Governor Dennis Daugaard’s FY18 Budget Address

Dec 6, 2016

South Dakota Governor Dennis Daugaard during his Fiscal Year 2018 budget address in Pierre.
Credit Kealey Bultena

Governor Dennis Daugaard is proposing a total budget of $4.6-billion for fiscal year 2018.   The state is seeing lower than expected growth in sales taxes due primarily to a downturn in the agriculture economy and lower tourism revenue over the last year.  Daugaard says the state can make up for a lower than expected growth in this fiscal year with a mix of one time funds and other cost saving measures.  He says the state remains in good economic standing thanks to an honestly balanced budget without any over-borrowing.

“We’ve made structurally balanced budgets the norm.  We’ve used one time dollars prudentially for one time uses only, and not to fund on-going obligations.  We have one of the strongest pensions in the nation.  We’ve memorialized finical practice improvements now in statute to help guide our state in the long term after you and I are gone. These practices are all paying dividends and this summer we received our final upgrade from Fitch Ratings earning South Dakota  the top credit rating from all three major rating agencies.   All of these accomplishments are due to the conservative principals we’ve upheld together,” says Daugaard. 

But some Democratic state lawmakers say Governor Daugaard’s proposed budget increases of one-percent for education and healthcare are not enough. The State Senate minority leader Billie Sutton says he’s glad the governor did not propose any major cuts.  But he says the say state government can find more money, from outside sources, like the Governor’s Future Fund. 

“I think we need to get creative in how we do more for education, healthcare and we do more for economic development I didn’t see anything in there as it related to the build South Dakota fund which is an economic development program that we passed a few years ago it’s running out of money and it’s been very successful in South Dakota and I didn’t see any way to fund that and that’s disappointing,” says Sutton.  

While some Democratic state lawmakers were critical of the governor’s budget, others in the state GOP praise the governor’s plan.  They say in a tough year for agriculture the state needs to maintain its fiscally conservative approach and avoid overspending.     

Lower Than Projected Sales Tax Growth

South Dakota’s two leading industries, agriculture and tourism, always play a large part in providing state revenue.  But both of those segments struggled in 2016.  Governor Daugaard says the state needs to adjust the current Fiscal Year budget to account for lower-than-expected incoming dollars.  Daugaard says the state’s farmers and ranchers have been hit hard the past couple of years.

“As you know, many purchases in the ag sector are exempt from sales tax, but sales and use tax does apply to farm machinery.  So if you look at 2007 and later, you can see tax incentives and strong farm income fueled strong machine purchases.  Sales tax here grew from $17.4 million n in Fiscal Year ’08 to $45 million in Fiscal Year ’14.  This boosted our sales tax revenue in those years.  Now, we see fewer machinery purchases, which means less sales tax.  And since the peak in 2014, sales on machinery have dropped 50 percent,” says Daugaard. 

Daugaard says this year brought tourism spending lower than 2015. This is largely due to the record tourism year in 2015 due to the 75th anniversary of the Sturgis Bike Rally. 

Daugaard says part of the lower than projected revenue also includes millions of dollars in un-collected internet sales tax.  The Governor lays out three scenarios where sales taxes need to be collected.  One is in a physical store, where the store collects taxes and sends them to the state.  If an online vendor has a physical presence, such as a store, in the state, online sales are taxable as well.  But when a state resident makes an online purchase, and that company does not have a store or other presence in the state, sales taxes are often not gathered.

“The lost sales tax revenue as explained in scenario number three, amounts to roughly 50 million dollars.  That’s the state and local governments.  Consumers should pay use tax if they do not pay sales tax, but few do.  We receive roughly four million dollars from remote sellers who voluntarily collect the sales tax.  This means most is not being received,” says Daugaard

The governor says overall state revenues are $26 million lower than projected at the start of the last fiscal year.  He says lawmakers will need to re-work the current budget, and will have only $19 million in extra spending capability for the next fiscal year.  Governor Daugaard says state employee wages should increase at a smaller than normal rate in the next spending plan.  The Governor proposes a one percent increase for most state workers.  But he says there are certain positions in South Dakota’s government that need additional income.

"The first line is a salary increase of one percent for permanent state employees costs three point six-five million dollars.  Then a pay-range minimum improvement of 780 thousand dollars, is to move the pay-range up for low-wage, frontline people who are doing difficult but important work.  A number of these employees are paid between 20 and 30 thousand dollars.  And I think we need to continue to get their entry-level pay at least up to the level it needs to be,” says Daugaard.

Daugaard says the larger increase would go to mental health workers at the Human Services Center in Yankton along with direct support employees at the Development Services Center in Redfield, and family service specialists in the Child Protection Program.

Initiated Measure 22

Governor Dennis Daugaard used nearly five minutes of his budget address to express his distaste for Initiated Measure 22.  Voters passed the measure last month.  It creates an Ethics Commission and makes other changes to re-work the state’s campaign finance laws.  Daugaard says he’s recommending the measure not be funded in Fiscal Year 2018.

“As written, IM 22 appropriates nine dollars per voter from general funds every year, starting in Fiscal Year 2018.  Nine times 544 thousand registered voters means nearly five million dollars every year.  With only 19-point-seven in new revenue, this would cannibalize more than 25 percent of it.  The already minimal one percent increase for education, mental health services and state employees, would need to be reduced to six-tenths of one percent,” says Daugaard.

Daugaard calls Initiated Measure 22 the most poorly-written measure he’s seen in his two-decade involvement in state government.

“IM 22 has 70 sections and 14 thousand words.  If I was reading it today, it would take me an hour and a half to recite it to you.  It’s our obligation, at least, to correct the obvious errors that make it unworkable.  Unfortunately, in this case, that’s a big job,” says Daugaard.

Daugaard says the bill was largely funded by out-of-state money, and works to solve a problem that does not exist in South Dakota. 

Proponents of the measure say it was approved by voters and Lawmakers should not be tamper with it.  Democratic state lawmaker Peggy Gibson says there are very positive parts of IM 22.

“We have an ethics problem in the state of South Dakota. And I’ve proposed an ethics commission in several of my bills throughout my 8 year career in the House of Representatives.  And I feel we need an ethics commission.  With all of the scandals we’ve had in South Dakota,  Gear-Up and EB-5, I think the voters definitely are telling South Dakota state government  that we want some ethics in our state,” says Gibson.

Some GOP lawmakers praise Governor Daugaard for showing leadership in opposing IM 22.  State Republican leaders say they will bring legislation to address issues they see in the measure during the 2017 session.

You can hear Governor Dennis Daugaard’s entire budget address and reaction from some state legislative leaders by clicking play below.