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Legacy Fund investments take new course

BISMARCK -- The Legacy Fund, a constitutionally created fund that can't be tapped until 2017, may see a larger return on its investments.

The 11-member State Investment Board unanimously approved an 18-month transition plan Friday to move the Legacy Fund's investments from short-term bonds to a more diversified, higher-risk portfolio of stocks, bonds and real estate.

"The plan will carry more investment risks, but you seek to gain more over the long term," said Darren Schulz, investment board member and interim chief investment officer of the North Dakota Retirement and Investment Office, which oversees the Legacy Fund's investments.

The fund was created after voters approved a constitutional amendment in November 2010 to use oil and gas revenues and mandate that lawmakers cannot spend any revenue from the fund until June 2017. Once they can, they may not spend more than 15 percent of its principal over two years unless they have a two-thirds vote in both chambers.

The fund collects 30 percent of total revenue from taxes on oil and gas production and extraction. Additionally, the fund receives 25 percent of the revenues over $300 million from the Strategic Investments and Improvements Fund.

With the transition, Schulz said the board would be shifting the fund's investments from a plan that is barely keeping up with inflation.

Since the Legacy Fund's inception, the fund has grown to more than $1.1 billion, but has only seen a 1.62 percent annual rate of return, Schulz said. With the transition to more riskier options, a study shows the fund stands to take in about 6.5 percent annually.

The low return is what prompted Schulz to ask the Legacy and Budget Stabilization Fund Advisory Board, which develops recommendations for the investment of funds, to hire a consulting firm to study the fund's investments.

The advisory board, consisting of four lawmakers and the heads of the Tax Department, Bank of North Dakota and Office of Management and Budget, hired Oregon-based consulting firm RV Kuhns to study the best options for the fund.

In its study, RV Kuhns said "the Legacy Fund cannot afford to be too conservative or income oriented if it is to achieve the long-term objective."

Schulz said they studied 12-month and 24-month transition plans, concluding the 18-month period is a reasonable amount of time to mitigate any potentially negative effects the market may have on the fund.

During the 18-month transition, the monthly deposits from oil and gas taxes will be transferred to managers within the investment areas approved by the board based on a prorated allocation.

During that time, $71 million in current short-term bonds will also be transferred to the higher-risk investments, with the fund eventually getting out of the short-term bond market completely.

By the end of the transition, the fund will invest in local and worldwide investments, along with fixed incomes, real assets and real estate.

Sen. Jerry Klein, R-Fessenden, the newly appointed advisory board chair, said the fund has been sitting in the idle mode for awhile, but that was because the original board members didn't know what they should do with the new fund.

"Early on, I don't think folks were sure what their abilities would be, or if they could take any risk because it is the people's money," Klein said.

But, he said, now with a study and $1.1 billion, the fund has some more direction.

"Certainly everyone is concerned about maintaining the stability of the fund and its future," Klein said. "But we've reached that point where we need to make some decisions."

During the interim session, the advisory board will study the fund and its methods to assure the fund provides the lasting benefits the voters wanted when they created it.

Schulz said he plans to give the investment board a list of individual account managers the board can invest with by the next board meeting July 26.

The State Investment Board includes the lieutenant governor, state treasurer, state insurance commissioner, executive director of Workforce Safety & Insurance, land commissioner, three representatives of the Public Employees Retirement System and three representatives of Teachers' Fund For Retirement.

Mike Nowatzki

Mike Nowatzki reports for Forum News Service. He can be reached at (701) 255-5607.