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Agency Presentation - FY14 - SIC Friday, February 01, 2013 4:18 PM SD Investment Council FY 2014 Budget Presented to Joint Appropriations Committee February 6, 2013 Organization Chart Assets Cost Efficiency Budget Process &

  1. Agency Presentation - FY14 - SIC Friday, February 01, 2013 4:18 PM SD Investment Council FY 2014 Budget Presented to Joint Appropriations Committee February 6, 2013 • Organization Chart • Assets • Cost Efficiency • Budget Process & Long Term Plan • Compensation Methodology • FY 2012 Budget Review • FY 2014 Budget Request • Investment Performance • Trust Fund Summary • Appendix

  2. ~ ~ Organization Chart Cl l\REl< ,C OL~Cll.l lE.\lBE RS, \\'ti!ayG T~I"'.« , Broohq1 Chm) l::hiP, M Bmot.a , \\'.1t 1rt0\lon ' ttit Clw:r) Jen Hw=t:• . ~hdU.OC Juu~tuna. Y~ D,nd Hibd, Rap,d c; · JM?Od J.obnJon, S!'.PL Ccmmll!DOni!!' R.Jclmd Sqw, St.at:• TrUDr1r Rob \\'ybt, SOR.S ~euot .,\n1~\'ffl0ffl-:• Aw:b\e:tt~• Ant~\'t!t~r:tr CMctal Eq Amnp Fiad~Ab:zi, , fmd*caMDtm- BNaFlz::, O,.,.;.V,:~ TQIIIPl(\,0,-,.,.A !r. PartltlUo !.1.au!tr Port!cb~u St.PMfobo~e- OldwEq,~ Olob'1- FIXN tDcemt. H!!P s:c.,,.,, , w.r:~ Srn,Sc~ Jlt.:Z:;.aHiJ"o~·Eo S,~)J&ap Mid C,;i Eq.i~ Sm !co:r&:.: P«tfoto~a Ponfollo~g Olob>I£.,.,,.,, Olohil E.;w~ A!so::Port!a!:o~p JOl4Zn,.t Cm,4Jev,,.,. Con, M,HJ&h Yield A.uocPort!oJo~ ,.,_,,,,,,,. SmMidCl;,Eql:ti.-y NU;So,td;"' Portfoto~• An.icPortfolio . !.p" Cioba!E:;,~ · C-lob'1E,; tn\b'tel,!).t A-"'.at:U~,,i~ Z::,,,,,,.CiHm., ·'"""""' Anoe:: Ponfoao ~!!' AtaPan!o!io~ -- S1:li ).lid c~ Eq:itr Co1wJ.i1t.'H:l,pn1ldl JJ}:~.st,10 .,tdc:!IIS(Jnr;:dl Dr.ti:i,J;;,.~ Auoc~).{p A»oc~UoMJJ <aot,J r.,..,;,y C-loe'1E,;,zy -'<ffa.ft .. A!:S.XPon:fo!lO~p- Sa).fidCl;,£.ql:.L~ R.fflv:!IAu."fU eoa. Mlbih nu! ...,.....,,..,.,,, ~Do:JI.Ia Aucc PortfbUoMg ,~,-a,~ C-klltal~~· tt,.\l:.IIh

  3. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Assets s South Dakota Investment Council ! ! .. Assets Managed ! ~ ! Fiscal Years 1973 to 2012 and s i Fiscal Year 2013 through 12/31/12 I g il ' I As.Mbasofo.cemb.,-J~ 2012 s n = • S.., h o ..... """-' 5w1um 71.s,; • 11,302.J) C i ;;; il L°" ' 11.J Hub, Care Ta.Jt Me 11"'3 a . m . , EOJGticn W..ncEtre:t Tn.st Fund 1~ C4rn1rc P-Mrt a..~.-nn MG ,s .1 0.5G i 207.2 L°" • sc:-.cct•Public:LMCRlf\d u .. ' • Oilkoti Cern TMt fund 2514 1 s...ho .... co;, F ,..,,,.d ™ ...1l.llS l()'J.0-. J Ul,S7J.J I e a :! g ~ ~ § ! a ~ .. Q :: § • • I: a I ; I : : ? t t i t a ; II g ; C I ; g I s a ~ I t I ; ; g ; S I ; I C ~ i:: ; ~Yu, • 11i1QI T- ID Dak • fll t l/llTJ Oll 2

