The FY2003 UJS funding level is $30,063,698. For personal services is $22,902,823 and for operating expenses is $7,160,875.

FY2001 UJS selected disbursements include: child support/alimony is $8,150,168, remitted to county is $13,599,154, remitted to city is $990,433, remitted to state is $6,779,661, and restitution is $2,755,402.

Mr. Hanson told the committee that there has been an increase in juvenile delinquency in Pennington and Minnehaha counties.

Senator Duxbury asked for a review of the child/support alimony. Mr. Hanson said the UJS funds are transferred to the Department of Social Services.

Mr. Hanson informed the committee of a detail that is not in the budget book which is the Supreme Court increase of $13,704 in general funds. This includes: $5,922 general funds for the increase in retirement from 5 percent to 6 percent and longevity increase, $4,646 for annual dues to the National Center for State Courts and $3,136 for Capital building maintenance.

There is no increase in the Judicial Qualifications Commission ($29,541 General Funds Total Budget).

The court administrator's office shows an increase of $118,444. This includes 2.0 FTEs and $97,485 for two computer programmers who will replace contractual employees, $3,038 for an additional 1 percent retirement benefit for Class A members and longevity increase, $6,000 increase in travel, $1,115 for Capitol building maintenance, $500 telephone, projected FY2003 revenue in the automated Court fund is about $27,450 over FY2001 actuals.

Senator Putnam asked about changing from the contractual positions to the 2.0 FTEs. Mr. Hanson said by adding FTEs, we could scale back on contractual. It makes more sense to have in-house personnel. Mr. Ellenbecker said the $6,000 is for current staff travel.

Senator Putnam asked if there are shortfalls in projected court funds. Mr. Ellenbecker said the department has had a good balance in revenues. The big expense is in contractual services.

Senator Apa asked what is the cost for contractual services. Mr. Ellenbecker said the costs are under $800,000 per year. The FY2003 budget is $980,000 and 2.0

Senator Duxbury asked about the division of programs. UJS personnel informed the committee of the following: protection order system, statewide adult probation system, juvenile system is new and

shows development of a tracking system, and the civil system.

Senator Putnam asked if the UJS juvenile information system talks to the Department of Corrections juvenile system. Mr. Johnson said that the UJS allows the DOC access to some records. They allow us to have data. The two systems do not talk to each other. Mr. Johnson said that it is a technology issue. The departments are moving to a more uniform language. The new systems go into the mainframe. He said that the UJS is trying to get the divisions of government to work together.

For judicial training, the overall increase of Other Funds is $67,452. This increase is in travel expenses and contractual services for training events (increase in LEOTF funds of $43,322 and an increase in Court Automated Funds of $24,030)

For circuit court operation, there is an increase of $539,121 and 1.0 FTE. The 1.0 FTE for a law clerk in the 2^nd circuit to assist the Circuit and Magistrate Judges in legal research and preparations of jury instructions at a cost of $40,875 and $101,658 general funds for special salary adjustment for the 12.4 Magistrate Judges. The raise would bring them to 80 percent of the Circuit Judges. Circuit Judges will make $94,027 and Magistrates will make $75,222.

Representative Richter asked about the raise that would bring the Magistrate Judges salaries up to 80 percent of the Circuit Judges. Chief Justice Gilbertson said that the UJS has tried to keep up and are now trying to bring Magistrates back to 80 percent. Mr. Hanson said that adjustments by 3 percent have been made since 1999.

Representative Richter asked for clarification saying the FY1998 budget started as 80 percent, then started falling back.

Representative Adelstein asked what the turnover rate was for Magistrates. Chief Justice Gilbertson said that the UJS thinks it has good Magistrates. The turnover of 2.5 Magistrates has been in the last few years.

Representative Adlestein asked what would happen if the money for salaries wasn't available. Chief Justice Gilbertson said, “If the money isn't there, the money isn't there”.

Senator Apa said that with the Magistrate's raise, they would have an increase of 13.6 percent from last year. He said that if turnover is not a problem and we have a tight budget, don't you think it is excessive. Chief Justice Gilbertson said, “No, the UJS wants to get the people up to where they should be and it wants to keep good people. There hasn't been an increase since 1998".

For clerks of court operations, there is an increase of $280,431 and 4.5 FTEs. The request includes $119,741 general funds for 4.5 deputy court clerk positions: Minnehaha 1.5 FTE, Pennington 2.0 FTE, Lawrence .5 FTE, Codington .25 FTE, and Moody .25 FTE. Travel, contractual services, and capital assets expenses are also included.

