Testimony Before the Oregon State Land Board on the Sale of State Trust Lands

Cascade Policy Institute President and CEO John A. Charles, Jr. presented a version of this testimony before the Oregon State Land Board on December 13, 2016.


Re: December 13 SLB hearing on the possible sale of the Elliott State Forest

Dear Land Board members:

I am writing in advance of the December 13 Land Board hearing to summarize my testimony.

First, you were correct in deciding last year that a sale of the trust lands was necessary to fulfill your fiduciary responsibilities to the Common School Fund (CSF) beneficiaries. The continued requests from public land advocates to retain ownership should be ignored.

Unfortunately, your sale protocol is fatally flawed, for two reasons: (1) the four unnecessary “public benefits” requirements inherently devalue the asset; and (2) you are prohibiting competitive bids. Both of these elements ensure that you will not be able to get the best possible offer for the transfer, which you are required to do as fiduciaries.

Any sale should be made through a straight up, no-string-attached auction of the property. That is the only way you can determine fair market value.

To illustrate how much money you are leaving on the table, we’ve done two sets of calculations. In one scenario, we took the difference between the “official” price tag of $220.8 million and the high appraisal of $262 million ($41.2 million), and calculated the value of that over 50 and 100 year periods.

In another scenario, we assumed that the Land Board took the “maximum revenue” approach by dispensing with appraisals and simply selling the Elliott via competitive bid with no public benefit requirements. For this scenario we picked $350 million as a conservative value for what the winning bid might be, then subtracted the official price of $220.8 and used the difference ($129.2 million) as the starting point.

We used two different assumptions about future return rates – the first being the 7.5% used by Oregon PERS, and the second a more conservative rate of 6.0%. The projections are below.

Elliott State Forest sale

Investment projections of net proceeds under various assumptions

Difference between high appraisal and sale price: $41.2 M
Interest rate 7.5% 7.5% 6.0% 6.0%
Time period 100 years 50 years 100 years 50 years
Present value $41,200,000 $41,200,000 $41,200,000 $41,200,000
Future value $56,982,781,049 $1,532,217,537 $13,979,245,841 $758,910,356
Difference between market price and sale price: $129.2M 7.5% 7.5% 6.0% 6.0%
Time period 100 years 50 years 100 years 50 years
Present value $129,200,000 $129,200,000 $129,200,000 $129,200,000
Future value $178,693,575,522 $4,804,915,187 $43,837,829,190 $2,379,883,932

Notice the stunning difference in earnings between the first 50 years and the second 50 years. This is, of course, the miracle of compounding. The refusal of the Land Board to sell off this land in a traditional auction will likely cost public school students somewhere between $44 billion and $179 billion in lost earnings by 2117, and much more in the centuries beyond that. 

You have a fiduciary responsibility to the CSF beneficiaries to get the best possible price for the timberland. That can only come through a traditional auction. I urge you to set aside the one offer in front of you and direct the DSL staff to design a new, competitive bid sale protocol to be implemented during 2017.

Sincerely,

John A. Charles, Jr.

President & CEO

Cascade Policy Institute

How Much Is the Elliott State Forest Worth to Oregon Schools? (Don’t Forget the Value of Compounding)

By John A. Charles, Jr.

Advocates of public schools frequently complain about the need for more money, yet many of them are now objecting that the State Land Board is on the verge of selling off the Elliott State Forest, which is an endowment asset for public schools.

The fact is, the Land Board is required by the Oregon Constitution to maximize revenue from the Elliott. The sale has to go forward because timber management is no longer profitable. But the Board should insist on competitive bids, which it is currently prohibiting. The Board should also remove all restrictions on future timber harvesting.

If the Elliott were sold in a competitive auction, it would likely go for $350 million or more. Let’s assume that the proceeds were invested in a manner similar to the PERS fund and had average annual returns of 7.5%, which is the target rate for PERS.

After 50 years, the investment would be worth $13 billion; but after 100 years, it would be worth $487 billion. The huge difference in the two time periods is due to the miracle of compounding.

