JOINT MEETING

SOUTH DAKOTA RETIREMENT SYSTEM AND RETIREMENT LAWS COMMITTEE

September 7, 2017

The Board of Trustees of the South Dakota Retirement System held their joint meeting with the Retirement Laws Committee on September 7, 2017. The meeting began at 8:30 a.m. in the downstairs conference room of View 34, Pierre, South Dakota.

BOARD MEMBERS IN ATTENDANCE:

Justice Steve Zinter, Chair Table of Contents Conflicts Disclosure ...... 2 James Appl Oath of Office ...... 3 Recognition of Dr. Buron O. Lindbloom ...... 3 Karl Alberts Approval of Minutes of June 14, 2017 ...... 4 Report from Nominating Committee and Election of Chair and Penny Brunken Vice Chair ...... 4 Jilena Faith Annual Investment Performance Report...... 4 SDRS Funded Status ...... 5 Laurie Gill Review of HHS/OMB Appeal ...... 5 Potential 2018 Legislation ...... 6 Kathy Greeneway Managing SDRS for Sustainability ...... 8 More Work to Do – Consideration of Future Beneift Improvements Laurie Gustafson And Corrective Actions ...... 8 James Hansen Supplemental Retirement Plan ...... 10 Old/New Business ...... 11 James Johns Myron Johnson Roy Lindsay Louise Loban Lt. Gov. K.J. Peterson Eric Stroeder Matt Clark, Ex Officio

RETIREMENT LAWS COMMITTEE MEMBERS IN ATTENDANCE: Sen. , Chair Rep. Dan Ahlers Rep. Tom Holmes Rep. Steven McCleerey Rep. Tim Rounds Sen. Rep. Craig Tieszen

Retirement Laws Committee members absent: Sen. Al Novstrup, Sen. Jason Frerichs, Sen. OTHERS IN ATTENDANCE: Deene Dayton Jeff Mehlhaff, LRC June Larson, Nationwide Retirement Solutions Hank Koster Bob Mercer, Newspapers Tammy Otten, SDIC Paul Schrader, Consultant Mike Studebaker, Nationwide Retirement Solutions Sandra Waltman, SDEA Don Zeller Rob Wylie Travis Almond Jane Beer Doug Fiddler Michelle Mikkelsen Jessica Reitzel Dawn Smith Jacque Storm

For continuity, these minutes are not necessarily in chronological order.

AGENDA ITEM 1 BOARD MEMBER CONFLICTS DISCLOSURE

Summary of Presentation Ms. Jacque Storm, SDRS General Counsel, stated that due to state board disclosure legislation that was passed this year, the instructions and forms and the waiver and decision matrix relating to the state board disclosure laws were revised slightly and resulted in a slight change to the board procedure for receiving waiver requests.

Board Action IT WAS MOVED BY MR. JOHNS, SECONDED BY MS. PETERSON, TO ADOPT THE WAIVER INSTRUCTIONS AND FORMS, WAIVER AND DISCLOSURE DECISION MATRIX AND THE PROCEDURE FOR RECEIVING AND DISTRIBUTING WAIVER REQUESTS. THE MOTION PASSED UNANIMOUSLY ON A VOICE VOTE.

2 AGENDA ITEM 2 CEREMONIAL OATH OF OFFICE FOR NEWLY ELECTED AND APPOINTED BOARD OF TRUSTEE MEMBERS

Summary of Presentation The Oath of Office was administered by Justice Steve Zinter to James Appl, Laurie Gustafson, James Hansen, Myron Johnson, Roy Lindsay and KJ Peterson.

AGENDA ITEM 3 RECOGNITION OF FORMER OFFICIAL

Summary of Presentation Mr. Rob Wylie, SDRS Executive Director, stated that the doctor for the SDRS Disability Advisory Committee had retired from that position. Mr. Travis Almond, SDRS Member Services/Communications Manager, presented a resolution of appreciation.

