PIERRE, S.D. (KELO) — People receiving pensions from the South Dakota Retirement System can expect a cost of living adjustment next year of approximately 1.9%.

That’s according to Doug Fiddler, the system’s senior actuary. He delivered the estimate at the SDRS trustees meeting on Thursday.

The estimate was based on 5.84% percent net gains that SDRS investments achieved during the 2023 fiscal year that ended June 30, and on his expectation that the nation’s CPI-W inflation rate will be 3% or slightly above.

If the inflation forecast holds true, the estimated 1.9% increase in benefit payments for 2024 would mark the third year in a row that the COLA trailed CPI-W. The COLA for 2023 was 2.10%, compared to 8.75% inflation; the 2022 COLA was the full 3.5%, while inflation was 5.92%.

By comparison, SDRS in prior years paid COLAs that were relatively close to inflation, either slightly above or below.

The meeting was the first in recent times for four people taking seats after their spring elections to the board. They included three newcomers: Dave Smith, city of Sturgis planning director; Hank Prim of Pierre, state Division of Criminal Investigation training administrator; and LaJena Gruis, Onida mayor and formerly a long-time employee at the Governor’s Office of Economic Development. Returning in the role of trustee representing retirees was Wes Tschetter of Brookings, a former chief financial officer at South Dakota State University who previously served on the board in several other roles for a total of 17 years.

Elected without opposition as the new chair Thursday was Eric Stroeder, a state Department of Transportation engineer from Mobridge who’s been on the board since 2004 and previously served as vice chair. Jim Appl, a teacher from Aberdeen who’s been on the board since 2017, was chosen as the new vice chair.

Stroeder recalled the comment that the board’s previous chair, James J.J. Johns of Rapid City, often made about SDRS operating on “razor-thin margins.” “Taking on additional liabilities, we don’t have funding for that,” Stroeder said. He said the contributions are fixed. “Again slim margins – we can’t afford to have any errors,” Stroeder said.

Appl noted that many private pensions don’t increase benefits. He said the majority of retired teachers he speaks with said they were happy to get COLAs.

SDRS administrator Travis Almond said “generally” the members have been supportive of the COLA design. He recalled the statement that another former board member, the late James Hansen of Pierre, often made that retirees cared more about avoiding benefit cuts than they did about receiving COLAs. Regarding expanded benefits beyond the COLA, Almond said, “We just know it’s not affordable and we can’t do it.”

Stroeder said he’s ”kinda” bothered that SDRS hasn’t been able to keep up with inflation in recent years. Paul Schrader, who’s consulted for the system’s since its creation in the 1970s, said the combined employee-employer contributions are paying the benefits and aren’t paying for debt incurred by an underfunded system.

Penny Brunken, a Sioux Falls teacher who’s been on the board since 2016, suggested that SDRS add a line to its materials pointing out that retired members or their spouses living into their 100s were still receiving benefits. “It’s a great point,” Schrader said, calling the system’s return on investment “sensational.”

Two of the senior employees at the state Investment Office presented a report on the performance of SDRS investments for the past fiscal year.

Portfolio manager Danielle Mourer explained that 35% of the $14.49 billion of SDRS funds were in cash that currently was earning about 5.2%. Senior portfolio manager Darci Haug said the system’s goal is to add value over 10- and 20-year periods, and that the best periods of returns for SDRS often followed the worst periods.

The state Investment Council and the Investment Office take a contrarian approach, buying when prices fall below fair-market value and selling when prices exceed fair value. The 5.84% return for 2023 was below the 10.65% benchmark for pension plans. Haug said most state plans have taken on more risk in recent years. “If the markets keep going up, we will likely lag farther behind,” she said.

Last year, SDRS saw a 0.7% loss, but the pension benchmark dropped much more, for a 13% loss. In 2021, SDRS had a 22% gain, while benchmark rose 28%. The SDRS approach has shown to be better in the long run: Over the past five years, SDRS and the benchmark saw similar gains of 6.4%; for 10 years, SDRS returned 7.6% compared to 7.2%; and over 20 years, SDRS gained 8.4% compared to 7.4%.

The return so far for fiscal 2024 on SDRS investments through Tuesday — just under two months — was estimated at one-half to 1%, outperforming the benchmark. Stroeder noted that the markets seemed to be in some turmoil — “It’s tough,” he said — and asked for the Investment Office’s perspective. Replied Haug, “I think that’s kind of the general consensus.” She said the office isn’t willing to invest in many opportunities because there’s so much uncertainty.

Stroeder encouraged other SDRS board members to visit the Investment Office in Sioux Falls. “I get a lesson in economics every time I talk to them,” he said. Appl recently spent about an hour-and-a-half there while other members of his family went shopping. “I got out of there and I feel really good about our system. I feel really good about where we’re going,” he said.

According to the 2022 annual report, SDRS had 97,830 members from state government, public universities and participating county and municipal governments, school boards and other special units, with 41,878 active contributing members and 32,348 benefit recipients. During fiscal 2022, the system paid $665 million in benefits and nearly $31 million in refunds, while receiving $143 million in contributions from employees and $143 million from employers.