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Lawsuit involving Missouri state employee pension losses spurs side fight over budget

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There’s a bitter fight underway in Jefferson City between the agency that manages the main retirement fund for state employees and an investment manager it accuses of dirty dealing.The main arena is a Cole County courtroom, where the Missouri State Employees Retirement System accuses Ontario-based Catalyst Capital Group Inc. of mismanaging $175 million entrusted to its care.A side arena is the General Assembly, where the agency known best as MOSERS must maintain confidence in its management of the state’s pension fund, valued at $8.4 billion when the most recent fiscal year ended June 30.Although it was filed in late 2020, lawyers are still arguing preliminary matters in the the lawsuit where MOSERS accuses Catalyst of “fraud, deception, willful misconduct, self-dealing and gross mismanagement” resulting in “hundreds of millions of dollars in losses to innocent investors, including MOSERS.”A trial is months, if not more than a year, away.But the state budget for the coming year will be settled in four weeks and, from the money set aside for future benefits – $718 million for the coming year – lawmakers give MOSERS an allowance, set in the pending budget at $15.6 million, for administration.Richard McIntosh, lobbyist for Catalyst and a one-time Senate budget analyst, said his review of MOSERS spending shows it has regularly exceeded that allowance by millions of dollars.McIntosh was hired in November 2020, about a month after the lawsuit was filed.“I was really on a mission of peace and the more the spending occurred the more questions it raised in our minds,” McIntosh said. “It started to become rather apparent that there were extraordinary expenditures made on the legal side.”So far, McIntosh estimates, MOSERS has spent about $5.2 million on legal help in the lawsuit, most of it for nationally known Quinn Emmanuel law firm, which charges in excess of $1,000 an hour for attorney fees.The legislative language each year sets an amount for “administration of the system, excluding investment expenses.”MOSERS contends the spending McIntosh targets is either one-time costs to update its computerized benefits system or to administer individual retirement accounts for state and higher education employees under its responsibilities separate from the general pension accounts.The financial statements verify that costs are allocated properly, MOSERS spokeswoman Candy Smith said.“We are aware of the narrative that Mr. McIntosh is pushing,” Smith wrote in an email.The lawsuitLast Thursday, for more than 90 minutes, Cole County Circuit Judge Jon Beetem heard arguments on the latest legal wrangle in the lawsuit.Attorney Dave Grable argued that Catalyst had such a close relationship with a firm named Callidus Capital Corporation that it should produce its internal documents. Catalyst’s founder and majority owner, Newton Glassman, was also chairman and CEO of Callidus.Catalyst purchased shares in Callidus at $14 per share in 2014, partially with funds invested by MOSERS. It also had outstanding loans worth $421 million to Callidus when it faced insolvency in 2019 it was sold for about 56 cents per share to a private investor.“Defendants did not manage investments honestly, or with anything close to due care,” Grable said in court.MOSERS has not provided The Independent an accounting of returns on its investments in Catalyst and one has not been filed among the public court documents in the case. One aspect of the case is the heavy censoring of public filings and the large number of documents filed under seal.MOSERS entrusted a total of $75 million with Catalyst via the two funds that held stock and made loans to Callidus. The combined market value of those funds in the latest MOSERS annual report is $16.9 million.“There were terrific losses in association with these investments as alleged in the complaint and detailed elsewhere,” Grable said. “It’s MOSERS position that there was a lot of wrongdoing in connection with these Callidus investments.”If MOSERS’ attorneys want to subpoena records from Callidus they are free to do so, attorney Alex Barrett, representing Catalyst, said Thursday.“It is not appropriate for us to go and collect these documents for MOSERS,” he said.A major part of the case is that the apparent early success helped persuade MOSERS to subscribe $100 million to a new fund in 2015. Early on in the lawsuit, MOSERS told Beetem it would refuse to fulfill its contractual obligations to provide cash to fulfill that commitment.In an April 2021 ruling warning MOSERS that he would not provide a court order protecting that decision, Beetem reminded the pension agency that it faced major sanctions under the partnership agreement if it carried through with the threat.“MOSERS asks the court to protect it from the consequences of its own decision,” Beetem wrote.In the decision, Beetem also cast doubt on many of MOSERS claims about the connections between Catalyst and Callidus.MOSERS backed down, made the $10 investment and has provided Catalyst $70 million of the $100 million subscription. The fund was listed with a fair market value of $71.4 million on the 2022 annual report.Over the past five years, Catalyst has received $13.6 million in fees for managing Missouri’s investment.On Thursday, Grable also argued that MOSERS should be allowed to pierce attorney-client privilege for Catalyst because it is a partner in the fund organized as a limited partnership.MOSERS wants to see the advice Catalyst received before investing in Callidus during the initial public offering.