Fiscal Year 2005 Budget Address

TATE OF SOUTH DAKOTA
FISCAL YEAR 2005 BUDGET ADDRESS
PIERRE, SOUTH DAKOTA
DECEMBER 2, 2003
GOVERNOR M. MICHAEL ROUNDS

Thank you. Thank you. Thank you. Mr. President, Mr. Speaker, Ladies and Gentlemen of the House and the Senate, I think this is a fitting time to talk about some of the message that your Speaker just brought up-and that was the beautiful mural that has been lit for perhaps the first time ever in this chamber-"The Peace that Passes All Understanding". It's a beautiful piece of work. It has such a marvelous message to it. And, if you look at it, the sunlight, the dawn, that seems to be there and lit for the first time is, I think, truly a message about what this part of the year is all about.

We're coming on the beginning of a new year, a time in which we look at new opportunities, new beginnings, new promises to be fulfilled, and yet to also recognize all that has passed before us in previous years. In our particular case, we're talking not just about a calendar year but we're also talking about a fiscal year. Today's message is one which is really business oriented and yet any time we talk about business with state government, anytime we talk about the peoples business, we're talking about the impact that we have-not just in terms of dollars and cents-because we are supposed to be responsible for the dollars that are entrusted to us, but also for the things that we do to make life better for the people that we represent.

And so with that, let me begin by explaining to you a little bit about what we see as our state's economy and what we see as happening in the next 18 months. In addition to that, what we see as the expenditures and hope everything fits together, and the opportunities, the opportunities that we have at this point that we should consider taking advantage of.

Ongoing state revenue-the picture is getting better. After coming through, along with the rest of the country, a real tough time-a time in which people from other parts of the world attacked individuals on our soil, individuals that attacked fellow citizens because they hated our way of life. We're starting to recover in terms of this economy, not just within the nation but within the state of South Dakota as well. The chart that we've laid out in front of you is the total amount of state revenue growth that is expected and that which we have already seen. If you'll look from 1998 through until the year 2002, it was steadily declining in terms of the ongoing state revenue growth. That's not the amount of state revenue but the growth in the state revenue. But look what happens in 2003, and then in the year 2004, which we're in the middle of right now. We're projecting growth in our resources for this year of over 6 percent. But then, since we're looking at growth not just in '04 but also in '05 which is the next fiscal year beginning in July of next year, it's our responsibility to forecast, as best we can, what we believe to be the sustained growth moving forward. Once again, it's positive, and we will expect to see growth in our revenues close to traditional averages of about 4.83 percent through the year '05, which is the budget year that I'll be proposing for you today.

Where is the growth occurring? The message has some subtleties to it that I think we have to talk about. If you look at the chart on the left, the part in yellow is sales taxes out of the entire…of the 6.9 percent increase in revenue. This is on the increase. Of that 6.9 percent, 3.24, more than half of it is from sales tax revenue. And then look what happens in '05. In '05, the amount of sales tax revenue compared to all the rest of the revenues increases. In fact, two-thirds of all of the growth in the revenues that we have available to us for ongoing expenditures comes from one source-and that is sales tax. Without that strong sales tax base, the amount of money available for education and taking care of people that have no where else to go, is lost, and the opportunity to meet those increased costs in the future is gone.

The bottom line, and I want to start from this and then I'll move my way on through it. The bottom line for 2005 shows that Sales and Use Tax will amount to $535 million, Video Lottery and Telecom. Tax is $108.3 million, Contractor's Excise Tax $64 million, Insurance Company Tax $57 million, other continuing receipts (everything else that we have) $186.9 million, one-time receipts $7.6 million, total receipts $959.1 million in expected revenue coming in from the different resources the citizens of this state allow us to collect.

In addition to that, let me show you what the expenses will look like. Under this proposed budget, we will spend for education $498 million. That's almost a half a billion dollars to educate our children-the first time ever. In addition to that, $284.1 million for taking care of people that have no place else to go. Protecting the public, $97.7 million. The rest of state government $71.4 million. Sale/leaseback, CPR, Bonds $18.1 million. And then special appropriations that we will request $6.4 million. The total expenditures $975.7 million.

Now if you recognize the amount of ongoing revenues at $959.1-subtract the expenses-you will see that we would be short $16.6 million which I will request as a one time payment from our reserve funds this year. So, when you look at the $16.6 million-you look at that and you wonder whether or not it's appropriate to spend out of reserves, let's take a look at how our reserves shape up. I wanted to walk my way through this because I think it's important as stewards of the dollars that are entrusted to us to be able to explain to the people back home exactly why we would consider spending $16 million out of reserve funds this year.

