Budget Message 2003

BUDGET MESSAGE 2003
GOVERNOR M. MICHAEL ROUNDS
 
Thank you.  Thank you.  Thank you.  Thank you.  I appreciate it.  Thank you.  You're very kind.  Thank you.  Thank you.  You are being very, very kind, and I once again would like to say thank you for allowing me to come and visit with you today.  This is perhaps a little bit more informal than what the State of the State is.  Really in the last week we've had the privilege and the honor of addressing you and the citizens of South Dakota.  This is the third time, and in our first, the Inaugural Address, we talked about what our goals were—what our visions were—the guiding principles that we would use in making changes within our government, and in how we would use the resources that the taxpayers of this state have allowed us as resources.  And in our second delivery in the State of the State, we tried to lay out a series of guidelines should I say, or directions that we believed would be appropriate as a manual to follow with regards to the long-term plan, the things that were important to us, the items that the people of South Dakota have talked about for the last year with us as we campaigned for this job.  And, today, after we've put together that skeleton, today we put the meat on it, the muscle on it, this is where we spend the money that they entrust to us.  And, so, we've worked on it, really during the transition period from right after the election.  Governor Janklow was very kind in the use of the information and the materials and the resources that he was able to put together and we have built upon that.  We started out facing a significant budget deficit within our state.  What I'd like to do today is to lay out for you a road map—a road map to bringing our deficit that in which we're using budget reserves under control.  I need your help.  None of us can do it alone.  But I think if we agree that it's better for the citizens of this state to work together, and if we agree that we can sit down and work through our differences, I believe that we will deliver for the people of South Dakota that which they expect.  And that is a balanced budget and at the same time a commitment to deliver the services that they expect from us.

So let me begin.  Let's talk about budget highlights.  I intend to offer you a budget today that, first of all, even though the economy is sluggish and as many of you know it's not just in South Dakota, but it's across the United States, this is a time in which because of 9-11, and a stock market that has not rebounded as many of us would have wished, and because in South Dakota we're still suffering the effects of a drought and two-thirds of this state that have forced cattlemen and cow/calf operators to sell a lot of his cattle.  Early this last year and in many cases, they sold some of their herd, their foundation herd, to the point where they may have had income last year but this next year they have fewer cows to have calves, and with those calves if they are bringing through—a number of those calves may very well be kept for replacement heifers, ah, to replace the cows that they sold last year.  So we're really expecting that this next year to cover the cow/calf operations, we may be just as bleak as we are this year if not worse because we're not going to have near the income in that portion of our farm economy as what we had last year when they sold off the calves and some of their cows.  Along with that, and what I believe to be important, is that even with the sluggish economy, we still have the responsibility to balance our budget, if at all possible.

Also, K-12 education, I believe, needs to be funded.  We've heard time and time again about their need for additional resources.  In our budget we are committed to providing that.  We talked about it in the State of the State; I'd asked for your help in seeing that those resources are delivered to our children.  And that means over and above the traditional formula this year.

 Along with that change, I would also like to ask for an inflationary increase for our health care providers that service our Medicaid population.  One of my commitments has always been that we will provide—or we will take care of those who cannot take care of themselves.  That is the very young, the very old, those living with disabilities.  That's what Medicaid does.

 Along with that request, I would also ask that you look seriously at the emergency and special appropriations as you have done in past years, those items that are important, and that I don't believe there will be a great deal of dissension on, but nonetheless I have included them in this budget and I am recommending their continuation.

 Finally, in this budget, you will find my commitment to state employees.  As an employer, we employ 13,000,or almost 13,000, state employees.  Sometimes you set the model.  Sometimes you set the example.  And when it comes to wages in South Dakota, if we talk about raising wages, what a better way to operate than to show that we can balance our budget and still provide for the wage earners that we're responsible for in the state of South Dakota and send a message to the rest of the good businesses in this state that says take care of your employees because if you've got good employees, they'll help you to run a profitable business and a good business for this state.  So that's what's in this budget.

Let me just give you some background and I'd like to move to ongoing state revenue growth.  Background information.  In 1997 through the year 2002, hard numbers in the blue on the screens in front of you, you will find that we've had a gradually declining state revenue.  Now it's still increasing, but it's increasing at a  slower rate.  The hard black line across the middle of it is between 4 and 5 percent.  That's what the average has been—the traditional average.  Since the terrorist attack in 2001 and the decline in the stock market, look what's happened to our revenues.  They've declined.  They're below the average.  And, in fact, it's continued to decline.  And, if you look at what's projected in '03 and '04, I've highlighted those—not in blue because they're not solid yet—but because they are projections, but on them part of the '03—I've marked in red—and that's because that's made up of the inheritance tax which is no longer there.  That was a continuing income item for the state.  That amounted to 1.01 percent of a total 1.35 percent increase in our state's revenue growth last year, and it was a one-time money.  It wasn't expected, and yet it's there.  In addition to that, if you will look we've had an additional almost one-third of 1 percent increase in other-fund expenditures in the last 12 months, or the existing year that you're in right now, the '03 budget year.

