2025 Budget Address

 
By: Gov. Larry Rhoden

December 2, 2025  

You can find a copy of the slides that accompanied the Budget Address here.

Introduction

Good afternoon, Lieutenant Governor Venhuizen, Mr. Speaker, members of the House and Senate, and my fellow South Dakotans. 

Before I begin, please join me in greeting my wife, Sandy, who is here with us!

Welcome back to Pierre! It’s only been a couple of months since we last saw each other. And I know that legislators have been hard at work getting ready for the 2026 legislative session. My team and I have been doing the same. I have my budget ready to present for your consideration. 

I’ve been in this Capitol for over 20 years. I served in this chamber and the one across the way for a combined 16 years – and filled many of the same seats that you’re sitting in today. I also served for 6 years as Lieutenant Governor under Governor Noem. For all of those years, I engaged in the budget process – whether as a legislative leader or literally sitting at Kristi’s right hand as she put her budget together. But this is the first budget with my name on it, so I’d like to set the table with some core budget principles for how I approached this budget.  

First and foremost, this money is the people’s money – not ours. So we spend it wisely and return it to the people when we can. We balance our budget. Every year. For 136 years in a row – and this budget will make the 137th. And we don’t use any gimmicks to do it – we structurally balance our budget. To achieve that, we don’t spend money we don’t have. And we don’t spend one-time money on ongoing expenses. We use one-time dollars to pay debt, invest in projects that will have a long-term benefit, or endow an ongoing cost to save taxpayer money over the long haul. We don’t engage in wishful thinking – we conservatively project revenue and expenses. We maintain at least 10% of our budget in reserves to save for true emergencies. And we fully fund our pension and protect our AAA credit rating. 

These are principles we have followed in the past, and I am strongly committed to following them as well. If we do, we’ll be in good shape, no matter how tough it gets. My budget achieves that. 

Economy and Revenues 

But before we get into the specifics, we need to understand the economic situation. Because we depend so heavily on sales tax, the economy drives our revenues, and revenue drives our spending decisions. 

There’s been a lot of speculation on the economy. I won’t sugarcoat it: revenues have been pretty flat – only rising slightly. But we have to keep the context in mind. We’re coming off some of the strongest years in our state’s history – or in any state’s history. Our economic growth may have slowed, but we’re comparing that to the fastest growth that South Dakota has ever seen. We still have the lowest unemployment rate of any state in America by a wide margin. We still have labor force participation that is far ahead of the national average. We still have the 2nd most competitive tax system in the nation and the 2nd least regulations of any state. Our overall economic picture is in strong shape.

When Governor Noem declared South Dakota “Open for Business” during COVID, I stood by her side. And our approach paid dividends. South Dakota proved that we are the freest state in a nation that was founded on the principle of freedom. We became a beacon to the nation. Business took off, incomes soared, and we achieved the lowest unemployment rate in the history of the United States of America.  

In fact, incomes soared so much that for the first time, our per-capita income became far higher than the nation as a whole. Just look at the growth! For years, people have claimed that South Dakota is a low-income state – not anymore.

South Dakota doesn’t have a personal or corporate income tax. We rely pretty heavily on our broad-based sales tax. And historically, in both good times and bad, our sales tax growth has tracked closely to our income growth. So when incomes are growing quickly – like they were over the last few years – sales tax soars. When that growth slows, our sales tax flattens out.  

That doesn’t mean our sales tax is weak – far from it. In fact, our growth was so strong that we are still far above our historical trendline. So when folks try to tell you that slower sales tax growth means our economy is weak, don’t be fooled. We’re in great shape. We just can’t spend money we don’t have. 

Ag is king in South Dakota. When ag does well, the state does well. But when ag struggles, our growth tends to slow down. It’s a tough time to be a crop farmer – and not just in South Dakota. Corn, wheat, and soybean prices are off their high points from a couple years ago. On the other hand, beef prices are at record highs, but that alone has not been enough for ag to keep pace overall. Historically, there’s been a correlation between our sales tax collections and farm income. So let’s pray for rain and for President Trump to be successful in his trade negotiations.  

Our overall sales tax growth has been better to start this fiscal year compared to last year. In fact, last year was just the third time in the past 30 years our sales tax is down for the year. Thankfully, we’ve bounced back somewhat, and we had a very strong October. We’ll be getting November numbers any day now. Year-to-date, we’re about where we want to be. 4% to 5% growth is pretty typical for South Dakota, but it also means we don’t have a ton of headroom.  

