Retirement Board Update - September16, 2005 - By Joe Flynn

   The Retirement Board met using the new format; Financial matters in the morning and Operational Items in the afternoon. The new schedule has some advantages; whatever you are interested in, it happens on Friday. All of the investment, audit, actuary, items are on one day (previously they were on separate days) and reviewed by the full Board. Operation items are handled by the full board on Friday afternoon, instead of separate committee meetings at other times. It gives all Board members a chance to hear a wide range of reports and action items, and it should make it easier for members wishing to attend.
   Last things first. The key action item considered by the Board was the Revision of DROP Distribution rules. The meeting was well attended, and this time we had interested members of the system instead of print and TV reporters. The attachment includes the Staff report and the proposed changes. These proposed changes were adopted by the Board at that meeting.
The reason for the changes in DROP distribution comes from a Internal Revenue Regulation change from June 2004. Staff and outside tax consultants reviewed the matter last year, brought it to the previous Retirement Board in December but no action was taken. With the change of Board members, and the ensuing time and attention devoted to litigation and waiver of attorney-client privilege this matter was delayed. Before I was seated on the Board, I met with Dave Crow to review items he was working on that I needed to pick up. Drop distribution was one of the key items. I wrote the Assistant Administrator of SDCERS requesting an update and asking that it be scheduled as soon as possible. The item was first scheduled in July, then moved to August, then moved to September. Some of the additional time was spent working with tax consultants trying to minimize the changes required.
   Members affected: Currently there are 894 active DROP members, 548 retired DROP members with funds left on account, and 260 retired DROP members now taking distributions of their DROP accounts. The changes made on Sept. 16 will require review by all retired Drop participants with funds on account with SDCERS. (Review of changes in options should also be made by active Drop participants.) Action in response to these changes will likely be required by most retired Drop participants. The changes made will bring Drop distribution into line with other IRS distribution programs. Drop participants will still be able to take a lump sum distribution and roll the funds over to an IRA, for example. It will also be possible to take fixed monthly payments over life expectancy, or fixed payments over a period less than life expectancy.
   Drop participants must make a decision on which form of distribution they wish to take, and this must be done by Dec. 1, 2005 so that the changes will meet the IRS required start date of Jan. 1. 2006.
   The good news in this change is that the 8% annuity rate will be paid on all fixed monthly payouts. Currently, this percent factor is reviewed every six months to determine what the return should be, and as you know, the 8% factor has in the past been challenged as being too high.
All Drop participants will be contacted by SDCERS in the very near future. More information will be provided on your options. SDCERS staff will also schedule meetings to answer questions. SDCERS is keenly aware of the need to get this information to the affected members at the earliest opportunity. I will continue to provide updates and give wider circulation to information provided by SDCERS. In the meantime, please contact your retired Drop participant friends, especially those out-of-state. Advise them to review their Drop accounts and watch the mail for information from SDCERS on this matter.
Part 2. The high attendance by retirees at this meeting was heartening. It also gave Retirement Board members a first hand view of retired members interest and concern as well as their understanding of the issue under consideration. Member testimony on the matter drove home the importance of the issue and the dissatisfaction with the timing and handling of this matter. Even though we had few options in dealing with these IRS regulations, a number of appointed as well as elected Board members took note of member concerns and expressed frustration with the timing. The show of interest and concern was not wasted.

In Financial matters: The SDCERS June 30, 2004 and Comprehensive Annual Financial Report (CAFR) is well underway and completion is expected before year end. Doug McCalla, Chief Investment Officer gave a report on year end earnings of $306.6 million which he stated was ample to cover the 13th Check and Corbett. I have been monitoring this issue carefully and quietly.

The Board is conducting a search for a new investment manager for a segment of the Fund's portfolio. I as well as other Board members were impressed with the work by SDCERS staff in screening responses to the request for proposal and the detailed comparisons provided. Nine firms were reviewed (extensively), and the search narrowed to four. A Board committee will interview these firms and make a recommendation on a finalist at the October 15 morning meeting.

Joe Flynn, Retiree Rep. to the Retirement Board