Next to it is what we are projecting to be able to spend, and that's less than one-fifth of 1 percent increase in the growth in revenues.  And so the projections that I'm making here today are not what I would consider to be optimistic.  We are being conservative in these estimates because we believe there are several factors that will slow the income to our state's revenue kettle.  Part of it is the fact that people are buying things over the Internet.  And when they buy things over the Internet, they are not subject to sales tax, and that's hurting us.  And that's one of the reasons why, during the State of the State, I asked that you move up the plan to allow us to collect Internet sales taxes.  That's the money that we use to fund Medicaid programs; that's the money we use to fund K-12 education.  If that is continued to be eroded, we're going to continue to suffer in the ongoing revenue sources for our state. 

The next line is the growth in state expenditures.  If you'll look from 1997 through the year 2002, these are all actual numbers.  These show that we had an increase and then we stayed just slightly below the average and yet in a number of those years, part of that increase in expenditures was for additional property tax relief.  And so, even though we have an increase in expenditures, part of it was actually an expenditure that went back as property tax relief.  And so when you look at what the actual improvement was or increase in the number of dollars that we were spending, look at the overall trend as it moves along.  It starts in '97 goes up—'98—starts to come back down in '99—slightly up in 2000—and then down '01—up again over the average in '02—and then as we hit this drop in the economy, and with 9-11, you as responsible legislators in the last couple of years, have reduced the amount of state spending that you've done.  You've done it correctly.  But, you've done it in the right areas.  And I tried to highlight that here.  I've taken '03 and '04, which are projections of expenditures because we're not done yet with '03 and we're only talking about '04 today for the first time.

I've identified the yellow as the discretionary—that item in which it was not mandated by statute, and it was not mandated by a federal regulation, and it was simply an opportunity that you saw that was what you thought to be an important expenditure.  That was 1.85 percent of the total expenditures—was discretionary in the increase.  The 2.44 which is right underneath it reflects medical expenditures and Medicaid and in K-12 education increases.  And so truly, what I am telling you is that I believe you were doing the right thing—that the expenditures that you made last year—you gave them to children, and gave them to places where they were important.  You improved medical services or you kept up to date in medical services protecting those who really have no place else to go for those services. 

Next year's budget, which is the one that we're going to be talking about today, I'm asking you for an increase in discretionary spending of less than one-fifth of 1 percent of the total amount.  And I'm asking for an increase in medical and K-12 of approximately $2.5 million (6 percent) for a total increase in state expenditures of 2.74 percent in the general fund category. 

Let's take a look at one more slide now.  This is the South Dakota job picture.  It's interesting what this tells us.  Now, I'm not an economist, but as I listen to what the economists tell me, I said that I really thought that this was important to share with you.  This slide represents the actual percentages of job increases in South Dakota.  In 1999, we had an increase—by the way these are nonfarm jobs—9,792 more jobs in 1999 than in '98.  That means that if we gained 11,000 and we lost a little over 1,000, the total increase between the amount that we gained and the amount that we lost, was 9,792 jobs.  A 1.5 percent, I'm sorry, 1.5 in '96, 1.8 percent in '97, 2.4 in '98, and '99, a banner year, 2.7 percent increase—9,792 jobs.  The year 2000 a 1.1 percent increase, and in 2001 a four-tenths of 1 percent increase, and in '02, the most recent numbers available, 74 more jobs were created.  Basically, zero growth in jobs.  And the reason that I bring that to us is that economists use this as part of an equation in trying to determine what you can expect for state expenditures.  And so as I talked to them, I said is there a correlation here?  And they said absolutely, we can go back and show you when you have little job growth, you have very little additional state revenue coming in—from sales taxes being collected and other revenue forms.  In fact, if you take the actual rate of inflation and you add it to the percent factor for job growth, it will tell you what you can expect reasonably in revenues for the state to increase.  And it seems to follow along very closely.  If you look at that line there, going way up and in '99 remember we talked about how well it was and how we had increased sources of revenue coming through and then you drop back down to '02, it's exactly the way the job market shows.  And so we need to create more good-paying jobs in South Dakota.  And when we do, it will reflect on the income for our state to use for ongoing programs and perhaps additional tax relief. 

 Let's move to the next slide, which is—this is kind of where we want to begin.  This is the adopted current year structural problem laid out for you—and it's easy to point out as I can—this is the budget which you adopted last year.  So this is the budget year for this year showing that you had expected that you would have $841 million in ongoing general fund receipts.  This you did in March of last year.  This is when you left.  You expected that you would have a budget or expenditures of $877.5 million and so you recognized a shortfall of $36 million, which you used reserve funds to cover, and appropriately so.  You did it so that you could continue on important ongoing programs.  You did the right thing.  And yet at the same time, after looking at that particular graph, remember that, that showed a $36 million expected hit on our reserves to balance the budget last year.  Now, let's go to the next page, or to the next screen, and you will find now that same picture but updated for what the information that we saw in December of this year, now halfway through this existing budget year.  Governor Janklow, in December, laid out for you what he saw as the expected income which he forecasted at $856 million.  And then the potential for this next year of $910 million in expected expenses or possible expenses.  And what the governor did was to say, I'm not going to be there, so I'm going to lay out for you what we anticipate to be, other than salary policy, what you may anticipate, and he was giving us a heads up.  That shortfall shows $54 million as the possibility.  Now that's the number that everybody's been talking about and looking at and to how we solve.  He used those numbers based upon revenue projections available to him in the first week in December, and possible expenditures based upon agency recommendations and the reviews that had been done to date--$54 million—and that's the one that many of your people back home have been aware of because that's what we've been talking about.  If you used $54 million out of the reserve, and it's your prerogative to do so, you would basically have a balanced budget using an additional $54 million out of your reserve.

