Fiscal Year 2006 Budget Address

STATE OF SOUTH DAKOTA
FISCAL YEAR 2006 BUDGET ADDRESS
PIERRE, SOUTH DAKOTA
DECEMBER 7, 2004
GOVERNOR M. MICHAEL ROUNDS

Thank you. I promised I would do my best to move this one along. Thank you. Mr. Speaker and Mr. President, first of all thank you very much for the very, very kind and humbling introduction. Members of the legislature, friends and citizens from all over South Dakota, thank you for the opportunity to come and share with you our proposed budget for the next fiscal year for the citizens of South Dakota.

I noticed when we first started working on this and we looked at what we were doing, it caught my attention that we were proposing this budget on the 7th day of December, and it would be fitting to recognize the importance of this day in the history of our state and in the history of our country-the day on which our nation was attacked at Pearl Harbor-and the resolve with which its citizens came together and the day in which we entered the Second World War putting in harms way all the fighting men, the warriors of this country, at that time.

And then I think today on the 7th day of December, in this the year 2004, and how even now we have young men and women, citizens of this state, that are away from home fighting in a foreign land defending the freedoms we hold so dear-the freedoms we sometimes take for granted. We have over 1,250 young men and women in our National Guard, our Air Guard, and in the Army Reserve that are away from family and friends this Christmas season. Let's not forget those families that are at home, that are suffering a loss during this time period of not having that loved one at home with them. And let's resolve to do what we can to make this period of their life in which they offer that sacrifice on all of our behalf so that our country remains free and that we share that freedom with men and women from around the world.

This budget address is designed to highlight what I believe to be the basic needs of a continued policy that does not increase or add new programs but rather continues in the tradition of educating our children because they are our future, of taking care of people that have no place else to go to be taken care of, and protecting society from those who would do us harm.

This budget has no new taxes. This budget includes provisions to allow for the continued reduction of property tax levies as are currently found under statute within South Dakota.

And, finally, this budget continues toward reaching our goal of totally eliminating our structural deficit, but which this year, once again, reduces the structural deficit that we have contended with for the last several years.

But I want to point out, one of the biggest challenges that we've had in preparing this budget has been the mandated expenses that we find ourselves working with in continuing the programs that we have adopted over the past several years. And I will point out in several different areas where those mandated expenses are challenging in meeting the goals in eliminating this structural deficit.

Where do we get the money? Let's go through the chart very briefly in which we show-and you've all seen it before-this is a layout and you will have the information in your handouts and you'll study it a lot during the session, the estimates that we have for the new revenues coming in as our economy grows, as our sales taxes continue to rise. We will not be using any one-time money this year other than what is in the budget reserve. But we will have additional revenues over last year of approximately $30.4 million even without the one-time revenues that we had last year. So, if we have more money coming in, why is it that we're simply not reducing our structural deficit even more? It's because our expenses also go up. One of the reasons why our sales tax revenues go up is because inflation drives up those costs. And the same way when the state purchases goods and services for the benefit of our citizens, we also pay for that. So our expenditures go up as well.

This year, we are proposing a budget which includes, on the bottom line, a receipt of income of $999.8 million in revenue. But at the same time, our expenditures, for the first time in our history, will exceed a billion dollars. Our proposed budget includes expenditures of 1 billion, 16.9 million dollars, leaving us with a reduced structural deficit but nonetheless a structural deficit of $17.1 million this year.

Let's go on and look a little bit at how we are going to take care of the structural deficit and where we get the money to handle it. As of today, December 7, we have two budget funds, or two reserve funds, that we use when we talk about our reserves. The first is the budget reserve fund, and we have about $42 million in that fund. We also have the property tax reduction fund, which we have about $116 million in for a total of about $158 million in our reserve accounts. Now, one of the reasons why the property tax reduction fund is that high is because last year, in June of the previous fiscal year and in July of this fiscal year that we are in, the federal government, in a one-time effort, provided us with about $70 million in fiscal assistance that was designed to allow states to work through the hard economy-through the tough times-without reducing the existing programs that we have committed to. Now, rather than spending that all in 1 year, you, as fiscal responsible legislators, have used only a part of it. And so we've got the reserves there in which to continue to work our way out of the structural deficit.