“The Callidus (initial public offering) there, as we’ve alleged, a lot of different rotten things we say that happened in connection with that, that did violence to the rights of the various limited partners,” Grable said.Catalyst claims those documents are privileged, Grable said.“When they sought that advice, they were seeking the advice in order to manage the investments of the limited partners,” he said. “So they’re not allowed to do that.”Chuck Hatfield, also representing Catalyst, said a ruling favoring MOSERS could cut both ways. The argument from Grable was based on Catalyst’s duty as a fiduciary to show it was being a prudent investor, he said.Hatfield spent many years working as chief of staff in the Attorney General’s Office, and is entitled to a pension from MOSERS.“It’s kind of strange to me that MOSERS is making the argument that under Missouri, and I guess Ontario, law, beneficiaries of a fiduciary are entitled to all privileged communications, because I’m a beneficiary of MOSERS,” Hatfield said.If he asked for privileged information as a beneficiary, he said, he would be refused “and they should.”Budget fightThe examination of the system’s spending grew out of frustration that MOSERS was blocking access to the bills for legal work in the lawsuit, McIntosh said.McIntosh’s associate, John Gaskin, filed a lawsuit when MOSERS claimed they were closed records and Gaskin’s motives were suspect as a representative of Catalyst. Circuit Judge Cotton Walker agreed and the case was dropped last year in June.McIntosh enlisted lawmakers to submit records requests to MOSERS. In each case, MOSERS responded with cost estimates ranging from $122.12 to $196.15. None of the costs have been paid, he said, but Sen. Denny Hoskins, R-Warrensburg, received a packet of records at no cost.“They fought us tooth and nail on the Sunshine lawsuits,” McIntosh said. “So we said, we’ll give up on that. State agencies must tell the legislature how much they are spending.”The most significant increase in spending by MOSERS has been on legal services, $5 million over the past two years and budgeted at $3.25 million for the coming year.That kind of expense, McIntosh said, should require justification that the lawsuit will recover at least that amount.“The legislature should start to ask some really, really, hard questions,” McIntosh said.The legal costs are an allowable investment expense, covered by the budgetary exemption, Smith, MOSERS’ spokeswoman, wrote. The system has always counted legal costs related to investments as exempt, she wrote in an email to The Independent.“MOSERS’ board actively oversees the system’s business, including this litigation and the associated legal expenses,” Smith wrote. “The board believes that the legal fees paid for prosecuting its claims against Catalyst in this complex litigation are incurred in the best interest of its members.”Hoskins, a member of the Senate Appropriations Committee, said he agreed to submit records requests because McIntosh convinced him MOSERS was blocking access. Former Rep. David Gregory, who lost the GOP primary for auditor last year, submitted requests that were not filled.“I am just trying to find out exactly what is going on, if they are overspending their budget authority or not,” Hoskins said.The 11-member Board of Trustees that oversees the system includes four lawmakers, two from the House and two from the Senate, as well as State Treasurer Vivek Malek and Commissioner of Administration Ken Zellers. The governor can appoint two members and people with vested pensions elect the rest.That is appropriate oversight to keep the budget within the legal limits, Smith wrote.In fiscal 2022, with complete information available on actual spending by MOSERS from its audited financial statements and proposed 2024 budget, MOSERS actually spent $24.3 million.The audited financial statement shows just under $7 million for investment-related expenses. Another $2.8 million was spent administering investment accounts for state and higher education employees and $2.1 million for the new computer hardware and software for administering benefits.For fiscal 2022, the cap was $12.3 million. If MOSERS’ accounting is accepted, it underspent its administrative allowance by $1,822.McIntosh contends the legal bills should count as administrative expenses, as should costs for buying capital assets. The cost of pursuing the suit should be weighed against the market returns on the same money invested, he said.By his analysis, MOSERS is overspending its allowance by as much as $6 million.“You can’t play hide the ball and not tell them what you are spending,” McIntosh said. “What is not OK is not telling the legislature what you are doing.”Hoskins said he has spoken to McIntosh about the analysis but hasn’t drawn any conclusions. If the budget allowance should be increased to reflect what MOSERS actually spends, he said he is open to that.“I would have to take a look at what that number is and what their reasoning is for why that number should be increased,” Hoskins said.He did not like being asked to pay to access records, Hoskins added.“I disagree with state agencies charging legislators to do our jobs,” Hoskins said. “We ultimately are in charge of protecting taxpayer funds and monitoring revenue and expenditures. I would expect they would make every effort to comply without charging for information.”Charging lawmakers fees for accessing public records they request has become more common as those information requests are formalized as Sunshine Law inquiries. McIntosh, who was the principal staff member for Democratic House Majority Leader Gracia Backer in the mid-1990s, said there should be bipartisan revulsion at the practice.“It is a complete constitutional abomination,” McIntosh said. “That is not how government works nor should it be how government works.”