 Let me go to the next slide now that shows the emergency reserves and what that would do.  To begin with, you had $115 million in the reserves available from two sources.  That was what we called the "rainy day fund" or the budget reserve and the property tax reduction fund.  The total between the two is $115,609,000.  Now, as of December, we had a projected shortfall of approximately $42 million because of additional expenditures that were not expected by the legislature last year, and the $54.1 million that Governor Janklow indicated was a possible shortfall based upon requests and anticipated needs and revenue shortfalls.  So if you did that, you would be between the remaining part of this year and next year's budget, you could have ended up with $18 million in your reserves at the end of this next fiscal year.  I don't think it's responsible to do that.  And one of our responsibilities is to do everything we can to reduce that deficit so that those reserves are available because I'm very concerned about the year after next and building a structural deficit.

 And so, what I'd like to share with you now is an action plan for the next fiscal year.  I can't do it alone, I need help, and this is what I'm going to recommend to you.  This is my road map.  I'm open for suggestions, but I believe that this is moving in the right direction, and we'll get to the goal that I believe the citizens of South Dakota expect us to achieve. 

 Let's just start out with the original starting point that the governor had outlined and that most of the folks that you talk with will recognize, and that's the possibility of a $54.1 million deficit for this next year beginning in July of this year. 
 I'm going to propose that the agency budget request that the governor had be reduced by approximately $12.6 million.  We reviewed them—I believe we can make those changes in the original anticipated expenses without hurting our schools, and without hurting the other ongoing important programs that you have already authorized.   And so I can reduce that deficit by $12.6 million with my own initiative.

 In addition to that, the 27th pay period, and I'm not sure if you're all aware of that or not, but let me just explain it.  It comes along every 11 years, kind of like a plague.  What happens is that under the existing pay structure that we've set up and worked under for years, every 2 weeks our employees get paid.  Well, if you multiply that out, that's about 26 pay periods per year.  Well, 26 times 7 is not 365 days, it's 364 days, and so every year you don't quite make the full year up in what you owe for salary policy.  And then you throw in three leap years with an extra day and the math shows that every 11 years you, as a legislature, get stuck with paying for one extra Tuesday as a pay day.  You're the lucky ones.  You get an extra pay period to come up with the money.  We believe we've solved the problem.  And, what we would like to offer to you, and by the way that amounts to approximately $4.4 million per pay period, we think that we're going to change that by going to two pay periods per month—once on the first and once on the 16th.  The amount that we pay our employees will become larger.  Nobody gets a cut in pay or anything like that.  But we simply make two pay periods a month so we go to 24 pay periods rather than 26 or 27.  Everybody's pay per pay period goes up because you have more days included.  But what it allows us to do then is to include only the number of days that we're responsible for each year.  So, even though we have a savings of $4.4 million in this next fiscal year, we have to pick up 2 days extra work, and that amounts to approximately $700,000 or so, and so the actual savings to us this year is actually almost $900,000.  It's about $3.5 million that you don't have to come up with in this next year's budget.  And once and for all, we will have solved it for the next legislature and the next governor 11 years from now.  They can say thank you to us then.  There is no loss to anyone in this program, it's simply a matter of finding some bright young minds who have taken the initiative to go out and find a way to fix the problem without costing anybody any money.  And, by the way, those bright young minds did not include mine, they include people that were working with us here over the transition period and through the first couple of weeks of this administration.

 Along with that, though, and here's the other part that I have to lay out for you right now.  I have some priorities.  And those priorities include spending an additional $15.9 million because I think they're important.  And those expenditures include salary policy, which were not included in the original $54.1 million deficit that Governor Janklow had outlined.  I believe that we should do something other than that which is mandatory for the medical provider, inflation for people who service our people in nursing homes, and for physicians who take care of the healthcare needs of those individuals with disabilities, and for children who are under the CHIPS program.

 And along with that, I've also, as noted in my State of the State, made a commitment that I want to put the declining enrollment dollars in education back into the education formula.  I've been able to do that within the $15.9 million that I'm asking as expenditure for this year.

 Those are my initiatives, and I'm categorizing that to show that after those changes, I've moved the deficit from $54.1 million down to $53.9 million so far.  But bear with me, we've got a long way to go on this map.

 Next of all, the revenue update.  Remember, Governor Janklow was using revenue updates that were based upon information in November.  Now we've got the remaining part of the November reports in, the December reports in, but we don't have the Christmas season completed yet.  And so these aren't up-to-date, but based upon these, and the review of what's actually coming in, in terms of investment on our state float on the number of dollars that are in state government that we get an investment return on, we believe that we can conservatively estimate that we will pick up about $5.6 million more than what we had anticipated in November of this last year.  That brings our deficit down to $48.3 million. 