This year and the year that we're in-the fiscal year 2005 budget that we're right in the middle of that began in July of this year-our expectations are, according to when you left the legislative session last year, we expected to spend about $22.5 million of the budget reserve. This year, under the budget we're proposing, we would expect that we would spend about $17.1 million additional from the budget reserve or $39.6 million in the last 2 years-leaving us a projected remaining balance in our reserves of $118.3 million as of June 30, 2006, so 18 months from now.

Now, if we do that, I believe we should have a goal of eliminating the structural deficit. This is what our goal is, and this is the plan to get there. Beginning in '05, where right now we have $158 million in the reserve accounts, we will spend $22.5 this year leaving us $135.5 remaining balance. This budget year we are proposing for you, if you should adopt it, would take an additional $17.1 million out, leaving us $118.3 million. In the fiscal year '07 budget, we would expect to cut our structural deficit in half. That would still leave us with an $8.6 million structural deficit as a goal. The remaining balance in our budget reserve accounts would then be $109.7 million. The following year in '08 assuming a structurally sound budget without a deficit, we would then continue with $109.7 million as our goal.

The reason I point it out to you is that I think it is fiscally responsible to have a budget reserve. And the budget reserve this legislature has adopted as a goal in the past has been 10 percent of what our general fund operating budget is, which this year is basically a billion dollars. So 10 percent of that is $100 million. Within the next 2 years, we would expect it to be more. We believe that the $109 million will reflect approximately equal to 10 percent of what our operating budget will be 2 years from now.

Let me talk a little bit, as well, about the major spending changes for the fiscal year 2006 budget we are talking about today. For those departments that make up what we call taking care of people, and let me list them for you a little bit. Taking care of people includes the Department of Social Services, the Department of Human Services, and the Department of Health. Their budgets, the increases in those budgets, account for 68 percent of the total increase in the budget. That amounts to $25.2 million.

Protecting society, as we talk about it in terms of the protections that our society expects us to assist them with, includes the budgets of Corrections, Courts, Public Safety, and the Attorney General's office. It accounts for 13 percent of the total increase. That is $4,895,000 as an increase. And these are all general fund increases.

With regard to education, those budgets that we've included in the overall category of education, includes the K-12 formula, the technical schools, the Regents, and they account for over 31 percent of the increase. However, this year, it will be offset by the carryover of approximately $5.1 million, which is currently in the Department of Education's budget, but which we did not need in order to meet our responsibilities as directed by law last year for the ongoing K-12 formula. We estimated, last year, a certain amount necessary. When the final numbers came in, we didn't spend all of the money that was required to be spent. Now in the past, people that work within the field of education have suggested-well that money, rather than going back to the general fund, should be carried over for education.

That's what I'm proposing to do. For the dollars that are left over from the previous year within that part of the education budget, I'm proposing that we carry it forward and we use it for this year's education budget. When we do that, we will have a total change, when you add those up from all the different departments, you will find along with the cost of state government, all the rest of the departments of state government, which amounts to $880,000, you will find that the increase in the budget from last year to this year is $37,305,000. Let me explain that that increase for all of the departments, including the rest of state government, includes provisions for salary policy for the next year. So we've included that in all these numbers.

Let's talk a little bit about the major spending changes and kind of where they are at here. In particular, I've highlighted, and I'm going to take these one at a time, in green at the top is the "Taking Care of People" budget, which is for those departments I've just identified for you. The $25,208,149 breaks out in the following manner, and these are the mandated expenses that we are faced with at this time. Please note these mandated expenses take up 91 percent of the total requested increase for taking care of people in the next year.

The Medicaid growth and utilization and the Children's Health Insurance Plan (CHIP) is up $9.3 million. This covers the prior year's shortfall and the increased utilization, which is basically when people go to the doctor more than what they have in the past, and the growth in the number of caseloads within this part of the budget for Medicaid and for the Children's Health Insurance Plan.

The inflation that we identify as being a cost of $6.5 million, this cost of Medicaid inflation-basically the standard inflation rate for these items is 1.4 percent. That's not included in this number. What is included in here are only those items that are required to be increased by federal government directive. Items that are included are what we call the big four-that's the inpatient, the outpatient, the physicians, and the prescription drug increases as mandated by federal law. There are also federally mandated increases such as Medicaid Part A and Part B that we've included in this part of the budget.

