Noem delivers FY2021 budget proposal

Mr. President, Mr. Speaker, members of the legislature, and my fellow South Dakotans.

We meet today with an incredible year behind us and great potential before us.  After the year that we have had to endure, from blizzards to flooding to tornadoes, South Dakota families once again showed the nation how strong we are and how resilient we can be. Our people are ready to tackle the future, and it is up to us to make sure that we are setting our state up for long-term, successful growth.

In our time together today, I will provide an overview of the state’s economy, revenues, and expenses. But, perhaps most importantly, I will outline the conditions needed to enable our families, workers, and businesses to thrive for many years to come.

Like last year, what we are discussing today is only a high-level overview; it doesn’t touch on everything I’m recommending. If you want to dive into all the details, please read through my budget book and the deck of appendix slides attached to this presentation on my website. 

Now, last year, my husband and First Gentleman, Bryon, thought the Budget Address needed a little something extra. As you may recall, he promised everyone popcorn. Well, Bryon is a man of his word and there’s popcorn on your desks.

When I travel across the state and around the country, people often remark on how strong South Dakota’s financial position is compared to the rest of the nation. Like you all, I take pride in the fact that we structurally balance our budget and have a AAA credit rating, and I’m committed to maintaining it while ensuring future security and growth for the people of South Dakota.

As you probably already suspect, money is tight this year. But just as South Dakotans always do, we will find a way to be successful with the resources at our disposal. At my direction, state agencies have already tightened their belts. Throughout today’s discussion, I will explain why I think we need to scale back certain areas of the budget in order to provide funding for areas that will make our state stronger.   

I want to make one thing clear: the men and women who work for our state are incredible people. Each and every day, I am amazed at their efforts to make this state run as efficiently and as effectively as possible. In short, I want to commend our state employees for their commitment and dedication to the hardworking taxpayers of South Dakota.

One final note before I jump into the numbers: when I ran for Governor, I committed to make transparency a cornerstone of my administration. Last year, I unveiled a new website that made it easier to navigate state spending. But today, we are expanding on that initiative and opening up the state’s budget even more. South Dakotans will be able to view my recommended budget, the budget the legislature adopts, as well as the actual spending of those dollars in an interactive, easy to use format. I encourage all of you – as well as every South Dakotan – to bookmark, OPEN.SD.GOV, and to visit the new open budget link. Building a strong foundation for future economic growth and opportunities for South Dakota families requires buy-in from the public, so I want everyone to keep an eye on our state’s fiscal position.

Let’s dive in.

In conjunction with outside economic experts, I look to the Council of Economic Advisors and BFM staff to inform the assumptions included in my budget proposal.

Historically low unemployment rates, rising wages, a strong housing market, and record-level consumer confidence demonstrate the strength of our economy.

Now, nationwide, the economy faces headwinds from slower growth in the rest of the world, uncertainty about the 2020 elections as well as current trade negotiations. 

As of today, we expect continued positive economic development, but we must remain vigilant, especially given recent slow revenue growth.

Inflation is another important variable to keep an eye on, because it has a direct impact on the growth of our sales tax. Traditionally speaking, higher inflation creates stronger growth in sales tax revenue, but lower inflation, as we’ve seen over the past several years, leads to slower growth in sales tax. We expect that inflation will be in the 1.9-2.1 percent range over the next two years, which is lower than the previous two years.  

Finally, as you know, agriculture is a major component of our state’s economy. From the trade war to flooding, our farmers and ranchers have dealt with a lot this past year. We are already looking ahead to the spring, wondering what the weather has in store for us. The prospect of a trade deal getting done this year or early next year continues to change on a daily basis. With these factors in mind, we are assuming that the agriculture sector will stay pretty flat over the next year.

With that background on economic conditions, let’s look at the full revenue picture, including the revisions for the current year, FY20, and estimates for FY21.

This chart shows the year-over-year increase in adopted revenues for the past five years. This averages to approximately $52.1 million in new, ongoing revenue per year that this legislature has adopted. Please keep that number in mind as we talk about my recommended revenue estimate.