To begin with, as of December 2nd, today, the budget reserve fund before we make any changes in it for the current fiscal year, the fiscal year that began July 1st of this year, the budget reserve fund had $40.6 million. The property tax reduction fund had $65.8 million for a total in our reserves of $106.4-almost $106.5 million. But then in '04, this budget year that we're in right now, beginning in July, it's going to end in June, we project that based upon changes that we're going to recommend today that you adopt during this legislative session that we have a surplus at the end of this fiscal year that's going to go up by $3 million to be returned to the coffers within the state of South Dakota.

Now in addition to that, remember that last year when you left you expected to have leftover about $60,000. We are going to spend some money during this fiscal year-one-time money during this fiscal year. But because of changes in revenue and so forth and some one-time dollars coming from the federal government, we will actually be able to meet those expenditures that are necessary and have not $60,000 at the end of the year but $3 million more to return back in to the reserves going to the property tax reduction fund. In addition to that, in the fiscal year '04 there is a one-time federal fiscal relief plan which will deliver to us $66 million in one-time revenue. The federal government, our Congress, our President, recognize what was going on at the state level in terms of the programs and the shortfalls in income that we pointed out earlier. This is their message to us to say they're with us, they understand, and they will assist us with this one-time amount of money to help us get through the tough times-to help us continue to provide those programs which this legislature has believed in, in the past--$66.3 million this year.

Now, by the way, for those of you that might be wondering, the actual amount of fiscal relief that was delivered to us was actually almost $71 million but remember that about $5 million of it came in, in June of last year and so that was included in the $65 million that's already identified in the property tax reduction fund to begin this fiscal year. So we've accounted for all $70 million that was delivered to us by the federal government, $66 of which comes in during this fiscal year. In addition to that, in 2005 I just told you that under the proposed budget I would ask you to spend $16 million of this money-leaving us with an increase in one-time dollars available for the reserve of $52.8 million, bringing our total projected reserves to $159 million after the necessary expenditures during the remaining part of this fiscal year and the changes that we're recommending for the next fiscal year. These reserves are due primarily, other than the first $3 million return to the surplus this year, these reserves are due to the one-time federal dollars that we have received.

Where are we going to get the rest of the money? Where are we going to get the money for the ongoing expenditures of state government? This is a very brief layout, it's a very brief identification of the different types of resources that we have available to us, and a comparison between 2004 (the current fiscal year) and 2005 (the one you will be budgeting for during this legislative session).

Sales and Use Tax is up by $31 million. The other taxes, Video Lottery and Telecom, $1.6. The Contractor's Excise Tax $4. Insurance Company Tax $3.7. Bank Franchise Tax $600,000. Other continuing receipts $200,000. There is also, in last year's budget, we broke out because we were looking everywhere we could to balance last year's budget, we broke out and found $28.5 million in one-time expenditures to balance the budget. Now those one-time expenditures, if you recall, were the accelerated cash flow on the interest proration in our investment accounts. It was one-time-we used for $13.5 million. In addition to that, the Highway Trust Fund had borrowed from the Petroleum Release Compensation Fund $15 million, which it turned out they did not need. They returned it back to the Petroleum Release-we borrowed it, took it from the Petroleum Release Fund, and utilized it to balance the budget last year. That's where that $28 million comes from, from '04. This year, we will be using only $7.6 million in one-time funds. But on the other side, if you notice, we will be transferring, if you accept my proposal, $16.6 million from the reserve this year. That would, at this time, provide us with $975 million, which is $37 million more than what we would have had under the expected receipts so far during this fiscal year based upon changes in the sales taxes and so forth that have occurred.

The proposed changes in the 2004 budget-now there's two different budgets that we're working with. The first one that I want to talk about is the one that we're in right now. And these are some changes that I believe are necessary in this fiscal year. The Medicaid shortfall-when you left session last year, we had no idea how quickly the cost of medical care would go up in South Dakota for individuals on the Medicaid programs. Our Medicaid shortfall projected for this year is $11 million in general funds. That matches basically a two-to-one match, another $22 million in federal funds. That's $33 million more than we thought we would spend for Medicaid this year. Where's it going? It's going up at the rate of 17.9 percent. One of the frustrations we have, this is an entitlement program. It's a program in which it's difficult to manage, the activity of individuals that are utilizing it, it's an entitlement in which the federal government lays out the rules and guidelines for it, and while we are making some headway in trying to manage the Medicaid expenses, it's not as easy as trying to manage other health care expenditures such as that which we have for state employees. As an example, Medicaid expenses are going up by 17.9 percent, but because our state employees are working with us and we're managing our state employee health care plan that we're going to talk about later, those expenditures are going to go up by 2 percent. So there's a major difference between those which you can manage and those which you're restricted from fully managing.

