1. Candidate Budget Basics
Welcome to Candidate Budget Basics! Lets talk budget process.
Let 's talk budget process!

2. SD Budget & Policy Institute
Mission - to promote responsible and equitable fiscal policy through research and education
Nonpartisan, not-for-profit 501(c)3 [not a state government function]
Funding from donations from people and businesses in South Dakota and periodic grants from organizations such as the Northwest Area Foundation and Center for Budget & Policy Priorities.
Hello My name in Joy Smolnisky, and I’m providing you this information from the SD Budget & Policy Institute where I serve as executive director.
Our Mission - to promote responsible and equitable fiscal policy through research and education
Nonpartisan, not-for-profit 501(c)3 [not a state government function]
We received funding by the Northwest Area Foundation to begin our work and it has been sustained by additional grants and donations from people and businesses in South Dakota who support our mission.
Our work is directed by a volunteer board of directors. We include directors who bring life experience as Republicans, Democrats and Independents to ensure a balanced perspective. You will find the current list of directors listed in your packet. Most have experience as past legislators, state officials or have valuable business or academic expertise.
OK – enough about us – lets talk budget!
Board of Directors
Robert Burns, President
Deb Fisher-Clemens
Kay Jorgenson
Dave Volk, Vice President
Eileen Briggs
Paul Dennert
Gene Lebrun, Sec/Treasurer
Rob Oliver
Jim Fry
Mary Bibby

3. Are you fluent in budget basics?
You might say the state budget is the ultimate policy document…
One of the most important bills passed each year by the South Dakota legislature may be one of the least understood. The state budget, which is usually passed in the final hours of each legislative session, can have an impact on every citizen.
The budget determines how we, as a state, collect and spend money for the common good. You might say the budget is the ultimate policy document.

4. How SD BPI talks about fiscal policy
Theoretically our budget policy should be a reflection of our shared values – our consensus on what services we believe we need as a state and are willing to pay for together.
Our citizens accomplish this through you – their elected legislator.
To understand state budget choices, citizens and local leaders need objective understandable information explaining the options under consideration.
They also need a simple explanation of the budget process, with guidance about how to get involved.
These are the questions the budget process answers. All are important policy questions that affect the lives of South Dakotans. It is your community members, who really feel the impact of budget choices once they are implemented.
The challenge is for citizens to share their insight and perspective with you as their legislators early enough in the budget process so you can incorporate their values into your legislative decisions.
So today we will go over the basic components of the budget and make sure we all understand how the budget process works.

5. …. a guide to understanding
To help the process SD Budget & Policy Project developed the SD Budget Primer. The Primer is a guide to understanding
the components of the state budget,
how it is created, and
Some of the priorities and choices it reflects.
You all have copies of the Primer and can go to sdbpi.org to download additional free copies if you wish.
That is what we will try to provide today:
An overview of sources of revenue and types of expenditures in our state budget .
A drill down on our highest expense areas – public education and Medicaid
A review of the budget development and approval process
A look at fiscal tools that help you as legislators and the public understand the decisions you are faced with.
Some discussion and background on key decisions looming before SD people and their legislators
a. Internet taxes
b. Medicaid Expansion at the state level
5. Other areas of interest?
the components of the state budget,
how it is created, and
the priorities and choices it reflects.
download free from sdbpi.org

6. Revenue vs per capita personal income
South Dakota - a low tax state not a low income state
Revenue vs per capita personal income
We’ll start with revenues Where does the money come from?
Many citizens and legislators in South Dakota tend to pride themselves on being what they consider a “low tax state”.
It is true, South Dakota has low state taxes. Per capita state taxes are consistently among the lowest in the nation – ranking either 49th or 50th for the past 10 years. South Dakotan’s pay about 1/3 less state taxes than the national average..
We also pay the least state taxes as a percent of available personal income. Our per capita income in South Dakota was $45,002 in 2015, 25th in the nation at 94% of the national average per capita income. But South Dakotans only pay 8% of their income in state & local taxes and the national average is 11% of income in state & local taxes. What this tells us is that we are not a particularly low income state, we are a low tax state.
Think about it this way – of every $100 we South Dakotans have in our pockets we only choose to spend $8 on state and local government – while the average throughout the country that people pay is $11 out of every $100 in their pocket.
Even though we only pay 2/3rds the taxes of the national average – many of us expect to have similar government services as other states – we want good roads, functional schools, adequate health care, emergency services, proficient court systems and reliable infrastructure… that’s where the tension between adequate revenue and adequate services begins

7. Main sources of South Dakota State and Local Revenue Sources (2015 in Million)
Sales, Use
& Excise
Tax
$1,344
Property Tax
$1,190
Motor
Fuel
Taxes
$170
Motor Vehicle fees
$142
Video Lottery
$112
Special Taxes
$95
Consumption taxes (Sales, Use and Excise taxes) provide the greatest source of revenue for State and local Governments.
Property taxes go to local governments
Special taxes (lottery, tobacco, alcohol, etc) to state government
Motor Fuel taxes primarily fund the state highway trust fund.
Motor vehicle fees primarily fund local government roads and bridges, etc.

