Privatizing Oregon's Largest Universities Would Be 'Complex'

Nov 12, 2017

What would it look like if Oregon’s largest public universities fell into private control? It’s an idea that surfaced recently as a possible way to save the state money. But the people who floated the suggestion also acknowledged that it’s a bit of a long shot.

The suggestion came as part of an effort to trim $5 billion of “unfunded actuarial liability” from the state’s public pension system, or PERS. There’s a $25 billion gap between what Oregon will owe its public retirees and what it currently expects to be able to pay them.

In April, Gov. Kate Brown announced she was forming a task force to explore options to cut into that shortfall. She left nearly everything on the table, including selling off most state assets. This month, the task force released a list of “options.”

One of those options was called, simply, “university privatization.” The task force estimates that doing this could raise anywhere from $250 million to $1.5 billion. That’s primarily through the initial process to hand the schools over to private control. There would be operational savings going forward, but those are less clear. And the savings wouldn’t necessarily be dedicated to paying down the public pension debt.

But as the report succinctly notes: “Conversion would be complex.”

How would it work?

At its most basic level, the Legislature could convert all or some of the state’s eight public colleges and universities to independent nonprofits and then simply stop funding them. Of course, pushing them off the cliff would be disastrous for the institutions, which no one wants. These are huge schools with lots of students and have a huge economic impact on their host communities.

But even if you did it that way, it gets tricky very fast. For instance, who owns all of the buildings? The state can’t just give them away. So, a privatized version of a school would need to immediately raise huge amounts of private money to purchase state assets like classrooms, labs and other school buildings, as well as to ensure ongoing operations. The task force says the amount of donations needed effectively removes smaller schools from this scenario, such as Southern Oregon University, Eastern Oregon University, Western Oregon University and Oregon Institute of Technology.

But even though the larger schools—the University of Oregon, Oregon State, Portland State and OHSU—are less-reliant on state funding, their size means they would need a considerably higher level of ongoing private support. And they would need billions of dollars up front, in order to maintain credit capacity, buy state property and increase their endowment in order to maintain a large, stable revenue source.

Is Phil Knight or anyone else prepared to come up with that kind of cash?

The University of Oregon says last year was its best fundraising year ever, with $695 million in donations. But $500 million of that was a single gift from Phil and Penny Knight, dedicated toward the new science campus.

The task force implies that no one, not even the Nike founder, is ready to make the kind of donation necessary to turn a public campus into a private one.

“No philanthropic donor has been identified with the available assets and interest to undertake privatization at this time,” the report says.

If it’s a long-shot, why did the idea even come up?

In a word: Money. If it works, university privatization would be a huge shot in the arm for the effort to pay down the PERS shortfall. And the governor’s task force was basically told to explore any and all options.

In theory, this is one. Privatization gives universities more autonomy to set their own policies, tuition and so on. But the influx of cash that would come from turning the schools into private nonprofits is clearly the big draw.

Aside from the funding challenges, what are the downsides to this idea?

One downside is that if larger schools are privatized, then those smaller universities that remain public could bear a higher cost for some shared administrative services. And of course, there can be a value in letting the state have a say in how higher education is run.

But to a large extent, it’s a matter of history and tradition. The large public universities are closely identified with the state, and have been for generations.

What about the current policy of offering lower tuition for in-state students?

Private schools would not be required to do this. The task force suggests this policy could be maintained by dedicating a portion of the privatization proceeds, as well as future General Fund appropriations, to a fund to offset tuition for in-state students. But this has the obvious downside of eating into the amount of PERS liability that could be paid down using this method.

Aren’t Oregon’s largest schools already more autonomous than they used to be?

Over the past five years, Oregon has transferred more control to the individual schools in the system. The seven traditional schools each have their own independent governing boards. There is still some oversight in the form of the Oregon Higher Education Coordinating Commission. OHSU has an even greater degree of independence, having been designated a “public corporation” in 1995.

Interestingly, a 2013 article published in Pacific Standard magazine, headlined “Breaking Away: Why Several Public Universities Are Going Private,” uses the higher education re-structuring in Oregon as its marquee example ... of public universities going private. The article doesn't explicitly call it privatization. And Oregon's large universities weren’t actually privatized. Otherwise, the PERS task force could not have included this as a revenue-raising option.

What are the chances this will actually happen?

Gov. Brown isn’t too keen on the idea. She more or less dismissed it outright in the press release announcing the task force report, saying she has “serious concerns” about the concept. Thanks to the task force, anyone who brings it up in the future will have some sense of the enormous challenges involved with it.

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