have to submit proof of a plumber’s insurance or plans or budgets before he fixes a toilet.
  2. The current lease language requires the club to maintain the pool in satisfactory condition.  The new language would require it to maintain the pool in “condition satisfactory to the city” and to permit the city, if things were not to its liking, to fix them itself and send the club the bill.  The club has said it can no more agree to that than the city could agree to let someone replace all the sewers and send the city the bill, a bill for which it hadn’t budgeted and had no money to pay, just because that person felt that, even though the current sewers were working fine, new ones would be that much better.  The club wants to continue using the maintenance language that has worked successfully for 46 years.
  3. The city has proposed new indemnity language that is so broad it would require the club to indemnify the city even for criminal acts and punitive damages that, as a matter of public policy, cannot legally be insured.  Rather than waste time arguing about the details of this language, the club has said that it will accept the language and indemnify the city to the extent things are covered by the club’s insurance, since everyone knows the club’s indemnity beyond its insurance has no value anyway because all of the assets are owned by the city.  Alternatively, the club will accept the indemnity language the parties have lived under for the last 46 years.
  4. The existing lease says that, in a challenge to the lease, the club and the city are each responsible for its own costs of defense and any damages awarded against it.  The city’s new language says the club has to pay for the city’s costs of defense of the lease and damages, in addition to its own.  The club doesn’t have the money to do that and could think of no reason why it should defend the city for a lease the city voluntarily entered into.  The club wants to continue the current concept.
  5. The city has proposed a new, elaborate indemnity and insurance requirement protecting it from liability for the use of hazardous materials.  While some of the chemicals the club uses, like chlorine, are considered hazardous, it is the club, not the city, that is handling them and, if they spill, you clean them up by flooding the spill with water.  There is no underground gas storage tank that could leak and require some huge clean-up of the land, or some other big environmental risk the city might be responsible for, so it is not clear what risk the city feels it needs to be protected from.  The club’s insurance broker, who has represented pools and health club’s for 25 years, is not aware of any pool or club that has this coverage, and the club questions why it should be the first pool required to bear this expense.  Nevertheless, it is investigating the availability and cost of this coverage with its broker.


The February 7, 2011 Staff Report on Swim Club Lease Negotiations:

No staff recommendation is provided, but the February 7, 2011 Staff Report on Piedmont Swim Club Negotiations includes information on the current status of negotiations, as well as a discussion of the fiscal ramifications of the City’s options.  The report states:

“The Piedmont Swim Club has operated for forty six years using the model of a privately owned and operated club leasing the land and facilities from the City. Over the years, this arrangement
has grown to include extensive community service by the Club through its granting of free water time to teams from Piedmont High School and programs of the Piedmont Recreation Department
as well as the charging of greatly reduced fees for use of the pool by the Piedmont Swim Team. In addition, the Club has provided fee based public access to the pools for non-members.”

The staff report documents that an initial sticking point was the payment of rent, which the City demanded and which PSC indicated it could not afford to pay when providing free access to the Piedmont High School Swim Team, the Piedmont High School Water Polo Team, the Piedmont Recreation Department programs, plus greatly reduced fees to the Piedmont Swim Team.  Subsequently, the City converted its demand for rent to a demand for a Capital Improvement Fund.  The staff report indicates the PSC remains concerned that these CIF contributions will be too great to be affordable.    In addition to mandatory  CIP contributions,  the City insists on several new requirements not contained in prior leases:  that PSC pay the City’s attorney fees in any dispute, that the PSC obtain additional insurance for “Hazardous Materials”, and others.

The staff report reviews the fiscal issues associated with a City take-over of pool operations, stating:

“The City is faced with the reality that should the Swim Club cease to exist, the City will need to operate the pool, which will require a significant subsidy from the general fund. In 2006, the City commissioned the Sports Management Group to do a report (the Livingston Report) on the cost of operating the facility as a public pool. This study provided a range of  probable operating costs as well as an estimate of the amount of revenue that the City could reasonably expect to generate. Our best estimates indicate that the subsidy will be between $100,000 to $300,000 per year for operating expenditures only. This amount does not include capital costs. In addition, Mr. Delventhal’s research indicated that some cities are getting out of the business of running pools on their own, rather choosing to seek private parties to operate the pool, as subsidies like the ones mentioned above are hard to afford in lean times.

“It should be noted that the City has never operated a pool before. Because of this, our staff does not have the requisite time or experience to manage such a facility. City operation of the pool will require a new division of the Recreation Department solely devoted to this task and staffed by people with the requisite skills to do so. In this light, the quality of the business arrangement with the pool must be measured against the necessity of a general fund subsidy as large as the one mentioned above.”

The report notes the urgent need to resolve negotiations immediately in order to 1) allow PSC to initiate a membership drive in March which is needed in order to meet the obligations set forth in the lease, or 2) to allow the City to create a new division in the Recreation Department to run the pool prior to July 1st, hire and train of personnel to run the pool, and hire outside consultants to handle issues involved in running a pool, such as obtaining licenses and permits.  (The City Council would be required to make a special appropriation from General Reserve Funds to fund this new Division, since funds to accomplish these tasks are not included in the current budget.)

The report points out the issues involving the pool are, fundamentally, a problem of scarcity:

. . . whomever operates the pool is engaged in the apportionment of scarcity. The pools in Piedmont are not large enough or of the type that allow for the use desired by individual and group users during peak hours. Therefore, difficult choices must be made regarding use, with some people and/or groups always unhappy with the allocations. This will not change if the city takes over the pool. The nature of apportioning a scarce, inadequate resource is inherently likely to make the decision maker unpopular. The City, like the Club, will be lobbied intently by interest groups for use of the facility during peak periods.

Finally, the report indicates that, whereas the PSC members have traditionally subsidized the High School Swim and Water Polo teams and the Piedmont Recreation Department with free use, as well as the Piedmont Swim Team at “hugely discounted” fees, city-operated pools normally require all users to pay for pool time, no matter who the sponsor may be.  The report observes that, with a city-operated pool, the PHS Swim Team, the PHS Water Polo Team, and the Piedmont Swim Team will either have to pay for their pool time or require a subsidy out of the City’s General Fund.  Their current subsidy, provided solely by swimmers via PSC membership fees, will no longer exist.

Details: Full text of the City’s most recent offer and the PSC’s most recent offer is attached as Appendix A and Appendix B of the February 7, 2011 Staff Report on Piedmont Swim Club Negotiations.

Link: An Editorial By the Piedmont Civic Association – Free Community Pools, Unicorns, and Other Myths

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