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Public pension plan is in a deficit, again

PIERRE--Trustees for the South Dakota Retirement System learned Wednesday its investments currently don't cover what its members are owed. This is the fourth time since 2009 that a deficit faced the public pension system. Among its participating ...

PIERRE-Trustees for the South Dakota Retirement System learned Wednesday its investments currently don't cover what its members are owed.

This is the fourth time since 2009 that a deficit faced the public pension system.

Among its participating units are state government, state universities and many school districts, counties, cities and other units of local government.

SDRS is structured to balance on annual average investment gains of 7.25 percent.

The market value of SDRS investments currently is down about 2.5 percent since the fiscal year started July 1, 2015.

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If the portfolio finishes at a negative 2.5 percent when the fiscal year ends June 30, the deficit would be $576 million, actuary Doug Fiddler told the trustees Wednesday.

Investment returns would need to average 7.9 percent annually for the next 10 years, according to Fiddler.

State law requires corrective actions to be taken if various conditions aren't met. One trigger is the fair value of the investments dropping below 90 percent.

SDRS finished the 2015 fiscal year at a fair value of 104 percent. The current estimate points to finishing fiscal 2016 at a fair value of 95 percent.

"This is our conservative nature," SDRS administrator Rob Wylie said. "If we fall below these thresholds, we're going to take action."

The trustees made $400 million worth of changes after finishing fiscal 2009 with a fair value of 83 percent.

Consultant Paul Schrader said Wednesday the trustees should develop a strategy for responding to deficit situations in the future.

"We need to formalize a plan in advance, if things get worse," Schrader said.

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He noted the assumed annual rate of return increases to 7.5 percent in the 2017 fiscal year. He said 7.25 percent and 7.5 percent are higher than many investment professionals currently advise.

The trustees set the assumed rate of return. The South Dakota Investment Council manages the SDRS portfolio in trying to earn that rate of return.

The council began taking profits and stacking up the cash last May, awaiting opportunities to purchase underpriced investments.

One bargain sector has been energy stocks, State Investment Officer Matt Clark said.

But generally, the markets have been overpriced, as the Federal Reserve continues to hold down interest rates, he said.

Clark said approximately 18 percent of the SDRS portfolio remains in cash through money markets and hedges.

Meanwhile, stock markets are overvalued by about 10 percent, he said, and the investment council will convert more of the SDRS portfolio to cash if market values keep rising.

"If you run up the credit card today, to build a better lifestyle today, the credit card comes due later," Clark said.

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"We're investing with a long-term mindset," he continued. "It is scary times."

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