Governor's budget tour hits Mitchell

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Gov. Dennis Daugaard meets with The Daily Republic editorial board at the newspaper’s office in Mitchell. (Republic file photo)

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• Governor Daugaard's budget tour

Gov. Dennis Daugaard does not support law changes to abolish structural deficits or place annual limits on state government spending, he said Monday.

Last week, during his budget address to the Legislature in Pierre, the new governor proposed $127 million in cuts to eliminate the state’s structural deficit. A “structural” deficit exists when a budget is balanced with money from sources such as reserves, while ongoing expenses remain greater than ongoing revenue.

South Dakota has had a structural deficit since the 2008 fiscal year. Though Daugaard is adamant about eliminating the structural deficit for the 2012 fiscal year, which legislators are now considering, he does not favor a law change that would ban the Legislature from adopting budgets with structural deficits in the future.

“I’d be very afraid of putting in something like that, because of the potential for unintended consequences,” he said.

Daugaard, a Republican, was in Mitchell as part of a statewide tour to explain and promote his budget proposal. After leaving The Daily Republic, he attended a meeting with about 70 local business leaders at Mitchell’s Highland Conference Center. Among the people traveling with Daugaard were his chief of staff, Dusty Johnson; the commissioner of finance and management, Jason Dilges; and the commissioner of the Governor’s Office of Economic Development, Pat Costello.

In citing “unintended consequences” as a reason to oppose a statutory ban on structural deficits, Daugaard referenced the recent economic recession. He said the swiftly changing economic conditions of 2008 caused state government’s ongoing revenues in fiscal year 2009 to fall nearly $57 million short of the projection in the budget.

In that kind of situation, Daugaard said, it would be wrong to tie state government’s hands with a law prohibiting a structural deficit.

“To come back and say you need to balance that budget by cutting $56 million right now by the end of the year, that might be the wrong approach to take,” he said.

Furthermore, Daugaard said, a law prohibiting structural deficits could be repealed.

“You can pass a law that regulates conduct for a year, but the next year, the next Legislature can undo that law.”

The governor used the same logic to argue against proposals from Democratic legislators that would limit state government’s spending. Last week, Democratic House Leader Bernie Hunhoff said he plans to propose legislation that would limit the annual growth in state spending to the rate of inflation up to a maximum of 3 percent, which is the same limit placed on state aid to schools. Hunhoff also plans to introduce legislation to limit state spending to 99 percent of expected state revenues.

Daugaard said the restrictions could be cast aside fairly easily by legislators. As proof, he cited legislators’ decision last year to excuse themselves from the law requiring a certain percentage increase in state aid for K-12 education.

Beyond that, Daugaard said, it’s unreasonable to hold the state to the same spending limits as schools, due to the unique circumstances facing the state. Primary among those circumstances is Medicaid, the state-federal program that provides health care for the needy and is one of the state’s biggest expenses. The state cannot control the number of enrollees or the enrollment standards, Daugaard said, which causes the state to face ever-increasing Medicaid expenses. If the state were held to an overall spending limit, he said, more drastic cuts might have to be made in other areas to account for the annual increases in Medicaid costs.

Ultimately, the governor said, laws cannot anticipate every future fiscal scenario.

“I’d rather figure that the voters are going to elect people who are going to deal responsibly with the problems the state faces, whether they be budgetary or otherwise.”

The governor also discussed other topics with The Daily Republic, including the following.

* Budget negotiations with legislators: Daugaard’s budget is just a proposal, and legislators could send him a budget that contains a structural deficit.

Daugaard said he would not “split hairs” and would likely sign the budget if it eliminates something like 98 percent of the structural deficit. If only 90 percent of the structural deficit is eliminated, he said, he’d have to consider a veto.

“The further away we get from 100 percent, the more dissatisfied I’m going to be. I also think, if you’re going to get that close, why not get it done?”

When asked what he’d say to legislators who come under pressure from interest groups that are opposed to budget cuts, Daugaard said legislators “should not interpret that organized objection as a groundswell of support” for a particular viewpoint.