Representative Klaudt asked about the closing of clerk of courts offices. Mr. Hanson said that the UJS is careful about closing clerk of courts offices.

For court services operations, the increase is $33,337. The request includes: longevity and retirement increase of $6,077 general funds, travel, contractual, supplies and capital assets of $24,961 in general funds, and a UJS federal grant from OJJDP to hire 3.0 FTE in FY2002.

Representative Richter said that we interfere with the salary schedules for state employees with the salary schedule on federal funded employees even though the federal funds are taken for only a few years. This causes turnover in our state. Mr. Johnson responded by saying that all the intensive probation officers were hired by the entry level state range. UJS has titles and job descriptions and we dovetail with those.

For the community-based juvenile services, there is an increase of $104,599 General Funds. This program uses mental health centers throughout the state. These facilities provide 90-day intensive treatment to juveniles and their families. The FY2003 estimate 267 juveniles at $1,547 for a total of $412,978.

Representative Adelstein asked how effective the CASA program is. Mr. Johnson said that UJS does not handle the CASA program. It is a service, and the UJS relies on feedback which has been excellent. CASA program is a service for families coming into the system. Chief Justice Gilbertson said that the CASA is in larger towns, and it is run at the local level. The UJS hears good feedback from each locale.

Representative Adelstein asked if CASA is doing well, could more funding be made available. Chief Justice Gilbertson said there is no problem in working with CASA on a policy basis.

Senator Duxbury asked about the percent of children who receive mental health services. Mr. Johnson said 50 to 60 percent of the juveniles are receiving intensive mental health services. There is home-based therapy for children in the court system. There is a whole array of mental health services the family could access. UJS wants to increase efficiency for families to take advantage of the mental health facilities. Great strides are being made.

For employee compensation, the increase is $949,691. The salary package breakdown includes: 3 percent cost of living increase is $602,219, 2.5 percent raise to midpoint is $179,784, and health insurance is $167,688.

Senator Apa made a motion to approve the 1-25-02 minutes and it was seconded by Senator Duxbury. It passed on a voice vote.

The meeting recessed at 9:45AM.

The meeting reconvened at 10:35AM.

INVESTMENT COUNCIL

Mr. Dale Bertsch, LRC, provided budget information to the committee (Document #4).

Mr. Steve Myers, State Investment Officer, South Dakota Investment Council, introduced the current council members. They include: Mr. Rich Lauer, Chair, Investment Council; Mr. Al Asher, Administrator-SDRS; Mr. Dick Butler, State Treasurer; Mr.Curt Johnson, Commissioner-S and PL. Other council members include: Mr. Richard Kahler,Vice Chair, Rapid City; Mr David Anderson, Lemmon; Mr.Roy Burr, Rapid City; Mr.Tom Everist, Sioux Falls. He introduced Mr. Matt Clark, Assistant Investment Officer and Tammy Otten, Assistant Investment Officer.

Mr. Steve Myers presented FY2003 budget request information for the South Dakota Investment Council (Document #5,#6, and #7).

The Investment Council Budget is first prepared by the Investment Council, approved by the Executive Board of the LRC before it is submitted to the Bureau of Finance and Management. The budget is entirely other funds. The South Dakota cash flow funds are assets of the state that are invested, these are more short-term investments because the fund needs to be sufficiently liquid to meet the cash flow needs of the state.

There are some unusual things in the Investment Council budget not seen in other budgets. Some of the items budgeted as investment services within contractual services may be provided to the Investment Council with which the Investment Council makes various transactions. The Investment Council has had its own salary policy built into the budget. The salary adjustment for Investment Council professionals has been 4.8 percent each year. The Investment Council has a performance plan for the investment officer and the portfolio managers. The Investment Council uses outside money managers to manage a small portion of assets, and the amount is decreasing. The increase in personal services is due to the Investment Council's own salary policy and the increase in the state's share of the retirement contribution. The increase in operation expenses is a combination of a $135,000 increase for a management consultant to review performance evaluation and decreases in the amount paid for investment services.

Mr. Lauer made a clarification due to House Bill #1331 (Sixty-Second Legislative Session, 1986-87) which changed the Investment Council's budget process. These changes include: the Executive Board approval needed before presenting to BFM and Appropriations Committee and the budget would be deducted from assets under management with no general fund appropriation. The Appropriations Committee 's Letter of Intent called for a change which includes: developing a long- term plan, encouraging internal management, and recognizing the potential need for outside management.

