agenda sdrs board of trustees

AGENDA SDRS BOARD OF TRUSTEES

South Dakota Retirement System

222 E. Capitol Ave Pierre, SD 57501

DATE: Wednesday, June 2, 2021 TIME: 9:00 a.m. CST (8:00 a.m. MST)

THIS MEETING WILL BE BROADCAST LIVE AT HTTPS://WWW.SD.NET/.

9:00 a.m. Call SDRS Meeting to Order – Determination of Quorum* ITEM 1 - Chair's Preliminary Remarks

• Introductions and Announcements • Board Conflict Disclosure • Policy Concerning Public Testimony and Comments

ITEM 2 - Approval of April 1, 2021 Minutes ITEM 3 - SDRS Board of Trustees Election Results – Dawn Smith, Executive/Board

Assistant ITEM 4 - Recognition of Retiring Board Members – Travis Almond, Executive

Director • Dr. James O. Hansen • Laurie Gustafson

ITEM 5 - FY23 Budget Request – Travis Almond and Michelle Mikkelsen, Chief

Financial Officer ITEM 6 - Appointment of Audit Committee – James Johns, SDRS Board Chair ITEM 7 - Member Services Educational Programs Review – Michelle Humann,

Member Services Manager and Alan Freng, Retirement Planner ITEM 8 - Follow-Up to Long-Term Benefit Goals Review – Paul Schrader, Retirement

Consultant and Doug Fiddler, Senior Actuary ITEM 9 - Update of SDRS FY21 Investment Performance – Matt Clark, State Investment Officer

https://www.sd.net/

ITEM 10 - Projected Funded Status of the South Dakota Retirement System – Doug Fiddler ITEM 11 - Asset Allocation – Matt Clark ITEM 12 - Public Comment ITEM 13 - Executive Director’s Performance Evaluation (Possible Executive Session) ITEM 14 - Old/New Business

• Conference Attendance • Upcoming Board Meeting Dates

ADA COMPLIANCE: THE SOUTH DAKOTA RETIREMENT SYSTEM FULLY SUBSCRIBES TO THE PROVISIONS OF THE AMERICANS WITH DISABILITIES ACT. IF YOU DESIRE TO ATTEND THIS PUBLIC MEETING AND ARE IN NEED OF SPECIAL ACCOMMODATIONS, PLEASE NOTIFY THE SDRS OFFICE AT LEAST 72 HOURS PRIOR TO THE MEETING SO APPROPRIATE AUXILIARY AIDS AND SERVICES CAN BE MADE AVAILABLE.

FUTURE 2021 MEETINGS September 2 December 2

*In some circumstances, the Chair may choose to take agenda items out of the listed order.

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BOARD MEETING

SOUTH DAKOTA RETIREMENT SYSTEM

April 1, 2021

The Board of Trustees of the South Dakota Retirement System held its regular Board meeting on April 1, 2021. The meeting began at 9:00 a.m. via Teams Conference Call. BOARD MEMBERS IN ATTENDANCE: James Johns, Chair Eric Stroeder, Vice Chair Karl Alberts James Appl Penny Brunken Kathy Greeneway Laurie Gustafson Dr. James Hansen Myron Johnson Kevin Merrill Justice Mark Salter Darin Seeley Glen Vilhauer Doug Wermedal Matt Clark, Ex Officio Board member Liza Clark was absent. OTHERS IN ATTENDANCE: Larry Langer, CavMac Paul Schrader Brittnie Adamson Travis Almond Jane Beer Doug Fiddler Michelle Humann

Table of Contents Board Member Conflicts Disclosure .............................2 Minutes .........................................................................2 Board Member Election Update ....................................2 2021 Legislative and Budget Report .............................3 Investment Performance Update ...................................3 SDRS Projected Funded Status .....................................4 Administrative Rules Hearing .......................................5 What’s Happening with other CavMac Clients .............5 Review SDRS Long Term Benefit Goals & Object ......6 Effective Rate of Interest for FY 2022 ..........................9 Set FY 2022 Supplemental Pension Benefit Int. Rate ...9 Public Comment ............................................................10 Old/New Business

Staff Retirement ............................................10 Upcoming Meeting Dates ..............................10

Executive Director’s Performance Evaluation ..............11

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Sam Koldenhoven Michelle Mikkelsen Dawn Smith Jacque Storm

AGENDA ITEM 1 CHAIR’S PRELIMINARY REMARKS AND

BOARD CONFLICT DISCLOSURE Summary of Discussion: No board member had any conflict to disclose. Board Action: No action was necessary.

AGENDA ITEM 2

APPROVAL OF MEETING MINUTES Board Action IT WAS MOVED BY DR. HANSEN, SECONDED BY MR. JOHNSON, TO APPROVE THE MINUTES OF THE DECEMBER 3, AND DECEMBER 10, 2020, BOARD MEETINGS. THE MOTION PASSED UNANIMOUSLY ON A ROLL CALL VOTE. THOSE VOTING AYE: ALBERTS, APPL, BRANT, BRUNKEN, GREENEWAY, GUSTAFSON, HANSEN, JOHNS, JOHNSON, MERRILL, SALTER, SEELEY, STROEDER, VILHAUER, WERMEDAL. THOSE ABSENT AND NOT VOTING: CLARK(LIZA)

AGENDA ITEM 3 BOARD MEMBER ELECTION UPDATE

Summary of Discussion Ms. Dawn Smith, SDRS Executive/Board Assistant, informed the Board of the current election candidates. She stated that there would be two elections as there were multiple candidates for the State Employee representative and Retiree positions. The candidate for the Teacher representative was unopposed. Board Action No action was required.

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AGENDA ITEM 4 2021 LEGISLATIVE AND BUDGET REPORT

Summary of Discussion Ms. Jacque Storm, SDRS Deputy Director/General Counsel, discussed the 2021 Legislative Session. She explained that all the SDRS bills received unanimous support from the Retirement Laws Committees of both houses and the House floor, however the COLA bill received two votes against it on the Senate floor. They were all signed by the Governor. She noted that there were several other bills SDRS was watching during the Legislative Session. These included bills that modify the composition of the Retirement Laws Committee and a bill that impacts how board members vote in a teleconference meeting. There were also several bills SDRS was watching that did not get enacted. These included bills that would have removed the requirement that each teleconference meeting provide a place for the public to participate, required posting all the materials of a public meeting at the principal office of a political subdivision, and required that any website or platform used by a public body to livestream a meeting meet certain requirements. Ms. Jane Beer, SDRS Chief Financial Officer, stated SDRS requested a decrease of $47,000 in expenditure authority and a shift of $87,021 in other fund expenditure authority from operating expenses to personal services for the 2022 SDRS budget and the Legislature approved the SDRS budget as requested. Board Action No action was necessary.

AGENDA ITEM 5 INVESTMENT PERFORMANCE UPDATE

Summary of Discussion Mr. Matt Clark, State Investment Officer, stated that through March 31, 2021, the estimated return for SDRS was approximately 16.5 percent. Board Action No action was necessary.

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AGENDA ITEM 6 SDRS PROJECTED FUNDED STATUS

Summary of Discussion Mr. Doug Fiddler, SDRS Senior Actuary, noted that the SDRS COLA will vary with both inflation and long-term affordability. As a result, under most circumstances, SDRS’s fair value funded ratio (FVFR) is expected to remain at 100 percent. Mr. Fiddler noted that since 2010, the average SDRS COLA of 2.3 percent was almost 1 percent higher than the average inflation for the same time period. Mr. Fiddler stated that based on a FY21 net investment return of 16.5 percent the baseline FVFR is expected to be 101 percent at June 30, 2021. As a result, the preliminary estimated 2022 COLA would be equal to inflation within the full COLA range (0-3.5 percent). Mr. Fiddler noted that the most significant immediate risk to SDRS is investment risk. The investment returns will first impact the variable SDRS COLA. Less than assumed returns will reduce the restricted maximum COLA while greater than assumed returns will increase maximum or enable the full COLA range. However, the variable COLA will not be sufficient to maintain 100 percent FVFR in all conditions and additional corrective actions may be required. Mr. Fiddler stated at June 30, 2020, the estimated one-year likelihood of required corrective action recommendations using the current asset allocation statistics was 24 percent. Legislation enacted in 2021 reduced the minimum COLA to 0%, which when considered at June 30, 2020, reduced the estimated one-year likelihood of required corrective action recommendations to 14 percent. Mr. Fiddler advised that if FY 2021 net investment returns are 10 percent, the estimated likelihood of required corrective action recommendations at the end of FY 2022 would reduce to 9 percent. In summary, advised Mr. Fiddler, the recent investment experience less than the 6.5 percent assumption reduced the maximum COLA and increased the likelihood of required corrective action recommendations. However, reducing the minimum COLA to 0 percent allows SDRS to weather more severe downturns without required corrective action recommendations and is a significant change. If FY 2021 net investment returns are below approximately negative 7 percent, a corrective action recommendation would be required. Returns near 10 percent would increase the maximum COLA range and the required corrective action likelihood would

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decrease. If the return exceeds approximately 15 percent, the full COLA range may be affordable.

ADMINISTRATIVE RULES HEARING

Summary of Discussion A copy of the minutes from the administrative rules hearing is in the office of the Executive Director. Board Action IT WAS MOVED BY DR. HANSEN, SECONDED BY MR. WEREMEDAL TO ADOPT THE ADMINISTRATIVE RULES AS PRESENTED. THE MOTION PASSED UNANIMOUSLY ON A ROLL CALL VOTE. THOSE VOTING AYE: ALBERTS, APPL, BRANT, BRUNKEN, GREENEWAY, GUSTAFSON, HANSEN, JOHNS, JOHNSON, MERRILL, SALTER, SEELEY, STROEDER, VILHAUER, WERMEDAL. THOSE ABSENT AND NOT VOTING: CLARK(LIZA)

AGENDA ITEM 7 WHAT’S HAPPENING WITH OTHER CAVANAUGH MACDONALD

CONSULTING CLIENTS Summary of Discussion Mr. Larry Langer, Principal and Consulting Actuary, Cavanaugh Macdonald Consulting (CavMac) shared CavMac’s recent experiences with other public sector clients. He noted that plans’ fiscal year 2020 returns generally exceeded return assumptions and COVID is having mixed demographic impacts with some reporting lower retirements and terminations, which contradicts expectations. Systems will likely experience more deaths in 2020/2021 with experience varying based on members covered and geography. In addition, public sector workers may not have the same experience as the general public. Mr. Langer stated that, while it is still early, no funding cuts were anticipated. There is some concern about salary/contribution leakage due to fewer active employees as well as the impact of the phase-in of contributions due to reductions in investment return. Actuaries’ focus on reducing the funding periods below 25 years to avoid negative amortization is not gaining much traction and the funding of OPEB is almost nonexistent. Mr. Langer noted that there were no real “major” legislative initiatives as the focus was currently elsewhere. COVID is driving some legislation as a presumption for disability benefits and temporary return to work legislation to fill high need positions. Revenues may not be an issue for many states as they are above

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expectations. In addition, advised Mr. Langer, some states are reviewing their COLA practices while others are continuing their focus on DC/Hybrid plans and lower benefits tiers to lower the sponsors risk. Mr. Langer stated that some states are adopting the PUB2010 Public Sector mortality table and are continuing to shift to generational mortality to reflect a gradually improving mortality. There is hesitancy to reflect the impact of COVID on future mortality until it occurs because there is no way to know which way mortality will trend. There is also a continued movement towards a more realistic investment return assumption as well as lowering inflation while maintaining real returns which drives lower return assumptions. Board Action No action was necessary.