8. Dependency on consumption taxes is growing
South Dakotas Consumptions taxes have been growing at an average of 5% of year for the past decade.
Our other sources of income don’t grow this quickly, and we have curtailed some of them (example – scaled back bank franchise taxes).
Therefore South Dakota’s dependency on consumption taxes is growing. According to the Department of Revenue data the percentage of revenue from consumptions taxes has grown from 65% to 76% during the past 20 years.

9. South Dakota Tax incidence analysis
Why do shifts in the type of taxes we get revenues from make a difference?
While state & local taxes are low in South Dakota on average, they aren’t so low for state residents with meager incomes. A January 2015 analysis by the Institute on Taxation & Economic Policy identified South Dakota as the fourth most regressive tax system in the nation. A regressive tax system is one that requires low- and middle-income families pay a higher share of their income in taxes than upper-income families.
The poorest quintile (20%) of non-elderly South Dakota residents pays 11.3% of their income in state taxes. The 60% of residents with middle-incomes pay 7.6% of their income in state taxes. Those in the top 20% pay between 5.2%, down to 2.8% for the top 1% of income earners.
Why is this so? Primarily because South Dakotas’ tax system differs from most other states. We don’t tax personal or corporate income or inheritances. These taxes tend to be higher for wealth families.
We do tax food and clothing. Since low-income people spend a much larger share of their income on basic necessities they pay a greater share of their income for sales tax.

10. Taxes as share of income
Why is it important to track who is paying taxes in the state?
The impact of a tax change differs depending on the financial circumstances or spending patterns of each household – this is highly influenced by total household income.
Tracking the distribution of taxes among households by income level allows evaluating tax-reform strategies from the perspective of “who will pay more” or “who will pay less” if this tax change is enacted.
As an example, I’ve included in your packet some tax incidence analysis of the most recent tax increase passed to fund teacher salaries. Lets look at that now.
Source:

11. During news coverage following the State of the State address last session, two options for raising money for teacher salaries were discussed.
Option 1: Increase Sales tax rates by .5 from 4 to 4.5%
Option 2: Remove Food from Sales Tax Base: Hike rate from 4 to 5% on all other taxable items.
Analysis of how much this would raise taxes and which households would pay more or less under the two plans helps citizens and lawmakers decide which idea they like better.

12. Once a decision was made to go with Option 1, additional analysis allows individuals to determine how the proposed legislation would impact their family budget. SD BPI published this information to help explain the impact of the proposal.

13. SD’s second largest source of state/local revenue is property tax which primarily fund county, township, municipal and school districts units of government.
Analysis of the relative share of property taxes paid by agriculture, owner-occupied home owners, and commercial property owners shows very little change in the distribution over the past 10 years.
31%
39%
26%

14. (rates increased by 6¢ April 1, 2015)
Total Collection of
Motor Fuel Tax
(rates increased by 6¢ April 1, 2015)
Another revenue source that was recent increased is fuel taxes.
Beginning April 2015 per gallon state taxes increased by 6 cents.
These funds are used to build and maintain roads and bridges.

15. Right to collect “use taxes”
The fundamental purpose of taxation is to raise the money needed to fund public services
TAXES
NEWS FLASH
Senate Bill 106
Right to collect “use taxes”
The fundamental purpose of taxation is to raise the money needed to fund public services
News Flash:
QUILL vs ND – said, in 1992, collecting it was too onerous for catalogue companies to figure out sales tax rates for all jurisdictions so they didn’t have to collect state sales taxes on items shipped to other states unless they had “nextus” there (meaning a physical presence in the state)
During Legislative Session 2016 SB 106 was passed, declaring SD will begin collecting those USE taxes regardless of the Supreme Court 1992 decision and is asking for the Court to revisit the issue given the improved technology to access tax rates and pay them remotely.
It is currently in Court – stay tuned to see if the Supreme court decides to take on this case. Of interest – 2016 House Bill 1182 (the ½ cent sales tax increase to pay for increasing teacher salaries) was amended to include a clause that    Section 18. That the code be amended by adding a NEW SECTION that removes the ½ cent sales tax if internet taxes increase revenue:
    ”If the state is able to enforce the obligation to collect and remit sales tax on remote sellers who deliver tangible personal property, products transferred electronically, or services directly to the citizens of South Dakota, the additional net revenue from such obligation shall be used to reduce the rate of certain taxes. The rate of tax …shall be reduced by one-tenth percent on July first following the calendar year for which each additional twenty million dollar increment of net revenue is collected and remitted by such remote sellers. However, the rate of tax …..may not be reduced below four percent pursuant to the provisions of this section.".

