ND Legacy Fund: Who is in Control? Part III

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KX News digs deeper into information released by Callan in response to questions surrounding the money managers whom it recommends, and whether they pay Callan for such recommendation

Last month in Part I and Part II of our ongoing investigation into the management of North Dakota’s Legacy Fund, KX News reported that the State Investment Board is advised by an out-of-state company, Callan LLC.

We also reported that Callan recommends other out-of-state firms to invest the taxpayer’s money from our more than $8 billion Legacy Fund. And, we reported on how these firms invest Legacy Fund dollars everywhere but North Dakota.

In Part III of our series, we dig deeper into Callan’s influence over the State Investment Board and the Legislature’s Advisory Board, and into why some documents Callan provided in response to Treasurer Beadle’s inquiry have not been made public.

We recently asked Rep. Keith Kempenich, who is the former chair of the Legacy Fund Advisory Board, how much control Callan has over the SIB.

“Callan doesn’t have any control on the State Investment Board. They don’t have any control on the advisory board,” said Kempenich.

Kempenich says Callan only advises the board, but looking at the votes recorded in the minutes of previous meetings going back two years, we have been unable to find a recommendation that did not get an 11-0 vote.

We also asked Lt. Gov. Brent Sanford, who chairs the State Investment Board, to explain why every vote always goes 11-0 with Callan’s recommendations.

“Well, we would hope that with the Retirement Investment Office (RIO) staff and the State Investment Board being involved from the beginning of the process to the end, that you’d have good selections at the end for investment manager decisions, and that might be terminating an investment manager, that might be hiring a new investment manager that might be changing an asset allocation. But what a consultant does for the pension plan for the sovereign wealth funds for the state investment boards is they help with how you manage the direction given by the client boards, whether it’s pension funds, they invest 60% in equities, and Legacy Fund says 50% equities, then we have to hire the investment managers to invest those funds. And so those are the conversations that happen with RIO staff with State Investment Board itself. And Callan assists in that,” explained Sanford.

An article earlier this year in the Fargo Forum said that the state has retained Callan for more than 30 years without subjecting the firm to a competitive bidding process.

Sanford told KX News that Callan has been contracted with the state since before the Legacy Fund was established in 2010.

Callan is the state’s chief investment advisor. Yet KX News has not been able to find any record of Callan advising the state that their own contract should be re-bid on a regular basis.

Shortly after taking office earlier this year, newly elected State Treasurer Thomas Beadle asked Callan questions about the company’s past problems in other states.

Beadle, who also sits on the State Investment Board, said he wanted to “make sure we have transparency and accountability,” and “to make sure our taxpayers have confidence in this outcome.”

“These are questions they’ve had to answer for decades, especially since some the accusations before,” said Beadle.

Beadle asked specifically about “pay-to-play” allegations.

Pay-to-play is the practice of money management firms using financial arrangements outside the bidding or selection process that may give one money manager an advantage over another.

Reports from 2002-07 indicated Callan faced allegations suggesting possible conflicts of interest or pay-to-play arrangements with pension funds in other localities. However, KX News has not found any current lawsuits or investigations regarding Callen.

A month after Beadle sent his letter to Callan, the Fargo Forum reported that nearly all of the Legacy Fund money managers that Callan recommended for work in North Dakota paid Callan’s educational arm for research and other services.

In their May 10, 2021 response to Beadle’s questions, Callan acknowledged receiving these payments but claimed the payments do not influence who they recommend investing our Legacy Fund monies.

Callen’s response provided a list of the current SIB management firms that pay them but asked the information be kept confidential.

The document with that information, identified as Attachment E to Callan’s response, is somewhere in the offices of the State Investment Board.

But KX News has found no record of it ever being provided to the public.

So the question remains: Do the firms that pay Callan the most money get the most work in North Dakota? Attachment E will help us answer that question if it’s released.

KX News has reached out to Sanford and other members of the SIB asking for the release of Attachment E, and other financial information. However, the SIB says the information is confidential under the North Dakota Records Act because fees paid by investment managers to Callan constitute confidential commercial and financial information under the law.

They instead directed us to a report prepared by Callen which provides no specific fee information.

At this point, the state’s position remains the same — the public does not have the right to know if the money managers that pay Callan the most money are getting the most work in North Dakota.

We asked Sanford why should an out-of-state firm such as Callen have a say in whether that information is public or not.

“It’s the contractual agreement with Callan and the State Investment Board in the RIO office. And, if it was an in-state firm with one of our investment firms could bid for this work. I would venture a guess that it would be a very similar agreement from them as well,” said Sanford.

We then asked Sanford why he is opposed to releasing that as public information.

“I’m not opposed to anything that’s legal. And so this is not legal from everything that’s been given to us by the Attorney General’s office by our executive director by staff. It’s not legal for us to do so within the contractual arrangements with the consultants,” said Sanford.

KX News looked at the confidentiality provision of the contract and confirmed that the SIB is required to protect information covered by any specific exemption under the open records law if, in its discretion, it determines an exemption applies. In this case, they said the confidential commercial and financial information exemption applies.

So long as the SIB asserts the exemption to the open records law, we and you will never know the amounts those consultants recommended by Callen pay to Callen for other services.

We have reached out to Callan for comment on this story, and they responded with a letter but requested KX News keep all content confidential.

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