Board Action DR. BURON O. LINDBLOOM IT WAS MOVED BY MS. LOBAN, SECONDED BY MS. GUSTAFSON, TO EXPRESS A VOTE OF APPRECIATION TO DR. BURON O. LINDBLOOM FOR HIS DEDICATED SERVICE TO THE SOUTH DAKOTA RETIREMENT SYSTEM BY ADOPTING THE FOLLOWING RESOLUTION:

WHEREAS, Dr. B.O. Lindbloom came to Pierre, South Dakota, as a practicing physician in June 1957 and quickly earned a reputation as both a skillful and beloved family practice physician; and

WHEREAS, Dr. Lindbloom served as the first physician at the South Dakota Women’s Prison when it opened in October 1997; and

WHEREAS, Dr. Lindbloom retired from active medical practice in 2003, but continued to serve as a physician at the Women’s Prison until 2007; and

WHEREAS, the South Dakota Retirement System recognized a critical need for a physician with wide-ranging but nonetheless detailed medical knowledge to serve on the System’s Disability Advisory Committee; and

WHEREAS, Dr. Lindbloom readily volunteered to become the second physician to serve on the Disability Advisory Committee in August 2012 and continued to serve on the committee until July 2017:

NOW, THEREFORE, BE IT RESOLVED, by the Board of Trustees of the South Dakota Retirement System assembled on September 7, 2017, that the Board express its appreciation and gratitude to Dr. Buron O. Lindbloom for his exceptional dedication and

3 willingness to serve his community and especially the members of the South Dakota Retirement System.

AGENDA ITEM 4 APPROVAL OF JUNE 14, 2017, MEETING MINUTES

Board Action IT WAS MOVED BY DR. HANSEN, SECONDED BY MS. GREENEWAY, TO APPROVE THE MINUTES OF THE JUNE 14, 2017, BOARD OF TRUSTEES MEETING. THE MOTION PASSED UNANIMOUSLY ON A VOICE VOTE.

AGENDA ITEMS 5 & 6 REPORT FROM NOMINATING COMMITTEE & ELECTION OF CHAIR & VICE-CHAIR

Summary of Presentation Ms. KJ Peterson, Chair of the Nominating Committee, stated that it was the recommendation of the Nominating Committee to nominate Justice Zinter as Chair of the SDRS Board of Trustees. It was also the recommendation of the Nominating Committee to nominate James Johns for the office of Vice-chair.

Board Action CHAIR AND VICE CHAIR IT WAS MOVED BY DR. HANSEN, SECONDED BY MS. LOBAN, THAT NOMINATIONS CEASE AND A UNANIMOUS BALLOT BE CAST FOR JUSTICE ZINTER AS CHAIR OF THE SDRS BOARD OF TRUSTEES. THE MOTION PASSED UNANIMOUSLY ON A VOICE VOTE.

IT WAS MOVED BY MR. LINDSAY, SECONDED BY MS. GREENEWAY, THAT NOMINATIONS CEASE AND A UNANIMOUS BALLOT BE CAST FOR JAMES JOHNS AS VICE-CHAIR OF THE SDRS BOARD OF TRUSTEES. THE MOTION PASSED UNANIMOUSLY ON A VOICE VOTE.

AGENDA ITEM 7 ANNUAL INVESTMENT PERFORMANCE REPORT

Summary of Presentation

Investment Performance Ms. Tammy Otten, Assistant State Investment Officer, SDIC, informed the Board that SDRS’s net annualized return for the one-year period ending June 30, 2017, was 13.81 percent.

4 Ms. Otten stated that the return for the capital markets benchmark for the fiscal year was 10.96 percent, a difference of 2.85 percent from the SDRS return.

During the last 10-year period the total fund has underperformed the benchmark in four individual years but has outperformed the benchmark in six of those individual years. Even with the underperformance in those four years, the fund had an average return of 6.5 percent for those 10 years compared to a benchmark return of 5.3 percent or an added 1.4 percent per year for the 10-year period.

Ms. Otten noted that over the 44-year history of SDRS, the SDRS total fund returned 10.42 percent compared to the capital markets benchmark of 9.43 percent for an over- performance of 0.98 percent per year.

AGENDA ITEM 8 SDRS PROJECTED FUNDED STATUS

Summary of Presentation Mr. Doug Fiddler, SDRS Senior Internal Actuary, presented estimated funding status results for June 30, 2017. He stated that with the investment return for SDRS for the fiscal year ending June 30, 2017, at 13.8 percent, the fair value funded ratio would be 100 percent.

