State budget office: revenue growth slowing, recommends limited use of reserves to finish prison funding

Bureau of Finance and Management Commissioner Jim Terwilliger told the Joint Appropriations Committee on a midwinter briefing that South Dakota's revenue growth is easing back toward long-term averages and that the governor's recommended fiscal 2026 budget balances a number of one-time receipts, midyear adjustments and ongoing pressures.

Terwilliger said the administration's updated numbers include a net $175,300,000 revenue revision for the current year driven largely by larger-than-expected unclaimed property receipts and higher interest earnings, while ongoing sources were revised down roughly $26,000,000. "We're experiencing that to some extent," Terwilliger said of the return to normal growth, adding the presentation was intended to be high level because agencies will present more detail in upcoming hearings.

The budget office highlighted several items that shaped the recommendation. Unclaimed property remittances were described as volatile; the administration budgeted a conservative ongoing assumption of $62,000,000 for FY2026 but reported a net unclaimed-property inflow this year that the team estimated at about $229,000,000 when receipts and claims are netted. Terwilliger cautioned that much of that money is one-time and uncertain because rightful owners can still claim assets.

Why it matters: the administration proposes using some one-time resources while protecting reserves. The budget recommendation assumes a $44,300,000 increase in ongoing resources for FY2026 (after growing from a lowered base), and it includes a proposal to use $34,000,000 from the state's combined rainy-day funds toward finishing the men's correctional facility project rather than issuing new bonds.

Key budget details and assumptions

- Prison financing: The men's correctional facility is budgeted at $825,000,000 total. Terwilliger said existing cash plus projected interest in the incarceration construction fund and a $182,000,000 cash transfer would, together with $76,000,000 of projected interest earnings, cover the remaining financing so the state would avoid issuing new long-term debt. The administration argued avoiding borrowing could save the state hundreds of millions in interest compared with issuing bonds on the full amount.

- Medicaid/FMAP: Terwilliger noted the state's federal medical assistance percentage (FMAP) share has shifted, increasing the state share of Medicaid costs; the recommended budget fully funds the scheduled phase-out of the enhanced FMAP and includes a net $85,000,000 in mandatory changes tied to Medicaid, CHIP and provider inflation.

- Midyear adjustments and reductions: The staff identified $105,000,000 in midyear general bill reductions (largely utilization adjustments in DSS and DHS and revisions to the 5% FMAP set-aside from prior years), offset by roughly $5.7 million of general bill increases and transfers including $182,000,000 proposed from the incarceration construction fund and $5,000,000 for IT modernization.

- Emergency and special appropriations: The recommended package lists a number of one-time appropriations requiring separate hearings, including a $53,700,000 bond payoff (to free about $5,000,000 annually in debt service), $13,000,000 for Richmond Dam repair (see separate presentation by School and Public Lands), $10,000,000 in school safety grants, and backfills for emergency/disaster and fire suppression funds.

- Ongoing revenue measures: The administration included two proposals that require legislation to lock in $44,300,000 of ongoing support in FY2026: repeal of the sales tax collection allowance (House Bill 1037) and adjusting cigarette-tax-funded tobacco-prevention advertising (Senate Bill 54).

Lawmakers' questions and context

Committee members pressed for detail on the contractors excise tax, the durability of unclaimed-property receipts (noting spikes tied to pandemic-era funds and banking charters), and whether the administration's conservative budgeting of unclaimed property was appropriate given payout risk. Terwilliger and staff repeatedly emphasized that the large unclaimed property inflows are best treated as one-time resources and that budgeting ongoing programs on those receipts would create structural deficits if the money does not recur.

Next steps

Terwilliger said agency hearings and the governor's FY2026 amendment and emergency appropriation bills will follow; he invited members to the Governor's Council of Economic Advisors meeting January 29, which informs the mid-February revised revenue estimates. The committee did not take formal votes on the budget overview during the briefing.

Ending

The budget office closed by reiterating the framework behind the recommendation: protect reserves against payout risk, avoid new long-term debt where feasible, and rely on conservative ongoing revenue assumptions while using one-time receipts for targeted investments and pressing needs.