16. Expenditures Where does the money go?
OK – that is where the money comes from. Now – where does it go?

17. SPENDING: 1. General Funds 2. Federal Funds 3. Other Funds
General Fund expenditures only represent a fraction of the money the Legislature approves spending in its budget.
Notice the variation in percentage of our budget covered by the federal government over the economic cycle. You see during the great recession the federal contribution increased as a % of the budget, offsetting decreased tax revenues in the state.

18. General fund total expenditures $1,433 million
K-12 Education
$414 million
Medicaid
$374 Million
Only one third of the budget comes from the general fund spending, which receives the majority of attention during the legislative session. Here you see how it is distributed, with the bulk funding Medicaid (within Health & Human and Social Services) and k-12 Education (within schools & local Governments).
Because these two categories – Medicaid and k-12 education require such a significant portion of the general fund (over half), we will look at them in more detail.

19. Children with disabilities or who live in low income households.
Adults with Disabilities, who are aged and live in poverty, or very poor parents or pregnant moms
Medicaid is a partnership between the Federal Government and State Government to provide health insurance to certain categories of low income individuals. In FY14, the Federal Government paid 60% of the overall cost and South Dakota state government paid 40% of the overall cost
In South Dakota the groups covered are:
Children with disabilities or who live in low income households.
Adults with disabilities who are aged and low income.
Low income pregnant women (only for services related to pregnancy).
Parents of dependent children who live in deep poverty.
Children with disabilities or who live in low income households.

20. 2016 Federal Poverty Level (FPL)
Family Size
50%
100%
133%
138%
200%
250%
400% 1
$5,885
$11,770
$15,654
$16,242
$23,540
$29,425
$47,080 2
$7,965
$15,930
$21,186
$21,983
$31,860
$39,825
$63,720 3
$10,045
$20,090
$26,719
$27,724
$40,180
$50,225
$80,360 4
$12,125
$24,250
$32,252
$33,465
$48,500
60,625
$97,000 5
$14,205
$28,410
$37,785
$39,205
$56,820
$71,025
$113,640 6
$16,285
$32,570
$43,318
$44,946
$65,140
$81,425
$130,280 7
$18,365
$36,730
$48,850
$50,687
$73,460
$91,825
$146,920 8
$20,445
$40,890
$54,383
$56,428
$81,780
$102,225
$160,360
Eligibility for Medicaid (and many other federal programs) is based on household income.
The measurement used is called the Federal Poverty Level (FPL).
The FPL (the column in red) is incrementally increased by family size.
Program eligibility is usually stated as a % of the federal poverty level.

21. For example:
Children in South Dakota are eligible for Medicaid if they live in households with incomes below 200% of the federal poverty level
Pregnant women are eligible if they live in households below 133% of the Federal Poverty Level
Parents with dependent children in the home are eligible if they live in households below 52% of the Federal Poverty Level
Childless adults are non eligible for Medicaid coverage regardless of their income unless they are elderly or disabled.
*Based on income as a percentage of the Federal Poverty Level by household size

22. Medicaid - health insurance for low income South Dakotans
The cost of the Medicaid program is split between state and federal government. This formula will help you understand how the state’s share of costs are derived.
Click: The first factor is the number of people eligible– South Dakotans are categorically eligible, based on factors such as age, health status and poverty level. The SD Department of Social Services (DSS)estimates the number of eligibles anticipated for the upcoming year based on trending data which is published monthly at
Click: Next DSS estimates the utilization patterns for those eligibles. Two-thirds of Medicaid eligibles are children – who are relatively inexpensive to cover. Children and adults with disabilities are more expensive.
The majority of those eligible are children, but their cost per child not as high as other categories of eligibles.
Technical note: Cost for aged and some disabled does not include Medicare Part A and Part B Buy In Program (AKA dual eligible). On average each month about 12,000 people are dually eligible and enrolled in both Medicaid and Medicare 73 million dollars – (of which state pays about 41 million)
6,073 total per person
3,500 state share of total per person

23. Will there be an increase or decrease in provider reimbursements in the upcoming fiscal year?
Reimbursements for providers is one area where the state legislature can control the rate of spending increase in Medicaid. It can do little to control # of eligibles, only some program efficiency modifications to control utilization, and – as you will see on the next slide – nothing to control the federal/state ratio of costs.
Each year the legislature decides if they will raise reimbursement for providers – will it stay flat, match general inflation, or match medical inflation? Will it be equally adjusted for all health care providers or will some providers, who have larger Medicaid case loads, get “higher” increases? These are the questions the legislatures must answer as well as determining the total amount of new money going into the program.
Last year the legislature put additional money into Medicaid to improve reimbursement for providers who were getting less than 90% of costs for services. A summer study is looking further into corrective action on this issue.

