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This executive board meeting will now come to order. Madam Secretary, please call the roll.

Deibert?

Here.

Kolbeck?

Here. Mehlhaff?

Here.

Otten?

Here.

Pischke?

Here. Aylward?

Here.

Gosch?

I'm here.

Healy?

Heermann?

Here.

Jamison?

Here.

Mulder?

Present.

Odenbach?

Here.

Larson?

Here.

Hansen?

Here.

Karr?

Here. Thank you.

And Healy?

Mr. Chair, you have a quorum.

Thank you, Madam Secretary. We have a quorum. At this time, the chair will entertain a motion to approve the minutes of our last executive board meeting.

So moved.

Second.

Moved by Senator Otten. Seconded by Senator Mehlhaff. Any discussion on those minutes? Seeing none, all those in favor of approval of the minutes will say aye.

Aye.

Opposed?

Nay. Minutes are approved. Before we get into the agenda today, just a couple of notes, and then I'm going to kick it over to the chair, President Pro Tem Karr, who is participating remotely today. One just minor change in the agenda. The LRC issue memorandums will be deferred until our next meeting. And so we'll take those up with 2 other issue memorandums at our next executive board meeting. Otherwise, we'll take everything on the agenda as it appears. And before we get into any of those agenda items, I want to kick it over to our Chair, President Pro Tem Karr. Good morning, sir.

Hey, good morning, Chairman Hansen. Thank you. Uh, first of all, I regret that I could not join you today, and I appreciate Speaker Hansen filling in and chairing in the room. I just think that's easier, more efficient. And I apologize, I can't be there. So thank you for that. I have visited with the chairman as well regarding public testimony today, and you just can't take the appropriator out of me. So I had— What I'd like to do today, and I've asked the chairman to just take the public testimony as we go after the items. So after we have the Investment Council, we talk about and approve a budget. We would take some public testimony on that matter. So we'll take it throughout the day as we go. So it's relevant to each topic, similar to how we would handle in appropriations. I think with that, I appreciate the announcement on the memos. Lets everybody know what the tone of the day is, how long we'll be going. I think we'll have a pretty quick and effective day. Of course, we'll have our executive session as well and handle, handle a little bit of business, but should be a good And efficient day. And with that, I'll turn it back over to the Chairman. Thank you again.

Thank you, Senator Karr. And yeah, I agree. So that's how we'll take up the agenda today. We'll take the issues one at a time, and then we'll take any public testimony along with those issues. And just a reminder to anybody who's testifying from the public that the testimony really does need to be on the issue that we're discussing as an executive board. Anything beyond what we're discussing as an executive board will be ruled out of order. And so with that, we'll begin with our first item of business, which is the Investment Council Subcommittee report. And that is the South Dakota Investment Council preliminary performance report and budget request from— I believe Mr. Clark will be presenting that. Good morning, gentlemen. Please go ahead and introduce yourselves and proceed with your remarks.

Thanks, Mr. Chairman. I'm Kelly Miners, the chair of the Investment Council, and with me is Matt Clark, the state investment officer. I guess I'd like also to introduce the other council members: Taylor Thompson, Kathy Clark, Michael Anderson, Rita Edwards, Travis Almond, Brock Greenfield, and Josh Haeder. Today we will review the investment performance through fiscal year 2026 and the fiscal year 2028 As here, the LRC Executive Board appoints 5 out of the 8 Investment Council members. The remaining 3 members are the State Treasurer, the Commissioner of School and Public Lands, and the Executive Director of the South Dakota Retirement System. The council has 28 investment professionals across a variety of asset classes, plus accounting, legal, and administrative support. At this time, I'd like to turn it over to Matt for the performance review.

Okay, thank you, sir. Mr. Clark, good morning. Welcome. Turn that microphone on and proceed.

Good morning.

Thank you.

Matt Clark, State Investment Officer. Page 2 shows the assets managed by the Investment Council. Assets have grown significantly to over $21 billion since inception more than 50 years ago. Given expensive market valuations, we need to be prepared for a severe downturn at some point in the future. And I hope to have a chance to mention that again as we go through. Then if we turn to page 3, focusing on the most recently completed fiscal year, fiscal '26, we have the attribution of the return for the retirement system compared to the capital markets benchmark for fiscal year '26. The specific benchmark is listed in the appendix as item 1. You know, with roughly 56% stocks and some high-yield bonds and some real estate investment trusts and regular bonds and cash. We try to assess how much risk we have in kind of simpler terms. You know, back in the old days, you just had stocks, bonds, and cash. So how can we kind of equate these exotic categories like private partnerships and real estate and high yield into kind of those simple 3 terms? So I'm going to be focusing on I'll come back on that here in a minute, but first, compared to that 17.75% benchmark, and that's a benchmark the council approves each year prior to the beginning of the year. It's proposed and recommended by staff, by the state investment officer, before the year starts. And then the council decides whether they agree with that or not. And then adopts a benchmark, and then we then compare how we actually do to that benchmark. And so if we know there's a certain amount in the benchmark, that kind of reflects, well, what would we do if markets were fairly valued? And that is our true belief of what we would do if all assets were fairly valued. We would just be at the benchmark because that's the question we ask when we set it.

What would we do if all assets are fairly valued?

So that's the benchmark. And then And then if stocks are high or stocks are low, we'll have more or less than that. And the same for the other asset categories. And then within each portfolio, within our stock portfolios, our teams will pick, well, which stocks do they like better?

Which high-yield bonds do they like better than the high-yield bond index?

And so we'll measure the returns of each of those portfolios versus the benchmark for their specific area. And they're all publicly available published indexes that are recognizable. A couple of tweaks that we have. And that's what most index providers do. For example, we strip real estate out of our stock benchmark REITs because we have real estate handled separately. And so again, the benchmark is on Appendix Item 1, and the underperformance for the year was 7.12%, which is a lot. We're very different from our benchmark.

We're significantly conservative versus the benchmark. And that's a good thing.

And the stocks went up a bunch. And so we lagged behind, kind of the same as the prior 2 years. So 3 years in a row has been a very similar story. And I'll be trying to show how much of this is due to being conservative on the stock allocation versus how much is due to the partnership allocation. So for the year, behind over 7%. And where did that come from? Well, down in the bottom gray boxes, we try to show— well, first in the orange in the middle, we see 4% came from asset allocation differences versus the benchmark. And 3% came from alpha, or how did our individual portfolios compare to their individual benchmarks? And I'll go through details on each of those. The primary asset allocation, that is What would happen if we did just reduce everything to just stocks, bonds, and cash? And what was our deviations from our roughly 70/30 stock/bond/cash benchmark? Technically, 70 stocks, 27 bonds, 3 cash, but roughly 70/30. So what's the effect of us having targets to be different from that 70/30? And, uh, uh, and, and so that was a little under 5% underperformance due to Our targets, where we chose to be compared to the benchmark equity-like risk, you know, that 70%, uh, cost us almost 5%, uh, uh, versus a zero return. Of course, we put some of that money— all that extra money went into cash, and so cash did earn a positive return. So cash earned a positive 1.28% from being overweight cash versus the benchmark. Uh, cash-like exposure. And then bonds, we were also underweight bonds and had some of that money in cash as well. Well, bonds did worse than cash. So while, while missing out on what little bond return there was compared to zero hurt, the cash actually earned more, a little bit more, and, and, and was actually a positive. Then we have secondary, uh, asset allocation, um, uh, items. Those deal with the other Categories other than stocks, bonds, and cash. So how do we equate real estate? We risk map each of those items, and we would call REITs like 85% stocks and 12% bonds and 3% cash. And then we would adjust for leverage, and the equity-like risk for real estate partnerships would then be 110% equities, and for real— for private equity partnerships, 120% equivalent stock exposure. And so— We take into account those other asset categories over and under weightings versus their equivalent underlying economic exposures to stocks, bonds, and cash. And if they beat that, because that's how we fund it. If we put money into real estate, we're taking it out. If it went into REITs, we'd take 85% of that money out of stocks to fund it and 12% out of bonds and 3% out of cash. That's how we'd fund it. So we're comparing whatever we're overweight or underweight to what the alternative would be that would fund it or where the money would go if we're underweight. And so those are captured in the secondary items. And you can see that— and also we've got, well, how do we implement the asset allocation changes? The attribution system, you know, looks at month ends. And when you actually implement it, it might be in the middle of a Tuesday. You know, at 10 o'clock. And so we have to track the difference between the prices we actually got, you know, in the middle of a month versus the month-end prices. And so, and also if we're wanting to have less in stocks, we can either sell stocks and get our stock exposure down to roughly the 20% that we're targeting right now, stocks alone, not counting the real estate or the private equity or the— Or the high yield, which contributes to equity-like risk. Or we can keep more in stocks, like 40% in stocks, which is closer to what we have, so that our stock portfolio managers can still try to add value on 40% of the money. And then we would hedge out the difference, and the hedging instruments are S&P 500 futures. And that was very helpful for SDRS this year because our stock portfolio managers beat their benchmarks by about 4% overall. And so we were hedging using the S&P, which did worse. And so that added— so if you're short something that doesn't do as well, it went up a lot, the S&P, but not as much as our stock portfolios did. And so that actually added value. When you net all that together, the secondary asset allocation effects are minimal. And the total of all asset allocation effects cost us that 4%. Again, to cut to the bottom line on that, it was from being underweight stocks so much. And then the portfolio alphas, we have that detailed. Our stocks did well. The 4% outperformance of our stocks compared to how much we had in stocks, you know, added 1 point— almost 1.4% to the total. And then some of the other portfolios are much smaller, but they added a little bit of added value. What hurt us badly were the real estate partnerships.

Yeah.

