Gov. Larry Rhoden laid out his state spending plan for Fiscal Year 27.
South Dakota, being a low-tax state, gets its primary revenues from the state sales and use tax. While the tax revenue is up slightly this fiscal year from the last, Rhoden affirmed that they’re lagging, telling the Legislature “we don’t have a ton of headroom.”
As a result, the Republican’s $7.44 billion budget was lean. While it had few cuts, it had few increases as well.
Chris Karr is the Senate Pro Tempore. He said he thought Gov. Rhoden gave the Legislature “a good framework.”
“And so we’re kind of getting back used to the norm, and we’re all kind of looking for those big $100 million projects, and we’re just not there. So, I thought it focused on core government, and I like that,” Karr said. “We do what we can, we don’t spend what we don’t have, pretty simple principles. I think the governor stuck to that.”
Karr added the Legislature still can put their ideas into the budget through the process in the 2026 legislative session.
Rep. Will Mortenson, however, is less optimistic about Gov. Rhoden’s proposal.
“That was a tough budget. I mean, Gov. Rhoden’s budget was bleak. I think there’s really a lot of cause for concern we draw out of it. I mean he reported that last year was only the third time in the last 30 years that sales and use tax actually went down," Mortenson said. "You gotta remember we had 3% inflation, and so even if we had the same economic activity, we should have 3% growth and we didn’t. That means 0% for schools, for Medicaid providers, for state employees and folks protecting the public, and so there wasn’t a whole lot of good news coming out of that budget.”
Rhoden outlined his plan to keep South Dakota “strong, safe and free.” The plan included one-time funding to bolster the state’s infrastructure system and equipment, increase the number of full-time employees at the nearly built women’s prison in Rapid City, add cameras to the Jameson Annex and the Sioux Falls Minimum Center and move funds from the Housing Infrastructure Fund to another economic development fund to support the Sioux Falls and Rapid City airport expansions.
He also asked the Legislature to increase the state’s rainy-day fund from 10% of the fiscal year budget up to 12.5%. Rhoden said that’s in response to slower revenue growth and weakness in the farm sector.
The budget also leaves around $14 million for lawmakers to play with. The governor's office said that's the first time a governor has left money on the bottom line for the Legislature since Gov. Dennis Daugaard's FY 2014 address on Dec. 4, 2012.
Rhoden’s budget doesn’t increase any budgets for K-12 education, state employees and Medicaid health care providers. Those are often deemed “The Big Three” by legislators. Accordingly, many legislators said they’d like to see that number increase.
Tim Rave is the President and CEO of the South Dakota Association of Healthcare Organizations. He had been watching revenues and knew they weren’t strong heading into the budget address.
“So, I’m not shocked. I obviously hoped that it would be maybe 1% or 2%, but certainly in light of very flat revenues not a shock at 0%," Rave said. "But [I’m] also very glad, thankful there’s no cuts.”
Raves added while he doesn’t expect an increase, there is one silver lining for the Medicaid provider side.
“I think the other bright side, if there was a bright spot and I know the governor talked about it, is that the Federal Match Assistance Program, and that’s confusing at best for everyone, but it’s the match between the state and the federal government and what they pay in Medicaid, that’s not going to go any higher really," Rave said. "I mean it can go a little bit, but we’re really at minimal exposure there. So, you won’t see the swing that we’ve had the last couple of years next year, so that will certainly help.”
Rave referred to the state’s federal match for Medicaid almost at 50%, something Rhoden said is the highest it’s ever been in South Dakota. Rave said a "ballpark" of the last two years, $29 million of ongoing funds were mandatory Medicaid minimums.
"Let's say we anticipate $50 million of new growth in the state revenues. If you're eating up every year $15-25 millions of that just with mandatory Medicaid minimums that's really important," Rave said.
Rave explained it further, saying if the state budget doesn't have to eat those costs next year, then it "really frees up some ongoing money."
“It gets to be kind of in the weeds but it’s importance to know those things matter. Those things make a difference," Rave said. "When I’m telling my members, ‘Hey, looks forward to next year. We don’t probably have to worry about exposure on that. ‘And hopefully that increases some money for some ongoing increases.”
Rave said if the flat rate goes through, some Medicaid providers would be affected.
“You know there’ll be increase to any provider rates. So, again thinking about providers that take care of folks on Medicaid as a payer. And certainly, hospitals where Medicaid is the payer for the procedure, there’ll be no increase in payment to either of those groups," Rave said. "For my members specifically, and then certainly in the long-term care space, no increase in rates to that rate that’s paid daily to nursing homes for having residents there.”
On the education side, there’s concern over the impact on school districts and their budgets. Rob Monson is Executive Director of the School Administrators of South Dakota.
“But in our school districts, you know, we are also going to see increased costs with inflation, whether it’s health insurance going up, cost of transportation, electricity, all of those things,” Monson said. “And without additional revenues of any sort, that’s really going to put financial strain on a number of school districts.”
He added there’s an economic impact to this.
“I think more people need to realize that we are the economic driver of a lot of things. We are one of the key people that educates the students to go into the workforce or into the tech schools or the universities and that we’re sort of the base of all of that operation,” Monson said.
The 0% increase means districts aren't required to increase teachers and first-time educator salaries. The state currently ranks 46th in the nation in teacher pay.
Rhoden’s budget doesn’t include state employee salary increases, but it does avoid raising health plan premiums for them. Rhoden said $3 million out of the health plan reserves and plan changes are avoiding the cost increase instead of raises.
Eric Ollila is the Executive Director for the South Dakota State Employees Organization. He said he’d like to see the number closer to 3% to account for inflation.
“The proposal for zero compensation increase for career state government employees is very disappointing. They had a sub-inflation rate last year of 1.25%. They had increased health care costs last year," Ollila said. "And this year the proposal moving forward is zero, and while there’s some additional money for health care for employees, it seems, if you look at the numbers, there’s still going to be significant amount of money that employees will have to cough up extra for health care.”
Ollila said the biggest hope would be for the holiday season to bring in additional revenue to the state.
"Hopefully this holiday season folks will be spending because every dime matters. And when it comes to budgeting, every couple million really matters," Ollila said. "We could use lots more couple millions moving forward in the budget."
SDPB employees are state employees.
For education, Executive Director of the School Administrators of South Dakota Monson said the health care changes bring additional challenges for school districts.
"You know, when you look at the state workers at least being provided an increase in their insurance premiums, school districts are going to have to pick that up on their own with no additional increase," Monson said.
Additional factors for education include potential property tax cuts, which are a revenue source for school districts.
Any budget proposal requires legislative approval. The Legislature may make changes to the budget before it heads back to the governor’s desk for final approval.