There’s been a lot of chatter about our year-end surpluses. Last year, we had a $63 million surplus, and historically that would’ve been a great year. But it was actually our smallest surplus since the pandemic by a decent margin. And it was largely driven by one-time unclaimed property revenues. Without those unclaimed property dollars, we would’ve actually been a bit short on our revenue at the end of last fiscal year. I want to be clear about this point: last year, the Legislature passed – and I signed – the creation of an Unclaimed Property Trust Fund. That’s a fiscally conservative way to handle the unpredictability of those dollars. But it also means that extra Unclaimed Property revenue won’t create a surplus anymore. As a result, we’ll have smaller surpluses and one-time revenues available in the future. 

I’ve also heard our rainy day fund is too large, and yes, it’s grown. Let’s remember, we left money on the bottom line to set aside for the prison project, then we spent $79 million out of the rainy day fund to avoid costly interest and debt. That’s exactly the sort of long-term planning that those dollars should be used for when necessary. Historically, we maintain at least 10% of our overall budget for a worst-case scenario. Because of continued slower revenue growth and weakness in the farm sector, I’m advocating we increase that to 12.5% this year. When I met with legislative leadership in October to go over early budget planning, I heard strong support for at least 12% in reserves. My good friend Chairman Ernie Otten wanted to be even more conservative than that. Well, Ernie.... congratulations! All reserves above 12.5% will be available as one-time dollars in this budget – more to come on that. 

Historical Spending 

Before the pandemic, our general fund budget grew 4% a year on average. After the pandemic craziness, that growth jumped to 10% a year. But a big cause was rising inflation, which meant we had to allocate more to building projects and provide more for the Big Three. That growth has not been equal across the board. If you look back to the start of the Noem-Rhoden Administration, Medicaid has grown far faster than any other area of the budget. In fact, for the first time in state history, Medicaid is a bigger share of the general fund than K-12 education. Well, why is that?  

About half of it – $180 million – is increases in the rates that we pay to providers. Close to 30% of the total increase is in the state share of FMAP – more on that in a second. $45 million is from Medicaid Expansion, which is actually less than we originally thought. And the rest is Medicaid utilization. Everything on the left side of that pie chart is mandatory – we have zero control over it. Everything on the right was optional – this Legislature has made the decision to increase provider rates, including to groups like CSPs, above and beyond what is required.

Why am I telling you all this? Because I need you to understand, if you want to make dramatic cuts to the budget, like I’ve heard some legislators in this chamber say, then provider rates are the largest, most obvious cost-cutting option. I don’t think that’s the right way to go, and I don’t think there’ll be a lot of appetite for that. In fact, if anything, I think we’ll hear some provider groups ask for more money this year.  

There is some good news. I talked about the second biggest Medicaid driver being FMAP to the tune of $105 million. This is a ratio where the feds pay at least half and the state pays the rest, and it’s based on how strong our economy is. When our economy does well, we pay more. Well, here’s the good news – we’re almost to 50%! Our share of FMAP has never been this high, and it can’t get much higher. If we have one more good year of strong economic growth, this will level off, and these increases will come to an end. 

Back to overall growth – everything besides Medicaid has grown at far slower rates. Well, one of the legislative summer studies came back with the recommendation that I propose 5% in budget cuts. Last year, Governor Noem stood at this podium and recommended $80 million in budget cuts. When I took the reins, I adopted her budget. The final budget included no additional cuts from the Legislature, and in fact you restored $7 million of the cuts we proposed. So, I ask the legislators who are asking for cuts, where should we cut? Should we cut healthcare, education, or public safety? Folks seem to want to cut the general operations of state government, the “All Other” on the far right. 

Put another way, outside of education, taking care of people, and public safety, only 4% of our budget goes to the rest of state government. That’s not enough to move the needle. I share the desire to cut property taxes. But slashing healthcare, education, and public safety is not the way to do it. I have a much better, more targeted plan to address property taxes, and I look forward to sharing the specifics with you in the State of the State.  

Remember, statute dictates that we provide 3% or inflation – whichever is less – for education. And we apply that to the Big Three: education, healthcare providers, and state employees. Because our revenues haven’t grown much, we have to keep them flat this year. But since the start of the Noem-Rhoden Administration, we’ve prioritized the Big Three. In fact, over that time, the statutory increase would’ve been 21.7%. And on several occasions, we provided increases above 3% – sometimes far above. That means that, even with 0% this year, funding over the past eight years has been 6.2% ahead of what was required, at 27.9%. 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.  

