SIOUX FALLS, S.D. (KELO) — The state of South Dakota closed out the 2021 fiscal year with a budget surplus of $85.9 million. This is an unusually high surplus for the state, roughly equal to the surplus of the last five years combined, and higher than any single year dating back to at least 2012, at which point the state had a surplus of $47.8 million.
So what does this mean? Is having such a large surplus a good thing? KELOLAND News reached out to Dan Talley, Professor of Economics and Statistics at Dakota State University to find out.
When it comes to who is responsible for the surplus, Talley spreads around the credit. “It sounds like the federal government was fairly generous,” he says “and in addition I think whatever cost-cutting measures and cost control measures that [the state government] implemented managed to keep costs under control for the state.”
In terms of what can theoretically be done with a surplus, Talley says it could allow the state to implement contingency plans, scale back budget cuts or restore cancelled programs. “I think of it as sort of starting from an initial base plan and then you get more options as the additional funds come in to fund different kinds of priorities over time,” he says.
Talley says one important thing to look at is how much of this surplus is expected to be ongoing, and how much is the result of one-time funding (such as federal pandemic relief) that the state can’t count on receiving in the future.
One area Talley highlights as a place that the surplus could be used is in increasing pay for teachers and state workers which he says have lagged behind in recent years.
The state of South Dakota has had a budget surplus each year since at least 2012, and Talley says that while it is important to have a rainy day fund, it might not be a bad time to utilize some of those funds. “At this point, maybe if we’re in good financial shape, it does make some sense to loosen the purse strings a little bit.”
While there are benefits to having a surplus, Talley says there are potential drawbacks too. “There can be such a thing as too much of a good thing,” he says. “I would characterize it in terms of risk. You want to make sure that you’re still doing cost benefit analysis to make sure that as you get a surge of funds that you’re not just being a little bit too exuberant with overspending.”
Talley says another thing that could be done is returning that money to the taxpayers. “Sometimes when there’s a surplus of riches there’s a tendency for the government to want to do something with the money when maybe the best thing is just to return it to the taxpayers,” he says. “I know a number of states have decided that they’re going to be giving some of the windfall back to the taxpayers and that’s especially lower income folks.”
When it comes to managing the state’s financial reserves, the choice is between saving or investing. South Dakota’s total reserves after the 2021 fiscal year come in at $301.8 million, up from $193.4 million in 2020. A focus on raising wages for state employees will lead drain (or at least a slowing of growth) on the state’s financial reserves, whereas a focus on growing the state’s reserves may lead to continued wage stagnation.
Inflation is another element at play in this equation and Talley says that increased inflation will likely lead to increased tax revenue, which can in turn lead to an increase in state financial reserves.
Talley says that while there is not a direct correlation between state wages and state reserves, the two do tend to move together. “If it’s true that the higher inflation is not met higher wage costs — and higher costs of goods and services — then we might actually see the inflation associated with higher reserves and higher surpluses.”
When it comes to whether such a surplus is good or bad, Talley indicated that while there can be drawbacks, it is can generally be seen as a good thing, but the dining factor will be what the state decides to do with it.