Each quarter the South Dakota Retirement System — the public pension program for state employees and for those units of municipal, county and school governments that choose to participate — sends its Outlook newsletter to members. The current issue is a fascinating political statement. The front page is all about the system’s return to strength: A 19 percent return in the past year; funded status of 103.2 percent; and all previously unfunded obligations now covered. The third page is a reprint of the column by Gov. Dennis Daugaard (and a reprise of his speech to the SDRS trustees at the previous meeting) about how the trustees, the investment council and their staffs through conservative managements have made SDRS “the best in America.” The back page is about new educational programs that will be offered the SDRS administration to members in 2014 and an invitation for new ideas on communicating SDRS information to members.
And then there’s page two.
I was surprised when I saw the news story in the Sioux Falls Argus Leader a month or so ago that reported SDRS was looking at a second system that would be offered to new members. SDRS, as established in state law, is a defined benefit plan. That means, no matter how much or how little, SDRS members are guaranteed payment of their benefits and, under current law, have a guaranteed range for the annual cost of living adjustment that depends on the system’s funded status. The story, which was based on comments by SDRS administration, said SDRS was looking at a defined contribution plan. Currently state law requires certain matching contributions by employee and employer, with the percentages of payroll based on the types of employees (law enforcement or non-law enforcement is the basic difference). In that respect, the contributions are defined. The real purpose of a defined contribution plan is the elimination of a guaranteed benefit. Instead, a defined contribution works somewhat like an individual retirement account: You put money in and what you get back depends solely on how the investments performed. The page-two article in Outlook is devoted to defusing the notion that SDRS is moving into a defined-contribution (aka no-defined benefit} plan. But the article doesn’t rule it out either. Here are the final two paragraphs:
“As of June 30, 2013, SDRS stands fully funded at 103.2 percent with no unfunded obligations. Even though SDRS is in a strong position, discussions regarding benefit improvements and the alternative benefit enhancement methodology will likely not be addressed by the Board until the system is at or near 120 percent. Any action the Board takes regarding the design of the alternative methodology would need to be defined in proposed legislation and submitted to the Legislature for implementation prior to implementation.
“There are no pending benefit improvements and there are no plans to change from the existing defined benefit plan to a defined contribution plan. SDRS is only exploring alternatives for future benefit enhancements for all plan members.”
That is a fascinating term: “alternative benefit enhancement methodology.” What’s really happening here is a recalibration of long-term sustainability of SDRS. State investment officer Matt Clark and his staff have done a remarkable job keeping SDRS funded through rough times, but the tremendous instability seen in the investment markets during the past decade means SDRS can’t reliably expect to average annual returns of 7 percent-plus returns. That is the expectation on which SDRS is currently built. South Dakota hasn’t fallen into the pension traps dragging down some other states and localities and some large companies — yet. Right now the member governments of SDRS — we, the taxpayers – are pretty much on the hook for the benefits owed to the members for the rest of their lives under the defined-benefit plan. Shifting to a defined-contribution plan essentially would take the member governments off the hook for those new members who would be covered under such a new plan.
To see the latest edition of Outlook, here’s a link on the Internet: