KPTV - FOX 12Audit: Ore. schools fund overdrawn by $76 million

An Oregon state agency improperly distributed $76 million from an account that boosts school funding, an oversight that is likely to decrease money available for schools in future years, auditors said in a report released Tuesday.

Auditors from the secretary of state's office blamed accounting procedures at the Department of State Lands for the error.

The money came from the Common School Fund, which was created at statehood to collect proceeds from the management of state-owned land. The State Land Board distributes investment earnings to schools based on student population, and the Oregon Constitution requires that the principal be protected.

Auditors found that the Land Board -- comprising the governor, state treasurer and secretary of state -- distributed too much between 2001 and 2007, paying a portion of the principal in addition to the investment earnings.

Lands Department officials concurred with the auditors' recommendation that the $76 million be repaid and accounting procedures improved. When the Land Board meets next week, agency staff will recommend that investment earnings now in the bank be used to repay the principal, said Louise Solliday, the agency's director.

The Legislature has committed just over $100 million from the Common School Fund during the current two-year budget, roughly 1.8 percent of the total state support for schools.

An account holding investment earnings currently has enough money to repay the principal and still make scheduled payments to schools for the rest of the current budget cycle, Solliday said.

That means schools shouldn't see an impact before 2013, and the precise hit will depend on the performance of investments from the $1 billion fund.

Auditors and agency officials said the error resulted from accounting mechanisms that failed to adequately differentiate principal from investment income.

The largest overpayment was in the 2003-2005 budget, when $53.5 million was paid but just $3.2 million was legally available, according to auditors.

"We don't have the financial records, we don't have anything that tells us why that happened," said Solliday, who joined the agency in 2006.

The audit was also critical of a 2005 law that allowed investment losses to be applied to the principal, instead of to the investment earnings. It was intended to smooth volatility that had historically put Common School Fund payments on a pendulum tied to market performance. But it created a policy where gains were distributed to schools and losses were deducted from the principal.

Agency staff will develop proposed changes for the Land Board to consider at an April meeting, Solliday said.

Auditors began digging into the Common Schools Fund based on the answers agency officials gave to questions asked during a routine annual audit, said Mary Wenger, deputy director of the auditing division.

Copyright 2012 by The Associated Press.  All Rights Reserved.