Q&A: Heidepriem says South Dakota's finances not 'in too bad a shape'

South Dakotans have heard repeatedly that the state’s budget situation is dire and that new taxes or tax increases might be necessary.

Scott Heidepriem, a candidate for the Democratic Party’s 2010 gubernatorial nomination, says taxes are not the solution. He acknowledges an upcoming budget deficit anywhere from $170 million to $300 million, but he also points to reserve accounts and trust funds that, combined, hold around $770 million.

“So when people are crying wolf or saying that the sky is falling, I look at those numbers and I think, we really aren’t in too bad a shape,” he said. “But we just have to invest it strategically in a way that makes the most sense.”

Heidepriem is a Sioux Falls lawyer, a former resident of Miller and Wessington Springs, and a state senator with 12 years of legislative experience. So far, he faces only Huron lawyer and former legislator Ron Volesky for the Democratic nomination.

Heidepriem embarked on a recent tour of the state to explain his views on the budget predicament, and he plans another tour soon to pitch his solutions — which, judging by his preliminary comments, will include the use of some money from reserve accounts and a proposal to cap the yearly growth of state government.

Following are selected portions of Heidepriem’s conversation with The Daily Republic, which occurred last week at the newspaper’s office in Mitchell.

SH: What I’m doing is I’m just rolling out a conversation about the budget, and the first stage is about how we got into the pickle we’re in. …

The governor came around and said that he projects a $174 million hole for our upcoming budget, and then Ron Williamson, of the Great Plains Public Policy Institute, said it’s $300 million, not $170 million. I’m not sure he’s right, but anyway, I think the “goalposts” are $170 million to $300 million. That’s our problem.

What’s also important is that FTEs have gone up actually from the time Mike (Gov. Mike Rounds) and Denny (Lt. Gov. Dennis Daugaard) took office from just under 13,000 to about 14,500, so it’s gone up about 1,500 employees at a time when the population has remained steady.

TDR: But when you look at the total size of our budget, even if you were to cut FTEs back to where they were when the Rounds administration started, that would be a relatively small budget impact, wouldn’t it?

SH: Oh, I think it would be significant. … But this, I think, is more significant: The general fund of state government has gone up 5.5 percent year in and year out. As you know, we impose on the Mitchell School District and the Davison County commissioners a cap of 3 percent or the rate of inflation, whichever is less. They can’t grow more than that. And yet, state government has no cap.

So my question was, what would have happened had we simply slowed our rate of growth from the 5.5 percent to the same rate that we impose on schools and counties? The answer is that over the past seven years, actual expenditures of the general fund have been $7.5 billion, and what we would have spent had we simply been as disciplined as what we expect of schools and counties is just under $7 billion. The savings would be $522 million.

Now, that sort of tells in my view how we got to where we are. We can’t wind the clock back. But we can decide going forward that we’re going to slow the rate of state government to at least what we expect of counties and cities.

TDR: At this point, all of this is hindsight. Did you or any of the other legislators see this coming, that the budget situation would get this bad?

SH: We saw the growth of state government coming, and that’s why each of the last three years, I’ve proposed a law to slow the rate of growth of state government to 3 percent or the rate of inflation, whatever is less. I have consistently introduced a law saying let’s impose on ourselves what we make schools and counties do. The Republicans have defeated that each year.

The other thing I’ve done is I voted against the budget in ’09 and ’08, but I voted for the budget in ’07, because it was the only budget in eight years that did not have a structural deficit.

TDR: We always hear that the Legislature is required by law to pass a balanced budget. So how does the Legislature get away with passing budgets with structural deficits? (One definition of a “structural” deficit is one that depends on reserves to balance the budget.) Do we need to change the law to clarify that structural deficits do not meet the definition of a balanced budget?

SH: I don’t think we need to a pass a new law. I think we just need to have discipline in the executive office. But I’m also willing to support a statute that would stop the rate of growth at 3 percent.

But you have to go back in history a little bit. When I was first in the Legislature, we had no savings accounts of any kind. We would establish our revenue projection, and then we would base our budget on what we predicted we would bring in, and then we would drive home and say a little prayer that our revenue projection would come in. Because if it didn’t, we’d be back in a special session. In our constitution, there’s a trigger that requires a property-tax increase to balance the budget if the Legislature ever fails to do that.