Do school funding advocates have a better idea for raising $487 billion? If not, they should support an auction sale of the Elliott State Forest.


John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

New Report Highlights Civil Rights Implications of Oregon Land Use Laws, Urban Growth Boundaries

FOR IMMEDIATE RELEASE

Media Contact:
John A. Charles, Jr.

john@cascadepolicy.org

503-242-0900

PORTLAND, Ore. – A new report released today by Cascade Policy Institute demonstrates that Portland’s rapidly growing housing prices are a major hardship on newcomers, renters, and low-income families. The report claims the ultimate source of Portland’s crisis in housing affordability is the region’s urban growth boundary and that minorities suffer the most from the consequences of high housing prices.

The report, Using Disparate Impact to Restore Housing Affordability and Property Rights, is authored by Randal O’Toole, an adjunct scholar with Cascade Policy Institute, Oregon’s free market public policy research organization, and the author of The Vanishing Automobile and Other Urban Myths.

The report claims the ultimate source of Portland’s crisis in housing affordability is the region’s urban growth boundary:

“The Oregon legislature and various cities have applied band-aid solutions to this problem; but none of them will work and some, such as inclusionary zoning, will actually make housing less affordable. That is because none of these solutions address the real problem, which is that the urban growth boundaries and other land-use restrictions imposed by the Land Conservation and Development Commission, Metro, and city and county governments have made it impossible for builders to keep up with the demand for new housing.”

“Common sense says that restricting the supply of something for which demand is increasing will cause prices to go up,” says O’Toole, who cites the findings of economic studies from Harvard, the Federal Reserve Board, the University of California, and the University of Washington, among others, to conclude that strict land-use regulation is the main cause of unaffordable housing.

Other policies which make Portland-area housing less affordable, the report claims, include lengthy delays in the permitting process, onerous impact fees, and architectural design codes. But these policies would have little effect if developers could meet market demand by building homes in unregulated areas outside of existing cities. Urban growth boundaries not only limit supply, but they shield city governments from outside competition.

“These policies effectively discriminate against low-income blacks and other minorities,” says O’Toole. “Under the 2015 Supreme Court ruling, Texas Department of Housing v. Inclusive Communities Project, they also violate the Fair Housing Act just as much as if Portland put out a sign saying, ‘No blacks allowed.’”

O’Toole explains how this Court decision could have a profound impact on Portland’s housing market. He says the Supreme Court’s ruling said that land use policies that make housing more expensive can be legal under the Fair Housing Act only if they have a legitimate goal and there is no other way of accomplishing that goal without making housing less affordable.

According to Cascade Policy Institute CEO John A. Charles, Jr., “Policymakers think the solution to our housing shortage is to build more tax-subsidized apartments, but simply deregulating the land markets would result in far greater housing supply at lower cost.”

The report, Using Disparate Impact to Restore Housing Affordability and Property Rights, is available here.

Founded in 1991, Cascade Policy Institute is a nonprofit, nonpartisan public policy research and educational organization that focuses on state and local issues in Oregon. Cascade’s mission is to develop and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity. For more information, visit cascadepolicy.org.

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Not One Dollar More

The State of Oregon will sell 84,000 acres of the Elliott State Forest by March 2017, in order to make money for public schools.

However, the lands will not be auctioned to the highest bidder. In fact, they will not be auctioned at all. The State will set the price based on appraisals, and purchasers will pay that price.

If there is more than one offer, the tie will be broken based on which buyer promises the most “public benefits.” Those benefits are defined as public access to at least 50% of the property; preservation of old growth timber; protection of stream corridors; and the guarantee of at least 40 jobs for 10 years.

Evaluating competing offers promising “more jobs” versus “wider stream corridors” will be entirely subjective—in essence, a beauty contest. At a meeting last week for prospective buyers, the Department of State Lands was asked about the possibility of simply offering a higher bid. They responded that if someone bid even one dollar over the appraised value, it would be deemed a “non-responsive” offer and rejected.