AGENDA ITEM 8

REVIEW SDRS LONG TERM BENEFIT GOALS AND OBJECTIVES Summary of Discussion Mr. Travis Almond, SDRS Executive Director, stated that the Board establishing and assessing goals, including specific goals for both funding/sustainability metrics as well as benefit adequacy, has been a significant contributor to the success of SDRS. He noted that SDRS operates within a fixed contribution budget and current SDRS funding neither requires benefit reductions, nor supports benefits improvements. Mr. Paul Schrader, SDRS Retirement Consultant, stated that for years, SDRS has set long-term benefit goals based on member needs and compared SDRS’ benefits with those of similar systems. The objective for this presentation, advised Mr. Schrader, is to review the current goals, assess progress in meeting those goals, consider updated information needed to judge adequacy of the goals, and identify potential changes to the goals. Mr. Schrader stated that SDRS’ Income Replacement Goal is at least 55 percent of final average compensation for career members (Class A – 30 years; Public Safety – 25 years; and Judicial – 20 years). Under the current provisions, the benefit formulas are higher for service before 2008 and different by member class and Foundation/Generational status. Currently, advised Mr. Schrader, this goal is not being achieved for all members. Mr. Schrader questioned whether the career service criteria was appropriate for the income replacement goal considering the typical working career of a member. He noted that the achievement of the goal for Foundation members varied based on

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members’ service before or after 2008, and there is a significant shortfall for Foundation members other than judicial. The goal could be achieved for Foundation members if Class A members worked an additional six years and Public Safety members worked an additional three years. For the Generational members, the goal is achieved for Class A and Judicial members and 94 percent achieved for Public Safety members when the variable retirement account (VRA) is included. Moving to the total income replacement/savings goal, Mr. Shrader stated that the goal was to promote an income replacement of 85 percent of FAC including SDRS, Social Security, and savings of at least 100 percent of pay at retirement. There are multiple savings opportunities offered through SDRS and education and promotion of those opportunities is ongoing. The 85 percent income replacement goal is likely achieved currently for the average Class A member with 30 years of service if the member retires at age 65 or later. Mr. Schrader noted that a 70 to 80 percent total income replacement was historically touted as adequate, with more needed for the lowest income employee and less for higher income employees. The 85 percent SDRS goal was developed years ago based on pre- and post-retirement expenses and tax considerations. The question now, advised Mr. Schrader, is 85 percent the right message? Should the goal vary based on income? How is the cost of health care considered? Is the savings goal of at least 100 percent of pay at retirement adequate? And should the 85 percent goal be met before normal retirement age with 30 years of service considering SDRS, Social Security and the savings goal? Mr. Schrader recommended an updated analysis of the income replacement needed at retirement for a fresh look and to address these questions. The normal retirement age goals have been achieved. For the Foundation members SDRS provides an unreduced benefit at appropriate age considering demands of public safety jobs, while the Generational normal retirement ages reflect higher life expectancies. Mr. Schrader advised that the goals should be periodically reevaluated to consider changes to the Social Security normal retirement age, improved life expectancy, and changes to Medicare eligibility. Mr. Schrader stated that the early retirement income goal for Foundation members was to provide unreduced benefits 10 years prior to normal retirement age for long-service members and subsidized reduced benefits for others. For Generational members the goal is to provide non-subsidized reduced benefits 10 years prior to normal retirement age. These goals are currently being achieved. Under the current provisions, Class A Foundation members have the Rule of 85 benefit based on age

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and service, and a 3 percent annual early retirement reduction. Generational members have no “Rule of benefit” and their early retirement reduction is 5 percent annually. Mr. Schrader noted that SDRS members are working longer and early retirement is not a reality for most members without substantial savings or work after retirement. Health care costs, particularly before Medicare eligibility, are a significant factor. SDRS education efforts may be influencing delayed retirements as well. The return to work rules appear to be effective in assuring termination of employment and avoiding subsidies. The Generational benefits trade a later normal retirement age and elimination of early retirement subsidies for higher benefit formulas and a variable retirement account (VRA). It is likely that younger members will need to work to an older age because of SDRS and Social Security normal retirement age changes and continuing high health care costs. The COLA goal of providing limited inflation protection after retirement and after termination of employment based on affordability and the CPI-W has been achieved. The COLA has met or exceeded inflation, except for the minimal shortfall in 2018-2019. Mr. Schrader questioned if the goal should be to provide inflation protection without the qualifier and if the CPI-W was the best measure of inflation. He noted that during high inflation, the COLA is limited to 3.5 percent. The COLA is also limited to less than inflation when not affordable. Past COLA adequacy has been identified as a priority consideration when improvements are affordable under the SDRS Board planning guide. Mr. Schrader stated that the disability income, family benefits, surviving spouse benefits, minimum death benefit, and enhanced portability goals have all been achieved. The disability and survivor benefits for death before retirement were greatly simplified and improved several years ago. The combination of SDRS and Social Security benefits provide benefit adequacy for the average member. For example, the average member will receive disability income of 67 percent of FAC including Social Security and temporary family income replacement of nearly 100 percent of FAC including Social Security in the event of the pre-retirement death of a spouse with two children. Having post-retirement surviving spouse benefits at no cost for the Foundation members is uncommon for plans covering Class A members. The post-retirement surviving spouse benefit changes for Generational members were part of the trade-off for higher benefit formulas and the VRA, which results in equal treatment for married and non-married members. The goals to maintain and enhance the likelihood of sustainability to preserve the current benefit structure and preserving the tax-qualified status of SDRS to continue favorable tax treatment to members have both been achieved as well. Both of these efforts are on-going.

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In summary, stated Mr. Schrader, most of the goals have been achieved. The income replacement goals are not met based on career service criteria and are the weakest link. The next steps are to revisit the income replacement needs, compare SDRS practices with peer plans in the region, identify new initiatives, and update the goals based on the findings. Board Action No action was necessary.

AGENDA ITEM 9

EFFECTIVE RATE OF INTEREST FOR FY22 Summary of Discussion Ms. Jane Beer noted that SDCL 3-12C-108 states that SDRS’s annual effective rate of interest shall be no greater than 90 percent of the average 91-day United States Treasury bill rate for the immediately preceding calendar year. Advising that the 91-day United States Treasury bill rate was .35 percent for 2020, Ms. Beer stated that 90 percent of the rate is .32 percent. She noted that this interest rate would be credited on July 1, 2022, for the period of July 1, 2021, through June 30, 2022. Board Action IT WAS MOVED BY MR. APPL, SECONDED BY MR. VILHAUER, TO SET THE EFFECTIVE RATE OF INTEREST TO BE CREDITED FROM JULY 1, 2021, TO JUNE 30, 2022, AT .32 PERCENT. THE MOTION PASSED UNANIMOUSLY ON A ROLL CALL VOTE. THOSE VOTING AYE: ALBERTS, APPL, BRANT, BRUNKEN, GREENEWAY, GUSTAFSON, HANSEN, JOHNS, JOHNSON, MERRILL, SALTER, SEELEY, STROEDER, VILHAUER, WERMEDAL. THOSE ABSENT AND NOT VOTING: CLARK(LIZA)

AGENDA ITEM 10 SET FY22 SUPPLEMENTAL PENSION BENEFIT

INTEREST RATE ASSUMPTION

Summary of Discussion Mr. Almond stated that the Board needed to establish the periodic Supplemental Pension Benefit interest rate assumption. He added that the interest rate assumption could not be greater than the actuarial assumed rate of return for SDRS, nor could it be less than the SDRS effective rate of interest.

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He advised that the interest rate assumption is established based on the recommendations of both the system’s external actuary and the State Investment Officer with the input of the Executive Director. The external actuary recommended between 1.75 and 2.75 percent and the State Investment Officer recommended between 3.0 and 3.5 percent. Based on all the information and the process established by the Board, Mr. Almond stated it was his recommendation that the Board set the Supplemental Pension Benefit interest rate assumption at 2.875 percent, effective July 1, 2021.

Board Action IT WAS MOVED BY MR. ALBERTS, SECONDED BY MS. GUSTAFSON, TO ESTABLISH THE INTEREST RATE FOR THE SUPPLEMENTAL PENSION BENEFIT AT 2.875 PERCENT, EFFECTIVE JULY 1, 2021. THE MOTION PASSED UNANIMOUSLY ON A ROLL CALL VOTE. THOSE VOTING AYE: ALBERTS, APPL, BRANT, BRUNKEN, GREENEWAY, GUSTAFSON, HANSEN, JOHNS, JOHNSON, MERRILL, SALTER, SEELEY, STROEDER, VILHAUER, WERMEDAL. THOSE ABSENT AND NOT VOTING: CLARK(LIZA)

AGENDA ITEM 11 PUBLIC COMMENT

Summary of Discussion There was no public comment.

AGENDA ITEM 12 OLD/NEW BUSINESS

Summary of Discussion Staff Retirement Mr. Almond stated that Jane Beer, SDRS Chief Financial Officer, would be retiring April 23rd. Upcoming Meetings The Board discussed the upcoming meeting schedule. Board Action No action was necessary.

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AGENDA ITEM 13 EXECUTIVE DIRECTOR’S PERFORMANCE EVALUATION

Summary of Discussion This item was deferred to the June meeting.

ADJOURNMENT IT WAS MOVED BY MR. JOHNSON, SECONDED BY MS. GREENEWAY, THAT THERE BEING NO FURTHER BUSINESS, THE MEETING BE DECLARED ADJOURNED. THE MOTION PASSED UNANIMOUSLY ON A ROLL CALL VOTE. THOSE VOTING AYE: ALBERTS, APPL, BRANT, BRUNKEN, GREENEWAY, GUSTAFSON, HANSEN, JOHNS, JOHNSON, MERRILL, SALTER, SEELEY, STROEDER, VILHAUER, WERMEDAL. THOSE ABSENT AND NOT VOTING: CLARK(LIZA) Respectfully submitted, Travis Almond Executive Director

222 East Capitol Avenue, Suite 8 PO Box 1098 Pierre, SD 57501

Toll-Free (888) 605-SDRS Phone (605) 773-3731 Fax (605) 773-3949 sdrs.sd.gov

2021 ELECTION TIMETABLE

Retirees, State Employees, and Teachers

December 11, 2020 “Notice of Election” and “Petitions for Nomination” mailed (must be done no later than January 15) February 23, 2021 Petitions must be filed with Executive Director no later than 5 p.m. (CT) Petitions Submitted:

• 8 Retiree Petitions • 2 State Employee Petitions • 1 Teacher Petition

April 13, 2021 Initial data provided to third party administrator April 23, 2021 Finalized data provided to third party administrator April 29, 2021 Ballots and special election newsletter mailed (must be mailed no later than April 30)

• Retiree Packets – 27,046 • State Employee Packets – 8,474 • Teacher Packets – 12,194 (newsletter only)

May 25, 2021 Ballots must be received from voting members no later than 5 p.m. May 28, 2021 Ballots must be counted no later than last business day of May. Executive Director notifies candidates and board members of tentative election results within 3 business days of completion of ballot counting June 2, 2021 Board of Trustees certifies results of the election

Three SDRS Board Positions Open for This Election

Election Newsletter2021

State employees and re rees will choose their

representa ves to the SDRS Board of Trustees in this

year’s elec on. The candidate for teacher

representa ve (James Appl) is unopposed.

