DALLAS - With oil prices plummeting to half of what they were three months ago, the University of Texas Board of Regents has cancelled plans to raise $1 billion for the state's Permanent University Fund through the sale of oil and gas properties.

The plan, approved by the UT System board of regents in July, was supported by Texas Gov. Rick Perry and Lieut. Gov. David Dewhurst, as well as Land Commissioner Jerry Patterson. Patterson chairs the Board for Lease of University Lands, an obscure agency that manages oil and gas leases on PUF lands.

The proposed sale, designed as a forward contract, unraveled as oil and gas prices plunged, said UT spokesman Matt Flores.

"They were in the process of crafting the deal and of course things changed," Flores said. "You could safely say the price of oil had something to do with it."

At roughly $63 per barrel, oil has fallen close to the $60 per barrel that state Comptroller Susan Combs cautiously used to project state revenues for the 2008 fiscal year ended Aug. 30. In January, when the state was reviewing economic scenarios, that price seemed absurdly low.

In her economic outlook issued last week, Combs noted that production tax collections for natural gas were up 42% for fiscal year 2008 and that tax revenues for oil were up 72% over the previous year.

Meanwhile gasoline tax revenue have fallen four of the last five months, with the number of miles driven in Texas down 2.8% in July, compared to 3.6% nationwide.

The state's constitution authorizes the UT Board of Regents to issue bonds and notes backed by the PUF for universities in the system.

For the UT System, the addition of $1 billion to the $12 billion PUF was not expected to increase bond issuance significantly, since current indebtedness is only about half of the limit set under the state constitution. University debt is allowed to rise to 20% of the fund's market value.

However, the deal would have allowed the UT System to take advantage of then high oil prices and low interest rates and would have added $50 million per year to the annual payout to 18 campuses and six agencies in the UT and Texas A&M University systems supported by the PUF. The payout, known as the Available University Fund is set at 5% of the PUF, and generally goes toward bond debt, construction and faculty salaries.

UT receives about two-thirds of the annual payouts from the PUF, with the A&M System receiving a third. For fiscal year 2007, distributions were about $415 million.

The PUF, established by the Constitutional Convention of 1875, began with a million acres and added another million in 1883. Oil was discovered on the so-called "University Lands" in 1923, when the Santa Rita No. 1 hit a gusher in Reagan County. The pumping rig for Santa Rita No. 1 now sits on the UT campus in Austin.

Since then, the University Lands have produced billions of dollars in revenue for the UT and A&M systems through royalties, bonuses and rentals.

The Board for Lease of University Lands has complete authority over the leasing of oil and gas and includes the Texas Land Commissioner, two members of the board of regents of the University of Texas System, and one member of the Texas A&M University System board.

The PUF carries triple-A ratings from all three ratings agencies.

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