24. FMAP fluctuates based on state per capita income (wealthier states get less federal assistance!)
The federal share of SD Medicaid costs is determined by fluctuations in the SD’s per capita income compared to the national Per Capita Income.
As you can see – over the past 20 years South Dakota’s per capita income has been steadily rising relative to the rest of the nation. It now averages around 100% of the national average.
The federal share is based on the assumption that states above the national average will only get 50% of their Medicaid costs covered by federal payments. Poorer states get a higher ratio.
Each time SD “drops” or increases by 1% point the SD Dep.t of Social Services estimates it amounts to cost-shifting about $7 million dollars between the federal and state share.
Fortunately, 50% federal share is the floor and SD is approaching that floor at about 52% as of FY15.
So the state funding need is (# of enrollees)*(utilization of services)*(Reimbursement rates)*(State share of costs)
SD BPI Reference documents: Federal Percentages and Federal Medical Assistance Percentages, FY 1961-FY2011
SA1-3 Per capital personal income dollars by state
50% Floor

25. 400% FPL 2014 federal insurance exchange subsidies (sliding scale)
Let’s take a look at how the Affordable Care Act (ACA) effects the ability of South Dakotan households to purchase insurance. We can start by reviewing those South Dakota households (by income level) who are currently Medicaid Eligible. Now lets look at the effect of the ACA.
Since 2014 Federal tax credits have been available to help households with incomes between 100% and 400% of the Federal Poverty Level who do not have affordable employer based insurance purchase health insurance coverage through the Federal Exchange.
The subsidies keep the cost of insurance affordable for moderate income families – between 2 and 9.5% of household income. So the individuals in Blue are Medicaid eligible. The individuals in yellow can purchase affordable insurance on the exchange. About 21,400 South Dakotans signed up through the market place in % qualified for an average tax credit of $228 per month to help make the cost of insurance affordable.
100% FPL

26. 400% FPL 2014 federal insurance exchange subsidies (sliding scale)
South Dakotans
without access
to affordable
health insurance
That leaves 26,000 non-elderly low income parents and childless adults without access to affordable health insurance (either through Medicaid or the Federal Exchanges) while their higher income neighbors have sliding scale supports.
Does it seem illogical that the lowest income folks would have no options for getting health insurance while higher income folks get coverage?
The reason is because of a supreme court decision that changed the original Affordable Care Act.
Originally – the ACA required all states to expand Medicaid (so the folks below 100% of poverty would not be left out). But the Supreme Court ruled that the states must have the right to either expand or not expand Medicaid.
South Dakota is one of 19 states that have not expanded Medicaid.
100% FPL
26,000 South Dakotans

27. SCENARIO #2 (without Medicaid expansion) Bob & Cathy. Nick & Deb Olsen
SCENARIO #2 (without Medicaid expansion) Bob & Cathy Nick & Deb Olsen Hansen
Olson family earnings Hansen family earnings
$11.50/hour $11.75/hour
(99% FPL) (101.% FPL)
Can these parents get affordable health insurance?
NO annual premium cost is $7, YES annual premium cost is $496
Bob’s income is TOO LOW to Nick’s HIGHER income makes both
qualify the parents for federal subsidies parents eligible for federal subsidies
(below 100% FPL) and too high Their insurance premium cost
to qualify the parents for SD Medicaid will be $496 a year.
Lets look at a real life example of how this works in South Dakota.
The Olson and Hansen families each have two children, ages 6 months and 3 years old. Mom & Dad are 30 years old. Each dad works full time for an employer who does not provide health insurance while mom is home taking care of the children. The children are insured through Medicaid.
Olson family earnings Hansen family earnings
$11.50/hour $11.75/hour
(99% FPL) (101% FPL)
Can these parents get affordable health insurance?
NO annual premium cost $7,296 YES annual premium cost $496
Bob’s income is TOO LOW to Nick’s HIGHER income makes both
qualify the parents for federal subsidies parents eligible for federal subsidies
(below 100% FPL) and too high Their insurance premium cost
to qualify the parents for SD Medicaid. will be less than $500* a year.
* Calculation data source cites premium cost for households below 133% FPL is 2.03% of MAGI.

