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North Dakota paid its top investment management firm millions without competitive bidding process

North Dakota pays millions of dollars every year to investment firms to manage its $19.4 billion portfolio, which includes public pension funds, insurance funds and the Legacy Fund. But state law does not require the contracts to go through a competitive bidding process.

An exterior view of the North Dakota State Capitol building
The North Dakota State Capitol is seen Jan. 17, 2021. Michelle Griffith / The Forum
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BISMARCK — The state of North Dakota has paid its top investment consultant $12.9 million over the past 20 years without subjecting the firm to a competitive bidding process, an arrangement allowed by state law.

The North Dakota State Investment Board has relied on investment consultant Callan for more than three decades to help select investment managers to steer the state’s $19.4 billion investment portfolio.

Every year, the State Investment Board pays millions of dollars to investment firms. Callan has a unique role in recommending other investment firms and working with the state on its overall investment strategies.

The Forum analyzed payments to Callan, which guides the state in hiring investment management firms, in reports, invoices and contracts obtained through public record requests.

Investment management services are one of several categories of fiduciary services — meaning that those securing the services are required by law to act in their client’s best interests — that are exempt from state procurement requirements .


Ordinarily, purchases of equipment, supplies and services must go through a formal procurement process involving requests for proposal and bids. The lowest bidder meeting the specifications is typically chosen.

The law grants exemptions for certain services, however, including employee benefit services, trust-related services and investment management services obtained by an agency with fiduciary responsibility for those services.

Callan, which has been an investment consultant for the state since the late 1980s, has come under scrutiny recently for recommending investment management firms to the State Investment Board, some of which have paid Callan for services, including research and education.

As previously reported by The Forum , Callan received payments from 12 of 14 investment management firms that the State Investment Board hired upon Callan’s recommendation to manage parts of the Legacy Fund.

Callan discloses those fees to the State Investment Board but asked officials to keep the figures confidential, and the information was not disclosed to The Forum through a public records request. Callan’s compliance chief also said it maintains strict “firewalls” between its educational arm, which receives payments for services from other investment firms, and its investment advisory unit, which works with investment clients, including the State Investment Board.

The state's Legacy and Budget Stabilization Advisory Board has asked Callan to explain how it manages potential conflicts of interest in a meeting on Wednesday , June 16.

Bidding law stirred controversy

The exemption for fiduciary services was first included in a 2003 law that otherwise required services to fall under state procurement requirements, said Sherry Neas, an official with the North Dakota Office of Management and Budget who oversees procurement.

“It was actually fairly controversial,” she said of the exemption, noting that an earlier effort to change the law governing procurement of services failed in 2001.


Legislators directed her office to draft guidelines in consultation with stakeholder clients, which helped shape the law passed in 2003, she said.

Exempt agencies including the State Investment Board and its staff arm, the Retirement and Investment Office, establish their own procedures for selecting consultants, with guidelines from the Attorney General’s Office, Neas said.

“It’s just a narrow exemption for those fiduciary services,” she said. “It’s not a blanket exemption.”

Dave Hunter, the state’s chief investment officer, said his office reviewed Callan’s performance along with the other nine largest institutional investment management consultants before agreeing to a five-year contract that runs to June 30, 2024.

Hunter presented an analysis of Callan’s performance to the State Investment Board in January 2020 ranking it first among three finalists chosen from the top 10 firms.

“If you do that comparison you see that Callan generates the highest return,” he said.


  • New 'invest in North Dakota' program to launch soon A portion of North Dakota's $8.7 billion Legacy Fund will be available to invest in North Dakota businesses. An out-of-state firm has been selected to review investment proposals, and bankers in the state want to get the chance to manage some of the portfolio.

  • Above board or 'pay to play'? Firm that guides North Dakota's $19.4B portfolio comes under fire The firm that works closely with the North Dakota State Investment Board to select investment fund managers receives payments from some firms it recommends to the state — an arrangement coming under scrutiny.

