South Dakota Gov. Larry Rhoden presents his 2025 budget address to lawmakers at the Capitol in Pierre on Dec. 2, 2025. (Photo by Makenzie Huber/South Dakota Searchlight)
PIERRE — 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.
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% 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%.
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.
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He framed his budget as a return to normality after several years of rapid revenue gains fueled by federal pandemic aid and strong sales tax collections.
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% 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% of the general fund budget — about $315 million — in rainy-day funds, up from the traditional 10%.
‘Big three’ held flat
One of the major discussion points among legislators could be Rhoden’s lack of a proposed 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.
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On education, Rhoden took a long-term view, saying that since 2019, the state has delivered a 27.9% 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% over the past decade in the state, he said, and there’s been a 216% 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 several new spending proposals, including:
- Staffing the new women’s prison under construction in Rapid City, including 133 full-time positions and $13.2 million in new annual expenses.
- $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 for $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.
- Increasing funding to South Dakota Public Broadcasting by $296,000 to support transparency and open government initiatives, including livestreaming of legislative proceedings.
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, 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 Medicaid costs surpassing the cost of education.
“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% to 10%.
“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.