28. exchange subsidies
138% FPL
SD CHOICES:
Governor Daugaard asked if South Dakota could expand Medicaid to just 100% of the federal poverty level instead of the 138% specified in the Affordable Care Act. The answer to South Dakota, and all the other states that asked this question is “no” the statute specifies 138%.
Don’t expand Medicaid – leaving 26,000 non-elderly South Dakotans with incomes below the poverty level with no affordable way to gain health coverage.
Expand Medicaid to 138%, providing coverage to approximately 50,000 non-elderly South Dakota adults.
NOTE: Any state that expands Medicaid can withdraw at any future point for any reason. States can choose to expand, withdraw, then expand again later. There is no limit on moving in or out of expansion.
Many states have built sunset language into their expansion legislation so that if the Federal Government does not continue to pay 90% of the cost of care under expansion, the state automatically stops participating in expansion.
100% FPL

29. These are the latest cost estimates to expand Medicaid in South Dakota.
This 144:1 match gradually decreases by 2020 to a 10:1 match rate. If the federal government changes the match rate in the future, South Dakota has an option to withdraw from the program. In fact, the federal government has clarified that states who chose to participate in Medicaid expansion can withdraw at any time without a specific reason.

30. IHS Indian Health Services - IHS Non-IHS medical providers
100% Federal
IHS
50% Federal
Indian Health Services - IHS
SLIDE 4: How might this work?
Let’s look at Current Medicaid Spending by Race in SD. 27% of spending in South Dakota is for American Indians covered by Medicaid.
The remainder is for all other races in South Dakota (primarily white).
Of the Medicaid dollars spent for American Indian care, $71 million [the green arrow] is 100% federal dollars used to reimburse for care delivered by Indian Health Services facilities and or and tribal health programs.
Another $133 million [the gold arrow] is used to reimburse for services NOT delivered or paid for by Indian Health Services. Those services are not reimbursed at the 100% federal rate – they are reimbursed at the same rates as services consumed by non-American-Indian South Dakotans on Medicaid—52% Federal/48%State.
Source:
50% State
Non-IHS medical providers

31. IHS Expand IHS capacity to meet needs.
100% Federal
IHS
50% Federal
SLIDE 5: GOAL Free up $33 million
Governor Daugaard has asked for flexibility from the federal government to be able to use 100% Federal funding to provide services to Native Americans in our state who are otherwise eligible for services through IHS, regardless of who provides the health care services.
For demonstration purposes, the concept suggests moving American Indian Spending into 100% Federal Match Category – freeing up enough state dollars to expand Medicaid. At the current match rate which is about 50% Federal to 50% state this would require shifting $114 million in spending to garner $57 million in savings.
Possible ways to accomplish this might be:
Expand Indian Health Services or Tribal Health Services Capacity to meet needs
Change requirements so non-Indian Health Service Medicaid Providers could, through certification or contract, become eligible to receive 100% federal funding for the services they are currently providing South Dakotans who are Medicaid eligible American Indian.
50% State
If non-IHS medical providers are certified or contracted to be IHS providers, services they provide would be 100% federally funded.

32. K-12 Education Funding Concepts to understand:
School Funding Formula
Per Student Allocation (PSA)
The current formula for funding general k-12 education, which took effect in1997, equalized operating funding for k-12 education across the state. An equal per student allocation comes from a mix of local property taxes and state aid to education.

33. How SD funds k-12 education
Source of funds to support SD k-12 education
Federal
State
Local
Funding for k-12 education comes from multiple sources. Over half is provided by local sources – primarily property taxes. A little less than a third if provided by state sources and 16% comes from the federal government.

34. School Funding Formula page 19 of Budget Primer
About half the funding-per-SD-student is subject to a State formula, which took effect in1997, equalized operating funding for k-12 education across the state. An equal per student allocation comes from a mix of local property taxes and state aid to education. This means that districts should have an equal amount available per student in their district, regardless of how much they can raise in local property taxes
Lets think through how this works. One way to understand the funding formula it is to think about the state of South Dakota as one big school district. State-wide, the funding needed is the per student allocation (about $4,800) times the number of students in the state (about 130,000). We also aid in certain “additions” to the per-student allocation (small districts get extra money to make up for their lack of economy of scale, as do sparse school districts). That is our total money necessary to “fund the formula”.
The legislature then sets a state-wide property tax mill levy for each class of property that will generate enough money statewide to pay about 47% of the cost of the funding formula. The rest (about 53%) is provided as state aid.
Now the state isn’t actually one big district – it is 151 separate districts. Each of those districts determines how much it needs locally (# of students times the per student allocation). The districts then apply the state-wide mil levy to the property in their district and see how much of their local need that will raise. The state gives each district “State Aid” to make up the difference between what the local property tax raises and the district’s local need.
“The per-student allocation is not a spending cap on how much money a school can spend per-student for their education. The per-student allocation is the standard amount that can be raised through local property taxes and state aid.” Districts can choose to “opt out” of the of the cap on property taxes raise more money. 44% (or 66 districts) have opted out.

