RURAL ELECTRIC COOPERATIVES WERE THE FIRST TO BRING POWER TO THE PRAIRIE.

>> YOU'RE WATCHING A PRODUCTION OF SOUTH DAKOTA PUBLIC BROADCASTING.

>> "STATEHOUSE" PROGRAM FUNDING PROVIDED BY THE SOUTH DAKOTA BAR FOUNDATION, THE EDUCATIONAL AND CHARITABLE ARM OF SOUTH DAKOTA LAWYERS AND JUDGES.

♪ >> HELLO AND WELCOME TO SOUTH DAKOTA MUST BE BROADCASTING'S LIVE COVERAGE OF THE GOVERNOR'S BUDGET ADRESS.

I'M STEPHANIE RISSLER ALONGSIDE LEE STRIBIN'ER.

IN JUST A FEW MINUTES, GOVERNOR DENNIS DAUGAARD WILL DELIVER HIS FISCAL RECOMMENDATIONS FOR BUDGET YEAR 2019 WHICH WILL MARK HIS LAST BUDGET ADDRESS AS THE GOVERNOR OF SOUTH DAKOTA.

>> WE DO KNOW THE GOVERNOR IS GOING TO BE RECOMMENDING A VERY CAUTIOUS BUDGET THIS YEAR DUE TO LOWER THAN EXPECTED REVENUE GENERATION.

SINCE THE START OF THE FISCAL YEAR, REVENUE COLLECTIONS ARE DOWN BY ABOUT $8 MILLION SO -- AND THESE DUE TO A FEW SEVERAL THINGS.

ONE IS A SLUGGISH AG ECONOMY.

THE STATE IS ALSO MISSING OUT ON-INTERNET SALES TAX COLLECTION AND ALSO THE RISING COST OF HEALTH CARE IS REALLY MAKING IT HARD FOR SOME SOUTH DAKOTANS TO HAVE DISPOSABLE INCOME TO SPEND THEIR MONEY.

>> HE'LL LAY HIS PLANS OUT HERE IN A FEW MINUTES.

WE'RE WAITING FOR THE GOVERNOR TO ENTER THE HOUSE OF REPRESENTATIVES.

RIGHT NOW, LIEUTENANT GOVERNOR MATT MICHELS HAS GONE TO THE PODIUM.

WE'LL BEING DOWN TO THE FLOOR.

>> REMEMBER HIM BUT ALL OF US, I WOULD ASK, AS WE CONTINUE TO WALK TO ENCOURAGE YOUNG PEOPLE AND OTHERS SERVING TO TAKE IN TO MIND AND ESPECIALLY WHAT THE RAPID CITY JOURNAL HAS SAID IS ESTABLISHING AN AWARD WHICH IS NICE BUT THERE ARE MANY PEOPLE WHO ARE CIVIL IN THEIR PUBLIC SERVICE, AND CONTRARY TO WHAT WE MIGHT SEE DAILY ON MEDIA, THAT IS NOT TRUE IN SOUTH DAKOTA.

THAT PEOPLE ARE -- WE ARE VERY CIVIL AND I THINK TO CONTINUE THAT IN CRAIG'S IMAGE, I KNOW HE AND HIS FAMILY WOULD APPRECIATE THAT.

WE'LL SEE YOU AGAIN, CRAIG, MY BROTHER.

NOORNS WITH THE SOUTH DAKOTA CONSTITUTION, THE GOVERNOR SHALL PROPOSE TO YOU A BUDGET IN WHICH THE EXPENDITURES OR APPROPRIATIONS MAY NOT EXCEED ANTICIPATED REVENUE, AND EXISTING FUNDS AVAILABLE FOR EXPENDITURE OR APPROPRIATIONS.

THE APPROPRIATIONS BY YOU, THE LEGISLATURE, MAY NOT EXCEED ANTICIPATED REVENUE AND EXISTING FUNDS AVAILABLE FOR EXPENDITURE OR APPROPRIATION.

ACCORDINGLY, THE GOVERNOR THROUGH HIS BUREAU OF FINANCE AND MANAGEMENT SHALL PREPARE AND SUBMIT TO YOU A BUDGET WITH COPIES THEREFORE FOR YOU TODAY, NOT LATER THAN THE FIRST TUESDAY AFTER THE FIRST MONDAY OF DECEMBER.

WILL THE SERGEANT AT ARMS PLEASE ANNOUNCE THE PRESENCE OF OUR GOVERNOR, PLEASE ANNOUNCE.

>> LADIES AND GENTLEMEN, IN JUST A MINUTE, WE WILL HAVE THE SERGEANT AT ARMS COME UP AND ANNOUNCE THE GOVERNOR.

WE'LL STAND BY FOR JUST A COUPLE OF MINUTES AS THE SERGEANT AT ARMS, WHO HAS ARMS AND IS A SERGEANT... LADIES AND GENTLEMEN, PLEASE WELCOME THE SERGEANT AT ARMS.

[Applause] >> WELL, Mr.

MICHELS, LAST YEAR YOU DID THIS, YOU CAUGHT ME A LITTLE OFF-GUARD BUT I'M MORE THAN PLEASED TO INTRODUCE OUR GOVERNOR.

>> IT'S QUARTERBACK MICHELS.

>> ALL RIGHT.

LADIES AND GENTLEMEN, PEOPLE OF SOUTH DAKOTA, PLEASE WELCOME OUR ON RABBLE GOVERNOR, DENNIS DAUGAARD.

[Applause] >> THANK YOU VERY MUCH.

THANK YOU, AND THANK YOU FOR THAT MOVING TRIBUTE TO OUR GOOD FRIEND, CRAIG THISSEN.

I KNOW WE WERE ALL SHOCKED WHEN WE HEARD THE NEWS ABOUT CRAIG AND AS SO MANY OF YOU VOICED SO ELOQUENTLY, HE WAS A CONSTITUTE PUBLIC SERVANT FROM THE PEACE CORPS TO HIS LONG PUBLIC SERVICE AS A LAW ENFORCEMENT SERVICE TO OUR FRIENDSHIP WITH HIM AND HIS SERVICE AS A LEGISLATOR.

HE NEVER LET HIS PRE-CONCEIVED NOTIONS GET IN THE WAY.

HE WAS ALWAYS A GOOD LISTENER, A GOOD DEBATER, RESPECTFUL, ALWAYS.

HE TOOK HIS TIME TO MAKE THE BEST DECISION.

WE ARE GOING TO BE MISSING HIM BUT HE IS A GREAT EXAMPLE TO US ALL.

MY DUTY TODAY IS TO OFFER A PROPOSED BUDGET FOR FISCAL YEAR 2019, AND IN TODAY'S SPEECH, I'LL REVIEW THE STATE'S ECONOMY, OUR CURRENT YEAR REVENUES AND EXPENSES AND OFFER MY PROPOSALS FOR NEXT YEAR.

THE BUREAU OF FINANCE AND MANAGEMENT RELEASES MONTHLY REVENUE UPDATES ON ITS WEBSITE EVERY MONTH AND IF YOU FOLLOW THOSE, YOU KNOW THAT THE STATE'S REVENUE COLLECTIONS HAVE NOT BEEN MEETING PROJECTIONS FOR THE YEAR WE'RE IN RIGHT NOW.

TODAY I'LL PROPOSE EXPENSE REDUCTIONS AND ONE-TIME REVENUE TO BRIDGE THAT GAP, BUT DESPITE THAT WEAKNESS IN REVENUE, REVENUE IS STILL GROWING, ALBEIT SLOWLY, AND BY NEXT JUNE, AT THE END OF THE FISCAL YEAR, WE SHOULD HAVE ENOUGH REVENUE GROWTH TO STRUCTURALLY BALANCE THE FISCAL YEAR 2019 BUDGET.

BUT LET'S BEGIN BY LOOKING BACK OVER THE PAST YEAR TO SEE THE CHALLENGES THAT WE HAVE ALREADY OVERCOME.

FISCAL YEAR 2017 WAS CHALLENGING BECAUSE OF WEAK REVENUE, THEN, AS WELL.

WE HAD TO REVISE OUR REVENUE ESTIMATES DOWN AS WE MOVE THROUGH THE FISCAL YEAR.

THE ADOPTED REVENUE ESTIMATES SEEN HERE WAS JUST SHORT OF $1.6 BILLION OF PROJECTED REVENUE AND THAT WAS ADOPTED IN FEBRUARY OF 2016, SELF MONTHS BEFORE THE FISCAL YEAR -- SEVERAL MONTHS BEFORE THE FISCAL YEAR EVEN STARTED.

THEN A YEAR AGO IN DECEMBER, AT THIS SPEECH, I PROPOSED A DOWNWARD REVISION OF ABOUT $12 MILLION LOWER AS REVENUE WAS LESS THAN PROJECTED FOR FISCAL YEAR '17.

THEN, LAST MARCH, WHEN YOU CONVENED, THE LEGISLATURE ADOPTED A REVENUE ESTIMATE WHICH WAS LOWER BY STILL ANOTHER $22 MILLION, 22.3.

AND THEN WHEN WE FINALLY CLOSED THE BLOCK IN 2017, ACTUAL REVENUE WAS LOWER BY STILL ANOTHER $7.6 MILLION.

ALL TOLD, COMPARED TO THE ORIGINAL ADOPTED ESTIMATE, WE HAD STAIR-STEPPED OUR WAYS DOWN A TOTAL OF $42 MILLION.

FORTUNATELY, WE WERE ABLE TO BALANCE THE BUDGET THROUGH REDUCED SPENDING.

THIS NEXT CHART ADDS ALL THE EXPENSE LEVELS FOR EACH ITERATION OF THE FY 2017 BUDGET, WHICH IS REPRESENTED BY THE RED BARS YOU CAN SEE HAVE THE EACH TIME OUR REVENUE ESTIMATE WAS LOWERED, WE CUT EXPENSES TO MAINTAIN BALANCE.

AND AS WE APPROACHED YEAR END, SEEING CONTINUE REVENUE WEAKNESS AND UNSURE WHERE REVENUE WOULD ULTIMATELY HAPPENED, I DIRECTED EXECUTIVE BRANCH AGENCIES TO CUT SPENDING STILL MORE, RESULTING IN A $7.9 MILLION SURPLUS AT FISCAL YEAR END.

AND THE SURPLUS WAS DEPOSITED, AS WAS REQUIRED BY LAW, INTO THE BUDGET RESERVE FUND.

LET'S TALK ABOUT BUDGET RESERVES.

SOUTH DAKOTA'S VERY PRUDENT ABOUT USING BUDGET RESERVES.

WE CAN BE PROUD OF THAT.

WHEN WE TALK ABOUT BUDGET RESERVES, I'M REALLY TALKING ABOUT THE COMBINED BALANCE OF TWO FUNDS, THE BUDGET RESERVE FUND, THAT'S THE TECHNICAL TERM FOR IT, AND THE GENERAL REVENUE REPLACEMENT FUND, COMBINED, THOSE ARE OUR RESERVES.

THIS CHART SHOWS THE BALANCE OF THOSE RESERVE FUNDS AS A PERCENTAGE OF OUR BUDGET OVER THE PAST TEN YEARS, AND AS YOU CAN SEE FROM FISCAL YEAR '09 THROUGH FISCAL YEAR '11, DURING THOSE RECESSION YEARS, WE HAD A LITTLE OVER 9% IN RESERVES.

SINCE THEN, WE'VE MAINTAINED RESERVES AT OR ABOVE 10% OF OUR GENERAL FUND APPROPRIATIONS.

NATIONALLY, FOR PERSPECTIVE, THE MEDIAN STATE BUDGET RAINY DAY FUND BALANCE IS ABOUT 6%, WITH HALF THE STATES ABOVE THAT AND HALF THE STATES BELOW.

OUR POLICY HAS BEEN TO MAINTAIN A COMBINED BALANCE OF THOSE TWO ACCOUNTS, EQUAL TO 10% OF GENERAL FUND SPENDING, AND WHEN OUR RESERVES HAVE BEEN IN EXCESS OF 10%, WE HAVE USED THE EXTRA FOR ONE-TIME EXPENSES SUCH AS DEBT REDUCTION.

TODAY, WE HAVE $165.3 MILLION IN RESERVES, OR ABOUT 10% -- 10.5% OF OUR TARGET GOAL.

MY RECOMMENDATION FOR FY 2018 IS TO USE THAT PORTION BEYOND 10% TO HELP COVER OUR CURRENT YEAR SHORTFALL, SPECIFICALLY, FOR EDUCATION FUNDING.

AND I'LL EXPLAIN MORE ABOUT THAT IN A MINUTE.

BUT FIRST, LET'S TAKE A LOOK AT SOME ECONOMIC TRENDS.

SOUTH DAKOTA'S ECONOMY, THE BUREAU OF FINANCE AND MANAGEMENT AND THE SOUTH DAKOTA COUNCIL OF ECONOMIC ADVISORS THAT REGULARLY REVIEW A WIDE RANGE OF ECONOMIC INDICATORS, WHICH ARE USED TO FORECAST FUTURE TAX REVENUE.

REVIEWING THIS INFORMATION WITH ECONOMIC EXPERTS FROM ACROSS THE STATE HELPS US PROVIDE THE BEST ECONOMIC AND REVENUE FORECAST FOR THE BUDGET EACH YEAR.

LET'S TAKE A LOOK AT SOME OF THOSE ECONOMIC FORECASTS.

FIRST LET'S LOOK AT NATIONAL FORECAST.

THE COUNCIL OF ECONOMIC ADVISORS AND OUR B.F.M.

STAFF, THEY LOOK AT NATIONAL FORECASTS FROM A CONSULTANT AS A BASELINE TO PROVIDE A REVENUE FORECAST FOR THE MAJOR SOURCES OF REVENUE SUCH AS THE SALES TAX.

I.H.S.

MARKET IS OUR PRIMARY CONSULTANT, I THINK THAT JUMPED AHEAD.

THERE WE GO.

I.H.S.

MARKET IS OUR PRIMARY CONSULTANT THAT PRODUCES A MONTHLY NATIONAL ECONOMIC FORECAST.

