State budget chief urges close look at schools with excess cash as property tax complaints continue

South Dakota Bureau of Finance and Management Commissioner Jim Terwilliger speaks to the state Senate Committee on Appropriations on Jan. 18, 2024, at the South Dakota Capitol in Pierre. (Photo by Makenzie Huber/South Dakota Searchlight)

South Dakota’s top state budget official is urging a close look at cash balances in some school districts as the governor and lawmakers consider ideas for property tax relief during the legislative session that begins next month.

Jim Terwilliger is the commissioner of the Bureau of Finance and Management and a member of the School Finance Accountability Board. He said the board should not condone excess school cash balances at a time when homeowners are complaining about high property taxes.

“When you start seeing a $600,000 excess balance, it begs the question, what are you doing?” Terwilliger said during a Nov. 12 board meeting. 

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The topic arose when leaders from six public school districts appeared before the board. The districts were required to appear because their reserves during the 2025 fiscal year exceeded limits in state law.

Reserves are calculated by dividing each district’s lowest monthly cash balance by its total general fund spending. The maximum allowable reserves are 40% for schools with enrollment of 200 or less, 30% for those with enrollment between 200 and 600, and 25% for those with enrollment of 600 or more.

When districts exceed the limits, the state board can recommend a full or partial waiver, a financial penalty or a financial review of the district by the state Department of Education. The recommendations go to the Legislature’s Joint Appropriations Committee.

Earlier this month, Terwilliger asked the accountability board to take its duty seriously.

“I don’t want this board to be looked at as more of a rubber stamp of waivers,” he said.

The board ultimately recommended denial of one waiver and a financial review of that district, while recommending three full waivers and another two partial waivers with financial penalties.

The legislative committee on Monday approved the denied waiver and financial review; approved two of the full waivers; suggested making one of the full waivers contingent on a financial review; and suggested waiving the two financial penalties. The committee’s proposed changes now go back to the board.

School funding, property taxes discussed

Under the state’s school funding formula, each district’s funding need is calculated based on factors including enrollment, target teacher pay, benefits and overhead. Local funding sources known as the “local effort,” including property taxes, are applied toward that need first, and state funding (which comes primarily from the state sales tax) fills any remaining gap.

If a district’s local effort fulfills its need, the district receives no general state aid. That situation applied to four of the six districts that exceeded their allowable cash balances during the 2025 fiscal year: Agar-Blunt-Onida, Hoven, Hill City and Lead-Deadwood.

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It’s reasonable, Terwilliger said earlier this month, to ask whether property taxpayers in those four districts are overburdened.

Local effort during the 2025 fiscal year exceeded the calculated need by about $1.1 million in Agar-Blunt-Onida, about $588,000 in Hill City,  about $676,000 in Hoven, and about $4.3 million in Lead-Deadwood.

Because those school districts don’t receive state aid, the board was not able to financially penalize them. 

Rep. Liz May, R-Kyle, worried at Monday’s meeting that a lack of financial penalties for those school districts will mean they won’t be held accountable.

“That doesn’t help the people back home that are paying the taxes,” May said.

Along with May, other lawmakers echoed Terwilliger’s concern at the Monday meeting, asking about factors affecting property taxes, including school spending and saving.

Financial reviews for Hoven, Agar-Blunt-Onida

Officials from Agar-Blunt-Onida told the board last month that a decision to close Blunt Elementary at the end of the 2023-24 school year reduced expenses and drove up cash balances, while an increase in rural electric generation tax revenue also pushed cash balances higher than expected. The additional cash will help launch expanded career and technical education and possibly junior kindergarten or preschool in the coming years, and district officials said they’re prepared to lower the general fund property tax levy if revenue remains strong.

The School Finance Accountability Board recommended a full waiver for Agar-Blunt-Onida. The Legislature’s Joint Appropriations Committee rejected the recommendation, suggesting the board recommend a financial review of the school district.

Lawmakers suggested the review partly because the school district has appeared before the accountability board four times in five years.

A financial accountability review allows the state Department of Education to monitor the district more closely, Director of Finance and Management Cody Stoeser told lawmakers on Monday. The district and department create an in-depth correction plan to spend the excess funds and meet the state requirements. If school districts don’t comply, then they risk losing their accreditation, which can impact federal funding or sports programming. 

“We can’t go ahead and tell them how to spend their money,” Stoeser said. “We just go in there and make sure they’re going to comply with the requirement.”

The board will meet within 30 days to consider the legislative committee’s action.

Lawmakers approved the state board’s denial of the Hoven School District’s waiver request and the board’s recommendation that the state Education Department complete a financial review of the district. Hoven has appeared before the board four times in five years as well.

Officials from Hoven said their higher cash balance reflected the realities of operating a small district that does not receive general state aid. They said the district needs a larger reserve to weather swings in property valuations and enrollment, because it lacks a state backstop if revenues fall short. 

Waivers approved

Hill City officials said they became newly eligible for a federal grant and received two years’ worth of funding in a single fiscal year.

Lead-Deadwood officials said they had an unfilled teaching position during the school year that resulted in less expenses and higher cash balances. They also said their food service fund is not self-sufficient, so they supplement it with general funds, and they will adjust the timing of that transfer to the beginning of the year rather than the end to better manage cash balances. Additionally, monthly state funding for the Box Elder Job Corps influenced cash balances, even though the district merely acts as a pass-through for the funding. 

The state board recommended a full waiver for Hill City and Lead-Deadwood, which the legislative committee approved.

Lawmakers disagree with financial penalties

The two districts that exceeded allowable cash balances while receiving general state aid were Frederick Area and Miller.

Leaders from Frederick Area said their overage was a timing issue caused by delayed startup costs for an agricultural career and technical education program and higher-than-expected interest earnings. 

The accountability board recommended a partial waiver for Frederick Area and a fiscal penalty of 10% of the excess amount, which would result in a reduction of $9,265 in general state aid for the 2026 fiscal year.

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Miller officials said their overage was tied to their recovery from a fire, infrastructure upgrades, staffing vacancies and revenue sources that were difficult to forecast. They said insurance proceeds and more efficient equipment lowered utility and maintenance costs, which in turn reduced expenses and pushed cash balances higher.

The accountability board recommended a partial waiver for Miller and a fiscal penalty of 10% of the excess amount, which would result in a reduction of $7,474 in general state aid for the 2026 fiscal year. 

Lawmakers voted to reject the penalties for both districts, in part because this year was their first appearance before the board in the last five years. The actions go back to the board, which will have 30 days to consider them.

School Finance Accountability Board Chairman Eric Stroeder told lawmakers that board members made the 10% penalty recommendations because they “want the board to mean something.”

“At some point,” Stroeder said, “it has to be done just to enforce the law.”