After several years of revenue surpluses that allowed for spending increases and ambitious government projects, the state of South Dakota expects a lean funding outlook, a reality reflected Tuesday in Gov. Larry Rhoden's budget address.

In his first budget address to the Legislature since becoming governor in January, Rhoden proposed no annual state aid increase for the so-called big three core funding responsibilities of state government: K-12 education, health care providers and state employees.

As a result, Rhoden's budget calls for no pay raises for the roughly 14,200 people employed in state government. To offset that pain, Rhoden also proposed that state employee health care plans not include a premium increase in the coming fiscal year.

His budget proposal also calls for no state increase in reimbursement to providers of Medicaid, the federal program that funds health care for low-income residents. And he offered no increase in spending for K-12 public education.

Rhoden, the former lieutenant governor, became governor when former Gov. Kristi Noem left to run the federal Department of Homeland Security. Rhoden is running for re-election in 2026 and will have to survive a crowded Republican primary field to advance to the general election in November.

Rhoden said that revenue challenges mean 'we don’t have a ton of headroom' in spending plans. But he closed his address with a challenge to lawmakers, who will have the opportunity to adopt or change his spending priorities during the upcoming legislative session.

'This limited budget might seem like a challenge, but as I often say, I encourage you all to view that as an opportunity,' Rhoden said. 'It’s an opportunity to make sure we’re investing only in the things that we should be.'

Rhoden said the recent revenue slowdown comes after several years of prosperity.

State data shows that South Dakota's main revenue source, the sales tax, fell by 2.6% in the fiscal year that ended in June 2024 and dropped another 0.6% in the fiscal year that ended in June 2025.

But sales tax revenues have risen in the first three months of the current fiscal year, and Rhoden said he expects more good news when sales tax figures for October are released soon.

Overall, he estimated that the state would see sales tax growth of $60.3 million and overall revenue growth of $58.7 million in the coming year.

'That doesn’t mean our sales tax is weak. Far from it,' Rhoden said. 'So when folks try to tell you that slower sales tax growth means our economy is weak, don’t be fooled. We’re in great shape. We just can’t spend money we don’t have.'

A slowdown in the agricultural economy, with prices for soybeans, corn and wheat all down this year, has exacerbated state revenue challenges, Rhoden said.

Rhoden said his largest public safety proposal is $13.2 million for 133 full-time employees at a new women's prison in Rapid City, which will open in 2026. The prison will provide extensive drug treatment programming, he said.

The governor also proposed spending $2.4 million in state funding to add to $38 million in federal funding to expand the South Dakota National Guard Readiness Center in Sturgis and build a new National Guard vehicle maintenance facility there.

Rhoden said sharp increases in passenger counts at airports in Sioux Falls and Rapid City create the need for expansion at both facilities. Rhoden said he wants to provide $15 million in zero-interest loans to the airports to allow for improvements and expansions.

Rhoden proposed using $6 million of state money to help pay for a new advanced manufacturing center at Southeast Technical College in Sioux Falls. He also has proposed spending $4.3 million for equipment upgrades and another $1.7 million in state aid for other programming at the state's four technical colleges.

After a statewide system outage this summer, Rhoden has proposed spending $10 million to modernize state technology systems and equipment. He also proposed spending $30.6 million more on repair and maintenance of state-owned facilities and equipment overall.

In his final message to lawmakers, Rhoden noted that his budget sets aside $14 million in non-specific spending that can be set by lawmakers in the upcoming legislative session, which begins on Jan. 13.

This story was produced by South Dakota News Watch, an independent, nonprofit organization. Read more stories and donate at sdnewswatch.org and sign up for an email to get stories when they're published. Contact content director Bart Pfankuch at bart.pfankuch@sdnewswatch.org.