Sales and Use Tax accounts for roughly 63 percent of our state’s ongoing revenues. Understanding recent trends around this major revenue source is important to understanding our overall revenue picture. 

In FY19, sales and use tax collections grew at 3.6 percent over 2018. This was 1.3 percent short of the revised estimate that was adopted last February. Now, to meet our adopted estimate in FY20, we would need to have growth of 4.9 percent over 2019 actuals. You can see that year to date, we are seeing growth of 4.1 percent. 

In light of this, my recommendation is to revise our sales and use tax growth rate to 4.5 percent.

This slide shows the major categories of general fund revenues – you’ll see a side by side comparison of what was adopted last year to what I’m recommending today. In total, you can see I recommend a downward adjustment of $5.9 million dollars.

As shown on that top line, by moderating growth expectations for the sales and use tax, it leads to a reduction in the estimate of $3.6 million dollars.

Following the chart down, the lottery has been revised by $1.4 million, this includes instant, online, and video lottery receipts to the general fund.  Video lottery is currently running 4.7 percent higher than a year ago. 

The contractor’s excise tax has been revised down by $3.7 million.  To date, we are 1.0 percent lower than the adopted estimate. We still anticipate healthy housing and construction activity, but just not at the level that was originally estimated.

The insurance company tax has been adjusted down by $1.7 million.

The remaining revisions get us to the total $5.9 million reduction. 

Before we dive in to FY21 numbers, I want to talk about some federal tax legislation that impacts our budget.

Senator Thune introduced legislation in 2015 that eliminated a grandfather clause in federal law that allowed South Dakota to continue taxing internet access services. I cosponsored similar legislation in the House of Representatives. This legislation was signed into law in February of 2016 and starting next July 1, it will provide permanent tax relief to South Dakota families and businesses who currently pay the government for simply accessing the internet. This will lead to an estimated $30 million in tax relief for South Dakotans, with $20 million of that coming from state revenues and approximately $10 million from local governments.

This chart is just like the previous one, but it adds the recommended 2021 ongoing receipts.

Based on our modeling, we project an increase in Sales and Use Tax of $36.6 million. Remember, as we just discussed, of the $30 million in tax relief provided by the internet tax freedom forever act, $20 million is in state taxes for a net increase of $16.6 million.

Lottery is projected to grow by $3.6 million.

Contractor’s Excise tax is estimated to remain strong next year growing by $4 million. 

Insurance company tax is projected to grow by $4.6 million. 

Tobacco taxes continue to decline as fewer people use the products, so the estimate is forecasted to decrease by $1.8 million.

In total, for FY21, I propose a revenue forecast of $1 billion, 723.4 million. This is $28.1 million higher than the revised FY20 forecast.  

While we have $28.1 million in new ongoing revenue, there are a couple of factors that must be taken into consideration to understand what is actually available to fund new, ongoing expenditures. 

Last year, the adopted budget left $500 thousand dollars on the bottom line. 

As we discussed, the revisions in the current year are $5.9 million, which also must be accounted for in the next year. 

Looking at the full picture, we are left with $22.7 million of total revenue available to fund new, ongoing expenditures.

Now, at the beginning of the revenue discussion, I showed a slide with the past five years of adopted ongoing revenue increases. This chart shows how our revised 2020 and 2021 estimates compare. The model calls for an additional $42.7 million in ongoing revenue this year, while slightly below recent trends, it could be considered a fairly average year for ongoing revenue increases. 

When we account for the estimated $20 million dollars in tax relief that is being provided to South Dakotans, the picture changes quite significantly: great news for South Dakota families and also a lean budget year for the state. 

Now that we have discussed the revenue picture, I want to talk about some of my budget proposals for the current year, FY20.

Here is our total, one-time revenue available. Revised FY20 ongoing revenue is down $5.9 million.

We have other, one-time funding available in the amount of $7.7 million. Most of this is attributable to refinancing gains from low interest rates.