Mr. Fiddler stated that average inflation from 2010-2016 was 1.3 percent. During that same time period, the SDRS COLA averaged 2.7 percent. Mr. Fiddler advised that over that time period SDRS retirees’ benefits increased 10 percent more than if they just kept pace with inflation.

Mr. Fiddler discussed the impact of the fiscal year 2017 investment return on the 2018 maximum COLA, the projected future COLA ranges, and the likelihood of additional required corrective actions assuming a 13.8 percent net investment return for fiscal year 2017. He stated that the preliminary estimated 2018 restricted COLA maximum would be 1.95 percent based on the 13.8 percent fiscal year 2017 net investment return.

Board Action No action was necessary.

AGENDA ITEM 9 REVIEW OF HHS/OMB APPEAL

Summary of Presentation Mr. Wylie stated that every year, auditors for the federal government’s Health and Human Services/Office of Management and Budget review the costs related to federal funding. In the fall of 2016, the Department of Health and Human Services (HHS) questioned the state Bureau of Finance and Management (BFM) about the pension costs

5 for SDRS. Throughout the winter of 2016-2017, BFM and SDRS staff attempted to explain SDRS’s fixed contributions and acceptable actuarial methodology. However, on March 10, 2017, the Cost Allocation Services of HHS issued its final determination that South Dakota owed almost $2 million for pension contributions. On April 6, 2017, South Dakota filed its Notice of Appeal in the case. On August 15, 2017, South Dakota filed its submission maintaining that the contributions for FY 2014 and FY 2015 were computed in accordance with established law and should be fully reimbursed as an appropriate and responsible funding amount which constitutes an acceptable actuarial cost method. The deadline for HHS to respond to SDRS’ submission is September 14, 2017.

Board Action No action was necessary.

AGENDA ITEM 10 POTENTIAL 2018 LEGISLATION

Summary of Presentation Ms. Storm stated that the first topic for proposed legislation deals with consistency in the refund processes. Staff recommends that a termination be required before a member is eligible for a refund. She noted that currently members only have to go from participating to non-participating to be eligible for a refund. In addition, staff recommends removing the waiting period for a refund. Currently a member must wait one year from the member’s last contribution. Finally, rather than allowing a refund within 90 days of returning to covered employment, staff recommends disallowing refunds after the member returns to work.

The second piece of proposed legislation deals with qualified domestic relations orders or QDROs. Currently the only reference to QDROs in statute as an exception to the general rule that the benefit is not assignable. This legislation would put some of the federal regulations into SDRS statutes.

Ms. Storm stated that a revision of the administrative and judicial review procedure was the next piece of proposed legislation. This legislation would revise current language to more specifically refer to grievances relating to final determinations, require a request for review be in writing to the executive director within a specified time, and retain procedures for appealing the executive director’s decision to the hearing examiner.

The next piece of proposed legislation, advised Ms. Storm, relates to the SDRS supplemental pension benefit (SPB). This legislation would allow members to purchase more than one SPB. It would also allow a surviving spouse to purchase a SPB with Supplemental Retirement Plan or Special Pay Plan balances that the member accumulated and for which the surviving spouse is the beneficiary.

6 Another proposal, noted Ms. Storm, is to provide a definition for temporary employment. Currently “permanent full-time employee” is defined as someone in a permanent position for at least 20 hours a week and at least six months a year. Staff proposes to define a temporary employee as an employee with a duration of no longer than one year and employment that does not include any employer provided benefits, which is in line with the definition of “terminated”.

Moving to actuarial terminology, Ms. Storm stated that the purpose was to clarify certain actuarial terms to explain their use in the administration of SDRS. First, staff proposes to rename “actuarial requirement” to “the minimum actuarial requirement to support current benefits”. In addition, staff recommends revising “thirty year period” to a “period not to exceed thirty years”. Second, define “actuarially determined contribution” as fixed, statutory contributions as long as they support the benefits taking into consideration the range of future COLAs. Finally, specify that the “actuarial value of assets” is the same as the “fair value of assets” as the fair value of assets will be the actuarial value of assets going forward.