For K-12 education, in particular, enrollments are down across the state. And why is that? There are two main reasons. Number one, births are down 9% over the last 10 years. And even though South Dakota still has the highest birth rate in America, it’s not high enough to keep up. In the meantime, we’ve seen a 216% growth in students getting alternative education, such as homeschooling. Those families are choosing the best education option for them, and they should! Our funding formula is largely based on the number of students in public education, and when there are fewer students, this is what happens. 

As for the third leg of the Big Three: state employees – my budget makes a modest investment in our State Employee Health Plan without raising premiums for our state employees. We’re investing $3 million out of health plan reserves and implementing plan changes to keep costs from going up on state employees, since we won’t be able to give them a raise this year. 

Ongoing Picture

Now it’s time to get into the nitty gritty details of our ongoing revenue. So far this fiscal year, we’re $8.2 million behind legislative adopted revenues. So while our sales tax revenues are up, we actually have to cut our total estimates by about $7 million. We’re expecting overall sales tax growth at 4.4% over the fiscal year, about where we’re at so far. And we’re revising other revenues up by more than $8 million, mostly because our severance tax revenues have been excellent! That’s the result of a strong gold market, and we expect that to continue.  

If you look at this year and last year, that’s two years in a row where we’ve been behind estimates. Of course, that’s after four years where revenues kept going crazy, so it’s been very hard to set estimates. I just want to stress the importance of being conservative in setting our revenue estimates this year. There’s always points of disagreement, but the Legislature always comes in with a little rosier estimate than the Administration. It’s worked out for us so far, but that’s mostly a result of high unclaimed property dollars – and again, with the creation of the trust fund, we won’t see those in future budgets. As we look forward to next year, we need to be cautious in how we set our revenue projections.  

Next year, we’re estimating sales tax growth of $60.3 million and overall revenue growth of $58.7 million. That’s realistic without being too rosy. Remember, we are far ahead of where we should be when you look back over the last several years. Things are still normalizing.  

So between the $7 million behind projections this year and the $58.7 million growth next year, our total ongoing revenue available is $51.6 million. And those dollars will be almost entirely spoken for by mandatory increases, which account for $47.2 million. We’re actually making $2.7 million in cuts. As I said before, we have $413 million in reserves, and we’re leaving 12.5% of our budget in the rainy day fund. We have the rest available for one-time investments.   

My budget keeps the state workforce flat – with the exception of staffing the new women’s prison. This budget invests taxpayer dollars conservatively and wisely to keep South Dakota strong, safe, and free. We’ll keep South Dakota strong by following the recommendations of the GRIT task force, modernizing our IT, prioritizing the longevity of state buildings, and making mandatory investments in state agencies. We’ll keep South Dakota safe by preparing for the opening of the new women’s prison in Rapid City, investing in our National Guard and Highway Patrol, and prioritizing security at county courthouses. And we’ll keep South Dakota free by improving freedom to travel, investing in the freedom to learn, and prioritizing rural projects that will maintain the freedom to live in the community of your choice. 

Strong 

My budget keeps South Dakota strong by focusing on what works. We realize that government is best when it is limited. But when it is government’s responsibility to do something, we should fulfill that duty with excellence.  

A few months back, I started the Governor’s Resilient Infrastructure Task force – or GRIT. It serves as a strategic advisory body to assess risks and vulnerabilities and support long-term planning and investment in critical infrastructure. Recently, GRIT made three requests for investments, and those three items are all in my budget. First, $10 million to the IT Modernization Fund to harden our systems and equipment. This should help protect against service outages like the one that occurred in August. Second, we’re investing $260,000 for a cloud-based backup to the State Radio so that State Radio can continue providing its crucial public safety role, even if there is another outage. Finally, I’m supporting a $300,000 investment to fund a nuclear energy study. This will help ensure an all-of-the-above energy approach for South Dakota. We’re already the national leader in largest share of energy that’s produced from renewable sources. More energy flexibility will lead to a more stable energy supply. And this announcement will pair well with GOED’s renewed focus on energy policy. 

My budget also invests another $3.1 million in one-time dollars to continue modernizing the employment system at the Department of Labor and Regulation. This system was built in the 1980s and needs to be replaced before all the techs who know how to fix it retire. We started this fix with federal funds. Let’s keep working to finish it. 

Last year, as part of the ongoing budget cuts, we reduced the ongoing maintenance and repair budget to 1.25% and used one-time dollars to keep M&R at 1.75%. This year, my budget does one better. We don’t have the ability to restore ongoing funds, but we’ll invest $30.6 million in one-time dollars to get overall M&R funding up to 2%. This will keep our state assets strong, which is the fiscally responsible thing to do. 