South Dakota is very cautious about using reserves, and we should all be proud of that.  When we talk about our reserve funds, we are talking about the combined balance of the budget reserve fund and the general revenue replacement fund.  While maintaining 10 percent in reserve funds, we are able to spend $16.8 million in the current year for one-time investments.

In total, we have $18.6 million in one-time money available to spend.

It’s important that we find ways to invest this money, so we can capture gains for South Dakota families for years to come.

One of my top priorities is keeping South Dakotans safe. One component of that is equipping our law enforcement and first responders with the tools they need to protect our communities. In 2003, we created the state radio system – forming a single, uniform communications system for first responders in every corner of this state. However, with the aging infrastructure and software, our current system needs an update. 

I recommend we spend $5.1 million in one-time funds, which augments the $4.6 million you appropriated last year, thus fulfilling our commitment to local law enforcement and first responders to upgrade our statewide communication system. This will ensure a smooth transition to the new system so there are no gaps in protecting South Dakota families.  

Additionally, by now you all know of my vision for high-speed internet in our state. We absolutely need faster, more reliable connections so everyone in our state can participate in the next generation of South Dakota’s economy.

We’ve made improvements in this area, but there’s still more work to be done.

In Mellette, for example, students without access to high-speed internet at their homes have their parents drive them to school late at night so they can use the school’s internet to do their homework. Many nights, the school has a line of cars in front of it. Sadly, this isn’t unique to Mellette – half of our counties have areas where one in four people have no high-speed internet access. 

Last year’s investment of $5 million leveraged more than $11.4 million in direct project costs to increase connectivity across the state. Eight projects were awarded funding to bring internet access to about 4,800 households and more than 100 businesses in underserved parts of South Dakota.

In addition to that, because the state had a broadband plan in place, applicants for the federal Reconnect dollars scored extra points. Those awards are just starting to come in, but we’re being told those dollars should bring the investment in South Dakota up to nearly $25 million, possibly more.

But we must do more to bring our communities into the 21st century, so let’s continue investing in this project with another $5 million this year.

We must also invest in our universities and its training programs for the next generation. Eleven of the University of South Dakota’s fastest-growing majors are in the School of Health Sciences, representing a significant opportunity for future growth in our state.  As we continue to see greater demand for this skillset, we must be prepared to train our workforce to meet it.

Therefore, I’m recommending $5 million dollars be dedicated to the construction of a new School of Health Sciences Building at USD.

I’m also recommending we dedicate $396 thousand for the Cyber Cync Incubator at Dakota State University. With the investment of $60 million to open the MadLabs facility this fall, a new era of research and development began. We can further enhance this by linking the MadLabs operation to this incubator to spur economic development – in turn, providing greater opportunities for South Dakota families and helping keep top talent in our state.

Let’s turn to storm recovery.

Over the last year, South Dakota has been devastated by catastrophic weather events. But as we all know, South Dakotans are unique. Our people set an example of resolve and community that the rest of the nation could aspire to. In the words of Tuff Hedeman, my friend and a four-time world champion bull rider: we bear down, try hard, and never quit. Never.  

For example, following the Sioux Falls tornadoes, one man spent his weekend driving around town responding to 211 requests and lending a hand wherever it was needed. He fixed flat tires on tractors being used for cleanup. He cleared loads of trees and debris. He even helped an older gentleman clean up in a couple hours what the man thought would take him a month. 

This story is just one of many. It makes me so proud – it should make us all so proud – of our people and our state. 

But there is still so much that needs to be fixed and rebuilt in our communities.

My budget includes a proposal to partner with local governments to provide not only disaster relief but also resources for mitigating future disasters.

Local governments have highlighted their cash flow concerns with high-dollar repairs.  To answer this need, starting with the 2019 disasters, we will now offer loans to cities, counties, townships, and tribes from the Emergency and Disaster Fund. The state will continue to pay for 10% of the cost of the disasters but will now offer loans for the other 90%.