Each group within SDRS elects its own representa ve;

therefore, only state employees and re rees will receive

ballots this year. Elec ons for representa ves to the

SDRS board are held each spring. The representa ves’

terms begin July 1 and are four years in length.

This special elec on issue of Outlook is intended to

provide members with basic informa on on the

candidates seeking elec on to the board. All biographical

informa on is printed as submi ed by the candidates.

Addi onal ques ons on qualifica ons or philosophy

should be directed to the candidates.

Votes Must Be Received by May 25, 2021

The 2021 SDRS Board of Trustees’ elec on and ballo ng

processes are being managed through a third‐party

elec on services provider, Elec on Services Corpora on

(ESC). Only state employees and re rees will receive

ballots in this year’s elec on, as the candidate for

teachers is running unopposed.

State employees and re rees: You may cast your vote

for your representa ve by mail or online. Each ballot

contains a unique code which allows a member to vote

only once. If you are vo ng by mail, do not vote online

as the first vote received is the vote that is counted.

Vo ng by Mail Included with this newsle er is a paper ballot. To vote

by mail, mark your selec on for ONE candidate, detach

the ballot por on, and place it in the enclosed return

envelope. Do not put any other material in the

envelope. To be counted, envelopes must be received

no later than 5:00 PM CT on May 25, 2021.

Vo ng Online If you prefer to vote electronically, you may access the

secure SDRS Elec on login page at:

h ps://vote.escvote.com/SDRS

To login and vote online, you must enter your Elec on

Valida on Number and ZIP code, as marked on the

enclosure. Votes can be cast online beginning April 29,

2021, at 8:00 AM CT and may be cast through 5:00 PM

CT on May 25, 2021.

If you need voter assistance or a replacement ballot,

please contact ESC by emailing

SDRSHelp@elec onservicescorp.com or call toll‐free

1‐866‐720‐HELP (4357).

This Year’s Election

Re rees State Employees Teachers

Prospective Election Schedule

2022 Classified Employees Public Safety Employees Teachers

2023

County Commissioners Elected Municipal Officials Judges, Jus ces, and

Magistrate Judges Municipal Employees

2024

Board of Regents County Employees School Boards State Employees

This special issue of Outlook is produced to communicate informa on about candidates seeking a posi on on the SDRS Board of Trustees. It is published with funds

provided through the contribu ons of teachers, school boards, state government, state employees, county commissions, county employees, municipal governments,

and municipal employees. 47,850 copies of this document were printed on recycled paper by SDRS at a cost of $0.129 per document.

Hello, my name is Jill Lenards. I grew up on a dairy farm near Kranzburg and graduated from Waverly. I obtained a B.S. degree in Accoun ng and Finance from Northern State University. I have served as an Auditor for the Department of Revenue for the last 22 years. I have had the privilege to work with many wonderful business people throughout South Dakota and the United States! I am a member of the South Dakota State Employees Organiza on (SDSEO). I have completed the STAR leadership program offered by the Department of Revenue. I recently finished the Governors Leadership Program. I am an ac ve volunteer with the Watertown Op mist Club, 4‐H, church and community events, SDHSAA, and Final Four ac vi es. As a vested member of SDRS, I am eager to maintain the sustainability of the system for many years and ensure all governmental employees understand the benefits of SDRS. I have been listening to the SDRS mee ngs and am grateful for all they have accomplished for the great State of South Dakota! I am passionate for all governmental employees and their future well‐being. Thanks for your considera on of my candidacy. I would be honored to serve as your representa ve.

Jill Lenards

State Employees

I began my current role as Medical Facili es Engineer for the Department of Health star ng in 2008. I earned a B.S. in Electrical Engineering from South Dakota State University in 2006. I’ve held several leadership roles in my life me star ng early as an Eagle Scout and con nuing to Students Associa on representa ve in college, leading up to my current role managing the finances and business of my church as Treasurer. The SDRS is the best benefit offered to state employees, and I will ensure we keep it that way. If you select me as an employee representa ve to the SDRS board of trustees expect more of what’s worked so well in the past. As the son and grandson of (re red) state workers reliant on the SDRS for income, I’ve seen firsthand the importance of the state pension and value its con nuity. I started managing my finances crea ng my por olio in 1998 at age 18, knowing even at that young age the importance of future financial stability. I’ve also had addi onal experience teaching several Dave Ramsey Financial Peace University classes in the past. Thank you for considera on of my candidacy. I would be honored to serve as your representa ve on the SDRS board.

Chad Meirose

Teachers (Unopposed)

I have served on the SDRS for 4 years and have been a teacher for the Aberdeen School District serving as a middle and high school teacher for 29 years. During that me I have served as a newspaper advisor, volleyball, boys’ basketball, girls’ basketball, football, and track coach. In my free me, I enjoy spending me with my wife Susan (music teacher), daughters Jessica (elementary teacher), Ka e (band teacher), and Jennifer (NSU future teacher). We travel, waterski, fish, snow ski, and hunt deer and pheasants together. My philosophy with money is simple. With my first paycheck from teaching, I invested $415 and s ll invest in Roth IRAs, TSAs, and SDRS Supplemental Plan. Our money has to work for us when we are young, so we can reap the benefits when we need it. I spend me reading financial books wri en by Dave Ramsey, Suzie Orman, and others. Behind their philosophies and my own, I am debt free and make fiscally responsible decisions. My goal is to help each of us reach our re rement goals. I believe our SDRS and its leaders have made great progress, and I want to con nue assis ng in its growth for a secure future for everyone.

James Appl

South Dakota Re rement System

1‐888‐605‐SDRS (7377)

sdrs.sd.gov

Retirees

Janet Lindemann, MD, MBA, professor emeritus and re red dean of medical student educa on at the University of South Dakota Sanford School of Medicine, is a 1980 graduate of the Medical College of Wisconsin and fellow in the American Academy of Family Physicians. A er six years in small town private prac ce, she joined the faculty at the Medical College of Wisconsin and later at the University of South Dakota School of Medicine. In 2001, Janet was appointed dean of medical student educa on where she oversaw the four‐year curriculum for the MD degree un l re rement in 2018. Her MBA in healthcare management is from the University of Sioux Falls. She served on the Liaison Commi ee on Medical Educa on, which assures accredita on of North American medical schools. Awards include the Wisconsin Family Medicine Educator of the Year and the Associate of American Medical Colleges Central Group on Educa onal Affairs Laureate. Board experience includes the Marshfield Clinic Health System. “There is only one re ree on the SDRS Board. I have decided to run for the posi on to represent all those receiving pensions from SDRS. Our system is among the best in the na on and I am commi ed to sustaining that success.”

Janet Lindemann

Hello, my name is Burt Ellio and I am running for a spot on the SDRS Board. I am a re red 37 year

teacher/coach from Central High School. My background includes serving in the State Legislature from

2000 un l term‐limited in 2008, a er which I served 4 years on the Brown County Commission. While

in the Legislature I served on the State Re rement Laws Commi ee, so I have some background in the

governance of the system I have been a member of since 1970. I have experience in Public Policy

crea on and applica on. I am married to the former Sherrie Gray. Together we have 4 children and 10

grandchildren. I graduated from Pierre High School in 1965. I have a BS from Northern State College in

1969 and an MS from Northern in 1976. I have been re red since 2007. The SDRS is one of the most

stable and well‐funded systems in the United States and we must preserve it for future genera ons. I

have law making experience, Public Policy experience, and a commitment to the State Re rement

System, to protect and preserve the system so that it con nues to provide financial security for future

genera ons. I hope you will consider vo ng for me. Thank you very much.

Burt Elliot

I seek to be the voice of re rees on the SDRS Board of Trustees. SDRS exists for the sole benefit of its members and their families. I feel that my background and experience uniquely qualify me to serve effec vely in this capacity. I was raised on a farm/ranch in Parmelee, SD. A er gradua ng from Todd County High School in 1967, I earned my B.S. Degree in Secondary Educa on from Black Hills State University in 1971. I earned my M.S. Degree in Educa onal Administra on from Rutgers University in 1978 and then pursued further graduate studies at the University of SD in 1986. I con nuously served as a teacher and/or administrator in four South Dakota school districts over 40 years. In July of 2011, I re red a er 10 years as the Superintendent of Meade School District 46‐1. I am married and have four adult children and five grandchildren. Historically, the SDRS Board of Trustees has worked diligently to improve benefits for all members and maintain the financial integrity of the trust fund. If elected, I hope to con nue and contribute to this tradi on. I ask for your vote in helping me bring your voice to the SDRS Board of Trustees.

James Heinert

I re red in 2008 from the Sioux Falls school district. I taught mathema cs for 18 years at Washington High School and for 17 years at Roosevelt High School. I taught advanced mathema cs classes at the Sioux Falls Branch of Colorado Technical University from 2002 through December 2016. I served on the Execu ve Board of the South Dakota Council of Teachers of Mathema cs for 16 years, including two terms as President. I have presented numerous workshops at state conferences and for school districts. I have been a consultant for the Department of Educa on. I served on the SDRS Board of Trustees from 2006‐2010 as the “teacher” representa ve, and I would like to con nue my service to SDRS as the representa ve for all “re red” members. I will con nue to rely on my exper se in cri cal thinking and problem solving, along with my background in mathema cs and sta s cs, as we deal with the crucial ma ers and decisions that we will face in the coming months and years. My primary goals will be to protect the assets of SDRS, to maintain fiscal viability, and to strive for maximum funding status so that SDRS will con nue to provide excellent service for our members.

Charles T. Holmstrom

Mark Barne was S.D. A orney General for 12 years. He made substan al improvements to consumer protec on, vic ms’ rights, and crime vic ms’ compensa on. He handled numerous criminal cases, including South Dakota’s only serial killer. His cases have been featured in three television documentaries and a book. Barne also argued and won two reversals in the United States Supreme Court. He served as President of the Children’s Home Founda on. He served on the Spearfish Canyon Founda on, helping the public secure ownership of Roughlock Falls. Barne served on the Cons tu onal Revision Commission, and chaired the Law Enforcement Standards and Training Commission. He has con nually served on numerous state and local boards. Barne was a Circuit Judge for 12 years. During that me, a then recently re red state employee sued SDRS, claiming that he was en tled to his first year COLA, every year for the rest of his life. Judge Barne rejected the lawsuit, no ng that there is no such thing as a “forever COLA” for one year of re rees (which would have been at the expense of all other re rees.) He asks for your support. “I will measure every issue before the board, for fairness to one and all.”

Mark Barne

As a candidate for the Board of Trustees, I pledge to provide my experience and knowledge to maintain the strong re rement system for re rees from all of the par cipa ng units including school districts, public higher educa on, municipali es, coun es and state government as well as the many smaller public en es par cipa ng in SDRS. I can offer several perspec ves for the benefit of current and future re rees. I previously served on the Board of Trustees for eleven years as a state employee representa ve and six years as the school board representa ve. I also served five years on the State Investment Council during the me the 2008‐2009 na onal financial crisis occurred. Today re rees con nue to benefit from strong policies on investments and asset management that protect our re rement assets. My involvement with SDRS goes back to the origin of the System. In 1973‐74 I was staff analyst to the special commi ee of the Legisla ve Research Council that dra ed the SDRS legisla on crea ng SDRS. While working for the LRC, I served as the staff to the Legislature’s Re rement Laws Commi ee. I re red in 2018 from SDSU a er having served as the Chief Financial Officer for 36 years.