We’re also keeping our state services strong by making mandatory investments to fulfill their responsibilities. Last year, we cut the Department of Human Services by $22 million – that was too steep, and utilization numbers have been too high, so we’re restoring $16.4 million of those cuts. The federal government is also requiring us to pay $14.1 million more in inflationary increases to Medicaid providers. This increase is specifically tied to prescription drugs and Medicare crossover plans. So, we’re required to pay it, and we will. I mentioned earlier that we have another FMAP increase to the tune of $11.8 million in ongoing needs. We’re also eliminating a government program: we can rely on the federal hemp program without compromising the industry or public safety.

We’re also going to backfill the loss of federal funding in a few programs. The federal government changed their match rate for administration of SNAP, which represented a $5.5 million cut to the food stamp program, which we have to pay. Thankfully, our SNAP error rate is the very lowest in the nation because we do business right in South Dakota – otherwise, the cut would have been about $10 million more. We’re also going to increase funding to South Dakota Public Broadcasting by $296,000 to support their open government platform – this will replace just a portion of the federal dollars that they lost. This will allow them to continue to broadcast the state government activities. I believe this transparency is a strength of our legislature, and I want to see it continue. 

Safe 

That’s how my budget keeps South Dakota strong. And now for how it keeps South Dakota safe.  

The biggest public safety investment is the Rapid City Women’s Prison. The prison’s construction is almost done, and it will open next year.  Now, it’s time to staff it up. That represents $13.2 million to support 133 FTE. It includes a heavy emphasis on programming staff. From the very beginning, the new prison was built with programming in mind. 

This facility will include a therapeutic community where the addiction counselors will be there with the inmates on a daily basis. This expansion of drug treatment will reduce recidivism and help alleviate overcrowding long-term. The vast majority of inmates will benefit from this new programming. And because we’ll need to ramp up staff before July 1, my budget includes $2.4 million in one-time dollars this year. 

We’re also making other investments in our prison system. My budget increases funding for offender healthcare by $1.1 million to cover increasing costs. It also makes a $555,000 one-time investment for new cameras to make the Jameson Annex and the Sioux Falls Minimum Center safer. 

We’re also investing in our South Dakota National Guard. It is my honor to serve as Commander in Chief of our National Guard. In fact, I’m humbled to be the first Governor since the legendary Joe Foss to be a former guardsman myself. We have extra reason to be proud of our Guard in South Dakota! Everywhere our soldiers go, they are recognized for their excellence. We have a contingent of South Dakota National Guard here with us today – would you please stand? And would everyone please join me in honoring them.

The National Guard Readiness Center in Sturgis is too small and extremely outdated. I am proposing $2.4 million in state funds, which will leverage $8 million in federal dollars, to increase the size of this facility to over 26,000 square feet. Additional classrooms will improve training and readiness. I’m also recommending $30 million in federal funding authority to build a new 37,000 square foot vehicle maintenance shop in Sturgis – this will move the facility from its current location to the area just east of the high school, with our other Guard facilities. The existing facilities are inadequate for today's larger military vehicles and do not meet our soldiers' operational needs. When I served in the Guard, I served in the 842nd Engineer Company. That unit is based throughout Sturgis, Spearfish, and Belle Fourche, and I’m proud that it will benefit from both these investments. 

My budget also supports a key investment in our South Dakota Highway Patrol. Throughout Operation: Prairie Thunder, the Highway Patrol has used aerial assets like their Highway Patrol airplane in support of that mission. This plane contributes in all kinds of ways: it helps us find missing people, track suspects who flee law enforcement, and investigate drug activity. But our current plane is coming up short far too often. Earlier this year, when a dignitary was in South Dakota, the camera system failed three times. And engine issues have kept the plane grounded at times. My budget recommends $5 million to purchase a newer – though still used – Highway Patrol plane, including equipment upgrades. We’d also sell the current aircraft. This option is the right mix of effectiveness and affordability – and it will support public safety in South Dakota. 

My budget also provides $9 million in expenditure authority to the Department of Social Services to grant opioid settlement dollars. DSS is working with the Opioid Advisory Committee on this, and they just announced a new framework to expand access to these funds. They’re focusing on reaching communities across the state to strengthen prevention, treatment, and recovery efforts. 

A few years back, the Noem-Rhoden Administration invested $5 million to improve security in county courthouses. Since then, we’ve modernized courthouses in 36 counties. My budget recommends $1.5 million to keep that ball rolling. We also recommend $4.2 million to replenish the Emergency and Disaster Fund; $2.7 million to refill the Fire Fund; and another $435,000 to backfill the loss of some federal fire assistance. 