The FMAP (Federal Medical Assistance Percentage). This is the part where we share the cost with the federal government. Traditionally, the average is $1.00 of state money to $2.00 of federal money for these welfare or social welfare programs found within this part of the budget. This year, the FMAP, or federal match rate, will go from 34.06 percent up to 34.69 percent on behalf of the state because our standard of living, the income levels for people in South Dakota, has increased compared to people that are living in other states. Therefore, we have to pick up a larger part of that. That increase will mean that we have to pick up an additional $3.6 million in the costs of these mandated programs.

Taking care of the kids and elderly-I identify that as foster care support, direct assistance payments for childcare, the elderly nutrition program for seniors, and in-home services. I'm going to talk a little bit more about the elderly nutrition program as well in a later slide.

The remainder of the mandatory increases-and this is about $2.3 million-this figure includes, but is not limited to, the expansion of the Division of Developmentally Disabled programs, mental health expansion, some food services expansions, and some incentive awards for child support and food stamps. But the total on that is about $2.3 million. Once again, this represents, under this category, 91 percent of the requested increase this year.

Then we have the discretionary part of the spending increases under this category. The Department of Social Services' inflation, this is not mandatory, but has been a tradition that the legislature will provide an inflationary trend. We have proposed a 1.4 prospective inflation for the year 2006. This has been a standard practice of the legislature in the past.
The salary policy for the Departments of Health, Human Services, and Social Services is also included in this part of the budget.

There are miscellaneous expenses for a number of items included in here and we identified it as approximately $45,000 but this includes some additional employees for child protective services and in the fraud and recoveries areas so we can do a little bit better job of finding and maintaining the most efficient type of a program in terms of catching those people who would try to cheat the system.

The item in red-this is the Department of Social Services' cost containments-these are the savings that we've been able to come up with during the past year, some of which will start next year, but these are the savings that we've found so far.
First of all, we expect to save a little over $2 million with what we call the disease management for the disabled population benefit. Part of these is because of exceptions or changes that have been allowed by the federal government and the way that we operate these programs.

We will increase some co-pay benefits-that will save us about $350,000.

The over-the-counter drug benefits-we will save about $350,000 by allowing the program to expect a smaller payment, but a payment nonetheless, from people who are benefiting from this plan.

Out-of-state hospital reimbursements-we will reduce the payments that we will pay out-of-state hospitals from 62 to 53 percent because of some changes in some contracts. That benefit will save us basically $1.5 million.

We've been looking through, and whenever we can find contracts, if we can renegotiate contracts for outside of state government, we compare eliminating the service as a contract and adding an FTE or negotiating to reduce the cost of the contract. We've also been able to save about $350,000 by reducing some costs for health care management contracts as well within the last year.

A couple of things that we are going to see in the future-we have a cost built in this year for setting up a plan to literally save on the purchase of prescription drugs, but we had to set up the program this year, so we have a cost built in and that cost is built in this year but we will see savings next year for what we call the prior authorization of the purchase of prescription drugs.

There's also the prior authorization for out-of-state procedures. The cost to set that up has been included in this year's budget but we are going to see the savings on it in the following year. Now we don't know what those savings are yet. But we've picked up the expenditures to find those savings this year already.

The total in this when we get all done with it, our total discretionary increases for taking care of people is about $2.2 million. But the mandated increases are about $23 million for a total increase in this part of our state's budget by $25.2 million.

Now, let's talk a little bit about Medicaid because Medicaid is what is really driving these increases. Let's talk about what it is for just a minute. Medicaid is identified as Title XIX and it is a federal entitlement program which was created in 1965 as part of the Social Security Act. It provides comprehensive healthcare to those in poverty such as the disabled, children who are living in poverty, and the elderly who are living in poverty.

In the FY 2004 budget, Medicaid and the state's Children's Health Insurance Plan covered 122,000 different men, women, and children. Of that 122,000, 80,000 were children.

