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Comedy From The North Dakota Capitol Building PDF Print E-mail
Written by Chet   

ShrineI hope you caught the section of an AP article making the rounds earlier this week. I missed it, but a link was forwarded to me by a friend who did some worthwhile analysis.  First, the clip, then the analysis:

OIL TAX TRUST FUND

North Dakota's oil tax "Legacy Fund" could hit $1 billion this month and a state board now is recommending that half of the fund's assets be shifted to the stock market and other investments.

North Dakota voters approved the fund in 2010 and it's been rising faster than predicted with booming oil production. None of the money can be spent until 2017, and even then it takes a two-thirds vote of the Legislature to get into it.

March deposits were about $87 million, bringing the fund's total to $927 million, according to Darren Schulz, the interim chief investment officer of North Dakota's Retirement and Investment Office.

Oil revenue began gushing into the fund only since September 2011 and analysts initially estimated it would have a $618 million balance when the state's current two-year budget period ends on June 30.

Revenue from the fund has been invested mostly in short-term, low-risk and low-return U.S bonds, guaranteed by government agencies, Schulz said. But annual earnings from the fund, about 1.6 percent last year, is barely keeping pace with inflation, he said.

The seven-member Legacy Fund advisory board, created by the Legislature, now wants to build on the fund with a broader investment policy by placing 50 percent of the money in stocks and other types of investments.

The new strategy is estimated to bring an annual return of 6.35 percent, but will still be in line with the state's conservative investment policy, North Dakota Treasurer Kelly Schmidt said.

"This allocation will give the fund an opportunity to preserve principle for future generations and maintain purchasing power," she said.

North Dakota's Investment Board, which supervises the Retirement and Investment Office and oversees state and local government employee pension funds, is expected to adopt the Legacy Fund advisory board's recommendation later this month.

NewsOK.com (AP)

First things first: I'm not a math professor; I'm just a caveman lawyer. The math in this might be a little over my head.  But I'm gonna do the best I can with my limited math brain capacity.

First, let's assume Kelly Schmidt is quoted accurately.  If so, she claims the state’s “conservative investment policy” [massive amount of LOL on my end after reading that] would have the Legacy Fund realizing a 6.35% return rate if HALF of it were invested in the stock market. This is coming from Kelly Schmidt, mind you.  She's the person who tripled the investment fees for the veterans post-war trust fund while, in real terms, going from positive to negative rates of return at the same time.

And then the North Dakota State Investment Board dude -- Darren Schulz -- says in the article that last year the Legacy Fund realized a 1.6% rate of return. Now, without drilling down any further into the underlying numbers, consider these two concerns:  

(1) Is there any chance Kelly Schmidt and Darren Schulz are on crack?

(2) If 50% of the Legacy Fund is going to be placed in the casino investments the North Dakota State Investment Board (SIB) is famous for (with 2 to 3 times the fees over industry averages, 100% stock fund turnovers [i.e. gambling not investing], disguising junk bonds and risky alternative investments as normal low risk investments when reporting their investments to the public employees so its consultant, Callan, can charge more fees, etc., etc., etc. -- then that means 50% of the Legacy Fund will stay in the 1.6% rate of return range – basically T-bills and muni-bonds - and the other 50% will go to the market as managed by Kelly's buddies in retail investment houses who send her illegal campaign contributions.

So, for the “new strategy” to get a total fund rate of return average of 6.35% they're claiming the Legacy Fund will get, that would mean that the 50% that will be going into stocks “and other types of investments” will have to get an average rate of return of 10.2% so the average of the 50% in T-bills and the 50% in stocks works out. (10.2%/1.6% = 6.375%)

Now, to get 10.2% return on investment with the nonsensically high fees SIB pays for no reason, the “new strategy” needs a 12-13% gross rate of return on the 50% of the Legacy Fund going into the stock market. Let’s compare that to the S&P 500. From January 1st, 2000, until December 31st, 2012, the S&P 500 grew at .95% annual average (inflation adjusted), and 3.65% (non-inflation adjusted).  [And I gotta tell you I found a variety of different sources for these numbers, and they were all inconsistent with one another. But let's just take these numbers and run with them.]

In a nut shell: The “new strategy” for the Legacy Fund is to beat the market by 3 to 4 fold (3.65% market average and they need 12-13% to get a total Legacy Fund average of 6.35%) Since nobody beats the market over the long term, and all academic reviews of the high fee strategies SIB uses prove they don’t beat the market - we are asking the people of our state to lay our Legacy Fund money into the hands of people that think they can have triple the return of the stock market with half our money.

Makes sense, right?

Which brings us back to question Number One again: ARE THESE PEOPLE ON CRACK???

The retail investment consultants pushing this are already shopping for new yachts.


Comments (5)add comment

What the Heck said:

God help us.
The Legacy Fund amounts to nothing more than over-taxation. Returning it to taxpayers would be a better 'investment' than letting Wall Street get their hands on it.
 
April 10, 2013
Votes: +5

nimrodent said:

...
Good think we have a state ethics watch-dog to make sure no government officials get any kickbacks on this money-making scheme. (Sarcasm)
 
April 10, 2013
Votes: +2

Chet said:

To WhatTheHeck
I would agree with you, WhatTheHeck, if all the state's bills were being paid, and if our property taxes weren't so high. To be clear, what I'm saying is that if this money -- or some of it -- went to pay for the things our property tax dollars pay for, there wouldn't be much of a surplus or legacy fund, at all. Counties end up paying a lot of money to try to recover from the damage done to the infrastructure by all this oil development, and nobody in Bismarck seems to care. They just keep socking more and more money away "for a rainy day." Well, the guys out in Williams County are looking at a torrential downpour, while the Republicans in the Red River Valley cover their eyes and ears and yell, "La la la la la la la la la la la. I can't hear you."

The problem isn't that the state has too much money and needs to start cutting free money checks to the citizens. The problem is that the state needs to figure out what its infrastructure needs are and pay for them.

If the state just started free money cutting checks to everybody, then they could say, "We can't pay to have the roads in Williams County fixed! We don't have any money!" Well, we have money. Pay to fix the damned roads. And pay for Fargo flood protection. Quit waiting for the Federal Government to come in with all ITS money (ha!) to pay for it.

The problem with North Dakota's Republicans is they can't figure out how to get checks written to their rich friends quickly enough. It's up to us to make sure they spend it on the State's needs before spending it all on their rich friends.
 
April 10, 2013
Votes: +2

What the Heck said:

...
I agree Chet in principle. Since they have already proved unable or unwilling to use our money wisely, then returning it to ALL citizens would be a hell of a lot better than letting Wall Street get their grubby hands on it.
 
April 10, 2013
Votes: +0

Dustin Gawrylow said:

Conflicted Investment Talkingpoints
Chet,

What do you think about how both sides have split personalities on the state investment issue:

With Republicans, on one hand they can't decide if the 8% return rate for the state pension funds is "absurd" and "unrealistic" (I argue they are unrealistic, as do those who want to reform the system) - meanwhile, they want to cite those same return projections for a target for all these other funds. (In my opinion, any target over 4% is overly aggressive in today's market climate.)

With Democrats, on the one hand, they defend the 8% target rate as being fine because they don't want the pensions touched - meanwhile, you point out these legitimate investment management issues, which are closer in line with those who want reform than those who want the status quo.

How can anything positive happen if both sides can't figure out what they actually think on it?
 
April 11, 2013 | url
Votes: +0

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