These leveraged private real estate partnerships that we've invested in for a long time and private equity partnerships, both of those hurt us by more than our stock outperformance was, quite a bit more, and netted out to a 3% loss. I'll talk later about how it's unusual. Usually in the past when our asset allocation wasn't working well, the partnerships were hitting home runs. And really making up for that. But this was a bad time in that we had 2 of our biggest pistons go wrong at the same time. We've never had that happen before. Then if we go on to page 4, this is again to show where we are. And then this is not the benchmark because that's too complicated with all those moving pieces. It's much easier to relate to it in terms of Stock-like risk, bond-like risk, and cash-like risk. And so if our benchmark is 70 stock risk, 27 bond risk, and 3 cash, then you can see where we actually are off to the right. And you can see the cash because we've got that benchmark stock cash-like risk of 3, but around it is 11.5 extra in cash coming from being— having less in bonds. So interest rates were very low. We are very fearful of bonds, and we were at our minimum bond exposure for a long time. It's finally getting to the point where that might start to change. But so far, we've been at our minimum bonds as these rates have moved up, and that has helped us. Not near as much as what we've missed out on stocks has cost us, though. And the blue hashed line, the 22.5%, that is the amount of the cash that comes from having less in stocks. And so roughly, Of the ex— all that cash other than 3% that's in the benchmark, all of the rest, a third of it roughly is money that would otherwise be bonds and two-thirds is money that would otherwise be stocks. Then if we go to attribution of the returns, we can see kind of in a different table form The same thing that we just went through for the 1 year, except for we've got it for the last 5 years, and then a 5-year annualized, and then we show it for the 10 years. And you can see that asset allocation, you know, did very well back in fiscal '22, and so did our partnerships. They did very well, and so did our internal equity portfolios. That 12.3% in fiscal '22 was the best year we ever had. And versus our benchmarks. The recent 3 years have collectively been the worst 3-year run that we've ever had by a ways. We've had worse individual years, but not 3, you know, pretty bad ones in a row like that. And the 4th one was pretty bad too at almost -5. And so if you look at the 5-year number, it's got 4 pretty bad years, 3 really bad. And then one, you know, home run in there, which nets out to over 2% per year annualized underperformance. So take that times 5 and you're up to, you know, almost 12% underperformance. So if one wanted to calculate dollars, you could take that times kind of what the average, you know, balance of SDRS was over that period of time, you know, $15 billion or a little less, somewhere around there. And then for the 10 years, the 10-year number is also poor, not quite as bad because the prior 5 years were actually— were better than the most recent 5 years. Some of the best years that we had rolled out 11, 12, 13, 14 years ago were very good years, you know, coming out of the financial crisis. And then we've added these really bad 4 years in there. And so the 10-year number is very bad. We'll see in a minute it's the worst period we've had. And there. If we move on to page 6, we can see the total fund return again, but just the return versus the benchmark. You can see again the 1-year minus 7%.

That's right.

The 5 and the 10-year we just saw. The bad recent period has dragged down our 20-year number as well to modestly negative. There were some good years right before the 20 years that rolled off, so we're just going to have to add some new good years. This has been a really unique period of kind of an extraordinary bubble. Again, hopefully later I'll have a chance to talk about how We think, you know, this is one of the 3 most extraordinary valuation periods we've seen: 1929, 1999, and now. And those are the 3 biggest overvaluation periods in history on our work. And so given that, and that we believe in that work, we feel compelled to be as low a risk as our policies allow, because if you're not going to go to your minimum, When you're in one of the 3 biggest bubbles, you know, in the last 100 years, when are you gonna? And it means you didn't set your minimum at the right spot. And our minimum is actually 40, and we can't get there. We're only at 47.5 because all these partnerships are hard to get rid of in a hurry without a fire sale. And our public equity, the stock portfolios, are at their minimum, 20%, right now. If we had more room to drop them down right now, we would. We'd increase our hedges or sell stock. But we're at our minimum, and so that's where we sit waiting for better opportunities. You can see— maybe I'll just move on to the next page. Compared to peers, page 7 shows that SDRS has outperformed the benchmark and other state plans over the full 53-year history, and we just saw that it's underperformed the benchmark by a little bit for 20 years and a lot for 10 and the shorter periods. Compared to the peer universes, you can see that 80% and 91% of the rolling 10 years versus peers have been outperformances. The bottom chart shows in red the SDRS return cumulative over the whole period of time has again, you know, outperformed the benchmark. But also points out that the benchmark itself is the toughest bogey long-term. Real recently, that's not been the case because a lot of peer funds have increased their risk a lot, even higher than that of our benchmark. But over time, the peer funds tend not to behave in a contrarian fashion. They tend to, you know, not buy low, sell high like we're trying to do. They tend to chase whatever is done better. In recent years, and and we try to fight against that. And so when expensive markets just keep going up, they're going to do better than us. When expensive markets revert back down, we'll do better. When cheap markets keep getting cheaper and we're already loaded up, we're going to underperform while it keeps going down to the ultimate bottom. And then when it turns around, we'll be the top performer. That's kind of what has happened in the past. Like happened in the financial crisis. So maybe I'll move on to the next several slides. I'll move quickly. Are just rolling five-year periods. You can see how bad the recent ones have been, but they're not the only bad ones. They're the worst, though—the last two—but there have been other bad ones in the past. In the and and the ones in the past were were kind of periods when our internal were different, though. Back then. In the early '90s, our real estate partnerships were doing really well and our asset allocation was doing fine. What was killing us then were our stocks were underperforming in some other areas. So the nature of what has helped and hurt varies at different times. So right now it's asset allocations hurting us and the partnerships, but there have been other times when those have been the best. Helpful items. And so kind of like pistons in an engine, different things go up and down at different times. What is somewhat unique is that 2 of those biggest pistons, the partnerships and asset allocation, have gone wrong at the same time in the recent period, and that hasn't happened like that before. And then if we go to page 10— or to page 9 on the rolling 10-year periods, you can see that even more. Because, you know, that 10-year period, you know, we dropped those good years. You can see if we just go back about 5 years, our rolling 10-year number was over 1.5% annualized for the 10 years, which is 3 times our long-term goal of about 0.5%. And so, but then it all went off the rails because of the market valuation going so high and the partnerships doing bad at the same time. You can see back in '99 when we underperformed, back then again it would have been a lot worse. Asset allocation was doing poor then because we were way too conservative while the internet bubble just kept going up, up, up. And so we were lagging way behind back then too due to asset allocation, but the partnerships did very well and made up for most of that. This time the asset allocation is also underperforming, but the partnerships are like knifing us, you know, and making it twice as bad. And so then if we go to the rolling 20-year period, you can see that this is the only rolling 20-year period that we've had, and it was behind by the quarter of a percent roughly. The other worst periods in the past, you know, kind of in the distant past, were back in the, around the financial crisis. And back then, you know, it was our stock portfolios doing bad and asset allocation and partnerships were actually doing well. So different things work at different times. Then people often ask, well, why do you keep following this contrarian asset allocation approach, you know, if it's killing you so bad? Well, because it has added value over the long term and we retain our faith in it. We recognize that that the outperformance is episodic. You'll go years being more cautious than others while the markets keep going up, and then boom! Something will change. It'll swing hard the other way, and you'll get a huge win quickly. And and so this chart shows in orange the added value since we started the original version of the modeling process, and and I had developed that way back then, and. We've continued to evolve it modestly over the decades. But that model that we have now, because I don't track all the performance of the different iterations that have gone along the way, but of that current modeling process, it would turn $1 into, you know, what was until the last year, $1.20. So an added 20% cumulative added value. And that's even with the bad returns. You can see how— How far that orange line has fallen in the last four or five years. Prior to that, in 22, we were at a record amount, our high watermark of added value from asset allocation. But it's really gone off the rails. It had kind of gone off the rails a little bit in like 18 and 19 too, and then then we had a big surge to a new record, and it definitely fell in the late 90s when when the market just kept going up and we were too conservative, and we actually got to a point where. We were from inception net behind by just a little, but most of the days it's ahead, and only on the worst days was it behind. And the blue is backtested back to 1973 when we first developed the original model back in and started using it in 1986. The very first one was developed in 1983 that I developed. Back then, well, we backtested it. You know, all the way back to 1926. And but but here I'm just showing on this chart the added value that following that process, had we had it then, would have added value prior to to the real-time use too. So that's why we want to follow it. But and another important thing we'll tie into the charts that Travis hopefully can cover. And then I'm going to speed up and get to the budget, I think, if that's okay. He has charts that will talk about the nature of the retirement system. You know, we have an unusual system here. We don't— we can't just ask for more money every year into the system. We have these fixed contributions and we have to stay 100% funded. Nobody has those combinations out there. So what do you do? You have to try to lower your risk. Of large absolute losses. And a contrarian strategy that we have is custom tailored to the nature of our system. And if over time that causes us to underperform some benchmark, well, that's maybe secondary. Maybe the benchmark's not right, but I still think it's fair and reflective because there will be times when we'll have more risk than the benchmark, the 70% in stocks. There'll be less Other times we have less. We'll probably average a little less over time, so that's a stiffer benchmark. But you should outperform, you know, if you're going to endure kind of the peer risk adverse comparisons. If you're going to lag behind others and have to endure the criticism, speaking from your perspective of that, well, you want to, you know, be rewarded for the pain of being a contrarian because it is painful and requires patience. And things like that. But a contrarian approach is custom tailored to the nature of our liabilities. I think it's justifiable on that basis alone and for the volatility reduction, but we also believe it can add value, and so that's why we do it. Then just a couple charts quick. Private equity long-term, even though it's done so terrible lately, has added a lot of value over the full 20 years. And then if I switch to real estate on page 13, real estate has added value over the long term. There's been 6 individual double-digit positive years for real estate. You can see the worst year it ever had was this past year relative to REITs with a 25% lag. They do tend to lag and smooth some of the results of those partnerships, so you need to wait sometimes several years to see how that sorts out. But over the long term, you know, it's added value. And there were 4 in the first 10 years of the '20s, there were 4 double-digit outperforming individual years, only 2 in the last 10 with, you know, this huge 25% drop and another one that wasn't quite that bad in the last 10 have hurt things for the last 10. But even for the 10 years, it's still positive. But really bad for the last 1 and 5 years. And then if we— I'll flash through these. Our stock, large-cap stock portfolios have done well lately and long-term on page 14. And then on page 15, our small mid-cap stock portfolios have been doing very, very well. I'm sorry. Recently and long-term. And then our investment-grade bonds have added value, pretty good value for just investment-grade bonds over the long-term. And, and even the last 5 years, -15%. The 1 year is really from adding in a secondary bond fund that we wanted for liquidity purposes. That's just all Treasuries. So it isn't really maybe a fair comparison to the bond return, but our bond portfolio managers have been And have been there for like 45 years doing that and have always done a very good job. And then our internal high-yield bond portfolios have had— have also did very well for the 1 year. And they've outperformed nicely for high-yield bonds over 10 years after a little bit of a rougher start when that program was new, which is— the current program has been around since— for 16 years. 16 years. Then we move on to page 18, just shows, well, if you add a lot of value over time, kind of if we can keep up that 40 basis point outperformance of the last 53 years over the next 20, it'll result in, you know, $2 to $3 billion of added value. And if you underperform, it'll be $2.5 billion in lost value. We saw earlier that, you know, the last 10 years of underperformance performed by quite a bit. And so it can be bigger than this. It has been bigger for the last 10 years outperformance. But there have been individual years, you know, in individual years when there can be a $2 billion swing plus or minus, which is huge numbers. You know, we try to think in percentages and things like that so the dollars don't mess up our thinking. But it can be big dollars, which is That's, that's what we keep our focus on. We have to make sure we do what's right for the long term and try to, try to capture that and not have the short-term fluctuations throw us off, which, which is really our main challenge. And then the budget stuff, cost efficiency, 10 basis points is what we're targeting for the internal expenses. That's all our staff, our rent, the average expected incentives. We also haircut the assets because we think they're overvalued. So we're expressing the budget as a percentage of assets that are haircut. And then we can compare that to our peer groups and other pension funds. And we think that 10 basis points is kind of our cap, and that's where we're at. And then maybe since you've had a chance to look it through earlier, The compensation, you know, I'll maybe skip over those, just talking about how we keep updating the compensation studies every 3 years roughly to make sure we're not falling too far behind our target, which is 70% of the cost-of-living-adjusted private sector for comparable positions. If we get outside a 10% band on that, we want to fix it. For some of the highest-level positions, you know, we're aiming for a bigger haircut than that. We're not at 70 or even close. It might be more like 50 or less for like the state investment officer position, which we think is appropriate. And I will note that the most recent study in 2025 showed that most of the investment staff were about where they should be except for the higher-end ones, but there was no intention to ask for any correction to that. And the chairman later can talk about the state investment officer's incentive, or maybe just now if you want to switch over and just make a couple comments. The state investment officer The state investment officer's incentive is at 200% maximum. The rest of the investment team is 225% because 2, 3 years ago when that change was made, it was determined that the state investment officer should just kind of— that any change for that should be postponed.

