An Audit Report on Controls over Permanent School Fund Real Estate and Collection of Oil and Gas Revenue at the General Land Office
June 2004
Report Number 04-040
Overall Conclusion
House Bill 3558 (77th Legislature) significantly increased the funds available to the School Land Board's (Board) and General Land Office's (Office) real estate investment program (program) for the Permanent School Fund (PSF). In response, the Board and Office worked to comply with legislative requirements to purchase $150 million of state real property for the PSF, and they also developed and generally adhered to reasonably comprehensive investment policies and procedures. However, because the Board and Office did not implement investment controls that represent best practices among institutional real estate investors--in particular, they did not initially retain an investment consultant or hire external portfolio managers--the following resulted:
- A lack of ongoing access to external expert advice in designing and implementing the program's policies and strategies.
- A slower-than-forecasted pace of investment. The Board and Office invested $77 million (17 percent) of the more than $453 million that was available for investment between September 1, 2001, and November 30, 2003. This led to the program's retaining high cash balances (more than $318 million as of November 30, 2003), forgoing the opportunity to earn higher overall return, and earning less than the $11.7 million the Office had anticipated earning for the Available School Fund during the 2002-2003 biennium.
- Performance reporting that did not fully demonstrate investment results.
- Targets for the real estate investment portfolios value and rate of return that might be overly optimistic, and geographic limitations on investments that could cause the Board to accept higher risk without an expectation for increased return.
During our audit, the Board was in the process of hiring an external consultant. If the Board procures all of the services it has requested, this should help to eliminate most of the above issues. The Office's controls over land holdings and over revenue collections for oil and gas leases that support the PSF are generally adequate.
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