In addition to that, I am going to propose this year under a one-time scenario, and by the way these are all one-time proposed changes, a Veteran's Bonus of $4.2 million. I think it is appropriate. We have right now young men and women serving overseas. We have young men and women who are serving full-time within the United States today. Since World War I, the people of South Dakota have provided a Veteran's Bonus as a very, very small way of saying thank you and recognizing those individuals that put their life on the line. I believe it's appropriate for us to spend that money at this time.

In addition to that, for 2004, last year when you left we truly did not believe that we would have any money being generated from the trust funds-money that would be available for special needs in education. Those trust funds did pretty good after you left. They did better than anybody expected. Because of that, I've set aside an additional $2.8 million, which is money coming from the Education Enhancement Trust Fund, and by constitutional directive can only be used for educational enhancement programs. $2.8 million as a one-time expenditure is made available for this legislature. There is nothing directed. You have no requirements as to where to spend it except that it be spent for education. If you decide as a legislative body that you want to put it in scholarships, that's acceptable. If you decide that you want to put it into ongoing educational programs for K-12 education for technical schools, or for that matter for educating the public in another way, it's totally up to you. But for 2004, there's $2.8 million available at your discretion.

In addition to that, correctional health care costs have gone up by $2.4 million. Of that $2.4 million, $1.8 million is being utilized by 18 people.

Fire Suppression Fund-traditionally, the legislature has allowed this fund to run in the red and then at the end of a fire season if we have expenses, the legislature will reimburse the fund. This year we had $2.1 million in expenses to fight fires in South Dakota. I'm asking on a one-time basis that you fill that fire suppression fund back up and take it out of the deficit that it is currently in.

In addition to that, the DOC Prison Expansion Match $1.7 million-last year you worked with us to provide additional construction planning for new facilities in areas within our prison system that were overcrowded. Along with that, we told you that when we were ready, we would have to provide a general fund's match. That's coming in at this time. In addition to that, there is also a one-time equipment cost included in this and one other item for $225,000, which is money to purchase land for a center in Rapid City because the land that we thought would be available to us turns out to be engineeringly unfeasible. There's problems with the ground in that area and we're going to recommend that we just find a new site outside the city limits of Rapid City to actually build the facility.

The other item on here is the Non-PEPL eligible expenses. This is expenses that our federal auditors have indicated that when we talk about the liability program for state employees we cannot bill back out to the agencies. This has to do with defending of Amendment E. This has to do with defending the state with regard to the Lonetree lawsuit and so forth. So rather than jeopardize the availability of federal funds in conjunction with our general funds for the other agencies' liabilities, I am asking you on a one-time basis turning that fund back to zero as well with a $1.2 million one-time appropriation.

The State Fair-the State Fair is in the red to the tune of $1.2 million over the last 3 years. The $1.2 million is there, it is a case of where we feel it is important and necessary that we bring the State Fair account back up to zero, and in such a position that the legislature can decide moving forward what you want to do with the State Fair. My proposal is give us the opportunity to make the State Fair work. But we wanted to tell you what the expenses were, how much it's been in the red, and on to a one-time basis once again bring it out of the red.

The Medical School Office-with the Board of Regents, I'm asking for $300,000 in one-time money this year. In next year's budget I will ask for an ongoing appropriation. This is the money that last year we asked the Board of Regents to go out and find additional funds elsewhere with other partners. They did not find this $300,000. It is a necessary part of keeping our Medical School accredited. The only other alternative we have at this time is to increase the tuition on each of the young people that is attending the Medical School in South Dakota. My recommendation is to put it back into the budget and fund it this year on a one-time basis and in the future within the general fund.

In addition to that one-time expenditure-the Public Utilities Commissioners' salaries last year were taken out of the general fund and they were placed into the gross receipts fund. The commissioners came back and indicated their concern about having their salaries funded out of the tax from the companies that they're responsible for monitoring and regulating. As a result of that, the proposal that came through that would have taken that money out of there, I vetoed. You sustained my veto. But the money was still not in the general fund because you had assumed it would come out of the gross receipts tax. What I'm recommending is that since we are not taking that money out of the gross receipts tax that it be appropriately put back into the general fund, but for this year it be put in as a one-time expenditure in the '04 budget.

The total, $27.2 million in additional expenditure requests for this fiscal year. How does it work? How does it look? Let me explain.

