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.

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

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.

 

 

Restore the Trust in State Trust Lands

By Anna Mae Kersey

When Oregon joined the Union, the U.S. Congress granted it control of State Trust Lands, public lands managed by the state to support public education in perpetuity through the Common School Fund.

Currently, 96 percent of Oregon’s remaining State Trust Lands show no signs of generating revenue within five to ten years. The primary reason for this is restrictions placed on the Elliott State Forest, transforming these lands from profit producing assets into deficit inducing liabilities.

The Common School Fund itself, which is invested by the State Treasurer and the Oregon Investment Council, consistently exceeds performance expectations. Over a three-year period ending in 2014, it earned a 13.25 percent average return on investment as opposed to the 0.1 percent earned by the State Trust Lands.

There can be no public trust in an agreement where one side fails to deliver. As such, there can be no trust in Oregon’s State Trust Lands. In the upcoming August State Land Board meeting, 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 in order to maintain the state’s fiduciary responsibility to the fund. The board needs to sell 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.

Sale of Elliott State Forest Would Mean Millions More Each Year For Schools

A new report released today shows that if the Oregon State Land Board sold or leased the 93,000-acre Elliott State Forest, public school funding would increase by at least $40 million annually.

Roughly 85,000 acres of the Elliott State Forest are managed for the primary purpose of raising funds for public schools. These lands are known as “Common School Trust Lands,” and the Oregon State Land Board is required by law to manage them for the trust beneficiaries: public school students. Net receipts from timber harvest activities on the Elliott are transferred to the Common School Fund (CSF), where assets are invested by the Oregon Investment Council in various financial instruments. Twice each year, public school districts receive cash payments based on the investment returns of CSF assets.

Due to environmental litigation, the State Land Board lost $3 million managing the Elliott State Forest in 2013. As a result, the Land Board has recently decided to sell 2,700 acres of the Elliott. An independent analysis conducted for Cascade Policy Institute by economist Eric Fruits shows that selling or leasing the entire forest would dramatically increase the semi-annual returns to public schools, and would do so in perpetuity.

According to Cascade president John A. Charles, Jr., “The Land Board has a fiduciary duty to manage the state trust lands for the benefit of the public schools. Losing $3 million on a timberland asset worth at least $600 million is likely a breach of that duty. The Land Board is doing the right thing by taking bids to sell parcels of the Elliott, and should continue to pursue a path of selling or leasing larger portions of the forest. There is no plausible scenario of Land Board timber management that would bring superior returns to public schools than simply disposing of these lands and placing the funds under the management of the Oregon Investment Council.”

Click here to read the report.

Cascade in the Capitol: Testimony in Support of the Oregon Department of State Lands’ Proposal for the Elliott State Forest

The Oregon Department of State Lands (DSL) is proposing that the Oregon State Land Board―comprised of the Governor, the Secretary of State, and the Oregon Treasurer―sell off 2,700 acres of the Elliott State Forest. The Elliott is a 93,000-acre state forest located on the southern Oregon coast. Most of the forest is required by state law to be managed to generate revenue for the Common School Fund, an endowment for public schools. Due to environmental litigation, timber harvesting has plummeted on the Elliott, making it impossible to fulfill the mission of providing income for the Common School Fund. Therefore, the DSL is proposing to sell three small tracts in order to generate funds.

Cascade President and CEO John A. Charles, Jr. submitted testimony earlier this week in support of the sale:

“I am writing in support of the proposed sale of three parcels within the Elliott State Forest―the Adams Ridge, Benson Ridge, and East Hakki Ridge Tracts. Sale of these parcels is consistent with the Constitutional and statutory directives to the Land Board that it maximize revenue over the long term from Common School Trust Lands.

“Clearly the annual returns on the Common School Fund over the past 20 years have been far superior to the returns from timber harvesting on the ESF, as noted in the Department’s Real Estate Asset Management Plan. Given that the returns on timber harvesting have been declining and will likely decline even more in the near future due to environmental litigation, public schools that rely on the twice-annual distributions from the CSF would be better served with the sale of timberland from the ESF, with the proceeds placed under the management of the Oregon Investment Council.”

Cascade has long supported the lease or sale of Common School Trust Lands, and welcomes the move by the SLB to sell off small parts of the Elliott State Forest. The Land Board will consider the matter at its upcoming meeting in Salem on December 10.