35. K-12 Funding Formula 1997 per-student allocation (PSA) $3,350
equalize dollars per student
annual increase—lesser of 3% or rate of inflation
44% of districts have opted-out tax limit
Under the funding formula, the per-student allocation increases each year by an index factor equal to inflation
or 3%, whichever is less. When the funding formula first started – the per student allocation was $3,350. for FY 15 it is $4,781.
The legislature has the option to increase funding at a higher rate, and in some years has done so. The Legislature chose NOT to increase funding by the index factor for FY11 and for FY12 cut school funding.
This graphic shows actual PSA increases vs to what it would have been had it been increased by CPI each year.

36. This breakdown of US census data shows the funding sources by student for each of our districts.
You can see the local dollars in blue underpin most funding, with state funding in green helping out in lowest income districts.
Most districts also get some federal dollars for title one students (students in poverty), school nutrition, and special educations.
But some districts get disproportionate shares of federal “other dollars” per student because of federal lands that are part of their district.
This leads to great disparity between the lowest funded and highest funded districts that the funding formula itself cannot well address.
Data Source: US Census Bureau
Analysis and Graphic by SD Budget & Policy Institute
*Elk Mountain excluded to minimize data skewing

37. SD Funding formula stalls k-12 investment growth rate
“SD Funding formula stalls k-12 investment growth rate.”
I’d like to walk you through the data to clarify the basis for that statement.
Nationally, the average spending per K-12 student has about doubled since 1997 (about the time we began using our current funding formula).
Wow- you think – no wonder South Dakota couldn’t keep up with other states!
Analysis and Graphic by SD BPI
Data Sources: US Census Bureau; SD Blue Book 2011; SD Budget Summaries 2005 to 2015; SD Department of Education

38. SD Funding formula stalls k-12 investment growth rate
Well – interestingly, SD total general fund expenditures have MORE THAN DOUBLED during that time period – up 119%.
If we had increased k-12 funding to match the national market place – k-12 would not have taken any greater percentage of the expenditures than it had at the beginning of the formula.
And other programs still could have grown at the same revenue growth rate.
Analysis and Graphic by SD BPI
Data Sources: US Census Bureau; SD Blue Book 2011; SD Budget Summaries 2005 to 2015; SD Department of Education

39. SD Funding formula stalls k-12 investment growth rate
But, SD’s funding formula didn’t prioritize keeping up with the national education market place, only tracking the urban rate of inflation (or 3%, whichever was less). Our SD k-12 Per Student Allocation is only up 46%.
Analysis and Graphic by SD BPI
Data Sources: US Census Bureau; SD Blue Book 2011; SD Budget Summaries 2005 to 2015; SD Department of Education

40. K-12 spending as % of SD personal income down 25% since funding formula
Nationally, for the past 20 years, states have been spending about 5% of the total personal income in their state for k-12 education. (that is the green line on the graph) You can see that South Dakota invested at the same rate as the rest of nation – until the funding formula was implemented.
CLICK: Then, you see a “bend in the trend” with South Dakota progressively spending less and less of the personal income available in the state on k-12 education, while nationally the support for k-12 education stayed between 4.5 and slightly above 5%.
From a long term perspective – what does this tell us about South Dakota?
South Dakota kids who went to school before the funding formula was implemented received a higher percentage of the state resources committed to their education than do South Dakota kids today. And the % of state resources they do get, is dropping faster than it is in regional states.

41. Just how far below market were South Dakota teacher salaries?
SOLUTION
HB 1182 – raises state sales tax by ½ cent.
SB 131 – Changes education funding formula
Formula based on target average teacher salary
$40 million of ½ cent sales tax increase will offset increases in local property taxes.
Caps Reserve Funds
Abolishes pension levy (0.3 mil)
Capital Outlay – limits growth and allows flexibility
Equalizes other revenues
Reviews district use of dollars so legislators can verify teacher salaries are increasing.
State-wide discussions have been focused on teacher salaries. Analysis shows that after calculating the impact of state and local taxes on regional average teacher salaries, then adjusting for price parity, teachers in South Dakota can move to one of the regional states and have significantly higher after-tax purchasing power than they do in South Dakota.
To address this issue, the 2016 legislature passed SB 131 and HB This solution raises sales taxes by ½ cent, allocates 64% of the funds to increase teacher salaries, 33% for property tax relief, and 3% for tech education salaries. These bills also make some changes in non-formula revenues to improve equity among districts.

