Selling Bonds to Buy the Elliott State Forest Would Be a Breach of Fiduciary Trust

By John A. Charles, Jr.

State Treasurer Tobias Read has announced that he is now prepared to support a plan being developed by Gov. Kate Brown to sell bonds that would “buy out” the Elliott State Forest from the Common School Trust Land portfolio and keep it in public ownership.

Unfortunately, this would saddle taxpayers with debt service on the bonds, thereby reducing or even eliminating the financial benefits of adding the bond proceeds to the corpus of the Common School Fund. This would be a breach of fiduciary trust on the part of the State Land Board.

Members of the public may not understand that bond sales don’t create “free” money; the face amount must be repaid over some designated period of time, with interest.

For example, if the legislature authorizes the sale of $100 million in general obligation bonds, total principal and interest will likely exceed $150 million over several decades.  All Oregon taxpayers will be legally obligated to pay off that debt.

Another option might be the sale of bonds backed by future earnings on the Oregon Lottery. But lottery revenues are essentially the same as General Fund revenues. Paying debt service on lottery-backed bonds will inevitably take money from public schools.

The Governor’s proposal to have the public buy a forest it already owns is akin to someone losing money in an IRA, then transferring funds into the account from a 401(k) to make up for the loss. If both accounts are owned by the same individual, there is no net gain; the loss is just disguised.

As the state’s elected Treasurer, Tobias Read should know better. The only way to decouple the Elliott State Forest from the Common School Fund is to sell it to private parties with no taxpayer financing involved.

Such an offer is sitting in front of the Board today. The Board should accept the offer of $220.8 million from the Lone Rock Timber consortium, place the net proceeds into the Common School Fund, and let the money begin immediately working for public school students.


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

 

It’s Finally Time to Sell the Elliott State Forest

By John A. Charles, Jr.

At the February 14 meeting of the State Land Board, the Board voted 2-1 to enter into negotiations with a private consortium to sell 82,450 acres of the Elliott State Forest. Gov. Kate Brown, who was on the losing end of the vote, has ordered the Department of State Lands to come back in April with an alternative plan that would allow for continued public ownership.

Not only is the Governor being petulant, but the alternative she favors has been studied repeatedly since 1995. That was the year that the Board released its first “Draft Asset Management Plan.” The Elliott was then valued at $850 million, but annual revenues were dropping due to rising management costs.

The Land Board was told by a consultant that “selling the Elliott State Forest would be the most effective way to maximize Common School Fund revenues.” The Board is required by the Oregon Constitution to make money on the Elliott because it is an endowment asset for public schools.

Sadly, that recommendation was rejected. Instead, state officials spent the next 20 years engaged in fruitless negotiations with federal regulators regarding compliance with the Endangered Species Act. Every time the Board thought an agreement to cut more timber had been reached, it turned out to be a false summit.

Meanwhile, advocacy groups used the Elliott as a legal piñata. They successfully sued the Land Board so many times that the forest stopped generating any revenue by 2013 and actually became a financial liability for Oregon schools.

The costs of this wait-and-see approach were not trivial. According to a report published by the Board in 2014, the Elliott had cost the Common School Fund $1.4 billion in lost earnings since 1995.

Things actually worsened after the report was published. In 2015 the Land Board decided to finally sell the Elliott; but instead of taking competitive bids, the Board established a fixed price. The Board also downzoned the land by imposing multiple limitations on future timber harvesting.

The result was that the Board received a single offer in 2016, for the state-mandated price of $220.8 million. The net result of 22 consecutive years of public ownership was a loss to the Common School Fund of at least $1.62 billion.

Governor Kate Brown now wants to renege on the sale entirely (despite voting for it in 2015) and use state bonding capacity to “buy out” a portion of the Elliott. This is probably the worst idea yet. The public already owns the forest; why would we want to go into debt buying ourselves out?

While the $220.8 million offer now on the table is a far cry from the $850 million we could have received in 1996, it’s better than hanging on to a dead asset. Secretary of State Dennis Richardson and State Treasurer Tobias Read voted to sell the forest, and that was the appropriate decision. Adding $220 million in new revenue to the Common School Fund endowment will generate many billions of dollars for schools over the next century.


John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization. A version of this article originally appeared in the Portland Tribune on March 16, 2017.

Land Board Votes to Sell Elliott State Forest

By John A. Charles, Jr. 

On February 14 the Oregon State Land Board – comprised of Governor Kate Brown, Treasurer Tobias Read, and Secretary of State Dennis Richardson – voted 2-1 to sell 82,450 acres of the Elliott State Forest to a consortium of private parties led by Lone Rock Timber Management Company. The agreed-upon sale price is $220.8 million; and the net proceeds will be placed in the Oregon Common School Fund (CSF), an endowment for public schools.

