P - Present
E - Excused
A - Absent
Roll Call
P Jones (Tom)
P Hawley
P Bolin
P Dryden
P Mickelson
P Novstrup (Al)
P White
P Romkema
P Peters, Chair
OTHERS PRESENT: See Original Minutes
The meeting was called to order by Chairman Deb Peters.
The SDRS, with its 75,000 members, is about to celebrate its 40th anniversary. The Retirement
System has a good financial status and they strive to continue that status. In 1982, the Retirement
System had $300 million in assets and today it is nearing $10 billion.
Mr. Wylie said providing services to its members is as important as the fiscal business. SDRS provides consultations with potential retirees, workshops on managing money and now offers two programs to assist the early to mid-career employees get started early on planning for retirement rather than waiting to the end. And a new retiree forum is offered to stay in touch with the retiree members.
Representative Bolin asked if other small rural states have in-house actuary services. As far as
retirement goes, Mr. Wylie said most of the in-house actuary services are for larger plans; however,
a few agencies in South Dakota are trying to get actuary service. In response to Representative
Mickelson's question, Mr. Wylie said the actuary contract is the largest item, just slightly over
$300,000, in the Contractual Services budget. Costs for the audit, data processing and a number of
bureau billings are also included in contractual services. Senator White asked what other areas in
state government use an actuary. Mr. Wylie said if the in-service actuary is brought on board, SDRS
would work with other agencies to use that resource, if they fit the criteria. Actuarial services can
be specialized; however, SDRS is committed to support other agencies if possible.
Senator Peters asked when employees are added to the organization, what kind of cost benefit
analysis is done, versus contract. Mr. Wylie said it is not just salary but total compensation. They
are not looking at a dollar gain doing this work in-house, in fact costs will be similar; however, they
will get more work out of it because they will not be competing against other agencies needing the
actuary's assistance.
Total benefits paid out in FY13 totaled $397,391,341 with $409,313,000 estimated for FY14 and
$421,590,000 in FY15. The benefit amount raises by 5-8% each year.
In response to Representative Bolin's question, Mr. Wylie said it appears there is a large number of
baby-boomers nearing retirement age; however, retirements are slowing down with 1,500 retiring
each year and the average age of retirement has increased by a full year.
Senator White asked Mr. Wylie for information on options for the Cement Plant retirement fund.
Mr. Wylie said there are two pieces of legislation making their way through the legislative process
dealing with the Cement Plant retirement fund.
Jason Dilges, Commissioner of Finance & Management told the Committee that the Cement Plant
Retirement Fund was kept separate following the sale of the plant. When the sale proceeds came in
$238 million was placed in the Cement Plant Trust Fund with the remaining funds retained for other
pending issues. The Cement Plant Retirement fund has multiple plan levels and a variety of benefits
and was fully funded at the time of the sale. However, after the sale the fund was frozen with no way
of putting money into the retirement fund. The state took the remaining amount of proceeds and
made periodic transfers to the retirement plan. Two pieces of property were sold and the proceeds
from the sale went into the retirement plan as well as a $6 million transfer from general funds. In the
recent past the shortfall was as much as $16 million. Today the fund is $5.6 million from being fully
funded. Commissioner Dilges said the Governor is adamant that this be the last time the state comes
to the Legislature to fund the Cement Plant Retirement Fund. SDRS requires other retirement funds
that come into SDRS to be fully funded for their outstanding costs. Commissioner Dilges said they
want to respect that requirement so the goal would be to take the plan up to 100% funded and merge
it with SDRS. SD 152 would appropriate the necessary funds to get the plan to 100% and then
authorize the merging of the two plans. SD 42 would allow former employees or surviving spouses
to take a lump sum payment and leave the plan.
Commissioner Dilges said merging of the two plans provides a benefit of allowing $10 billion plan
and its long term rate of return to guide the $60 million plan's rate of return. Commissioner Dilges
said a number of the Board members were concerned about the big plan subsidizing the smaller plan;
however, the proposed sequence of events should prevent that. Once the two plans are merged,
going forward the two plans would grow at the same rate. Commissioner Dilges said this action will
make the plan 100% funded and will prevent any further requests from the Legislature for additional
funding.
Representative Mickelson asked if the two plans could still merge if the appropriation was short.
Commissioner Dilges said they feel the appropriation is on track and that the plan would be fully
funded at the time of the merger and would be merged before the next actuarial value date. Mr.
Wylie said if they go to another year, it would have to be recalculated and the new accounting system
may change things. In response to Representative Mickelson, Commissioner Dilges said the
proposal is on the yield for this fiscal year, currently at 6.75%, so if they waited a year the money
next year would be the same; the need fluctuates on the yield.