Yeah, that was— the state investment officer is the only one that's still at the 200% Which was a hard decision for the council. But the thing I'd say on that, it was just mainly due to the economic and market valuations. It had nothing to do with his job performance or anything like that. That's what I'd add.

I think if I could add, there's sensitivity to, you know, inflation was really high. And unfortunately, you know, the markets just don't allow— I guess if we took a lot of short-term risk and then in the very short term, You know, we could have made more money, but we didn't believe that there were sustainable long-term returns available to pay enough COLA. You know, we have to stay 100% funded, and so there was an optics consideration, and the executive board ultimately made that decision. But that was recommended by the investment council and encouraged by myself. Then if we move on to— The budget funding sources on 22. There's no general fund dollars involved. It all comes from the assets under management, primarily from SDRS, shown in red there, and then the trust funds in green. Then the long-term plan executive summary on page 23. The focus is on the unit cost at the bottom. We try to hold the internal cost to that 1/10 of 1%, or what we call 10 basis point level. You can see that for the current Budgeted year, that is the case. And for this purpose, we include some guess on what salary policy might be. I think we just always include for this purpose a 2.5% guess because that's our inflation guess. But but we know that that that the budget request we're actually submitting doesn't have any salary policy in there. We just add that in there to leave room for that in case there is one, to make sure that we're not going to go over the 10 basis points. The 10th of a percent cap. And you can see that we're staying, holding to that level. We are mindful of that when we think about, can we, do we have room to add positions? You know, can we even raise pay more? Has come into account on the basis of being constrained by that cap. And then if we turn to The fiscal '26 budget versus actual on page 24. I'll just note that, that we don't draw down whatever budget you authorize and the Appropriations Committee and governor authorize each year. It's just our authorized budget and we draw it down in pieces throughout the year. And usually one big piece in the fall to pay out any incentives and then tide us through till spring and then another chunk in the spring to tide us through again till fall. The idea is if we're not going to spend it and we know that as we're going along, we don't draw it in the first place so that we don't have a lot of money sitting in our account, council's account, in the cash flow fund earning the cash rates. Although right now maybe that'd be okay because, you know, we have lots of cash anyway. But normally we want to keep all the money in the retirement system that we're not going to actually have to spend to cover our expenses or for the trust funds. And so that's how that's done. So we only kind of draw it as we need it up to the authorized level so that we don't have a lot of money sitting around. And then— and so you can see that there was a lot of money unexpended. And in the interest of time, maybe I'll just point out that most of that is from unexpended incentives because the performance has been poor. So, you know, and the amount funded is the entirety of it. So if you earn half the maximum incentives, then, you know, only half of the incentives will be earned. If you earn, you know, only a fourth of it, only a fourth of it will get spent. We have had home run periods in the past when, you know, three-fourths or 80% of it was earned back when we were having all those home runs. And so it's always fully funded. We don't actually draw the money though. It's just available in case.

Yes.

You know, the maximum incentives are earned. And then we have some retirements and other turnovers that has, you know, caused some youngsters to be hired, you know, at entry-level pay, and which is much lower than for senior folks. And then also we have some research flexibility dollars that we didn't spend at all. And some legal contingency funds in relation to bankruptcies for our high-yield distressed debt portfolio that didn't need to be needed. And so maybe in the interest of time, I'll skip on, but there's more details on that in the appendix, and happy to take any questions. For the FY '28 budget request, if I catch up here, the overall base compensation The increase in compensation is an increase of 1.25%. That's the result of, you know, lots of youngsters getting promotional increases. They can get 5, 10% a year extra as they get promoted, you know, over time from entry level to senior. But if you didn't have anybody retire, then our budget would be going up 7% every year like it used to when we had all young people and nobody was retiring. And, but now we're having people retire, and, and so them being replaced by an entry-level person makes up for most of that. And so it'll vary from year to year based on the exact number of retirements. And so for the budget request for this year, the 1.25%, that would be, you know, the promotional increases for the youngsters, because there's no salary policy in here at this stage at all. So if that ends up being 1% or whatever it is this year, that would be added in later in the process by BFM. And after appropriations decides on that, then— and so— but then also all the investment staff, we have an extra 1.5% in there each year, which we put in at the early stage of the budgeting process. And that can be removed if there isn't much of a salary policy. In fact, if that's the case, it'll get removed when it goes to appropriations. And if the environment goes off the rails like it did, we thought it was a couple years ago with the tariffs going in and the market was going down a bunch, we thought, you know, the environment looked very dicey. We didn't pay it. In fact, we didn't do it the last 2 years. And we didn't do it like I think 4 other years prior, not consecutive prior to that, but of the prior like 10 years. It was not paid more than it was paid. And so that is in there in case it's needed for the pay to keep up with kind of the targets from our compensation studies. Otherwise, we keep falling behind. Thank you. And I do believe that if the markets struggle like I think they will, that industry pay will come under pressure, and the extent that our pay is behind will be fixed by the market coming down to us. It's possible it even goes the other way, but that would just be the cyclical variation, and we try to look through that. So just because we fall behind in a bubble You know, doesn't mean we're going to try to fix it, at least very much of it. And so I hope that explains kind of the base compensation. The incentives is just a function of the maximum incentives that could be earned based upon the base pay for the year before. And so this year that's actually not increased. And then personal services overall, a quarter of a percent roughly increase before any Salary policy gets added on. In actuality, you know, we may not fill all the open positions, or, you know, we may not, you know, provide that 1.5% again like we did the last couple years. And we always talk with that about— with the e-board about that in the spring, because that's a component of mine, and they decide on that for mine. And if they don't do it for mine, if the reasons are specific to my position, Then maybe, you know, with their blessing, I'd do it for the rest of the folks. But if, if it was a general thing, then we pull it for everybody, and that's what we've done the last couple years. So the executive board actually gets opportunity to, to, to give us guidance on that in the spring and, and to determine it specifically for mine. Then for the operating expenses, there are some increases there, about 5.5%. I'll go through in a second. Thank you. Overall budget up less than 1%, and it stays within that tenth of a percent target. Next page, on page 26, we've got the contractual services. Some of those items are flat, but investment databases and quote fees—the stock exchanges have monopolies, and they keep using that monopoly power to jack up the quote fees that we get. You know, on our machine. To display live prices. You know, we can get 15-minute-old prices, but when you're managing billions of dollars, you can't trade off that. You have to have the live prices. And, and we've also added that access to some newer staff members. And so, but mostly them just jacking the prices up, and we have no, you know, no, nothing, no alternative to that if we want to be in this business. Then we have to pay it. And so that's up 8%, unfortunately. The investment databases, that's from adding a couple new youngsters access to that. And then if we get down to administrative, the telephone, that was kind of a restructuring of BIT, I think, does the telephone bills and also some cell phone additions. We went from having only, you know, 2 or 3 of us having work cell phones to adding another 3 or 4 people to have that access.

Yes.

So, that's a big success for when they're traveling, and especially those that need to trade, and trade futures especially, for that. And then the custodial fees went up a lot after being flat for many, many years. We, every year, wondered when they were going to ask for an increase, and then they finally did. And they were so laggard on that, they wanted, like, to double it, and we were able to negotiate kind of the increase that is reflected in the budget there. And that may have to go up another step down the road, which is very, very low compared to peers, which we get through surveys. Then if I move on to trust funds, in the interest of time, I'll maybe see if there's any questions about the trust funds and then maybe turn it over to the chairman To disclose. It's nothing that needs to be approved at this point. It was always approved when the pay is approved at the beginning of the year before the performance year begins. But the chairman can disclose what the incentive is just to make it publicly disclosed for the, for the state investment officer.

I'm just going to kind of summarize this slide right here. This is just for the state investment officer, is what I'll point out, that 60% of his 60% of his incentive is tied to the total fund performance. 40% is tied to the collective incentive capture rate of the rest of the investment team. Of that, in 2026, he received 33% of the 40%. He received 0% of the 60% for the total fund performance. This results in an incentive of just under 27% of the possible 200%. Just to kind of summarize it for 2026.

Thank you.

If I may, there's other information in the appendix, but I think we're, we're finished, uh, uh, with our prepared remarks.

Very good. Thank you both for your testimony. We appreciate it. Um, I presume that concludes all the testimony from the Investment Council, and so we'll ask you guys to step down for now as we We will now move on to public testimony. We will first hear any public testimony at this time. Are there any public testifiers at this time? And just a reminder, today we're here to discuss the preliminary performance report and budget request that was just thoroughly gone over by the prior 2 testifiers. Good morning, ma'am. Welcome. Please go ahead and introduce yourself. Turn on that microphone. And proceed with your remarks.

Hello, Mr. Chair, members of the board. I am Renae Randall, and I am testifying on my behalf. Um, there was also a subcommittee piece that I think I'll start out with here. Um, this will have to do with the trustworthiness of these Presentations. I'm here to alert the executive board of extremely concerning behavior of Matt Clark, SDIC management, which includes Tammy Otten, Chris Nelson, Jan Zeeck, Darci Haug, and Jarrod Edelen, and the SDIC board in my being fired for whistleblowing about a collapse of internal controls, and the action Matt Clark, SDIC management, and the SDIC board took in preventing an investigation. Into the incident and actively trying to cover it up. Ma'am? Yes. Thank you for that.

Does this relate particularly to the preliminary performance report that we just reviewed as an executive board?