 Next of all I'd like to talk about what I call cash management initiatives.  These are things that, to me, are good government.  If it was at my home, or if it was in my business, I'd be looking at how to best handle the resources that I have available rather than raising taxes.  And so let's look at what I believe we can do to utilize existing resources.  I will caution you right now, most of these if not all of these are one time resources of money.  These will take care of our problem, or work towards taking care of part of our problem this year.  But they do not solve the structural deficit that we find ourselves in because of the loss of the inheritance tax and because of the slowdown in our economy.  But for this year, it helps.  And here they are.

 First of all, last year the legislature moved money from (and this is cash) the Petroleum Release Compensation Fund (PRCF) to the State Highway Trust Fund.  They did that because we were concerned that we might not have enough money to match all of the federal funds that would be available for continuing highway projects.  And the one thing we don't want to do is to find ourselves short in meeting those contract needs, or in bringing those federal dollars in here for repairing our roads, or for the creation or the continuation of finishing up the four-lane projects that are across the state.  But we had something else happen as well.  We had some help from some rather large corporations around the United States who put a ton of money into advertising "Buy New Cars".  Buy new cars at zero percent financing.  Well, it worked.  And what we had was an influx of money in motor vehicle excise taxes.  And that basically made up for the loss that we thought would occur in the Highway Trust Fund.  Along with that, some gas prices have gone down, people are traveling a little bit more, but we are okay in the Highway Trust Fund and the department never touched the $15 million that they thought they needed.  And in discussing it with the secretary of the Department of Transportation, they don't need, they do not project needing that money in the future.  And so we're going to request from you that you take it back out of the highway fund, put it back into the PRCF, and then transfer it into the general fund where it will be available for other needs this year.  That's $15 million in cash that will be available on a one-time basis. 

 We also have the current practice of taking the investment income earned on state cash flow the year after it's been earned.  And so in last year's budget, you estimated how much, or you were told, how much money you had earned in the previous year which you could spend.  What I'm proposing to you is that we know right now we are earning money on our trust funds and on our cash flow funds.  The cash flow funds we can guesstimate very closely how much money we're going to have.  Rather than taking that as income the following year and using it in next year's legislative session, I'm proposing that we account for it in the year in which it's earned.  But since we're doing it halfway through the year and you don't have it all available to you right now, and that might change as we talk about it for the next year, I'm recommending that you only count on 80 percent of what you would project to get.  And so we're being conservative in our estimates.  Now this is the money that you're going to earn next year—from July through June of next year—July of this year through June of next year.  But account for it and be prepared to spend it during that same time period.  If we do that, 80 percent of what we estimate will be about $10.5 million.  And we'll continue to do that each year.  But in this first year, it provides you with about $10.5 million of one-time money to balance the budget.  That will bring your anticipated deficit from $54.1 million down to about $22.8 million.

 We still haven't talked about the ongoing need for revenues.  And so far we've talked about has been available resources on a one-time basis.  But I think we also have to talk about the need for ongoing revenues as well.  And when we talk about revenues, sometimes that's an easy way to avoid saying a tax word.  I think in this particular case, I have to ask you to work with me in increasing a tax.  And the tax that I'm going to ask you to increase is the cigarette tax—the tobacco tax.  What I'm going to ask you to do is to increase the cigarette tax—the tobacco tax—30 cents.  And so it would go from 33 cents to 63 cents.  I know that there are many among you who believe that it should be more than that—there are some among you that say I'd rather spend one-time money than to do any tax at all as long as we have it available.  I believe we have to do something to increase our ongoing revenues.  And so I'm asking you—regardless of your concerns about ongoing versus one-time revenues and so forth—I believe that this is the appropriate time to ask for an increase in this particular revenue source.  It would bring the state of South Dakota approximately $14.8 million—on an ongoing basis. 

 I would also like to ask you to work with me in broadening the sales tax on interstate phone usage—for two reasons.  Today we collect sales tax on cell phones regardless of whether they're making in-state to out-of-state phone calls or if they're making an in-state to in-state phone call because they haven't figured out yet within that industry how to separate the two.  I suspect that they're probably working on software to be able to separate that out.  We already count on that revenue.  Rather than having a loss in existing revenue, I'd like to level the playing field and also tax those phone calls made from secured or land lines that compete with cellular phones as long as they begin in South Dakota and go to another location in South Dakota, or go from a place in South Dakota to a location out of South Dakota, or from a place out of South Dakota and end up in South Dakota, as long as the billing address is within this state.  Toll-free lines are excluded from my proposal.  So if you would agree to do that, it would level the playing field between cellular phones who compete with land line phones, and they would all be subject to that particular sales tax.  If you were to accept my proposal, this would bring in approximately $4 million per year. 