Now, Medicaid is also a safety net. It's a funding source for individuals who have no where else to turn, perhaps through the loss of their insurance because they've exceeded the maximum benefit allowed by their insurance; some of those with catastrophic illnesses such as cancer, hemophilia, premature babies; or they've been put in a nursing home and there are no dollars to pay for the nursing home from their own resources. It is the largest payer of healthcare benefits in South Dakota today.

One out of every eight South Dakotans and 50 percent of all children under the age of 1 are on Medicaid. The cost of Medicaid this next year is projected to increase by $21.9 million in general funds alone. Now that matches twice that much in federal funds for healthcare services for people who are citizens of South Dakota.

Why are Medicaid expenses going up? Here are just a couple of examples. Inpatient hospital costs-inpatient hospital costs in South Dakota for Medicaid-are equal to $80 million. But interestingly enough, of that $80 million, there are 12,566 people who have used inpatient hospital services in this state in the last year. But for catastrophic illnesses-cancer patients, premature babies, hemophiliacs, and accident victims-2.2 percent of that 12,566 people, or 276 people, are responsible and have received $42 million of the total $80 million that have been expended by the Medicaid program within this state. All the rest, the 12,290, have spent the $40 million.

So what I am getting at here is this. At the state level, for our state employees' health care plan, we've been able to manage those costs. We've been actively involved in working on those individuals who could have the highest costs associated with healthcare. Because it's private, because it's our state employees, we've been allowed to work on those plans and to reduce those costs by actively managing those diseases. But with the Medicaid program, we're not allowed to do that. Or at least it's a very limited allowed practice. We are the payer. Unfortunately, we are not the manager, we follow the federal guidelines, and in doing so, we simply get the bill.

Why do our Medicaid expenses go up? Here's another example. Last year, we had 11,033 children born in South Dakota. Five thousand and eighty of them participated in Medicaid in the first year of their life. That is, 46 percent of all the children born last year were on Medicaid for at least a month in their first year.

Here's another example of why our Medicaid costs are going up. Now, this is a good program. This is the elderly nutrition program. This is what takes care of and provides a good nutritious meal for seniors that are still trying to stay in their homes, and if we're not able to help them, may very well end up in an assisted living center.

This is the money that takes care of providing good nutritious meals in senior citizens centers. Well, the federal government started this program and back in fiscal year '02, we basically had only a 4.2 percent responsibility for the cost. In '03, 4.3 percent, in '04, 4.6 percent, in '05 it changed, and this last year we paid 10 percent of the cost of that program at the state level. But in '06, it's almost doubled, and we will be responsible for 19.6 percent of that plan. Now, this is a good plan. Currently, we provide, on an annual basis, 1,522,846 meals that are served at 227 sites in 183 communities and in over 4,000 homes in South Dakota.

Let's go to the next section of our budget. This is protecting society. Let's talk a little bit about this. Now we've talked already about taking care of people, now we talk about protecting society. This is the highlighted green area. Here are the mandated spending proposals for '06. I'm just going to walk my way through these a little bit. When we talk about mandated, these are the ones I do not see that we have a choice in doing, then we'll have a second page which we'll go through those which are discretionary and that we're recommending because we think it's smart to do them.

But these are the mandated ones. Staffing for the new Department of Corrections units. Two years ago, this legislature agreed with us that we will run out of prison space. You allowed us to start building three different locations. Since that time, the prison population has slowed in its increase. We have started and are in construction for two of the three. They will be on-line and ready to go. One of the three we will not build because we don't believe that we will need it and that's the Rapid City trustee unit, which will avoid the cost of staffing that location. But we will have the responsibility of staffing these two new locations which will be at the Jameson Annex in Sioux Falls and at the Mike Durfee State Prison at Springfield. The increase in staffing is $1.5 million, which includes 30 FTE-that's for the 400-bed barracks at Mike Durfee State Prison-and that will begin operation on August 1st, and 8.3 FTE and $315, for Unit D, which is located at the Jameson Annex at the South Dakota State Penitentiary in Sioux Falls.

The Unified Judicial System budget increase of $485,000 is as it is submitted from the Chief Justice, and I know that the chief is planning on delivering to you a State of the Judiciary. I will tell you that I support his proposal for this change in his budget.

We also had the loss of the Juvenile Accountability Incentive Block Grant (JAIBG). The feds are continuing to decrease the block grants each year. In this particular case, we are replacing it with general funds.