MOST RECENT NATIONAL FORECASTS FROM I.H.S.

MARKET IS THAT THE REAL G.D.P.

GROWTH FROM THE UNITED STATES WILL GROW 2.4% IN 2018 AND 2.2% IN 2019 HAVE THE THE SOUTH DAKOTA ECONOMIC FORECAST IS A LITTLE MORE CONSERVATIVE, WHICH IS CONSISTENT WITH THE VIEWS OF THE COUNCIL OF CHILD CARE ADVISORS, AND THIS SOUTH DAKOTA FORECAST WAS USED TO DEVELOP THE REVENUE PROJECTIONS THAT I'M PRESENTING TO YOU TODAY.

WE EXPECT POSITIVE ECONOMIC GROWTH BUT NEED TO BE CAUTIOUS GIVEN RECENT SLUGGISH REVENUE GROWTH.

INFLATION IS AN IMPORTANT VARIABLE BECAUSE INFLATION HAS A DIRECT IMPACT ON THE GROWTH OF OUR SALES TAX.

HIGHER INFLATION CREATES STRONGER GROWTH IN SALES TAX REVENUE, BUT LOWER INFLATION, AS WE'VE EXPERIENCED THE PAST SEVERAL YEARS, LEADS TO SLOWER GROWTH IN SALES TAXES.

INFLATION IS ANTICIPATED FROM 1.7 TO 2.2% RANGE OVER THE LAST TWO YEARS, SLIGHTLY STRONGER THAN IN RECENT PAST BUT LESS THAT HISTORICALLY SEEN.

THE FORECAST ASSUMES NO ECONOMIC RECESSION WILL OCCUR, NOR A MAJOR DISRUPTION FROM ABROAD, AND IT ALSO ASSUMES STEADY HOUSING AND CONSTRUCTION ACTIVITY OVER THE NEXT TWO YEARS.

FINALLY, AS YOU KNOW, AGRICULTURE IS A MAJOR CORNERSTONE OF OUR STATE'S ECONOMY, AND DROUGHT CONDITIONS IN MUCH OF THE STATE THIS GROWING SEASON EXACERBATED THE IMPACT OF LOW PRICES, WHICH WILL LIKELY RESULT IN THE FOURTH YEAR OF DECLINING FARM INCOME SINCE 2013.

THE FORECAST PROJECTS THAT CALENDAR YEAR, CALENDAR YEAR 2017 WILL BE NEAR A LOW IN TERMS OF FARM INCOME, WITH PERHAPS SOME MARGINAL IMPROVEMENT IN CALENDAR YEAR 2018 IF NORMAL PRODUCTION LEVELS RETURN.

THIS OF COURSE CAN DEPEND ON THE WEATHER AS WELL AS FEDERAL TRADE POLICY.

THESE CHARTS SHOW MOST RECENT FORECASTS BY I.H.S.

MARKET FOR THE U.S.

ECONOMY USING FOUR INDICATORS, THE GRAY BARS, THE DARK BARS THERE SHOW THE CALENDAR YEAR ACTUAL FIGURES AND THE BLUE BARS ARE THE FORECASTS.

THE FIRST CHART, TOP LEFT, SHOWS U.S.

REAL GROSS DOMESTIC PRODUCT IN TRILLIONS OF DOLLARS.

REAL G.D.P.

IS CONSIDERED THE MOST COMENS IRV MEASURE OF U.S.

ECONOMY AND REAL G.D.P.

HAS REALIZED STEADY GROWTH SINCE THE RECESSION ENDED.

I.H.S.

MARKET FORECASTS MORE THAN $17 TRILLION OF REAL G.D.P.

IN 2018 AND 2019 AT GROWTH RATES OF 2.4 AND 2.2%, RESPECTIVELY.

I MENTIONED THAT EARLIER.

THE TOP RIGHT CHART SHOWS U.S.

EMPLOYMENT, EMPLOYMENT.

JOB GROWTH IS FORECAST AT 1.3% FOR 2018 AND 1.1% FOR 2019.

THE BOTTOM LEFT CHART SHOWS MILLIONS OF U.S.

HOUSING STARTS.

IN 2017, HOUSING STARTS HAVE BEEN FLAT BUT THEY ARE ANTICIPATED TO GROW AT A STEADY PACE IN 2018 AND 2019.

THE BOTTOM RIGHT CHART SHOWS THE U.S.

INFLATION RATE.

OVER THE PAST FOUR YEARS, WE'VE EXPERIENCED LOW INFLATION, ALMOST ZERO IN 2015.

INFLATION IN 2018 AND 2019 IS PREDICTED TO INCREASE 1.7% AND 2.2% RESPECTIVELY.

NEXT LET'S CONSIDER FOR SOUTH DAKOTA SPECIFIC ECONOMIC INDICATORS, EMPLOYMENT, NON-FARM INCOME, HOUSING STARTS AND UNEMPLOYMENT.

AGAIN, THESE FORECASTS ARE FOR SOUTH DAKOTA'S ECONOMY AND WERE USED TO PROJECT REVENUE FOR FY '18 AND '19.

REMEMBER, THESE FORECASTS FROM I.H.S.

MARKET WERE ADJUSTED TO BE MORE CONSERVATIVE, CONSISTENT WITH THE COUNCIL OF ECONOMIC ADVISORS' VIEWS.

FIRST LET'S LOOK TOP LEFT, SOUTH DAKOTA, EMPLOYMENT.

DURING THE RECESSION, SOUTH DAKOTA DID REALIZE JOB LOSSES BUT ONLY ABOUT HALF THE RATE OF THE U.S.

ECONOMY.

WE RECOVERED THOSE JOBS MORE QUICKLY THAN THE NATION.

IN RECENT MONTHS, OUR EMPLOYMENT GROWTH HAS SLOTDZ AND WE ANTICIPATE CONTINUED SLOW GROWTH IN BOTH 2018 AND 2019.

THE CHART ON THE TOP RIGHT, SOUTH DAKOTA NON-FARM INCOME, SOUTH DAKOTA NON-FARM INCOME IS FORECAST TO GROW 3.1% AND 3.8% IN 2018 AND 2019, LOWER THAN HISTORICAL GROWTH RATES.

BOTTOM LEFT IS SOUTH DAKOTA HOUSING STARTS.

HOUSING STARTS HAVE BEEN DOWN, AS YOU CAN SEE, IN 2017, COMPARED TO AN UNUSUALLY STRONG YEAR IN 2016 BUT ARE EXPECTED TO BE AT HEALTHY LEVELS IN 2018 AND 2019 OF AROUND 5,000 HOUSING STARTS HAVE THE THE LAST CHART, BOTTOM RIGHT, IS SOUTH DAKOTA UNEMPLOYMENT.

AFTER LEVELS OF 5% OR WORSE DURING 2009 AND 2010, SOUTH DAKOTA UNEMPLOYMENT DECLINED TO A LOW OF 2.8% IN 2016.

SO FAR IT'S INCREASED SLIGHTLY TO 3.5% BUT WE ANTICIPATE IT WILL AVERAGE ABOUT 3.1% ON AN ANNUAL BASIS OVER THE NEXT TWO YEARS.

THEY INDICATE A CAUTIOUS OUTLOOK FOR THE SOUTH DAKOTA ECONOMY.

WE SHOULD CONTINUES TO BE CONSERVATIVE IN OUR FORECASTS AS IN THE PAST.

NOW, WHEN WE LOOK AT REVENUES, GENERAL FUND REVENUES, WE MUST REMEMBER THAT SALES AND USE TAXES MAKE UP NEARLY 63%, OUR LARGEST REVENUE SOURCE BY FAR, 63%, IT CAN BE VOLATILE MONTH TO MONTH AND IT'S IMPORTANT TO TRACK SALES TAXES AS WE MAKE BUDGET DECISIONS.

LET'S LOOK AT SOME TRENDS WE'VE BEEN SEEING IN THE SALES TAX BASE.

THIS IS TAXABLE SALES, NOW.

THIS CHART TRACKS MONTHLY TAXABLE SALES, NOT THE SALES TAX BUT THE TAXABLE SALES UPON WHICH THE TAX IS LEVIED.

IT SHOWS ABOUT 120 MONTHS OF HISTORY BACK TO 2007 AND IT'S BEEN SMOOTH USING A TWO-MONTH MOVING AVERAGE.

YOU CAN SEE FROM 2012 TO 2014, WE EXPERIENCED STEADY GROWTH BUT GROWTH HAS BEEN SLOWING SINCE 2015.

YOU CAN NOTICE ON THE RIGHT SIDE OF THE CHART, THE PAST THREE YEARS, WE'VE BEEN NEARLY THAT THE.

LATER WE'LL TALK ABOUT THE REASONS OUR SALES TAX HAS BEEN SLUGGISH RECENTLY.

LET'S LOOK AT AN ANNUAL BASIS.

THIS CHART AGAIN SHOWS TAXABLE SALES BY FISCAL YEAR, IN NORMAL YEARS, WE CAN EXPECT SOME GROWTH.

NOTICE THAT FISCAL YEAR '11, FOR EXAMPLE, HAD VERY STRONG GROWTH.

FISCAL YEAR 2014 HAD STRONG GROWTH, '15 AND '16 SLIGHTLY MORE TAXABLE SALES AND WE ACTUALLY HAD A DECREASE IN TAXABLE SALES IN FISCAL YEAR '17.

LET'S LOOK AT SOME RECENT MONTHLY DATA TO SEE HOW OUR SALES TAX HAS PERFORMED IN RECENT MONTHS.

THIS CHART SHOWS THE MOST RECENT 16 MONTHS OF SALES TAX GROWTH RATES MEASURED ON A YEAR OVER YEAR GROWTH RATE.

MONTHS IN 2017 WERE ADJUSTED TO REMOVE THE IMPACT OF THE HALF-PENNY SALES TAX SO IT WOULD BE APPLES TO APPLES COMPARISON.

AS WE SAW EARLIER, FISCAL YEAR 2017 WAS A CHALLENGING YEAR WITH EIGHT OF 12 MONTHS SHOWING LOWER TAX COLLECTIONS THAN THE PREVIOUS YEAR.

EVEN AFTER ADJUSTING.

IN A MORE RECENT MONTH, WE'VE SEEN SOME IMPROVEMENT BUT LOOKING AT THE FAR RIGHT SIDE OF THE CHART, YOU CAN SEE THE 4% GROWTH IS THE LINE, WE NEED THAT GROWTH ON AVERAGE TO MEET OUR ADOPTED FY'18 SALES TAX ESTIMATE.

THIS ADDED RED LINE SHOWS THE YEAR TO DATE GROWTH AS IT PROGRESSED EACH MONTH.

SO IN FISCAL YEAR 2017, YOU CAN SEE WE FINISHED THE YEAR WITH A DECREASE FOR THE YEAR OF 1.6%.

REMEMBER, FOR COMPARISON PURPOSES, AGAIN, FY 2017 GROWTH RATES WERE ADJUSTED TO REMOVE THE HALF PENNY.

SO COMPARING 4% TO 4%, WE ACTUALLY COLLECTED LESS SALES TAX IN FY 2017 THAN IN 2016.

THROUGH THE FIRST FOUR MONTHS OF 2018, FISCAL YEAR, WE'RE UP 2.3% COMPARED TO A YEAR AGO.

IT'S CERTAINLY GOOD TO SEE THE SALES TAX HAS IMPROVED IN THREE OUT OF FOUR MONTHS BUT WE'RE STILL A LITTLE BIT BELOW THE ADOPTED GROWTH RATE NEEDED OF 4%.

SO WHAT WE'RE DOING NOW, WE'VE ADDED A REVISED GROWTH RATE OF SALES TAX THAT I'M RECOMMENDING TO YOU TODAY, IT'S REVISED DOWN TO THREE%, ABOUT 1% LOWER THAN THE ORIGINAL ADOPTED ESTIMATE AND THAT'S THE FY '18 PROJECTED REVENUE AS ADJUSTED.

WE SHOWED THIS CHART PREVIOUSLY WITH THE HISTORY OF TAXABLES SALES.

NOW AT THE RIGHT WE HAVE ADDED THE ESTIMATED 2018 TAXABLE SALES, SHADED IN THE FAR RIGHT COLUMN.

YOU CAN NOTICE THE SLIGHT IMPROVEMENT FROM 2017 WHICH AGAIN REPRESENTS THE REVISED 3% GROWTH BUT STIM RELATIVELY FLAT AS COMPARED TO THE THREE PREVIOUS FISCAL YEARS.

BEFORE WE COVER THE REVENUE FORECAST, NOW, LET'S DISCUSS SOME REASONS WHY OUR SALES TAX HAS BEEN SOFT IN RECENT YEARS.

WHAT ARE SOME OF THE FACTORS THAT ARE CONTRIBUTING TO SALES TAX WEAKNESS?

FIRST, LOW FARM INCOME.

AS WE MENTIONED BEFORE, FARM INCOME HAS BEEN LOWER, LEADING TO LOWER SPENDING, BOTH DIRECTLY AND INDIRECTLY IN RURAL AREAS OF THE STATE.

SECOND, LOW INFLATION, AS ANOTHER FACTOR, LOW INFLATION THAT WE'VE EXPERIENCED OVER THE PAST SEVERAL YEARS HAS LIMITED THE GROWTH IN OUR SALES TAX BASE.

AS A THIRD FACTOR, E COMMERCE.

CONTINUED GROWTH OF eCOMMERCE SPENDING CONTINUES TO BE A CONCERN BECAUSE SALES TAX IS NOT BEING COLLECTED ON A PORTION OF THESE SALES BUT OUT-OF-STATE BUSINESSES.

FINALLY, THE EVER-INCREASING COST OF HEALTH CARE IN OUR COUNTRY IS CROWDING OUT INCOME AND SPENDING, ESPECIALLY DISCRETIONARY SPENDING THAT COULD BE SPENT ON TAXABLE GOODS AND SERVICES.

AND * AND NOW I'D LIKE TO LOOK AT EACH ONE OF THESE FACTORS A LITTLE MORE CLOSELY.

FIRST, FARM INCOME.