* Education cuts and taxes: Daugaard said his plan to reduce state aid to K-12 education by 10 percent will result in decreased property taxes, rather than increased property taxes.

He said the K-12 funding formula currently allows for a base of $4,804 in combined local and state funding per student. Local school districts’ property tax collections provide as much of that amount as possible, and the state provides the rest. Reducing the per-student allocation by $480 would therefore reduce both the property taxes and the state aid necessary to reach the total allocation, the governor said.

Residents of school districts who wish to avoid the lowering of their per-student allocation can adopt what’s called an “opt-out” and raise their own property taxes, Daugaard said. Dilges, the commissioner of finance and management, estimated that about two-thirds of the state’s school districts already have adopted opt-outs.

* School closures and consolidations: When asked if his proposed cut to state aid for K-12 education might lead to school closures and consolidations, Daugaard said “I shouldn’t think so.”

“If it causes more consolidations and closings,” he continued, “then it was probably going to happen anyway.”

* Spring flooding threat: With the snow piling up around the state (Mitchell’s snow depth was 16 inches as of Monday, according to the National Weather Service), some people’s thoughts are turning to a potential repeat of last year’s spring flooding.

Daugaard said he has not spent much time thinking about spring flooding since taking office earlier this month, but he expects to begin receiving more information on the issue next month. He noted that the fall season seemed drier than the previous one, which could help alleviate the flooding threat.

Daugaard’s chief of staff, Mitchell resident Dusty Johnson, said there is not much concern emanating yet from the Department of Public Safety, which includes the Office of Emergency Management.

“This early-season snow has a tendency to be drier; the moisture content isn’t as high,” said Johnson, whose tasks include overseeing the Department of Public Safety. “So while it may seem like there’s a ton of it, it isn’t always as dangerous as your late-season snow, which has a tendency to be just wet as all get-out.”

“So it hasn’t been brought to you yet,” Johnson continued, turning to Daugaard, “in large part because they’re not that nervous yet.”

* Small-town economic development: Daugaard offered few details in response to a Daily Republic question about his plan, announced during his State of the State address, to identify and develop small-town specialists in economic development.

The governor said much of the strategy remains to be developed, but it so far includes identifying some of the more successful individuals and efforts from among the state’s 160 economic development groups and determining how the state can encourage the spread of those successful techniques.

* Reserve funds: Daugaard does not want to use reserve funds to balance the state budget. The Daily Republic asked Daugaard what the state’s reserve funds are for, if not to get the state through economic recessions like the one the state recently suffered.

Daugaard said the state needs to maintain some reserves at all times for a potential “lightning-strike kind of a thing.” As examples, he cited the natural disasters last year that pushed the state’s disaster spending $13 million over budget, and the $27.5 million in refunds the state owes to banks following a change in federal credit-card regulations that caused them to overpay taxes.

The state’s $107 million in reserve funds is not excessive, Daugaard said, because it equates to only 10 percent of the state’s general fund budget. Meanwhile, he said, the average K-12 school in the state holds nearly 20 percent in reserve, the average city holds nearly 35 percent in reserve and the average county holds about 50 percent in reserve.

* Economic impact of budget cuts: The governor was asked if his proposed $127 million in cuts to state spending might negatively impact the state’s economy. He said his budget starts with about $86 million in spending increases that the state has little to no control over, and the $127 million in cuts are needed to eliminate the structural deficit after those rising expenses are figured in. So the “net effect” of the cuts is about $40 million.

Doing some quick figuring, Daugaard said “our gross domestic product is, what, about $32 billion? So we’re talking about $40 million out of $32 billion, or you could say 40 out of 32,000, or four out of 3,200.”

Johnson added his take on the situation.

“The governor has said many times: If your alternative is to increase taxes $127 million, that’s also taking money out of the economy.”

Tags: governor dennis daugaard, dennis daugaard, budget address, structural deficit, highland conference center, dusty johnson, jason dilges, pat costello, south dakota state budget, news, money