Over the preceding decade, with Callan’s input in selecting investment managers for the state’s portfolio, state investment funds generated an “excess positive return” above benchmarks totaling about $500 million, investment staff said to the investment board in a January 2020 report.
The report compared Callan to two other leading firms, RVK and Aon, comparing returns over one-, three-, five- and 10-year periods, noting whether they met investment benchmarks. Callan’s performance was compared to non-Callan firms grouped together, but not broken out separately in the report.


“They’re competing against themselves,” said Luke Heck, a Fargo lawyer who has advocated investing part of the Legacy Fund within the state. “They’re showing comparative numbers for themselves.

“Why have healthy competition and bidding when all you have to do is evaluate them?”

Pension lags in comparison

The Institute for Pension Fund Integrity compared public pension fund performance in an August 2019 study. The analysis determined whether the pension funds outperformed a passive, index portfolio that invested 60% in stocks and 40% in bonds.

North Dakota was ranked among the 10 lowest states in the comparison, with a performance that lagged behind the passive index. South Dakota was the top-ranking state in the comparison.

Hunter, who has been North Dakota’s chief investment officer since 2013, said South Dakota’s pension fund outperformed North Dakota over 20- and 30-year horizons, but North Dakota has done better over the past one- and five-year periods.

“We’ve actually been doing pretty good the last one to five years,” he said. Client boards, including those for teacher and public employee pension funds, set the investment goals, which the State Investment Board strives to meet or exceed.

Last year, North Dakota ranked 31st among the more than 200 public pension plans in the country, Hunter said.

“North Dakota’s a very fiscally conservative state,” with a very conservative investment philosophy to match, Hunter said. That typically results in a mix of investments that are less volatile but also less likely to yield very high returns, he said.

The asset allocation of the $8.7 billion Legacy Fund, for example, is 50% stocks, 35% bonds and 15% real assets. Since its inception in 2010, the Legacy Fund’s investment returns have totaled $3.1 billion.

The investment board’s current contract with Callan, an institutional investment consultant based in San Francisco, is a five-year agreement that will end on June 30, 2024. The contract specifies base annual fees of $430,000, or $2.15 million over five years, with a provision for annual increases of 3% starting in the second year.

For additional services, such as special research projects or studies, Callan and the State Investment Board agree on the scope of services and payment.

In 2020, when the State Investment Board began exploring an in-state investment program, Callan did a three-phase study to create the framework for the 1889 Fund for $185,000, the details of which were agreed upon in an exchange of letters between Hunter and Paul Erlandson, a Callan representative.

Other top investment staff officials also were copied on the correspondence.

In March 2021, Callan proposed additional work in setting up the Legacy Fund investment program to “specifically address the unique characteristics of the Legacy Fund’s spending, contributions and investment policies,” with a fee of $65,000, billable upon completion.

Hunter agreed to the additional work, and copied his approval to Rep. Keith Kempenich, R-Bowman, chairman of the Legacy and Budget Stabilization Fund Advisory Board.

Patrick Hart, chairman of the North Dakota Democratic-NPL Party, said he was surprised to learn that investment management services contracts are exempt from competitive bidding requirements.

“I find that troubling,” he said. “I’m blown away that this isn’t a competitive procurement process. I’m baffled by that.”

Mike Nowatzki, a spokesman for Lt. Gov. Brent Sanford, who heads the State Investment Board, issued a statement saying the board is following the law.

“The State Investment Board operates in compliance with state statute, and within that structure, the three investment pools overseen by the SIB earned $4 billion for SIB clients and North Dakota taxpayers in the last year alone, including $1.9 billion for the Legacy Fund,” Nowatzki said. “The Legacy Fund has received the highest marks for transparency through the Sovereign Wealth Fund Institute.”

An earlier version of this story erred in reporting that Callan didn't disclose fees it receives from investment firms for educational and research services. Callan discloses those fees to the State Investment Board but asked officials to keep the figures confidential, and the information was not disclosed to The Forum through a public records request. The earlier version of the article also erred in referring to Callan's investment advisement unit as its marketing branch.

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