Well, it has to do with performance in that part of the whistleblowing was about Matt Clark refusing to fix a formula error that I found in the asset allocation model. Matt Clark's investment performance is negative versus the benchmark over the last 20 years of his entire career of being state investment officer from a starting point of significant outperformance when he began. It is likely from a formula error I found in the asset allocation model pertaining to stock buybacks that he refused to fix. This led to severe underperformance when stock buybacks became high and sustained from around 2014 to 2024. Other concerning model quality issues in the currency model and emerging market model also contributed to underperformance. So this underperformance of the last 20 years is not due to conservatism, but low model quality and reckless investment manage— and management behavior. With the collapse of internal controls, that I was fired for whistleblowing about, there's also likely a fraud going on. I'll jump ahead to SDRS. SDRS is going to brag that they're 100% funded.

Ma'am, we haven't heard from the SDRS yet. We will have the SDRS testimony in a moment, but for now we're not on that topic of conversation in our agenda.

All right, thank you.

Thank you. We appreciate that. Is there any further public testimony? Okay, seeing none, then we will open up to questions from the committee. Are there any committee questions at this time? Representative Aylward.

Yeah, I got a question or two. Um, just— I just had it pulled up here. Um, with the different buckets, I was just curious, do you guys engage in like forex trading And like which bucket would that be included in with the risk area that you were talking about before?

Uh, yeah, yes sir.

Um, uh, within the global equity portfolios, um, whenever we want to buy a stock in another country, we have to purchase that currency, you know. So if we know we're going to buy, you know, $5 million of Nestlé, then we'll have to buy the currency for that country in order to have it settle in time, you know, to complete that purchase. And then if we sell a stock in another country, then we'll get currencies. Generally, we'll convert them back to U.S. dollars, but if they're small amounts or dividends coming in, we wait until we can have larger size trades to get, you know, volume discounts on the transactions cost. And then separately, from time to time, if a currency becomes significantly expensive or cheap versus its history versus the U.S. dollar, then we'll consider hedging that currency. Or if, if there's a circumstance where where a currency is viewed as very cheap on our long-term valuation models, and they're very long-term based, and, and they presume that currencies move in very wide ranges around a central tendency that kind of evolves over time based on relative inflation differences, kind of like, you know, some of these purchasing power parity type models that one might read about if they've ever looked into currencies before. And, and so when we get Towards extreme bands on that, if we don't have very much exposure to a country, we don't like the individual stocks, but we're we're concerned that we don't have enough currency exposure to that country. We can buy currency forwards, and we're just buying currency that just will settle later. You know, maybe a year or two later, or if if we're worried that the currency is way too high and might collapse on us at some.

Point and harm the value of our interest, we'll hedge the currency.

And we've done both over a long time. I developed the internal international equity program myself. It went live in 1992. And we were doing these things ever since then. And I always— I was the portfolio manager for that for a long time.

And then others were brought on board.

And I was always the lead for that and did all the currency modeling work initially myself. Other teammates on the international team, you know, also reviewed all of that. And then in 2004, around the time I was selected to be State Investment Officer, so 23 years ago, give or take, and then we merged our large-cap U.S. and our foreign foreign international stock portfolios together. And then we continue to do those things. And from time to time, kind of at extremes, we will do that.

Otherwise, we just kind of leave our currency generally unhedged to just kind of float around.

But in extreme times, we will consider either buying extra currency to make up for not having enough stock exposure Given how cheap the currency is, or to hedge the currency if we're worried that will hurt our performance. So I hope that helps.

Thank you. Follow-up, Representative Aylward?

Yeah, just a quick follow-up on that. And, um, just— I'm thinking basic level questions here. So when you get into a different currency to trade it, do you guys automatically put like a stop loss on it, or how does that work, just to make sure you don't lose a big, big chunk?

Mr. Clark.

Yes, sir. No, we do not do that. We don't do that on any of our trading. It's, it's, it's more of a tool that's helpful for momentum-style trading, I would argue, short-term trading type issues. If we were that kind of an investor, then we no doubt would, because that's commonly utilized by those kind of shorter-term momentum-oriented Long-term and contrarian investors, like, you know, we're trying to be like a not as good a version as Warren Buffett, you know, focused on the long term. Well, he doesn't do that. He'll sell a stock if it goes down because he realized he messed up and the company's not worth what he thought it was.

And even though it went down, it's still not cheap anymore. And we'll do the same thing.

So if, if like on a stock, The fundamentals erode by more than the price and no longer looks cheap, it actually looks expensive now even though the stock's down because it deserved to be down even more, well, we'll sell it then. Likewise, if a stock goes up a lot but the fair value went up by even more, we might buy more. And so, but generally speaking, the typical case is if a stock falls a bunch and the fair value only changed a little, Then we're going to buy more. And if the stock goes up a lot, usually it deserves to go up some, but it usually gets overdone, and then we're usually going to sell. I hope that helps.

Thank you. Follow-up, Representative Aylward. Further questions from the committee? Representative Gosch. Thank you, Mr.

Chair. It's for you, Mr. Clerk. I'm trying to get through this as fast as I can, and you do a great job of going through it quickly, and I probably missed it, so please just bear with me here. But how much of your investment Portfolio is in America's debt? And a follow-up question to that, if, if any, was just bonds, stock, Treasury bonds, whatever. What are the concerns? I know there's talk of them manipulating the interest rates again to try to refinance. I mean, there's speculation out there. What are the concerns and how do you address that? Again, this is just pure curiosity.

Mr. Clark.

Yeah, Mr. Chair. Our investment-grade bond portfolios are around 13% or so in physical bonds.

Maybe 3% of that is purely Treasuries. The other, like, 9%, 10% of it would be maybe a third Treasuries. And then we've got all kinds of T-bills. Of our— cash exposure, you know, which is in the mid to upper 30s. That comes either from shorting S&P 500 futures as a hedge, which would be, you know, let's say 20% of it, just to round. I don't want to disclose actual numbers. And the rest is in T-bills or T-bill money market funds.

And so, and one of my teammates maybe has their ass in location sheet behind me, and if that's okay, can just mention what the physical cash is. If I may. I didn't bring that sheet up here with me now.

So 23% is in T-bills that we own directly or Treasury bill money market We want that cash, as I've stated before, to make it vivid, pure as the driven snow, so that it is available on the day of the crash, no matter how bad it gets. If Lehman goes under, if Goldman goes under next week, and all the money market funds that aren't just T-bills close, because that happened in the financial crisis, we were able to rebalance and buy at the bottom on the scariest day. Only because I had prior to that moved all cash into T-bills or T-bill money market funds.

And so, so then you'd say, well, how worried are we about that cash? I'm worried about bonds and the federal debt. It's going up exponentially.

It's my biggest worry that I have, you know, other than that I'm probably sick or something. And, and I think it's, it's horrific, you know, the, all the juicing And stimulus that's been done, like in COVID, some of it was justified because, you know, it was a crisis and you have to do enough to stem panic, you know, whether it's on the fiscal side or the monetary side, the money printing side or the low rate side.

But they did way more than that.

They did enough to juice a bubble that's only been seen close to— that's almost as bad as 1999 and 1929. And so— I am very worried about the eventual consequences of that on inflation and on interest rates needing to go up.

And the higher the rates go up, the faster the deficit's going up and leading to more inflation. And then all those entitlements, you know, on the medical side, which is getting out of control, you know, the cost of the hips and knees that, you know, old people like I'm gonna be starting next year, that can be on on Medicare, that's going to be going up with inflation, not just hold flat. And so I'm very worried about that. And that's a contributing factor behind our, you know, desire to be conservative. And that's why all of— most all of the bonds and cash is mostly in the cash, the T-bills.

And we're still just barely over the minimum that our policy limits allow us to have. in investment-grade fixed-income debt because of the worries about them. Now, the rates have gone up lately, and they're getting closer to where we'd move a step up off our minimum to one step up, but they've got to go up, you know, another couple chunks, and then we can maybe get to our neutral, which is like 27% bond-like risk, not, you know, down there around the 16 or 17 area where we'd be now. I hope that helps.

Follow-up?

Good. Further questions from the committee? Representative Jamison.

Thank you, Mr. Chairman. A question for Mr. Clark. Earlier in your presentation— there's a lot to unpack here, but you mentioned that you had said the asset allocation and the real estate cylinders, if you will, were failing. And it made me think, well, just how many cylinders are we— do we have? And are we an 8-cylinder kind of group or a 4-cylinder? And when you see those 2 cylinders, as you referred to them, down, uh, you know, is that a prelude to a recession? Are you using that as a benchmark or a trigger of some sort? Because I guess the, the, the idea is here you are prepared for a recession, it appears. And I guess I'm just curious if that's what you see in the next 12 months. Is that something you see in the next 6 months? Any thoughts?

Mr. Clark.

Mr. Chair, the prices suggest that there won't be a recession, that earnings will keep going up from here, that the markets are somewhat overvalued but not dramatically so versus kind of the current earnings power. Which is really high. It's really been wind-aided by, you know, all this AI spending and things like that. Technology earnings are through the roof. And so if we believed that, that the current good times not only could be sustained but would get better and then be better above the normal growth rate and then be sustained from there, then we'd think markets were maybe fair valued. But history has shown that every time earnings are well above trend, and they're— they are significantly above our trend line, or what we call normalized earnings, that, that while the market's going up, it might be safe to focus on, well, gee, stocks aren't so expensive versus where earnings are right now, so let's just ride this some more. But then the minute you have a setback and There's some earnings setback, and then the markets go down. You know, it's hard to say whether the recession causes the market to go down or vice versa, and it can— there can be feedback mechanisms. You know, just overinvestment can ruin profitability and cause the stock market to go down, and then that scares people and leads to a recession. And so you do find that recessions do accompany, regardless of which came first, Those, those overinvestment and, and, and high earnings environments when, when they fade. And then you look back and say, gosh, we should have focused not on those boomtime earnings that were doomed to, you know, be spurious, that were only there for a little while and were going to go away. We should have focused on, on the sustainable earnings more, the trend line. And so that's what we focus on. And we don't try to pick when the turn's going to happen because we don't think we're smart enough to do that. We don't think anybody really is smart enough to do that and try to be a contrarian. So we just focus on trying to make sure we're positioned properly for what eventually comes, and we'll grit our teeth and gut it out until then, so long as I believe you'll be okay with that. Because you're the ones that get to decide if I can't do that anymore.

Thank you.