  4. Cost Efficiency Management Fees 1.700% •• 1.120% 0. 73 1% 0.590% 0.367% • 0.092% • ,_.., SOJO SOJ O ti,:w n1cl Cor. o.r.,,do Man.~ Difference between SD IC cost of .367% and benchmark cost of .731% is $36 million per year • Using fully budgeted maximum In vestment performance incentives ' ' Plus 20% profit participation after preferred r eturn 3

  5. Budget Process & Long-Term Plan • Budget o Budget approved by LRC Executive Board before presenting to Bureau of Finance and Management and Appropriations Committee (SDCL 4-5-22) o Budget deducted from assets under management, no general fund appropriations (SDCL 4-5-30) • Long-Term Plan o Developed Plan in 1987 - has helped guide operations for 26 years o Recommended by Appropriations Committee and Executive Board o Key to development and retention of high-quality internal investment team 4

  6. Long Term Plan Executive Summary Projected LTP Budget WW Will WlUi I NVESTMENT OFF I CE BUDGET Personal services umller or Empk>yees (30 1 132 1 (34 1 Col!llensatlon w/0% Invest ment Performance Incentive 4 397 .1 22 6 698 959 8872 003 Total MaXirnLm Potenuat lnl/eStment Perl Incent ive 3 573 . 300 5 685 354 7 595 998 Int ern . Council , Longe 37 228 45630 57 645 Benelils 1 308 , 450 2 031 053 2 700 290 Total Personal Services 9. 316 .1 00 14460 995 19 .22 5 936 Operating Expenses Contractual Services 1. 500 , 980 1 907 927 2 361 874 Trave l 103 854 137 925 78 000 O ice Supplies & Postage 12 733 17 170 23 062 Capital Assets 29 894 56049 69644 Total OperatJng Expenses 1 621 . 607 2 085 000 2 592 506 Total Investment Council Budget 10 937,707 16 545.994 21818442 ASSET SUMMARY " 1 ntemal Assets 8, 228 819 0 37 10 69 981 728 14 018 943 392 External Assets 2, 742 939 679 3 565 993 909 4672981131 Total Assets 10 ,9 71 , 758 , 716 14 263 975 637 18691 924 523 EXPENSE SUMMARY I ntemal Expenses 10 937707 16 545994 21 818 442 External Manage r Fees 30 172 336 39 225 933 51402 792 Total Expenses 41 110 0,4 557 I 927 73221 23 4 UN IT COST SUMMARY Int ernal Expenses as% or Total Assets 0. 100 % 0. 118 % 0. 117% Int ernal Exp as% or Total Assets (1 12 asst.rne<l l ntenllves ) 0. 083% 0.096% 0. 096% Total Expenses as% of Total Assets 0.375% 0. 39 1% 0.392% 5 ~ Prqecfiom based on long-term ass1.aned retwns appli!d to 61»'\2 aMeb . ~ated each Ju,e 30 .

  7. Compensation Methodology Plan Details • Deloi tte compensat ion study presented to Council in Apr il 2006, updated in April 2010, developed i nvestment industry compensation benchmar ks for SDIC i nvestment posit ions. Study in process of being updated Spring 2013. Council w ill assess i mpl ications for FY 2015 budget o Benchmark is the median to tal cash compensation for best position match o Benchmark is adjusted for cost-of-living differences • SDIC target is 70% of benchmark to balance desi re to get a good dea l for South Dakota (quali ty results at low cost ) wi t h the risk of losing the good deal if we cannot keep our people o 30% discount from benchmark is after adjustment for cos t- of -living differences o Total compensation co n sis ts of two-thirds in the form of base pay and one-third in invest ment incentive o Investment performance incenti ve expected to average 50% assuming SDIC historic level of super ior invest ment performance continues to be ac hi eved o Discount drifted to about 40% for FY2011. Discount for FY 2012 has increased to 45% o Any changes toward target compensation may invol ve increasing performance incentive compensation to encourage outstanding investment performance • SDIC tar get is less than one-th ird the industry top quart ile pay level o Benchmark based on median, but pay for top quartile performers can be at least double the median o SDIC historic results are not only top quartile, but are in top 10% versus private sector o If SDIC historic success is not ma intained, then incenti ves will be negatively impacted and the discount wi ll al so be larger versus median pay levels 6