At the beginning of the fiscal year, when you left the legislature last year, you expected to have for this fiscal year that we're in about $60,000 slightly under one-tenth of a million dollars in surplus at the end of this fiscal year. Then here I am requesting midway through the year that you add $27.2 million to one-time expenses for this fiscal year, meaning if you accept my proposal, we would have a deficit of $27.1 million. But the unanticipated trust fund earnings that have come in at equal to $11.6 million. That would leave a deficit of $15.5 million. Fortunately, the economy has turned, and with that growth rate that I pointed out in the very first slide, we will have an additional $18.8 million in revenues for this year that we did not count on at the end of the last legislative session. When you apply that to the $15.5 million deficit, you'll find a $3.3 million surplus, which we have to make one more correction to and that is we will have to add one item in the continuous appropriations column which is $200,000 which will go back to the counties for their share of additional insurance premium taxes that we split with them. And so when you take the $200,000 out, if you accept our proposal, for this fiscal year that we are in, your surplus will rise from less than $100,000 to $3.1 million to be redeposited into the reserve accounts. That's after having met the obligations indicated by the $27.2 million we have proposed.

Next year, the '05 budget year-I have a number of items that I want to compare and I want to show you. I have a separate chart for Medicaid, medical, and provider services, but I to simply say those costs in the general fund will be up by $24.6 million. I will reiterate my frustration in trying to manage within the federal guidelines this part of our budget. All of that money that we put in is matched by federal dollars at the rate of about 2 to 1 for health care.

In addition to that, I have a separate slide that I'd like to show you on state aid and on education enhancement. We are proposing adding $13.3 million additional for education.

In addition to that, we are also adding under this in a separate slide as well for employee compensation, including the 2 percent increase in their health care costs this year for a total of $9.4 million.

Corrections-I'm requesting $6.5 additional expenditure authority. Of that $6.5 million, $4 million is for health care.

Tourism and State Development-I have a separate slide on but I am requesting $4.6 million for tourism and state development, of which $3.4 million will be a direct pass through to the Board of Regents for research and technology development.

The rest of state government I am requesting $5.4 million increases.

The Board of Regents has an additional $2.1 million request in.

And then on government efficiencies realized, now I have a separate slide I'd like to go through with you that we found savings in the general funds of $2.3 million that we can apply toward next year's budget. The total changes from this year to next year $63.6 million.

Why is our cost going up in Medicaid? Ladies and gentlemen, just to maintain the existing status, this is not new caseload, this is not a matter of having more people on the lists, what's happening is that the utilization of services-whether they be utilization of physician services or inpatient services or outpatient services or pharmacy charges-the utilization by these individuals has gone up by 17.9 percent. The total increase in our medical costs for our Medicaid population-17.9 percent. Compare that with a 2 percent increase for our state employees when we're allowed to work with them to manage their health care.

Lay it out a little bit differently. In the 2005 general fund budget, the increases that are coming through-if you add up the amounts that we're proposing to increase for education, and the amount that we're proposing to increase for the taking care of people, the Social Services budget, that is 75 percent of our total increase. The other parts, 11 percent goes into corrections, and by the way, of that 11 percent that's going into corrections, more than 4 percent of that is for health care. And then all the rest of state government, everything else gets 14 percent of the total increase.

There is an item that I wanted to bring out because we've talked about it before, something that I wanted to do last year and we simply did not have the money. But I think it's something that's important that we talk about it here because when we talk about spending money, we also talk about who's receiving the benefit. We talk about the responsibilities that we have to take care of the very old, the very young, those individuals that have no place else to go-some people firmly believe that one of the tests of a society is how they treat those individuals that are helpless. In our society, we believe it is appropriate and it is a necessary government function to protect those individuals who have no place else to go in order to be protected and in order to be helped. And, in this case, one item that we found was that when it comes to individuals, thousands of them that live in our nursing homes and under our Title XIX, individuals that are on Medicaid that have no place else to go for a place to live. Those individuals that are over age 65 have no other income. Those individuals, we take from them, their SSI, their Social Security Income checks, and we allow them, under our law currently, to keep $30, I'll say that again, $30 a month for all of their personal needs-shampoo, a new shirt, a long distance telephone call to a loved one, just to get a haircut or a hairdo. It hasn't been changed since 1988. This is money that we collect from them. I'm going to propose that we don't collect all of that money, that we collect only that which will allow them to keep, rather than keeping $30, let's let them keep $60 a month for their personal services. So if we did that, we'd have to replace in the general funds about $732,000 a year. So included in this budget proposal is $732,000 to increase the allowance for people in nursing homes so they can keep $60 rather than $30.