AGRICULTURE, OF COURSE, PLAYS A VERY IMPORTANT ROLE IN SOUTH DAKOTA'S ECONOMY.

THE BLUE BARS MEASURED AGAINST THE LEFT HAND NUMBERS IN BLUE SHOW SOUTH DAKOTA NET FARM INCOME ON A CALENDAR YEAR BASIS, THESE ARE CALENDAR YEAR BLUE BRARS.

LOOK AT 2002, 2006 AND 2012, YOU CAN SEE THE INCOME DROP DURING THOSE DROUGHT YEARS.

LOOK AT 2008 AND LATER, INCOME IS STRONG WITH HIGH CROP PRICES AND BIG HARVESTS IN BOTH YEARS FEEL CALENDAR YEAR 2012 WAS A DROUGHTS YEAR BUT CROP INSURANCE LOCKED IN SPRING PRICES WHICH WERE STILL HIGH.

FROM CALENDAR YEAR 2014 TO '16, FARM INCOME DROPPED EACH YEAR, AND IN 2017 CALENDAR YEAR, INCOME IS EXPECTED TO BE LOWER YET AGAIN DUE TO DROUGHT CONDITIONS AND CONTINUED LOW CROP PRICES.

SO WHAT DOES THIS MEAN FOR OUR BUDGET?

OF COURSE, THERE IS A SIGNIFICANT INDIRECT IMPACT, AS LOWER FARM INCOMES MEAN LESS SPENDING IN ALL SECTORS OF OUR ECONOMY.

THE MOST DIRECT IMPACT IS ON SALES TAX RECEIPTS ON FARM MACHINERY, AND AS YOU KNOW, IN SOUTH DAKOTA, MANY PURCHASES BY AG PRODUCERS ARE EXEMPT FROM SALES TAX BUT SALES AND USE TAX DOES APPLY TO FARM MACHINERY.

THE RED LINE DEFINED BY THE RED NUMBERS ON THE RIGHT ESTIMATES FARM MACHINERY SALES TAX COLLECTIONS, AND THIS IS FISCAL YEAR DATA, LOOK AT 2007 AND LATER, TAX INCENTIVES, AND STRONG FARM INCOME FUELED STRONG MACHINERY PURCHASES.

SALES TAXES GREW FROM 17.4 MILLION IN FY '08 TO NEARLY 45 MILLION IN FY '14.

THIS BOOSTED OUR TAX REF FEW DURING THOSE YEARS AND HELP OUR ECONOMY THROUGH THE RECESSION.

BUT TODAY WE SEE FEWER FARM MACHINERY PURCHASES AND LESS SALES TAXES, CONSEQUENTLY.

SINCE THE PEAK IN 2014, FISCAL YEAR 2014, SALES MACHINERY -- SALES TAXES ON MACHINERY HAVE DROPPED MORE THAN 50%.

LOWER NET FARM INCOME MEANS LESS FARM MACHINERY SALES TAXES.

NOW LET'S LOOK AT THE SECOND FACTOR INFLATION.

THIS GRAPH SHOWS ANNUAL INFLATION RATES AS MEASURED BY THE CONSUMER PRICE INDEX, EXCLUDING HOUSING AND RENT PRICES.

WE DON'T PAY SALES TAXES ON RENT, WE DON'T PAY SALES TAXES WHEN YOU MAKE A MORTGAGE PAYMENT OR BUY A HOUSE.

THIS IS NATIONAL DATA, BY THE WAY, AND BECAUSE CHANGES IN HOUSING PRICES DO NOT HAVE A DIRECT IMPACT ON THE SOUTH DAKOTA SALES TAX BASE, THOSE PRICES HAVE BEEN EXCLUDED SO THESE BARS MORE CLOSELY REFLECT THE PRICE CHANGE IN OUR SALES TAX BASE.

FROM 1997 THROUGH 201, YOU CAN SEE THIS INDEXED AVERAGE 2.3% GROWTH PER YEAR, BUT WITH EVERYTHING ELSE HELD CONSTANT, PRICE INFLATION CONTRIBUTES TO SALES TAX GROWTH, WITH CONSUMERS PURCHASING THE SAME VOLUME OF GOODS AND SERVICES AT HIGHER PRICES, THEY'LL PAY HIGHER TAXES.

BUT NOW LOOK AT THE FAR RIGHT, THE PAST FOUR YEARS, FROM 2013 TO 2016, THE SAME INDEX HAS ONLY INCREASED .3 -- THREE-TENTHS OF ONE PERCENT ON AVERAGE.

LOWER INFLATION MEANS LOWER GROWTH IN OUR SALES AND USE TAX COLLECTIONS, CERTAINLY ONE OF THE REASONS WHY OUR SALES TAX BASE HAS EXPERIENCED SLOWER GROWTH IN RECENT YEARS.

NOW LET'S LOOK AT THE THIRD FACTOR I MENTIONED, ECOMMERCE.

THIS CHART SHOWS THE GROWTH OF THE UNITED STATES GROWTH IN RETAIL ECOMMERCE AS PUBLISHED BY THE CENSUS BUREAU SINCE THE YEAR 2000.

THESE ARE QUARTERLY FIGURES AND MOST RECENTLY IN THE THIRD QUARTER OF 2017, eCOMMERCE SALES TOTALLED $115.33 BILLION, NATIONWIDE, REPRESENTING 9.1% OF TOTAL RETAIL SALES.

REMEMBER THAT, 9.PON% OF TOTAL RETAIL SALES.

IN RECENT YEARS, eCOMMERCE SALES HAVE BEEN INCREASING AT A RATE IN EXCESS OF 15%, YEAR OVER YEAR, JUMPING 15% BUT TODAY, STILL COLLECTIVELY ABOUT 3.9% OF TOTAL RETAIL SALES.

SO LET'S PUT THAT IN PERSPECTIVE.

THIS CHART HAS THE SAME DATA BUT THE SCALE HAS BEEN MODIFIED AND WE'VE STACKED THE BAR TO SHOW TOTAL TOTAL RETAIL SALES AND THAT 91.% SO THE 1.3 TRILLION TOTAL SALES ECOMMERCE IS 1.15 BILLION OR AS I SAID, ABOUT 9% OF THE TOTAL.

WHILE THE ECONOMY CONTINUES TO GROW, THIS IS STILL A RELATIVELY SMALL PERCENTAGE OF TOTAL RETAIL SALES IN THE UNITED STATES.

BUT WHAT ABOUT SOUTH DAKOTA?

A QUESTION WE CONTINUE TO AMLIZE IS HOW MUCH IN TAXES DOES SOUTH DAKOTA LOSE FROM ECOMMERCE SALES?

WELL, THIS PIE CHART FIRST REMINDS US THAT IN SOUTH DAKOTA, WE HAVE A VERY BROAD SALES AND USE TAX ON MOST GOODS AND SERVICES.

eCOMMERCE SALES OF GOODS MAY BE RAPIDLY GROWING BUT ECOMMERCE SERVICES, NOT AS MUCH.

YOU CAN'T GETS A HAIR CUT ONLINE, YOU CAN'T GET YOUR CAR REPAIRED ONLINE.

MANY SERVICES ARE LIKELY STILL BEING TAXED, MEANING ONE-THIRD OF OUR SALES TAX BASE IS PROBABLY NOT AS VULNERABLE TO eCOMMERCE LOSSES.

FOCUSING ON THE TAXABLE GOODS, THEN, WHAT SHARE IN SOUTH DAKOTA OF GOODS ARE PURCHASED VIA eCOMMERCE?

IT'S A DIFFICULT QUESTION TO ANSWER.

IF WE ASSUME 9%, FROM THE NATIONAL RETAIL SALES FIGURES, IT WOULD BE ABOUT -- WELL, SOMETHING LESS THAN 6% OF OUR TOTAL SALES TAX BASE, AS OUR TAX BASE AS I MENTIONED INCLUDES SERVICES.

IN OTHER WORDS, 9% OF THAT 63% IN YELLOW REPRESENTS LESS THAN 6% OF THE TOTAL.

ANOTHER QUESTION WE HAVE TO ASK IS, HOW MUCH OF THAT IS ALREADY TAXED AND CAPTURED TODAY?

WE KNOW MANY ONLINE SELLERS, LIKE AMAZON, ARE VOLUNTARY PAYERS IN SUPPORT OF THE STREAMLINED SALES TAX INITIATIVE AND OTHERS WERE ENCOURAGED BY SENATE BILL 106 FROM THE 2016 SESSION.

SO SOME OUT-OF-STATE SELLERS ARE VOLUNTEERING THEIR SALES TAX.

AND WE ALSO KNOW SOME RETAILERS IN SOUTH DAKOTA THAT HAVE SOUTH DAKOTA STORES ALSO HAVE SIGNIFICANT eCOMMERCE, STORES LIKE WALMART, BEST BUY, KABELA'S, THEY ARE REMITTING ALL THE SALES TAX ON ECOMMERCE AND IN-STORE SALES, AS WELL.

THE PROBLEM IS, SOME OF THEM FILE A COMBINED TAX RETURN AND THEY DON'T SHOW HOW MUCH IS FROM THE E-SALES AND HOW MUCH IS FROM IN-STORE SALES SO IT'S HARD TO KNOW EXACTLY HOW MUCH TAX IS RELATED TO eCOMMERCE VERSUS TRADITIONAL RETAIL FOR THOSE SELLERS.

SO THE POINT IS, WE KNOW SOME COMPANIES ARE STILL NOT REMITTING TAX BUT THE AMOUNT IS HARD TO KNOW.

WE PREVIOUSLY ESTIMATED THE $50 MILLION LOSS OF STATE AND MUNICIPAL SALES TAXES BUT WE CONTINUE TO ANALYZE THE AMOUNT OF THIS LOSS AS WE FIGHT ECOMMERCE BATTLE THROUGH THE COURT SYSTEM.

THE LAST FACTOR, THE FOURTH FACTOR THAT I MENTIONED EARLIER THAT I'M GOING TO TALK ABOUT IS HEALTH CARE SPENDING.

THIS GRAPH SHOWS THE PERCENTAGE OF TOTAL SOUTH DAKOTA CONSUMER SPENDING WHICH IS HEALTH CARE SPENDING, AS MEASURED BY THE BUREAU OF ECONOMIC ANALYSIS.

THIS IS NOT SPENDING BY STATE GOVERNMENT, THIS IS SPENDING ON OUTPATIENT SERVICES AND HOSPITAL AND NURSING HOME SERVICES BY CONSUMERS.

IT ALSO DOES NOT INCLUDE SPENDING ON HEALTH INSURANCE.

IT'S JUST SPENDING BY CONSUMERS DIRECTLY ON THOSE COSTS.

HEALTH INSURANCE PREMIUMS HAVE BEEN GOING UP BUT THAT'S NOT INCLUDED ON THIS CHART.

IN 1997, YOU CAN SEE SOUTH DAKOTA CONSUMERS SPENT ABOUT 15% OF THEIR TOTAL SPENDING ON HEALTH CARE COSTS, ABOUT 2.1 BILLION.

ON THE FAR RIGHT BY 2016, THAT PERCENTAGE HAD INCREASED TO 20.5%, A SHIFT OF 5.5% OF ADDITIONAL SPENDING ON HEALTH CARE OVER THE PAST 20 YEARS.

THE CHANGE MEANS SOUTH DAKOTA CONSUMERS ARE SPENDING 1.85 BILLION ON HEALTH CARE WHICH IS NOT TAXABLE, INSTEAD OF TAXABLE GOODS OR SERVICES.

IF THAT 1.85 BILLION WAS BEING SPENT INSTEAD ON TAXABLE GOODS AND SERVICES, THAT WOULD EQUATE TO MORE THAN $80 MILLION IN STATE SALES TAXES TODAY.

SO THE INCREASE IN HEALTH CARE SPENDING HAS ERODED THE SALES TAX BASE.

NOW, WITH THAT BACKGROUND ON ECONOMIC CONDITIONS AND ON THE SALES TAX, LET'S LOOK AT THE FULL REVENUE PICTURE IN DOLLARS, INCLUDING THE REVISIONS FOR THE CURRENT YEAR, FISCAL YEAR 2018 AND ESTIMATES FOR BUDGET YEAR, FISCAL YEAR 2019.

IN THIS CHART, SEE THE ADOPTED FY '18 COAL ALMOST, THIS IS OUR ONGOING REVENUE FORECAST ADOPTED LAST MARCH FOR THIS YEAR, 2018 FISCAL YEAR, THE ADOPTED FISCAL YEAR TOTAL WAS, AS YOU CAN SEE, $1,590.1 MILLION.

AT THE BOTTOM OF THAT FIRST NUMERICAL COLUMN.

THE NEXT SHOLE THOSE THE REVISED AND THE LAST ONE IS SHOWING OUR TOTAL PROJECTED TOTAL IS DOWN 3 MILLION.

REVISED TAX IS REVISED LOWER.

WE DISCUSSED THAT WITH THE WEAKNESSES WE'VE SEEN LATELY.

LOTTERY HAS BEEN REVISED HIRE BY 1.1 MILLION, THIS INCLUDES INSTANT ONLINE AND VIDEO LOTTERY RECEIPTS TO THE GENERAL FUND.

VIDEO LOTTERY IS CURRENTLY RUNNING 4% HIGHER THAN A YEAR AGO.

CONTRACTORS' EXCISE TAX HAS BEEN REVISED LOWER BY 79.9 MEDICAL.

SO FAR THIS FISCAL YEAR, WE'VE BEEN LOWER COMPARED TO VERY STRONG COLLECTIONS A YEAR AGO.

WE STILL ANTICIPATE HEALTHY HOUSING AND CONSTRUCTION ACTIVITY BUT JUST NOT AT THE LEVEL THAT WAS ORIGINALLY BUDGETED.

INSURANCE COMPANY TAX IS DOWN 6.1 MILLION AS COLLECTIONS FINANCE 2017 LOWER THAN ANTICIPATED.

WE CAN EXPECT GROWTH COMPARED TO A YEAR AGO BUT JUST LESS THAN WAS ADOPTED.