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Poll: Support for Missouri abortion rights amendment growing

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A proposed constitutional amendment legalizing abortion in Missouri received support from more than half of respondents in a new poll from St. Louis University and YouGov.That’s a boost from a poll earlier this year, which could mean what’s known as Amendment 3 is in a solid position to pass in November.SLU/YouGov’s poll of 900 likely Missouri voters from Aug. 8-16 found that 52% of respondents would vote for Amendment 3, which would place constitutional protections for abortion up to fetal viability. Thirty-four percent would vote against the measure, while 14% aren’t sure.By comparison, the SLU/YouGov poll from February found that 44% of voters would back the abortion legalization amendment.St. Louis University political science professor Steven Rogers said 32% of Republicans and 53% of independents would vote for the amendment. That’s in addition to nearly 80% of Democratic respondents who would approve the measure. In the previous poll, 24% of Republicans supported the amendment.Rogers noted that neither Amendment 3 nor a separate ballot item raising the state’s minimum wage is helping Democratic candidates. GOP contenders for U.S. Senate, governor, lieutenant governor, treasurer and secretary of state all hold comfortable leads.“We are seeing this kind of crossover voting, a little bit, where there are voters who are basically saying, ‘I am going to the polls and I’m going to support a Republican candidate, but I’m also going to go to the polls and then I’m also going to try to expand abortion access and then raise the minimum wage,’” Rogers said.Republican gubernatorial nominee Mike Kehoe has a 51%-41% lead over Democrat Crystal Quade. And U.S. Sen. Josh Hawley is leading Democrat Lucas Kunce by 53% to 42%. Some GOP candidates for attorney general, secretary of state and treasurer have even larger leads over their Democratic rivals.

Brian Munoz

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St. Louis Public RadioHundreds of demonstrators pack into a parking lot at Planned Parenthood of St. Louis and Southwest Missouri on June 24, 2022, during a demonstration following the Supreme Court’s reversal of a case that guaranteed the constitutional right to an abortion.

One of the biggest challenges for foes of Amendment 3 could be financial.Typically, Missouri ballot initiatives with well-funded and well-organized campaigns have a better chance of passing — especially if the opposition is underfunded and disorganized. Since the end of July, the campaign committee formed to pass Amendment 3 received more than $3 million in donations of $5,000 or more.That money could be used for television advertisements to improve the proposal’s standing further, Rogers said, as well as point out that Missouri’s current abortion ban doesn’t allow the procedure in the case of rape or incest.“Meanwhile, the anti side won’t have those resources to kind of try to make that counter argument as strongly, and they don’t have public opinion as strongly on their side,” Rogers said.There is precedent of a well-funded initiative almost failing due to opposition from socially conservative voters.In 2006, a measure providing constitutional protections for embryonic stem cell research nearly failed — even though a campaign committee aimed at passing it had a commanding financial advantage.Former state Sen. Bob Onder was part of the opposition campaign to that measure. He said earlier this month it is possible to create a similar dynamic in 2024 against Amendment 3, if social conservatives who oppose abortion rights can band together.“This is not about reproductive rights or care for miscarriages or IVF or anything else,” said Onder, the GOP nominee for Missouri’s 3rd Congressional District seat. “Missourians will learn that out-of-state special interests and dark money from out of state is lying to them and they will reject this amendment.”Quade said earlier this month that Missourians of all political ideologies are ready to roll back the state’s abortion ban.“Regardless of political party, we hear from folks who are tired of politicians being in their doctor’s offices,” Quade said. “They want politicians to mind their own business. So this is going to excite folks all across the political spectrum.”

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Democrat Mark Osmack makes his case for Missouri treasurer