Education-nobody came here saying that they didn't want to help education. Last year, you helped education. Last year you provided as much money as has ever been provided in a single year for education within our state-K-12 education. I propose that we do it again. Let me show you how. Under the existing statutes that we have, we will provide a 2.2 percent increase in the formula, the formula that we're familiar with, the state aid to education formula, which will cost us

$5.4 million. In addition to that figure, there is an additional amount of $3.3 million which beginning last year we agreed that we would send back to schools by statute. And, so I have asked once again that we include the declining enrollment numbers that's $3.3 million that last year was in the formula for kids that were accounted for. This year we have fewer students. But you still have to keep the lights on, you still have to pay the janitor, you still have to pay in some cases all the other utilities that are there regardless of if you have 19 children in a class or 18 children in a class. So we are averaging back in the $3.3 million into the formula and then we are also adding $1.5 million additional for special education according to the existing statutes that are there. Total formula base funding is requested at $10.2 million for the coming year.

But let's not stop there. Let's go the extra couple of yards. In K-12 education, on the per student increase, last year we added some additional money in. I'm going to propose that we do it again this year. Let me explain. In the year 2003, when you did your formula, there was nothing else to add in so during the 2003 formula you provided on a per student allocation $3,889 per student. That was an increase from the previous year of $86 almost $87. But in 2004, last year, we not only put in the underlined base formula money, but we also added in the declining enrollment money to the tune of $20 per student and then honoring the commitment because we thought we would have trust money available from when this legislature set up the tobacco settlement trust funds-call them the education enhancement trust funds-and you put that money aside so that the returns would be used in your words "for education enhancement." Unfortunately, when you left last year, the money wasn't there. But you agreed with our proposal and you found one-time money to the tune of $7.3 million and you replaced the trust fund money that wasn't there. In doing that, we could add in an additional $58 almost $59 last year to the amount that we sent back for every child going to school in this state-meaning last year we increased the funding on a per student basis from $3,889 by $137 to $4,026. Using that same formula for this year, I would like to increase it by $177 to $4,145 per student, leaving the $7,300,000 from general funds in one more time on a one-time basis. With your help, we have more than doubled the increases to education in the last 2 years.

Now, the Education Enhancement Trust Fund I believe is important and I believe it is important to maintain the integrity of that trust fund. This year, after you left, the trust fund dollars went up, more than what had been expected. That money set at the end of the year. It was $2.8 million. It can be used for nothing else except education enhancement. I have not built it into any particular plan in our budget. I left a new line item for the year 2004 and for the year 2005. The money is there, the program is your choice. For 2004, it's $2.8 million, but for 2005, it's increased to $3.1 million as part of the total overall trust fund dollars that are not currently buried in ongoing expenditures for education. My goal is to eventually take the dollars that are not in ongoing expenditures from the trust fund and to place them in a line item within the Department of Education for your choice as to where they should be spent on a year-to-year basis. So this year you have $5.9 million additional available to you to spend the way you believe it should be spent to enhance education within this state-whether it be through K-12, the Board of Regents, the technical schools, tobacco education, or career and technical education. The choice is yours. I will work with you whether it be scholarships, whether it be another way, but all that our Constitution says is that this money will be used for education enhancement. And I believe it appropriate that the legislature who put together and stood together to create those trusts should also benefit in deciding where that money will be spent in the future.

Just to lay this out, and I won't spend a lot of time on this, but let me explain. Right now, when this started back in '03, there was $3.5 million and it was used for technology. And remember it used to be we did technology with declining enrollment money. We no longer do that. But in '03 there was no other money available and so the decision was made to use trust fund monies for technology. In '04, technology was an ongoing and it was expended in that respect, but state aid formula also came out of -in the original budget last year-out of trust fund dollars so what we ended up with was $2.8 million remaining, which is the money you see in this new line item. Now that total is $14.1 million for this fiscal year, which is the total amount of the trust fund revenues. For '05, I want to make additional changes. In the '05 budget we still have technology coming from the trust fund, we have state aid coming from the trust fund, but we have $3.1 million in the education enhancement fund-a total of $14.4 million. We also have one-time general fund money at the very bottom of $7.3, which is the money that you've allocated back in the past on a per student basis in addition to the regular formula funding. My goal in the next couple of years is to put more and more of that trust fund money onto the line called education enhancement and begin using general funds to fill in the technology and the state aid formula dollars that currently are used by the trust. Hopefully, in the future, the money we are currently using as general fund money for the one-time trust replacement will be part of the trust fund money as we originally discussed that it would go back to children on a per student basis.