42. Balancing the Budget Increase revenue? decrease expenditures?
Wow – that was a lot about taxes and spending.
Now lets shift gears and look at the budget process. You have a fact sheet on the Budget Process in your packet highlighting some of these points.
The state budget is more complicated than a household budget, but there are basic similarities. Each year elected leaders must identify the most important state needs and determine how much money is necessary to cover those needs.
The SD constitution requires that the budget be balanced each year expenses and revenues must be equal.
The constitution says: “The Legislature shall provide for an annual tax, sufficient to defray the estimated ordinary expenses of the state for each year.
And whenever it shall appear that such ordinary expenses shall exceed the income of the state for such year, the Legislature shall provide for levying a tax for the ensuing year, sufficient, with other sources of income, to pay the deficiency of the preceding year, together with the estimated expenses of such ensuing year.”
In 2012 Amendment P was passed – the attorney general’s description said: While the constitution currently restricts the State from incurring debt, it does not expressly require the State to have a balanced budget. Amendment P requires the Governor to propose a balanced budget. In addition, Amendment P prohibits legislative appropriations from exceeding anticipated revenues and existing available funds. The amendment is not intended to affect other constitutional provisions
So….when spending needs are greater than available revenue, tough decisions must be made.
Will the state raise additional income by increasing taxes or fees?
If so, how will the increase be structured? Who will pay?
Will the state cut services for people?
If so, which services will be sacrificed – road maintenance, public education, public safety?
Who will be most affected – children, elderly, residents with disabilities, business, agriculture, the poor, the wealthy?
Or will the state select a balanced approach, including both service cuts and revenue increases that are spread broadly across many groups?
decrease expenditures?
expenses = revenues
combination of both?

43. A budget is born Page 6, SD Budget Primer
The budget process begins the summer before each session when departments and agencies formulate their budget requests and submit them to the Governor. The governor introduces his recommended budget in early December.
The ongoing operational expenses of government are included in the General Appropriations Bill which requires a simple majority to pass. Special Appropriations Bills and Revenue Bills are submitted separately and require a 2/3rd majority vote in each house to pass.
The General Appropriations Bill is heard by a joint committee of the House and Senate with hearings beginning the first day of session and no amendments allowed until a time designated by the Chair – often the last week or even last day or two of session.
Revenue and Special Appropriations Bills make their way through the process (unless killed by committee or chamber) during the course of the session so all are complete before the final decisions on the General Appropriations bill must be made.
Page 6, SD Budget Primer

44. A budget is born Page 6, SD Budget Primer
If the legislature passes a bill, it can be signed or vetoed by the Governor. Line items vetos are allowed on the general appropriations bill. It requires a 2/3rd majority from each Chamber to override a gubernatorial Veto.
Page 6, SD Budget Primer

45. Historic challenges in our budget process
part-time legislature
short Legislative session
General bill amendments introduced last day or two of session
Revenue estimate delayed until March
What are unique challenges in our process?
Part Time legislature/very short legislative session: South Dakota has a part-time citizen Legislature and a short legislative session and term limits
This adds up to a situation where a lot of work has to be accomplished very quickly by part time legislators. It is a lot to expect and legislators benefit from public input to help them understand how legislation will impact their constituents.
The Joint Appropriations Committee must reconcile the governor’s budget with the revenue and/or special appropriations bills passed during the session.
Historically, final revenue setting was not set until March and budget amendments were often not introduced until the last days of session, leaving citizens and legislators alike little time to research, discuss and provide feedback on proposed changes. This has been one of the greatest transparency challenges in our state… and it is more due to the process than the participants…

46. Recent improvement in South Dakota’s BUDGET PROCESS
During the 2016 Legislative Sessions:
Joint Appropriations begins adjusting their budget approval process.
Revenue estimate was set in February instead of March
But improvements are underway in the budget process. Last year during the 2016 Legislative Session
The Joint Appropriation Committee adjusted their budget approval process to begin decision making several weeks earlier in the session.
Revenue estimates were wet in February based on January data instead of waiting until March.

47. Recent improvement in SD fiscal tools
During the 2015 Legislative Session
Tax Expenditure report included in Budget Summary
2015 Governor requires annual Long Term Financial Plan
Improvements are also showing up in the availability and quality of fiscal tools that support budgeting decision.
In recent years South Dakota has
Added tax expenditure report to the Budget Summary released by the Governor at the time of his budget address. What is a tax expenditure? (See SDBPI publication:
Published a Long Term Financial Plan (on the BFM website) What is a current services budget / revenue estimate? See SDBPI publication:

48. BFM Website State Budget
This is the home page for the Bureau of Finance and Management.
From this page you can lick the left hand menu to go to the state budget or to the long term financial plan.
Lets look at the state budget link first.