Representative Hawley asked if the Cement Plant Retirement fund members had been consulted on
this proposal. Mr. Wylie said there have been meetings with both the SDRS Board and the members
of the Cement Plant fund and no one saw it as negative. The retirement fund members understand
the dynamics of the plan and understand the value of the merger. Commissioner Dilges added that
Mr. Wylie had done a good job of due diligence with the Cement Plant fund and the members
appreciate the Legislature taking care of them in all that has gone on.
Senator Peters asked for information on how the South Dakota High School Athletics Association
qualifies as a member of the SDRS. Mr. Wylie said the IRS has offered a number of public
employee retirement arrangements. SDRS is a qualified governmental plan under the Internal
Revenue Code (IRC) Section 401(a). The IRC qualified plan framework, IRC Subsection 414(d)S
is a 401A determines who can participate in the plan. (Document 4) Document 4
Mr Wylie referred to SDCL 3-12-47(56) which defines “political subdivisions”. Mr. Wylie said the
IRS is currently doing a major review of the plans and who may participate in the plans; however,
they have not received any additional guidance from the IRS.
In response to Senator White, Mr. Wylie said for an agency to apply to be part of the SDRS they
must be public employees and have a governmental function. The SDRS purview of the agency does
not include an agencies administrative activities or how they approach their business practices.
In response to Representative Mickelson's comment, Mr. Wylie said they consider the SDRS COLA
one of the most innovative in the country. It is based on not just a cost of living but the funding of
the plan. If the plan is fully funded, they would pay the original COLA prior to the change in 2010
of 3.1%. If the funded ratio is between 80% and 90% they would pay it based on the CPI but not
greater than 2.4% or 2.8% but no lower than 2.1%. If the ratio is below 80% the COLA would drop
a full percent to 2.1%. This was part of the compromise made in 2010 when funding went below
the mandated threshold of at least 80% funding. Mr. Wylie said if the fund is at 80% or lower, they
consider themselves in a difficult time; while other states consider 80% as being adequate. The
SDRS goal is to be 100% funded.
Representative Mickelson commented that the SDRS is paying out $400 million a year and taking
in $200 million and are now considering merging with the Cement Plant plan. Mr. Wylie said the
Cement Plant retirement fund is a frozen plan, with no cash flowing into the fund. Currently the
Cement Plant fund has to have an 8% return just to make payments to the individuals; there is no
growth or expectation of growth.
The State Investment Council budget is .085% of the assets; when adding external managers the cost
goes up to .433%. The difference between the SD Investment Council cost of .433% and the
benchmark cost of .731% is a savings of $33 million per year.
The Investment Council is funded 79.7% by retirement systems, 11.1% by the Cash Flow Fund and
9.2% by the various Trust Funds with the exception of the School & Public Lands fund whose share
is paid from the Cash Flow Fund. Mr. Bartels reminded the Committee there were no general funds
in the Investment Council budget. Unit costs are the most important thing in a long term plan with
the Council wanting to stay below one-tenth of one percent in total costs.
Compensation Overview
Mr. Bartels said long term results have consistently exceeded benchmarks and have added over 25%
beyond benchmarks to the SDRS assets in the past 15 years. Continued success depends on a high
caliber team and the future team depends on retention of the talent staff and trainers. The Council
compensation plan was revised in 2006, updated in 2010 and again in 2013. The target is 70% of
the cost of living adjusted median industry pay to balance getting a good deal for South Dakota. The
plan incorporates performance incentives which are expected to average 50% with continuation of
SDIC historic level of superior performance. Pay was increased to 70% target after the 2006 study.
Mr. Bartels said the Investment Council looked at compensation again after the 2010 review but the
timing was not good.
The 2013 study indicated compensation was below the 70% target with pay at 55% rather than the
70% cost of living adjusted industry median. The Council believes it is important to get back on
target and is seeking support for an increase in the incentive plan in order to get to target by adding
longer term and stretch incentives.
FY13 Budget and Actual
The budget for FY13 was $8,785,318 (which did not include $45,888 for health insurance and BIT).
The actual expenditures for FY13 were $7,741,377 leaving $1,043,941 unexpended. The Investment
Council budgets for paying 100% of incentives. On average, 50% of incentives are paid and the
remaining personal services is returned.
FY15 Budget Request
The FY14 budget totaled $10,275,078. The FY15 request totals $15,305,503 a 48.96% increase
primarily due to the proposed incentive plan. Contractual Services includes $85,000 for a new Trade
Order Management System, $12,000 for an upgrade to the Portia investment accounting system;
$17,678 for additional users of Factset data system and $10,550 for expanded use of Credit Sights
research.
