Lawmakers seek AG probe after audit finds problems with North Dakota business financing program

A legislative audit committee voted Tuesday to urge the full Legislature to shut down a state-backed business financing program and send problematic audit findings to the attorney general for investigation.

Members of the Legislative Audit and Fiscal Review Committee pressed state officials about the North Dakota Development Fund’s lack of documentation for millions of dollars in transactions, number of high-risk loans, loans written off and how conflicts of interest were disclosed, among other findings in two audits.

A key official said changes have already been made or are underway. But committee members said they see the situation differently, including the chair, who called the audit findings a disaster.

“There’s so much there, I don’t even know where to start,” chair Sen. Jeff Magrum, R-Hazelton, told the North Dakota Monitor. 

Magrum said he wants the attorney general to look for any kind of wrongdoing, whether it’s criminal, fraudulent or incompetent in nature, and report back.

State Auditor Josh Gallion said the Development Fund audit was “probably a little bit worse than on average” compared to others.

“To not have some of this documentation, to not be adhering to some of these policies, it does provide concern, especially when you’re talking about this amount of money,” said Gallion, a Republican. 

The Development Fund, created in 1991, provides loans and investments as gap financing to new businesses that might not be able to get loans elsewhere. The fund is legally structured as a nonprofit corporation but functions as a state-administered public economic development entity within the Commerce Department, a Commerce spokesperson told the North Dakota Monitor.

The fund touts 929 projects funded and 9,350 jobs created during its existence. Job data is self-reported from borrowers and not independently verified, according to audit findings.

Among other findings were a lack of documents auditors sought, whether nonexistent, unretained or not provided; no procedures for tracking denials or documenting appeals; and inconsistent conflict of interest disclosures, according to the audit.

Those conflicts of interest included nearly $4 million in funding for five organizations that had relationships with one or two fund board members, the audit said. 

The audit also made a variety of recommendations for fixing the problems, such as maintaining or requiring specific documentation and creating a formal conflict-of-interest review process.

Fund officials mostly agreed with those recommendations or said they’ve already made changes, according to a response attached to the audit.

Lawmakers asked Gallion and Commerce Commissioner Chris Schilken about who makes final decisions for the fund, whether it has outlived its usefulness, how its board operates and what education the fund’s four employees have to handle high-risk loans.

The panel ultimately voted 9-4 to recommend the 2027 Legislature repeal the fund, transfer its remaining funding to the state’s general fund and move outstanding loans and equity positions to the state-owned Bank of North Dakota until repaid or completed. 

Some lawmakers said they’d rather see the Development Fund overhauled, not dissolved. 

Rep. Austen Schauer, R-West Fargo, cautioned his colleagues before the investigation vote.

“Maybe if you’re doing work for the board and this organization and now you’re going to be investigated by the attorney general and potentially having to hire attorneys on your own and getting dragged into the newspaper, etc., that’s a pretty nasty situation,” Schauer said. “I don’t think there’s any clear evidence that there’s a potential crime.” 

The investigation vote was 10-3. Attorney General Drew Wrigley, a Republican, is not required to investigate the audit findings.

Schilken said a Bank of North Dakota partnership to provide expertise and a goal to consolidate all Commerce boards into one panel will help the Development Fund improve, among other changes in the works. 

“While most fixes were underway before the audit began, others will come directly from these recommendations,” Schilken said. He emphasized the Development Fund is a separate legal entity from Commerce.

The fund allows North Dakota to compete in economic development projects that a traditional bank would not take on, he added.

The 2019-2024 performance audit, required by a 2025 law, covers 126 loans and investments totaling more than $81 million.

Last year, the Republican-led Legislature approved $25 million from a state fund derived from oil tax revenue and a $25 million Bank of North Dakota line of credit for the Development Fund. Schilken said officials don’t plan to use the line of credit. 

The audit committee chairman told the commerce commissioner that nothing has changed in nearly two years of the Armstrong administration, despite a focus of the governor to reform the Commerce Department.

“If it is corruption or just incompetence, either way, we all can agree it’s a disaster,” Magrum said. 

Reach North Dakota Monitor reporter Jack Dura at [email protected]