THE REMAINING REVISIONS ROUGHLY OFFSET ONE ANOTHER, TOTAL ONGOING RECEIPTS, 1.569 -- 1 BILLION, 658 MILLION, WHICH IS 23.1 MILLION LOWER THAN ADOPTED LAST MARCH.

REMEMBER, THIS 20.3 LOWER FIGURE, WE'LL TALK AGAIN ABOUT THIS IN A MINUTE.

BUT LET'S TALK ABOUT FY '19 PROJECTED REVENUE, JUST ADD A COLUMN.

THIS CHART ADDS THAT FY '19 ONGOING RECEIPTS COLUMN.

THE FAR RIGHT COLUMN SHOWS THE CHANGE IN MILLIONS AS COMPARED TO THE FY '18 ADOPTED ESTIMATE.

SALES AND USE TAX STARTING ON THE LEFT, 989 MILLION WAS THE ADOPTED FY '18 ESTIMATE.

79.3 IS REVISED ESTIMATE TODAY FOR THIS YEAR, AND FOR NEXT YEAR, FY '19, I RECOMMEND A FORECAST OF 1 BILLION 16.9 MILLION.

THE INCREASE OF 27.9 MILLION IS SHOWN IN THE FAR RIGHT COLUMN COMPARED TO, AGAIN, THE FY 2018 ADOPTED FIGURE.

THIS REPRESENTS HOW MUCH NEW SALES TAX WE'LL HAVE FOR NEW FY '19 EXPENSES.

LOTTERY, YOU CAN SEE IS BROKERED TO GROW 3.3 MILLION.

THE NEXT THREE REVENUE SOURCES IN THE RIGHT COLUMN YOU'LL SEE WE'RE BEING CAUTIOUS WITH OUR PROJECTIONS, FORECASTING A DECREASE IN CONTRACTORS' EXCISE TAX, INSURANCE COMPANY TAX AND UNCLAIMED PROPERTY AS MEASURED AGAINST THE FY '18 ADOPTED FIGURE.

LICENSED PERMITS AND FEES ESTIMATE IS UP $4.9 MILLION, PRIMARILY NORMAL GROWTH IN SECURITY FEES.

OTHER ONGOING RECEIPTS, GROWTH OF 4.4 MILLION INCLUDES TRANSFERS TO THE GENERAL FUND FROM THE SOUTH DAKOTA HOUSING AUTHORITY AND THE STATE VETERANS' HOME OPERATING FUND.

IN TOTAL, FOR FY 2019, I'M PROPOSING A REVENUE FORECAST OF 1 BILLION 622.5 MILLION, AND THIS IS 32.4 MILLION HIGHER THAN THE ADOPTED FY '18 FORECAST, MEANING, AGAIN, WE HAVE 32.4 MILLION IN NEW ONGOING REVENUE IN FY '19.

NOW, AGAINST THAT 32.4 NUMBER, AGAINST THE 32.4 NUMBER, LET'S CONSIDER PROPOSED EXPENSES.

FIRST AN OVERVIEW.

DUE TO LACK OF REVENUE GROWTH, I CANNOT RECOMMEND INFLATIONARY INCREASE AT ALL FOR EDUCATION OR MEDICAID PROVIDERS, OR STATE EMPLOYEE SALARIES.

MY BUDGET DOES INCLUDE THE FOLLOWING INCREASES.

FOR EDUCATION, I'M PROPOSING FUNDING TIED TO INCREASED STUDENT ENROLLMENT.

FOR MEDICAID PROVIDERS, TWO YEARS AGO, YOU'LL RECALL WE BEGAN A PLAN TO MOVE COMMUNITY-BASED PROVIDERS' RATES TO AT LEAST 90% OF THEIR ACTUAL COSTS.

OVER THREE YEARS, WE'VE BEEN WORKING TOWARD THAT AND THIS YEAR I'M RECOMMENDING FUNDING TO COMPLETE THAT PLAN.

AND THEN THIRDLY, FOR STATE EMPLOYEES, ALTHOUGH I'M NOT -- I'M RECOMMENDING A ZERO PERCENT SALARY INCREASE ACROSS THE BOARD, MY PROPOSAL DOES INCLUDE FUNDING TO KEEP SOME EMPLOYEES COMPENSATION FROM FALLING FURTHER BEHIND THE MARKET AND I'LL EXPLAIN MORE IN DETAIL ABOUT THAT LATER.

BUT LET'S TAKE A LOOK AT THE DOLLAR COSTS OF THESE OVERALL RECOMMENDATIONS.

FOR EDUCATION, TOTAL DOLLAR INCREASES OF 20,331, FOR PROVIDER ASSISTANCE, TOTAL INCREASES OF 11.3 MILLION.

PROTECTING PEOPLE IS 2.6 MILLION.

STATE EMPLOYEES AT MINIMUM AMOUNT, 630,000.

TITLE 19 MEDICAID FMAX SAVINGS IS ACTUALLY A BENEFIT TO -- IT'S LOWER EXPENSES OF 9.8 MILLION.

MISCELLANEOUS INCREASES AND DECREASES OF 2.4 MILLION, AND THEN BUILDING SOUTH DAKOTA, I'M SHOWING THAT AS AN EXPENSE OF 4.9 MILLION DOLLARS, THIS IS COST-NEUTRAL BECAUSE THE REVENUE ESTIMATE THAT I'M OFFERING INCLUDES INCREASED REVENUE RELATED TO THAT.

I'LL ADDRESS THAT IN MORE DETAIL LATER.

SO AS YOU CAN SEE, THIS TOTALS TO THE $32.4 MILLION IN INCREASES THAT WE SHOWED IN THE PROJECTED REVENUE MATCHING UP WITH THAT PROJECTION.

SO NOW LET'S LOOK AT EACH ONE OF THOSE LINE ITEMS IN DETAIL.

LET'S BEGIN WITH THE $20,330,660 FOR EDUCATION.

STATE AID TO EDUCATION IS 16.1 MILLION OF THAT, THAT'S PRIMARILY INCREASED ENROLLMENTS IN THE K-12 DISTRICTS.

IN FY '19, WE PROJECTED ENROLLMENTS TO GROW BY ALMOST 1900 STUDENTS, THIS INCLUDES AN INCREASE IN STUDENTS WHO QUALIFY AS ENGLISH LANGUAGE LEARNERS, WHICH COUNT AS AN ADDITIONAL QUARTER OF A STUDENT FOR EACH ONE OF THEM IN THE FORMULA.

MAINTENANCE REPAIR FOR THE BOARD OF REGENTS AND THE TECHNICAL INSTITUTES, 1 MILLION.

SEVERAL YEARS AGO, I PROPOSED AN YOU ADOPTED A PLAN TO BRING MAINTENANCE AND REPAIR BUDGETS TO 2% OF THE REPLACEMENT VALUE OF OUR STATE BUILDINGS OVER THE COURSE OF FOUR YEARS.

WE'VE REACHED THIS GOAL IN 2017 BUDGET YEAR BUT WE RETREATED FROM IT TO BALANCE THE BUDGET.

AFTER UPDATING BUILDING VALUATIONS THIS YEAR, WE HAVE FALLEN FURTHER BELOW THAT 2% MARK.

MY RECOMMENDATION FOR THIS YEAR WOULD BE TO GET THE BOARD OF REGENTS TO 1.76% SO WE DON'T FALL EACH FURTHER BEHIND.

I'M ALSO RECOMMENDING FUNDING TO BEGIN A SIX-YEAR PLAN TO GET THE STATE-OWNED TECHNICAL INSTITUTES BUILDINGS TO 2%.

THE NEXT LINE ITEM, BOARD OF REGENTS, UTILITIES, UTILITY EXPENSES AT THE BOARD OF REGENTS ARE PROJECTED TO INCREASE 894,000.

SOUTH DAKOTA OPPORTUNITY SCHOLARSHIPS 614,000.

THE 2015 LEGISLATURE INCREASED THE SCHOLARSHIP TO 6500 PER STUDENT WITH A FOUR-YEAR PHASE-IN.

THIS IS THE FOURTH AND FINAL YEAR OF THE PHASE-IN.

THIS FUNDING HELPS KEEP THE SCHOLARSHIP COMPETITIVE AS AN INCENTIVE FOR STUDENTS TO TAKE RIGOROUS HIGH SCHOOL CURRICULUM AND STAY IN SOUTH DAKOTA FOR COLLEGE.

4,188 RECIPIENTS ARE PROJECTED FOR THE COMING SCHOOL YEAR.

THE NEXT LINE ITEM, TECHNICAL INSTITUTES, 558,000 AND THIS CORRESPONDENCE TO A PROJECTED ENROLLMENT GROWTH OF 160 STUDENTS IN FY'19.

DUAL CREDIT INCREASES, 399,000, THE NUMBER OF STUDENTS TAKING DUAL CREDIT COURSES CONTINUES TO INCREASE.

THIS FUNDING IS FOR AN ADDITIONAL 4,129 CREDITS IN FISCAL YEAR '19 OVER THE CURRENTS FY '18 NUMBERS.

FINALLY THERE'S MISCELLANEOUS INCREASES AND DECREASES OF 702,000, ALL TOTAL TO THE 20.3 MILLION WE SAW IN THE PRIOR CHART.

NOW LET'S LOOK AT THE ITEMS WHICH ARE THE SECOND ITEM ON THE BIG CHART WHICH ADD UP TO 11.3 MILLION FOR MEDICAL AND PROVIDER ASSISTANCE.

THIS SECOND CATEGORY OF MEDICAL AND PROVIDER ASSISTANCE PROVIDES MANDATORY INFLATION OF $5.4 MILLION AND THESE INFLATIONARY ADJUSTMENTS ARE REQUIRED BY THE FEDERAL GOVERNMENT AND VARY ACROSS SERVICES, SUCH AS MEDICARE AND CERTAIN FEDERALLY QUALIFIED RURAL HEALTH CLINICS.

SECOND, GROWTH IN UTILIZATION OF $4.8 MILLION IN FY '19, WE PROJECT AN ADDITIONAL 945 PERSONS WILL ENROLL IN MEDICAID.

THAT'S 8-TENTHS OF ONE PERCENT GROWTH.

I MIGHT MENTION, DURING THE RECESSION, WE WERE ADDING 1,000 PEOPLE A MONTHS TO THE MEDICAID ROLLS SO TO SEE 945 OVER THE COURSE OF THE ENTIRE FISCAL YEAR '19 IS REALLY VERY SLOW GROWTH.

RURAL FAMILY RESIDENCY TRACK, 180,000.

LAST YEAR, YOU FUNDED START-UP COSTS FOR A RURAL FAMILY PRACTICE PHYSICIAN RESIDENCY PROGRAM.

PROGRAM HAS NOW RECEIVED INITIAL ACCREDITATION AND THIS 180,000 FUNDS YEAR ONE OF A THREE-YEAR IMPLEMENTATION PLAN TO ADD TWO RESIDENTS EACH YEAR FOR THREE YEARS.

DATA SHOWS THAT THE MAJORITY OF DOCTORS STAY TO PRACTICE IN THE STATE IN WHICH THEY COMPLETE THEIR RESIDENCY PROGRAM AND WITH THE EXPANSION OF THE MEDICAL SCHOOL IN SOUTH DAKOTA, SOUTH DAKOTA GRADUATES MORE PHYSICIANS EACH YEAR THAN WE HAVE RESIDENCY POSITIONS, AND WHEN THIS PROGRAM IS COMPLETE, THERE WILL BE ADDITIONAL SIX RESIDENCY SLOTS IN SOUTH DAKOTA SO WE'LL EXPORT FEWER TRAINED PHYSICIANS AND KEEP MORE OF THEM IN RESIDENCY IN SOUTH DAKOTA, ESPECIALLY IN RURAL COMMUNITIES WHERE OUR NEED IS MOST CRITICAL.

THE NEXT ITEM, MENTAL HEALTH COURT, 139,000.

THIS IS FUNDING TO THE TREATMENT PORTION OF THE MENTAL HEALTH COURT PILOT PROGRAM IN PENNINGTON COUNTY.

THE MISCELLANEOUS INCREASES AND DECREASES, $775,000 THROUGHOUT THE DEPARTMENTS OF SOCIAL SERVICES, HEALTH AND HUMAN SERVICES.

THEN FINALLY THE SOUTH DAKOTA HEALTH CARE COALITIONS -- SOLUTIONS COALITION, YOU CAN SEE A NEGATIVE NUMBER AND A POSITIVE NUMBER.

AS STATED EARLIER, TWO YEARS AGO, I PROPOSED AND YOU ADOPTED A PLAN TO INCREASE COMMUNITY-BASED PROVIDERS TO AT LEAST 90% OF COSTS OVER THREE YEARS.

THIS YEAR, MY RECOMMENDATIONS INCLUDE FUNDING THAT WILL COMPLETE THAT THREE-YEAR PLAN AND THIS WILL BE FUNDED USING SAVINGS GENERATED BY THE SOUTH DAKOTA HEALTH CARE SOLUTIONS COALITION'S WORK TO IMPLEMENT FEDERAL POLICY FOR THE FEDERAL GOVERNMENT TO PAY THE FULL BILL WHEN INDIAN HEALTH SERVICE REFERS MEDICAID PATIENTS TO OTHER PROVIDERS.

YOU CAN SEE THE SLIDE INCLUDES A SAVINGS OF 4.5 MILLION AND AN EXPENSE IN THE SAME AMOUNT AS THESE FUNDS ARE USED TO INCREASE RATES.

SO THE TOTAL INCREASE ON THAT CHART FOR MEDICAL AND PROVIDER ASSISTANCE IS THAT NUMBER YOU SAW EARLIER ON THE OTHER CHART, $11.3 MILLION.

NEXT WE'LL LOOK AT THE DETAIL FOR THE $2.5 MILLION UNDER PROTECTING PEOPLE.

THIS THIRD CATEGORY OF PROTECTING PEOPLE INCLUDES CORRECTIONAL HEALTH CARE EXPENSE OF $1.3 MILLION FOR COSTS ASSOCIATED WITH PROVIDING MENTAL -- MEDICAL AND MENTAL HEALTH CARE TO ADULT OFFENDERS.