Wesley Tsche er

Dr. Kumoli Ramakrishnan (Dr. Ram), Emeritus Associate Professor, USD, earned a Ph.D. in Interna onal Business and Finance, from UT Dallas, a Masters in Management (Dis nc on) Asian Ins tute of Management, Philippines, and B.Sc.(HONS) Poona University, India and over 3 decades corporate, economics and finance teaching experience at Hofstra University, NY, Kellogg School of Management, Evanston, IL and USD. He co‐founded the student investment group, Coyote Capital Management (CCM), with assets about $2 million. With over 20 research presenta ons and publica ons, his 2021 research covers Global Demographics, and Covid‐19 infec on in different countries. His September 2020 publica on co‐authored with Dean Emeritus, Dipak C. Jain, Kellogg School of Management is, “The 5 Ps: President, Policy, Public, Pragma sm and Pandemics: Covid19”. He has over a decade execu ve experience in MNCs and the State Bank group in India. He served on the board of directors of Jovia FCU, New York, and Vermillion FCU. He also served in the Lions Club. He travelled extensively to Austria, Australia, India, England, Ireland, Scotland, New Zealand, Netherlands, and Philippines. His wife Michele and he live in Burbank, SD, on the Missouri River. Hobbies include Photography, Hiking, Boa ng. He has volunteered to serve on the Board of SDRS.

Dr. Kumoli Ramakrishnan

Service as an educator was my forty‐two‐year career. In 2006 I re red from the Rapid City School District a er serving 20 years as an elementary principal and Director of Federal Programs/Grants. Before that me I was a teacher in Sturgis and an elementary principal in Hot Springs. A er re ring from Rapid City, I was president of EduPeaks, Inc. This was an educa onal service company that contracted with the South Dakota Department of Educa on for eight years to provide oversight on how certain school districts spent Federal educa onal alloca ons. My wife of 46 years, Sharon, was also a teacher. She taught Family and Consumer Science as well as middle school science classes. We have a daughter who is a reading specialist in Spearfish. She and her husband have a son and a daughter. Our son and his wife Gina, own Old MacDonald’s Farm outside of Rapid City and the parents of four daughters. My interest in the posi on of Re ree Representa ve to the SDRS Board of Trustees is to help maintain the re rement system in a fiscally responsible manner and to provide the re red members all the benefits that are allowed.

Robert L. Rose

FY 2021 FY 2021 FY 2022 FY 2023 CHANGE % CHANGEAPPROVED ESTIMATED APPROVED PROPOSED FROM FROM

Summary Information: BUDGET EXPENSES BUDGET BUDGET FY 2022 FY 2022

PERSONAL SERVICES $2,823,967 $2,799,904 $2,974,514 $2,974,514 $0 0.0%OPERATING EXPENSES $2,222,265 $1,831,426 $2,110,272 $2,110,272 $0 0.0%

TOTAL SDRS BUDGET $5,046,232 $4,631,330 $5,084,786 $5,084,786 $0 0.0%



PERSONAL SERVICESSalary and Per Diem $2,148,772 $2,146,520 $2,297,510 $2,297,510 $0 0.0%Employee Benefits $675,195 $653,384 $677,004 $677,004 $0 0.0%

TOTAL PERSONAL SERVICES $2,823,967 $2,799,904 $2,974,514 $2,974,514 $0 0.0%

OPERATING EXPENSESTravel $101,539 $3,511 $101,539 $101,539 $0 0.0%Contractual Services $1,712,226 $1,362,625 $1,627,233 $1,627,233 $0 0.0%Supplies and Materials $322,000 $428,214 $342,000 $342,000 $0 0.0%Capital Assets $86,500 $37,076 $39,500 $39,500 $0 0.0%

.TOTAL OPERATING EXPENSE $2,222,265 $1,831,426 $2,110,272 $2,110,272 $0 0.0%




PERSONAL SERVICESSalary and Per Diem

Full-time Employees $2,131,141 $2,094,917 $2,279,231 $2,279,231 $0 0.0%Part-time Employees $1,907 $42,103 $1,976 $1,976 $0 0.0%Board of Trustees $15,724 $9,500 $16,303 $16,303 $0 0.0%

Total Salary and Per Diem $2,148,772 $2,146,520 $2,297,510 $2,297,510 $0 0.0%

Employee BenefitsSocial Security $201,200 $154,577 $192,614 $192,614 $0 0.0%Retirement $93,278 $136,327 $122,298 $122,298 $0 0.0%Moving expenses $0 $0 $0 $0 $0 0.0%Insurance, Health $376,933 $361,024 $358,241 $358,241 $0 0.0%Worker's Comp $2,845 $223 $2,845 $2,845 $0 0.0%Unemployment Insurance $939 $1,234 $1,006 $1,006 $0 0.0%

Total Employee Benefits $675,195 $653,384 $677,004 $677,004 $0 0.0%

TOTAL PERSONAL SERVICES $2,823,967 $2,799,904 $2,974,514 $2,974,514 $0 0.0%

SOUTH DAKOTA RETIREMENT SYSTEMFISCAL YEAR 2023

CHANGE FROM FY 2022


CHANGE FROM FY 2022

FISCAL YEAR 2023CHANGE FROM FY 2022

SOUTH DAKOTA RETIREMENT SYSTEMFISCAL YEAR 2023

of 2FY 2021 FY 2021 FY 2022 FY 2023 CHANGE % CHANGE

APPROVED ESTIMATED APPROVED PROPOSED FROM FROMOPERATING EXPENSES BUDGET EXPENSES BUDGET BUDGET FY 2022 FY 2022

TravelAuto state owned in state $16,960 $1,512 $16,960 $16,960 $0 0.0%Auto Private in state L rt $1,480 $41 $1,480 $1,480 $0 0.0%Auto Private in state H rt $3,000 $174 $3,000 $3,000 $0 0.0%Air state owned in state $4,400 $0 $4,400 $4,400 $0 0.0%Lodging in state $17,270 $0 $17,270 $17,270 $0 0.0%Incidentals in state $50 $0 $50 $50 $0 0.0%Non empl travel in state $1,278 $0 $1,278 $1,278 $0 0.0%Meals taxable in state $4,528 $41 $4,528 $4,528 $0 0.0%Non-taxable meals in state $3,000 $310 $3,000 $3,000 $0 0.0%Air comm out of state $16,498 $1,308 $16,498 $16,498 $0 0.0%Other puble out of state $2,480 $126 $2,480 $2,480 $0 0.0%Lodging out of state $26,880 $0 $26,880 $26,880 $0 0.0%Non taxable meals out of state $3,715 $0 $3,715 $3,715 $0 0.0%

Total Travel $101,539 $3,511 $101,539 $101,539 $0 0.0%

Contractual ServicesServices: Audit $148,375 $146,250 $158,375 $158,375 $0 0.0% Banking $20,300 $27,667 $35,300 $35,300 $0 0.0% Finance 5204134 $14,500 $0 $14,500 $14,500 $0 0.0% Valuations 5204130 $109,000 $64,000 $94,000 $94,000 $0 0.0% Consulting 5204131 $43,500 $0 $41,500 $41,500 $0 0.0% Studies 5204132 $5,000 $0 $5,000 $5,000 $0 0.0% Special Projects 5204133 $125,000 $63,496 $120,000 $120,000 $0 0.0% Legal $164,000 $4,164 $76,979 $76,979 $0 0.0% PR and Advertising $60,000 $0 $60,000 $60,000 $0 0.0% Medical $28,500 $0 $23,000 $23,000 $0 0.0% CEM 5204135 $45,000 $50,000 $50,000 $50,000 $0 0.0%Operations: Computer Services $451,973 $572,352 $472,125 $472,125 $0 0.0% Central Services $124,487 $68,418 $117,197 $117,197 $0 0.0% BOP/ Insurance Prem & Bonds $5,000 $4,138 $5,000 $5,000 $0 0.0% Equip Service & Maintenance $11,000 $47,645 $21,000 $21,000 $0 0.0% Janitorial Maintenance $11,894 $22,915 $20,060 $20,060 $0 0.0% Equipment Rental $23,997 $1,957 $5,997 $5,997 $0 0.0%Subscriptions $18,000 $23,237 $3,000 $3,000 $0 0.0%Dues and Membership Fees $61,000 $65,077 $56,000 $56,000 $0 0.0%Workshop Registration Fees $9,000 $4,644 $14,000 $14,000 $0 0.0%

Rent/Design Consulting Admin Bldg $146,700 $146,000 $146,700 $146,700 $0 0.0% Rent - local meeting rooms $34,800 $1,457 $34,800 $34,800 $0 0.0% Utilities $13,500 $8,156 $13,500 $13,500 $0 0.0% Telephone $26,500 $39,001 $28,000 $28,000 $0 0.0% Miscellaneous $11,200 $2,051 $11,200 $11,200 $0 0.0%

Total Contractual Services $1,712,226 $1,362,625 $1,627,233 $1,627,233 $0 0.0%

Supplies and Materials Office Supplies $43,000 $87,314 $53,000 $53,000 $0 0.0%

Publishing & Printing $54,000 $105,437 $64,000 $64,000 $0 0.0%Postage $225,000 $235,463 $225,000 $225,000 $0 0.0%

Total Supplies and Materials $322,000 $428,214 $342,000 $342,000 $0 0.0%

Capital AssetsFurniture/Fixtures/Trans $31,500 $34,413 $2,000 $2,000 $0 0.0%Hardware $34,000 $2,663 $16,500 $16,500 $0 0.0%Software/Resource Mat $21,000 $0 $21,000 $21,000 $0 0.0%

Total Capital Assets $86,500 $37,076 $39,500 $39,500 $0 0.0%

TOTAL OPERATING EXPENSES $2,222,265 $1,831,426 $2,110,272 $2,110,272 $0 0.0%


SOUTH DAKOTA RETIREMENT SYSTEM FISCAL YEAR 2023

CHANGE FROM FY 2022

FY 2023 Major Items Requested

General Federal Other Total

FTE Funds Funds Funds Funds Comments

MAJOR ITEMS REQUESTED:

1. Travel 0 0 no increase requested

2. Contractual services 0 0 no increase requested

3 Capital Assets 0 0 no increase requested

TOTAL REQUESTED INCREASE/(DECREASE) 0.0 0 0 0 0

TOTAL FY 2022 BUDGET 33.0 0 0 5,084,786 5,084,786

TOTAL REQUESTED FY 2023 BUDGET 33.0 0 0 5,084,786 5,084,786


05/21/2021 9:54 AM Page 1 fy2023major items requested.xls

222 East Capitol Avenue, Suite 8 PO Box 1098 Pierre, SD 57501 Toll-Free (888) 605-SDRS Phone (605) 773-3731

Fax (605) 773-3949 sdrs.sd.gov

MEMO NO. 2021-03B TO: MEMBERS OF THE BOARD OF TRUSTEES FROM: JAMES JOHNS, CHAIR SUBJECT: AUDIT COMMITTEE DATE: MAY 24, 2021 This is to advise that I have appointed the following members of the board to serve on the Audit Committee:

• Karl Alberts, Chair • Kathy Greeneway • Glen Vilhauer

Michelle Mikkelsen, Chief Financial Officer, will be the staff point of contact for the committee. As defined in the audit charter, the committee’s responsibilities include the following:

• Meet with the contracted external auditor and SDRS staff for an opening conference to review the annual audit engagement schedule. Based on those conversations, the Audit Committee Chair will work with management to provide an engagement letter. The Audit Committee Chair and management will each also provide representation letters.