Prospective buyers were stunned. The timber is likely to be worth somewhere between $300 million and $450 million, and a high bid could really help schools. But for the State Land Board, price doesn’t matter.


John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

When Will the State Land Board Restore the “Trust” in Oregon’s State Trust Lands?

 

By Anna Mae Kersey

When Oregon joined the Union in 1859, it was granted approximately 3.4 million acres by Congress in State Trust Lands, public lands managed by the state to support public education. In so doing, Congress assigned a fiduciary responsibility to the state to produce a profit from these lands for the Common School Fund in perpetuity. Over time, Oregon sold the majority of these lands in an effort to yield more economic benefits for the fund, with some 772,776 acres remaining under state management.

 

Unfortunately, those lands have been poorly managed, especially when compared with other Western states and the federal government.


 

Average Annual Return on Investment

State Trust Lands vs. Federal Management

2009-2013

Jurisdiction Revenues Expenditures Returns per dollar spent
 
New Mexico $554,218,262 $13,516,608 $41.00
Arizona $231,823,603 $16,629,652 $13.94
Montana $107,610,838 $12,443,132 $8.65
Bureau of Land Mgmt. $4,690,082,024 $1,508,484,072 $3.11
Idaho $66,033,347 $23,572,154 $2.80
Oregon (2013-14) $8,096,821 $7,593,305 $1.09
U.S. Forest Service $571,781,109 $5,708,126,237 $0.10

 

 

 


 

When Oregon can barely break even on lands that other states manage for great profit, it is a serious indictment of leadership by the State Land Board.

Furthermore, only 7,400 acres of the 772,776 acres currently classified as State Trust Lands actually meet the criteria of having either short- or long-term revenue earning potential. This means that approximately 96 percent of State Trust Lands show no signs of generating revenue in five to ten years.

The primary reason for the discrepancy between Oregon’s profit margins and those of its peer states is the endangered species restrictions placed on the Elliott State Forest. These restrictions have transformed these lands from profit producing assets into deficit inducing liabilities.

Oregon, in essence, is in default to the Common School Fund. In addition to its obligation to continue to bring in revenue, it is also legally bound to maintain “intergenerational equity” and “cannot benefit current students at the disadvantage of future students, or vice versa.” Neither current nor future students stand to benefit from a deficit.

In contrast, the Common School Fund itself earns significant net revenue for schools each year. Assets of the Fund are invested by the State Treasurer and the Oregon Investment Council and consistently exceed performance expectations, earning an annual average of 13.25 percent return on investment over the past three years, as opposed to the 0.1 percent return on investment by the State Trust Lands.

There can be no public trust in an agreement where one side, time and time again, fails to deliver. On August 13, the State Land Board will meet in Salem to discuss the Elliott State Forest. It is imperative that board members look to the past to prepare for the future. There is already a precedent of transferring lands to private ownership. The board needs to sell those lands that are costing the fund and future generations, so that the trust in State Trust Lands can be restored.

Anna Mae Kersey is a research associate at Cascade Policy Institute, Oregon’s free market think tank. She recently graduated from Mercer University in Macon, Georgia with an Honors B.A. in Philosophy and is pursuing a Master’s of Liberal Arts at St. John’s College in Santa Fe, New Mexico.

 

 

If the state loses $1.4 billion for schools and nobody notices, did it really happen?

The Oregon legislature is in the midst of its biennial quest for more public school funding. Advocates are so desperate for cash that they are even proposing that the state seize gift cards as “abandoned property” if some portion of the original value remains unused after three years.

While grabbing gift cards is certainly creative, it will not materially affect school funding. A much more lucrative source is available if we have the political will: selling the 93,000-acre Elliott State Forest (ESF) and placing the net receipts (likely to be $400 million or more) into the Common School Fund, where investments typically earn 8% or more annually.

In fact, the failure of the state to sell the Elliott 20 years ago when it was first proposed has already cost schools at least $1.4 billion in lost value. It’s a mystery as to why school advocates are willing to accept this.