Mr. Wylie stated that it had been 10 years since the automatic enrollment feature was added to the Supplemental Retirement Plan (SRP) for state government and Board of Regent employees, as well as any other employer who elected to participate. Five years later automatic escalation was implemented for state employees and any other employer who chose to participate. Because of the great success of the program and the low opt- out rate, staff is again bringing legislation to expand automatic enrollment and automatic escalation in the SRP to include employees hired prior to the effective date of the original legislation. He noted that increasing the deferral and automatic escalation amount may, or may not be, part of the legislation.

Justice Zinter informed the Retirement Laws Committee that the Board had been studying the salary schedule of the executive director for some time in an effort to decouple the executive director’s salary from the state’s salary policy.

Ms. Gill explained that a survey by the Bureau of Human Resources regarding the executive director’s salary has been completed. She stated that the current executive director salary was $136,468, and that this position was unique in that it was appointed by the Board and linked to the Retirement Laws Committee. Ms. Gill noted that her office surveyed the six surrounding states, as well as used salary information from a published survey of 33 state retirement systems.

Lt. Governor Michels stated that the Board is proposing that, subject to budgetary authority and oversight both by the Legislature and joint Retirement Laws Committee, the Board has the authority to set the salary for the executive director.

Board Action No action was necessary.

7 AGENDA ITEM 11 MANAGING SDRS FOR SUSTAINABILITY

Summary of Presentation Mr. Wylie stated that SDRS covers essentially all South Dakota public employees. Defined benefits with hybrid and variable benefit features, as well as fixed, statutory contribution rates and statutory funding thresholds requiring recommendations for benefit reductions or other corrective actions if crossed, make SDRS unique.

Mr. Wylie stated that the fixed, statutory contribution rates have never been adjusted because of plan experience. The contribution rate of 6 percent of pay for both employer and member for most members is very modest compared to the median employer rate of 13 percent for statewide retirement plans. He noted that benefits must be actively managed to reflect available resources from fixed member and employer contributions, volatile investment returns, and changing economic conditions.

The Board of Trustees oversees SDRS. The Board is comprised of primarily elected representatives of employee and employer groups and has the fiduciary responsibility for managing SDRS, making policy recommendations to meet funding goals, and initiating legislation.

The bipartisan standing Retirement Laws Committees review all legislation pertaining to retirement issues, almost always with input and recommendations from the Board, with changes to SDRS typically made only with broad consensus.

Mr. Wylie went on to highlight some Board initiatives and legislative changes that have happened over the past 10 years. He noted that significant and frequent initiatives have been required to manage SDRS within its resources and the Board’s and Legislature’s actions over the past 10 years have been unmatched in the history of SDRS.

Mr. Wylie stated that while SDRS is currently well positioned, the contingency planning will continue.

Board Action No action was necessary.

AGENDA ITEM 12 MORE WORK TO DO – CONSIDERATION OF BENEFIT IMPROVEMENTS AND CORRECTIVE ACTIONS

Summary of Presentation Mr. Paul Schrader, Retirement Consultant, reviewed the accomplishments of SDRS. He noted that those accomplishments happened because of the dedication of the Board, Investment Office, and legislators who all took responsibility for the plan.

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Mr. Schrader stated that the current policy regarding consideration of benefit improvements included minimum conditions that needed to be met before benefit improvements would even be considered. These include a 120 percent minimum fair value funded ratio, ability to fully fund the improvement, and maintain 120 percent fair value funded ratio after funding the benefit improvement.

He noted that some additional recommended objectives included improving benefits for both active and retired members, avoiding additional fixed benefit obligations, and basing improvement on both member pay and service. In addition, the Board should consider the objectives established in the long-term benefit goals and any shortfalls. The Board should also add flexible language to have the ability to reverse or reduce the improvement in the future if required due to changing conditions. Most importantly, advised Mr. Schrader, the Board needs to be cautious.

Mr. Schrader stated that benefit improvements that could be considered when the minimum conditions are met include making a contribution to a variable retirement account and considering an allocation formula based on both pay and all or partial service for active and inactive members. For retired members there could be a 13th check, one time or repeating for a limited period, or a one-time COLA adjustment if past COLAs have not met inflation.

