PIERRE — Gov. Larry Rhoden’s first budget address as governor is in the books.
And it was a “straightforward” budget without many surprises, as multiple lawmakers told the Argus Leader.
Rhoden presented his recommended budget Dec. 2 for South Dakota’s fiscal year 2027 at the State Capitol Building.
The Republican governor asked lawmakers to budget $7.44 billion in state fiscal year 2027, up from the $7.28 billion recommended by former Gov. Kristi Noem for FY2026. FY2027 is split between about 34% state funds, 42% federal funds and 23% funds marked as “other.”
Rhoden is also leaving about $14 million for lawmakers to divvy up during the upcoming Legislative Session in January. And an additional 135 full-time staff have been recommended for the next fiscal year, up from a budgeted 14,095 in FY 2026.
But Rhoden, who is only serving a partial term as governor after having taken over the reins from Noem last January and now faces reelection in 2026, is taking on the state’s fiscal goals and ambitions amid slim revenue projections and realities.
“I won’t sugarcoat it: Revenues have been pretty flat – only rising slightly,” Rhoden told lawmakers during his address. “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.”
Ongoing sales and use tax collections suffered in FY25 before bounce back
More than half of the state’s overall revenue picture is made up of an ongoing sales and use tax, which saw a fiscal year-to-year decrease.
South Dakota FY2025 collected about $1.43 billion from the state sales and use tax — a 1.5% decrease compared with FY2024. Data from the state’s Bureau of Finance & Management indicates several months measured in FY2025 saw dips in sales and use tax growth.
The Rhoden budget estimates the FY2026 collections will reach about $1.5 billion and $1.56 billion in FY2027.
State sales and use tax revenue has seen month-to-month growth since June, with a more-than-8% increase in October.
“We’ll be getting November numbers any day now,” Rhoden said. “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.”
South Dakota’s farm sector sees impacts of Trump tariffs; Rhoden says to ‘pray for rain’
Recent data shows the Midwest has seen economic swings in the agriculture and commodity markets — and Rhoden had to acknowledge it, at least in part.
According to a recent study by The Dakota Institute, a nonprofit economic research firm, South Dakota saw its real gross domestic product (GDP) shrink by 3.1% in Q1 of 2025 — neighboring states saw similar impacts.
It later rebounded in South Dakota with 5.2% annualized growth in Q2 of 2025. But President Donald Trump’s tariff strategy and an international trade war underlined the volatile nature of in the state’s corn, soybean and wheat prices, which have dropped since to lowest prices in years, while U.S. beef cattle prices are at record highs.
“The weakness reflected ongoing pressures from trade disruptions through the implementation of tariffs and a mass renegotiation process of multiple trade agreements,” The Dakota Institute’s study indicated. “This volatility — contraction followed by robust recovery within six months — underscores both the region’s vulnerability to external shocks and its capacity to bounce back when conditions stabilize.”
“When ag does well, the state does well,” Rhoden said. “But when ag struggles, our growth tends to slow down … 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.”
Medicaid spending overtakes K-12 dollars in FY27
Medicaid, one of South Dakota’s largest fiscal responsibilities, has grown “far faster than any other area of the budget,” Rhoden said.
“In fact,” Rhoden added, “for the first time in state history, Medicaid is a bigger share of the general fund than K-12 education.”
According to the BFM, the state’s Medicaid budget has grown by $360 million since 2020 to $758 million. Rhoden budgeted $725 million for K-12 education.
The state’s share of the Federal Medical Assistance Percentage, which determines matching each state’s federal match, now represents $105 million. South Dakota’s coverage share went up by 0.86%, from 48.47% to 49.33%.
State employees won’t see budgeted raises in next fiscal year
Breaking from his predecessor, who pushed for state employee raises during her tenure as governor, Rhoden revealed that employees for the state won’t see a baseline raise to their salaries in FY2027.
Rhoden said the state budget includes a “modest investment in our State Employee Health Plan,” specifically a $3 million investment in health plan reserves. The Republican governor added there are also “plan changes” in the works to prevent employees’ healthcare costs from going up, “since we won’t be able to give them a raise this year.”
But Eric Ollila, executive director and lobbyist for the South Dakota State Employees Organization, told the Argus Leader following the budget address that Rhoden’s budget picture doesn’t account for healthcare deductibles.
Ollila also said the “plan changes” that Rhoden teased were too vague for his liking. He later expressed concern that the changes would be passed through to state employees.
“What it’s not going to do is save employees 100% of the healthcare costs,” Ollila said.
Rhoden recommends raising reserve allocation to 12.5%
Rhoden plans to increase the state’s budget reserve from 10% to 12.5%
The governor attributed his desire to raise reserves based on “continued slower revenue growth and weakness in the farm sector.”