The 2010 Initiative-we've talked about it with a number of people across the state. The 2010 Initiative is an economic development plan, it's not my plan. It's a plan that comes from the people from all over South Dakota who participated in meetings on the visitor industry. They participated in meetings concerning research and development. They participated in new ideas to attract businesses into our state from all over the state of South Dakota. When they were done, they had given us literally hundreds and hundreds of different ideas. From that, we set out a series of goals. And then we began the process of identifying objectives that had to be reached if we wanted to make those goals. Then we starting putting together action plans to meet those objectives. That plan does not work unless we hold ourselves accountable for it. The plan does not work unless we hold ourselves to timelines. It also does not work if we do not commit some resources to the plan. Therefore, in this next fiscal year I am requesting some additional resources be used specifically for economic development opportunity. I've laid this out in some detail and I'll briefly go through it. I would love to take the time to address small groups or the entire group with regard to the 2010 Initiative and your participation in it.

Agricultural specific marketing and development--$300,000 to go to the Department of Ag. That doesn't limit the amount that's available for the Department of Ag or for ag issues, but I wanted to make sure that they had a set amount up front to begin with. To talk about the value added products, to promote value added processing within South Dakota, to try to market our own products, to add our own label to those valuable resources.

In addition to that, I am asking that we continue within the Board of Regents the nursing program that was due to be sunsetted this year. We find that right now within the Board of Regents there is a waiting list of individuals that want to participate in this program and that cannot currently participate with the Board of Regents' plan. This is a $1 million request.

Tourism-I'm requesting $1 million that will have to be leveraged by the visitor industry on an ongoing basis and if they will find the resources to match it, we will put in $1 million a year for the next 3 years to prove that if you advertise which is good, that if you advertise what we've got here in South Dakota, if you're not afraid to promote yourself and the state, that we can bring in more sales tax revenue and generate more business and more gross state product then what it will cost us to do it. But we're doing it only if the dollars that are involved in this are leveraged and that other people participate and add their commitment to your commitment.

Also, I'm requesting that we add $100,000 into the budget for the celebration of our history, for the celebration of the arts, for the participation of arts in our schools. But requiring that the new offices of history and the arts work in unison so that the money that we have goes as far as it can and that they come up with matching resources from outside of government to make our dollars go farther in promoting the arts in South Dakota.

Along with that, expansion of our tribal relations office. Our tribes have truly expressed a desire to work with us. We've run out of manpower. We're trying to meet with them as quickly as possible-we're putting together new tax compacts with them for the first time in years. We're working with them to resolve issues concerning highway construction. We're working with them in areas of health care-in areas responding to the need to talk about the prison populations that are Native American. But with the opportunities that we have for economic development in those areas of our state, we really and truly can make a difference, which is on our reservations. They need more resources. They need help. So I'm asking that we add an additional FTE and the funds to pay for an additional person to participate in our tribal relations office. Along with the $30,000 for the tribal relations office, I'm also recommending that of this total amount that for research and development in conjunction with the Board of Regents, we add $3.7 million into the Tourism and State Development budget. The reason that it goes into tourism and state development is because this will be an organized effort in which these resources can only be used when they are leveraged with other resources, whether they be federal or private but they will only be awarded on a competitive basis and that these are for research and development projects that can be commercialized within South Dakota. Did you know that, in South Dakota today, when it comes to the issuing of licenses and patents, we're last. We're last in America. That's got to stop, and it stops when we start talking about putting dollars into research and development and bringing in the kinds of jobs that research and development promote that keep our young people in South Dakota.

Of the total $6.13 million that the 2010 Initiative is based upon, 78 percent of it requires outside matches. Our goal is to make our investment go as far as we possibly can-to invite others to participate, to require the participation of others to get their investment in our state to make the tax dollars that we are responsible for go farther by allowing other people to help us with the ongoing costs of promoting our state and in gathering the research and development opportunities that are there for the taking today with the bright young minds that we produce in this state.

The research and development-here's the way it would break out. Faculty research time for 20 faculty across South Dakota from different universities - $1.4 million. Graduate assistants to support the faculty - $500,000. Equipment support for research and development projects - $900,000. And, an additional $600,000 to make sure that a complete amount of $1.5 million is available between the $900,000 for equipment and $600,000 separate is available to match all of the EPSCoR funding that the federal government makes available for us in an attempt to find new research and development opportunities within our state.

Furthermore, we will set up separately an office within the Board of Regents and within Tourism and State Development to make sure that all of these funds are leveraged and that this is not simply a question of whose turn is it next to get the money, but on a competitive bid situation, we're getting the most return for the dollars that I'm asking you to invest in research and development.