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Mark Osmack has been out of the electoral fray for awhile, but he never completely abandoned his passion for Missouri politics.Osmack, a Valley Park native and U.S. Army veteran, previously ran for Missouri’s 2nd Congressional District seat and for state Senate. Now he’s the Democratic nominee for state treasurer after receiving a phone call from Missouri Democratic Party Chairman Russ Carnahan asking him to run.“There’s a lot of decision making and processing and evaluation that goes into it, which is something I am very passionate and interested in,” Osmack said this week on an episode of Politically Speaking.Osmack is squaring off against state Treasurer Vivek Malek, who was able to easily win a crowded GOP primary against several veteran lawmakers including House Budget Chairman Cody Smith and state Sen. Andrew Koenig.While Malek was able to attract big donations to his political action committee and pour his own money into the campaign, Osmack isn’t worried that he won’t be able to compete in November. Since Malek was appointed to his post, Osmack contends he hasn’t proven that he’s a formidable opponent in a general election.“His actions and his decision making so far in his roughly two year tenure in that office have been questionable,” Osmack said.Among other things, Osmack was critical of Malek for placing unclaimed property notices on video gaming machines which are usually found in gas stations or convenience stores. The legality of the machines has been questioned for some time.As Malek explained on his own episode of Politically Speaking, he wanted to make sure the unclaimed property program was as widely advertised as possible. But he acknowledged it was a mistake to put the decals close to the machines and ultimately decided to remove them.Osmack said: “This doesn’t even pass the common sense sniff test of, ‘Hey, should I put state stickers claiming you might have a billion dollars on a gambling machine that is not registered with the state of Missouri?’ If we’re gonna give kudos for him acknowledging the wrong thing, it never should have been done in the first place.”Osmack’s platform includes supporting programs providing school meals using Missouri agriculture products and making child care more accessible for the working class.He said the fact that Missouri has such a large surplus shows that it’s possible to create programs to make child care within reach for parents.“It is quite audacious for [Republicans] to brag about $8 billion, with a B, dollars in state surplus, while we offer next to no social services to include pre-K, daycare, or child care,” Osmack said.Here’s are some other topics Osmack discussed on the show:How he would handle managing the state’s pension systems and approving low-income housing tax credits. The state treasurer’s office is on boards overseeing both of those programs.Malek’s decision to cut off investments from Chinese companies. Osmack said that Missouri needs to be cautious about abandoning China as a business partner, especially since they’re a major consumer of the state’s agriculture products. “There’s a way to make this work where we are not supporting communist nations to the detriment of the United States or our allies, while also maintaining strong economic ties that benefit Missouri farmers,” he said.What it was like to witness the skirmish at the Missouri State Fair between U.S. Sen. Josh Hawley and Democratic challenger Lucas Kunce.Whether Kunce can get the support of influential groups like the Democratic Senatorial Campaign Committee, which often channels money and staff to states with competitive Senate elections.

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As Illinois receives praise for its cannabis equity efforts, stakeholders work on system’s flaws

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Medical marijuana patients can now purchase cannabis grown by small businesses as part of their allotment, Illinois’ top cannabis regulator said, but smaller, newly licensed cannabis growers are still seeking greater access to the state’s medical marijuana customers.Illinois legalized medicinal marijuana beginning in 2014, then legalized it for recreational use in 2020. While the 2020 law legalized cannabis use for any adult age 21 or older, it did not expand licensing for medical dispensaries.Patients can purchase marijuana as part of the medical cannabis program at dual-purpose dispensaries, which are licensed to serve both medical and recreational customers. But dual-purpose dispensaries are greatly outnumbered by dispensaries only licensed to sell recreationally, and there are no medical-only dispensaries in the state.As another part of the adult-use legalization law, lawmakers created a “craft grow” license category that was designed to give more opportunities to Illinoisans hoping to legally grow and sell marijuana. The smaller-scale grow operations were part of the 2020 law’s efforts to diversify the cannabis industry in Illinois.Prior to that, all cultivation centers in Illinois were large-scale operations dominated by large multi-state operators. The existing cultivators, mostly in operation since 2014, were allowed to grow recreational cannabis beginning in 2019.Until recently, dual-purpose dispensaries have been unsure as to whether craft-grown products, made by social equity licensees — those who have lived in a disproportionately impacted area or have been historically impacted by the war on drugs — can be sold medicinally as part of a patient’s medical allotment.Erin Johnson, the state’s cannabis regulation oversight officer, told Capitol News Illinois last month that her office has “been telling dispensaries, as they have been asking us” they can now sell craft-grown products to medical patients.“There was just a track and trace issue on our end, but never anything statutorily,” she said.

Dilpreet Raju

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Capitol News IllinoisThe graphic shows how cannabis grown in Illinois gets from cultivation centers to customers.