IT ALSO INCLUDES D.O.C.

COMMUNITY TRANSITION PROGRAM COSTS OF $1.1 MILLION, AND THIS PROGRAM WOULD PROVIDE COMMUNITY PLACEMENTS FOR PAROLEES TO SAVE ON OPERATIONAL COSTS AS MUCH AS STAFF AND HEALTH CARE WITHIN THE PRISONS.

THIRDLY, MENTAL HEALTH COURT, $109,000.

THIS FUNDING WOULD ESTABLISH A MENTAL HEALTH COURT IN PENNINGTON COUNTY TO MORE EFFECTIVELY IDENTIFY AND TREAT PEOPLE WITH MENTAL ILLNESS WHO ARE ENTERING THE CRIMINAL JUSTICE SYSTEM.

THEN MISCELLANEOUS INCREASES AND DECREASES, NEARLY 15,000.

IT INCLUDES VARIOUS OPERATING EXPENSES, AT ADULT CORRECTIONAL FACILITIES, DECREASES WITHIN JUVENILE CORRECTIONS DUE TO THE DECLINING JUVENILE POPULATION AND AN INCREASE IN SECURITY STAFF AT THE COMMUNITY WORK CENTERS.

THE TOTAL INCREASE RELATED TO PROTECTING PEOPLE $2.6 MILLION.

THE FOURTH LINE ITEM ON THE MAJOR CHART IS, I'M ALSO PROPOSING ALMOST $632,000 TO ADDRESS LOW PAY FOR CERTAIN STATE EMPLOYEES.

AS I SAID, I'M RECOMMENDING NO SALARY INCREASE OR MARKET ADJUSTMENT FOR MOST STATE EMPLOYEES FOR THE SECOND YEAR IN A ROW AND NO MOVEMENT TOWARD MARKET VALUE OR PAY-FOR-PERFORMANCE.

WE JUST CAN'T AFFORD IT.

I'M ALSO RECOMMENDING NO INCREASE STATE SUPPORT FOR STATE EMPLOYEE HEALTH PLAN COSTS, EVEN AS EVER-RISING HEALTH CARE COSTS WILL FORCE CHANGES TO OUR HEALTH PLAN WHICH WILL IMPACT STATE EMPLOYEES.

AS WE MINIMIZE THAT IMPACT AS MUCH AS POSSIBLE, WE WILL LIKELY DEPLETE OUR CURRENT HEALTH PLAN RESERVE AND PUT MORE EXPENSE ON THOSE EMPLOYEES AND THEIR DEPENDENTS.

FOR A PAY RANGE TO ADDRESS EMPLOYEE MARKET MINIMUM, $632,000 NEARLY TO KEEP SOME EMPLOYEE PAY, WHICH IS ALREADY LOWER THAN MARKET, FROM FALLING EVEN FARTHER BEHIND THE MARKET, AND I'M GOING TO WALK YOU THROUGH AN EXAMPLE SO THIS COMES DOWN TO HUMAN TERMS.

I'M GOING TO USE A CASE WORKER WHICH IS ONE OF THE JOBS THAT WOULD BE AFFECTED BY THIS AND THERE'S ABOUT 15,000 JOBS LIKE THIS HAVE THE THE AVERAGE MARKET SALARY FOR THIS JOB CURRENTLY IS $21.7 -- $21.70 AN HOUR, AND HOW DO WE KNOW WHAT THAT IS?

BECAUSE WE SURVEY THE MARKET EVERY YEAR AND WE HAVE A VERY COMPREHENSIVE SURVEY EVERY FOUR YEARS, WHICH WE JUST COMPLETED.

SO THE AVERAGE WAGE IN THE MARKET AMONG PRIVATE EMPLOYERS AND OTHER GOVERNMENT EMPLOYERS IS $21.70.

THIS IS WHERE WE WOULD LIKE THE SALARY OF OUR FULLY PROFICIENT EMPLOYEES TO BE.

THE HIRING POINT OR THE TARGET MINIMUM FOR A NEW EMPLOYEE IN THIS JOB WOULD BE $18.45 AN HOUR, WHICH IS 85% OF THAT AVERAGE MARKET WAGE.

HOWEVER, WE'RE CURRENTLY HIRING NEW EMPLOYEES FOR THIS JOB AT $15 AN HOUR BECAUSE THAT'S ALL WE CAN AFFORD.

WE CALL THIS OUR ARTIFICIAL MINIMUM, OR THE CURRENT MINIMUM.

AS YOU CAN SEE IN THIS SLIDE.

MY PROPOSAL WOULD ALLOW US TO MOVE MINIMUM PAY FOR THIS JOB FROM $15 AN HOUR TO $15.87 AN HOUR.

THIS DOESN'T GET US TO OUR TARGET MINIMUM BUT IT PREVENT US FROM FALLING FURTHER BEHIND.

AS AVERAGE MARKET WAGE GOES UP IN FISCAL YEAR '19, WE WON'T FALL FARTHER BEHIND.

ADDRESSING THIS NOW TO THE EXTENT WE CAN WILL AVOID MORE EXPENSIVE PROBLEMS DOWN THE ROAD.

AND AS I SAID, THIS WILL AFFECT APPROXIMATELY 1500 CURRENT EMPLOYEES.

THE FIFTH MAJOR EXPENSE THAT IS ACTUALLY HELPFUL TO OUR BUDGET, THE FEDERAL MEDICAL ASSISTANCE PERCENTAGE, OR FMAP, WHICH IS THE FEDERAL GOVERNMENT'S SHARE OF EACH MEDICAID PAYMENT, WILL INCREASE FOR FY '19, MEANING OUR STATE SHARE OF EACH PAYMENT WILL GO DOWN.

LET'S LOOK AT FMAP HISTORY.

THIS CHART SHOWS THE CHANGES OF THE FEDERAL AND STATE SHARE OF MEDICAID PAYMENTS TO PROVIDERS.

THE FEDERAL SHARE IS SHOWN BY THE RED LINE, IT'S CALLED THE FEDERAL MEDICAL ASSISTANCE PERCENTAGE, OR FMAP.

THAT'S THE FEDERAL SHARE.

BECAUSE THE FMAP IS INCREASING HERE IN THE LAST THREE YEARS, OUR STATE SHARE, THE BLUE LINE, WILL GO DOWN BY 1.13% TO 43.63% OF EACH PAYMENT.

SO WHY IS THIS HAPPENING?

WELL, OUR FMAP RATE IS DETERMINED BY COMPARING SOUTH DAKOTA'S PERSONAL INCOME CHANGE OVER THREE YEARS, LOOKING BACK THREE YEARS, WHAT'S OUR PERSONAL INCOME CHANGE AS COMPARED TO THE UNITED STATES PERSONAL INCOME CHANGE AVERAGE OVER THE LAST THREE YEARS.

YOU'LL REMEMBER THAT FY 2011 WAS ENHANCED UNDER THE STIMULUS SO THAT'S WHY THERE IS A BIG GAP THERE BUT IN FISCAL YEARS 2012 THROUGH '16, OUR THREE-YEAR TRAILING AVERAGE OF PERSONAL INCOME WAS GROWING FASTER THAN THE UNITED STATES' PERSONAL INCOME WAS GROWING.

IN PART BECAUSE OF HIGH FARM INCOME, BECAUSE FARM INCOME GETS FIGURED INTO THAT ASSESSMENT.

SINCE THEN, THOUGH, SINCE OUR FARM INCOME STARTED FALLING, OUR THREE-YEAR AVERAGE HAS SLOWED COMPARED TO THE REST OF THE NATION SO THE INCREASED FMAP IN 2019 WILL SAVE STATE GENERAL FUNDS IN FIVE DIFFERENT DEPARTMENTS ACROSS THE STATE BUDGET, AND THE TOTAL SAVINGS IS ALMOST 9.8 MILLION DOLLARS.

ASIDE FROM SOME OTHER MISCELLANEOUS INCREASES AND DECREASES, THE LAST MAJOR ITEM NOT TO DETAIL IS BUILDING SOUTH DAKOTA.

IT'S SHOWN AS AN EXPENSE BUT IT'S OFFSET BY AN INCREASE IN GENERAL FUND REVENUE.

LET ME EXPLAIN THAT.

OUR CURRENT LAW INCLUDES SEVERAL STATUTES THAT DEFINE HOW REVENUE FLOWS INTO BUILDING SOUTH DAKOTA, HOW THOSE DOLLARS ARE ALLOCATED AMONG FIVE DIFFERENT FUNDS AND HOW THOSE FUNDS ARE SPENT.

IT'S BECOME VERY COMPLICATED.

A FEW YEARS AGO, YOU MIGHT REMEMBER, WE ALLOCATED A LARGE SUM OF ONE-TIME MONEY TO BUILDING SOUTH DAKOTA WITH THE HOPE THAT THE PROGRAM WOULD SUSTAIN ITSELF FOR THREE YEARS.

IN FACT, THOSE FUNDS HAVE LASTED FOR FOUR YEARS.

LOOKING FORWARD, HOWEVER, THE ONGOING REVENUE SOURCES THAT FUND BUILDING SOUTH DAKOTA ARE VERY VOLATILE AND UNPREDICTABLE.

CURRENTLY, BUILDING SOUTH DAKOTA RECEIVES FUNDING IN TWO WAYS.

YOU CAN SEE AT THE TOP.

FIRST, IF THE BOARD OF ECONOMIC DEVELOPMENT APPROVES A REINVESTMENT PAYMENT FOR A CONSTRUCTION PROJECT OVER $20 MILLION, THEN THE CONTRACTOR'S EXCISE TAX FOR THAT PROJECT THROWS TO BUILDING SOUTH DAKOTA.

AND THAT VARIES GREATLY YEAR TO YEAR BECAUSE IT FLOWS AT THE END OF THE PROJECT, WHEN THE PROJECT IS COMPLETE.

AND USUALLY THERE IS A DELAY OF TWO OR THREE YEARS FROM THE TIME A PROJECT IS APPROVED TO WHEN IT IS COMPLETED AND THE CONTRACTOR'S EXCISE TAX IS TRANSFERRED.

SECONDLY, THERE IS A STATUTE THAT STATES THAT IF THE BUDGET RESERVE FUNDS ARE OVER 10% OF OUR GENERAL FUND BUDGET AND BUILDING SOUTH DAKOTA FUNDS ARE LESS THAN 1% OF OUR GENERAL FUND BUDGET, THEN FUNDS ARE TRANSFERRED TO BUILDING SOUTH DAKOTA AND THOSE CONDITIONS HAVE NEVER OCCURRED.

I WOULD LIKE TO PROPOSE THAT WE MAKE THIS MUCH SIMPLER.

MY BUDGET WOULD TAKE THE APPROXIMATELY $3 MILLION PER YEAR IN CONTRACTORS' EXCISE TAX THAT'S CURRENTLY DIVERTED TO BUILDING SOUTH DAKOTA AND, INSTEAD, DIRECT IT BACK TO THE GENERAL FUND.

THEN I'M PROPOSING THAT WE ALLOCATE $3 MILLION IN GENERAL FUNDS, THE SAME AMOUNT, INTO THE FUNDS THAT MAKE UP BUILDING SOUTH DAKOTA.

IN ADDITION, THE HOUSING DEVELOPMENT AUTHORITY HAS COMMITTED $1.5 MILLION IN ONGOING FUNDS FOR THE NEXT FIVE YEARS ANNUALLY, AND WE'VE ALSO COMMITTED $400,000 ANNUALLY FROM THE PRIVATE ACTIVITY BOND FUND, SO ALL TOLD, THIS WOULD BE A COMMITMENT OF $4.9 MILLION IN ONGOING GENERAL FUNDS THAT COULD BE, IN TURN, SPENT IN THE GENERAL APPROPRIATIONS BILL FOR BUILDING SOUTH DAKOTA.

THIS PROPOSAL WOULD ELIMINATE THE 5% STREAM OF DOLLARS THAT'S CURRENTLY ALLOCATED TO THE REDI FUNDS AND WOULD ALLOCATE THE DOLLARS INSTEAD TO THE FOUR REMAINING FUNDS, HOUSING OPPORTUNITY, 1.9 MILLION, LOCAL INFRASTRUCTURE 1.5 MILLION, WORKFORCE EDUCATION 1.125 MILLION, AND ECONOMIC DEVELOPMENT PARTNERSHIP 375,000, AND I BELIEVE THAT ALLOCATION CLOSELY MIRRORS THE CURRENT ALLOCATION AND THE LEVEL OF UTILIZATION EACH PROGRAM HAS SEEN.

BUT I'M CERTAINLY OPEN TO REBALANCING THAT THROUGH THE APPROPRIATIONS PROCESS FEEL.

IF WE MAKE THIS CHANGE, THESE FOUR FUNDS WILL EXIST IN THE GENERAL APPROPRIATIONS ACT EACH YEAR RATHER THAN RELYING ON A COMPLICATED AND UNRELIABLE SIDE STATUTE.

IN WILL MAKE IT EASE JURY FOR LEGISLATORS TO WEIGH THE BALANCING OF THE FUND AND TO MAKE CHANGE.

IF MY PROPOSED LEGISLATION DOES NOT PASS, THE $3 MILLION IN CONTRACTORS' EXCISE TAX WOULD CONTINUE TO BE WITHHELD FROM THE GENERAL FUND FOR BUILDING SOUTH DAKOTA AND THAT'S WHY THIS PROPOSAL IS REVENUE NEUTRAL.

WE'RE ADDING THREE MILLION TO THE GENERAL FUND AND PUTTING THREE MILLION DOLLARS OF SPENDING IN THE GENERAL BILL FROM THOSE DOLLARS, ALONG WITH THE 1.5 AND THE FOUR FROM THE OTHER TWO SOURCES.

UNLESS THIS PROGRAM IS ABOLISHED ENTIRELY, THERE'S NO WAY TO REDIRECT THOSE FUNDS ELSEWHERE BECAUSE THEY WON'T EXIST IN THE GENERAL BILL.