Free 

In all those ways, my budget keeps South Dakota safe. But we’ll also keep South Dakota free – free to pursue opportunities and happiness. 

A little over a month ago, I announced that my administration will support the continued expansion of the Sioux Falls and Rapid City airports. Since the start of the Noem-Rhoden Administration, travelers through the Rapid City airport are up 30%, and they’re up 25% in Sioux Falls. I’m proposing that we provide up to $15 million in 0% interest loans to both airports. This is the exact same approach we took last year to support the investment in the Douglas School District. But instead of making these loans out of the Housing loan fund, I recommend moving the remaining $65 million to the REDI Fund. The original $100 million in housing grants has been fully utilized, but only $20 million in loans were ever leveraged. We’ve made a huge positive impact on housing. Now, we need to focus on other important investments. By supporting these airports, South Dakota will see more gates, more flights, and more destinations. We’ll be able to draw more visitors and keep our state Open for Opportunity! 

My budget also strengthens education by supporting continued growth at our tech colleges. Ultimately, education is about the freedom to learn – to pursue the life and career of your dreams. Truth be told, I never graduated from college. I did take a year of ranch management at Western Dakota Tech. I thought I’d spend my whole life running the ranch, but God had other plans. South Dakota’s tech colleges continue to prove themselves some of the best in the nation, and they’re creating all kinds of opportunities for our kids to get into the careers of their dreams. 

My budget invests $6 million one-time in a new Advanced Manufacturing center at Southeast Technical College in Sioux Falls. This facility will increase student capacity by 130 in several programs. The state will support one quarter of the project, and the rest will come from a mix of federal, local, and private funds. 

My budget also supports $4.3 million one-time for equipment upgrades at all four of our tech colleges. This will provide two-thirds of the investment as we have done in recent years. Our tech schools will be able to make sure their students meet industry expectations, provide higher safety standards for students and instructors, and grow overall student capacity. My budget also increases ongoing aid to our tech colleges by $1.7 million because of rising enrollment – which is great news! 

I grew up on a ranch near Union Center. I was born 45 miles from there in Sturgis. That’s how life is for many folks in our rural communities – they get their healthcare miles from home. And over the years since then, we’ve seen rural healthcare face more challenges. President Trump’s One Big Beautiful Bill prioritized Rural Health Transformation, and South Dakota stands to benefit from that investment with at least $500 million over the next 5 years. We reached out to folks across South Dakota to get their ideas on how we could make an innovative, long-lasting impact on rural healthcare. We have a good plan; we’re just waiting for the Trump Administration’s green light, which we hope to have by the end of December. My budget proposes $500 million in federal funding authority to support this plan, and if we get approved for more than that, then we’ll adjust the number accordingly. That’s not an increase in state spending – it's just authority to spend those federal dollars allocated to South Dakota. 

Speaking of our rural communities, the Noem-Rhoden Administration made it a top priority to expand high-speed broadband access in every South Dakota community. To-date, we’ve invested over $300 million between state, federal, and private funds. My budget requests another $87 million in federal funding authority to leverage more federal dollars to keep the ball rolling. 

Conclusion

Before I close, there’s one more thing I want to cover. My budget maintains reserves at 12.5%, but we have $14 million unallocated. I’m leaving that funding on the bottom line for legislative priorities. I’m eager to work with you and to see how you choose to invest those dollars to keep South Dakota strong, safe, and free. 

There you have it, ladies and gentlemen: my first budget as Governor! I couldn’t have put it together on my own. I owe an incredible debt of gratitude to BFM Commissioner Jim Terwilliger and his entire team. They’re sitting behind me – would you all please stand? Everyone, please join me in thanking them for their hard work!

This budget invests in our people. It keeps our home state strong, safe, and free by making targeted investments where we should, saving extra money for the future, and still paving the way for property tax relief. We recognize these dollars aren’t ours. They belong to the good people of South Dakota. As our state motto says: “Under God, the People Rule.”

This limited budget might seem like a challenge, but as I often say, I encourage you all to view that as an opportunity. It’s an opportunity to make sure we’re investing only in the things that we should be. To look with fresh eyes on our budget principles and make sure that we’re living up to them. That’s what I did when putting this budget together, and I think we hit the mark.

Thank you for your time and your consideration. I look forward to seeing you next month for the State of the State and working through this budget during legislative session. Until then, Merry Christmas and Happy New Year! God bless you all, and may God continue to bless the great state of South Dakota.

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