Multiple Agencies
A Review of Controls Over Investment Practices at Six Major State Investing Entities
Report Number 97-014
November 1996
Overall Conclusion
Although controls over investment practices are adequate at most of the major investing entities, there are opportunities for the Legislature, governing boards, or management to enhance accountability for, or performance of, the investments managed by these state entities. The six entities reviewed, with investments of approximately $100 billion as of March 31, 1996, help ensure that sufficient monies are available to pay retirement benefits, fund public and higher education, and pay the State's operational costs.
Controls over investment practices are generally adequate at the four entities with the largest long-term portfolios (Teacher Retirement System, Texas Education Agency, Employees Retirement System, and The University of Texas System). At the State Treasury, which primarily manages shorter-term investments and has now merged with the State Comptroller of Public Accounts, improvements are needed in monitoring and in documentation of policies and procedures. Controls over long-term investments made by the State Treasury on behalf of the Texas Lottery Commission appeared adequate to ensure that future amounts are sufficient to pay prize installments.
Key Facts and Findings Related to Crosscutting Issues
Periodic independent investment reviews of the State's largest investing entities are not required, with the exception of a recent consultant review of the Teacher Retirement System. Reviews by investment experts would give the Legislature independent assessments of these entities' investment strategies and investment performance.
Constitutional restrictions on the use of capital gains and ordinary investment income of the Permanent School and University Funds may impair managements' ability to optimize long-term performance of those funds. A constitutional amendment eliminating those restrictions would provide more flexibility in attempting to maximize long-term growth in both the corpus and the distributions from those funds.
Statutes affecting similar investment operations of four of the largest investing entities are not consistent. Requirements differ concerning the extent of investment expertise on governing boards, independent investment reviews, evaluation and analysis of investment performance, and the extent of securities lending indemnification. These differences could impact the quality of board. decisions and legislative oversight, the perceived objectivity and reliability of reported investment performance, and the income from securities lending activities.
Public accountability for investment operations may be diminished when nonprofit corporations are established to manage state investments. State laws governing state employee and officer conduct, open meetings, and open records may not apply to the nonprofit investment corporations authorized by the 74th Legislature to manage the investments of the Texas Education Agency and The University of Texas System. The University of Texas Investment Management Company's (UTIMCO) meetings are not open to the public and the minutes are considered confidential.
Key Facts and Findings Related to Individual Entities
The State Treasury should improve controls over investment practices in several areas. Improvements are needed in portfolio monitoring by executive management and in documentation of important policies and procedures. The State Comptroller of Public Accounts, who is now responsible for the State Treasury's functions, is in the process of contracting for an outside management control audit of these functions which should help identify and correct existing weaknesses.
The Board of Regents of The University of Texas System should consider using an independent investment consultant to strengthen its ability to meet its investment oversight responsibilities and to ensure that it does not rely solely on information and recommendations from UTIMCO. In addition, adequate documentation of adherence to ethics standards should be maintained in investment files.
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