Oregon Voting on Bonds for First-Ever State College Fund

Oregon voters will decide Nov. 4 whether to let the state sell bonds to create a first-of-its-kind endowment to boost financial aid for college students.

A ballot question known as Measure 86 would authorize a constitutional change permitting the state to borrow for purposes other than capital projects. The proposal, which grew out of frustration with lawmakers slashing higher-education funding, assumes Oregon can produce endowment investment returns that beat the cost of paying back the bonds, said Ted Wheeler, state treasurer.

“I don’t want people to think I’m crazy,” Wheeler, a Democrat who has spearheaded the campaign for the measure, said from Salem, the state capital. “It’s a bold proposition, but considering where we’re starting, it requires us to take some bold steps.”

Oregon would become the first state to create and run an investment trust fund for higher education if the measure passes, according to Wheeler. He said it would take as much as $500 million of bonds to seed the endowment depending on interest rates, and that the money would be managed alongside the state’s $70 billion pension pool.

Recession’s Toll

States have only begun making up for cuts to higher education following the 18-month recession that ended in 2009. Oregon reduced aid for public colleges by 34 percent over five years, to $3,875 per full-time equivalent student last year, the fourth-lowest funding level in the U.S. behind Colorado, New Hampshire and Vermont, according to data compiled by the State Higher Education Executive Officers Association.

“States have recognized that this is a cost they can shift onto the buyer, which is the student or student’s parents,” said Tim Duy, an economics professor at the University of Oregon in Eugene. Selling bonds and investing the proceeds is “a clever way of locking in the state’s contribution to education,” said Duy, who supports the measure.

The endowment would supplement the Oregon Opportunity Grant, a tuition-aid program dating back to 1971 for lower-income residents going to college in the state. While the program distributed $51.6 million last year to about 33,500 students, it has failed to keep pace with demand, awarding grants to about 20 percent of qualified applicants, according to Wheeler.

State Obligation

The bonds would be an obligation of the state, while investment earnings from the endowment would go to tuition aid. Wheeler has estimated that the funds would earn about 7 percent a year on average, after the pension fund logged a 10.9 percent weighted average annual return for the past 30 years, according to the treasurer’s office. The endowment would also raise money through donations.

Governments nationwide, from Illinois to Orange County, California, have used a similar approach to bolster their retirement systems, selling taxable debt and reinvesting proceeds through their pension funds.

While borrowing costs close to generational lows make the approach attractive, the deals’ success is a question of timing, according to a July report from the Center for Retirement Research at Boston College. With stocks gaining after the recession, the majority of pension bonds have generated positive returns as of February, according to the center. That’s a change from mid-2009, when the financial crisis left most of the deals with losses.

Discomfort Zone

If Oregon voters approve, the proposal goes back to the Democratic-controlled legislature, which would have to decide how much to borrow. Oregon, rated one step below Aaa by Moody’s Investors Service, has about $5.3 billion of general-obligation bonds and “above-average debt ratios,” the ratings company said in a June report.

“Some people are not comfortable with use of debt,” said Tobias Read, a Democrat in the state legislature representing Beaverton, who backed the bill passed last year sending the bond question to voters.

The Cascade Policy Institute, a nonprofit based in Portland that supports limited government, has led opposition to the ballot question. The group argues that Oregon should follow states such as Texas that are focusing on reducing costs by promising to deliver public college degrees at a lower tuition.

Taxable Debt

“While the measure might help some specific students, the additional tax money will likely increase the overall cost of the higher-education system,” Steve Buckstein, an analyst at the institute, said in a telephone interview.

Oregon voters are also being asked to legalize marijuana and re-elect Democratic Governor John Kitzhaber, who supports the bond plan. DHM Research, a Portland-based polling firm, found in a survey of 516 registered voters that 35 percent support the debt measure, 41 percent opposed, and 25 percent were undecided. The error margin of the poll, released Oct. 13, was 4.3 percentage points.

If Oregon borrowed $500 million, it would generate enough revenue to increase the grant program by 50 percent, according to Wheeler, the treasurer. The state would have to sell taxable securities because the money is being reinvested for gains instead of going toward a tax-exempt public project. The money would go directly to offset the cost of tuition and students wouldn’t have to repay the funds.

School Autonomy

Massachusetts, with the same Moody’s credit grade as Oregon, issued $200 million of taxable general obligations Oct. 22, with a portion maturing in November 2019 priced to yield 1.71 percent, data compiled by Bloomberg show. Five-year Treasuries yielded 1.43 percent that day.

The University of Oregon, the state’s flagship public school with more than 20,000 students, released a similar bond plan in 2010, proposing the state borrow $800 million to create an endowment, with investment returns replacing annual funding. The proposal failed to gain support in the legislature.

Oregon’s public universities have sought greater autonomy and have ramped up fundraising as public aid declines. Lawmakers last year approved a measure enabling the schools to raise tuition, issue revenue bonds and hire and fire their presidents. Tuition and fees across the state’s university system rose 50 percent from 2005 to 2012, according to Wheeler.

While schools always welcome more aid, they’re also concerned that lawmakers might cut other funding, said Wim Wiewel, president of Portland State University.

“Any initiative that looks to expand the amount of financial assistance to students is a good thing,” said Wiewel. Yet “there’s always a worry it will come out of our hides.”

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