The Elliott is located on the South Coast near Reedsport. By law, most of the timber must be managed to maximize revenue for the “common schools.” Unfortunately, over the past 20 years, timber harvesting on the ESF has plummeted due to environmental litigation. As a result, in 2013 the state actually lost $3 million on the Elliott, then lost more money in 2014. These losses drain money from public schools.

This disaster could have been avoided. In 1994, the state commissioned a study of ways to increase net revenues on the Elliott. The consultant reported that “selling the ESF would be the most effective way to maximize CSF revenues.”

The State Land Board (made up of the Governor, the Secretary of State, and the State Treasurer) considered selling the Elliott in 1996 but rejected the idea. That decision locked the state into a revenue death spiral on the forest.

The extent of that loss was quantified by the Oregon Department of State Lands (DSL) in a report published last November. The chart below summarizes the results:

Simulated Prior Elliott Sale versus Actual Elliott Management

 

Simulation Simulated endowment in 2014

Simulated distribution over time period

Estimated residual land value Total value over time period
(Actual) managed for timber since 1995 $1.4 billion $0.7 billion $0.4 billion $2.5 billion
Sale in 1995 and invested proceeds $2.5 billion $1.4 billion $0 $3.9 billion
Buyout in 2005 and invested proceeds $1.8 billion $0.8 billion $0 $2.6 billion

Source: Oregon Department of State Lands, November 2014

The failure to sell the ESF in 1995 cost schools $1.4 billion in lost value. That is a very large number, not only in absolute terms, but compared with public losses elsewhere that have resulted in resignations and political scandal.

For example, the U.S. Congress is investigating the disappearance of $305 million in federal funds spent on Cover Oregon. At the state level, the Oregon Department of Justice has just opened a civil and criminal investigation into the $11.8 million of energy tax credits issued for an array of solar panels installed by several state universities.

Yet the loss of $1.4 billion in school funding seems to be uninteresting to school advocates. No lawsuits have been filed, and no investigations are underway.

The legislature should insist that the Governor, the Secretary of State, and the Treasurer turn the Elliott from a liability into an asset, as required by law. Selling the entire forest is the best option for doing that.


John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.

It’s Time to Change Our Failed Federal Lands Policy

By Ken Ivory

In 1976, Congress changed its “policy” regarding our public lands (Federal Lands Policy Management Act, or FLPMA). This “policy” change sought to retain public lands in federal ownership―ignoring the 200-year-old obligation of Congress to transfer title to our public lands.[1]

In 2009, the U.S. Supreme Court, in Hawaii v. OHA, unanimously declared that Congress does not have the authority to unilaterally change the “uniquely sovereign character of [a state’s] admission,” particularly where “virtually all of a state’s public lands are at stake.” This “policy” change has failed Western communities and schools, forest health, wildlife preservation, watershed management, and jobs and the economy―locally and nationally. The Supreme Court has also called these statehood Enabling Acts promises “solemn bilateral compacts between each State and the Federal Government” where both parties have rights, duties, and remedies for breach―even against the federal government if it fails to perform its duties, including its duty to transfer title of the public lands.

However, because Congress changed its “policy” regarding our public lands:

  • Western communities are dying;
  • Western communities have as little as 10% taxable lands to generate revenues for schools, roads, public safety, and public services for the sick and the poor;
  • Western communities are prevented from creating jobs through the responsible use of their abundant natural resources, which further diminishes tax revenues;
  • Western communities are prevented from harvesting even sick and dead trees (let alone our great renewable forest resources), which would create healthier forests less susceptible to catastrophic fires that kill millions of animals, destroy watershed for decades, and harm life and private property;
  • The FBI is now warning that our forests are weapons for al Qaeda jihad efforts instead of renewable resources for creating wealth, funding schools, and providing for healthier forests;
  • Hunters, fishers, campers, recreationists, and others are denied access to public lands as federal agencies arbitrarily close thousands of roads throughout the West;
  • Western states and local governments are dangerously dependent for funding on a broke federal government that is cutting promised funding, robbing revenues derived from Western lands, and even clawing back SRS monies already paid;
  • Western states get between 30-50% of their total revenues from this same broke federal government;
  • Eastern states are paying nearly $9 billion a year to inflict this harm on Western states;
  • As a nation, we are dependent on China for 95% of the rare earth minerals that are essential for national defense technology and modern electronics (including renewable energy technologies), even though an abundance of rare earth minerals is locked up in federally controlled Western lands;
  • As a nation, we are dependent on foreign sources of oil, gas, and minerals, despite having more than $150 trillion in oil, gas, and minerals (and tens of thousands of jobs) locked up in federally controlled lands.