Investment Performance - Returns vs. Benchmarks
SDRS beginning FY13 Assets $7.835 billion
SDRS ending 6/30/13 Assets $9.076 billion
Earnings vs. Benchmarks
Total SDRS dollars earned FY13 $1.503 billion
Total SDRS dollars earned last 4 years $4.350 billion
Total SDRS dollars earned last 10 years $5.937 billion
The fund still grew $1.25 billion after paying benefits. Mr. Bartels said there were 4 good years in
a row and that will be hard to do again. The patience that leadership showed for the support of the
plan proved itself.
Potential Excess Earnings
SDIC 40-year out-performance = 1% annualized vs benchmark
If 1% out-performance continues in the next 20 years = extra $7 billion
Out-performance of even half that amount = extra $3.4 billion
Under-performance of 1% = cost to retirement system of $5.8 billion
Mr. Bartels said a lot of good returns have come from being in the right asset at the right time; every
asset category has good and bad years.
Trust Funds (Preliminary Estimates)
Matt Clark presented information on the various trust funds that add budget dollars to the general
fund.
Health Care Trust:
The Principal as of 12/31/13 $ 85,631,024
Principal as of 12/31/13 adjusted for inflation $110,565,966
Fair Value as of 12/31/13 $128,488,000
Markets have gone up so much, the prospects from here might be below average. The fund is $42
million ahead of principal, almost $17 million ahead of inflation. Fiscal year to date return is 9.68%
with a long term expected mean return of 6.27%. If interest rates go back up the long term may go
to 7%. Distribution estimates for FY15 is $4.3 million (may be higher).
Education Enhancement Trust
The Principal as of 12/31/13 $334,012,613
Principal as of 12/31/13 adjusted for inflation $430,578,631
Fair Value as of 12/31/13 $467,830,000
Fiscal year to date return 9.67%. Distribution estimate for FY15 is $15,696,982.
School & Public Lands
Inflation protection mandated by Constitutional Amendment - (payout is reduced by inflation to
extent inflation not offset by realized gains.
Fair Value as of 12/31/13 $248,037,000
Fiscal year to date return 9.66%.
Distribution for FY14 (Feb. 4, 2014 to K-12) $ 8,773,822
Senator White asked how the incentive package is dealt with as part of the benefit program. Mr.
Clark said it is considered W2 income, taxes are paid; most senior portfolio managers will be past
social security tax limits. Retirement system contributions are made for 2 levels of employees, those
that joined before a particular date pay 6% out of the incentive and the employer will match that 6%
out of the budget. SDRS has a feature where another 6% makes up the FICA. The younger
employees who reach higher income are under a $250,000 cap. If they go over that cap there is no
6% contribution or any match; however, the 6% for FICA is still paid.
Senator Novstrup complimented Mr. Clark and the Investment Council on their work on the Cement
Plant retirement plan.
Representative Mickelson asked what the hard cap on the retirement eligibility was. Mr. Clark said
for people employed prior to 1996, SDRS contributions are made on all compensation but the
benefits are only calculated and paid to approximately $250,000. The IRS limits the amount of the
benefit which can be paid.
The budget FY14 budget totaled $69,358,775 and the recommended FY15 budget totals $71,260,812, an increase of $1,902.037. The majority of the increase, $1,800,000 is in operating
expenses, supplies and materials, for the 2016 license plate issue. The department is also requesting
one additional FTE, an attorney, which represents an increase of $77,794 to personal services. The
increase of $24,243 to contractual services reflects changes in internal service rates billed by the
bureaus.
In response to Representative Bolin question on the $9,175,000 in grants, Mr. Gerlach said the grants
were in the gaming budget for paying out prizes. Senator Peters asked for a flow chart of the funds
that come in and go out for gaming.
FY15 Budget
Secretary Gerlach spoke to the FTE request for an attorney at a cost of $77,794. This request is
necessary because the department is seeing more complex cases dealing with a significant amount
of money. A number of larger businesses have taken the department to court on issues dealing with
the tax code and these cases take time and resources. Secretary Gerlach said basically it is more time
on more complex cases with large dollar value. Senator Jones asked if the $77,794 included
benefits. Secretary Gerlach said it included all personal services, including health insurance and
operating expenses. Senator Peters asked for a cost analysis on an in-house attorney versus having
the Attorney General's office do the work. Secretary Gerlach said they did that analysis; however,
they found the Attorney General's staff is stretched as far as everyone else. In response to Senator
Peters question, Secretary Gerlach said the department currently has 4 attorneys on staff.
