Lane Community College and the PERS bond

About five or six years ago, when the Public Employees Retirement System (PERS)crisis in Oregon was at its worst, a number of public agencies floated bonds, took the proceeds and sent them to PERS to reduce their Unfunded Actuarial Liability (UAL). Lane Community College was one such entity. The theory was simple. Bonds could be sold for rates between 5 and 6 percent. PERS has an actuarially assumed rate of return of 8% on the funds it manages. Uncorrected, a UAL grows by 8% annually, so giving the money to PERS reduced that cost. It also allowed LCC to fund the UAL over 20 years, a much longer period than PERS would require otherwise.

In one regard, it worked great. The bond spreads that pain over a long period of time and shifts the burden to the next generation. This is particularly true since the bond was back-end loaded, so that initial payments are low and increase over time. Starting at $2 million and change, they pass $7 million in the final year.

Overlooking the immorality of this, it still only worked if PERS produced the 8% return. But that was never a guarantee, it was an actuarial assumption used to calculate the fund's ability to cover future liabilities. PERS may have earned 8% over carefully selected timeframes, more in some, but in the last 14 months they've been losing their shirts.

This includes their investment of the $55 million that LCC sent them. The college was lucky to time the bottom pretty closely and earned a good return over the first four years. But PERS has been hammered and I doubt that today the "side account" for LCC contains more than the $55 million it began with.

So after five years, the college

a) Has a greater UAL than it started with,
b) Still owes just about the full $55 million, since it has hardly been covering accrued interest,
c) Has a steadily increasing bond repayment schedule in the years ahead,
d) Faces a sharp decline in state funding, as Oregon, dependent as ever on income taxes, goes into a sharp recession.

Not all of this will become apparent at once. But there's no doubt it will come into full view over the next four years and budget making for LCC will be gruesome. The college is fortunate to now have available the abilities of Greg Morgan, who replaced the catastrophically incompetent vice-president Marie Matsen in 2007, but it takes more than administrative skills to get out of this mess. It will take a fundamental rethink of the mission of the college.