 I would also ask you to consider increasing the tax on wholesale alcohol beverages.  We currently receive approximately $7.8 million a year.  I'm going to ask you to increase that so that we pick up about an additional $3.7 million.  My reasoning for that is that the last time this was raised, was in 1987.  And, at that time, we knew what the percent was.  Now, this was one of those complicated taxes that, until you get a chance to sit down and have someone within the Department of Revenue sit in front of the tax committee and explain it, it looks like it ought to be a percentage of what it is, like sales tax, but it's not.  This is a tax that the manufacturer collects from the wholesaler.  But they collect it on a gallonage basis—on a volume basis—at so much per gallon.  But it's based upon the type of liquor it is as to how much they charge per gallon.  It's different for wine versus beer versus hard liquor.  And so when you start asking, or when the questions come up, well how much more is that gonna cost me?  I can't tell you that right now unless I'm going to take the time to lay out for you what it is on each different type of liquor.  But the total overall increase would be approximately, in that tax, about a little over 53 to 54 percent, but it actually brings us back up in terms of price about the same ratio as what the tax was to the price of that delivered product in 1987.  And so if the tax was 3 percent of what the total was in '87, we're bringing this in at a per-gallon basis to reflect the same percentage on what the value of it is today.  But that would be approximately $3.7 million additional ongoing revenues.

And, finally, just in terms of—I'm putting this in because it's something that you need to see—the Secretary of State charges fees for their different services.  It's time to update and revise some of those fees for the services that they provide to businesses within the state.  Those revised fees include the filings of UCC's and so forth, and there's a difference now between the filing of what we would propose for the filing of paper filing versus electronic filing.  Part of it is to bring more and more of our businesses to on-line filing rather than paper filing.  But the total amount of that would be approximately $700,000 per year.

The total amount after you were to add on, if you were to accept these recommendations, would be to bring us from a $54.1 million deficit to a black number of $441,941, which unless you spent it, would actually add to our reserves rather than taking away from our reserve.  APPLAUSE

Thank you.  Thank you.  But we can't be done yet.  We've still got to look back at the current year that we're in.  And what I would like to talk about now is what we might be able to do in this fiscal year to take care of the original shortfall that you recognize as being approximately $36 million when you left last year.  Remember that number—the $36 million that you left last year.  Since that time, some things have changed.  Some of it's not good, some of it helps.  Here's our action plan for the remaining part of this year.  Let's recognize that we've had some emergency appropriations that are necessary.  If we want—at least they're necessary if we want to continue our Medicaid program because we have a larger caseload than what we thought we would have—and our basic expenses for Medicaid have been greater.  This is an entitlement program, and it's one that unless, I know we won't, but we literally have to do this in order to continue the Medicaid program on.  It's going to cost us approximately $8.7 million to continue on the Medicaid program for the rest of this year, and to take care of some fire suppression issues, and to take care of corrections health issues.  Last year, we underestimated the cost of health care for prisoners and we have more prisoners than what we anticipated.  The cost of that for this year is $8.7 million that you did not anticipate last year when you had your $36 million deficit.  So that's going to hurt.  That brings these down to about a $45 million deficit.

But then the good news that Governor Janklow shared with you is that we have a one-time windfall from one large estate in which we picked up $19.2 million—one-time money on an inheritance tax settlement because of a death that occurred prior to the elimination of the inheritance tax.  That brings your deficit down to $25.8 million.  And then, because we have more accurate numbers now than what we had in November, we could anticipate approximately $300,000 more in revenue this year than what we would have last year.  That brings you to a $25.5 million deficit rather than a $36 million deficit that you thought you'd have last year. 

Then, finally, I understand as a former legislator that what I've asked you to do on some other revenues will take a two-thirds vote in order to increase the tobacco tax and perhaps some of the other changes as well, based upon how well we determine whether it's a two-thirds or majority vote.  But I will ask you if, as a former legislator, to consider adding an emergency clause to several of those revenue measures.  And if you do that, we would be able to begin collecting some of those revenues in this year, based upon setting them up, giving the organizations that have to collect the taxes adequate time to do so, we can reasonably expect that we could bring in from the increase in the tobacco tax for April, May, and June approximately $3.2 million this fiscal year.  And on the increase on the wholesale alcohol beverage tax, approximately $900,000 to reduce your deficit to approximately $21.4 million this year. 

Now let me lay out for you the emergency reserves.  Currently, remember the fact we talked about, the fact that you would have $115,609,000 available, and then we had expected that you would have a $42 million hit on that, with the projected shortfall in 2003, and from Governor Janklow's concerns expressed in the numbers that many of your people back home have grown to look at as the beginning basis of a $54 million possible deficit, you would have used between those 2 years $97 million of your $115 million reserves, showing a possible remaining balance of $18,457,000.  If you would agree with me that the road map that we've laid out is fair to follow, based upon the spending recommendations and the revenue recommendations, and the changes in cash management, we should look at a 2003 shortfall of $21,000 rather than $42,000.  And we should look at a shortfall in '04, not in the red, but in the black of $441,000 given back to the reserve, meaning that the total amount of reserves needed over that same time period, rather than $97 million, $20,957,000 leaving $94,652,000 in reserves for emergency purposes in the next couple of years, or a difference of $76,195,000 better off on our reserve picture.  APPLAUSE

