Five things to watch during SD Gov. Kristi Noem's budget address
On Tuesday, Dec. 6, Gov. Kristi Noem will kick off her second term and unofficially begin the 2023 legislative session with her budget address. Here are five things to watch as she unveils her budget proposal for the 2024 fiscal year.
SIOUX FALLS, S.D. — Gov. Kristi Noem is set to deliver the first budget address of her second term at 1 p.m. Central on Tuesday, Dec. 6 from the state capitol building in Pierre.
While legislators certainly have the latitude to tweak and add to the governor’s vision in the coming months, the remarks and in-depth budget documents released at the same time will frame her administration’s hopes for the coming legislative session, which begins in January.
Here are five things to watch as Noem proposes her fiscal year 2024 budget, which will contain revenue and expenditure estimates covering the period between July 1, 2023, and June 30, 2024.
To tax or not to tax
In a Dec. 2 press release previewing Tuesday’s address, Noem revisited her campaign promise to lift the grocery tax, writing that her budget would include a “complete elimination of the state sales tax on groceries.”
The general understanding of how much annual revenue this will lose the state is in the realm of $110 million, although exactly which items are covered by this tax could change that price tag.
Noem’s language in the press release appears to make clear that municipalities will still be able to levy a tax on groceries.
“Last year the Senate wasn't too prone to let that happen,” said Ernie Otten, who served in the Senate last term but made the switch to the House side this election. “I don't think that that's likely to have changed. But we're going to have to take a firm look at it.”
However, sending part of the more than $400 million in state reserves back to the people — especially since that number is set to increase as the 2023 budget shows strong growth in revenues — could take several different forms.
A summer study on property tax structure recommended a proposal to forgive the school portion of property tax on the first $100,000 in home values, which would likely carry a similar price tag to a grocery tax repeal.
“I don't know if we can fund both property tax relief as well as grocery tax relief,” said Sen. Bryan Breitling, the second-in-command on the Senate Appropriations Committee. “So it'll just be a discussion about what is the appropriate tax relief.”
Raises for the ‘Big Three’?
Forty-year highs in inflation over the past year have affected pocketbooks and juiced sales tax receipts by the state. However, the bill on those increased funds now comes due, as costs for schools, healthcare providers and state employees have increased alongside everything else.
Appropriators from both sides of the aisle say attempting to keep pace with inflation will be top of mind as they listen to Noem speak.
“There are many [departments] that we are just simply not able to hire staff because we're no longer competitive with the market,” Breitling said. “The legislature is going to work hard to support whatever the governor proposes. And if the governor proposes a lower number, we're going to work very hard to raise that number.”
Last year, the legislature funded a 6% increase in the “Big Three,” a shorthand budget term for the state’s major obligations to funding education, healthcare and government employees. In an inflationary environment of around 8%, advocates point out that even this larger-than-normal increase was in fact a pay cut.
Noem’s Friday press release promises to “continue to support South Dakota schools, public safety, and our healthcare obligations” and fund “essential state services.”
On top of helping key government functions keep pace with rising costs, some legislators want to see Noem fully reimburse providers for Medicaid costs, which would affect programs caring for the elderly and disabled in the state.
This year, for example, South Dakota is only reimbursing nursing homes at approximately 74% of true costs for Medicaid patients, one factor behind several closures and dozens of facilities at risk of closing.
“It's not right that we haven't been [paying full reimbursement rates] especially when we have surpluses,” Rep. Chris Karr, who will sit on the House Appropriations Committee this session, said, estimating the cost of fully funding at around $45 million in 2024. “So if we can do that, that alleviates a lot of burdens for providers.”
The all-important revenue estimate
Framing any conversation about appropriations — both in terms of funding for priorities and the ability to fund ongoing tax breaks — is the question of just how much money the state plans to bring in.
In the first four months of the 2023 fiscal year budget, revenues continue to grow at a breakneck pace of nearly 12% over last year. That leaves the state with some $75 million in revenues above what was estimated when the budget was enacted last session and on pace for a record-shattering surplus.
However, legislators continue to approach these numbers with caution, unsure of how much of this growth is genuine and how much is driven by federal funds and inflation.
When Noem unveils her 2024 budget proposal, revenue estimates as far out as 18 months will show what her economists think about revenue growth in the near future — will receipts stay at 10% growth, or will they dip down to 7% or even 5%?.
Knowing the size of the pie thus begins the rest of the conversations.
“We're doing well right now. But you throw on top of that inflation and those numbers continue to be very high. So first we need to figure out how much of this is real. And then how much of this is sustainable if we do a $100 million or more grocery tax reduction?” Breitling said. “What does that mean to the state budget? What does that mean to, you know, nursing homes and teachers and state employees?”
While important, the revenue estimates contained in the budget book are not final, and up-to-date estimates and tax receipt reports throughout February could alter the state’s outlook.
How much for prisons?
A pair of studies during the interim session made clear that updates to South Dakota’s correctional system, beginning with a new women’s prison in Rapid City and a new maximum security facility in Sioux Falls.
That money could also go to upgrading prison infrastructure at the county level as well.
Anticipating what will be a costly set of projects, the legislature in the past two years has put nearly $90 million into the Infrastructure Construction Fund. With Noem saying in her Dec. 2 press release she will “make key investments in both infrastructure and public safety,” exactly how much money is added into this fund will be watched closely by legislators.
Rep. Ernie Otten told Forum News Service he heard that the administration would recommend putting approximately $60 million into the fund, though he didn’t know if those numbers were firm.
“I would prefer to make a bigger investment [if only $60 million is recommended] and try to get our foot into the door of that. Of course, we'll also be putting bonds out on it, so actually, it's kind of an ongoing expense,” Otten said. “But the more money we could put in toward that, the better off we would be.”
For Breitling, fiscal responsibility in addressing a glaring need in corrections infrastructure is a priority.
“Can we take $100 million a year and put that into a new penitentiary? Rather than food tax? I would rather do that but we'll see. We'll see how the budget shakes out. But taking a billion dollar loan out and then at the same time cutting revenues doesn't work very well.”
Grab-bag: Education, child care et. al.
In addition to what has already been mentioned, Noem could use her address to begin making good on campaign promises in family leave, child care, workforce development and more.
Part of her Friday press release hinted at “targeted investments” that “will focus on building stronger families.”
Rep. Linda Duba, the lone Democrat on the House Appropriations Committee, is skeptical of how much substance will follow these ideals.
“Paid family leave is a good thing. But we've got to understand, are we just going to mandate it and expect employers to cover it or are we going to put skin in the game?” Duba said. “Then from a child care perspective, all the governor is going to talk about is that $38 million in [federal] funding. I don't anticipate that she's going to move anything forward.”
For some on the Republican side, the hope is that the state will make good on its current promises before standing up new programs.
“Let’s not expand every program that we can, let's not spend every dollar expanding programs or starting new programs,” Karr said.
Other potential policies advanced in the speech may include another state-funded tuition freeze for public universities, new directions on $150 million in housing dollars and, as first reported by the Dakota Scout, an increase in tuition reimbursement to fully cover higher education for the state’s National Guard members.