Correctional health care-this increase reflects the inflationary increases. The main inflationary increases for the correction health care of $381,000 are for outsourced services and prescription drugs.

The alternative placements and what we mean by that is a $296,000 increase in general funds. This is the money necessary to provide detention, residential treatment, group care, outpatient and aftercare services to youth that are under the supervision of the Department of Corrections, but who are not being placed within a state-run facility. These are the kids that need the extra help or the special help. In some cases, we've placed them out of state if that's where we have to go to get the best care. Some of them are placed in state if we have the facilities capable of assisting them.

The remainder of the mandatory increases, and it's a $400,000 amount, let me give you a little bit of an example of what this is. It's a number of items, but it includes four additional parole agents, which is $144,000-it includes a number of items within the Department of Corrections that will ensure our compliance with some federal rules and regulations. This also includes some additional assistance so that we can continue to take care of the new State Radio system which provides State Radio across the state of South Dakota with our new digital system.

The total for the mandated increases, which equal 72 percent of the protecting society part of our budget, 72 percent is equal to $3,545,000 in general funds.

We also have the discretionary spending increases for protecting society. We have salary policy. We have the Unified Judicial System salary policy. We have the Attorney General's discretionary. This Attorney General's discretionary is the money that we need in order to continue the Internet Crimes Against Children department. This good plan is what we use to take care of and follow up on those individuals using the Internet within South Dakota to seek and make victims of children.

We also have a civil litigation attorney that we have to keep separate from other items that takes care of the civil litigation that we find ourselves in from time to time. And when the Attorney General hires out a certain attorney from outside of the state's regular employment of attorneys, when we have a particular case which is being tried because the governor, the legislature, or because of an act of the people, we have to defend a law in court.

Let me talk for just a second-I see I've also got right in red here the Department of Corrections cuts. Let me give you an example of what we've done. We renegotiated our food services contract. We saved $377,000. A few years back we were becoming accredited for the juvenile community corrections, and when we became accredited, we were able to pick up some federal dollars. The federal dollars coming into our system allowed us to free up some general dollars to the tune of about $799,000. There were some miscellaneous changes and so forth but basically that's the vast majority of the $1.2 million decrease in the Department of Corrections.

When you add those all up, the total discretionary increases are about $1.3 and a half million. When you add that to the $3.5 million we have for mandatory increases, the total increases under the broad headline of protecting society, we end up with about $4.9 million in requested increases for the next fiscal year.

Let's talk now about education. The education funding, in this particular case, will go up under this proposed budget by $11.3 million. The mandated part of this part of our budget of the $11.3 million is found in the statutes as a 2 percent increase because that's what inflation is this year under the way we figure inflation. So we provided $1.9 million under the statutory increase for state aid to education. That goes back to local school districts. We've also included, as per the statutes, a 2 percent increase in our state's special education budget, which is $500,000. So the total mandated increase for education is $2.4 million. If you notice in terms of the mandated cost, while the other mandated costs in the other areas have been significant compared to the total increase, the amount mandated for education represents only 22 percent of the increases I am proposing to you today.

Now let's talk about discretionary spending for educating our children. I am proposing the Board of Regents' salary policy, which is $4 million.

I am proposing that we include what we call the declining enrollment dollars to put back into the state aid formula. Each year we figure out how many people we have or how many students we'll have going to kindergarten through twelfth grade across the state. As you know, that number has been declining each year. Last year, we had a certain number. This year, we have fewer children going to school. But that doesn't mean it takes less to run a school. You still have the janitors, you still have the utilities, you still have the lights, you still have to have a teacher in a classroom, even if the number of kids in the class went from eighteen down to seventeen. So, rather than simply putting that back into the general fund, I am proposing that the difference between what we've put in the formula last year for the number of students and the number we would have to put into the formula this year for the number of students, we add back in-average out once again the declining enrollment dollars over all the children that are left within our K-12 system. That would put back in basically $2.2 million. I'm also adding and asking for your approval for an additional discretionary addition to the budget-an additional $1.3 million. So it's money that's not obligated to be paid by the legislature-it is $1.3 million that we would put into the ongoing funding of education K-12.

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