CHICAGO — South Dakota lawmakers have approved a $3.9 billion all-funds fiscal 2012 budget that fulfills Gov. Dennis Daugaard’s promise to eliminate the state’s structural deficit within one year without dipping into reserves or raising taxes.
Daugaard, a Republican, is expected to sign the spending plan into law by March 24, making the state the first to pass a fiscal 2012 budget.
The budget follows South Dakota’s tradition of passing conservative budgets with little debate during its brief 38-day session. The final plan relies on a 10% cut to nearly all state agency spending and slightly smaller cuts to education and Medicaid. It features almost no changes from the proposal Daugaard first unveiled four weeks ago.
“We fixed the structural deficit, so we are in a good position,” said Jim Terwilliger, economist at the South Dakota Bureau of Finance and Management.
“Instead of looking at cuts next year and the year after, if the economy recovers we’ll be in a good position to start looking at increases in areas like education and health care,” he said. “We think we’re in a good position for the long term.”
The budget comes a year after the usually durable state saw a decline in its sales tax revenue for the first time in decades. South Dakota relies heavily on sales tax revenue for its general fund spending.
Fiscal officials say the revenue has since rebounded and is expected to keep climbing through 2012.
While not as strong as its oil-booming neighbor, North Dakota, the double-A rated state has fared relatively well throughout the recession.
It enjoys one of the lowest unemployment rates in the nation — 4.6% as of last January, compared to the national rate of 9% — and strong industries anchored by health care, domestic tourism, and agriculture.
“They never were a boom state so they didn’t have a lot of ramp-up of property values or the gold rush of suburban residential housing, so there was nothing to crash,” said John Kenward, a Standard & Poor’s analyst who covers the state.
“Unlike other states, they haven’t really had to dig into their reserves,” he said, adding that a state’s management of its reserves is a key credit criterion.
The general fund budget totals $1.1 billion, down $41.5 million from last year. South Dakota had about $85.5 million in mandatory general fund increases and offset that with $127 million in cuts, Terwilliger said.
The budget enacts 10% cuts to most state agencies, a 6.6% cut to education, and 6% cuts to Medicaid providers.
The spending plan does not touch the state’s two reserve funds, which together total $107 million, more than 10% of total revenue. The last time lawmakers dipped into the reserves was fiscal 2008.
“This may be among the most difficult challenges that I will face as governor,” Daugaard said in a statement. “It would have been easier to raise taxes, to spend emergency funds, or to continue cuts year after year. Each of these methods would have encouraged the very problems that caused our structural deficit — slowing economic growth and overspending.”
Sales tax revenue makes up 63% of the fiscal 2012 budget. The state has no income tax. While sales taxes are considered a volatile revenue source, South Dakota’s levy is broad and stable because it has no exemptions.
“The sales tax can take its lumps during a recession, but income tax gets hit harder,” Kenward said. “Sales tax has relatively less risk than income tax in terms of planning for the future. South Dakota has a much more conservative culture and when things pick up with more farm income or sales income, they’re not in a hurry to come up with new ways to spend it.”
Recent revenue estimates, which are adopted by the Legislature, project that sales tax revenue will increase by 8% over 2010 and then grow another 3% by the end of 2012.
Sales tax receipts are boosted by the state’s surprisingly strong tourism trade, driven largely by visitors to Mount Rushmore and other state parks.
Agriculture is South Dakota’s other key industry, and the rise in recent corn prices — leading to the increase in the value of farmland — has translated into wealthier farmers who are more inclined to spend.
On the borrowing side, the budget authorizes only $25.2 million of bonds, which will be sold by the South Dakota Building Authority.
The state’s second-largest issuer, the authority expects to issue $13.2 million this year to finance various capital projects at universities and colleges, and another $12.1 million to finance part of a $34 million veteran’s home to be built in Hot Springs, according to SDBA executive director Don Templeton.
The state’s largest borrower, the South Dakota Housing Development Authority, is an independent agency that is not affected by the state budget.
South Dakota does not issue general obligation debt. Fitch Ratings rates the state’s lease-backed debt AA-minus. Standard & Poor’s assigns an issuer credit rating of AA. Moody’s Investors Service has no underlying rating on the state.
Another key credit strength is the state’s well-funded pension funds. The South Dakota Retirement System was 96% funded as of June 2010.
The state’s other-post employment benefits liability totaled $67.1 million as of July 1, 2008, according to Moody’s. The actuarially required contribution was $7.6 million — less than 1% of the state budget, analysts noted.