Lane Community College is toast

I've run for the LCC Board three times now, all unsuccessfully. In all three, in varying degrees, I've argued that the college spent money on grand gestures, such as KLCC and the boutique Women's Program, which could be better spent on getting larger numbers of students an education they could afford.

It doesn't matter now. The Oregon Public Employee Retirement System (PERS) has sunk the ship. Or is slowly sinking the ship in a process that will continue for years. Retrenchment will be the order of the day for the next twenty years. Those things I said should be replaced by more effective operations will gradually die off, not to be replaced by better options. There is no money left for good options.

This may seem grim, and far beyond anything yet appearing in the news, but it's all online, waiting for anyone who wants to check the numbers and consider the implications. PERS posts its monthly returns online. A year ago, PERS will roughly fully funded, not including the side accounts (more about them later). It shows a loss of 27% for 12 months on its investments. Since the actuarially assumed ROI is 8%, this puts it down by a third compared with where it needed to be.

But it's much worse than that. Two asset classes -- private equity and real estate -- have done so badly that they can't be properly valued. So PERS is carrying those investments at cost, which is reports to the last thousand dollars even though the market is not known within a billion dollars. Those two classes at the end of December represented a third of the PERS regular fund, $15 billion out of $45 billion. Knowing what highly leveraged positions have done in the past year, it seems certain that they have lost most of that money. It would be odds on that they've lost 80% of it.

January was another bad month in the market, and PERS probably dropped two billion more. A proper valuation would probably be between $30 billion and $35 billion on January 31. If the total PERS UAL is under $25 billion, it would be surprising.

Bringing us back to LCC. In 2003, LCC floated a $53 million bond and created a PERS side account. The theory was simple, borrow at a little over 5% and let PERS invest it at 8%. Unfortunately, after several good years, PERS has had an awful year and wiped out all the earlier returns. LCC has paid nothing on the principal and consequently now has a $55 million debt and a $30 million side account. Again, this is pending an honest valuation by PERS.

The LCC portion of the PERS UAL is hard to know, but I think half a percent is reasonable. That would make it $125 million. Add the $25 million shortfall resulting from the bond, and PERS represents a $150 million hole for LCC.

I suppose it could be as low as $100 million, although I'd be really surprised if it were less than $120 million. Whatever the figure, it's a colossal sum and will require contributions that would average $10-15 million (principal and interest) if spread out over 20 years. Since LCC won't even begin to dent the problem for several years, until the issue hits the board upside the head and even not then immediately, the cost is eventually going to reach $15-20 million/year.

If anyone can tell me where this will come from, I'd be interested to hear.

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.