And so as long as you're okay with being a contrarian and, and being patient and waiting, that's what I'm going to do because that's, that's the only thing I have high confidence in will ultimately pay off. It has in the past. There's been underperforming periods before. And, uh, but, but for the partnerships, for the pistons, maybe about 6 pistons. Um, the biggest one would be the asset allocation, you know, varying the stock weight And then another big piston would be the private equity and then the real estate partnerships each, because they're, they're a decent amount of money and they're very volatile. So they, they have a lot of impact. Our— how our global— how our equity portfolios perform versus benchmarks, another big piston. So we have like 4 pretty big ones there. And then we have, um, uh, kind of the other smaller asset categories. We have a small hedge fund that we outsourced to Bridgewater, 1% of the money, but it's very volatile. We have our high yield and our investment-grade bonds. So if you add all them together, they're kind of a little bit smaller piston as well. So, so I guess I've come up with 5.

Just as a follow-up to that, you know, on those real estate partnerships and private equity partnerships, you'd said earlier that 2 of those deals went bad on us. Can you just give a summary of, just a high-level summary of what those deals were?

Yeah, if I may, to clarify, it's that the performance of the category as a whole has done poorly for both of those areas. So they both went bad on us, the overall aggregate. The real estate, which was the largest, and One of my senior partners that isn't here today that's semi-retired has been involved in that a lot. And then another one of our executive committee members has been moving in to help us with that area as well. And so I think the main thing that has happened is that a lot of the old investments that they have, they've struggled to sell. It seems like people only want to invest in AI. Apartments, leveraged apartment buildings haven't done that well because the rates went up. Everybody invested in them a few years ago with high leverage at very low rates. And when those low rates expire and you have to re-underwrite that thing, a lot of these real apartments always had been the most stable thing, you know, stable cash flows. You think, well, how can that be risky? Well, anything can be risky. If you leverage it up too much and you use low rates like subprime rates and then the rates triple on you and you got to refinance it and the bank says, well, since things have gotten dicey now, we want more equity. Well, they were already leveraged to the hilt. Maybe they had 20% equity in and the bank wants 30% now. And, and they've lost money because they're negative cash flow with the interest and they don't have the money. And so they're having to turn the keys over. And so we have some investments like that. Office has been a disaster. You know, any major city, all the office buildings are down, you know, 70%, 80%, 90% for anything that's not brand new, you know, with the modern, you know, efficiency standards and the modern conveniences and things like that. So there's write-offs there. Malls are terrible. Anything in your Europe is terrible, and a lot of our real estate is over in Europe. And so that's been terrible. You know, the Ukraine war, the high energy prices, probably just their economies have really lagged. Perhaps their movement to more socialism has hurt than what we've seen here, has hurt their economic performance as well, along with all those other factors combining. And so, and then they're trying They've been cautious because when they're going out trying to sell stuff, they're not getting bids, you know, above where they're carrying it at. And they used to like to, you know, have a nice 20% markup when they would sell the thing. And they can't get that. And so they've been writing them down and sitting on it. And hopefully that they're more reasonably valued now. So from here, decent returns can be generated. And in the comparison to REITs, REITs just had a huge year last year, and we think that's vulnerable to a setback when the stock market goes down. So hopefully we'll have better performance going forward, not because these things will do great— they'll hopefully do okay— but the things they're compared against will do bad is what my best guess is going forward.

One more follow-up to that. So when you engage in, say, a real estate partnership, are you engaging with a local developer, a national? Outfit, you know, same with the private equity partnerships. Are you dealing directly with local businesses, or, you know, just maybe just in brief explain what that investment looks like?

Yeah, thank you for the question. Our real estate partners are, are some of the largest real estate firms in the world. Blackstone is among them. They're our largest partner. The Investment Council did help set them up. In the real estate business. They were a large private equity manager, you know, way back in the early '90s after the Real Estate Trust Corporation was set up to deal with all these repossessed real estate properties from the S&L crisis. And all the private equity firms pretty much set up real estate divisions to move into that space, take advantage of that distressed opportunity. And so we partnered with Blackstone then. And we've had, you know, huge returns back in the old days with them. And inception to date is still very good, even though it's been terrible in the last 3, 4 years. The other— another large one is Starwood, Barry Sternlicht's firm. And the Starwood Hotel chain that people probably stayed at their properties was created by the Starwood real estate investment firm, and they bought all these hotels and grouped them together and created a hotel operating company and then eventually sold that off. And so we're— they're our second largest partner, and they're one of— also one of the largest, you know, real estate fund managers in the world. And another is Brookfield, which many have claimed is like the Canadian Blackstone. Blackstone's the largest. They're based in Canada, and they're global real estate investors as well. Very, very large firm. And so those are our 3 largest and, and the 3 that we've continued to invest in. And then on, on private equity, there's been a few over time, such as KKR was one of the early biggest private equity firms. We, we've had relationships with Blackstone And we continue to have invested in their energy fund in private equity because they've done very well there. And then there's a firm, CVC, in Europe that does private equity in Europe. They're one of the, you know, 2 or 3 largest London-based private equity firms and the one that we thought was kind of doing the best. They originally spin out of a savings bank. Group way, way, way back decades ago, Citicorp Venture Capital Group. We don't invest in venture capital, but in Europe they call private equity venture capital. It's just a labeling issue. And then Silver Lake, who's the largest technology-focused private equity firm, and we've invested with them since their first fund. They were the group that like bought Dell Computer, you know, and took them private with Michael Dell and and InstantNet and E-Trade that some people have heard about, as well as all kinds of other— Seagate, hard drive company. So they're big. They're the largest one focused on technology. And those are active ones. So they're all very large ones. Maybe some of the younger, hungrier ones would do better, but you have much greater And you have greater chances of getting a zero when you do that as well. And we have a very small team that's focused on those areas. We've been shrinking our commitment a lot. And so, you know, it's not lost on us that those areas have been underperforming. And we've been committing probably at a third, half tops of the prior pace of investing in those areas. And they're continuing to shrink. If we get some home runs coming out of this again, we may jump back into that quickly. Otherwise, it's been fading.

Okay, thank you. Representative Mulder.

Yes, thank you, Mr. Clark. Um, uh, you've thrown a lot at us, and I'm fascinated by how your mind works and all the information you've been able to share with us. I'm going to try to boil this down into real layman's terms, um, to help me understand everything that's been presented here with my question. At the end here is, as I look at all this information, I mean, I look at 2025 to 2026, and we increased essentially the overall fund by $1.1 billion, correct? And yet we're talking about all this underperformance. In that same time, you've paid out $775 million in benefits through South Dakota Retirement System, right? So another $1.8 billion of total cash kind of just gone through the entire thing. But yet we're talking about all this underperformance compared to a benchmark despite positive growth in the overall fund and payout of $775 million of investment. So my question is, is the benchmark wrong? Like, do you have to reevaluate to the group behind you and huddle up and say, Is our benchmark in the correct place, or how do you evaluate if you have set the right benchmark to compare all of this to?

Mr. Clark.

I do think the benchmark still makes sense.

You know, I recommend it every year, and it's been very consistent for many years. I just think it's appropriate, you know, to judge things over full market cycles. And, you know, market cycles used to be like 7, 8 years. You know, you would get expensive, then cheap, and then get back where you started. And then with all this, maybe what we're talking about, all this manipulation of markets through the interest rate influences by the government and all this massive stimulus, every time that there's any little bump in the road in the economy, they throw more billions or trillions at it. That has kind of disrupted of those economic processes. They can't do that forever because it's gonna be a big inflation price to pay for it. You can't just print money or, you know, Zimbabwe would be the richest country in the world where they have hyperinflation. And so, but in the short term, they can do it until the confidence in the dollar and in our markets' interest rate levels break, which maybe we're getting closer to. I think, I fear we are. But that could still be several years away before the ultimate comeuppance for the dollar, but we're certainly chipping away at it. But we haven't had a full market cycle. And so what we've had— so if we wanted to compare like the '99 peak to the peak now, that's kind of a market cycle. Or if we wanted to compare the bottom, you know, of the market after '99 or after The financial crisis to wherever the bottom ends up being, if it ends up going back down again. Well, that's a market cycle. And I think that's a fair comparison against our benchmark. And I hope that we can outperform over those full market cycles, you know, 2 out of 3 times. Or if only half the time, the wins are bigger than the underperformances, because otherwise we're not going to be We're going to beat those benchmarks. And if we weren't going to beat the benchmarks, then, you know, then there is maybe an argument that given the nature of our liability structure, maybe the 70/30 is too high of a risk level to withstand a market crash without us having to explicitly cut benefits beyond the COLA going to zero automatically. And that is some other information we have provided. We can I can show you in another presentation that's already prepared for that.

But I still hope that we can beat, you know, that 70/30 roughly benchmark, you know, over the long term, over full market cycles. And so I think it's a good target to achieve. And, you know, we could just do that, and maybe we got to tweak somehow our liability structure or something differently. Or just gut it out. You know, we're just going to gut it out, you know, when the market crashes with 70% in stocks. And if we have to cut benefits, you know, so be it. If we tell everybody, hey, your benefit's going down 20%, you know, because the market just crashed, you know, like it did in the financial crisis. If we're— but I—

so I'm torn on that answer.

I'm not sure that it's settled in my mind.

Follow-up, Representative Mulder.

I guess just to follow up to that, and it's not really a question for you, more of a statement, I guess, to all of that, is I understand I asked that question about readjusting your benchmark because we're talking about all this underperformance despite a positive growth in the investment, you know, based on a benchmark and whether the benchmark's right. Well, please understand, if you are outperforming the benchmark, we might be sitting here asking you, is your benchmark too low? So Just please, you don't need to respond to that. I'm just— I understand fully what I'm asking there, but just a consideration.

Thank you. Senator Karr. Yeah, thank you.

This isn't an attempt to backseat drive here, Mr. Chairman, but I want to get us back on track and get us moving forward here with our agenda. I'm going to let somebody else from the subcommittee Make a motion and get this budget approved because that's what we're here to do. We've had a lot of conversations about the performance, the benchmark, and we have committed to having another meeting to address that, look at that in more depth. But I think today we've we've kind of taken that as far as we should go, maybe further. So here's what I can tell you about the budget, and here's what I'll say is what I really appreciate about working with Matt Clark and the Investment Council. There's a consistency and there's a philosophy that's based on a principle. And we can have discussions about some of that philosophy and whether or not we should be allocating those assets in a different format or different mixture. And we'll probably have some of those conversations going forward. But there is a consistency that you can trust. And it's, it's throughout. It's not just in the investment. There's not just a conservative investment approach. There's also a conservative approach to the budget itself and how the, the folks that are part of the investment council are compensated. And you see that to the tune of millions of dollars that probably, you know, there's probably a way that those dollars could have been justified in getting paid out over time. But instead, there's been a very strict scrutiny. by the Investment Council, by the officer in charge, to be conservative on how those are spent and doling those dollars out. So I appreciate that consistency in that philosophy. And then as far as it's been consistent and it's something we can trust, and I think that trust is why we like and have so much adoration for the Investment Council and the officer himself. So I just want to acknowledge that. I think that the budget is a solid budget. Again, super conservative. I've had many conversations ever since I was in appropriations about the compensation and whether we're being too conservative. But I'm going to keep following the lead here of the council and the officer regarding their budget, and I'm hoping that we can get that pushed through. It asks one of the subcommittee members to make a motion in the room so we can move forward.