• Discuss issues identified during the audit process affecting the annual financial statements.

• Review the Audit Report and all audit findings prior to presentation to the SDRS Board of Trustees. If necessary, work with SDRS staff to respond to audit findings.

• Review the Risk Assessment.

JJ:dms


Member Services Preparing for Retirement

SDRS Board of TrusteesJune 2, 2021

2

Member Services Goal

• Provide our membership with the tools to make informeddecisions on their retirements through:

– Personal Consultations

– Employer Requested Visits

– Educational Workshops

3

Member Services Staff

• 8 planners with a total combined 94 years of SDRS service,including:

– 1 Full-time disability planner

– 1 Departmental audit planner

– 1 Full-time traveling planner

• 4 staff in our records department with a total 47 combinedyears of SDRS service

4

Member Initiated Customer Service

• Phone, in-person, and Microsoft TEAMS Consultations

• Typical annual interactions:

– 20,000 phone calls

– 2,000 individual consultations at 36 events around the state

– 800 in-office consultations

5

Personal Consultations

• Checklist provided prior toconsultation

• 30 minutes for each member

• In-person, over the phone,or virtually, via MicrosoftTEAMS

6

Personal Consultations

• Personalized to the age ofthe member

• Provides information for nowand in the future

• Provides estimates basedon member request

7

Requested Employer Visits

• Employer initiated Contact

– 1,600 members attend large group meetings

– 300 individual consultations at employer events/meetings

– 900 contacts at booths

8

Women and Financial Planning Workshop

• Targeted audience: Women during career

• Workshop focus:

– Unique financial and retirement planning challenges facing women

– Strengthening the overall financial wellness of SDRS' largestmembership group

• Attendance:

– 2019: 130 attendees


9

On the Road to Financial Success: Early & Mid-Career Workshop

• Targeted audience: Recent hires and mid-career members

• Workshop focus:

– Personal financial awareness

– Retirement preparedness through budgeting and financial planningexercises

• Attendance:



10

Coffee Talk Forum

• Targeted audience: Retirees

• Forum focus:

– Legislative changes as they relate to SDRS

– Cost-of-living adjustments

– Other topics of interest and importance to our retirees

• Attendance:



11

Employer & Authorized Agent Training

• Targeted audience: Primary contact with employers

• Training focus:

– SDRS forms

– Electronic reporting and direct deposit of contributions

– Foundation and Generational benefit designs and general SDRS

– SDRS Supplemental Retirement Plan (SRP) and Special Pay Plan(SPP)

• Attendance:

– 2020: 131 agents attended

12

Successful Transitions to New Beginnings

• Targeted audience: Members nearing retirement

• Seminar focus:

– Income planning skills

– Overview of SDRS

– SDRS Supplemental Retirement Plan (SRP)

– Social Security

– Retirement income and budgeting

• Attendance:

– 2019 and 2020: approximately 600 attended



SDRS Board of TrusteesJune 2, 2021

2

• Provide members nearing retirement the tools to a successful transition at the end of their careers

• Major Topics– Retirement Readiness– SDRS Basics and Formulas– Other Retirement Considerations (COLA, taxes, re-employment)– Disability and Survivor Benefits– Social Security and Medicare– Supplemental Retirement Plan– Personal Savings– Retirement planning and risks


3

Retirement Readiness

• Planning & Preparation

• Piecing together retirement puzzle

4

Retirement Income and SDRS

• Income needs vary

• Essential vs. discretionary needs

• 4th Leg….working in retirement

• SDRS is DB plan….not DC

• SDRS replacement goal 50%

5

Retirement Benefits –Benefit Formula

• Simple formula:– Benefit Multiplier– Final Average Compensation (FAC)– Credited Service– Early Retirement Reduction

• Components differ based on Class and benefit structure:– Foundation: subsidized early retirement

provisions & post-retirement survivor benefits

– Generational: later normal retirement age, higher multiplier, and Variable Retirement Account (VRA)

6

Retirement Benefits –Multipliers and VRA

• Foundation multipliers:– 1.7% for service through June 2008– 1.55% for service after June 2008

• Generational multiplier:– 1.8% for all service– Also receive VRA

7

Retirement Benefits –FAC and Examples

• FAC moving from 3-year to 5-year average

• Each year used in FAC determination limited to 105% prior highest year’s compensation– Contributions in excess of cap paid to

members with investment earnings at retirement

8

Retirement Benefits –Other Considerations

• COLA:– Goal is to match inflation– Paid in July– Variable between 0%-3.5%

• Benefits subject to income tax:– Withholding determined by member

9

Retirement Benefits –Other Considerations

• Retire/Rehire considerations:– Employed by SDRS employer– Full-Time vs. Part-Time– Age 59 1/2 – 3-month separation

10

Survivor and Disability Benefits

• Disability and pre-retirement survivor benefits provided at no additional cost

• Foundation post-retirement survivor benefits also provided at no additional cost

• Generational post-retirement survivor benefits require election with reduced member benefit

11

Retirement Process

12

Social Security

• Social Security is a family protection plan

• Funding is not adequate:– Changes are likely– If no changes are made, only 79% of

benefits will be affordable in 2035

13

Social Security

• When to start is an individual decision

• Limits on earned income while drawing benefits before FRA

• Several spousal benefits available

• Apply for most benefits online

14

Medicare

• Medicare enrollment at age 65

• Several options for coverage

• Annual benefit review suggested

• Help is available…SHIINE.net

15

Personal Retirement Savings

• Lifetime income often not enough

• Personal savings bridge the gap

• Ideally used for discretionary costs

• Multiple opportunities available

• Tough to save too much

16

Supplemental Retirement Plan

• Administered by Nationwide

• State Investment Officer selects funds to choose from

17

Special Pay Plan

• Termination pay to SPP

• Tax savings for employee/employer

18

SRP and SPP Resources

• Variety of tools available for help

• Retirement Specialists

• Income Planning Analysis– Free to all SDRS members– Where you stand compared to where

you’d like to be

19

Retirement Planning and Risks

• Expect the unexpected

• Various estate planning needs

20

Your Action Plan

• Plan for YOUR future

• Review retirement income/expenses

• Save more

• Consider risks

• Evaluate insurance needs

Follow-Up to Long-Term Benefit Goals Review South Dakota Retirement System

South DakotaRetirement System

June 2021

1

Long-Term Benefit Goals

• Goals reviewed and assessed in April• Findings:

– Most goals met or exceeded– SDRS income replacement goals not met for all

• Objectives today:– Determine retirement income needed to maintain pre-retirement spendable

income– Assess benefit adequacy using spendable income analysis

• Conduct retiree survey and present results at September meeting• Consider any recommended changes to goals in September

2

How Much Retirement Income Is Needed?

• 70-85% of Final Average Compensation (FAC) is general benchmark• However, each member has a unique target considering:

– Cessation of contributions to SDRS, Social Security, savings, and work-related expenses

– Spendable income and spending patterns before and after retirement– Health– Lifestyle in retirement– Debt– Financial obligations to children, parents, grandchildren– Home ownership

3

Spendable Income Analysis Approach

• Determine spendable income before retirement• Determine gross retirement income needed after retirement to match

spendable income before retirement• Meeting this objective will maintain standard of living assuming:

– Spendable income reflects actual expenses before retirement– No significant increase in total expenses after and during retirement– Inflation protection provided after retirement

• Spendable income is determined by considering:– Contributions to SDRS, Social Security, and retirement savings before

retirement– Federal income taxes before and after retirement

• Spendable income approach avoids common planning mistake ofcomparing gross income after retirement to net income before retirement

4

Example: Spendable Income Before Retirement

• Average spendable income during FAC period:

• Member needs $49,698 (no savings) or $48,684 (with savings) ofspendable income after retirement to equal spendable income beforeretirement

No Personal Savings

With Personal Savings

– Final Average Compensation $65,000 $65,000– Less SDRS contributions -3,900 -3,900– Less Social Security/Medicare Taxes -4,973 -4,973– Less retirement savings N/A -1,300– Net income $56,127 $54,827– Less Federal income taxes -6,429 -6,143– Spendable income $49,698 $48,684

5

Example: Spendable Income After Retirement for 2021 Retiree

• Spendable income calculation (Class A Foundation member, $65,000FAC, 30-years’ service, age 65):

• Spendable income after retirement will vary with FAC:– $25,000 FAC: 13.3% increase (no savings), 23.9% increase (with savings)– $150,000 FAC: 11.4% decrease (no savings), 2.2% decrease (with savings)

No Personal Savings

With Personal Savings

– SDRS Benefit $31,883 $31,883– Social Security Benefit 18,804 18,804– Benefit from savings N/A 4,220– Total Retirement income $50,687 $54,907– % of FAC 78.0% 84.5%– Less Federal income taxes -3,835 -4,341– Spendable income $46,852 $50,566– % change in spendable income -5.7% 3.9%

6

Spendable Income Analysis Findings

• The average paid 2021 SDRS retiree with 30 years of service retiring atage 65 with additional savings of 100% of pay at retirement will morethan replace spendable income before retirement– Lowest paid members will replace spendable income by an even greater

margin– Highest paid members will fall slightly short of replacing spendable income

• Most SDRS members will need additional savings to replacespendable income before retirement

• For most SDRS members, total retirement income of 80-85% of FACwill result in the same spendable income after retirement

7

Benefit Adequacy

• SDRS benefits represent only one source of retirement income• Adequacy based on spendable income replacement approach is 80-

85% of FAC• Adequacy assessment should include benefits available from SDRS,

Social Security, and personal savings• Following charts show benefit adequacy assuming members:

– Meet career service criteria– Retire at SDRS normal retirement age in 2021 for Foundation members and

at normal retirement age for Generational members– Achieve savings goal of 100% of pay at retirement– Commence Social Security benefits at retirement (except for Public Safety

members)

8

Class A Foundation Member

0%

20%

40%

60%

80%

100%

120%

$25,000 $50,000 $65,000 $100,000 $150,000 $200,000Final Average Compensation

Normal Retirement Income Replacement Rates Class A Career Foundation Members

SDRS Social Security Savings Income Replacement Needed

9

Class A Generational Member

0%

20%

40%

60%

80%

100%

120%

$25,000 $50,000 $65,000 $100,000 $150,000 $200,000Final Average Compensation

Normal Retirement Income Replacement Rates Class A Career Generational Members

SDRS Social Security Savings VRA Income Replacement Needed

10

Public Safety Foundation Member

0%

20%

40%

60%

80%

100%

$50,000 $65,000 $100,000 $150,000Final Average Compensation

Normal Retirement Income Replacement Rates Public Safety Career Foundation Members


11

Public Safety Generational Member

0%

20%

40%

60%

80%

100%

$50,000 $65,000 $100,000 $150,000Final Average Compensation

Normal Retirement Income Replacement Rates Public Safety Career Generational Members


12

Judicial Foundation Member

0%

20%

40%

60%

80%

100%

$100,000 $150,000Final Average Compensation

Normal Retirement Income Replacement Rates Judicial Career Foundation Members


13

Judicial Generational Member

0%

20%

40%

60%

80%

100%

120%

$100,000 $150,000Final Average Compensation

Normal Retirement Income Replacement Rates Judicial Career Generational Members


14

Benefit Adequacy Conclusions

• Most SDRS career retirees will currently match or exceedspendable income before retirement based on retirement at normalretirement age and meeting savings goal

