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Texas Report Questions Management Of Funds in Teacher-Retirement System

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A six-month investigation by the Texas attorney general's office has called into question the management of some of the funds in the state's teacher-retirement system.

While emphasizing the overall stability of the $35 billion retirement program, state prosecutors said their probe has raised serious questions about the management of real-estate loans that make up $2 billion of the agency's portfolio.

"Although teachers' benefits are not in jeopardy, our purpose is to insure that the fund is never at risk,'' Attorney General Dan Morales said in releasing the report this month. "This money belongs to the hard-working, dedicated teachers of our children.''

Officials of the retirement system quickly questioned the accuracy of the report and called the charges "misstated and untrue.''

The investigation began last year after the attorney general's office was asked to write a legal opinion on the system's authority to hold and sell real estate. The resulting report has now been sent to the Austin district attorney's office for further action.

Sitting on Bad Loans

The state charges that senior administrators of the retirement system sat on millions of dollars in bad loans and permitted conflicts of interest by some officials.

The report notes that the state constitution prohibits the system from directly investing in real estate, allowing only the buying of mortgage certificates secured with property.

By foreclosing on 13 of the 53 real-estate ventures it participated in during the 1980's, the system held an improper investment, according to the prosecutor's office. Further, the report faults system officials for failing to dispose quickly of the foreclosed properties.

Retirement-system officials countered that the depressed Texas real-estate market had made it impossible for them to sell the properties.

The report also questions financial dealings by officials managing the system's real-estate portfolio.

Specifically, the report alleges that, in restructuring a loan for a completed construction project, an additional $16 million was borrowed and placed in an escrow account. The report could not trace how the money was distributed.

In addition, the report contends, a conflict of interest occurred when the son of a former head of the system's real-estate division was paid commission and consulting fees for insurance policies covering the foreclosures.

But system officials responded that it had been an outside consultant, not the agency itself, that had recommended hiring the insurance agent, without regard to his connection to the former system executive.

The retirement system's governing board called the report "one side of the story.''

But Mr. Morales argued that the proof of the charges was clear. "Pervasive conflicts of interest have existed and continue to exist throughout the system,'' he said.

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