We have the opportunity of our generation to leverage our voices, through local and state representatives, to compel Congress to change its failed “policy” that is killing Western communities, siphoning funds out of Western schools, closing off Western lands, destroying Western forests, locking up Western resources―and in the process destroying Western and national jobs, economic activity, and tax revenues.

It’s been done before. Did you know that the federal government controlled for decades as much as ninety percent of the lands in of Illinois, Missouri, Indiana, Arkansas, Louisiana, and Florida? Those states simply refused to be silent or take “no” for an answer. They banded together and leveraged their individual, community, and state voices and persistently called upon Congress to honor its obligation to transfer title of their public lands.

There is a solution big enough for the pressing problems of Western states, including Oregon. Congress must change its failed, community-killing “policy.” County and state representatives and their constituents should refuse to be silent or take “no” for an answer until it does. Jobs, school funding, better care for and access to our lands, and our economic future depend on it.

Ken Ivory is president of the American Lands Council and a member of the Utah House of Representatives. He has been a guest speaker on this issue for Cascade Policy Institute, Oregon’s free market think tank.

[1] See, A Legal Overview of Utah’s H.B. 148 – Transfer of Public Lands Act by Professor Donald Kochan, http://americanlandscouncil.org/downloads/Kochan%20Utah%20Public%20Lands%20WP.pdf

Report Shows Possibilities for Elliott State Forest to Make Money for Oregon Schools

Today, the Cascade Policy Institute released a report analyzing the range of policy options for turning the Elliott State Forest from a liability into an asset for Oregon’s Common School Fund.

The Elliott State Forest (ESF), located on Oregon’s South Coast, is part of a portfolio of lands known as “Common School Trust Lands.” These lands are an endowment for the Oregon public school system and must be managed by the State Land Board to maximize income over the long term. Unfortunately, due to environmental litigation, income from the Elliott’s net timber harvest receipts has been steadily declining over the past two decades. In 2013, the ESF cost Oregon taxpayers $3 million, which was a drain on the Common School Fund.

“The State Land Board has been watching the financial returns from the Elliott State Forest steadily decline for over 20 years, while doing essentially nothing,” said Cascade Policy Institute President John A. Charles, Jr.

“The Elliott is now a liability instead of the $800 million asset it was in 1995. Oregon schools deserve better,” said Charles. “The State Land Board has a fiduciary obligation to take decisive action, and the analysis by Strata Policy helps provide a road map for Board decision-making.”

The Land Board in 2014 directed the Oregon Department of State Lands to develop a “new business model” for the ESF. The Cascade report, prepared on contract by Strata Policy, a Utah-based consulting firm, provides a critical review of various options for accomplishing this goal.

The report divides the known options into three categories: viable options, potentially viable options, and individually unviable options.The top three recommendations – the only ones considered “viable” – are full privatization, a land exchange with the federal government, and completion of a Habitat Conservation Plan that would allow logging in habitat currently used by protected species.

The full privatization option was analyzed at length for Cascade Policy Institute by economist Eric Fruits and published as a separate paper in March. Selling or leasing the forest clearly would result in the greatest financial returns to Trust Land beneficiaries over the long term.

A land exchange with the federal government also could result in healthy financial returns to the Common Schools if any lands could be identified for such an exchange, but that is doubtful given the litigious nature of federal forest management in the Pacific Northwest. Moreover, it would take Congressional approval, which likely would take a decade or more to execute. Such delays appear to be a violation of the fiduciary trust responsibilities held by the Land Board.