SO THIS SLIDE ONCE AGAIN SUMMARIZES ALL THOSE MAJOR SPENDING CHANGES IN THE BUDGET THAT I'M PROPOSING TODAY.

THE NET SPENDING INCREASE OF $32.4 MILLION MIRRORS THE INCREASE IN PROJECTED REVENUE FOR FY '19.

SO NOW THAT WE'VE DISCUSSED THE PROPOSED FY '19 BUDGET, LET'S GO BACK TO 2018, THE YEAR WE'RE IN RIGHT NOW.

WE'VE GOT SEVEN MONTHS TO GO IN THE YEAR BUT WE KNOW WE'RE GOING TO HAVE A REVENUE SHORTAGE IF THINGS CONTINUE TO GO, AND, REMEMBER, AS DESCRIBED EARLIER, OUR MOST RECENT PROJECTIONS TODAY ARE THAT OUR REVENUE WILL BE 20.3 MILLION LESS THAN OUR ADOPTED EXPENDITURES.

AND THAT'S AT DOPTED EXPENDITURES AND REVENUE WE ADOPTED LAST MARCH.

3 IN ADDITION TO THE 20.3 MILLION REVENUE SHORTFALL, WE ALSO HAVE $10.4 MILLION IN ADDITIONAL FY '18 EXPENSES, AS WELL.

LET'S LOOK AT THOSE INCREASED EXPENSES.

STATE AID TO EDUCATION, $9 MILLION.

THIS INCREASE IS DUE TO THE SAME -- SOME OF THE SAME FACTORS WE MENTIONED EARLIER.

FIRST, THE NUMBER OF STUDENT ENROLLMENTS COMPARED TO WHAT WAS ESTIMATED IS ABOUT 450 MORE STUDENTS THAT ENROLLED.

SECOND, THE NUMBER OF ENGLISH LANGUAGE LEARNERS IS UP AND, AS I SAID EARLIER, WE PAY AN EXTRA 25% FOR EACH STUDENT WHO * ENGLISH LANGUAGE LEARNERS.

FIRST, DUAL CREDITS.

AGAIN, FOR FY '18, WE'RE PROJECTING 2,282 MORE CREDITS.

AND OUR VALUATIONS ARE A LITTLE LOWER THAN EXPECTED WHICH REDUCES THE AMOUNT OF MONEY SCHOOLS ARE GETTING FROM THE LOCAL PROPERTY TAXPAYERS WHICH RAISES THE AMOUNT WE MUST THEN PAY THEM TO FILL UP TO THE PER-STUDENT EVALUATION FEEL THE SECOND ITEM ON THAT LIST IS UTILITY RATE AND FOOD SERVICE ADJUSTMENTS OF $617,000.

THEY'RE DUE TO INCREASED COSTS AND USAGE IN THE CURRENTS YEAR BY VARIOUS AGENCIES.

THE TECHNICAL SCHOOL, OUR FEE ALSO INCREASED ENROLLMENT.

THEY'RE SEEING 103 MORE STUDENTS ENROLLED THAN PREVIOUSLY BUDGETED, THAT'S COSTING US $358,000 MORE.

AN MISCELLANEOUS INCREASES OF $394,000 INCLUDES $320,000 FOR THE OBLIGATION RECOVERY CENTER FOR RECOVERY FEES WHICH IS A NET IMPACT OF ZERO TO THE GENERAL FUND BECAUSE IT MEANS WE'RE ALSO COLLECTING MORE DEBT THAN WE ANTICIPATED.

COLLECTIONS FOR FY'18 ARE PROJECTED TO INCREASE 1.4 MILLION OVER BUDGETED LEVELS AND MOST OF THESE FUNDS DO NOT GO TO THE GENERAL FUND BUT INSTEAD GO TO THE COURT SYSTEM, MUNICIPALITIES AND COUNTIES.

BUT IT'S AN INDICATOR OF A GOOD THING BECAUSE WE'RE COLLECTING MORE DEBTS THAN WE WOULD OTHERWISE HAVE ANTICIPATED.

6 THEN I'M ALSO RECOMMENDING $3 MILLION IN EMERGENCY SPECIAL APPROPRIATIONS FOR FY 2018, ADDING IN THESE APPROPRIATIONS BRINGS OUR TOTAL SHORTFALL TO $33.7 MILLION, AND LET'S TAKE A LOOK AT THOSE SPECIAL APPROPRIATIONS IN DETAIL.

FIRST, HEALTH CARREY CRUMENT ASSISTANCE PROGRAM, 837 -- ALMOST $838,000.

THIS FUNDING WILL PAY FOR HEALTH CARE PROFESSIONALS SUCH AS PHYSICIANS, DENTISTS, NURSE PRACTITIONERS, PHARMACISTS, SO ON, WHO HAVE MET THEIR COMMITMENT TO PRACTICE IN RURAL AREAS AND NOW WE OWE THEM A REIMBURSEMENT FOR THEIR TUITION.

SECOND, WILDLAND FIRE SUPPRESSION FUND IS $667,000 IS TO BACKFILL THE FIRE FUND FOR FIRES THAT HAVE TAKEN PLACE IN THE PAST YEAR.

AVIATION SUPPORT FACILITY, $500,000.

THIS WILL PROVIDE A PORTION OF THE FUNDING NEEDED FOR YEAR ONE OF THREE YEARS TO PAY FOR AN AVIATION SUPPORT FACILITY FOR THE ARMY NATIONAL GUARD AT THE RAPID CITY REGIONAL AIRPORT.

WE ARE ABLE TO MOVE UP THE FEDERAL PROJECT LIST AND TOTAL FUNDING NEEDED FROM STATE SOURCES WILL BE $5 MILLION OVER THREE YEARS WITH AN ADDITIONAL $15 MILLION, 15 MILLION DOLLARS FROM THE FEDERAL GOVERNMENT.

THE NEXT ITEM TAX REFOUND FOR THE HE HAD DEERLY YOU'VE SEEN BEFORE, THIS IS AN ANNUAL APPROPRIATION THAT PAYS FOR REFUNDS OF SALES TAXES OR PROPERTY TAXES FOR ELDERLY AND DISABLED PERSONS, THAT MEET LOW-INCOME GUIDELINES.

THE EXTRAORDINARY LITIGATION FUND, $44,000.

THIS IS TO BACK-FILL THE EXTRAORDINARY LITIGATION FUND FOR LITIGATION EXPENSES NOT COVERED BY THE PEOPLE FUND, THE PUBLIC ENTITY POOL FOR LIABILITY.

AND IN TOTAL, AS YOU CAN SEE, THIS IS JUST UNDER THE $3 MILLION OF SPECIAL APPROPRIATIONS.

SO, HERE AGAIN, IS THE TOTAL SHATTER SHORT IF FALL OF $33.7 MILLION FOR THE YEAR WE'RE IN RIGHT NOW, AND HERE'S HOW I'M PROPOSING TO FILL IT.

FIRST, WE'RE GOING TO REDUCE EXPENSES BY $16 MILLION AND LET'S LOOK AT WHAT THOSE REDUCTIONS ARE.

THE DEPARTMENT OF SOCIAL SERVICES UTILIZATION, AGAIN, I REMARKED HOW SLOWLY OUR ENROLLMENT GROWTH IS AS COMPARED TO WHAT IT WAS DURING THE RECESSION, SO WE'RE GOING TO REDUCE THE NUMBER OF PEOPLE WE PROJECT ELIGIBLE FOR MEDICAID SERVICES TO FOLLOW THE TRENDS WE'VE BEEN SEEING.

SECOND IS DEPARTMENT OF SOCIAL SERVICES PROGRAM FUNDS, $5.8 MILLION.

THIS INCLUDES USING $3 MILLION IN TEMPORARY ASSISTANCE FOR NEEDY FAMILY FUNDS, $2 MILLION OF PRESCRIPTION DRUG REBATE FUNDS AND $800,000 IN SNAP FUNDS, SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM, FORMERLY FOOD STAMP.

FROM THE DEPARTMENT OF HUMAN SERVICES, WE'RE PROJECTING LOWER UTILIZATION, AGAIN, LIKE -- MUCH LIKE THE MEDICAID ENROLLMENT, THAT IMPACTS HUMAN SERVICES, REDUCTION INS LONG-TERM SERVICES AND SUPPORTS AND DEVELOPMENTAL DISABILITIES BASED ON CURRENT PROJECTIONS, AND ALSO A REDUCTION AT THE SOUTH DAKOTA DEVELOPMENT CENTER IN REDFIELD DUE TO OUR INITIATIVE TO RIGHT-SIZE THAT PROGRAM.

NEXT, THE D.O.C.

JUVENILE UTILIZATION IS DOWN DUE TO THE DECLINING JUVENILE POPULATION AND THE UPCOMING SALE OF STAR ACADEMY.

THIS ASSUMES WE WILL GET THE STAR ACADEMY SOLD AND GET OVER HALF A MILLION DOLLARS OF EXPENSE OFF THE BOOKS.

ANNUAL EXPENSE.

FROM PUBLIC SAFETY STATE RADIO, $100,000 REDUCTION BASED ON CURRENT EXPENSES AND A FIRE PREMIUM REFUND UPDATE, $20,000 OF ADJUSTMENT TO THE FIRE PREMIUM REFUND CONTINUOUS APPROPRIATION BASED ON ACTUAL FIGURES.

SO YOU CAN SEE ALL THOSE REDUCTIONS TOTAL $16 MILLION AND THAT WILL COVER PART OF THE GAP.

THE OTHER PART OF THE GAP IS THE USE OF ONE-TIME CASH RESOURCES, AND SO WE'LL LOOK AT THAT NEXT, THE $17.7 MILLION IS MADE UP BY QUITE A FEW THINGS.

THE BUDGET RESERVE, YOU WILL PROPOSE TO TRANSFER 7.2 MILLION DOLLARS FROM THE BUDGET RESERVE THAT, WILL STILL KEEP OUR RESERVES AT 10% BUT USES THE EXCESS, THAT 7.2 MILLION AND THAT WILL BE USED TO COVER MOST OF OUR FY 2018 SHORTFALL IN STATE AID TO EDUCATION.

FROM HEALTH AND EDUCATION FACILITIES AUTHORITY, 2.5 MILLION TO COVER THE REST OF THE SHORTFALL IN EDUCATION FUNDING AND TO COVER OUR RURAL HEALTH CARE RECRUITMENT INCENTIVE OBLIGATIONS, BECAUSE, YOU KNOW, THAT AUTHORITY HAS TO SPEND MONEY ON EDUCATION AND HEALTH CARE.

THE REST OF THIS LIST INCLUDES CASH RESOURCES WITHIN THE VARIOUS DEPARTMENTS WHICH YOU CAN SEE ON THE SLIDE, DEPARTMENT OF HUMAN SERVICES HOME MAKER FEES, TWO MILLION, COMPENSATION FUND 1.3 MILLION.

DEPARTMENT OF WORKFORCE EDUCATION, 793,000.

DEPARTMENT OF HUMAN SERVICES TELECOMMUNICATION RELAY SERVICES, 750,000.

DEPARTMENT OF HUMAN SERVICES PRESCRIPTION DRUG FUND, 750,000.

DEPARTMENT OF EDUCATION E-RATE FUNDS, 500,000.

VIDEO LOTTERY FUNDS 500,000.

COURT AUTOMATION FUND 500,000.

PRIVATE ACTIVITY BOND FEE FUND, 481,000, FINANCE AND MANAGEMENT BUDGETARY ACCOUNTING FUNDS, 261,000 AND VETERANS' HOME OPERATING FUNDS, 120,000.

ALL TOTAL, $17.7 MILLION.

SO THOSE TWO ITEMS COVER THE SHORTFALL OF 33.7 MILLION DOLLARS IN THE CURRENTS FISCAL YEAR, AGAIN, REDUCING EXPENSES BY APPROXIMATELY 16 MILLION AND UTILIZING $17.7 MILLION OF CASH RESOURCES.

AND TO PUT THIS IN PERSPECTIVE, THE $33.7 MILLION IS ABOUT 2% OF OUR GENERAL FUND BUDGET AND ABOUT SEVEN-TENTHS OF 1% OF OUR TOTAL BUDGET.

SO IT'S A HOLE BUT PUT IT IN PERSPECTIVE ANOTHER WAY, S & P -- NO, MOODY'S REPORTED WHEN THE FISCAL YEAR BEGAN, SEVERAL STATES DIDN'T HAVE A BUDGET YET.

MONTANA JUST FINISHED THEIR SPECIAL SESSION TO FIX THEIR BUDGET HOLE.

OKLAHOMA HAD AN EIGHT-WEEK SPECIAL SESSION THAT ENDED UP IN FAILURE AND THEY'RE PROBABLY GOING TO HAVE TO GET BACK TOGETHER TO FILL A $250 MILLION BUDGET HOLE.

SO ALL THINGS CONSIDERED, I THINK WE'RE IN RELATIVELY GOOD SHAPE.

I WISH WE HAD BETTER REVENUE GROWTH.

WE WISH WE DIDN'T HAVE THESE UNFORESEEN EXPENSES BUT, AGAIN, ALL THINGS CONSIDERED, WE'RE IN PRETTY GOOD SHAPE.

SO HERE IS A FINAL LOOK AT FY '18 AND '19.

I'M PROPOSAL A REVISED BUDGET IN 2018 OF $4.6 BILLION AND RECOMMENDING $4.7 BILLION IN TOTAL SPENDING FOR 2019.

THE RECOMMENDED FTE FOR 2019 ARE 13,905.9.

FULL-TIME EQUIVALENT EMPLOYEES AND AGENCIES UNDER MY DIRECT CONTROL ARE STILL 116 FEWER THAN WHEN I TOOK OFFICE IN 2011.

BOTH YEARS ARE HONESTLY BALANCED WITH ONGOING EXPENSES FOR FY '19 FULLY SUPPORTED BY ONLY ONGOING REVENUE AND THERE AGAIN IS A DISTINCTION FROM OTHER STATES.