When the fair value funded ratio is less than 100 percent or fixed, statutory contributions are not sufficient to fund benefits, corrective actions are required by statute. When this happens, recommended objectives include considering reversing the most recent benefit improvement, if possible. The Board could also follow the template from the Generational benefit structure and maintain the balance between the Foundation and Generational members. However, since variable COLA adjustments will have reduced the COLA to the .5 percent minimum, additional COLA adjustments should be considered only after other changes. Considering corrections that exceed what is minimally required may also be prudent.

Some possible corrective actions that could be made when required include providing an actuarial reduction for early retirement, raising the normal retirement eligibility to reflect improved life expectancy, modifying the special early retirement eligibility, extending the final average compensation period beyond five years, providing the Generational benefit structure for future service for Foundation members or suspending contributions to the variable retirement account for active and inactive members. For retired members, suspending the COLA would be the recommended action.

The next steps, advised Mr. Schrader, are to continue the discussions and finalize the objectives. The Board should also consider other benefit changes and prioritize changes to be considered when and if conditions dictate.

9 Board Action No action was necessary.

AGENDA ITEM 13 SUPPLEMENTAL RETIREMENT PLAN/SPECIAL PAY PLAN

Summary of Presentation Annual Service Report Ms. June Larson, Program Director, and Mr. Mike Studebaker, Regional Vice President, Nationwide Retirement Solutions, reviewed the plan membership information for the Supplemental Retirement Plan and the Special Pay Program.

Ms. Larson noted that the employer must elect to join the automatic enrollment provisions and currently 60 local employers, the executive branch of state government, and seven other state entities have joined. Of those, 27 employers have elected to offer the automatic-escalation to their employees as well.

From July 1, 2016, through June 30, 2017, there have been 2,950 new hires auto-enrolled into the SRP and, to date, only 138 of them have opted out of the plan. The number of participants who have increased their deferrals during FY 2017 increased from 4,495 to 6,312. The average amount of the deferral increase decreased from $15 in 2016 to $14. This is due to the auto-escalation process that took effect last year.

Mr. Studebaker stated that there are currently 23,280 members in the SRP. Of that number, 12,372 are actively deferring, 9,895 have assets but are not deferring, and 1,013 are in payout status. He advised that the number of actively deferring as well as inactive participants continues to grow, which is a good sign.

In the Special Pay Program, advised Mr. Studebaker, there are 3,077 participants with total assets of over $50M. There are currently 134 participating employers.

Investment Portfolio Review Mr. Clark advised the Board that the Investment Office has reviewed the SRP investment alternatives and was not recommending any changes to the investment options.

Board Action IT WAS MOVED BY MR. ALBERTS, SECONDED BY MR. LINDSAY, TO ACCEPT THE SUPPLEMENTAL RETIREMENT PLAN REPORT AS PRESENTED BY REPRESENTATIVES OF NATIONWIDE RETIREMENT SOLUTIONS. THE MOTION PASSED UNANIMOUSLY ON A VOICE VOTE.

10 AGENDA ITEM 14 OLD/NEW BUSINESS

Summary of Presentation Recent Communications – Election Survey Mr. Almond reviewed the results of the election survey that was sent to 5,500 members.

Actuarial Standards Board Pension Task Force Mr. Fiddler noted that there has been a recent report from an Actuarial Standards Board task force that suggested changes to how public pension plans value and disclose their liabilities. This means is that in the next year or two staff will be interacting with the Actuarial Standards Board about proposed changes to reporting standards for public pension plans.

Upcoming Board Meeting Dates Mr. Wylie stated that the proposed meeting dates were listed on the agenda and asked for Board input on a couple of the dates.

Board Action Upcoming Board Meeting Dates It was the consensus of the Board to have the December 2017 meeting on December 7 and the June 2018 meeting on June 13&14 in Sioux Falls with the Investment Council.

ADJOURNMENT

IT WAS MOVED BY MR. JOHNSON, SECONDED BY MR. LINDSAY, THAT THERE BEING NO FURTHER BUSINESS, THE MEETING BE DECLARED ADJOURNED. THE MOTION PASSED UNANIMOUSLY ON A VOICE VOTE.

Respectfully Submitted,

Robert A. Wylie Executive Director

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