• The SDRS COLA is key to maintaining standard of living• Income replaced by SDRS benefits for future Foundation retirees will

decline slightly and gradually due to unimproved benefits since 2008– full decline will be 2.5% of FAC in 17 years for Class A Foundation

• Public Safety members who retire at normal retirement age of 55/57 andother members who retire early will not have Social Security benefitsavailable until age 62

• Similarly, SDRS adequacy goals are based on members retiring at65/67—earlier retirement (particularly before Social Security eligibilityat age 62) is not a reality for most members without substantial savingsor work after retirement

15

Other Thoughts

• Spendable income analysis provides objective starting point • One size doesn’t fit all—SDRS should continue to encourage each

member to establish individual goals based on their uniquecircumstances

• Logically expenses will change after retirement but will vary for eachmember. For example:– Medicare provides significant health care benefits at age 65 and effectively

limits charges—even so health care costs after retirement can be substantialand generally increase with age

– Surveys of retirement spending indicate that total spending in retirementtends to decrease with age until at least age 80 at a rate of 1-2% per year

– Retirement spending may be higher in initial years of retirement due totravel and lifestyle decisions, and at older ages due to health care costs

16

Next Steps

• Survey retirees and present results in September• Consider any changes to goals based on spendable income analysis

and retiree feedback in September

South Dakota Retirement System Retiree Survey

SDRS is asking retirees for help evaluating the counseling and educational services provided to members prior to retirement. We would appreciate you sharing your thoughts on your retirement planning and experiences as a retiree so we can help our members be better prepared for retirement. Your SDRS Membership Information Name (Optional)______________________________ Age at retirement ____ How much credited service did you earn with SDRS? Less than 10 years 11-20 years 21-30 years Over 30 years How long have you been retired? Less than 10 years 11-20 years 21-30 years Over 30 years Your Retirement Planning What age did you expect to retire? 55-60 61-65 66-70 71-75 76+ What age did you start planning for retirement? < 30 30-35 36-40 41-45 46-50 51-55 56-60 61-65 65+ During your retirement planning, did your retirement plans change? Yes No

If Yes, please check all reasons that apply. Availability/cost of health insurance Early retirement incentive Personal or family issues, including health changes Career changes Not enough retirement savings Still enjoyed working, not ready to retire Other __________________________________

What motivated you to retire when you did? (Please check all reasons that apply) Planned to retire at that age Was financially able to retire Changes/unhappy with employment Employer offered retirement incentive Wanted to pursue another career Spouse was retiring Wanted more time for myself and family Personal or family health issues Other __________________________________

How prepared were you for retirement? Very prepared Adequately prepared Not adequately prepared Not at all prepared

2 Your Retirement Finances Besides SDRS and Social Security, did you participate in additional retirement savings programs offered by your employer or did you accumulate personal savings? Yes No

If Yes: Excluding contributions to SDRS and Social Security, at what age did you begin saving for retirement? <20 20-25 26-30 31-35 36-40 41-45 46-50 50-55 56+ How much were you able to save at retirement? Less than 50% of my annual pay at retirement 51%-100% of my annual pay at retirement More than 100% of my annual pay at retirement

How are you taking distributions from these programs? (Check all that apply) Lump-sum withdrawal Partial lump-sum withdrawals Fixed-dollar amount Fixed-period payment

Purchased a lifetime annuity As needed withdrawals Other _______________________________ How are you using these additional retirement savings? (Check all that apply) Covering basic living expenses Paying off debt Healthcare/assisted living expenses Travel Hobbies Saving for an inheritance Charitable giving Other _______________________________

How important have these savings been in meeting your financial needs during retirement? Extremely important Important Not very important

Do you receive an additional pension benefit from employment not covered by SDRS? Yes No Have you worked after SDRS retirement with any employer? Yes No If Yes, which best describes your work? Part-Time Full-Time

3 Which of these statements about your total living expenses while you have been retired is most accurate? (check only one) My expenses have increased moderately My expenses have increased significantly My expenses have decreased moderately My expenses have decreased significantly My expenses have remained fairly stable My expenses did increase for a while and are now decreasing My expenses did decrease for a while and are now increasing My expenses vary each year Rank your monthly expenses with 1 being the highest cost, 2 the next highest cost, etc.

Housing _____ Food _____ Healthcare _____ Clothes _____ Automobile/travel _____ Entertainment _____ Other (describe) ______________ _____

Check each of the following that apply with regard to healthcare I am not yet eligible for Medicare

If Yes: (check one) I have health insurance provided by my former employer I have health insurance provided by my spouse’s employer I am working and have health insurance with my current employer I have purchased my own health insurance I have no health insurance

I am eligible for Medicare

If Yes: (check one) I also have supplemental health insurance provided by my former employer I also have supplemental health insurance provided by my spouse’s employer I am working and have supplemental health insurance with my current employer I have purchased my own supplemental health insurance I have no supplemental health insurance

My healthcare costs have increased since I retired by: Less than 10% 11-25% 26-50% More than 50%

I have purchased long-term care insurance. Yes No

Which of these statements is most accurate? I have been able to maintain my standard of living in retirement I have not been able to maintain my standard of living in retirement

4 Please share any comments or suggestion that may be helpful to other SDRS members as they prepare for retirement. SDRS may use comments provided in future presentations, newsletters, or correspondence but any comments used will remain anonymous. ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


Projected Funded Status as of June 30, 2021

June 2021

1

Projected Funded Status and COLAs

• SDRS contribution rates are fixed and benefits vary based on affordability

• COLA is primary variable benefit and will vary directly with both inflationand long-term affordability

• The following exhibits examine:– SDRS COLAs and inflation since 2010

– Projected June 30, 2021 FVFR and corresponding July 2022 COLA range

– Projected July 2023 COLA ranges and likelihoods

• Projections are developed using an actuarial model intended to estimateshort-term changes in funded ratios and resulting COLA ranges:– Future demographic gains and losses are excluded from the projection

– Likelihoods are calculated based on June 2020 and 2021 investment portfoliostatistics provided by SDIC staff

2

COLA Process:July 2021 COLA Calculation

Step 1:June 30, 2020

Baseline FVFR = 91.9%

Step 2: RestrictedMaximum COLA = 1.41%

Resulting in FVFR of 100%

COLA = CPI-W Increase (1.28%)Minimum = 0.5%

Maximum = 1.41%July 2021 SDRS COLA = 1.28%

If Less than 100%If 100% or More

COLA = CPI-W IncreaseMinimum = 0.5%Maximum = 3.5%

July 2021 SDRS COLA = 1.28%

3

0.0%

3.6%

1.7%

1.5%

1.7%

0.0% 0.3%

1.96%

2.79%

1.56%

1.28%

1.5%

2.1%

3.1%

2.1%

3.1% 3.1% 3.1%

2.1%

1.89%2.03%

1.56%

1.28%

2.3%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Average

Annual Inflation and SDRS COLA Increases 2011-2021

Prior Year Inflation (Increase in 3rd Quarter Average)

SDRS COLA Effective July 1

Inflation and SDRS COLAs Since 2010

4

Inflation and SDRS COLAs Since 2010

Statutory COLA change

17.6%

17.6%

13.5%

11.6%

10.0%

8.1%

8.1%

7.80%

5.73%

2.86%

1.28%

28.6%

25.9%

22.2%

19.6%

16.1%

12.6%

9.2%

6.93%

4.95%

2.86%

1.28%

Before7/1/2010

FY 2011

FY 2012

FY 2013

FY 2014

FY 2015

FY 2016

FY 2017

FY 2018

FY 2019

FY 2020

Retirement DateCumulative Inflation and SDRS COLA Increases 2011-2021

Cumulative Inflation Cumulative SDRS COLA

5

Projected Funded Status as of June 30, 2021 and July 2022 COLA Range(1)

(1) Before consideration of liability gains/losses for FYE June 30, 2021. June 30, 2020 Baseline FVFR: 91.9% and COLA Range: 0.5% to 1.41%.(2) Reflecting 0% minimum COLA.

Net Investment Return FYE June 30, 2021

Baseline FVFR

COLARange(2)

Final FVFR Applicable Conditions

<= (7.0%) 80.0% NO COLA <100% Corrective Action Recommendation Required

(6.9%) 80.4% 0% to 0.01% 100%

Restricted Maximum COLA

0.0% 86.5% 0% to 0.80% 100%

6.5% 92.3% 0% to 1.44% 100%

12.0% 97.1% 0% to 1.96% 100%

14.0% 98.9% 0% to 2.14% 100%

15.2% 99.9% 0% to 2.24% 100%

15.3% 100.0% 0% to 3.50% 100%

Full COLA Range16.0% 100.6% 0% to 3.50% 101%

18.0% 102.4% 0% to 3.50% 102%

20.0% 104.2% 0% to 3.50% 104%

38.0% 120.0% 0% to 3.50% 120% 120% Benefit Improvement Threshold Met

6

Inflation Measurementfor Social Security and SDRS COLAs

(1) Increase in the third calendar quarter average over the prior highest third calendar quarter average – the specified inflation measurement for theSocial Security COLA effective the following January and the SDRS COLA effective the following July.

(2) Increase in most recent three-month average (February to April 2021) over July to September 2020 average. Current trend indicates a 3.2% to3.9% increase for the year, depending on projection method used.

Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan 2018 Jul 2018 Jan 2019 Jul 2019 Jan 2020 Jul 2020 Jan 2021 Jul 2021

Increases in CPI-W

0.35%Increase(1)

1.96% Increase(1)

2.79%Increase(1)

1.56%Increase(1)

1.28%Increase(1)

2.21%Increase(2)

CPI-W Index

3rd Quarter Average

7

Historical COLA Ranges

• Recent investment experience has reduced the affordable COLA range

• Investment returns for FY 2021 greater than the 6.5% assumption willreverse that trend and increase the maximum affordable COLA – ifgreater than approximately 15%, the full COLA range may be affordable

1.89%

2.03% 1.88%

1.41%

3.50%

0%

1%

2%

3%

4%

2018 2019 2020 2021 Projected2022

COLA Payable July 1:

Affordable COLA Range

Inflation

Projected Inflation

8

COLA Process: ProjectedJuly 2022 COLA Calculation(1)

Step 1:June 30, 2022

Estimated Baseline FVFR = 102%

Step 2: RestrictedMaximum COLA

Resulting in FVFR of 100%

COLA = CPI-W IncreaseMinimum = 0%

Maximum = Restricted Maximum COLA

If Less than 100%If 100% or More

COLA = CPI-W IncreaseMinimum = 0%

Maximum = 3.5%

Estimated July 2022 SDRS COLA: CPI-W Increase between 0% and 3.5%

(1) Before consideration of liability gains/losses for FYE June 30, 2021. Final COLA range and inflation will not be known until mid October 2021. Currenttrend indicates a 3.2% to 3.9% inflation increase for the year, depending on projection method used.

9

Risk Analysis

• The most significant and immediate risk to SDRS is investment risk

• Investment returns will first impact the affordable COLA range– Less than assumed will reduce restricted maximum COLA

– Greater than assumed will increase maximum or enable full COLA range

• The variable COLA will not be sufficient to maintain 100% FVFR in allconditions and additional corrective actions may be required

• The following exhibits show one-year likelihoods of COLA restrictions,corrective action requirements, and benefit improvement possibilities fromJune 30, 2020 with and without the COLA change, and from June 30,2021 assuming 16% net return for FY 2021

10

• From June 30, 2020 with a 0.5% minimum COLA, the likelihoods for July 2022 COLA ranges, primarily driven by FY 2021investment returns, were:

– 24% likelihood: 0.5% COLA and additional corrective action recommendations required– 55% likelihood: COLA equals CPI-W increase between 0.5% and a restricted COLA maximum– 21% likelihood: COLA equals CPI-W increase between 0.5% & 3.5%; <1% likelihood of 120% benefit improvement threshold met

Before consideration of liability gains/losses. Likelihoods based on SDIC 2020 current asset allocation investment portfolio statistics (mean = 5.72%, standard deviation = 11.9%).