So moved.

Thank you.

Thank you. Representative Mulder.

Mr. Chair, I move that we approve the FY28 request of the South Dakota Investment Council of $30,517,260.

Second.

That motion has been made by Representative Mulder, seconded by Representative Gosch, and I believe that dollar amount is the dollar amount that was presented in the budget request. So the motion before the committee is to approve the FY28 budget request by the South Dakota Investment Council as presented. Are there any further comments, discussion on that motion? Representative Mulder.

I would just defer to Senator Karr and what he had shared. My comments would reflect what he had said.

Thank you. Any further discussion on that motion? Anything further from the committee? Okay, seeing none, then the motion before the committee is to approve the FY28 budget request for the South Dakota Investment Council as presented. All those in favor will vote aye. Those opposed, nay. Madam Secretary, please call the roll.

Deibert? Aye. Kolbeck? Aye. Mehlhaff? Aye. Otten? Aye. Pischke? Aye. Aylward?

Aye.

Aye.

Gosh?

Aye.

Healy? Aye.

Heermann?

Aye.

Jamison?

Aye.

Mulder?

Aye.

Odenbach?

Aye.

Larson?

Aye.

Hansen?

Aye.

And Karr?

Aye.

Mr. Chair, you have 15 ayes and 0 nays.

Thank you, Madam Secretary. That motion carries. The budget request is approved. Thank you, Mr. Clark. We'll move on then to the South Dakota Retirement System with a preliminary report and estimated funding status. Mr. Almond, good afternoon, sir. Welcome.

Well, good afternoon. Let me see if I can work this technology here and get this pulled up.

There we go.

Well, good morning, Mr. Chair and members of the committee. Travis Almond, Executive Director of the South Dakota Retirement System. I am going to keep this brief and try to get you guys back on track. That's typically what I do when I sit in front of you guys every year is just to give you guys the update. The most important thing you guys want to hear from me is where is the funded status. And I'm just going to go to the summary page if that's all right with you, Mr. Chair. I think that makes sense. Let me just see if we can scroll But I did want to touch on a couple of points as Matt was talking about the investments and really good questions from all of you. To start the summary before I get into the funded status, you know, when you look at the South Dakota retirement system, we operate fundamentally different than the majority of the plans that you're going to see across the country. Not to suggest that we're on an island and we're all by ourselves, There are some other plans that operate similarly, but the majority of the plans operate very differently than us. Here in South Dakota, we are on fixed contributions. When you look at those contributions, those are set in statute. Those fixed contributions are very modest when you compare those across the country. The employers that are participating in those statewide plans across the country are paying in about 2.5 times greater when you look at the median state plan compared to our employers here in South Dakota. So much less of a cost here in South Dakota compared to the others. We then operate on variable benefits. Variable benefits, our primary variable benefit is our COLA. You've probably heard me say that before. And so we have experience with whether it's the markets or when you're looking at our actuarial assumptions relative to— excuse me, our experience relative to our other actuarial assumptions. And we see those losses, then we only pay the COLA that we can afford to keep us 100% funded. The other systems across the country, they operate the opposite of us. They have variable contributions and more fixed benefits. So when they have that experience, they see those losses, their funding status goes down, it's a pass-through to the employer, and they're going to pay much more contributions like what you're seeing currently across the country, as I said earlier. Very, very different. The other fundamental difference here in South Dakota is that we have statute that says that we have to be fully funded. And if we're not fully funded, then we have to come to you as a legislature and make corrective action recommendations, which is just a fancy word for benefit cuts at the end of the day. So very different. I know of no other system, and I'm confident to say there is no other system or state that operates under that same standard. We are very, very different than what you see across the country. So when you look at fiscal year 2025, I'm going to start there. We ended the year at 100% funded in fiscal year 2025. That was based on a restricted COLA maximum. The maximum COLA that we could afford to pay was 1.56%. That would have been paid just this July, July of 2026. That's what the benefit recipients' benefits increased by. We are just now starting the actuarial valuation process. That takes a couple of months. You're gathering all of the data. Once we get all the data put together and cleanse it and make sure it's accurate and those sort of things, we then go through the actuarial process doing all those mathematical calculations and all that fun stuff. And so I can tell you for fiscal year 2026, and this is again the valuation takes a couple of months, we It won't probably finish until about mid-October because we still have some data coming in. And then also the final inflation number comes in about the middle of October. But what I can tell you today is that I know that we will be 100% funded. So we will continue to be one of very few systems across the country that can say that, that we're 100% funded. It will be on a restricted COLA maximum. I would expect that that COLA will probably land somewhere around 2%. We still have a lot of work to do on that, but I'm guessing it'll be 2%. So an increase from what we saw for the COLA that would have been just this July, and that would be again payable on July of 2027. So again, I am going to keep that brief and just give you guys that preliminary update. We still have a lot of work to do on all those calculations. So thank you for your time here this morning.

Thank you, Mr. Almond. We appreciate it. With that, we will move We will now move to public testimony on the South Dakota Retirement System preliminary report and estimated funding status. Would anybody like to testify from the public? Good afternoon. Welcome back. Ms. Randall, please go ahead and reintroduce yourself and then proceed with your public testimony on this preliminary report and estimated funding status.

Yeah, this is Renae Randall. Um, so part of my key testimony is the trustworthiness of all these presentations, but I don't know if you're— so are you not interested in that? It was important to Chris Karr that, that the state investment officer was trustworthy.

Well, uh, you know, particularly what we want to discuss is what's Before us on the agenda, which is the preliminary report and estimated funding status. If there's a trustworthiness issue that has to do with those reports, then we'd like to hear that. And so I can't judge one way or the other at this time unless, you know, you say what is on your mind, and then I can tell you whether or not you're in bounds or not.

Okay, um, could I ask Matt Clark a question about that yen trade? Why I got demoted for Jan Lee lying to you?

I'm sorry, that would not be in order. All right, Representative Aylward, quick question just for clarification.

So Mrs. Randall's a constituent of mine. I've been talking with her for the last few months. I directed her to go to GOAC. My mistake. She went to GOAC. She was then directed to come to eBoard because she was told that this is an eBoard issue. So my question for the committee is, if she's not allowed to give public testimony right here, at what point can she? Does she have to— just asking for clarification. Public testimony on her whistleblower complaint? I guess her situation in general. Again, I told her to go to GOAC. That was my fault for doing that. She was then directed, told to go to eBoard because it's an eBoard issue. So I'm just looking for clarification and how to help her the most. Okay. Just to get some more, uh, just to allow her to speak.

Sure. Well, yeah, I mean, like every item that we discuss in this committee or other committees of the legislature, we need to have them properly noticed on our Okay. So we have to have that agenda before we can take that up as a committee. We do that as a matter of transparency for the public. And so, you know, that's why, as we've done today, the testimony that we take in is relative to the items that are on the agenda. And so if she would like to speak publicly on a matter, you know, she can speak to the chair of this committee and ask that to be posted publicly so that we can have that discussion. If there's another avenue for that discussion, you know, we can talk about that as well. But as a general matter, for purposes of discussion or consideration before this committee or any other committee of the legislature, it requires that item to be posted on our agenda for proper discussion.

Okay, I emailed you just real quick.

I— and I appreciate that. So I have a friend, and I'm just going to use GOAC as an example. That chair runs the meeting the way he sees fit. He's the chair. I understand that. He allows public testimony without anything being— without it being pertinent to what the schedule looks like. And I just say that because I have a friend that testified on something completely different at the last GOAC meeting. It didn't pertain to anything on the schedule. And he allowed it. Again, that's his committee. He runs it the way he wants to. But again, just, uh, just looking for the best way to allow her to, to speak. And if that's the way I guess we want to do this committee, I guess that you guys are the chairs.

So yeah, thank you. I appreciate that. So back to the agenda item at hand. It's the South Dakota Retirement System preliminary report and estimated funding status. So would you like to testify specifically to the report?

Yes. So SDRS will brag that they are 100% funded, but that isn't due to investment performance, but their ability to cut benefits to get to 100% funding, which I appreciate. Travis Almond telling the truth about. The other stuff has to do with trustworthiness. I guess you can cut me off when you don't want to hear anymore. I'm also concerned about the disturbing conflicts of interest on the SDRS board and their executive session on personnel matters on June 4th, 2025, meeting a few days after I was fired, and the audio record of this meeting that has been deleted from the Boards and Commissions site, I would kindly request that that recording be put back up.

Okay, well, ma'am, I don't have any, as far as I know, jurisdiction over that meeting being posted or recorded or anything like that. And I'm interested in hearing what you have to say about your time and why you were fired, and your complaints that you have as a result of that, but this forum is not the proper forum for that. And so I'd be happy to have those conversations with you. I'm sure other members of this committee would as well, but this hearing is particularly for this preliminary report and estimated funding status. And so we really need to keep our discussion to that agenda item.

Okay. Yeah, I, I emailed you guys On Friday, but I never got a reply back of how the testimony was going to work. Thank you.

Thank you. Okay, any further public testimony on this matter? Okay, seeing none, we'll open up to questions from the committee. There's no action on this particular agenda item, and so we'll just have this opportunity to have any questions from the committee. Any questions? Okay. Seeing none, thank you, Mr. Almond. We appreciate you being here today. We will move on then in our agenda to the budget subcommittee report for the Legislative Research Council. Mr. Chair, Representative Mulder.

Yes, I just want to, um, before, uh, Mr. Mehlhaff gets started with the budget subcommittee report of the legislative audit or legislative council, just want to mention that the subcommittee did meet this morning and are bringing a recommendation to the executive board. I can do that later, but obviously, um, you'll see here that it's an efficient and wise budget request.

Thank you.

to meet the needs of the LRC for the next fiscal year.

Thank you very much. With that, we will hear from our interim director, Mr. Mehlhaff. Good afternoon, sir.