Development of a Habitat Conservation Plan (HCP) would face the same bureaucratic challenges. Oregon attempted to develop an HCP in cooperation with the U.S. Fish and Wildlife Service and spent $3 million over a 10-year period without gaining federal approval. Before reviving this effort, there needs to be some reassurance from the federal government that an HCP is actually possible.

The Land Board is scheduled to take public testimony regarding ESF management in Coos Bay on October 8, and will discuss options for a “new business model” at its December meeting in Salem.

The full report by Strata Policy may be viewed here.

Report Shows Possibilities for Elliott State Forest to Make Money for Oregon Schools

Today, the Cascade Policy Institute released a report analyzing the range of policy options for turning the Elliott State Forest from a liability into an asset for Oregon’s Common School Fund.

The Elliott State Forest (ESF), located on Oregon’s South Coast, is part of a portfolio of lands known as “Common School Trust Lands.” These lands are an endowment for the Oregon public school system and must be managed by the State Land Board to maximize income over the long term. Unfortunately, due to environmental litigation, income from the Elliott’s net timber harvest receipts has been steadily declining over the past two decades. In 2013, the ESF cost Oregon taxpayers $3 million, which was a drain on the Common School Fund.

“The State Land Board has been watching the financial returns from the Elliott State Forest steadily decline for over 20 years, while doing essentially nothing,” said Cascade Policy Institute President John A. Charles, Jr.

“The Elliott is now a liability instead of the $800 million asset it was in 1995. Oregon schools deserve better,” said Charles. “The State Land Board has a fiduciary obligation to take decisive action, and the analysis by Strata Policy helps provide a road map for Board decision-making.”

The Land Board in 2014 directed the Oregon Department of State Lands to develop a “new business model” for the ESF. The Cascade report, prepared on contract by Strata Policy, a Utah-based consulting firm, provides a critical review of various options for accomplishing this goal.

The report divides the known options into three categories: viable options, potentially viable options, and individually unviable options.The top three recommendations – the only ones considered “viable” – are full privatization, a land exchange with the federal government, and completion of a Habitat Conservation Plan that would allow logging in habitat currently used by protected species.

The full privatization option was analyzed at length for Cascade Policy Institute by economist Eric Fruits and published as a separate paper in March. Selling or leasing the forest clearly would result in the greatest financial returns to Trust Land beneficiaries over the long term.

A land exchange with the federal government also could result in healthy financial returns to the Common Schools if any lands could be identified for such an exchange, but that is doubtful given the litigious nature of federal forest management in the Pacific Northwest. Moreover, it would take Congressional approval, which likely would take a decade or more to execute. Such delays appear to be a violation of the fiduciary trust responsibilities held by the Land Board.

Development of a Habitat Conservation Plan (HCP) would face the same bureaucratic challenges. Oregon attempted to develop an HCP in cooperation with the U.S. Fish and Wildlife Service and spent $3 million over a 10-year period without gaining federal approval. Before reviving this effort, there needs to be some reassurance from the federal government that an HCP is actually possible.

The Land Board is scheduled to take public testimony regarding ESF management in Coos Bay on October 8, and will discuss options for a “new business model” at its December meeting in Salem.

The full report by Strata Policy may be viewed here.

Understanding and Defending Your Property Rights—And Why It’s So Important

Please join us for Cascade’s monthly Policy Picnic led by Pacific Legal Foundation’s Christina Martin on July 14, at noon. An attorney, Christina was a project director at Cascade Policy Institute before joining Pacific Legal Foundation.

For decades, your property rights have faced major challenges from local, state, and federal regulations. Now, the U.S. Supreme Court has begun to push back. Come learn about recent property rights cases to better understand your rights, why they are important, and what you can do to protect them.

Admission is free. Please bring your own lunch. Coffee and cookies will be served. Space is limited to sixteen guests on a first come, first served basis, so sign up early.

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