1-Year Outlook from June 30, 2020If 0.5% Minimum COLA Unchanged

Current Asset Allocation Statistics

11

• From June 30, 2020 with a 0% minimum COLA, the likelihoods for July 2022 COLA ranges, primarily driven by FY 2021investment returns, were:

– 14% likelihood: No COLA and additional corrective action recommendations required– 65% likelihood: COLA equals CPI-W increase between 0.5% and a restricted COLA maximum– 21% likelihood: COLA equals CPI-W increase between 0.5% & 3.5%; <1% likelihood of 120% benefit improvement threshold met


1-Year Outlook from June 30, 2020After 0% Minimum COLA Change


12

• Assuming 16% net investment return for FY 2021, the preliminary likelihoods for July 2023 COLA ranges, primarilydriven by FY 2022 investment returns, are:

– 5% likelihood: No COLA and corrective action recommendations required– 47% likelihood: COLA equals CPI-W increase between 0.0% and a restricted COLA maximum– 48% likelihood: COLA equals CPI-W increase between 0.0% and 3.5%; 4% likelihood 120% benefit improvement threshold met



1-Year Outlook from June 30, 2021Assuming 16% Net Return for FY 2021

13

Historical 1-Year Corrective Action Requirement Likelihoods

Lowering minimum COLA to 0% and favorable investment experience in FY2021 will reverse recent trend of increased likelihood of requiredcorrective action recommendations


15%13%

14%

24%

14%

5%10%

20%

30%

FY 2018 FY 2019 FY 2020 0.5% Min 0% Min FY 2021

0% Min FY 2022

1-Year Likelihoods of Required Corrective Action Recommendations

Following 16% Return

14

Projected Funded Status and Risk Analysis Summary

• Recent investment experience less than the 6.5% assumption reducedthe maximum COLA and increased the likelihood of required correctiveaction recommendations

• Reducing the minimum COLA to 0% allows SDRS to weather more severedownturns without required corrective action recommendations and is asignificant change

• FY 2021 returns below approximately negative 7% would require acorrective action recommendation

• If the FY 2021 net investment return exceeds 15%, the full COLA rangemay be affordable

Asset Allocation


June 2, 2021

Discussion topics

▪ Recommended benchmark equity-like and bond-like risk and ranges

▪ Equity-like and bond-like risk embedded in other categories

▪ Recommended benchmark asset category allocation and ranges

▪ Expected return and standard deviation

▪ Asset category valuation

▪ Allocation movement within ranges

1

Benchmark equity and bond risk

▪ Historical outcomes are helpful in relating to impact of risk

▪ Long-term return history is available only for equity, bonds, and cash

▪ Equity returns are best over the very long term, but are volatile

▪ Bonds returns are lower over the long term, but provide diversification

▪ Return/risk tradeoff depends on willingness to endure volatility

2

Equity long-term returns much higher

3

0

1

10

100

1,000

10,000

1935 1945 1955 1965 1975 1985 1995 2005 2015

EQUITY BOND

Equity downturns can be brutaltwo-year periods with equity returns below negative 20%

4

Equity less bond return rolling 10-year periodsred line adjusted to impose future equilibrium returns on past

5

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1935 1945 1955 1965 1975 1985 1995 2005 2015

Equity less Bond Eq less Bd adj to equilibrium returns Zero

Equity-like and bond-like riskbenchmark and ranges

▪ Recommend benchmark equity-like risk of 70%, bond-like risk 27%, cash-like 3%− 70% Equity / 30% bonds and cash balances long term returns with drawdown risk remembering

benchmark should represent what can be adhered to through thick and thin.

▪ Recommend 40% to 85% equity-like range, 15% to 60% bond-like range− 40% equity-like risk minimum is believed appropriate when markets extremely expensive using our

valuation measures. Was 50% prior to 2019. 50% reached in late 1990’s, fall ’18, fall ’19, & now.

− The minimum provides still meaningful exposure if wrong or a decade early.

− New low steps of 45% and 40% are for when markets are extremely expensive such as 1999.

− 40% minimum is significantly below the benchmark and would increase underperformance risk but also reduce absolute risk when markets extremely expensive (and likely after big gains).

− 85% believed appropriate for when markets are very cheap using our valuation measures. The cheapness would suggest much or most of a potential decline had already occurred.

− 85% maximum approximate peak during financial crisis. Seems appropriate having experienced.

− Goal is to enter market downturns with near minimum benchmark risk then increase toward maximum during downturn to benefit from eventual rebound.

− Markets typically continue to rise or fall further after reaching thresholds to move to our minimum or maximum risk position. Essential to be patient for 5 years or more.

6

Risk of various equity allocationstwo-year periods with equity returns below negative 20%

7

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

1932 Q2 1938 Q1 1942 Q1 1970 Q2 1974 Q3 2002 Q3 2009 Q1

100:0 85:15 80:20 70:30 60:40 50:50 40:60

Return and risk for stock/bond allocationsusing SDIC long term expected returns and fat tail adjusted volatility

8

20%

0%

2%

4%

6%

8%

10%

0% 5% 10% 15% 20% 25%

Return

Volatility

Equity allocation

0%

100%85%

70%

50%40%

Equity-like and bond-like risk for other categories

▪ Other categories are mapped to equivalent equity/bond/cash risk− REITS mapped primarily to equity with remainder mapped to short duration bonds

− High yield mapped to equity and short duration bonds depending on credit quality

− Private equity treated as leveraged equity

− Opportunistic RE treated as leveraged REITs

▪ Exposures embedded in other categories is accounted for when targeting overall equity-like / bond-like / cash-like risk

9

Benchmark construction

▪ Categories in benchmark are significant and passively implementable− equity, bonds, real estate (REITS), high yield, and cash

▪ Skill/niche categories excluded from benchmark, but have permitted range− private equity, opportunistic real estate, arbitrage and hedge funds, commodities

− equivalent stock/bond/cash risk is accounted for and offset if invest in these

▪ Benchmark constructed to achieve 70% equity-like, 27% bond-like, and 3% cash-like risk exposures

10

SDRS Capital Market Benchmarkallocations, indexes, min max ranges, and equity-like risk

11

Real HY Investment Opportunistic HY Aggressive

Public Estate Corp Grade Private Real Real Estate Absolute Merger Convert Equity

Equity REIT/Core Debt Debt Cash Equity Estate Debt Return TIPS Commodities Arb Arb Like Risk

Maximum 1 75% 20% 2 15% 50% 50% 12% 15% 2 10% 5% 5% 5% 10% 5% 85%

2022 Benchmark 58% 10% 7% 23% 2% 3 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 70% (proposed)

Minimum 1 20% 2% 0% 13% 0% 0% 0% 0% 0% 0% 0% 0% 0% 40%

Index MSCI AC IMI (3/4) MSCI FTSE FTSE FTSE

+ MSCI IMI US (1/4) REIT High Yield BIG 3 mo.Tsy bill

Benchmark history

2021 Benchmark 58% 10% 7% 23% 2% 3 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 70%

2020 Benchmark 58% 10% 7% 23% 2% 3 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 70%

2019 Benchmark 58% 10% 7% 23% 2% 3 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 70%

2018 Benchmark 58% 10% 7% 23% 2% 3 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 70%

2017 Benchmark 58% 10% 7% 23% 2% 3 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 0% 4 70%

2016 Benchmark 58% 10% 7% 23% 2% 0% 0% 0% 0% 0% 0% 70%

2015 Benchmark 60% 10% 7% 19% 2% 0% 0% 1% 1% 0% 0% 70%

2014 Benchmark 56% 8% 7% 18% 2% 7% 0% 1% 1% 0% 0%

2013 Benchmark 56% 8% 7% 18% 2% 7% 0% 1% 1% 0% 0%

1. Buffer for market drift of 1% for Equity and 1/2% for debt (example: Investment Grade debt minimum of 13% can drift to 12.5%)

2. Real Estate (RE) maximum applies to REITS/Core RE and Opportunistic combined. Opportunistic RE counts 1.3x against RE max. Projected case allocation used for partnerships

3. Cash to provide liquidity for benefits payments and rebalancing

4. Skill and niche categories are not included in benchmark but do have a permitted range to invest in opportunistically

Equity-like risk (equity and embedded equity from other categories)

total and contribution of each component 5/1/2021 back to 1974

12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

21

20

19

20

16

20

13

20

10

20

07

20

04

20

01

19

98

19

95

19

92

19

89

19

86

19

83

19

80

19

77

19

74

Total Equity Private Equity Real Estate HY/Distressed debt HF/merger/conv Commodities

Equity-like risk (equity and embedded equity from other categories)

total and contribution of each component 5/1/2021 back to 12/31/2006

13

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

5/1

/21

9/3

0/2

0

4/3

0/2

0

2/2

9/2

0

6/3

0/1

9

12

/24

/18

5/3

1/1

8

9/3

0/1

7

1/3

1/1

7

5/3

1/1

6

9/3

0/1

5

1/3

1/1

5

5/3

1/1

4

9/3

0/1

3

1/3

1/1

3

5/3

1/1

2

9/3

0/1

1

1/3

1/1

1

5/3

1/1

0

9/3

0/0

9

1/3

1/0

9

5/3

1/0

8

9/3

0/0

7

1/3

1/0

7

Total Equity Private Equity Real Estate HY/Distressed debt HF/merger/conv Commodities

Additional risk measures and control

▪ Risk measurement– Focus on equity-like and bond-like risk - easier to relate to historical returns for stocks and bonds

– Statistical measures of risk, such as standard deviation and correlation, are also calculated but are adjusted to reflect higher real-world frequency and magnitude of adverse outlier events

– Behavior of some assets in a crisis can vary depending on if an inflation or deflation rooted crisis

▪ Risk control– Risk managed by broad diversification and reducing amounts invested in expensive assets

– Adequate liquidity maintained to avoid liquidations of depressed assets and allow rebalancing

▪ Need to participate in economic system– Participation in free enterprise economic system provides highest long-term rewards

– To get the long-term rewards, must endure the short-term ebbs and flows

– Faith in the long term despite periodic bumps in the road and potentially rockier future

▪ Strength and determination to handle tough markets– Strong funding and benefit design helpful to managing downside volatility

– In very difficult circumstances, benefits may require further adjustment to maintain funding

14

SDRS expected return and standard deviationusing J.P. Morgan inputs as proxy for conventional inputs

15

Expected Standard Correlation Matrix

Return Deviation* US Eq Intl Hedge Debt Cash HY Comd RE Priv Eq RE Opp Tips

Domestic (US) Equity 4.1% 15% 100%

International Equity 6.5% 17% 88% 100%

Hedge Funds 3.1% 9% 81% 83% 100%

Investment Grade debt 2.1% 3% 0% 7% -5% 100%

Cash 1.1% 0% -7% -3% -4% 10% 100%

High Yield Debt 4.8% 8% 71% 75% 79% 18% -11% 100%

Commodity Index 2.3% 16% 47% 57% 60% 0% 6% 50% 100%

REITs 6.5% 15% 73% 67% 54% 28% -5% 64% 30% 100%

Private Equity 7.8% 19% 74% 78% 80% -22% 7% 67% 59% 45% 100%

Real Estate Opportunistic 8.1% 18% 51% 44% 55% -20% -8% 50% 38% 60% 50% 100%

Tsy Inflation Protected Sec(TIPS) 1.5% 5% 9% 16% 11% 74% 8% 33% 26% 25% 5% 2% 100%

* Standard deviation is a measure of volatility. There is a 66% chance of being w ithin plus or minus 1 standard deviation, a 95% chance of being w ithin 2 standard deviations.