This parcel is a small part of the Oregon Common School Trust Land portfolio of 1.5 million acres of lands that must be managed by the Land Board to maximize revenue over the long term for the benefit of public schools.

For many years the Elliott was a money-maker, but environmental litigation steadily reduced timber harvesting to a trickle. For the last three years the Elliott has actually lost money, which prompted the Board in August 2015 to vote unanimously to sell the Elliott and put the proceeds into alternative investments.

As a long-time Board member, Gov. Kate Brown repeatedly voted to sell the forest, but in December 2016 she changed her mind and announced her intent to use state bonding capacity to buy a portion of the Elliott and keep it in public ownership. Treasurer Ted Wheeler and Secretary of State Jeanne Atkins agreed with her conceptually, but no formal vote was taken and both of them have since left the Board.

At the meeting earlier this week, Gov. Brown made a motion to terminate any further negotiations to sell the forest, despite the fact that Lone Rock and its partners had spent at least $500,000 putting together a good-faith offer in response to the Land Board’s sale protocol. Her motion never received a second.

New Treasurer Tobias Read indicated that he was uncomfortable walking away from the offer at the last minute, and that the legal doctrine of “undivided loyalty” to Common School Fund beneficiaries – public schools – compelled him to sell the money-losing forest. Secretary of State Dennis Richardson concurred and the Governor was out-voted.

Cascade Policy Institute has been urging the Land Board to sell the Elliott since 1996, when the forest was valued at roughly $800 million. It was evident to us that over the next several decades, environmental lawyers would treat the Elliott like a legal piñata and file continuous lawsuits to prevent timber harvesting. That is exactly what happened, turning this vibrant forest into a net liability by 2013.

Cascade published a number of technical papers demonstrating that over virtually any time period and under any reasonable set of assumptions, Oregon schools would be better off if the Board simply sold the forest and put the net proceeds into stocks, bonds, and other financial instruments. These papers were ignored by multiple generations of Land Board members, including John Kitzhaber, Ted Kulongoski, Jim Hill, Phil Keisling, Randall Edwards, and Kate Brown.

Many editorial writers are urging the Land Board to “hit the pause button” on this sale, but the fact is the Board has been “pausing” since at least 1995. As timber harvest receipts steadily declined over the next several decades, Oregon wasted more than $3 million trying to negotiate a so-called “Habitat Conservation Plan” with the federal government that would shield Oregon from further litigation. Such an agreement was never reached.

In a report paid for by the Department of State Lands in 2015, experts found that the failure to sell the Elliott in 1995 – as recommended by a Department of Forestry consultant – had cost public schools $1.4 billion in lost earnings over a 20-year period.

Gov. Brown’s last-minute effort to buy back timberland the public already owns was poorly thought out. Most of the media observers – who tend to favor public ownership – have apparently overlooked the fact that any revenue bonds sold by Oregon would have to be paid off by profits generated on-site. Since the Elliott has been steadily losing money under public management, it’s unlikely that anyone would even buy such bonds.

Although selling the Elliott was the right thing to do, we will never know if the public received fair market value because the Land Board refused to take competitive bids. In 2016 the Board established a price of $220.8 million based on multiple appraisals, and no one was allowed to offer a higher amount. Clearly, this was a bizarre way to sell a valuable asset and demonstrates how Kate Brown, Ted Wheeler, and Jeanne Atkins consistently abdicated their fiduciary responsibilities in favor of a political agenda to retain public ownership.

Treasurer Read and Secretary Richardson deserve credit for moving forward with the sale. Neither of them wanted to do it, but they understand that they have an obligation to current and future public school students to add value to the Common School Fund.


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

Kate Brown’s Math Problem

By John A. Charles, Jr.

For the past 18 months, the Oregon Land Board has been working to sell the Elliott State Forest. The decision to seek buyers was based on the fact that the Elliott is losing money, and it is supposed to be making money for Oregon schools.

At its December meeting, the Board was presented with a firm offer of $221 million from a private buyer. Instead of accepting the offer, the Board did nothing. Governor Kate Brown said she wants to sell bonds to buy the Elliott so that it remains in public ownership.

The only problem is that the public already owns it. Selling bonds to buy ourselves out makes no sense.

Land Board members have a fiduciary obligation to maximize revenues from the Elliott for the benefit of students. Increasing taxes on the parents of those students to pay off bonds would be a breach of fiduciary trust.

