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An Audit Report on the Texas State University System Foundation, Inc. and Transactions Involving the Texan Hall Dormitory at Angelo State University

March 2009

Report Number 09-023

Overall Conclusion

The Texas State University System Foundation, Inc. (Foundation) received $1,833,696 in student housing revenue when it sold the Texan Hall dormitory, located on the Angelo State University campus, to the Texas State University System (System) in June 2006.

A portion of this transfer did not conform to the resolutions passed by the boards of the Foundation and the System. Specifically, due to an error in the closing documents for the sale, $891,721 that was originally authorized to be transferred to the System was instead transferred to the Foundation.

The $891,721 was originally authorized to pay principal and interest on the System's Series 2006 bonds and for repair and replacement of the Texan Hall dormitory. The Foundation used $228,984 to make a partial interest payment on behalf of Angelo State University on the Series 2006 bonds issued by the System, but the Foundation retained the remainder of the funds it received. The Foundation's financial statements for fiscal year 2007 show that repair and replacement funds were designated for the benefit of Angelo State University. The repair and replacement funds totaled $261,515, but Angelo State University has not received those funds. The Foundation asserted it did not receive the three-year maintenance plan it required from Angelo State University in order to disburse repair and replacement funds. Angelo State University asserted that it submitted that plan.

When the Texan Hall dormitory was sold, the Foundation also received an additional $102,301 that had originally been allocated to the management company for the dormitory.

Appendix 3, Figure 2, page 16, provides detailed information on all of the funds the Foundation received when the Texan Hall dormitory was sold.

It is important to note that the funds the Foundation received were student housing revenues and not bond proceeds. The $1,224,088 that remained in original bond proceeds (Series 2002) at the time of the sale of the Texan Hall dormitory was transferred into an escrow account to reduce the amount of new bonds issued. All new bond proceeds (Series 2006) were used to redeem the original bonds and pay issuance costs.

Auditors also identified weaknesses in controls over the student housing project at both the Foundation and the System. For example:

- The Foundation did not adequately monitor the management company or trustee for the Texan Hall dormitory.

- The Foundation did not maintain sufficient financial records and did not consistently produce annual financial statements.

- The Foundation and System did not ensure that contractually required ground lease payments were calculated correctly or made when due.

Maintaining adequate controls over the student housing project was particularly important because the composition of the Foundation's board of directors and the use of certain advisors resulted in less than arm's-length transactions between the Foundation and the System. The Foundation's board of directors includes current and former members of the System's board of regents and System administrators. The Foundation and the System shared the same bond counsel and financial advisor for the bond transactions. (See Appendix 4 for detailed information regarding the parties involved in the construction and operation of the Texan Hall dormitory.) Additionally, the control weaknesses auditors identified potentially affected three other dormitories that the Foundation constructed and operated at other System component institutions.

Based on the results of this audit, the State Auditor's Office will consider conducting an audit of the Foundation if resources become available.

Contact the SAO about this report.

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