Summary of Report 01-017

January 2001

Report Number 01-017

Overseen by the Legislature, the six investing entities covered by our follow-up audit manage $61 billion in investments as of August 31, 2000. The Legislature and the investing entities generally strengthened controls over investment practices but still have opportunities to improve them further. However, we are concerned that a decline in the State Board of Education's (SBOE) controls over its oversight of the $22 billion Permanent School Fund (PSF) has impaired its decision-making process.

The six entities substantially implemented our most significant prior recommendations to strengthen controls. We generally assessed their controls as adequate in our 1996 and 1997 reports. The Legislature also strengthened the State's investment practices controls but has additional opportunities to enhance the ability of the major investing entities to manage state investments and increase the amount of useful information the Legislature receives about investment management.

Since the previous audit, SBOE's ability to make prudent contracting and policy decisions in its oversight of PSF has declined. Members of SBOE, an elected div class="aboutText", normally rely on others for impartial technical investment advice, but they have not had access to a functioning investment advisory committee. Some SBOE members began to deeply mistrust the PSF staff and some outside PSF consultants; they began to rely on at least one informal advisor, often privately. This advisor's undisclosed financial relationships represented a conflict of interest.

• A 1999 amendment to the Texas Constitution permitted The University of Texas Board of Regents to increase the Permanent University Fund's (PUF) distributions by $108 million in the current biennium. The amendment should also help achieve better management of future PUF distributions, a higher expected rate of return on PUF investments, and maintenance of the highest possible credit rating on bonds guaranteed by the PUF.
  
  
• The passage of similar constitutional amendments for the Permanent School Fund and Higher Education Fund could produce comparable benefits.
  
  
• Most governing boards that oversee the largest investment funds are not required to have a majority of members with substantial investment expertise. Establishing a requirement for some resident expertise on these boards might make problems with the oversight and decision-making process, such as those at SBOE, less likely to occur.

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