Board recommends fix for SD retirement system

AP News
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Posted: Dec 03, 2009 10:58 AM

The South Dakota Retirement System should limit annual increases in benefits to improve the system's financial condition after a more than 20 percent fall in assets in the last fiscal year caused by the recession, the system's board of trustees recommended.

The board on Wednesday voted 15-1 to endorse a bill that would reduce annual cost-of-living adjustments in benefits at least temporarily. The proposal will be submitted to the 2010 South Dakota Legislature, which will have the final say on the changes in the retirement system that covers public employees in the state.

James Hansen of Pierre, who represents retirees on the board, said the changes are needed to prevent more serious financial trouble in future years.

"In order to make the system sustainable, these actions are necessary now so we won't have to make a drastic cut sometime down the road," said Hansen, a retired education official who now serves on several state boards.

Officials have stressed that the proposal will not cut retirees' benefit payments but will reduce the size of annual inflationary increases.

The board's proposal also would trim refunds for those who choose to take their retirement money with them when they leave the system before retirement. The panel also is seeking to put some restrictions on a program that allows some public employees to retire and then be rehired in a public job, drawing both paychecks and retirement benefits.

The bill would set the annual cost-of-living increase in benefits at 2.1 percent initially, down from 3.1 percent. It could vary between 2.1 percent and 3.1 percent as inflation and the financial health of the system changes in future years.

The system has more than 70,000 members, most of whom are still working and not yet retired. It includes employees of state government, cities, counties and school districts. The system pays retirement benefits of more than $300 million a year.

The Retirement System's assets fell to $5.6 billion by the end of the fiscal year June 30, down more than 20 percent from $7.3 billion a year earlier, because of a loss in value of stocks and other investments. It also lost 8.7 percent of its value in the year ending June 30, 2008.

State Investment Officer Matt Clark said the Retirement System's assets have grown by 18 percent since July 1 because of stock market gains, but he said those earnings are not yet sufficient to restore the system to the required level of financial health.

"This return helps, but there's a long way to go before we get back to full funding," Clark said.

It takes a while to recover from significant losses, because improved returns are being earned on a lower asset value, Clark said.

The system was 105 percent funded as of June 2008, meaning its assets were 5 percent greater than the present value of all potential benefits payable in the future. It fell to 76 percent funded as of June 30 this year.

State law requires the board to report to the governor and the Legislature if certain conditions are not met, including a funded ratio of 80 percent. If the conditions persist for three years, the board is required to recommend changes, but it decided to propose changes right away to prevent the problem from getting out of hand.

Rob Wylie, executive director of the Retirement System, said the proposed changes would get the funded ratio back to 80 percent. The system assumes an average investment return of 7.75 percent a year, and it cannot count on continued good stock market returns for the rest of the year, he said.

Officials said retirement systems in other states are in far worse financial shape. Some states are seeking increases in contributions, but South Dakota will not make such requests from workers or the agencies that employ them, they said.