  8. FV12 Budget and Actual Unexpended credited against FY13 Received Actual Exp FY 2012 FY2012 Unexpended PERSONAL SERVICES Compensation With 0% In vest Performance lncenllve 3,343.185 3. 27U82 .44 71 .802.56 Total Maximum Potenti al Incentive 2 553 557 1.595 763 23 957,793 77 Compensation w/100% max po t enbal I nv est Perf Incant 5,896 742 4,867 145 67 1,029,596.33 O ne- Time Payment ( gran ted to all state employees) 0.00 156 830 91 (156.830 91 ) In tern 3977 0 00 3.977 00 Counc il Compensabon 7.088 2.850.00 4,238.00 Longevity 6 825 6 985 00 (160 00) Personal Benefits 975.770 845,154.21 93,233.47 Total Personal Services 6 890 403 5 878 965 79 1 011 437. 21 OPERATI NG EXPENSES Contractua l Serv ic es (see appendix for/ me , te m deta il s) 1,702 210 1,207 608 19 494, 60 1. 81 Tr ave l 4,960. 75 65.700 60 .739.25 Office Supp lie s & Postage 1 2733 9 150.41 3.582 59 Caprta l Assets 28 242 13 ,010.91 15, 231 .09 Total Operating Expenses 1808885 1,290 508 76 518.376.24 TOTAL BUDGET 8,699 288 7.169 474 55 1,529,813.45 • Includes S49 492 77 Alianz r ei mb 16Semerd & compensation changes in Investmen t accountants due to turnover 1

  9. FY 2014 Budget Request Major Items • Two new entry level Investment Professiona Is • Rent increase for larger conference room and additional cubicle spaces • Capital Assets - primary purchases include Mitel VOiP phone system, two computers and furniture for new space • Incentive Program fully funded to 100% • Legislative Audit fees increase to allow interim auditing • Travel to increase interaction with managers, companies, and leading peers 8

  10. ~ FV14 Budget Request Summary R ec e iv ed Request illill E!1lli INVESTMENT OF STATE FUNDS 3210 Personal Services Base Compensation 3608 ,630 3,804 S71 043% 1244n - Two n ew FTE lnves1ment positions 106 000 Retirement & resignation flexibili ty fu nds Tot al Intern, Council, Longevity 15,336 34.790 f :&16 ... Benefrts 674 ns 748 618 1094~ To1al Personal Se rv ic es 12cg•. 4 298 7' 5 4.818452 Operating Expenses Contractual Total ( see a tt ached lo< lne 1lem dela 15) I 4 73.&n 1,434 119 - Lea% Travel 65,700 85 000 Nla~ O ffi ce Supplies & Postage ooo• .. 12 ,733 12,733 Capital Asse ts 28.242 48,500 1173'- T 01al Operating Expense s oao-. I 580 352 1580352 .... .. BUDGET REQUEST 3210 6,879,097 6,398,804 PERFORMANCE BASED COMPENSATION 3211 MaJ<imum potenti al Investment Pe rf onnance Incentive 2703-., 2 555,074 3,261 124 Benefi s 351,1 47 448 582 ?J'"e~ v .... BUDGET REQUEST 3211 2, sos , 221 l i7 09 z7 06 ,~oe,;. TOTAL BUDGET REQUEST 8,185 13 18 10 ,1oa,s10 UNIT COST SUMMARY Internal Expenses as % of Total Assets 0084% 0092% oon,r, Internal Expenses as % of Total Ass e ts {wi th s o,r, •vv tiv Perl lncnl) 0072% Total Expenses as % of Total Assets 0359% 0367% 9

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