IN ILLINOIS, THEY ARE VERY CLEARLY FUNDING ONGOING EXPENSES WITH ONE-TIME REVENUE AND MUCH OF IT THROUGH BORROWING AND THAT'S NOT SOMETHING WE'RE DOING MUCH WE'RE HONESTLY BALANCING OUR BUDGET WITH ONGOING REVENUE ONLY BEING USED FOR ONGOING EXPENSES.

IN CLOSING, SOUTH DAKOTA'S WORKING.

WE'RE WORKING BETTER THAN MANY OTHER STATES.

WE COULD PROBABLY SAY THAT WE STRUCTURALLY BALANCED OUR BUDGET HONESTLY WITHOUT GIMMICKS IN THIS OUR 129th YEAR OF BALANCED BUDGET WHICH IS HONESTLY BALANCED.

WE'VE PRUDENTLY MAINTAINED A 10% RESERVE.

WE'VE ONE OF THE STRONGEST PENSION PLANS IN THE NATION, S & P JUST RELEASED A REPORT A COUPLE MONTHS AGO THAT IDENTIFIED SOUTH DAKOTA AMONG THE TOP 170 PLANS IN THE NATION.

WE'RE ONE OF FIVE THEY HELD UP AS EXAMPLES.

WE ARE PLACING IMPROVEMENTS IN OUR FINANCIAL PRACTICE INTO STATUTE TO HELP GUIDE OUR STATE FOR THE LONG TERM.

AFTER WE'RE GONE, OTHERS IN OUR PLACE WILL FOLLOW THESE STATUTES, HOPEFULLY.

AND ALL OF THESE PRACTICES ARE PAYING DIVIDENDS.

SOUTH DAKOTA HOLDS THE TOP CREDIT RATING FROM ALL THREE MAJOR CREDITING RATING AGENCIES AND I'M VERY PROUD OF THE ACHIEVEMENT ON THIS SLIDE.

THEY AREN'T MY ACHIEVEMENTS, THEY REFLECT THE DISCIPLINE AND MATURITY THAT YOU'VE SHOWN AS LEGISLATORS, THAT MANY PAST GOVERNORS AND LEGISLATORS HAVE SHOWN AND WE SHOULD NEVER TAKE THAT FOR GRANTED.

EVERY YEAR, OUR CONTINUED PROSPERITY IS NEVER GUARANTEED.

WE MUST BE EVER WATCHFUL AND NOT TAKE THAT FOR GRANTED.

MANY OTHER STATES FIND THEMSELVES IN DIRE STRAITS TODAY BECAUSE THEY FAILED TO MAINTAIN THAT DISCIPLINE THAT I'M PROUD SOUTH DAKOTA HAS HISTORICALLY MAINTAINED.

I HOPE YOU'RE PROUD OF THESE ACCOMPLISHMENTS ALSO.

I LOOK FORWARD TO WORKING WITH YOU TOGETHER THIS YEAR TO HELP SOUTH DAKOTA MAINTAIN A SOUND FINANCIAL FOOTING.

THANK YOU VERY MUCH FOR YOUR ATTENTION TODAY.

[Applause] >> GO FORTH AND PROSPER AND DON'T SPEND BEYOND YOUR MEANS.

HAVE A GREAT DAY.

WE'LL SEE YOU IN JANUARY.

[ Banging Gavel ] >> AND THAT WILL CONCLUDE GOVERNOR DENNIS DAUGAARD'S BUDGET ADDRESS.

HE GAVE THOSE RECOMMENDATIONS FOR FISCAL YEAR 2019, ALTHOUGH THERE WAS MUCH TALK ABOUT TWEAKING THE BUDGET FOR 2018 DUE TO LOW SALES TAX THAT ARE COMING IN.

ONE OF THE THINGS THAT THE GOVERNOR TALKS ABOUT AT THE END WAS THERE ARE A LOT OF STATES THAT ARE IN SERIOUS SITUATIONS BECAUSE THEIR BUDGETS ARE IN SUCH BAD SHAPE.

HE STRESSED THAT SOUTH DAKOTANS, SOUTH DAKOTA LAWMAKERS SHOULD BE PROUD OF THE FACT THAT HISTORICALLY, THEY HAVE BALANCED THEIR BUDGET HERE AND THEY WILL CONTINUE TO DO SO.

ONE OF THE THINGS HE MENTIONED THE SOUTH DAKOTA ECONOMIC FORECAST STILL CALLS FOR POSITIVE GROWTH, WHICH IS GOOD, HE JUST STRESSES THAT LAWMAKERS NEED TO BE CAUTIOUS AS THEY MOVE FORWARD HAVE THE HIS RECOMMENDATIONS ARE COMING FROM THE SOUTH DAKOTA COUNCIL OF ECONOMIC ADVISORS.

THEY DEVELOPED THE REVENUE PROJECTIONS THAT WERE PRESENTED TODAY.

ONE OF THE THINGS TALKED ABOUT RIGHT AWAY WAS THE SHORTFALL FROM FISCAL YEAR 2018, $33.7 MILLION FROM FISCAL YEAR '18 IS THE SHORTFALL.

HE TALKED ABOUT HIS IDEAS ON HOW WE FILL THAT.

A COUPLE OF DIFFERENT WAYS TO DO THAT ARE GOING TO BE SOME REDUCTION IN EXPENSES WHICH WILL COME FROM A VARIETY OF SOURCES.

THE GOVERNOR ALSO TALKED ABOUT SOME ONE-TIME CASH RESOURCE OF ABOUT 17.6 MILLION, SO BETWEEN 17.6 MILLION AND A ONE-TIME CASH, IF YOU WILL, ADVANCE TO THE GENERAL FUND AND A $16 MILLION REDUCTION IN EXPENSES, IT SHOULD FILL THAT $33 MILLION SHORTFALL THAT THE GOVERNOR TALKED ABOUT TODAY FOR FISCAL YEAR '18.

STAND BY WE'RE GOING TO BE VISITING WITH STATE LAWMAKERS TO HEAR WHAT THEY THOUGHT ABOUT THE GOVERNOR'S RECOMMENDATIONS, TO WILL GET THEIR TAKE ON THE 2018 LEGISLATIVE SESSION, WHICH IS JUST AROUND THE CORNER.

IF YOU MISSED ANY OF TODAY'S SPEECH, YOU CAN FIND IT ARCHIVED AT SDPB.ORG.

YOU CAN ALSO VISIT US ON Facebook AND TWITTER AT SDPBNEWS, WHERE WE WILL HAVE EVERYTHING ARCHIVED, INCLUDING OUR REPORTERS THAT HAVE BEEN FOLLOWING THE GOVERNOR'S SPEECH ALL DAY, BRINGING YOU INSIGHTS AND INFORMATION AND NUMBERS AND CLIPS FROM THE SLIDES THAT THE GOVERNOR PRESENTED, HIS LAST BUDGET ADDRESS AS THE GOVERNOR OF SOUTH DAKOTA.

WE'RE GOING TO START DOING SOME INTERVIEWS NOW.

I'M GOING TO THROW IT SO SDPB'S RADIOLY STRIBINGER.

LEE.

>> THANK YOU FOR JOINING ME.

WHAT DID YOU THINK OF THE GOVERNOR'S PRESENTATION?

>> I THOUGHT IT WAS A GOOD BUDGET PRESENTATION, THE BUDGET OF COURSE IS BALANCED AND IT REFLECTS A TOUGH AG ECONOMY SO OUR SALES TAX COLLECTIONS ARE DONE, IT REFLECTS THE FACT THAT 9% OF ALL THE RETAIL SALES ARE ONLINE AND INCREASING AND THAT'S A BIG ISSUE FOR OUR BUDGET HERE IN SOUTH DAKOTA, SO IT'S A MODEST BUDGET WITH NO INFLATIONARY INCREASES FOR K-12, MEDICAID PROVIDERS OR STATE EMPLOYEES.

JUST A REALITY.

>> THE FISCAL YEAR '18 BUDGET IS STILL GIVING US SOME TROUBLE.

THE GOVERNOR WANTS TO REDUCE IT BY $33.7 MILLION MORE AND EVEN DIPPING INTO THE RESERVES.

I GUESS, WHAT ARE YOUR THOUGHTS ON THAT?

>> WELL, WE DON'T HAVE A CHOICE.

I MEAN, WE'RE NOT GOING TO SPEND MONEY THAT WE DON'T HAVE AND IF THERE IS SOME MONEY AVAILABLE IN THE RESERVES, WE'LL GO TAKE A LOOK BUT I THINK IT'S A SOLID APPROACH TO BALANCING THE BUDGET.

>> HOW IS THAT SHORTFALL AND THEN THE UPCOMING FISCAL YEAR '19 BUDGET, HOW IS THAT GOING TO IMPACT THIS UPCOMING SESSION?

>> WELL, MOST OF THE THINGS THAT WE'RE GOING TO TRY TO DO, WE'RE GOING TO HAVE TO DO WITHOUT MONEY, HONESTLY, OR WE'RE GOING TO HAVE TO TAKE MONEY AWAY FROM SOMEONE ELSE OR WE'RE GOING TO HAVE TO COME UP WITH A NEW REVENUE SOURCE.

IF THERE'S THINGS THAT THE LEGISLATURE DECIDES THAT THEY WANT TO DO THAT COST MONEY, AND THERE ARE -- THE LEGISLATURE HAS SOME IDEAS.

I KNOW THERE ARE SOME AREAS THAT WE NEED TO ADDRESS AND SOME OF THOSE MIGHT INVOLVE TAX OR FEE INCREASES IN CERTAIN LIMITED AREAS.

>> IS THAT TAKING A LOOK AT SOME OF THE TAX EXEMPTIONS IN THE STATE, AS WELL?

>> I DON'T KNOW, THERE WILL CERTAINLY BE -- THERE WILL BE SOME DISCUSSION OF THAT BUT, PROBABLY NOT.

YOU KNOW, OUR HEALTH CARE BILLS ARE HIGH ENOUGH.

I DON'T SEE US GOING TO TAX HEALTH CARE SERVICES, YOU KNOW, THAT'S A PRETTY HARD THING TO DO.

WITH THE AG ECONOMY IN THE TANK, WE'D BE FOOLISH TO TRY TO TAKE AWAY THEIR EXCEPTIONS AND THAT PRETTY MUCH COVERS 90% OF THE EXCEPTIONS IN THE STATE BETWEEN HEALTH CARE AND FARM, AG.

>> SPEAKERRER MICKELSON, THANK YOU FOR JOINING ME.

STEPHANIE, BACK UP TO YOU.

>> THANK YOU, AND THANK YOU TO REPRESENTATIVE MARK MICKELSON, AS WELL.

NOW I'M JOINED BY THE SENATOR.

YOU HEARD THE SPEECH TODAY, THE SECOND PEACH YOU'VE HEARD AS A STATE LAWMAKER.

WHAT DID YOU THINK SO FAR?

>> IT IS -- THINGS AREN'T AS BAD MAYBE AS SOME MADE THEM OUT TO BE, IT'S GOING TO BE A TIGHT BUDGET YEAR BUT THERE IS A PLAN IN PLACE.

I WAS MORE CONCERNED BY THE LACK OF AN OVERALL VISION.

WE TALK ABOUT FISCAL DEFICITS BUT WE DON'T TALK ABOUT THE EDUCATIONAL DEFICITS IN THIS STATE.

WE'RE ONE OF THE LAST STATES, PERHAPS THE LAST STATE IN THE COUNTRY TO HAVE A NEEDS-BASED SCHOLARSHIP PROGRAM SO I I THINK WE GIVE ABOUT $14 FOR EACH STUDENT WHO IS ELIGIBLE FOR FEDERAL PELL GRANT IN THE STATE OF SOUTH DAKOTA, SO ABOUT $14 ON AVERAGE, WHEREAS A STATE NEXT TO US, LIKE MINNESOTA, HAS SPENT $1500 AND THAT'S ONE OF THE REASONS WHY WE HAVE A HIGH NUMBER OF OUR STUDENTS IN COLLEGE WHO HAVE HIGH LEVELS OF STUDENT DEBT.

BOTH A HIGH NUMBER WITH DEBT AND A HIGH AMOUNT OF DEBT.

AND THERE'S NOTHING IN THERE.

THE BOARD OF REGENTS DOES HAVE A PLAN TO ADDRESS THAT AND I WAS SAD THERE WAS NOTHING IN THE GOVERNOR'S ADDRESS ABOUT THE BOARD OF REGENTS' PLAN.

>> SO WITH THAT INFORMATION MOVING FORWARD, THE 2018 LEGISLATURE WILL KICK OFF IN ABOUT THREE TO FOUR WEEKS, WHAT ARE YOU HOPING WILL TAKE CENTER STAINING WHEN YOU COME BACK IN JANUARY?

>> WELL, I AM ON THE APPROPRIATIONS COMMITTEE SO I DO SPEND A FEW HOURS EVERY DAY IN BUDGET HEARINGS SO WE WILL BE TAKING A CLOSER LOOK AT THIS.

SOME OF THOSE ONE-TIME MONIES I THINK WILL GET CLOSER SCRUTINY AND WE'LL KEEP LOOKING FOR OTHER PLACES TO CUT THIS BUDGET.

I'M HOPING THAT AT THE END OF THIS YEAR, THAT WE CAN TAKE A STEP BACK AND MAYBE IT'S TIME FOR A SUMMER STUDY, FOR US TO REALLY TAKE A LOOK AT OUR TAX STRUCTURE OVERALL, JUST IS IT DOING EVERYTHING THAT WE NEED IT TO DO?

THAT WE DO HAVE THESE OTHER DEFICITS IN TERMS OF WE DON'T HAVE A PRE-K EDUCATION PROGRAM, WE'RE STRUGGLING, WE'RE NOT GOING TO HAVE HIGHER TEACHER PAY, I WORRY WE'RE SLIGHTING BEHIND IN TEACHER PAY, WE'RE NOT ABLE TO DO INCREASES AND WE'RE NOT MEETING THE NEEDS OF OUR UNIVERSITIES STUDENTS IN TERMS OF THOSE WITH FINANCIAL NEEDS SO THERE'S OTHER DEFICITS THAT NEED TO BE ADDRESSED BESIDES OUR FISCAL ONES.