And then in the fiscal year 2005 special appropriations, I'm again asking that tax refunds for the elderly and disabled in the amount of $1 million be continued, that school district consolidation incentives for the different school districts that have already qualified under our state law be honored to the tune of $300,000, that the physician's tuition reimbursement which allows for physicians to come and stay in our smaller communities and to be reimbursed for part of their tuition to the tune of $87,000 be paid. And then on a separate slide I'd like to introduce to you food tax relief for the working poor in the amount of $5 million.

One of the most critical tax bases that we have in the state is sales tax. As I pointed out earlier, two-thirds of all the increase in this year's revenue comes from one tax source, and that is sales tax. I understand there are a lot of people that truly believe that the very poor, that the working poor, are impacted more severely by sales tax on food than other parts of our population that may spend less of their total income on food. At the same time, the proposals that have been suggested would eliminate the sales tax base on all of food. I'm offering an alternative-one that would allow us to maintain the integrity of our sales tax base moving forward while at the same time providing true relief for individuals that are needy-for individuals that are working and yet poor-for individuals that today through other programs may have some assistance because of other programs that they are currently participating in, this proposal would eliminate all sales tax on food that is not otherwise covered by the federal program for food stamp eligible families. This would include all families up to 130 percent of poverty. It would use the existing program criteria and the existing method of administration. It would be done right at the checkout register. The state would pick up all the administrative costs. What this does is provide relief to the tune of $5 million for the poor of our state who do today pay sales tax on food.

In addition, we work within state government with a lot of people that I am very proud of. These individuals work every day, they get the job done, they are proud of what they do, they cooperate with us, they give us ideas, they support their communities. These are the workers in state government, within the Board of Regents, the Unified Judicial System, the constitutional officers, I am proposing a traditional 3 percent increase in salary policy for those individuals, and for those individuals that are below what we call the average in their salaries for their position, the mid-point, a 2 percent traditional movement to job worth. And finally included in that same $9 million is the increase of 2 percent of the existing health care costs. These employees working with us-these employees managing their own health care-have limited the health care costs in their plan to 2 percent growth this year. They are to be commended, and I believe it's appropriate that we increase that funding to maintain that health insurance plan for those good solid employees.

We tried to put together some examples of the efficiencies that we found so far. Rodger Leonard in our Office of the Comptroller and our Bureau of Finance and Management, but along with them, a lot of state employees who have come forward saying I've got an idea how you can save some money, I've got a proposal, I think there's a way you can save some money one way or another. We put together a list here that you can go through and look at. But general fund efficiencies we found over $2.3 million in general fund efficiencies. This is not an impact on programs, it's not an impact on people, simply a better way of dealing within government. One of those items that I'm going to highlight specifically later on, is the consolidation of our state park system.

But let me just slide through this just a little bit. We found $2.3 million in savings that we're going to propose to you in general funds, but that's not all, because in the other funds category, which is the money that if you are a professional and you pay licensing fees, or in some cases if it's fund expenditure authority that one department has to pay another, as a part of a service being provided. In those areas, we call them other funds because they are restricted in what they can be used for. We, just as an example, by bringing contracted services in-house and taking in many cases the same people that were contracted on a long-term basis, by bringing them in as state employees, we have to add nine FTE to do it. But we're going to save $1,072,000 by eliminating the contract and having them come on board as state employees. The same services are being provided but there's a savings in it. Sometimes it's best, on short term plans, on short term needs, it's better to contract it out and not to add an employee. But in other cases, we are working our way through all of the contracts within state government, and of those which have been in existence for an extended period of time. We're looking at whether or not it's more cost effective simply to make them state employees and avoid the middle man who, in many cases, resides out of state as the actual contract owner.

We did one more thing, we went back and looked at legal services contracts. That's personal services and it's one that you pay for professional services for good attorneys. We use a lot of good attorneys, but we also discovered that there was a huge discrepancy between the rates that were being paid from one contract to another, from one organization within state government to another organization within state government. We coordinated the planning for laying out those contracts-we standardized the contracts and we've begun the process of standardizing the payment schedules for many of those individuals who do the same type of work as others. And, in doing so, we were able to save additional dollars as well in contracts.

Then under the federal fund efficiencies, we were able to save federal dollars because I think it's important that where you find it, you also find a way to save federal dollars when you can, when it's appropriate, and in this case by the relocation of the Department of Labor fiscal staff to Pierre where all the other fiscal staff is at, we were able to cut four FTE but save $109,000 in expenditure authority.

And finally by bringing contracted services in-house, once again, we were able to save an additional 170,000 of federal dollars. The total federal savings $279 almost $280,000 over a million almost $1.1 million in other funds, $2.4 and a half million in total general funds, for a total of $3.69, almost $3.7 million in efficiencies that we believe can be found and that we're proposing simply by changing the way that we manage within state government.