49. The State Budget Page lets you look at all the materials that were released with the Governor’s budget recommendation back to 2005.
You can also see the enacted budgets, Revenue Forecasts, Economic Reports and Current Session Documents.
Let’s look at the most recent Governors recommended budget (FY2017)

50. BFM Website Governor’s budget and supporting documents
Here we see we can review the Entire Budget Book or the Budget Summary Book.
There are also slides used in the Governors budget address and numerous other links.
We’ll stop and take a moment to look at a few of these documents in hard copy.
Newly elected legislators might find it helpful to review the previous years budget presentation before the Governor presents his budget in December of It will help them understand the type of information to expect and provide a sense of history for the information.
SD Public Broadcasting also provides links to listen to past video of government procedings that you can review.

51. Current services budget
Remember I also said we could Link to the state’s Long Term Financial Plan from the BFM website?
The value of this plan is it provides a revenue projection and a current services budget.
A current services budget is an estimate of the expenditures required to maintain the current level of state services and benefits in upcoming years.
A state current services budget takes into account inflation, caseload and population changes and previously-enacted program expansions and eliminations. It answers the question: what would it actually cost, moving forward, to continue providing current services, with no policy changes?
Most current services budgets are broken down by type of government expenditure (health care, education, public safety, etc.) because each may have a unique inflation rate and utilization change.
Without a current services budget it is difficult to determine if a proposed spending level will result in an increase or a decrease in public services, because inflation and population growth are not always clear.
A good current services budget will also present information in a way that makes it easy to identify and evaluate the budgetary impact of any proposed changes in policy.
Twenty-one states prepare some form of current services baseline looking forward 3 to 5 years. The Budget & Policy Institute has been encouraging South Dakota to implement such a tool since 2010 and is delighted it is now available.

52. Are you facing a long term structural deficit or a structural surplus?
Project Revenues
Are you facing a long term structural deficit or a structural surplus?
The Current services Budget shows its real value when you compare your revenue review with your current services budget.
This comparison shows whether the state can expect a growing or shrinking structural deficit, if it maintains its current taxing and spending policies.
Will the anticipated growth in the current mix of revenues be adequate to offset inflationary and population driven cost increases in current government services in future years? If they aren’t – you either have to change your revenue mix or decrease you services…. Or both.
It’s easy to forget that even though we aren’t expanding services, we may be growing into a structural deficit – if our revenues aren’t growing as fast as inflation and population changes are increasing our expenses.

53. Legislative Research Council (LRC) Fiscal tools that inform SD budget decisions
Fiscal notes on legislation
LRC briefings on agency budget requests and other documentation available at
Budget Basics: The Legislative Research Council also produces fiscal tools that inform SD budget decisions
Fiscal Notes: a fiscal note explains the cost of implementing a particular piece of legislation. A Legislators can ask for a fiscal notes if it is done before the second reading and there is support from 1/5th of the body. The presiding officer, committee chair, or majority vote of a standing committee can also ask for a fiscal note.
The Legislative Research Council (LRC) compiles a briefing of each agency’s budget request. This, along with nearly every document submitted during the agency hearing, is posted on the LRC website.

54. LRC Website legis.sd.gov URL: sdlegislature.gov
The LRC website provides access to an incredible amount of current and historic information.
Under Legislative Sessions you can choose to look at information from the current year or past years.
Let’s click “Budget from the blue menu on top and see what is available.
URL: sdlegislature.gov

55. LRC Website Hearing Schedule and Materials
You can choose from various years – lets look at the most recent – clicking 2016

56. LRC Website Materials from Dept. of Education hearing
Here you see how the information compiled by your legislative staff – the Legislative Research Council, is made public.
The Budget documents are laid out using a ONE NOTE format with agencies or topics along the top and subcontents of each topic along the left hand margin.
As An example, I have selected Education from the cluster of options at the top. This will bring up a unique menu of education files along the left hand side (blue panel). I’ve clicked “Presentation DOE” and the power point presentation they shared becomes available.
This information is populated throughout the legislative session as soon as it is available and is a way for you, and your constituents, to drill down into the financial details on the government agencies where you have interest.

57. Thank-you for your willingness to serve your fellow citizens as a state legislator
So it all starts with becoming informed, listening carefully and then adding your voice to the discussion.
Citizen involvement helps assure that South Dakota’s budget priorities reflect statewide values and meet the needs in the state.
Thank you, on behalf of your constituents for your willingness to serve as legislators and your efforts to educate yourself to best address these important issues.