Summary of Report 03-004

An Audit Report on Higher Education Authorities Established by Westlake and Cameron

October 2002

Report Number 03-004

Overall Conclusion

The entities established by the Town of Westlake (Westlake) and the City of Cameron (Cameron) appear to be operating within the provisions of Chapter 53 of the Texas Education Code and of the Texas Non-Profit Corporation Act. We found no evidence of improper payments in our review of expenses.

Both Westlake and Cameron have issued tax-exempt revenue bonds to be used for educational or student housing facilities.

Westlake and Cameron's higher education authorities and corporations have borrowed a combined total of $153 million through bond issues and installment sale agreements. Proceeds from the borrowings, less issuance and closing costs of more than $4.9 million, were used to acquire $113 million in properties. Annual costs to manage the properties exceed $900,000. In addition, from 1995 through 2002, the Westlake entities awarded student scholarships valued at $664,000.

The costs associated with issuing the bonds for both Westlake and Cameron are significantly higher than the average cost paid by state entities, municipal entities, and other nonprofit education entities. These costs do not represent expense to the State. In addition and in what appears to be common practice, the same firms provide bond counsel, financial advisor, finance counsel, and underwriter services on most Westlake bond issues.

Provisions in the Texas Education Code provide certain advantages to higher education entities in return for educational benefits. In general, higher education authorities and corporations that acquire properties have several advantages over student housing competitors. The higher education entities can secure less expensive financing by issuing tax-exempt bonds. As nonprofit corporations, they are also exempt from federal income and state franchise taxes. Furthermore, current properties are exempt from local property taxes. As a result, local governments will forgo revenues exceeding $2.1 million for the 2001 and 2002 tax years. On the other hand, higher education entities are restricted to leasing only to university students, faculty, and staff, and they fund student scholarships.

In some cases, Westlake entities have entered into agreements that provide specific benefits to the state universities involved. The universities obtain student housing without issuing debt and therefore preserve bond capacity. The universities also receive at least 95 percent of any net cash flow from the projects, and on two projects the universities are relieved of the liability and administrative burden of operating student housing facilities. The universities will also own the properties years from now after all debt is paid. In two of the projects, the universities received monies ($100,000 and $50,000) when the bonds were issued.

Key Facts and Findings

Town of Westlake

Westlake creates entities that purchase student housing properties in Texas cities with universities. The entities also provide scholarships to students in school districts near Westlake. As of August 2002, Westlake had borrowed more than $142 million to acquire or construct student housing properties and had awarded scholarships valued at $664,000. Bond issuance and closing costs on five projects exceed $4.5 million to date.
Since 1995, Westlake has created six entities (one authority and five corporations). The entities currently own properties in Austin, San Marcos, and Denton that are not assessed property taxes and that therefore represent a loss of local tax revenue. Properties in Bryan and College Station have been foreclosed, and one property in Austin was sold. The other property in Wichita Falls is on the campus of Midwestern State University. The Town of Westlake does not receive financial benefit from the entities or the properties.
Current properties were purchased from and are subsequently managed by companies that are affiliated partnerships. Annual costs to manage three current properties and projects exceed $900,000. These costs include program administration services contracted to another company that also provides management services to the town. We reviewed expenses of the Westlake corporations and the property management firms and did not identify any payments that appeared inappropriate or unusual.

City of Cameron

Cameron has created one entity, the City of Cameron Education Corporation (Corporation), which provides borrowers access to the tax-exempt bond market. In contrast to the Westlake entities, the Corporation has not acquired properties or granted scholarships. It has paid $34,900 to the City of Cameron.
To date, the Corporation has issued three series of conduit debt, totaling $30.6 million. (In a conduit debt transaction, the entity that issues the bonds assumes no responsibility for their repayment. The borrower for whom the bonds were issued assumes all responsibility for repayment.) The Corporation loaned the proceeds of two bond issues ($10.7 million) to faith-based organizations in Dallas. Issuance costs on these two issues exceeded $440,000.
The Corporation loaned the proceeds from the other issue ($19.9 million) to one of the Westlake corporations. In addition, borrowers paid issuance fees totaling $45,900 to the Corporation. The Corporation also receives a $10,000 annual sponsorship fee from the Westlake corporation.