Fiscal responsibility or neglect of state priorities: Surplus sparks debate about budget cuts

A January 2025 view of the South Dakota State Capitol in Pierre. (Makenzie Huber/South Dakota Searchlight)

Now that South Dakota has finished its fiscal year with a $63 million surplus, some Democrats and people affected by budget cuts are criticizing the state’s Republican administration and legislative majority for slashing spending too aggressively.

Falling sales tax revenues and rising Medicaid obligations drove lawmakers to enact targeted spending reductions in the fiscal year 2026 budget they adopted during the legislative session that ended in March. Among the notable cuts were those affecting Temporary Assistance for Needy Families, the State Library, tobacco-use prevention efforts, and subsidies for high school students taking dual credit college courses. 

Last week, Gov. Larry Rhoden reported that the state ended the 2025 fiscal year with a $63 million surplus. About a third of the surplus came from state departments spending less than their budgets allowed. About two-thirds came from higher-than-expected unclaimed property revenue. 

South Dakota lawmakers navigate financial pressures to produce a $7.3 billion budget

Unclaimed property consists of an array of abandoned or forgotten private assets, including money from bank accounts, PayPal accounts, stocks, life insurance payouts, uncashed checks, unused refunds, and the contents of safe deposit boxes. Holders of the money or items, such as banks, try to find the owners. The property reverts to the state after three years.  

Rhoden told South Dakota Searchlight he didn’t regret any cuts, since they were made to ongoing programs and most of the surplus came from unclaimed property, which is an unpredictable revenue source. 

In his weekly column, he added he’s glad the state didn’t spend more money on “this handout or that pet project.”

“For those who wish that we would’ve spent more, I won’t apologize for making fiscally conservative decisions as your governor,” Rhoden wrote. “South Dakota is a leader in disciplined financial management.”

This is the 14th consecutive year South Dakota has reported a year-end surplus. It was achieved this year despite a $3.7 million decline in sales tax revenue.

Surplus shows a ‘neglect’ of state needs, former state contract worker says

What the governor calls “disciplined financial management,” Carter Linke calls “neglect and cruelty.”

Linke’s contract position with the state Department of Health through Black Hills Special Services Cooperative was cut in May. He served as a tobacco prevention coordinator, researching emerging tobacco products and providing tobacco education to school districts and communities. The Legislature and Rhoden approved a $3 million annual cut to the program.

South Dakota still needs the work he was doing, Linke said. 

“This notion that South Dakota is being fiscally responsible doesn’t really address the full picture and neglects the purpose of what these programs were and why they’re essential,” he said.

Linke now plans to pursue a master’s degree out-of-state this fall.

Partisan split on unpent funds

House Majority Leader Scott Odenbach, R-Spearfish, said the Legislature worked to “tighten up” budgets for state departments to avoid reverted funds like the $22 million reported for the 2025  fiscal year.

“Just like everything else, it’s a matter of being smart, defining priorities well and only budgeting for what you really need,” Odenbach said.

Democratic Sioux Falls Rep. Erik Muckey said reverted funds aren’t always a sign of overbudgeting and can also result from state departments failing to carry out their missions. He sits on the legislative budgeting committee.

Muckey pointed to recently approved cuts to Temporary Assistance for Needy Families benefits and a Department of Social Services fund transfer regarding what he said the department described as “under utilized” mental health funding. Officials in the department said the unused funds were connected to a workforce shortage, according to Muckey, but he said it was a sign the state does not reimburse providers enough to sustain a mental health workforce.

“You can understand my ire for that when we have money and aren’t using it properly,” Muckey said.

Rhoden said the reversions are a sign of “commonsense decision making” to find opportunities to save money.

“If every state and Washington, D.C., did business that way, our country would be a lot better off,” he said in his weekly column.

Extra money goes to budget reserves

The $63 million surplus will flow into the state’s reserve funds. So will $106 million set aside during the legislative session to potentially help fund the construction of a new men’s prison. Legislators plan to meet Sept. 23 for a special session to consider a prison proposal. 

Rep. Kadyn Wittman, D-Sioux Falls, criticized the surplus and unspent funds. She said the Governor’s Office opposed her most recent push to provide free lunch for public school children, which would have cost $616,000 annually.

“The budget really reflects our values, and this year we chose as a Legislature to bank millions of dollars instead of investing in critical areas,” Wittman told South Dakota Searchlight.

She’d like more flexibility with unspent funds to meet needs and bridge funding gaps after the legislative session ends, rather than “banking it.” 

Reserve funds are “hard to get at,” Muckey said, because lawmakers need a two-thirds majority to pull money from the funds. Muckey said that law shouldn’t change. That’s why it’s important, he said, to fully address the state’s needs upfront rather than having leftover money “go to the bottom line and watch things starve.”

The state’s reserve funds, now at $492 million, account for 19.9% of the fiscal year 2026 budget. Muckey would like to reduce that to 15%.

South Dakota can be fiscally responsible and take care of people because “those things are not mutually exclusive,” he said. Lawmakers often refer to reserves as “rainy day” funds, and Muckey said program cuts that hurt people are the kinds of “rainy days” the state should use excess reserve funds to avoid.

“When we are experiencing ‘thunderstorms’ in our state, why are we not using our rainy day fund to help people?” Muckey said. “We’re just hoarding cash.”

Rhoden said in the surplus announcement that the $106 million left unspent in the 2026 budget is intended to “help cover the costs of a future prison.” But Odenbach said the money could be used for other priorities.

“We need to decide where to put it,” Odenbach said, “whether that’s put toward a prison or property tax relief.”