Let me, let me go a little bit into where we get the money between '03 and '04, and just...and as you know, you'll all have this on line and also in budget books so that you can take it with you and review it.  We actually expect approximately, and this is about a 4.07 percent increase in sales tax, we believe that our sales and use taxes will be up about $19.2 million in '04 versus '03.  We expect that video lottery will be up about $4.6 million.  We believe that the contractor's excise tax will be up approximately $3.1 million.  The insurance company tax will be up approximately $2.7 million.  And franchise up about $800,000.  And all other taxes combined will be down approximately $28.5 million.  A large part of that is the inheritance tax and also earnings on interest or interest, on what we have in the cash fund of the state.  The new revenues would be approximately $44.5 million, and transfers from reserves would be down because we wouldn't be needing the $21.4 that we've talked about in our new budget.  So the total general fund revenues would change to a total of approximately $911 million to work with, or approximately $24.8 million more than what you had this last year or the year that we're in right now.  If you look at the spending changes for '03, the year that you're in now, the one that you recommended last year, and that we're now proposing changes in, just to keep up with those necessary costs, Medicaid caseloads—and this is the reason why I'm asking for this—our Medicaid caseloads, we've got about 4,625 more people on Medicaid now than we had a year ago.  Remember what Medicaid does.  It takes care of children, through the Children's Health Insurance Plan, and this is for children whose parents are close to the poverty level.  Also, it takes care of individuals living with disabilities, and finally it takes care of individuals that are in nursing homes—the very young, the very old, those living with disabilities.

We do have a budget shortfall in the corrections department and that is strictly attributable to the cost of health care.  Two reasons—we underestimated what our costs would be last year, we have more people that are incarcerated, and we have a higher cost for the health care than what we thought we would have.  But that's $2.6 million.  It's a direct out-of-pocket expenditure on part of the state for necessary health care services. 

The fire suppression fund—we had fires last year.  We pay it on an annual basis based upon what our costs were—if we put the $1.3 million back in, we are simply bringing it back to zero.  We're paying back the money—and each year what we do, we have the fund available, we expend it, and then we pay it back.  So I'm continuing that and I'm paying back the money that we owe.

And then we also owe to counties for their part of the fire premium refunds.  This is when we get premium tax increases on fire insurances, part of that we owe to the counties, and this really isn't an emergency special, but I wanted to put it in to point out that we're going to put about $300,000 more back to the counties for their use in buying and equipping their fire departments and for fighting those fires.

 The total amount of the increases this year—now this is the '03—is approximately $8.7 million and that is included in the road map that I've laid out for you just earlier.  It's not in addition to this.  So based upon the changes that I'm recommending, these are included and taken of in that plan.

 Major spending changes for 2004 would include, as I stated in the State of the State, $15.1 million for schools next year.  Medical provider services, which are mandatory, really, they are the Medicaid issue, they are caseloads or people utilizing Medicaid, utilization which means the actual use of those services is greater and as out-of-home placements of children, and then the mandatory part of what we call the required maintenance of effort in order to comply with the federal mandate if we're to stay within the guidelines of the federal Medicaid program.  Then I'm off to $12.9 million.

 I'm recommending the state salary package, as in past years, at 3 percent salary policy along with the traditional PACE programs started by Governor Mickelson, and the health care costs that are associated with it.  The cost of that is $11.5 million. 

 The medical provider services, I'm also adding in an additional amount of $3.8 million in discretionary use to bring medical provider inflation rates up from the mandatory amount up to 2.2 percent across the board.  That cost is $3.8 million per year.

 Corrections, I'm recommending an increase in $3.7 million.  $2.7 million of that is for medical costs.

 The rest of the Department of Social Services and the Department of Health or the Department of Human Services actually will have a return or lower cost this year--$5.1 million, and the reason is because they found ways to transfer expenditures from general funds to federal fund authority.  These folks have been working hard—they're good people, they understand the programs, they've looked every way they can to maximize the number of federal dollars that we can utilize in these federal programs.  They've done a good job.  This year we recognize that with a $5.1 million reduction without the elimination of services. 

The rest of state government—we'll reduce it by $2.1 million throughout the rest of the departments under the executive branch of state government.  The total changes for 2004 amount to an increase of $39.8 million.

 Now, let me just add one item.  Each year, the state aid to education formula requires that we provide so many dollars of state money over and above what we call local effort, which is amount of property taxes that are collected for the number of children that are in the district, and as you know, it started out at $3,889 and then we're going to bump that up again this year.  But in doing that, we have to estimate how many kids we've got, then we overestimate that, we call that, or when we estimate it, and then we have the discovery that wait a minute, we've had a declining number of kids there, and so we have money left over, that's called a declining enrollment part of the formula.  We're putting that back in already.  But there's another part of the formula as well, and that's the amount that we estimate every year, as best we can, how much it's going to take to meet that local match with property dollars.  And we can't be under because then we don't have enough money to pay for state aid that year.  This year, what we've discovered, is that there was more money left in state aid because of local effort issues than what we had anticipated.  And, so, that money I'm transferring from this year's budget to next year's budget—that helps to pay for the $15.1 million that I've requested from you already.  But I wanted to make that note because as you add these up you will see that there's dollars available there, and I wanted you to know where I was getting it from. 