>> I THANK YOU FOR YOUR TIME, WE HAVE SENATOR NESIBA COMING TO US FROM SIOUX FALLS.

SEE YOU IN JANUARY.

>> THANK YOU.

>> LEE, BACK TO YOU.

>> STANDING HERE WITH STATE REPRESENTATIVE DAVID ANDERSON, HE'S A REPRESENTATIVE FROM DISTRICT 16 IN HUDSON, ALSO CHAIR OF THE HOUSE APPROPRIATIONS COMMITTEE.

WHAT ARE YOUR THOUGHTS ON THE GOVERNOR'S BUDGET ADDRESS?

>> I THINK IT'S A VERY RESPONSIBLE BUDGET BASED ON THE CONDITIONS, ECONOMIC CONDITIONS THAT WE HAVE.

IT'S, I GUESS, TYPICAL OF THIS GOVERNOR, HE'S NOT GOING TO STEP OUT ON A LIMB AND I GUESS I APPRECIATE THE FACT THAT HE'S OFFERING CONSERVATIVE ESTIMATES, IF OVER THE NEXT THREE TO FOUR MONTHS, WE FIND THAT WE DO HAVE SOME ADDITIONAL REVENUES, THE HOLIDAY SEASON, CHRIS MALL SEASON, SALES TAX PICKS UP A LITTLE BIT, OTHER ECONOMIC FACTORS IMPROVE IT, WE'LL HAVE A CHANCE AS A LEGISLATURE TO GO BACK IN AND LOOK AT SOME OF THESE AREAS THAT ARE NOT GETTING INCREASES AND PERHAPS ADD A LITTLE TO THOSE AREAS.

>> NOW, BEING ON THE APPROPRIATIONS COMMITTEE, CHAIRING IT, YOU KNOW, WE'RE TALKING ABOUT A $33.7 MILLION REDUCTION IN FISCAL YEAR '18.

I GUESS, YOU KNOW, FISCAL -- FY '18 KEEPS GIVING US TROUBLE.

COULD YOU TELL ME HOW APPROPRIATIONS ARE GOING TO GET THAT DONE?

>> WELL, AS GOVERNOR INDICATED, A COUPLE OF YEARS, REDUCE SOME SPENDING IN CERTAIN AREAS AND THEN WITHDRAW SOME CASH OUT OF SOME FUNDS THAT ARE THERE, YOU KNOW, OBVIOUSLY THEY'RE THERE OVER TIME TO USE FOR THOSE PROGRAMS BUT WE DO THIS EVERY YEAR.

PERIODICALLY WE DRAW DOWN FUNDS.

THE COURT AUTOMATION FUNDING IS AN EXAMPLE THAT HE MENTIONED AND WE DID THAT LAST YEAR, AS WELL.

WE TOOK SOME MONEY OUT OF THERE, IT'S A FUND THAT HAS A STREAM OF INCOME THAT'S COMING INTO IT ALL THE TIME FROM A VERY PARTICULAR SOURCE AND THE COURTS USE THAT MONEY FOR THEIR COURT AUTOMATION, OBVIOUSLY, BUT THEY HAVEN'T BEEN USING IT AS RAPIDLY AS THE FUNDS HAVE FLOWED INTO IT.

SO PERIODICALLY WE GO IN AND WE PULL A LITTLE BIT OUT OF IT AND THAT'S PART OF WHAT WE'RE DOING IN LOTS OF DIFFERENT AREAS.

>> REPRESENTATIVE ANDERSON, THANKS FOR JOINING ME ON THE FLOOR.

STEPHANIE, BACK TO YOU.

>> ALL RIGHT, THANK YOU VERY MUCH.

I'M NOW JOINED BY REPRESENTATIVE RAY RING FROM VERMILLION.

REPRESENTATIVE, WE HEARD A LOT FROM THE GOVERNOR IN HIS SPEECH TODAY.

ONE OF THE THINGS WE'VE BEEN HEARING MORE AND MORE ABOUT OVER THE LAST FEW YEARS IS ECOMMERCE AND HOW WE CONTINUALLY AREN'T GETTING THE MONEY THAT WE SHOULD BE GETTING.

WHAT ARE YOUR THOUGHTS ON THAT?

>> I THINK THAT IS A SERIOUS PROBLEM.

NO DOUBT THAT THE SALES TAX IS DOWN FOR -- OR AT LEAST NOT GROWING AS RAPIDLY AS WE EXPECT IT FOR A NUMBER OF REASONS, INCLUDING THE AGRICULTURAL ECONOMY BUT I THINK WE'RE REALLY BEING HURT BY THE EROSION OF OUR SALES TAX BASE BECAUSE OF THE INCREASE IN ECOMMERCE.

RIGHT AFTER BLACK FRIDAY, THE "WALL STREET JOURNAL" HAD SOME ARTICLES TALKING ABOUT THE HUGE SHIFT ONTO eCOMMERCE AND THAT'S OBVIOUSLY HURTING US, AND AT THIS POINT, I WISH THAT CONGRESS WOULD DO SOMETHING.

CONGRESS COULD DO SOMETHING ABOUT THAT.

THE HOUSE -- SENATE PASSED A BILL A FEW YEARS AGO BUT THE HOUSE REFUSES TO ACT.

WE HAVE THIS CASE OUT OF SOUTH DAKOTA NOW THAT WE HOPE THE SUPREME COURT WILL ACCEPT AND HOPE THEY'LL COME DONE WITH THE RIGHT DECISION.

IF THEY DON'T, THEN THESE PROBLEMS WITH SHORTAGES AS LONG AS WE'RE RELYING SO HEAVILY, WHAT DID THE GOVERNOR SAY, 63% ON THE SALES TAX, THEN THAT SHORTFALL IS I THINK ONLY GOING TO GET WORSE UNTIL WE DO SOMETHING ABOUT IT.

>> MY FOLLOW-UP QUESTION WAS, THE GOVERNOR MENTIONED THIS WILL CONTINUE TO BE BATTLED IN THE COURTS SO IT SOUNDS LIKE THERE'S NOT MUCH MORE THE STATE LEGISLATURE CAN DO AT THIS POINT.

>> I THINK THAT'S RIGHT.

ACTUALLY, A COUPLE YEARS AGO, I PROBABLY WOULD HAVE SAID I DIDN'T THINK THERE WAS MUCH MORE THAT THE LEGISLATURE COULD DO AND THEN THEY CAME UP WITH S.B.

106, I THINK IT WAS AND THAT'S BEEN WORKING ITS WAY THROUGH THE COURTS.

I THINK THAT'S -- IT'S MY IMPRESSION THAT'S SORT OF OUR LAST, BEST HOPE AND IF THAT OH -- IF THAT DOESN'T WORK, THEN WE'RE BACK TO BEGGING CONGRESS TO DO SOMETHING, WHICH AS YOU MAY KNOW, THE SUPREME COURT IN THEIR DECISION, IN THE QUILL DECISION SUGGESTED TO THE STATES, IF YOU DON'T LIKE THIS, TALK TO CONGRESS.

BUT CONGRESS WON'T DO ANYTHING.

>> BEFORE I LET YOU GO, THIS WILL BE THE GOVERNOR'S LAST YEAR.

SOMETIMES THEY'LL REFER TO THAT AS THE LAME DUCK YEAR.

YOUR THOUGHTS ON WORKS THAT COULD OR COULD NOT GET TO BE THIS COMING SESSION?

>> OH, I DON'T THINK IT WILL HAVE THAT MUCH -- THE FACT THAT HE'S A LAME DUCK WILL HAVE THAT MUCH OF AN INFLUENCE ON WHAT WE GET DONE.

IT DOESN'T SOUPED TO ME LIKE THERE ARE ANY HUGE ISSUES COMING UP THAT ARE GOING TO TAKE A LOT OF ARM-TWISTING OR INFLUENCE, IMPOSING OF THE GOVERNOR'S POWER AND SO I DON'T THINK THINGS WILL CHANGE ALL THAT MUCH.

>> ALL RIGHT.

WE LOOK FORWARD TO SEEING YOU BACK HERE IN JANUARY.

THANK YOU, REPRESENTATIVE RAY RING OF VERMILLION.

>> THANK YOU VERY MUCH.

>> ALL RIGHT, LEE, THROW IT BACK DOWN TO YOU.

>> STANDING HERE WITH STATE SENATOR JIMBO WESTERN FROM CAN TOP, THE CHAIR OF THE SENATE EDUCATION COMMITTEE.

SENATOR, WHAT ARE YOUR THOUGHTS ON THE GOVERNOR'S PROPOSAL?

>> I WAS GLAD TO SEE HOW THE GOVERNOR WORKED DILIGENTLY TO BALANCE THE BUDGET FOR THE STATE.

THERE WILL BE -- OUR REVENUES ARE NOT INCREASING AS FAST AS WE THOUGHT THEY WOULD.

BY THE SAME TOKEN, WE DO HAVE SOME MONEY IN RESERVE, IT'S GOING TO USE AT LEAST $7 MILLION OF THAT TO TRY TO CUSHION SOME OF THE BLOWS BECAUSE OUR REVENUE IS NOT AS STRONG AS WE MIGHT HAVE ANTICIPATED.

BUT I THINK ONE OF THE BIG QUESTIONS WILL BE, SHOULD WE MAINTAIN A 10% BUDGET RESERVE OR SHOULD WE PERHAPS GO A LITTLE BIT LOWER THAN THAT AND USE SOME OF THAT MONEY TO HELP SOCIAL SERVICES AGENCIES AND SCHOOLS MAINTAIN THEMSELVES IN THE LAST YEAR OF HIS ADMINISTRATION.

SO I THINK THAT WILL BE REALLY THE BIG QUESTION, IS 10% A MAGIC NUMBER?

>> HOW ARE THESE BUDGET REDUCTIONS THE GOVERNOR WAS PROPOSING, HOW IS IT GOING TO IMPACT EDUCATION IN THE STATE?

>> WELL, I THINK SCHOOL DISTRICTS DO HAVE SOME MONEY IN RESERVE.

IT WILL -- YOU KNOW, WE DID INCREASE SCHOOL FUNDING, ESPECIALLY FOR TEACHER SALARIES BY $60 MILLION A YEAR -- TWO YEARS AGO AND I SUPPORTED THAT.

WE'LL JUST HAVE TO WAIT AND SEE.

I KNOW MOST, NOT ALL BUT MOST SCHOOL DISTRICTS HAVE SUFFICIENT RESERVES TO GET US THROUGH THIS PARTICULAR DIFFICULT TIME BUT I THINK WE'RE JUST -- THE JURY IS STILL OUT ON THAT AT THE PRESENT TIME.

>> YEAH, SOME SCHOOL DISTRICTS ARE HAVING TROUBLE MEETING THOSE TEACHER PAY INCREASES.

ARE THEY GOING TO HAVE TO TIGHTEN THEIR BELTS EVEN FURTHER?

>> PERHAPS, BUT I BELIEVE THIS MORNING THE -- THE GOVERNMENT ACCOUNTABILITY BOARD APPROVED ALMOST ALL THE WAIVERS AND I THINK IT'S ALSO IMPORTANT TO REMEMBER THAT THE VAST MAJORITY OF THOSE SCHOOL DISTRICTS WERE VERY SMALL AND MOST OF THEM WERE RURAL AND MOST OF THOSE WAIVERS WERE GRANTED SO THE ACTUAL AMOUNT OF DOLLARS THAT'S GOING TO NEED TO BE RENEGOTIATED IS GOING TO ACTUALLY BE QUITE SMALL.

>> YOU'RE IN THE SENATE BUT THE HOUSE JUST RECENTLY NOMINATED AND VOTED FOR REPRESENTATIVE STEVEN HAUGAARD TO BE SPEAKER PRO TEM HERE IN THE HOUSE.

IS THERE ANYTHING YOU CAN TELL US ABOUT REPRESENTATIVE HAUGAARD?

>> I WORKED WITH HIM WHEN I WAS IN THE HOUSE FOR FOUR YEARS, HE LOVES IN THE RURAL AREA, HE'S A LAWYER, BEEN ON THE MINNEHAHA COUNTY BOARD OF MENTAL HEALTH FOR MANY YEARS.

I GET ALONG WITH HIM PRETTY WELL.

I AGREE WITH HIM ON MOST THINGS BUT NOT EVERYTHING.

>> SENATOR BOWEN, THANK YOU FOR JOINING ME.

STEPHANIE BACK TO YOU.

>> ALL RIGHT, THANK YOU, LEE, AND THANK YOU TO SENATOR JIM BOWLEN FROM THE CANTON AREA.

THAT WILL CONCLUDE SOUTH DAKOTA PUBLIC BROADCASTING'S COVERAGE OF THE GOVERNOR'S BUDGET ADDRESS.

IF YOU MISSED ANY OF IT, IT IS ARCHIVED AT SDPB.ORG.

JUST A REMINDER, SDPB WILL BE BACK HERE ON JANUARY 9TH AS WE KICK OFF THE 2018 LEGISLATIVE SESSION.

THE STATE-OF-THE-STATE ADDRESS WILL BEGIN THAT AND WE WILL REMAIN HERE THROUGHOUT THE ENTIRE RUN OF THE UPCOMING LEGISLATIVE SESSION.

PUCK TUNE IN FOR DAILY RADIO NEWS STORIES, YOU CAN WATCH US ONLINE AT SDPB.ORG, AS WELL AS SD.NET AND, OF COURSE, LIFE GAVEL-TO-GAVEL COVERAGE OF THE HOUSE AND SENATE IN A FRIDAY-NIGHT WRAP UP PROGRAM.

ON BEHALF OF ALL OF US WITH SOUTH DAKOTA PUBLIC BROADCASTING, I'M STEFFLY RISSLER, LEE STUBBINGER, WE THANK YOU FOR WATCHING.

GOODBYE.

6 >> "STATEHOUSE" PROGRAM FUNDING PROVIDED BY THE SOUTH DAKOTA BAR FOUNDATION, THE EDUCATIONAL AND CHARITABLE ARM OF SOUTH DAKOTA LAWYERS AND JUDGES.

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