Rhoden proposes ‘limited budget’ to legislators

Republican Gov. Larry Rhoden proposed a $7.44 billion state government budget Tuesday that would avoid big cuts but also hold South Dakota’s funding for schools, Medicaid providers and state employees flat next year.
“This limited budget might seem like a challenge, but as I often say, I encourage you all to view that as an opportunity,” Rhoden told lawmakers during his annual budget address at the Capitol. “It’s an opportunity to make sure we’re investing only in the things that we should be. To look with fresh eyes on our budget principles and make sure that we’re living up to them.” 
The news comes as state spending on Medicaid — the federal-state health program for poor and disabled people — has overtaken spending on K-12 public education for the first time, Rhoden said. Sales tax revenue was down 0.6 percent during the fiscal year that ended in June, which was only the third time in 30 years that the state experienced a negative sales tax trend. So far during the current fiscal year, sales tax revenue is up 4.7 percent.
Rhoden said it all adds up to a tight budget situation.
“I won’t sugarcoat it: Revenues have been very flat — only rising slightly,” he said.
He framed his budget as a continued return to normality after several years of large spending increases fueled by federal pandemic aid and inflation.
Rhoden’s plan for the fiscal year beginning July 1 includes about $2.5 billion in state general funds, with much of the rest coming from federal funding. The total proposed budget would be a 1.6 percent increase from the budget legislators adopted last winter.
Rhoden said the state’s economy remains strong, with the lowest unemployment rate in the country, high labor-force participation and a competitive tax climate. 
Yet, partly due to uncertainty in the national economy and low crop prices affecting South Dakota’s farm economy, Rhoden wants to reserve 12.5 percent of the general fund budget — about $315 million — in rainy-day funds, up from the traditional 10 percent. 
‘Big three’ held flat
One of the major discussion points among legislators as they consider Rhoden’s proposals could be the lack of a funding increase for the so-called “big three”: schools, state employees and health care providers.
“Because our revenues haven’t grown much, we have to keep them flat this year,” Rhoden said.
That means no across-the-board inflationary increase for teacher salaries, Medicaid reimbursement rates or state worker pay. To soften the blow for state employees, Rhoden said his budget puts $3 million into the state health plan to avoid premium hikes.
On education, Rhoden took a long-term view, saying that since 2019, the state has delivered a 27.9 percent increase in funding for schools.
“So while these priorities aren’t getting an increase this year, I’m proud of what we’ve done for them over the past several years,” Rhoden said.   
Rhoden also tied flat education funding to declining public school enrollment. Births are down 9 percent over the past decade in the state, he said, and there’s been a 216 percent surge since 2015 in “alternative instruction,” including homeschooling, private schools and other forms of non-public education. 
No state cuts for local property tax relief
The governor did not propose using any savings from state government cuts to provide relief for local property taxpayers. Legislators made several proposals to that effect during summer study meetings.
Rhoden reminded lawmakers that the proposed budget last year included $80 million in cuts, and legislators restored $7 million. He suggested it will be challenging for legislators to find cuts this year.
“So, I ask the legislators who are asking for cuts, where should we cut?” he said. “Should we cut health care, education or public safety?”
There will be some room for legislators to maneuver. Rhoden said his budget leaves $14 million unallocated for legislative priorities.
New investments
Rhoden made some proposals for new or higher spending, including:
• Staffing the women’s prison under construction in Rapid City, including 133 new full-time positions and $13.2 million in new annual operating expenses.
• Restoring $16.4 million of the $22 million that was cut from the Department of Human Services in the current budget, which Rhoden said “was too steep” (the department manages programs serving elderly and disabled people).
• $10 million in one-time funding for information technology modernization to prevent state system outages like one that struck in August.
• A newer Highway Patrol airplane at a cost of $5 million.
• Reallocating $65 million in unused loan money from a $200 million housing infrastructure fund to an economic development fund, and giving $30 million of that as interest-free loans for airport expansion projects in Sioux Falls and Rapid City.
• $2.4 million in state funds to expand the National Guard Readiness Center in Sturgis, with additional funding from the federal government.
• $6 million for a new Advanced Manufacturing Center at Southeast Technical College in Sioux Falls, with additional funding from federal, local and private sources, and $4.3 million for equipment upgrades at all four technical colleges in the state, plus a $1.7 million increase in state funding for tech colleges that Rhoden attributed to rising enrollments.
• Increasing funding to South Dakota Public Broadcasting by $296,000 to support transparency and open government initiatives, including livestreaming of legislative proceedings. 
• Boosting the maintenance and repair budget for state buildings back to 2 percent of replacement value, after several years of funding it at 1.75 percent.
Lawmakers react
Republican Speaker of the House Jon Hansen, R-Dell Rapids, is running for governor in 2026 against Rhoden and other candidates. He wants to cut the budget and reallocate the savings as property tax relief for homeowners. He said the first place he would look is at the governor’s “slush funds,” referring to various funds managed by the Governor’s Office of Economic Development.
Rep. Will Mortenson, R-Fort Pierre, has endorsed U.S. Rep. Dusty Johnson, R-South Dakota, for governor. Mortenson said “Governor Rhoden’s budget was pretty bleak.”
“I think there’s real cause for concern for our state,” Mortenson said, pointing to sales tax revenues, and to Medicaid costs surpassing education funding. 
“It seems like we’ve economically gotten stuck in the mud,” he said.
Democratic Rep. Erik Muckey, of Sioux Falls, who serves on the budget committee, said the state could free up $70 million for the budget by reducing the rainy day fund allocation from 12.5 percent to 10 percent.
“We can be fiscally responsible with our budgets while also actually taking care of our people,” Muckey said. 
Legislators will begin debating the budget proposals when they convene in January for their annual lawmaking session.
South Dakota Searchlight’s Seth Tupper and Meghan O’Brien contributed to this report.
South Dakota Searchlight is part of States Newsroom, the nation’s largest state-focused nonprofit news organization. See more at southdakotasearchlight.com.