The National Institute of Building Sciences has found that mitigation funding can save $6 dollars in future disaster recovery costs for every $1 dollar spent on hazard mitigation. It is our belief that the Hazard Mitigation Grant Program and the Pre-Disaster Mitigation Program will help cover project costs to improve infrastructure resiliency, provide long-term solutions to repetitive loss situations, and help avoid reliance on federal dollars for future recovery.

Even though these programs have existed for years, they have not been used to their full advantage because of local funding concerns.

In addition to lowering the match requirement from 25% to 15%, the state will also provide loans from the Emergency and Disaster Fund for the local share of these mitigation programs. 

We must rebuild damaged communities, build stronger communities for the future, and ensure long-term resilience so our families can thrive.

Obviously, I’ve only discussed a few of my one-time spending proposals. To the appropriators adding this up, it would appear that we have spent more money than what is available. However, my FY20 budget proposal also includes various increases and more than $17 million in reductions to various state agencies, which are laid out in detail in the budget book.

Now that we have discussed one-time expenses, let’s turn to the proposed ongoing expenses for FY21.

As a reminder, this slide shows our ongoing revenue available. We are projecting $22.7 million will be available to fund new expenses.

First, let’s look at the overview of ongoing expenses.

Due to the lack of revenue growth, I will not be able to recommend inflationary increases for education or Medicaid providers or for state employee salaries.

But my budget does include the following increases:

For education, I am including funding tied to increased K-12 student enrollments. I am also recommending additional funding for the special education allocation rebase.

My recommendation also includes increases in mandatory provider inflation for things like Medicare crossovers, prescription drugs, and federally qualified health centers. Additionally, I recommend funding for increases in Medicaid utilization and cost, as well as increases for home and community-based services for the developmentally disabled. Long-term care services continue to be a priority in this state. My budget includes a new funding mechanism for assisted living services. I am proposing rate tiers for these providers to offer a broader range of services.

For state employees, I am recommending that we maintain the current health insurance benefits and add enhancements to family leave. 

In FY21, general education student counts are projected to increase by approximately 1 percent, and special education student counts are projected to increase by approximately 2 percent.

There are six disability categories funded in special education. The allocation amounts for each of the six categories have been recalculated based on statewide average expenditures for the previous three years and take effect in FY21. These allocation adjustments are projected to result in nearly $14 million in total funds going to school districts for special education.

We all know – many of us too well – how big a problem meth use is across our state. In South Dakota, twice as many 12 to 17-year-olds reported using meth in the last year as compared to the national average. Not only does it devastate our families, but it also costs the state millions of dollars every year.

Recently, I heard a story about a young woman – we’ll call her Jenny – who became addicted to drugs in her early 20s. Her addiction spun out of control pretty quickly, and it wasn’t long before she found herself in jail, homeless, and unemployed. People tried to help her, but she sunk deeper and deeper into addiction.  

Jenny found out she was pregnant when she was three months along. She tried to get clean, but relapsed hard shortly before the birth of her baby boy. She was high on drugs when she gave birth. Because of her addiction and the concerns for the baby, the courts gave Child Protection Services custody of her son when he was released from the hospital.  

Jenny was broken. The one thing in the world that was hers had been taken from her. And she hit rock bottom. But it was also her turning point.  

Jenny started working with a Family Services Specialist from CPS and the foster family who was caring for her baby. She worked hard, knowing that it wasn’t just about her anymore – her actions would determine whether she would ever be able to have her son returned to her. She went through drug court, found housing and a job, and steadily made her way toward recovery.  

Jenny’s son is three now and they live together. They have maintained a relationship with the foster family that cared for him – in many ways, they’ve become like extended family. She’s been promoted in her job and has been clean now for almost three years.  

When I heard this story, I was amazed at the redemption it portrays. And I want to hear stories like that over and over. But I also see that the road to recovery requires help. It takes people raising their hands to be foster parents – to be that middle-mom or middle-dad that these kids need. It takes social workers who commit to doing the journey together. It takes pastors and teachers and counselors and doctors. Judges, neighbors, police officers, and people who know just when to offer a word of encouragement.    

