Acquisition means company state is suing becomes new investment advisor

Lawmakers concerned as Mercer, blamed for billions in liabilities, buys Callan Assoc.

Posted: Tuesday, March 17, 2009

A top investment advisor for the state is raising doubts among some lawmakers.

Callan Associates has worked for the state for two decades, advising the Alaska Permanent Fund Corp., the Alaska Retirement Management Board and the Department of Revenue's Treasury Division.

What has some lawmakers concerned is last month's announcement that a Callan competitor, Mercer, Inc., is purchasing Callan.

The concern, legislators said, is with Mercer.

"This is a firm we had a very bad experience with, and have sued because of their incompetence, their bad judgment," said Senate Majority Leader Johnny Ellis, D-Anchorage.

The ARM Board has sued Mercer for at least $1.8 billion in a case expected to go to trial next year.

In Alaska, Mercer's human resources consulting subsidiary worked for the board until recently, and provided what state officials said were unrealistically low estimates of future retirement costs.

That left the state short on many billions of dollars it will need over the next 25 years to pay retirement costs, an amount state officials call "unfunded liability."

Mercer earlier told the Empire that Alaska is blaming the company for its decision to not set aside enough in state pension funds.

Alaska's lawsuit "is a misguided and meritless attempt to blame Mercer for investment losses, escalating health care costs and funding policies over which it had no control," Mercer stated in court filings.

Placing a company that state officials say was responsible for the unfunded liability in charge of earning the money back may present a conflict of interest, some legislators warned.

In his final constituent newsletter, former Sen. Kim Elton, D-Juneau, cautioned against letting Mercer take charge of Alaska investments.

"I suggest we start casting about for a group of professionals not working for the Mercer group," Elton wrote. "Let's not let the Mercer folks get back at our money through our existing relationship, and their new relationship, with Callan."

Deputy Revenue Commissioner Jerry Burnett said the Treasury and the ARM Board already are advertising to hire an investment advisor, but not because of the Callan acquisition.

Callan's contract is ending in June, and Alaska issued a request for proposals for new investment advisors even before the Mercer acquisition.

That could be a Mercer-owned Callan, or some other firm, he said. The request for proposals does not preclude Callan from winning the contract again.

"There's nothing to prevent them from rebidding the contract," Burnett said.

Burnett acknowledged it "looks funny" to be doing business with a company the state is suing, but said the attorney general's office determined there was no direct conflict of interest.

Immediately after Mercer announced the Callan acquisition, the ARM Board met in a special meeting to discuss the Callan relationship. It decided to continue to use Callan.

"Even so, Ellis said it might be a good idea to have different investment advisors for different agencies.

"Having all of our eggs in one basket may not be the wisest course," he said.



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