Business Tax
The primary functions of this division are:
7 * to ensure compliance with all applicable tax laws in South Dakota and to promote sales tax
equity on a national basis through simplification of sales tax laws and administration.
8 * to administer municipal and special jurisdiction sales and use taxes, excise tax, prepaid
wireless, and 911 emergency surcharge
9 * to process sales, use and contractors' excise tax payments
Senator Peters said SDCL 10-1-44 established the sales and use tax collection fund. All revenue
collected goes to that fund and is then disbursed to other funds. What percent of that fund is used
to fund the department? Ms. Serfling said the sales and use tax collection fund's first revenue source
is the administrative fees charged to the municipalities for the administration and collection of the
various city taxes collected by the department. The balance needed to support the amounts budgeted
from the fund are retained from the state's sales and use tax collections and transferred to the sales
and use tax collection fund. All taxpayer receipts from sales, use and contractor's excise tax are
transferred into an agency fund, not the sales and use tax collection fund. From the agency fund,
transfers are made to the fund for payments for cities sales tax collections, to other agencies for
collections made on their behalf (i.e. tourism tax, 911 surcharge, etc), to the general fund for sales,
use and contractor's excise tax and to the sales and use tax collection fund for the administrative fee
charged for the collection of city tax and the balance needed to meet the amount budgeted from this
fund for administering the these taxes.
Senator Jones asked if additional staff was required to handle the $70/month retailers refund
program. Secretary Gerlach said they are handling that with current staff. The program has been
very successful with no issues.
Senator Novstrup commented that it appears that the department is consistently taking funds coming
in and treating them as user fees and asked if the department is consistently following that
philosophy? Secretary Gerlach said he wasn't aware of any inconsistency in this regard.
Business Tax Division
The is the largest division with 57.5 FTE and is funded primarily with other funds (sales and use tax
collections). The total FY15 recommended budget is $4,112,343 with minimal increases for bureau
billings.
Secretary Gerlach said the department has budgeted $787 million in Sales Tax Collections and
commented that the agriculture industry is helping with the sales tax collections as well as the
contractor's excise tax. Another area tracked by the department is the market place fairness act; an
effort of the Streamline Sales Tax Program. Nationally, this has increased 17% in the last year.
South Dakota is currently unable to collect taxes on those individuals making purchases online and
the department estimates South Dakota is losing approximately $60 million/year.
Senator Peters commented on the 1099K changes and requiring businesses to collect based on credit
card purchases; what does the department do to ensure that people are complying with the laws.
Secretary Gerlach said when audits are done on an out-of-state company they see the 1099K's and
from that information they attempt to get the tax from those type of purchases. Senator Peters said
the department should be able to collect use tax from those individuals instate who chose to not pay
the tax. Senator Peters expressed her concern regarding the 1099K information. Secretary Gerlach
agreed to provide further information.
Motor Vehicles
FY15 recommended budget request totals $7,186,858 with 46 FTE. The largest increase, $1,800,000
involves the 2016 license plate issuance.
Secretary Gerlach said the license plate design decision will be finalized in September 2014; Pheasantland Industries will begin ordering materials in November of 2014; production of specialty and new plates will be done between January and June of 2015 at an estimated cost of $1,800,000. Approximately 40% of the license plate inventory will be issued between July 2015 and June 2016
and a projected FY16 budget request of $2,240,000. The balance of the plate inventory issuance will
be between July and December 2016 with a projected FY17 budget request of $1,560,000. January
2016 will be the beginning of new plate issuance with 1,400,000 plates at $4.00/set for a total of
$5,600,000. Senator Peters commented that the plate production is budgeted over a 3-year period and
requested documentation on how the 1.4 million plates at $4/set is budgeted, how the funds come
into the department and what amount is returned to the counties.
Representative Romkema asked if there was a law enforcement reason for the two plate requirement.
Secretary Gerlach said he believes the two plates, and the design of the plate, play a vital role in the
visibility issue with law enforcement.
In response to Representative Dryden's question on the $5,600,000, Secretary Gerlach said this is
other fund authority. The department takes what is needed to fund the plate production and the
remaining funds go to the counties.
