High-Value Elliott State Forest Underperforms for Schools

Testimony of John A. Charles, Jr.
in the House Agriculture, Natural Resources and Rural Communities Committee
Regarding Management of the Elliott State Forest
January 26, 2009

The Oregon Constitution requires that Common School Trust Lands be managed for maximum revenue over the long term in order to support K-12 schools. In 1992 Oregon Attorney General Charles Crookham reviewed this mandate and wrote, “Non-economic factors may be considered only if they do not adversely affect the potential financial contribution to the Common School Fund.”

Unfortunately, this objective has become secondary to other objectives for the Oregon Land Board. We know this because the Common School forestlands have an empirical track record that we can compare with revenue generation from the portfolio of stocks and bonds held within the Common School Fund, managed by the Oregon Investment Council. The non-timber investments routinely out-perform the timberland investments.

This trend was noted by DSL in its first Asset Management Plan (AMP), published in 1995:

“Over the past twenty years, the Common School Fund’s financial investments (cash, equities and bonds) have consistently obtained above market rates-of-return. Unfortunately, the same cannot be said for the financial performance of the real property portion of the CSF portfolio. Overall, these assets have been consistently underperforming in terms of contributions to the CSF, particularly in comparison to the returns obtained by the State Treasurer’s investment pool. Net revenue for most real estate assets has been declining.”

The Elliott State Forest is the most valuable asset within the CSFL portfolio, with a potential market value of $1 billion or more. Unfortunately, the value has been dropping due to the management strategy employed by DSL/DOF to comply with the federal Endangered Species Act. As DSL noted in the 1995 AMP:

“Largely due to costs associated with protecting endangered species, expenditures incurred by DOF in management of CSFL have increased significantly over the past nine years, reducing net revenues to the CSF. The ratio of expenses to revenues has increased consistently during the study period, increasing by one percentage point annually, on average. This trend is expected to continue.”

As indicated in the attached spreadsheet, the trend has continued. Management costs for the Common School forest lands have more than doubled over the past decade. For the Elliott, total cost of management was 48% of revenues in 2008.

The legislature continues to hope that every two years, DSL managers can be brought in for a conversation about the Elliott, and after some hand-wringing, things will get better. That was certainly the message in May 2007 when the Elliott was discussed by this committee, and DSL speculated that net revenues would soon be going up. Predictably, that forecast proved wrong. At the April 2008 Land Board meeting, State Forester Marvin Brown told the Board, “In July 2007 we were thinking net revenue for the biennium would be $29 million. Instead it’s going to be $23-24 million.”

DOF informed the SLB that management costs would be going up again due to the need for one additional FTE associated with the HCP, increased costs for murrelet surveys, and additional monitoring requirements. State Treasurer Randall Edwards commented: “You [DOF] can’t seem to harvest more and your costs are going up. And hopefully we don’t have a convergence of those lines. But my concern has been that that’s been a trend going the wrong way.”

When the subject was revisited in October, Mr. Brown told the Board: “Net revenue to the CSF last year was down 36%. It was only $4.6 million for 2008, close to the lowest level in 10 years. The volume that was removed in 2008 was about 28% below the five-year average. From 1999-2007, management costs on the Elliott averaged 31% of revenues. This biennium will be about 35%. That’s not tracking in the direction we want it to go but I think there’s a lot of indications here that it’s going to get better.”

Like the Chicago Cubs in spring training, the Land Board always seems to think that this is the year we’ll finally get it right; we’ll actually begin maximizing net revenue on the Elliott. There is simply no reason to think this is going to happen; 35 years of evidence suggests that state management of the Elliott is a doomed financial model.

This has been known for a long time. In 1994 forestry consultant John Beuter was retained by DOF to analyze the Common School timberlands. Mr. Beuter concluded: “Selling the Elliott is the only marketing alternative likely to significantly increase net annual income to the CSF.”

Unfortunately, this recommendation has been consistently ignored by the SLB. Had it been followed in 1995, the CSF today would be worth at least $3 billion, even after the market declines of 2008. Instead, it is only worth about $1 billion. Even by the standards of legislative appropriations, one would think that $2 billion in lost asset value for school funding is something to be concerned about.

John A. Charles, Jr. is President and CEO of Cascade Policy Institute.