Thank you, Mr. Chair. I'm Jeff Mehlhaff. I'm doing double duty today as your interim director and fiscal chief. Usually there's 2 people up here. It's just me today. So I'm going to walk you through a few slides, get us back on time. So I want to give you an overview of the LRC. So we're kind of divided up into 5 divisions. We have IT, which has 7 FTEs, and you can see the positions we have there. Research and Legal has 11 FTEs, Fiscal has 7, Operations has 6, and Code Council has 4. Our total FY27 budgeted FTE is 41.6. This is made up of 36 full-time LRC positions and 5.6 FTE for session-only staff. 3 new FTEs were added in 2027. That was a legislative editor, the assistant code counsel, and a position in research and legal. Just to kind of give you some history on this, in FY20, so roughly 7 fiscal years ago, LRC had 27 full-time positions. So instead of 36, we had 27 then. There were only 5 FTE in IT, 7 in research, 7 in fiscal, 6 in operations, and 1 in code counsel. So in that amount of time, we've added 9 full FTE, but LRC is still the smallest fiscal staff Or not fiscal staff, fiscal and research staff, a whole LRC operation in the country. So we have the smallest legislative staff in the country still, even though we've added 9 FTE over the last 7 years. So with the amount of resources we have, we do accomplish a lot. Even with a very small staff, we do accomplish a lot. So I am proud of our staff for everything that they accomplish everything they do for you guys throughout session, throughout the year. If there's no questions on kind of LRC overall, I just want to make sure you understood where the positions were, kind of how we're, how we're broken out into different divisions. I will turn to the budget. So within our budget here in front of you, you have what we spent in FY25, what we spent in '26, what we were budgeted 24 and 26, our '27 budget, and our FY '28 request. I will start by identifying that about 47% of our budget is for legislative expense— legislative member expenses. So if you were to take the 3 lines of legislative members, legislative support and printing, and intra-member costs, that is about 47% of our budget. So 45% of our budget goes pay for legislator expenses. The other 53% is for staff expenses, um, um, equipment, other items like that. So for F— and you, um, I'll start with FY25 and '26. We reverted, um, we had unspent dollars of $5,286 in '25, unspent dollars of $7, $191.26. So we generally spend everything that we are budgeted in our budget. Our 2 FY28 requests revolve around legislator salaries and legislator per diem. The legislator salaries, this is set in statute in 2-4-2 where it's set in accordance with the 1/5 of the South Dakota median household income. And so LRC is expecting that to increase by about 4%. This would create a legislator salary in the 2027 session of $16,608.80. If you're wondering what the legislator pay was last session, it was $15,970. So we're expecting about a 4% increase from that. We won't know this final number until about mid-September when the U.S. Census Bureau releases the median household income numbers. So this, this budget request will be updated once that actual information is provided. And so this is a typical request every year. Last year we requested it and then we pulled back the request because the number actually went down. The household median income went down by about 2%, so we didn't need any more dollars added to our budget then. But we are expecting that median household income to increase for this next year. The second request we have is a legislator per diem. So this would be the amount that legislators are paid on a per-day basis during session. Right now that amount is $178 that we pay to a legislator per day to cover their per diem costs. Right now our budget is $161.95. Since we haven't increased this budget, we've had to find other dollars within our budget to cover this. The reason we pay the $178 is because this is set by statute in 2-4-2, where we have to pay the greater of $123 or what those general services administration rates are, and the general services administration rates are that $178. So our budget hasn't increased for it, so we've been— have to— have had to find other dollars within in our budget to cover that. This year we're asking for the dollars to cover that cost. Aside from that, those are the only 2 budget requests for LRC, and if you have any questions on the budget or LRC overall, I will stand by for questions. Thank you.

Thank you, sir. Any public testimony on this item? Okay, seeing none, are there any questions from the committee? Any committee questions? I can't see online right now, so if anybody has a question online, just speak up. Any committee questions? Okay, going once, going twice, seeing none, the chair would entertain a motion. Representative Mulder.

Mr. Chair, I move that we approve the Legislative Research Council I move to approve the 2028 budget request as presented.

Second.

Motion made by Representative Mulder, seconded by Representative Gosch, to approve the FY28 budget requests from the Legislative Research Council as presented. Any discussion on that motion? Representative Gosch.

I just wanted to clarify the record here. Technically, the Northern Mariana Islands have less of a legislative staff than we do. Just, just wanted to make sure that was on the record.

Thank you. Any further discussion? Interesting factoids. Okay. Seeing none, then the motion before the committee is to approve the FY28 budget requests from the Legislative Research Council as presented. All those in favor will vote aye. Those opposed, nay. Madam Secretary, please call the roll.

Deibert. Aye. Kolbeck. Aye. Mehlhaff. Aye. Otten.

Aye.

Pischke?

Aye.

Aylward?

Aye.

Gosch?

Aye.

Healy?

Aye.

Heermann?

Aye.

Jamison?

Aye.

Mulder?

Aye.

Odenbach?

Aye.

Larson?

Aye.

Hansen?

Aye.

Karr?

Aye.

Mr. Chair, you have 15 ayes and 0 nays.

Thank you, Madam Secretary. That motion carries. The budget request of the Legislative Research Council for FY28 is approved. Moving on in our agenda to the FY2028 Department of Legislative Audit budget request. Good afternoon, gentlemen. Welcome. Please go ahead and introduce yourselves and proceed with your testimony.

Mr.

Chair, my name is Russ Hulse. I am the Auditor General with with the Department of Legislative Audit.

Mike Kogelmann, Legislative Audit, State Government Audit Manager.

We appreciate the time in front of you today to basically bring forward our FY28 budget request. We have basically sent this out to everyone. I'll try to be as expedient in time as possible. First and foremost, I want to thank the executive board for all of its support. Thank you, Mr. Chairman. Thank you, Mr. Chairman. I want to thank you for your support over the many years that I've been the Auditor General and also want to thank the Appropriations Committee and the entire legislature for the support that they've given us. When I started, I talked about the plan that we had basically laid out that we wanted to accomplish, and thanks to your great help, we've really made great strides in doing that. One being an increase in our starting salaries to try and remain competitive, and the second part is to partially fund our compensation plan to reward and keep our skilled, knowledgeable professionals that we have with our department. Overall, the request is for an increase of $71,502, which is a 1.19% increase in Legislative Audit's general fund budget. We are fully generally general funded. One of the other things I will tell you is we do, based on statute and based on how we operate, we do bill for our services. And so we actually are one of the few departments that returns money back to the general fund from that standpoint. The 2 pieces that I've talked numerous times with the executive board in the past is about trying to basically increase our starting salary to get good professionals to come and work for us. We have a tremendous group of professionals that I have the pleasure of working with, but we need to get new staff. I had 3 retirements this year, and so, you know, it's certainly attempting to bring in those new people. So my request includes basically moving our starting salary from $65,000 to $67,500. The second part of my request deals with basically— or excuse me, let me continue with that— hiring the new and qualified people. One of the things I do when I look at this is, is I compare ourselves to the surrounding states and to the rest of the nation in organizations that are similar to me. And I've included an exhibit on there on page 9 is the comparison that I put together. And in that, you can see that based on the surrounding states, we were in FY26 about $2,278 behind our surrounding states. That's my reason for my request to get this increase started, so that we're at least trying to, you know, keep up with the surrounding states around us. Thanks to your guys' help, the next part of my request is our compensation plan. We have been able to remain fairly competitive in that area, as the table will show. However, we are not part of BHR's system. We have our own compensation plan that is approved by the executive board and has been for a long time. Based on that, we have a plan set up that basically progresses our employees and our professionals through their gaining of knowledges, skills, and experience that rewards them for that. And it's very important that we keep those trained professionals because they're the ones that are training our new auditors, and basically they're the ones that basically we rely on to make sure that the, the work that we do is done correctly. So part of it, I'm partially asking to partially fund our compensation plan, which is I will tell you it is performance-based. It is not a given that everybody gets this. This is based on the evaluation process that we do on a per-audit basis and on an annual basis of how they're performing. Are they advancing in the manner that we want? If they are, they're rewarded. If they aren't, we basically set down a plan of saying this is what we need to do to improve and to basically move forward. We have a great group of people. We're a very small organization. We only have 43 FTE. And so it's a great atmosphere. I did mention when I was talking about losing 3 to retirement, I did have one individual that left to take a different job. And again, I wished him well, you know, in his endeavor. A while later after he left, He got— called me back up and he asked me if it was still possible to come back, and I said absolutely because he was a great individual. And so, you know, I really appreciated that from the standpoint he missed the culture, he missed what he had with us, and I really appreciated that. To summarize very quickly, I'm asking for just an increase for my personal services and employee benefits, to increase our starting salary, and to partially fund our compensation plan. I'm not asking for any other increase in travel, contractual services, supplies, or capital assets. The budget we have, I think, you know, we can live within that from that standpoint. Um, our department doesn't— is basically, it's 90% people. That's what we are. We don't have big projects. We don't do big things. We just do audits. And so my people are the most important asset that I have with this and, and certainly appreciate everything that they do for me. Certainly willing to answer any questions that you guys have and certainly appreciate all the support you've given us in the past.

Mr. Chair, thank you, sir. We really appreciate it. With that, is there any public testimony on this agenda item? Any public testimony?

Good morning.

Welcome back. Please reintroduce yourself and proceed with your testimony. Yes, this is Renae Randall.

I'm testifying against the Department of Legislative Audit budget request as I don't think anyone should trust the numbers they publish, performance or budget or otherwise, as they seem to have issued a fraudulent two. 2025 audit through either incompetence or malfeasance. Although I'm genuinely concerned for what seems to be high turnover and short staffing, I am also concerned that those employees could have been fired for whistleblowing, for finding fraud, or they left because they knew there was a fraud in the retirement system, therefore making the job unappealing versus any other job available to them. But this seems to be a common problem throughout the state of South Dakota agencies. The willful lack of investigation into my fraud report and multiple conflicts of interest in the SDRS and SDIC boards have likely resulted in a fraudulent 2025 audit and puts the state of South Dakota credit rating at great risk to downgrade. And then I'd also, if you are interested in my whistleblower report, Can I contact you?

Absolutely.

All right. Thank you.

Thank you. Appreciate your testimony. Any further testimony on this item? Any further testimony? Okay. Seeing none, are there any questions from the committee? Any committee questions?

Mr. Chair?

Senator Mehlhaff?

I have a question for Mr. Randall.

Go ahead. Ms. Randall.

I have a question. Could you come forward again, Senator Mehlhaff? Mr. Chair, thank you. I did have a question. I did see your billboard that was located outside of Fort Pierre, and I did take a picture of it and forwarded it to the Attorney General's office for further investigation. As you know, the Attorney General passed a lot of bills to to do with internal controls and whistleblowing and fraud. And I was wondering if you were ever contacted or had conversations with the Attorney General regarding your whistleblower, or have you forwarded that report to their office?

So I was in communication and contact— he— with Hank Prim. He was That's my AG Integrity Unit contact. He's on the SDRS board, um, and when I sent him the notice of claims of wrongful termination that Sarah Frankenstein from the GP&A law firm sent me, uh, he never got back to me again.