The only way to ensure that taxpayers benefit is to sell the Elliott to private parties and place the proceeds in the Common School Fund, where the investment earnings are shared with school districts.

The two new Land Board members—Treasurer Tobias Read and Secretary of State Dennis Richardson—should work with the Governor to accept the private offer and move on.


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

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.

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Oregon Land Board Low-Balls Elliott Timber with Fixed-Price “Bidding”

Last week the Oregon Department of State Lands announced the “fair market value” of 82,450 acres of Common School Trust Lands within the Elliott State Forest as $220.8 million. The number was picked by Roger Lord of the consulting firm Mason, Bruce & Girard after analyzing three different professional appraisals. Proceeds from the land transfer will go to the Common School Fund and be invested for the long-term benefit of public school students.

At a public meeting held in Salem, the Director of the Department, Jim Paul, reiterated that anyone hoping to acquire the 82,450 acres must offer exactly $220.8 million. Any offer above that will be considered “outside the protocol” and deemed “non-responsive.” This announcement was the latest step in the Land Board’s plan to dispose of the Elliott property in a non-competitive bid process.

The Land Board has invented a “fair market” value of the Elliott timberland without allowing a market to actually function. The price investors are willing to pay might be higher than $220.8 million, or even multiples of that number. Unfortunately, we’ll never know because the Land Board is refusing to take competitive bids. Clearly, this is a breach of fiduciary trust. Public school students, teachers, and parents deserve to get top dollar in this once-in-a-lifetime sale of a public asset.

Elliott Forest Oregon.gov

Oregon Land Board Low-Balls Elliott Timber at $220.8 Million

FOR IMMEDIATE RELEASE

Media Contact:
John A. Charles, Jr.

503-242-0900

john@cascadepolicy.org

 

PORTLAND, Ore. – Today the Oregon Department of State Lands announced the “fair market value” of 82,000 acres of Common School Trust Lands within the Elliott State Forest as $220.8 million.

The number was picked by Roger Lord of the consulting firm Mason, Bruce & Girard after analyzing three professional appraisals which valued the land at $262 million, $225 million, and $190 million, respectively.

All proposed “Elliott Acquisition Plans” are due to the Department of State Lands by 5:00 p.m. November 15, 2016. If there are multiple plans accepted, the Oregon Land Board will choose the winning offer at its December meeting. Proceeds from the land transfer will go to the Common School Fund and be invested for the long-term benefit of public school students.

At a public meeting held in Salem, the Director of the Department, Jim Paul, reiterated that anyone hoping to acquire the 82,000 acres must offer exactly $220.8 million. Any offer above that will be considered “outside the protocol” and deemed “non-responsive.”

Today’s announcement was the latest step in the Land Board’s plan to dispose of the Elliott property in a non-competitive bid process. This prompted Cascade Policy Institute President John A. Charles, Jr. to make the following statement:

“The Land Board has invented a ‘fair market’ value of the Elliott timberland without allowing a market to actually function. The price investors are willing to pay might be the $262 million appraisal, or it could be multiples of that number. Unfortunately, we’ll never know because the Land Board is refusing to take competitive bids. Clearly this is a breach of fiduciary trust. Public school students, teachers and parents deserve to get top dollar in this once-in-a-lifetime sale of a public asset.”

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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Trust Lands Should Be Auctioned to High Bidder to Benefit Schools

In his recent guest column in The Oregonian, Director of the Oregon Department of State Lands Jim Paul summarizes the history of the Elliott State Forest. He correctly notes that the Common School Trust lands within the Elliott must be managed as an endowment asset for public schools.

Since the Elliott is now a net liability instead of an asset due to environmental litigation, the State Land Board has appropriately concluded that the Trust Lands should be sold.

Unfortunately, the sale will not take place through competitive bidding, because this is not an auction. On July 27, the Land Board will announce the results of an appraisal and set the sale price as the appraised price. If you dare to offer even one dollar more, your bid will be set aside by state lawyers as “nonresponsive.”

The three Land Board members – the Governor, the Secretary of State, and the Treasurer – do not want prospective purchasers to compete on price. They want them to compete on four non-financial variables, which will greatly complicate the sale process.

All offers must include at least the following set of “public benefits”: (1) at least 50 percent of the timberland must remain open for public recreational use even after it is transferred to new owners; (2) 120-foot no-cut buffers on each side of fish-bearing streams must be left permanently untouched; (3) at least 25% of the older stands of trees must be left standing; and (4) at least 40 full-time jobs annually must be provided over the first ten years of ownership.

