State Treasurer’s Opportunity Initiative is seriously flawed

by Bob Clark

5 Reasons to Oppose the Oregon Opportunity Initiative (state wide Initiative 402)

The 2013 Oregon legislative session approved for referral to Oregon voters state Treasurer Wheeler’s Oregon Opportunity Initiative (Senate Joint Resolution 1).  Oregonians should vote No, as the Oregon Opportunity Initiative as currently designed is fraught with excessive costs and risks.

The Oregon Opportunity Initiative would ask the Oregon legislature and governor to issue general obligation bonds, give all the monies raised from the issuing of these bonds to a newly created Student Opportunity Fund overseen by an unelected (and as yet unspecified) administrative entity, and obligate the state of Oregon to repay the bonds with interest.  The administrative entity would invest the bond monies transferred to it and provide college scholarships (assistance) to qualifying students using various criteria.  The Oregon Opportunity Initiative is also recently reviewed in Nigel Jacquiss, “Mining Fool’s Gold,” Willamette Week, September 4, 2013, page 8.  I share the skepticism highlighted in Mr. Jacquiss’ article, and list below the reasons I oppose the Oregon Opportunity Initiative as it will go to voters in November 2014.

1.        The State’s Outstanding General Obligation Bond Debt Could Rise Sharply.

The State Treasurer’s Opportunity Initiative documents indicate the State would borrow $500 million in general obligation debt to begin funding the Student Opportunity Fund, with additional state borrowings expected.  This would mean upping the state’s total outstanding general obligation debt by roughly ten percent just as an initial step.  The actual borrowing limit stipulated in the Initiative is 1% of the real market value of all properties in the state of Oregon.  Currently, this would allow the State to borrow up to $5 billion, roughly, representing a doubling of the state’s current total outstanding general obligation debt.  In practice this upper amount of issuance is unlikely to occur, though. The Treasurer’s office says, as a matter of administrative policy, the state actually manages its outstanding general obligation debt so associated debt servicing costs do not exceed 5% of the general fund.  This should restrain to some degree general obligation bond issuance for the Opportunity Initiative.  Yet, that the Oregon Public Employee Retirement System has run an unfunded actuarial liability of as much as $14 billion should give citizens pause as to how much the state might end up borrowing and giving to the Student Opportunity Fund (and once the bond monies are transferred to the Student Opportunity Fund they are no longer freely available to the legislature, per the Initiative).

2.        The Interest Cost to the State of Borrowed Monies Gifted Is Relatively Expensive.

Opportunity Initiative documents estimate the interest rate for Oregon General Obligation bonds will be 4.5% per year, which is in line with various Oregon General Obligation bond offerings available from various bond brokers over the past several months.  Currently, college students with similar qualifications to those possibly targeted by the Opportunity Initiative have access to federal government sponsored loans bearing an interest rate of less than 4% per year.  Moreover, there are ways to effectively reduce this interest rate via various forms of federal student loan forgiveness/deferral, especially with the enactments and executive orders implemented by Congress and the President of the U.S. in the year 2012.  This begs the question:  Instead of having the State pay 4.5% or more in interest costs to aid college students, why not allow college students to borrow money from the federal government at a lower rate of interest?  Oregon State could alternatively assist qualifying college students by changing the Oregon state tax code to allow a deferrable tax credit for college loan interest costs against income.  (An added benefit of this alternative form of assistance would be it doesn’t end up giving college assistance from the State to those students who leave the state once graduating from college, as is plausible with the Oregon Opportunity Initiative.)

3.        Investments for the Student Opportunity Fund may Under Perform.

Corporate financial officers as a matter of practice routinely issue warnings for investors that actual results may be less than expected.  The State Treasurer in touting his Opportunity Initiative does not have such a guarded approach about the returns he expects from investing Student Opportunity Fund monies in stocks, bonds, and other financial assets.  Opportunity Initiative documents presume the Student Opportunity Fund will earn a 7% annual rate of return, which the documents seem to imply is a conservative assumption.  The State Treasurer’s Office Website touts a ten year annual rate of return of roughly 8.7% on investments made for the Oregon Public Employee Retirement System (PERS).  However, there are two weaknesses I suspect in this highlighted rate of return.  One, I suspect it is a simple average of annual rates of returns, rather than a compounded average annual rate of return (which might be a full percentage point lower).  Two, the ten year period (end of 2002 to end of 2012) includes only one down year in the stock market (as measured by the U.S S&P 500 index and including dividends) when historically there are usually between two and three down years on average.  More to the point, the audited actuarial reports available on the PERS website for the time period end of 2001 to end of 2011 (last available annual report and containing two down stock market years) show a PERS compounded annual average rate of return of only about 4.5% (which is not higher than the expected interest cost of establishing the Opportunity Fund).

4.        College Assistance and College Education Advancing without Opportunity Initiative

Opportunity Initiative documents bemoan the flat allocation of state general funds to the Oregon University System and tout the 40-40-20 goal which seeks to have 40% of adult Oregonians hold a bachelor’s or advanced degree, 40% hold an associate degree,  and the remaining 20% hold a high school diploma.  Can we get real?  First, total college financial assistance which includes all forms of assistance not just that from the state legislature is growing sharply at nearly 15% per year since the school year 2000-01, extending through the last year reported by Oregon University System Fact books, 2010-11; and as highlighted in the graph below (data source can be found at http://www.ous.edu/factreport/factbook/2012 and other fact books listed at this website).  Moreover, Opportunity Initiative documents ignore the fact that Oregon State is already forgoing revenues to help College students, in the form of tax deductions for the Oregon College Savings Plan, and in some cases, college tuition tax deductions.   Second, the 40-40-20 goal which the Opportunity Initiative partly bases its need is pure fantasy and a miss-appropriation of public funds.  Most telling is the last page of the full Opportunity Initiative document which projects educational levels required by occupation in Oregon for the year 2020 (this PDF file is listed in the middle of the following web page:  http://www.oregon.gov/treasury/AboutTreasury/Pages/Opportunity-Initiative.aspx).  This page shows less than 45% of all occupations will require an associate or higher level degree, not the 80% implied by the 40-40-20 goal.  We should realize public resources going to the Oregon University System out of state general funds at some point come at the expense of other public needs, including K-12 education.

5.        There’s a Promising New Way to Aid College Education:  Pay Forward, Pay Back

The State Treasurer, Governor and invited parties brainstormed and hatched the Opportunity Initiative in 2011.  But college students in the trenches championed a different way forward for college financing called Pay Forward, Pay Back; and following suit, the Oregon legislative session of 2013 passed House Bill 3472 which takes the first step in establishing and authorizing a pilot program for students to attend college tuition “free” if they sign a binding contract to pay a percentage of their wages/salaries for a stipulated period of time following graduation.  The payback from wages and salaries, post-college, would go to a yet unspecified, revolving fund.  Here’s the potential beauty of this Pay Forward, Pay Back program:  Oregon colleges could very well find takers for revenue bonds issued against the payback revenues from college graduates.  In essence, the market is left to test the merit of this form of college financial assistance; and not government officials touting schemes like the Oregon Opportunity Initiative.  Oregonians would not be on the hook, via taxation or reduced public services, for the Opportunity Initiative’s interest rate costs, principal repayment, or failed investment returns.  Moreover, Pay Forward Pay Back could lead to more independence among Oregon Universities and inject a new dose of competition among universities which might lead to lower tuition and other college education prices even for those students not signing up for “free” tuition and/or fees.