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Gov. Dennis Daugaard delivers his budget proposal for the 2015 fiscal year to the South Dakota Legislature on Tuesday afternoon in the House Chambers at the Capitol in Pierre. (Sean Ryan/The Daily Republic)

UPDATE: Daugaard proposes spending boosts for schools

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By Chet Brokaw

PIERRE — Gov. Dennis Daugaard on Tuesday proposed a $4.3 billion state budget that would use a windfall in unclaimed property payments to give bigger-than-expected spending increases for schools, health care for poor people and pay raises for state employees.

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Daugaard said lackluster tax receipts a few months ago indicated it would be difficult to fund increases of 1.6 percent, the minimum bump for inflation that state law requires for school aid. But he told state lawmakers Tuesday that an unexpected $70 million in unclaimed property receipts — money the state gets from bank accounts and other property in which the owners cannot be found — will help allow 3 percent increases in school aid, key programs and payments to health care providers in the Medicaid program.

“Things looked pretty bleak in September, but today things look better,” Daugaard said.

The Republican governor also proposed a 3 percent raise for state employees and a 3 percent hike in spending on South Dakota's four technical institutes.

In addition, he recommended spending nearly $4 million to freeze next year's tuition for resident students at South Dakota's six state-run universities at this year's rate. Another $915,000 would be used to hold down tuition at the state's four technical institutes.

A key part of the governor's spending plan would use more than $100 million available on a one-time basis, including some reserves and some of the extra unclaimed property receipts, to pay off bonds and other obligations early. That would free up money on an ongoing basis to fund priorities next year.

Daugaard's overall budget for the fiscal year starting July 1 would be nearly 3 percent smaller than this year, down by about $124 million. Spending would include nearly $1.4 billion from general state taxes, about $1.7 billion from federal funds and nearly $1.2 billion from other state funds.

The Legislature will determine the final budget in the session that opens Jan. 14.

Sen. Mike Vehle, R-Mitchell, said the infusion of one-time money seems to have "saved our bacon, in a way." But he praised the governor for the unique ways in which he is proposing to spend the unexpected extra funds.

"That's a novel approach, taking that one-time money and turning it into ongoing funds by paying off debts that we would face every year."

House Republican Leader David Lust of Rapid City said he and many other lawmakers were surprised the governor was able to propose 3 percent spending increases for schools and other programs.

“I think that unclaimed property windfall is a game-changer,” Lust said.

Lust also said the tuition freeze is critical because the state needs to provide an affordable education to develop its workforce.

House Democratic Leader Bernie Hunhoff of Yankton said it makes sense to use reserves and other one-time money to support key programs, but many lawmakers will seek to boost spending on schools by more than the 3 percent recommended by Daugaard.

“It in no way heals our schools,” Hunhoff said of the governor's proposal. “We've created a huge crisis in our schools and this is not going to fix it, but it's probably a decent first step.”

State law calls for aid to school districts to increase each year by the level of inflation, up to 3 percent. That would require an increase of 1.6 percent in school aid next year. In some years, the Legislature has given schools extra money, but there was no increase in 2010 and aid was cut in 2011, when the sluggish economy limited tax collections.

This year's unclaimed property windfall resulted from a change in state law that requires such property to be turned over to the state after only three years of inactivity, rather than five. Two large banks also located their home offices in South Dakota, increasing the pool of idle accounts.

Daugaard is proposing to use $30 million in this year's one-time money from unclaimed property and other sources to fund an economic development program that otherwise would have required funding next year. He also is using $58 million in one-time money to pay off some state building bonds early, saving $6.3 million a year in ongoing bond payments.

In addition, he wants to pay cash instead of bonding for $16.4 million to pay the state's share of the cost of a new State Veterans Home in Hot Springs.

Those early payments will free up money next year to cover the spending increases in education, health care and state employee pay raises, he said.

As expected, Daugaard said he is not recommending that South Dakota expand its Medicaid program to cover the health care costs of more low-income people, at least not in the next budget year. The federal health overhaul law gives states the option of expanding the Medicaid program, and officials have said that would add 48,000 South Dakotans to the program.

Daugaard has said he doubts the federal government can meet its pledge to pay most of the expansion costs. He said Tuesday the implementation of the federal health care law has been “unpredictable and chaotic.”

Hunhoff said the state should expand Medicaid to improve health care for more people and help small hospitals across the state.

“That's a moral imperative,” the Democratic lawmaker said.

Vehle noted that the state's share of the federal-state Medicaid program already increases as the state's economy improves. He recalled that the state's share was less than 40 percent when he joined the Legislature in 2009 and is now climbing near 50 percent.

"No good deed goes unpunished," Vehle said.

-- The Daily Republic contributed to this report.

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