The health and well-being of our kids is something each of us here today cares deeply about. We know that addiction to meth requires more intensive therapy than other addictions. 

My budget contains ongoing funding to support additional intensive meth treatment. It’s time this horrible drug is eradicated from our communities.

Building stronger, healthier, and safer communities begins with families.

About five years ago, Blake and Rachel Schmieg of Big Stone City were considering adoption. They had three boys biologically and had always wanted a girl. After months of thinking and praying, they decided to try foster parenting. One day, they got a call asking them to take in an 18-year-old girl named Sadie who needed a safe place to live until she finished high school. They said yes.

Sadie quickly became an important part of their life. Remembering back onto those first few weeks and months in their home, Sadie said that she felt like she was part of a family for the first time in her life. She remembers when the younger boys made Christmas ornaments for all their family members at school and made one for her. She remembers having a stocking at Christmas time. She remembers reading to the boys and feeling like she belonged.

As Sadie got closer and closer to finishing high school, they started having conversations about what was next and how everything would work once she went to college. Where would she go for Christmas break? Where would she leave the things that wouldn’t fit in a dorm room?

Little did Sadie know that Blake and Rachel had been talking about the possibility of adoption. When they asked her if she wanted to become a permanent part of their family, Sadie started crying. She said it was the first time she had ever felt wanted.

Over the next few months, the family waded through legal tape and began the process of adoption, only to realize that the adult adoption law in South Dakota didn’t fit their situation. They were told there was nothing they could do and that adoption was off the table.

As Blake said, “We hit wall after wall, but we knew this was something God had called us to do, so we looked for doors and windows.”

Working with Representative Fred Deutsch, the family drafted a bill to change the law, gave testimony in front of a committee, and followed the bill through the legislative process. In March, they travelled to Pierre when I signed the bill into law. It was an incredible day.

On August 20, Sadie was legally adopted. They got the paperwork that told them what they’d known for a long time – Sadie was theirs and they were hers. Forever.

Blake and Rachel are here today. Would you stand? Thank you for all you are doing for the next generation. You’re truly an inspiration to us all.

Some of you have heard me speak about how foster care and adoption have impacted my life. I grew up with a foster brother, and I’ve been blessed with several nieces and nephews who’ve brought sunshine and a new kind of love into our family. Adoption is beautiful. It’s lifechanging.

Last year I spoke about the need for more foster families, and South Dakotans rose to the challenge. This year, my budget includes ongoing funding to meet the increased interest in individuals wanting to become licensed foster parents and approved adoptive parents. Every child deserves a family. Every child deserves a home. 

Here is an overview of FY21 ongoing budget recommendations. We have broken this overview into major budget categories. As you can see, my ongoing recommendation includes almost $9 million in budget reductions across a number of agencies. 

The total recommended general fund increase for FY21 is $22.7 million.

This chart shows a summary of the bottom lines for the current and upcoming fiscal years.

I began this address by noting how challenging 2019 was for our great state, but what’s so exciting – the real bottom line – is that we have tremendous opportunity before us.  We have some revenue challenges, yes, but I expect that will drive us to do better with the resources we have.  

The growth of our current industries and the attraction of new ones will drive opportunity.

Expanding on some already successful initiatives will drive opportunity.

And laying the foundation to enhance our competitiveness with respect to other states will help ensure our top talent stays in South Dakota – creating more opportunity for years to come.  

In his 34th and final address from the Oval Office, Ronald Reagan said the number one lesson he learned while President was that all great change in America begins at the dinner table.

The same is true today. Government programs don’t drive change, it happens out there. Around the state. One conversation at a time. At dinner tables. In coffee shops. Leaning against a fencepost.

This budget sets us up for continued financial success, and I look forward to working with everyone in this chamber here today and everyone around our great state as we create and implement the policies that will grow our economy and strengthen our communities – all in service of the essential building block of our state: South Dakota’s families.

Thank you.