Summary of Report 04-007

October 2003

Report Number 04-007

During this audit, we followed up on recommendations we made in 2001 to strengthen the operations of the Texas Treasury Safekeeping Trust Company (Trust Company), the Texas Guaranteed Tuition Plan (Plan, formerly the Texas Tomorrow Fund), and the Texas Local Government Investment Pool (TexPool). We also pursued additional objectives to audit (1) specific aspects of the Plan actuarial assumptions, asset management, and payment timeliness and accuracy and (2) the Plan's and the Trust Company's contract management processes. Overall, we found that:

• The Trust Company has fully or partially implemented all of our 2001 recommendations, many of which were aimed at establishing basic building blocks through the consideration of industry standards.
  
  While the Trust Company has strengthened its organizational structure, staffing, and internal controls, it still needs to fully implement outstanding 2001 recommendations. Most importantly, it needs to fully implement outstanding recommendations through its implementation of new automated systems. As it continues modifying its structure and processes, other necessary improvements have been identified and may continue to be identified. For example, the banking examination the Trust Company obtained in response to our 2001 recommendation identified weaknesses in governance and financial integrity. The financial audit the Trust Company obtained in response to our 2001 recommendation identified material weaknesses in segregation of duties and accounting reconciliations.

• The Plan has fully or partially implemented most of our 2001 recommendations, but it still needs to fully implement outstanding 2001 recommendations. Most importantly, it needs to implement outstanding recommendations to obtain formal research on investment rate of return assumptions and broaden the range of sensitivity testing in its actuarial reports. It should also be noted that the Plan's financial health has declined since our 2001 audit. Much of the decline in the Plan's financial health can be attributed to conditions in financial markets. In addition, the effect of tuition deregulation on the Plan's financial health is uncertain. As of March 31, 2003, the Plan projected that its liabilities exceeded its assets by $226 million. Under more conservative investment return assumptions, we estimate that deficit could be $318 million. The Plan is guaranteed by the State; therefore, if the Plan's financial health does not improve, the State would eventually be required to contribute funds to the Plan.
  
  The Plan's investment return assumptions exceed those of comparable prepaid tuition plans and two state retirement plans; therefore, they should be re-examined. Implementation of certain measures in areas such as decision making and investment policy also would help the Plan to balance the difficult task of managing assets to provide benefits to participants while minimizing future liabilities to the State. The Plan generally disburses tuition payments in an accurate and timely manner.

• Now managed by external vendors overseen by the Trust Company, TexPool has strengthened the oversight of its investment operations and its monitoring of external vendors by implementing all of our 2001 recommendations.

• The Trust Company did not consistently follow formal policies and procedures designed to ensure that it fairly and objectively awards contracts to external investment managers. The Trust Company and the Plan also lack formal policies and procedures for monitoring contracts. In addition, unlike other state investing entities, the Plan lacks a policy requiring the members of the Texas Prepaid Higher Education Board (Board) and key employees to disclose conflicts of interest regarding potential contractors.
  

Contact the SAO about this report.

Download the PDF version of this report. (.pdf) (HTML)*

Download the Acrobat version of this report summary. (.pdf)

*HTML equivalents for PDF documents are generated utilizing Adobe's PDF Conversion by Simple Form.