One of the major aspects of Gov. Larry Rhoden’s Fiscal Year 2027 budget proposal is an uptick in the state’s budget reserves, better known as the rainy-day fund. A large piece of the puzzle is the decline in federal funding some expect from the Trump Administration.
Some have criticized the rainy-day fund’s size as is, yet Gov. Larry Rhoden is asking lawmakers to bump it to 12.5% of South Dakota’s general fund budget. It’s traditionally been kept around 10% in recent years. Rhoden said the increase will account for “smaller surpluses and one-time revenues available in the future.”
In an interview with SDPB on Wednesday, he said some of the interpretations of the reserve fund look inflated due to funding that was originally designated for a new men’s penitentiary in Lincoln County.
“What people don’t understand is a year ago when the prison vote [happened], we had that extra revenue to finish paying for the prison, when that vote failed that money went to the bottom line and that went into that reserve fund,” Rhoden said.
During the upcoming legislative session, lawmakers will decide if they want to adopt the increase in rainy day funds. That includes Tea Sen. Ernie Otten, who’s chair of the Appropriations Committee. He’s in favor of the jump, even advocating for as much as a 13% reserve plan dating back to May. Otten said that’s partially because the state revenues have “dried up.”
He said his position is largely driven by the state’s reliance on federal dollars, and what that could mean if there are additional federal cuts.
“Half of our budget is the feds. So, I mean the feds sniffle, we’re gonna end up with a cold. So, I think that we’re just in one of these moments in time where we have to watch our Ps and Qs,” Otten said. “I know of course there’s folks that are going to come at us that you know, a lot of their ideas are well meaning. The question is if my reserves and everything else dries up, where am I left?”
Otten added he doesn’t want to make any cuts in the future, “But if I have to and balance the budget, I will do it.”
Otten said the impression he got during a recent fiscal symposium and capital forum in Washington D.C. was that states shouldn’t expect financial assistance from the federal government.
“When I was in Washington one of the things that was a big takeaway, is number one, they said, ‘You know, well, of course, Washington-- their spending can't continue this way.’ And of course, everybody knows that,” Otten said. “And then one of the analyses throughout this [said], ‘Don't expect any money from Washington to help bail out of things,” Otten said. “And so that resolidified my position on the 12.5%. We need to hold that and to see where we are in a year here.”
Gov. Larry Rhoden affirmed that “uncertainty” was a primary driver behind the increase. He said he had discussions with Sen. Otten on keeping reserves healthy in case of potential shakeups in the state’s budget.
"Sen. Otten is very conservative and very forward thinking and, just like me, thought it was appropriate to build that reserve fund above the 10%,” Rhoden said. “So, the rest of it’s just semantics as far as what the right number is. We settled on 12.5%.”
Democratic Rep. Erik Muckey is another appropriator who will help decide the FY 27 budget. He said choosing to hold onto reserves while not taking action to raise revenues would be what he calls a “colossal failure of Republican leadership, especially in Washington.”
“Because we’re choosing effectively not to do anything. Choosing inaction for the people of South Dakota when we need support both here and federally, especially when we have one of the most powerful federal delegations in the country, is a really damning conclusion for our leadership to have,” Muckey said. “I have deep respect for my colleagues in the Legislature, and ultimately if there’s a message being sent to them in Washington that we’re not going to see the federal funds we’re typically used to seeing, I don’t blame them for it. But I do blame our members of Congress for not advocating for us.”
Muckey believes state lawmakers have a responsibility to pass legislation to help the people of South Dakota in that case then. He said the extra 2.5% in reserves could be better used to solve affordability issues in the state right now.
“The challenge that we have right now going forward is what are we going to do to take care of South Dakotans if that’s what we’re elected to do? And if our folks in Washington are failing to do that for us, we have to pick up the slack,” Muckey said. “And that means we need to do more than sit on our hands and do nothing while Washington strips us of our abilities to operate as a state.”
Muckey said he doesn’t think increasing budget reserves achieves that.
Otten, however, told SDPB it would take a “Damascus” moment for him to change his tune on the subject. He pointed to other states that have seen budget struggles in recent memory.
“If you take a look just at our neighbor to the east, Minnesota. Three or four years ago, they had an $18 billion budget surplus, and now they’re at a $6 billion deficit,” Otten said, referring to reports that projected large deficits in Minnesota for 2028. “So, I think you’re going to see this in a lot of blue states across the board. Those that I talked to when we were in Washington, D.C., they’re all feeling the same thing that we’re feeling up here in South Dakota. Except I think on our Ag and other stuff, we’ve slid into the doldrums there. I’m just real leery.”
Otten said the solution is either budget cuts or increasing revenues—or taxes. Both Otten and Muckey said there is little-to-no appetite in the Legislature to raise revenues or taxes this session ahead of the 2026 elections.
“The problem I think we’re running into right now is it’s convenient in an election year to choose not to touch taxes in any way, shape or form, even at the cost of every South Dakotan,” Muckey said. “I don’t see a lot of pathways where I see a large amount of folks say, ‘We’re gonna raise our hand to increase taxes.’ But I also see a pathway here very clearly where our elected officials need to get serious about finding what those revenues are and getting serious about doing their jobs as elected officials to make that happen for the people of South Dakota.”
Muckey said that doesn’t necessarily mean increasing taxes but rather finding ways to help achieve affordability relief.
“So, South Dakotans have to look at this carefully and say, ‘What are we doing to get ahead?’ And sometimes that means we’re going to have to do uncomfortable things to help ourselves,” said Muckey.
The Democratic appropriator made it clear he’s not advocating for additional taxes.
“But I am advocating that we get serious about, ‘How do we get serious about our revenue problem?’ Because it’s going to continue to hit us in the face until we actually do something about it,” said Muckey
Sen. Otten said it’s important to remember there’s a contingent of legislators who want to see a 5% cut across the entire budget. That’s one of the recommendations put forth by a property tax task force this summer, resulting in an estimated $123 million cut. Otten said there’s not much hope for an increase in taxes.
“I just do not see us having the votes to get and muster any tax increase for anything,” he said.
That’s a hard pill to swallow for the Big Three—state employees, K-12 education and Medicaid healthcare providers—whose budgets would remain flat under the governor’s proposal. Some have called the 0% increase a cut given inflation. Otten said additional revenues would be the easiest pathway to an increase for the groups, adding he empathizes with the frustrations.
“I totally get it. In fact, I was just talking to some highway patrol folks, and they’re going, ‘You know, you guys just don’t appreciate us.’ And I totally get that sentiment. The problem is, I have to go to the public to get the raise to generate extra income, and I don’t believe that there is near that appetite for any of this,” Otten said. “So, folks are going to have to just grin and bear it and hopefully we can work our way through some of this. And maybe there are some things that we can get rid of to help us with the big three, but I don’t at this time see that happening.”
He called it “balderdash” when legislators try to keep everyone happy with the budget.
“Because this one here, everybody’s going to walk away fairly grumpy,” Otten said.