Senator Novstrup asked if there will be a time when the counties come up $1.6 million short
compared to the normal cash flow. Ms. Serfling said yes, the revenue in the license plate revolving
fund comes from the 2.5% of all registration fees and other miscellaneous fees. At the end of the
year any cash in excess of what is needed reverts back through the Local Government Highway
Bridge Fund to the counties, cities and townships. When it is time for a license plate issue, the
expenditures obviously increase which means less of a cash balance and less money going back to
local governments. Senator Novstrup asked in which fiscal year will this happen? Ms. Serfling said
the total license plate issue, based on estimates from Pheasantland Industries is $5.6 million. If the
state did not issue license plates, which they didn't in 2011, the funds would go back to local
governments. Senator Peters asked how much of the 2.5% pays for license plates. Ms. Serfling said
100% and they are requesting authority to spend that cash.
Senator White asked for a breakdown of where license plate fees are distributed. Ms. Serfling said
the counties collect the money and retain a majority of it. A portion comes to the state of which 2.5%
goes to the license plate revolving fund which is used to pay for the license plate decals and any
replacement plates. The rest goes to the Local Government Highway Bridge Fund which is
distributed back to the local governments. All total at least 97%, goes to the counties.
Property and Special Taxes
The recommended FY15 budget totals $1,117,713 and is funded solely with general funds. Property
tax assessments and collections are the primary source of funding for school systems, counties,
municipalities and other local government units.
Representative Hawley asked for an update on Bank Franchise Tax. Secretary Gerlach said bank franchise tax laws have not been updated in 40 years and were not keeping up with the many changes in banking. It was discovered the department was taxing receipts or transactions that did not happen in South Dakota. New code was developed and is currently being reviewed by major tax
organizations across the country. The new code will allow them to go to a customer based approach
for receipts in South Dakota. Property, payroll and now receipts will be used to track customers.
The problem is that with 800,000 people in South Dakota there is only so much ability to tax
citizens. Secretary Gerlach said good tax policy gets you less money than what is budgeted for bank
franchise tax. The state's share of bank franchise tax is about $17.7 million. The risk is that it is an
income tax and is very hard to predict.
Audit Division
The Audit Division conducts audits of sales, use, contractors' excise, motor fuel and severance taxes.
The Audit Division completed 2,199 audits in FY13, with audit assessments of $17.6 million and
collections of $18.3 million.
FY15 recommended budget is $4,128,596 funded through the Sales and Use Tas Collection Fund
and the State Motor Vehicle Fund.
Lottery
The FY15 recommended budget for Instant and On-Line Operations totals $38,184,566 which is
funded with other funds. Secretary Gerlach said Powerball sales generate over 50% of the instant
sales. The state has seen good revenue growth within the Lottery.
The FY15 recommended budget for Video Lottery totals $2,548,209 which is funded through other
funds. Secretary Gerlach reminded the Committee that 50% of the revenue from video lottery goes
back to the operator, 49.5% goes to the property tax reduction fund and .5% goes to fund the lottery.
The decrease in video lottery is due in part to the smoking ban and also a mature industry which
needs to look at reinventing itself. Senator White questioned the impact on video lottery due to the
number of casinos built around the state.
Representative Mickelson asked for information on the Lottery Commission's suggestions on
improving Video Lottery. Secretary Gerlach said twenty recommendations were presented to the
Commission by a research group hired to study the issue and two of those are now in the form of
legislation. One recommendation is to increase the number of video lottery machines and the second
is to raise the bet limit.
Representative Bolin asked what the impact would be on the state budget if this revenue stream does
not increase. Secretary Gerlach said he believes the current high end numbers will be the high going
forward. Representative Bolin commented that would expect program cuts or a tax increase.
Representative Romkema commented that during the downturn the lottery seemed to hold it's own;
and asked if there was any correlation between alcohol sales and video lottery. Secretary Gerlach said
he has not seen any correlation between alcohol sales and lottery.
Commission on Gaming
In response to Representative Bolin's question, Secretary Gerlach said there is still horse racing in
Fort Pierre and Aberdeen each spring; however, South Dakota no longer has a dog racing track.
Senator White asked if we have adjusted the remuneration for the people who have the machines and
have the percentages been constant? Secretary Gerlach said the percentages for video lottery are firm
and are in statute. The Deadwood casinos have more flexibility but Secretary Gerlach wasn't aware
that they had made any changes.
Representative Hawley asked what the net revenue was to the state from Deadwood gaming. Ms.
Serfling said a total of $17 million.
This information was available in the department's Annual Report but that a total of $17 million was
distributed to the Tourism Promotion Fund, twice to the General fund, Historical Preservation,
Department of Human Services and the City of Deadwood.
MOTION: ADJOURN
Moved by: Dryden
Second by: Hawley
Action: Prevailed by voice vote
Barb Bjorneberg
Note: For purpose of continuity, the minutes are not necessarily in chronological order. Also, all referenced documents distributed at the meeting are attached to the original minutes on file in the Legislative Research Council.