Any follow-up, Senator Mehlhaff?

Nope.

So I haven't been in communication with the AG office since October 14th.

Okay, so you, you shared information with them and they, they never re-engaged with you after that, Mr.

Randall?

Nope.

All right, thank you, Senator. Thank you, Mr. Chair. Thank you, Representative Aylward.

Mr. Randall, since you're on it, can you just go through your whole whistleblower from start to beginning— from start to end, I'm sorry? What steps you went through?

We're getting a little far.

Mr. Chair, point of order.

Yes, go ahead, Senator Karr.

I'm just going to make a couple comments, and I appreciate public testimony, and I really appreciate whistleblowers. There's a process that is very basic to how this works. This answers your question from earlier, Representative Aylward. This all works based on legislators and/or public members building a coalition to bring things to the process of the legislature, whether it be a committee or a bill. So if you want to have this committee take up a topic or a subject matter, there has to be enough interest and you have to build a coalition to have that topic discussed. And I'm happy to, to have those conversations. But until we do that, to really delve into that and put it on the agenda, then this would be out of order. That's not on the agenda today.

I, I, uh—

I hope that makes sense and helps clarify the process and how these things work. That's for any committee, whether it's Health and Human Services, GOAC, or the Executive Committee, or Joint Appropriations. You have to build some interesting coalition. Sometimes lobbyists do it. Sometimes a member from the public does it. Sometimes legislators do it. But I spend a lot of my time doing the exact same thing on a thing that's interesting to me or a constituent to call all of you and say, I'd really like to have this heard XYZ. And so if that's what we want to do, that's the process. That's the first step.

The chair finds your point in order. It is out of order. At this time to hear that testimony. I do agree with Senator Mehlhaff's point, though. I mean, I would strongly encourage you to reengage the Attorney General's Office. If laws have been broken, we want those laws to be followed. And so please, I would encourage you to do that. Senator Aylward.

Yeah, just appreciate that, Senator Karr. And just for clarification for future, I know it's I think we got one more meeting scheduled, but just for clarification, if I were to go forward, I need to get agreement from everybody on this committee before we get something on the agenda. Am I hearing you correctly?

Mr. Chair?

Go ahead.

Yeah, well, I wouldn't say everybody, but you're gonna have to have some, some broad agreement on a topic. Because here's also what can happen, just going through process here, is even if you were the chair Representative, and you said, "I want to put this on the agenda," and you were able to do that, which in certain situations you could. What can happen is if you don't have some some sort of buy-in as to why it's worth the committee's time, the state's time, the taxpayers' time to to look into it, then I would call you know I could challenge that item on the agenda, and if supported by the other members. We wouldn't hear it. That's why you have to build coalitions. It's something I remember the first speaker that I served under, that was Mickelson, sat down and we had a great conversation talking about this very thing. All things we do or touch, even if it's an item on the agenda, you should treat it like a bill and go and talk to the folks on the committee about that agenda item and/or potential agenda item to buy to get the buy-in to look at it, and you have to have reasons why it's worth our time.

Okay, so—

I hope that helps.

Yeah, thank you, Senator Karr. So we are on the Department of Legislative Audit budget request, so if you have any further testimony on that particular item, we would welcome it at this time. Otherwise, we're going to ask you to step down at this time.

Yeah, I'll make one quick point that has to do with Both here. One of the processes, um, to report after you get fired for whistleblowing or whatever is a fraud report to the Department of Legislative Audit, which I have uploaded in the documents I sent in. Um, Russ Olson did give me a reply back, but it was never looked into.

Okay, thank you, ma'am. Yep. We appreciate being here. Any further questions or discussion or action on the Department of Legislative Audit budget request?

Mr. Chair.

Representative Mulder.

Thank you. Uh, I move due pass of the Department of Legislative Audit FY 2028 budget request as presented.

Motion made by Representative Mulder, seconded by Senator Otten. To approve the 2028 budget request of the Department of Legislative Audit as presented. Any discussion on your motion, Representative Mulder?

Yes, I know there wasn't a lot of questions for Mr. Olson here today, but the Budget Subcommittee did meet prior to the e-board. We did pass a recommendation of this after some questioning and discussion. We're confident in the 1.9% increase and thank him for being sensitive to just the state budget overall. Representative Gosch.

Thank you, Mr. Chair. I've had the pleasure of serving on this executive board 8 out of the last 10 years. I was here under his predecessor, saw the transition to Mr. Olson on the process there. I have seen, you know, if you look at the presentation that was provided to us on the organizational chart, it's Exhibit D. You don't have to flip to it. There's a ton of boxes on there. And I do know, and I do remember when those boxes were very empty, and there were not a lot of people in that department, and they had done— they had worked tirelessly to try to get those people hired to those positions. That took some work by the executive board, but it took a lot of collaboration between the 2 departments on increasing salaries, becoming more competitive, allowing certain restructuring to happen to make that happen. And a lot of that in part is due to what the work that Mr. Olson's done. I can also say that there have been situations in which audits were completed and they were incredibly necessary to correct actions, especially in certain local levels. In my area in particular, and I'll brag that kid up a little bit, he's a kid to me anyway, they do phenomenal work. And I don't want that lost, that the organizational structure that we look— all of these employees here, what they do do and provide us with, and the information does work. The system is working. I have used that information in audits to correct issues and are currently ongoing in local government situations particularly. So I just— I don't want it to be lost that your work is appreciated, and thank you for what you guys have done.

Thanks. Thank you. Appreciate that, Representative Gosch. Any further discussion on the motion? Any further discussion? Seeing none, then the motion before the committee is to approve the FY28 budget request of the Department of Legislative Audit as presented. All those in favor will vote aye. Those opposed, nay. Madam Secretary, please call the roll. Deibert.

Aye. Kolbeck. Aye. Mehlhaff. Aye. Otten. Aye. Pischke. Aye. Aylward. Aye. Gosh. Healy. Aye. Heermann. Aye. Jameson. Aye. Mulder. Aye. Odenbach. Aye. Larson. Aye. Hansen. Aye. Carr. Aye. Mr. Chair, you have 15 ayes and 0 nays.

Thank you, Madam Secretary. That motion carries. The FY 2028 budget request of the Legislative Audit is approved. Thank you, Mr. Olson. Appreciate you being here. Okay, so as I said at the outset, we are going to defer action on the LRC issue memos. That brings us to the portion of our agenda in which we are going into executive session. I believe there is food available though.

Okay.

Mr.

Chair, Senator Karr.

Yeah, I know it's, it's 12 o'clock. The LRC had lunch brought in. If everybody could grab their lunch quickly and then we could go into executive session while you eat, does that work for everybody?

Yeah, that's, that's fine. Yeah, we'll go ahead and grab our food, bring it back into the, uh, committee room here, and then we'll head right into executive session.

Okay. Thank you.

So, uh, we'll be at ease for just a moment. Hold on, I'm getting a look here from my interim director. One second. Okay, so we'll go at ease for about 10 minutes while we go over, grab food, bring it right back in here. Then there will be a motion to go into executive session, and at that time is when we'll go into executive session. Everybody clear?

Thank you.

All right, we'll be as quick as possible. Uh, the committee will be at ease. Okay, ladies and gentlemen, the executive board will now come back to order. At this time, the chair will entertain a motion to go into executive session. That motion has been made by Representative Gosch. It was seconded by Senator Deibert. All those in favor of that motion will say aye. Those opposed, nay. That motion carries. We will now go into executive session. All right. The executive board will now come back to order and out of executive session. And at this time, the chair will entertain a motion regarding the salary of the auditor general.

Mr. Chair. I would make a motion that we increase the Auditor General's salary in, in accordance with the salary policy of the state, which is 1.4%.

Second.

Motion made by Senator Mehlhaff, seconded by Senator Otten, to set the Auditor General's salary at its current level plus an additional 1.4% pursuant to the state salary policy. Any discussion on that motion? Any discussion? Okay. Seeing no discussion, the motion before the committee is to set the Auditor General's salary to its current level plus 1.4% increase, which is commensurate with the state salary policy that was set this last legislative session. All those in favor will vote aye. Those opposed, nay. Madam Secretary. Please call the roll.

Deibert?

Aye.

Kolbeck?

Aye.

Mehlhaff?

Aye.

Otten?

Aye.

Pischke?

Aye.

Aylward?

Aye.

Gosch?

Aye.

Healy?

Aye.

Heermann?

Aye.

Jamison?

Aye.

Mulder?

Aye.

Odenbach?

Aye.

Larson?

Aye.

Hansen?

Aye.

Karr?

Aye.

Mr. Chair, you have 15 ayes and 0 nays.

Thank you, Madam Secretary. The motion carries. The Auditor General's salary is set at its current level plus 1.4%. Thank you, Mr. Olson. We appreciate it. Okay. Next up, the chair will consider motions relative to the open LRC director position.

Mr. Chair.

Senator Mehlhaff.

I would make a motion that we direct the executive committee to open up the application process for at least 45 days and to engage with LRC in hiring a search Committee to find a qualified applicant.

Motion has been made by Senator Mehlhaff and seconded by Senator Deibert to direct the executive committee of the executive board to reopen the application process for a minimum of 45 days. Additionally, to work with LRC to engage the services of an executive recruiter to assist in Searching out hiring that candidate. Any discussion on that motion? Any discussion from the committee? Okay, seeing none, all those in favor will vote aye. Those opposed, nay. Madam Secretary, please call the roll.

Deibert. Aye. Kolbeck. Aye. Mehlhaff. Aye. Otten. Aye. Pischke. Aye. Aylward. Aye. Gosh. Healy. Aye. Heermann. Aye. Jameson. Aye. Mulder. Odenbach. Larson. Aye. Hansen. Aye. Carr. Aye. Mr. Chair, you have 15 ayes and zero nays.

Thank you very much. That motion carries. The executive committee is so directed. All right. Anything further from the committee members?

Senator Otten.

Mr. Chair. Do we adjourn? Senator Karr, did you have anything before we adjourn?

I wanted to just thank the chair for running the committee in my absence. I want to thank LRC for helping organize the meeting and Providing a wonderful lunch for all of you in the room as well.

Absolutely. Safe travels. Thank you. Anything further? Senator Otten. Oh, hold on one second. Representative Gosch.

I just wanted to say, and thank you so much, it's just a breath of fresh air having you back chairing this committee. It was real efficient today. Thank you. Thank you.

Anything further? Any further compliments for the chair? No? Okay. Seeing none, Senator Otten.

Mr. Chairman, I move to adjourn.

Is there a second? Motion made by Senator Otten, seconded by Representative Mulder, that we adjourn. All those in favor say aye. Aye. That motion carries. We are adjourned. Thank you, everybody.