And then I also indicated that at the Game, Fish and Parks, I'm going to request by executive reorganization order that we merge the parks and recreation and Custer State Park those two divisions into one statewide park system. In doing that, we will maximize the funding opportunities in order to cut general funds and take advantage of operating efficiencies and reduce staff due to those efficiencies. The actual savings in general funds will be $367,000 and two FTE.

The budget-the big picture-in 2005, the state of South Dakota will, in general funds, if you accept my proposal, collect and spend nearly $975 million of taxpayer money. We will also be the recipient of $1.2 billion in federal funds, and an additional $703 million in other funds-licenses, fees, and so forth. The total budget for the state of South Dakota that we are proposing today is $2.9 billion. But our goal, our goal, first of all, reducing the structural deficit. In FY 2005, the structural deficit will be reduced from $28.5 million to $19.2 million, a little over $9 million. It's going to take us awhile yet to work our way through the loss of the inheritance tax. It's still there, but we are working our way through it.

In addition to that I can tell you that the way that we intend to do it is not with new taxes. As a matter of fact, we do not see a need for any new taxes in the near future. None this year, and with the infusion of the one-time federal dollars, that as we told you we would use part of this year in this proposal, but put the rest into the reserve for future use until we can dig ourselves out of the fiscal deficit that we've got, that structural deficit, that we would continue to work department by department to find new efficiencies to deliver the services that we all want to deliver as efficiently as possible.

And, finally, we're going to do our best in this budget to preserving the existing tax base that we need in order to provide, in order to meet, the needs of our people within the state of South Dakota.

This is the second time that I've had the privilege talking to you about a budget. Last year, we started with a basic proposed budget. Governor Janklow was kind enough to set it up and prepare it and then to hand it over to us and say now go to work on it, there are resources there, there are opportunities there. Even now a year later we're continuing to learn but there are some things that I feel good about in this budget. There are some things that I hope you will feel good about in this budget. This year we will meet our needs. We will meet our needs not only in the existing year but in the next year. In fact, we'll spend additional dollars in this year and yet we will return more in terms of surplus at the end of the year of taxpayer money than what we started with last year. We will return $3 million more now than what we thought we would when you left session last year. In addition to that, we're going to do it without any new taxes.

We will, for the first time in history, provide over a half a billion dollars to our children for education.

We're going to begin-we're going to take baby steps-but we're going to begin to develop a plan of research and development in this state that leads to new kinds of jobs for our children. As the old jobs fade out and as new job opportunities come along, research and development will play a key role in providing our young people the opportunities of the future.

I'm proud to say that this year we begin with the research and technology opportunities and we're doing it within our budget and we are matching other resources outside the taxpayers' base.

We've responded appropriately to the increased costs of medical care for the indigent in South Dakota.

We've reduced by $9 million the structural deficit from last year to this year, and at the same time, from the time that you left last year until the time this year rolled around because of a one-time infusion of federal dollars, we have $52 million of one-time money in our reserves that we didn't have before.

And I think it's appropriate that we are recognizing the concern of many of you at the very poor among us. The working poor among us should have some relief from the sales taxes collected on food for them and we've offered a proposal that still maintains the integrity of our tax base.

And, finally, we're providing a veteran's bonus to individuals who have protected our country.

We have shared a workload with a number of individuals within my office-I want to just say thank you and I want to recognize some people that should be very, very proud of what they've been able to accomplish so far working on this budget. From my office I want to recognize all the work that Jim Soyer has done. And from the office of the Bureau of Finance and Management, I'd like to recognize Jason Dilges, Tami Darnall, Kellie Engelhart, Shane Mattheis, Chris Peterson, Angella Van Scharrel, and Kari Weisbeck for all the work they have done over the last number of months in putting together and fine-tuning this proposal because you see they have a goal, and it should be the same goal that all of us have here.

I've done probably 17 maybe 18 deployment ceremonies around the state. We have people from almost every community in South Dakota defending the freedoms that we take for granted. By the end of this round of activations, almost 60 percent of our National Guard, the Army National Guard, will be on active duty. This week, we activate the 153rd engineers, we will be activating the 216th out of Sturgis, the 147th has been notified, we're not sure what their activation date is yet, but when we're all done with it, we will have over 1,800 young men and women away from home-committed to defending the freedoms and the values and things we take for granted here in the state. Our job, our job while they are gone is to commit that we will do everything possible to see that this great state that they will return to is even better for their return than what it is today. That's our challenge. I think we're up to it.

Thank you very much for your time and your cooperation.