Mean 1 year 5 year 10 year 20 year

U.S. Intl Hedge Inv Gr HY Comm Private RE Expected Standard Standard Standard Standard

Equity Equity Funds Debt Cash Debt -odity REITs Equity Opport TIPS Return Deviation Deviation Deviation Deviation

100:0 Equity/Debt 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 4.10% 14.8% 6.6% 4.7% 3.3%

70:30 Equity/Debt 70% 0% 0% 30% 0% 0% 0% 0% 0% 0% 0% 3.50% 10.4% 4.7% 3.3% 2.3%

add International EQ 47% 23% 0% 30% 0% 0% 0% 0% 0% 0% 0% 4.05% 10.6% 4.7% 3.4% 2.4%

add REITs 42% 20% 0% 28% 0% 0% 0% 10% 0% 0% 0% 4.26% 10.6% 4.7% 3.4% 2.4%

add High Yield Debt 40% 19% 0% 24% 0% 7% 0% 10% 0% 0% 0% 4.37% 10.6% 4.7% 3.3% 2.4%

add Cash 40% 19% 0% 22% 2% 7% 0% 10% 0% 0% 0% 4.35% 10.6% 4.7% 3.3% 2.4%

add Private Equity 32% 17% 0% 22% 4% 7% 0% 10% 8% 0% 0% 4.53% 10.3% 4.6% 3.2% 2.3%

add RE Opportunistic 31% 16% 0% 22% 6% 7% 0% 2% 8% 8% 0% 4.58% 9.8% 4.4% 3.1% 2.2%

Benchmark FY22 (proposed) 39% 19% 0% 23% 2% 7% 0% 10% 0% 0% 0% 4.33% 10.4% 4.7% 3.3% 2.3%

SDRS Current AA 19% 9% 1% 12% 29% 11% 0% 0% 10% 9% 0% 4.01% 7.5% 3.4% 2.4% 1.7%

Return Ranges Mean 1 Year Horizon 5 Year Horizon 10 Year Horizon 20 Year Horizon

Exp Ret up 1sd dn 1 sd dn 2 sd up 1sd dn 1 sd dn 2 sd up 1sd dn 1 sd dn 2 sd up 1sd dn 1 sd dn 2 sd

Benchmark FY22 (proposed) 4.33% 14.8% -6.1% -16.6% 9.0% -0.3% -5.0% 7.6% 1.0% -2.3% 6.7% 2.0% -0.3%

SDRS expected return and standard deviationusing SDIC expected returns and fat-tail adjusted risk measures

16

Expected Standard Correlation Matrix

Return Deviation* US Eq Intl Eq Hedge Debt Cash HY Comd RE Priv Eq RE Opp TIPS

Domestic (US) Equity 6.7% 22% 100%

International Equity 6.7% 22% 100% 100%

Hedge Funds 5.0% 12% 73% 73% 100%

Investment Grade debt 3.7% 7% 0% 0% -10% 100%

Cash 3.3% 1% 0% 0% 0% 0% 100%

High Yield Debt 5.1% 12% 75% 75% 35% 23% 0% 100%

Commodity Index 3.7% 22% 50% 50% 35% -20% 0% 20% 100%

REITs 7.0% 24% 75% 75% 30% 0% 0% 50% 30% 100%

Private Equity 7.4% 30% 88% 88% 30% 0% 0% 55% 40% 70% 100%

Real Estate Opportunistic 7.6% 32% 75% 75% 25% 2% 0% 60% 25% 90% 60% 100%

Tsy Inflation Protected Sec(TIPS) 3.7% 7% 0% 0% 0% 100% 0% 24% 0% 0% 0% 0% 100%

* Standard deviation is a measure of volatility. There is a 66% chance of being w ithin plus or minus 1 standard deviation, a 95% chance of being w ithin 2 standard deviations.

Mean 1 year 5 year 10 year 20 year

U.S. Intl Hedge Inv Gr HY Comm Private RE Expected Standard Standard Standard Standard

Equity Equity Funds Debt Cash Debt -odity REITs Equity Opport TIPs Return Deviation Deviation Deviation Deviation

100:0 Equity/Debt 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 6.69% 22.0% 9.8% 7.0% 4.9%

70:30 Equity/Debt 70% 0% 0% 30% 0% 0% 0% 0% 0% 0% 0% 5.78% 15.5% 7.0% 4.9% 3.5%

add International EQ 47% 23% 0% 30% 0% 0% 0% 0% 0% 0% 0% 5.78% 15.5% 7.0% 4.9% 3.5%

add REITs 42% 20% 0% 28% 0% 0% 0% 10% 0% 0% 0% 5.87% 15.6% 7.0% 4.9% 3.5%

add High Yield Debt 40% 19% 0% 24% 0% 7% 0% 10% 0% 0% 0% 5.88% 15.6% 7.0% 4.9% 3.5%

add Cash 40% 19% 0% 22% 2% 7% 0% 10% 0% 0% 0% 5.88% 15.6% 7.0% 4.9% 3.5%

add Private Equity 32% 17% 0% 22% 4% 7% 0% 10% 8% 0% 0% 5.86% 15.5% 7.0% 4.9% 3.5%

add RE Opportunistic 31% 16% 0% 22% 6% 7% 0% 2% 8% 8% 0% 5.84% 15.6% 7.0% 4.9% 3.5%

Benchmark FY22 (proposed) 39% 19% 0% 23% 2% 7% 0% 10% 0% 0% 0% 5.85% 15.4% 6.9% 4.9% 3.4%

SDRS Current AA 19% 9% 1% 12% 29% 11% 0% 0% 10% 9% 0% 5.30% 12.3% 5.5% 3.9% 2.7%

Return Ranges Mean 1 Year Horizon 5 Year Horizon 10 Year Horizon 20 Year Horizon

Exp Ret up 1sd dn 1 sd dn 2 sd up 1sd dn 1 sd dn 2 sd up 1sd dn 1 sd dn 2 sd up 1sd dn 1 sd dn 2 sd

Benchmark FY22 (proposed) 5.85% 21.2% -9.5% -24.9% 12.7% -1.0% -7.9% 10.7% 1.0% -3.9% 9.3% 2.4% -1.0%

Asset category valuation

▪ Equity-like and bond-like risk− Equity and bond valuation processes

▪ Real estate (REITS)− REIT valuation versus underlying equity and bond components

▪ High yield− High yield valuation versus underlying equity and bond components

▪ Private equity− Subjective and data assessment of risk adjusted added value versus equity

▪ Opportunistic real estate − Subjective and data assessment of risk adjusted added value versus REITS

▪ Arbitrage and other strategies− Monitor for signs of distress and bottom-up underwriting of proxy transactions

17

Equity valuation

▪ Estimated future cash flows– Normal earnings– Growth rate

▪ Discount rate based on risk– Inflation + real cash yield + term premium + equity risk premium

▪ Value is discounted value of future cash flows

▪ Adjustments to value – Monetary stimulus/restraint– Earnings strength

18

Normal earnings

▪ Normal earnings– Adjusted book value multiplied by normal return on equity

▪ Adjusted book value– Book value is balance sheet reported value of assets net of liabilities– Book value may not track retained earnings due to index changes, mergers, and

buybacks. These leakages must be adressed. – Book value write-downs are smoothed

▪ Normal return on equity = Historic Real ROE + Expected Inflation + ROE Adjustments

– Return on equity is earnings divided by adjusted book value– Real ROE is return on equity less inflation– Historic Real ROE is the historic average Real ROE– Expected inflation is drawn from long term and recent history

▪ ROE Adjustments– Inflation can impact the level of real ROE– Governance can also impact real ROE

19

Normal EPS (regular scale to better see recent levels)

Book value multiplied by adjusted ROE

20

(30)

(20)

(10)

0

10

20

30

40

50

1960 1967 1974 1981 1988 1995 2002 2009 2016

Actual EPS Normal EPS

Normal EPS (Log scale to better see historic levels)

Book Value multiplied by adjusted ROE

21

0

1

10

100

1960 1967 1974 1981 1988 1995 2002 2009 2016

Actual EPS Normal EPS

Normal growth

▪ Normal Growth = organic + acquisition + inflation pass through – attrition

– Organic growth = organic reinvestment times normal ROE• Organic reinvestment = portion of earnings reinvested excluding acquisitions• Normal ROE adjusted to avoid double counting of inflation pass-through effect

– Acquisition growth = acquisition investment times cost of capital• Acquisition investment = portion of earnings invested in acquisitions• Return of acquisitions based on cost of capital

– Inflation pass through = expected inflation x pass-through percentage• Expected Inflation = same as used for Normal ROE• Pass-through percentage = percent of expected inflation estimated to pass through as an

increase in normal earnings

– Attrition = estimated mortality rate of normal earnings• Adjust for bias of earnings power (absent further investment) to be at risk of erosion• Attrition rate helps reconcile historic actual growth with the growth otherwise expected

22

EPS growthNormal versus 20 year actual

23

-5%

0%

5%

10%

15%

1960 1967 1974 1981 1988 1995 2002 2009 2016

Normal Growth Rolling 20Y Actual

Equity price to valueraw and with monetary and earnings adjustments

24

25%

50%

75%

100%

125%

150%

175%

1960 1968 1976 1984 1992 2000 2008 2016

Eq Adj PV Eq Raw PV 100%

Bond valuation

▪ Equilibrium yield estimated– Inflation

– Real cash yield

– Term premium

▪ Bond value based on equilibrium yield

▪ Adjustments to value– Monetary stimulus/restraint

– Earnings strength

25

Bond price to valueraw and with monetary and earnings adjustments

26

25%

50%

75%

100%

125%

150%

175%

1960 1968 1976 1984 1992 2000 2008 2016

100% Bond Adj PV Bond Raw PV

Price to valueequity, bond, real estate, high yield

27

25%

50%

75%

100%

125%

150%

175%

1960 1967 1974 1981 1988 1995 2002 2009 2016

Equity Bond Real Estate High Yield

Allocation over and under-weightsbased on valuation

▪ Thresholds to adjust equity-like and bond-like risk– Meaningfully cheap or expensive to initiate over or under-weight– Move back toward fair value to remove over or under-weight– Several steps between the benchmark and minimum and maximum levels

▪ Other categories over and under-weights depend on valuation relative to valuation of risk mapped blend of stock/bonds/cash– Equity-like, bond-like, and cash-like risk from other categories is offset by adjusting

weight of stocks, bonds, or cash

28

Model suggested allocationsEquity-like, bond-like, cash-like

29

0%

20%

40%

60%

80%

100%

1960 1968 1976 1984 1992 2000 2008 2016

Equity-like Cash-like Bond-like

Equity-like risk3/1/2020 through 8/15/2020

30

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

3/1 3/11 3/21 3/31 4/10 4/20 4/30 5/10 5/20 5/30 6/9 6/19 6/29 7/9 7/19 7/29 8/8

agenda sdrs board of trustees

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