Gov. Kristi Noem delivers the fiscal year 2026 budget address at the Capitol in Pierre on Dec. 3, 2024. (Makenzie Huber/South Dakota Searchlight)
By: Joshua Haiar
PIERRE, S.D. (South Dakota Searchlight) — South Dakota Republican Gov. Kristi Noem proposed a leaner state budget Tuesday with a small increase for schools and cuts to some departments and programs, yet with new money to create a school-choice program and continued contributions to a prison construction fund.
In her fiscal year 2026 budget address, Noem outlined a $7.29 billion spending plan, which would be a reduction of about $20 million, or 0.27%, compared to the current fiscal year budget of $7.31 billion. The reduction is driven primarily by lower-than-expected sales tax collections and the depletion of pandemic-era federal relief and stimulus funds.
“We’re going to have to make some tough decisions to deliver the 136th consecutive balanced budget for South Dakota,” Noem said.
Noem delivered her speech to lawmakers in the state House of Representatives chamber at the Capitol. Legislators will take her proposals into consideration next month when they gather for their annual lawmaking session.
Noem is expected to resign as soon as late January to accept an appointment as secretary of the U.S. Department of Homeland Security, if she’s confirmed by the U.S. Senate. Lt. Gov. Larry Rhoden would then take over as governor and appoint a new lieutenant governor.
School choice and public education funding
The governor proposed the creation of a $4 million education savings account program, which she said would offer $3,000 per student toward private school tuition or alternative education curricula.
She said the money would not cut into public school funding.
“Public schools are very important to our state’s educational future,” Noem said.
Yet she proposed only a 1.25% increase in funding for public education, health care providers and state employees.
Noem said she and legislators have provided 27.9% worth of inflationary increases for those “big three” parts of the state budget since she took office, while inflation during that time has been 24.9%
But this year’s proposed increase would fall short of the current 3.2% inflation rate reported by the Federal Reserve Bank of Minneapolis.
Incoming House Majority Leader Scott Odenbach, R-Spearfish, praised the governor’s support for education savings accounts.
“This could be a game-changer for education in South Dakota,” he said.
Speaking after the speech to South Dakota Public Broadcasting, which carried the speech live, incoming Senate Minority Leader Liz Larson, D-Sioux Falls, expressed skepticism.
“One of our core beliefs as Democrats is that we protect public education,” Larson said. “So we would need to make sure those types of programs are not a slippery slope leading to less investment in our public schools.
Cuts
Noem proposed nearly $72 million in “reductions and discretionary changes,” many of which are cuts to state departments and programs.
Those include $38 million in combined reductions for the Department of Social Services and the Department of Human Services.
“They have been reverting money for years at the end of the fiscal year, and it’s time we right-size these budgets,” Noem said.
Other proposed cuts include a $17 million reduction in maintenance and repairs of state property, and a $5.3 million reduction for the Temporary Assistance for Needy Families program, which is designed to provide assistance and build economic self-sufficiency for children and families.
Noem also wants to cut $3.6 million from South Dakota Public Broadcasting and $2 million from the Board of Regents, which oversees the state’s public universities.
“We must consult our means rather than our wishes,” Noem said, quoting President George Washington.
Incoming House Assistant Minority Leader Jamie Smith, D-Sioux Falls, expressed concerns about cuts to social programs.
“We need to understand how these cuts will impact the most vulnerable people in our state,” he said.
While he applauded Noem’s proposal of $10 million to help schools make safety upgrades and improvements, he questioned the necessity of her proposed 12% budget reserve.
“Today is a starting point,” Smith said. “And there are things we can work together on, but we need to closely examine areas where the most vulnerable might be affected.”
South Dakota Public Broadcasting, which relies on the state for part of its funding and the nonprofit Friends of SDPB for additional funding, issued a statement Tuesday saying Noem’s proposal would be a 65% decrease to the organization’s state budget allocation.
The organization highlighted the importance of its online, radio and television coverage of topics including high school sports, fine arts, education, public policy and the Legislature.
“A cut of this size and scale will force significant reductions to all these important services,” SDPB said in a statement. “This cut is likely to disproportionately affect rural service, where SDPB’s programming is most valued.”
Prison money
Noem proposed putting $182 million in a fund to build a new state prison south of Sioux Falls, which would largely replace the antiquated Sioux Falls penitentiary, parts of which date to 1881.
The state has already set aside $567 million for the project, which is expected to cost $825 million. Noem said the state expects $76 million in interest earnings from the prison fund. The interest and the proposed $182 million would fully fund the project, she said.
The prison location and price have been controversial, and Odenbach said he expects significant lawmaker attention to the project.
“We’re going to have a lot of discussions about this,” he said.
Unclaimed property record
The budget will receive a boost from a record-setting $229 million in unclaimed property revenue, exceeding last year’s historic haul.
That money comes from an array of abandoned or forgotten private assets, including bank accounts, stocks, life insurance payouts, uncashed checks and the contents of safe deposit boxes. The holders of the money or items — such as banks, including some large ones chartered in South Dakota due to the state’s favorable finance laws — try to find the owners. But after three years of dormancy, the property reverts to the state.
Noem proposed reserving $43 million of unclaimed property revenue for potential claims from people seeking to recover their money. The state Treasurer’s Office maintains a list and makes efforts to help people reclaim the money.
“This money belongs to the people, and we must be ready to pay it back when those claims come in,” Noem said.
Sunsetting sales tax reduction
During the 2023 legislative session, when the state was flush with federal pandemic relief and stimulus funding, lawmakers temporarily reduced the state sales tax rate from 4.5% to 4.2%, with a sunset in 2027.
Noem appeared to call for that reduction to be made permanent.
“Our people deserve better than a temporary sales tax holiday,” she said.
Other spending
Among other highlights, the governor noted that the state faces $86 million in mandatory ongoing spending increases, mostly due to the joint federal-state Medicaid program that provides health care for people with low incomes.
She also proposed $1.2 million in additional ongoing funding for regional mental health facilities, and a $1.5 million investment in Agency with Choice, a Department of Human Services program that families use to choose companion care, respite care, personal care or supported employment services for people with developmental disabilities.
To continue work on replacing the Richmond Dam at the state Richmond Lake Recreation Area near Aberdeen, the governor proposed $13 million.
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