 The general fund spending by category.  We have a total of $891,851,798 in general funds available under this budget.  If you'll look at the screens in front of you, you will discover that because of state aid to local education, the Board of Regents, and technical education, we will spend $479,432, I'm sorry, $479,432,874 for 54 percent of the money that you asked the taxpayers for goes back out to take care of our kids—54 percent.

 Next we have under the category of taking care of those who cannot take care of themselves, the medical welfare under Title XIX, which is Medicaid.  The rest of the health, human, and social services budget, the Yankton State Hospital, and welfare reform which you recognize as temporary assistance to needy families, the total amount that we will spend under this projected budget is $255,271,489 or 29 percent of the total expenditures this year.  

 Corrections will cost us $54,651,738, and the cost continues to climb because the number of people that are incarcerated continues to climb.  The Unified Judicial System—the cost this year is estimated to be $26,585,209.  Specials and continuing appropriations which I had mentioned earlier is $3,123,336.  The total for all of those corrections, Unified Judicial, specials and continuing appropriations is $84,360,283 or nine percent of our total budget. 

 The rest of state government, that's 13 departments, four bureaus, and the legislature together are budgeted $72,687,152, for 8 percent of the total general fund budget. 

 For those of you that would like to see it in a pie chart, we've laid that out for you.  As you can see in the pie chart, a pretty fair chunk of it goes to places that I think most of us agree are very, very appropriate—providing a quality education for our children because they are our future, taking care of those who cannot take care of themselves, and protecting our citizens from those who would harm us. 

 Just as an overview on the remaining part of the overall budget, the total budget, I'd like to point out that our federal funds are approximately 41.6 of our total budget of $2,698,481,444 for the next fiscal year.  Of those federal funds, what do we use them for?  Medicaid is $381 million, transportation, that's highway taxes that the federal government sends back to us, is $258 million, the Regents are $70 million in federal funds, and the Department of Labor is $34 million in federal funds.

 Also, we have what we call the other funds category.  Some specific items that I would like to point out include that the Regents, because they collect tuition from students, also receive $194 million in other funds category or tuition and so forth, grants, and so forth, but this is expenditure authority for them.

 The highway funds, which is money that we collect, is $162 million in gas tax money.

 And, finally, Game, Fish & Parks, with licensing fees and grant money and so forth, is $35 million.  That's 24.7 percent of our total budget.

 Let's talk a little bit about FTEs.  Some people think that that's always meaning how many employees do you have, but what it means is full-time equivalents.  The full-time equivalents picture for the total this year in the whole budget shows that we're requesting 180 more FTEs.  But I want to point out where they're at.  The Board of Regents is requesting 159 of the 180 FTEs.  The reason, because we have more of our children going to school, because they need more te achers to teach our children.  And one of the things that we want to do is to keep our children in South Dakota, provide them with a quality education, and then not export them.  Keep them right here.  And the more of them we can keep here, going to school here, the better opportunity we have to keep them in our state and keep them working with us.  The Unified Judicial System, the legislature, and the other elected offices, 15.2 additional requested FTEs.  And, finally, all of the agencies under the direction of the governor, 5.8 FTEs.  I would like to advise you that of that 5.8 FTEs that I'm requesting for that part of the government under my control, five of those are for what we call the Black Hats, these are the firefighters in the Black Hills that help when we have those forest fires.  And, when they are not being utilized here, they will be utilized elsewhere.  These people are professional firefighters—I do believe that they are important and I believe they are important enough to add them as employees under our direction.

 I wanted to put this slide in because I think it's important to point out the number of districts and who's receiving the money in our education distribution system.  134 districts, or 77 percent of our districts, will actually get more than the basic new base of $3,976 per student.  But let's go the next step also.  Of the 134 districts—remember these are the districts that have less than 600 children in each of their districts—those that over 600 children in their district don't receive anything more than the basic $3,976.  So we have 55 schools with less than 200 students.  They receive $4,771 per student.  But there are 7,350 of those students.  Then we have 79 schools that receive between $3,976 and $4,771 per student.  There's actually in that group—that big yellow part there—of our total number of students, there are 26,876 students that get more than the minimum but less than the maximum.  And, finally for those 40 schools that have more than 600 students in them, that's 89,872 students—they receive the $3,976 if you would agree with our proposal, for this year's budget.

 And let me go through one more time with you briefly the K-12 education funding increases that we are proposing.  First, we have the statutory 1.5 percent increase under the formula guidelines for inflation.  That's $1.3 million additional.  We also have special education formula funding of $3.9 million.  We have the declining enrollment money which is from the nine hundred and some students that we had last year that we don't have this year that I'm putting back in—the money from those students and averaging them back out over the others—put in the formula so this is based, the distribution is based upon adjusted daily membership, and that is $2.6 million additional.