In 1991, I was still in the Senate, and we were afraid of unfunded federal mandates coming down from the Bush administration at the time. And so we had a positive revenue stream, and George Mickelson was the governor, and we made the decision to create a savings account. …

TDR: What account are we talking about here?

SH: The budget reserve account. And we established a maximum of $45 million in that account. The debate was, should we put $20 million or $40 million in there? Should we put $20 million in and refund the rest to the taxpayers, or should we make it more? In the end, we decided to make it more. And we passed a law saying $45 million could go into the budget reserve, and we would hold on to that, and it would require a two-thirds vote to spend any of it. We have used that account various times.

1995 comes along, Mitch Richter from Sioux Falls chairs the Appropriations Committee, Bill Janklow is back as governor, Dave Knudson (who is running for the 2010 Republican gubernatorial nomination) is his chief of staff, and we have a very positive revenue stream in ’95, even though that’s the “property-tax rebellion” time. And so they decide what we should do, and they say, “Well, we can’t put any more in the budget reserve because it’s full. That’s the most we’re statutorily authorized. Let’s create a second budget reserve fund, only we’ll give it a different name, and we’ll call it the property-tax reduction fund.”

Today, that has $63 million in it, and it does not require a two-thirds vote; it’s a simple majority. It is simply an extension of the general fund, essentially. …

So then, along comes the sale of the state cement plant, the tobacco litigation and the health-care litigation (the litigation was settled nationally, and states received payouts), and they all hit in the late ’90s. And so Janklow says, let’s go to the people with a constitutional amendment, and in 2001 the people overwhelmingly approve these trust funds. The cement plant trust fund has currently $235 million. The tobacco litigation, the governor decided to turn it into the Education Enhancement Trust Fund. And that’s the biggest one, and I think that currently has about $325 million. And then there’s the health-care litigation, and that’s just called the health-care trust fund, and it has $100 million in it.

So this is what we have in savings in South Dakota right now. About $770 million.

TDR: If you mention that to any person on the street, wouldn’t they say we’re not nearly as bad off as the predictions of a deficit budget seem to indicate?

SH: You get different reactions. You really do. Let me tell you the rest of this: The trust funds are a three-fourths vote to spend, so they’re almost impossible to get at, except for the interest. And the interest kicks over into the general fund.

I run into a lot of people in South Dakota who feel like they want to hang on to trust funds in difficult times, even though none of this money existed 15, 18 years ago. We had none of this, and now we have almost a billion dollars. So when people are crying wolf or saying that the sky is falling, I look at those numbers and I think, we really aren’t in too bad a shape. But we just have to invest it strategically in a way that makes the most sense.

The question that this begs is, OK, if we are $170 million in the pot, or $300 million in the pot, or pick the right number — say it’s $200 million — how do we get back to square one? That’s really the issue that’s going to take a lot of time and attention. And I think what the governor’s going to do, though I don’t know, is he’s going to drain the property-tax reduction fund completely. But I think that’s the only one he’s trying to get at.

TDR: So what’s a better system: The one the state used years ago when, as you said, legislators made a revenue prediction and prayed it would come to fruition, or the new one, in which the state keeps millions of dollars in reserve?

SH: I think it’s better to use the reserve accounts than to increase taxes. I don’t know what the magic figure is, but at what point do you say to the voters in the state, ‘Even though we have all this money stockpiled, we’re still going to increase your taxes.’?” That message is coming out of Pierre. They’re proposing gas-tax increases, a sales-tax increase, a sick-tax increase, and some people have even proposed an income tax. And my message is, you don’t tax your way out of a downturn. I’m not going to support that.

TDR: When I think about you and your legislative service, one of the first things that comes to mind is your stance on education funding. You and other Democrats have advocated repeatedly for more education funding, to the tune of about $100 million in increases spread over several years. If the state had done that, wouldn’t we be in even worse shape now with our budget?

SH: Well, we’d certainly have to make some adjustments. But if we’d done that, and we’d slowed the rate of growth of the rest of state government as I’m proposing, which would have kicked over $75 million more per year, we could’ve managed that. That’s sustainable.