No notice has been posted, but Johnson’s verbal guidance comes almost two years after the first craft grow business went online in Illinois.It allows roughly 150,000 medical patients, who dispensary owners say are the most consistent purchasers of marijuana, to buy products made by social equity businesses without paying recreational taxes. However — even as more dispensaries open — the number available to medical patients has not increased since 2018, something the Cannabis Regulation Oversight Office “desperately” wants to see changed. Johnson said Illinois is a limited license state, meaning “there are caps on everything” to help control the relatively new market.Berwyn Thompkins, who operates two cannabis businesses, said the rules limited options for patients and small businesses.“It’s about access,” Thompkins said. “Why wouldn’t we want all the patients — which the (adult-use) program was initially built around — why wouldn’t we want them to have access? They should have access to any dispensary.”Customers with a medical marijuana card pay a 1% tax on all marijuana products, whereas recreational customers pay retail taxes between roughly 20 and 40% on a given cannabis product, when accounting for local taxes.While Illinois has received praise for its equity-focused cannabis law, including through an independent study that showed more people of color own cannabis licenses than in any other state, some industry operators say they’ve experienced many unnecessary hurdles getting their businesses up and running.The state, in fact, announced last month that it had opened its 100th social equity dispensary.But Steve Olson, purchasing manager at a pair of dispensaries (including one dual-purpose dispensary) near Rockford, said small specialty license holders have been left in the lurch since the first craft grower opened in October 2022.“You would think that this would be something they’re (the government) trying to help out these social equity companies with, but they’re putting handcuffs on them in so many different spots,” he said. “One of them being this medical thing.”Olson said he contacted state agencies, including the Department of Financial and Professional Regulation, months ago about whether craft products can be sold to medical patients at their retail tax rate, but only heard one response: “They all say it was an oversight.”This potentially hurt social equity companies because they sell wholesale to dispensaries and may have been missing out on a consistent customer base through those medical dispensaries.Olson said the state’s attempts to provide licensees with a path to a successful business over the years, such as with corrective lotteries that granted more social equity licenses, have come up short.“It’s like they almost set up the social equity thing to fail so the big guys could come in and swoop up all these licenses,” Olson said. “I hate to feel like that but, if you look at it, it’s pretty black and white.”Olson said craft companies benefit from any type of retail sale.“If we sell it to medical patients or not, it’s a matter of, ‘Are we collecting the proper taxes?’ That’s all it is,” he said.State revenue from cannabis taxes, licensing costs and other fees goes into the Cannabis Regulation Fund, which is used to fund a host of programs, including cannabis offense expungement, the general revenue fund, and the R3 campaign aiming to uplift disinvested communities.For fiscal year 2024, nearly $256 million was paid out from Cannabis Regulation Fund for related initiatives, which includes almost $89 million transferred to the state’s general revenue fund and more than $20 million distributed to local governments, according to the Illinois Department of Revenue.Medical access still limitedThe state’s 55 medical dispensaries that predate the 2020 legalization law, mostly owned by publicly traded multistate operators that had been operating in Illinois since 2014 under the state’s medical marijuana program, were automatically granted a right to licenses to sell recreationally in January 2020. That gave them a dual-purpose license that no new entrants into the market can receive under current law.Since expanding their clientele in 2020, Illinois dispensaries have sold more than $6 billion worth of cannabis products through recreational transactions alone.Nearly two-thirds of dispensaries licensed to sell to medical patients are in the northeast counties of Cook, DuPage, Kane, Lake and Will. Dual-purpose dispensaries only represent about 20 percent of the state’s dispensaries.While the state began offering recreational dispensary licenses since the adult-use legalization law passed, it has not granted a new medical dispensary license since 2018. That has allowed the established players to continue to corner the market on the state’s nearly 150,000 medical marijuana patients.But social equity licensees and advocates say there are more ways to level the playing field, including expanding access to medical sales.Johnson, who became the state’s top cannabis regulator in late 2022, expressed hope for movement during the fall veto session on House Bill 2911, which would expand medical access to all Illinois dispensaries.“We would like every single dispensary in Illinois to be able to serve medical patients,” Johnson said. “It’s something that medical patients have been asking for, for years.”Johnson said the bill would benefit patients and small businesses.“It’s something we desperately want to happen as a state system, because we want to make sure that medical patients are able to easily access what they need,” she said. “We also think it’s good for our social equity dispensaries, as they’re opening, to be able to serve medical patients.”Rep. Bob Morgan, D-Deerfield, who was the first statewide project coordinator for Illinois’ medical cannabis program prior to joining the legislature, wrote in an email to Capitol News Illinois that the state needs to be doing more for its patients.“Illinois is failing the state’s 150,000 medical cannabis patients with debilitating conditions. Too many are still denied the patient protections they deserve, including access to their medicine,” Morgan wrote, adding he would continue to work with stakeholders on further legislation.Capitol News Illinois is a nonprofit, nonpartisan news service covering state government. It is distributed to hundreds of newspapers, radio and TV stations statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation, along with major contributions from the Illinois Broadcasters Foundation and Southern Illinois Editorial Association.

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