Representative Adelstein asked for an outline of how the new program performs. Mr. Myers said that a proposal from the management firm presently used by the Investment Council will be provided at a later date.

Mr. Lauer presented information on management fees per $1,000. He told the committee about wealth accumulation, and even without considering the potential for continuing superior Council performance, future wealth grows an extra $1.8 billion and $6.1 billion by keeping costs low.

The FY2003 budget request is a 6.27 percent increase. The unit cost for internally managed assets is budgeted at 73 cents per $1,000 of assets for FY2003 compared to a median industry cost of $4.10 per $1,000 of assets.

For personal services, the salary budget is slated to increase 8.25 percent. It is the intent that in FY2003 most upper level investment positions will increase by 4.8 percent, the assistant portfolio managers and research assistant by up to 16 percent, and the business manager and secretary by 3 percent. The four investment accounting positions will increase by between 3 percent and 10 percent. This level of compensation reflects their CPA status, and these positions will fall within the Grade 16 range of the state system. They will be moving to the maximum of the range over the next few years.

For incentive compensation, the Investment Performance incentives reward outperformance of capital market benchmarks and the private sector corporate universe and range from 0 percent to a maximum of 100 percent of base salary. It is paid only if earned by superior performance. An additional employee will be eligible for investment performance incentive in FY2003 with an initial funding of 15 percent.

Senator Putnam asked if the incentives are carried over each year. Mr Myers said ????

For employee benefits, the 13.57 percent increase in personal benefits results primarily from the increase for Retirement System contribution from 5 percent to 6 percent. The operating budget is slated to increase by 1.44 percent. Consulting fees increased from $15,000 to $150,000 to provide the opportunity for the Investment Council to hire an outside consultant on issues of performance

evaluation, benchmarking and potentially broader topics. Strong negotiations with several investment service firms let to significant decreases in contractual-investment expenses. Contractual-administrative services decreased by -7.12 percent due to the delay of expected increases in custodial fees. No increase is requested for travel or office supplies. Capital asset expenditures are expected to decrease by -17.46 percent.

Representative Richter said that hiring a consultant sounds like a wage study. Mr. Lauer responded that the Council did a study a few years ago. Now a new compensation committee has formed to update compensation programs. The consultant was retained to update the benchmark. The Council needs an outside group to provide proper analysis of what the Council is doing. The Council believes the benefits are well founded.

Senator Apa asked if the Council arbitrarily bid the consultant contract. Mr. Lauer said that they interviewed firms.

Mr. Myers continued to explain the long term business plan which continues to provide an excellent roadmap. This provides an excellent foundation for stability of South Dakota's professional investment function, continues the long term focus on low unit cost management, and is a key ingredient to long term superior investment performance.

The South Dakota Investment Council FY2003 budget request for total personal services is $3,409,990. The total contractual-investment for operating expenses is $613,085, and the total contractual-administrative for operating expenses is $438,702. The FY2003 Governor's total recommended budget is $4,567,452.

Representative Adelstein said as a policy matter where is the Council in considering venture investment capital in South Dakota. Mr. Lauer said that the Council does not think ventures capital should be confined to South Dakota, but global venture capital would be considered. Mr. Lauer said that too much staff time would be needed to make venture investment capital an option. The Council would like to be part of a study to investigate the possibility of investing in venture capital.

In 1984, Governor Janklow wanted the Council to check on venture capital investments. In 1987, the Council looked into only South Dakota venture capital investments, and this was challenged and found to be unconstitutional.

Mr. Myers talked about the South Dakota retirement system earnings. The total SDRS dollars earned fiscal year 2001 is $146,000,000, the total SDRS dollars earned in the last two years is $356,600,000, the total SDRS dollars earned in the last five years is $2,244,000,000.

Mr. Myers said historically, the Council's outperformance for the last 28 years has been 1.5 percent compounded annualized return. The Council's goals going forward must be more modest because of greater market efficiencies and intensive competition from all peer groups. Superior returns of

even 0.5 percent make an extraordinarily large difference as illustrated by additional earnings of $2.7 billion by the year 2022 versus average returns. A one percent outperformance would produce an extra $5.6 billion where as a 1 percent underperformance would cost the retirement systems $4.7 billion relative to average performers.

Mr. Myers told the committee for the years 1994-2001 the state retirement plans annualized rates of return is 12.1 percent.