If there are multiple offers at the same mandated price, the tie will be broken by the strongest package of these public benefits. But that turns the process into a beauty contest. There is no objective way to compare an offer with 130-foot buffers with another offer that has only 120-foot buffers but proposes to employ 50 people each year rather than 40.

Public school students, parents, and employees deserve to receive fair market value for surrendering this asset. An “appraisal” is not the same as market value.

Evidence of this is everywhere. For example, almost everyone selling a home in Portland right now knows that the final sale price is likely to be higher than the listed price, because the Portland market is red-hot.

When the State of Indiana decided to lease the operations of the state turnpike to a private vendor in 2006, the “experts” estimated that it might be worth $2 billion. In fact, the winning bid from a Spanish-Australian consortium was $3.8 billion.

In 1984 the Portland Trail Blazers famously appraised the value of Michael Jordan to be lower than that of Sam Bowie. Subsequent events proved that the Trail Blazers had made one of the worst talent “appraisals” in pro sports history.

And just last month, a Chinese investor paid $3.4 million for one lunch with investor Warren Buffet (the purchaser gets to bring seven of his closest friends). How many of us, if asked on the street, would have appraised a single lunch with anyone as being worth $3.4 million?

But that’s the point of competitive bidding. Only the market knows the value of an asset. If even one person in the world is willing to pay millions for a single lunch, then that is exactly what the lunch is worth. If we don’t allow a market to set the price of Elliott State Forest timberland, we’ll never know its true value.

There is a simple fix to this problem. The Land Board should require that all offers for the Elliott Trust Lands include the mandated four public benefits, and then select the highest responsible bid.

School beneficiaries such as local school boards, employee associations, and parent booster groups should prepare now to sue the Land Board for breach of fiduciary trust if the Board continues with its absurd plan to give away Common School Trust Lands without competitive bidding. The appraised value announced on July 27 should be the starting point for competitive offers, not the end point.


A version of this article originally appeared in The Oregonian on July 14, 2016.

Why is the State Land Board selling the Elliott State Forest without competitive bidding?

In August 2015 the Oregon Land Board (Governor Kate Brown, Secretary of State Jeanne Atkins, and Treasurer Ted Wheeler) voted to sell roughly 82,450 acres of “Common School Trust Lands” within the Elliott State Forest because the state was losing money on those lands. Under Oregon law, School Trust Lands are supposed to make money for schools.

Given the ongoing losses, the Board reached the correct decision. Unfortunately, the sale protocol adopted by the Board is bizarre. The Board will establish a price for the land based on appraisals, and that will be the only price accepted. If you dare to offer $1 more, your offer will be declared “non-responsive.”

How can this make sense when Trust Lands serve an as an endowment for public schools? Trustees of any endowment have a fiduciary obligation to make decisions in the best interest of beneficiaries. The 82,450 acres of timberland being sold in the Elliott may be worth anywhere from $300 million to more than $400 million, but no one knows the exact value. Setting a non-negotiable price through appraisals means that potentially vast amounts of money could be left on the table.

Anyone who has been to a charity fundraising auction knows that the estimated value of something frequently turns out to be wrong—by a lot. That’s why we have competitive bidding.

The same is true in business transactions. Just last month, for example, Alaska Airlines bought Virgin Airlines for $2.6 billion, or $57/share—a price that was 80% higher than what the shares had been trading for prior to the sale.

Instead of bidding on price, the Land Board plans to pick a winning offer based on which prospective purchaser has the best package of “public benefits.” The minimum level of benefits has been defined by the Board as the following: (1) at least 50 percent of the purchased timberland must remain open for public recreational use; (2) no-cut buffers of 120 feet on each side of fish-bearing streams must be left permanently untouched; (3) at least 25% of the older stands of trees must be left intact; and (4) at least 40 full-time jobs annually must be provided over the first 10 years of new ownership.

These benefits may have merit, but using them as the way to choose the best offer will turn the sale protocol into a beauty contest. There is no objective way to compare an offer including 130-foot buffers with another offer that has only 120-foot buffers but proposes to employ 50 people each year rather than 40.

This protocol is going to create a nightmarish decision process for the three Land Board members, while violating their fiduciary obligations to schools.

There is an easy solution to this problem: Simply make the four public benefits a minimum requirement, and then pick the highest-price offer meeting those requirements. Maybe we’ll find out that the Elliott is worth a lot more than it’s been appraised for.

Anyone who works at a public school, serves on a school board, or has a child enrolled at a public school should be outraged at this giveaway.


This article originally appeared in the Salem Statesman Journal on April 30, 2016.

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