 Finally, the replacement of the estimated trust funds earnings that we were all hoping would come through.  When we had the education enhancement trust funds placed there from the tobacco tax settlement, we all thought we would have money from those trust funds available for education this year.  It didn't materialize, and rather than having our schools not receive the money that we hoped was there, I'm asking the legislature to include $7.3 million of money that would otherwise fall to the general fund or into the budget reserve and to send it back out to our schools.  I know that some of you consider that to be one-time money.  It is one-time general fund money, but it's a replacement for trust fund money that I believe will be there available next year as the trust funds begin to generate income.  But the total amount of new funding for K-12 would be $15.1 million.  APPLAUSE

This next year, our Medicaid expenses are going up.  But this is just to maintain the existing programs that we already have--$8.3 million of general funds.  Now that matches federal funds on a two-to-one basis—one dollar of ours to two of theirs.  That money comes into South Dakota and takes care of healthcare needs.  Those individuals would have healthcare, but if they didn't have the money to pay for them through these programs using federal funds, physicians and professionals would probably still treat them, but they would add on to the cost of healthcare for everyone by passing on those charges to the private-pay sector in South Dakota, driving up dramatically the cost of healthcare even more than what it is already.  And so I firmly believe that we have to continue the Medicaid because it does take care of those who have no other place to go, and I believe that it slows down the increase in healthcare costs for the rest of the people in South Dakota.  But why is it going up?  People who are eligible are recognizing that this is available to them.  Also, job growth, as we pointed out earlier, is stagnant.  We don't have the jobs or the individuals.  And there are financial pressures on individuals and families to where they are swallowing their pride—they're stepping in and asking for help.  There are, this year, 9,941 more eligible than what we had last year.  Here's where the money is going, and let me just show this.  Last year, the growth in the number of children served from '03 budget to what we believe is the '04 budget—we're going to have 7,933 more children qualifying for the children's health insurance program and Medicaid.  That's a 13.8 percent increase.  Adults from 29,812 to 31,820, which is a 2,008 estimated increase in the number of individuals who will be requesting service.  That's a 6.7 percent increase.  The total 9,941 more South Dakota citizens qualifying and being eligible for Medicaid, which is an 11.4 percent increase, but what is even a little more shocking is that it is 12.9 percent of the total population in South Dakota.  It says something about what we have to do to drive this economy and to bring more jobs into this economy to bring a healthy development into this state and make it grow.  The key here is to make our economy stronger with more jobs available, providing not only more income for doing programs, but for more of an opportunity for our people to go to work and to stay in South Dakota and to pay for their own healthcare expenses in the future for those children.

 I talked earlier about special appropriations.  I will, once again, recommend in the next budget year $1 million for tax refunds for the elderly and the disabled.  I will recommend the payment of the school district consolidation incentives that have already been earned in the amount of $240,699 and in the fulfillment of our obligation to pay for the physicians tuition reimbursement for those physicians who have come back to South Dakota and are staying in our smaller communities in the amount of $151,424.  The total general fund special appropriation is $1,392,093.

 And then under the other funds' category, I will ask once again this year that we put a quarter of a million dollars from the special equestrian fund into the domestic abuse shelters program.

 Finally, before I finish up, I'd like to talk about the following year—not this next budget year ending in July, but in the next one beginning July of the year after next in 2004.  We have a structural deficit even with the recommendations that I've made for increases in some tax revenue.  We still have a $25.5 million structural deficit that we have to address.  And so what I'm asking is we work to build an economy so that our income from that economy, the sales taxes and so forth that develop from a healthy economy, can rise.  I'm convinced that if we jump-start our visitors and industries bureau to make it climb, and if we work on ag development, and if we ask additional businesses to come within our state and to expand the mixed markets of healthcare and financial services, that we can generate enough income from the existing revenues that will be on the books at that time to overcome this structural deficit.  And at the same time, I'll commit to you that I will do everything within my power to deliver the services that are expected of us as efficiently and as economically as possible.  So we want future growth, and we also want to do it through combinations of services, reorganizations within government, efficiencies within the remaining part of the executive branch of government, within the next 6 to 12 months.  We've started on the reorganization, we're going to continue with it, but we'll take it one step at a time and I will report back to you in December of next year about how we've come along and whether or not we've been successful in making those changes.

Where are we and what will we have done?  If you will follow our road map, if we can agree on this, if we can come to an agreement on the plan, we will have reduced in this year's budget the deficit from $36 million when you left last year to $21 million now.  We will have reduced the anticipated or expected or possible deficit from $54 million back to being in the black in '04.  We will have increased for those who can't take care of themselves the medical services budget of $16.7 million, we will have increased the amount of support for higher education by $4.9 million, K-12 education—our children who are our future by $15.1 million, and we will have provided a fair salary policy for these hard-working state employees.  I need your help.  I'm asking for your help.  Can you buy the program?  Can you work with me on this?  Can we make it work?  I believe we can.

 I'd like to thank today some people that have worked very hard to put this program together.  Jason Dilges and his crew; my chief of staff, Rob Skjonsberg, who's worked countless hours; Dale Bertsch, who many of you know and who's been working with us; Rodger Leonard, who started to put the budget together and then has continued to work to find efficiencies; Randy Frederick, former State Senator who I've asked to work on our transition team and on our legislative task force; Jim Soyer, who has worked diligently to put together with his experience the information necessary to help find the resources necessary; and members of Jason's office, Tami Darnall, Chris Petersen, Kari Weisbeck, Kellie Englehart, Shane Mattheis, and Angella Van Scharrell.  These folks have worked countless hours to put this together for your review.  I'm asking for your help.  I look forward to working with you to make South Dakota even better.  Thank you very  much.  APPLAUSE