Just a heads up to whomever else works like this.. Here are a few notes.
We do something similar like you will find in this article:
Moving the app folder out of the main CI install keeps things easy. Our file system looks like:
/CI/ SVN External: system http://dev.ellislab.com/svn/CodeIgniter/trunk/system/
This insures we always have the latest CI core running and keeps the .htaccess files tidy.
A decent auth lib we have used a lot is dx_auth It needs a few tweaks after install to work the way we want, but overall is reall nice.