Inspector General Patrick Maley said he found no fraud, but rather a pattern of mismanagement that allowed the inappropriate practice to escalate out of control.
His report comes a month after the university's president asked lawmakers for $13.6 million to pay bills that began piling up in October.
Since 2006-07, the university has covered deficits by using state match money for a federal program that provides farming research and assistance throughout the state. The money should be restricted to the program.
The state's only public historically black university used the money as an "interest-free loan, drawn upon and repaid many times a year,'' Maley wrote in his report, dated Monday. "What may have started out as a harmless, but still inappropriate, short-term borrowing for cash flow turned into substantively a permanent loan not formally recognized.''
The diversion continued even after state budget officials advised them last year to stop. The last transfer occurred on Jan. 31, to help process payroll, a week after the university's lawyer issued a legal opinion that federal law didn't allow it.
Earlier this month, university officials agreed to create a separate account for the program and repay the $6.5 million. That means three years' worth of state matching money can finally be spent appropriately, Maley said.
University spokeswoman Sonja Bennett-Bellamy said the practice won't be repeated.
"We appreciate the inspector general's work to bring transparency to a lingering financial issue that has plagued this university for more than eight years,'' she said in a statement Tuesday. "The report clearly indicates that there was no fraud whatsoever.''
Last month, university President Thomas Elzey asked lawmakers for a direct payment of $13.6 million, instead of a loan, saying that would eliminate the university's deficit and start next school year "with a clean sheet of paper.''
He pledged that the university will have a balanced budget next school year.
That relies on enrollment rising to 3,700 students this fall, about 240 more than started last fall and 560 more than currently attend. Yet, university officials attributed its fiscal woes to enrollment dropping by nearly 1,800 students since fall 2008.
State budget officials began meeting with SC State administrators in February after the university submitted a deficit recovery plan.
Maley noted the misuse of state matching money did not cause the university's fiscal crisis but "is only a symptom of a broader financial problem.''
A spokesman for Gov. Nikki Haley said she's committed to getting "this important and proud university back on its feet.''
"But it will require the school's leadership and stakeholders to roll up their sleeves and get serious about addressing the problems,'' Doug Mayer said. “The issues at South Carolina State didn't arise overnight and finding solutions that work to protect the students and safeguard taxpayer dollars will take a real team effort.''