Every Five Dollars Spent in South Dakota, Two Come from Washington
The state’s budget depends on the federal government at a proportion that surprises — and that has remained stable for decades. With the era of post-pandemic emergency budgets coming to an end, what changes is the degree of exposure to decisions made far from Pierre
Each legislative session, the governor of South Dakota presents a budget proposal, but both the governor and the state legislators have less influence than it may seem. About 40% of the state’s budget is, in fact, financed by Washington, and that money always comes with conditions attached. The amount of money allocated to South Dakota in the 2027 fiscal year was almost $7.5 billion, with $3.1 billion from federal sources.
The combination of state and federal funding is not a phenomenon that has occurred only since the pandemic; Actually, 20 years ago, at the end of Mike Rounds’ term as governor, the figure was almost the same — 41.6% of the 2007 budget was provided by the federal government.
What changed in recent years was the composition of that money. Between 2020 and 2022, the federal government poured extraordinary resources into states through the American Rescue Plan Act (ARPA) — the stimulus package created in response to the pandemic. South Dakota received $13.84 billion in federal COVID relief funds, of which $4.2 billion went directly to the state government. That cycle is coming to a close, and the final $106 million of ARPA funds must be spent by the end of 2026. What remains, after the pandemic, is the structural budget, and the dependency it reveals.
To understand where federal money comes from, it’s necessary to understand how it is distributed. Most of it doesn’t arrive as a direct, discretionary transfer; it arrives through formulas defined by Congress and is largely generally to specific programs. The largest of these is Medicaid, the public health program for low-income individuals, elderly residents in nursing homes, and people with disabilities.
Medicaid accounts for 38% of all federal transfers to the state and for nearly 69% of total federal funds sent to states across the country. In South Dakota, 40% of children depend on Medicaid or the Children’s Health Insurance Program (CHIP) in their first year of life. More than half of nursing home residents have their bills paid by the program. This helps explain why changes in the federal formula that determines how much the government pays (called FMAP, short for Federal Medical Assistance Percentage) have an immediate effect on the state’s finances. Every percentage point reduction in South Dakota’s FMAP allocation formula means $13 million less in South Dakota’s budget.
The second largest block is the Department of Transportation, which receives $863 million in federal funds, accounting for 27.8% of the state’s total federal transfers. Roads, bridges, and road infrastructure in South Dakota structurally depend on these funds, while the state covers a total of 37% of its own highway spending with its own resources. The rest comes from Washington, via the Highway Trust Fund — the federal fund financed primarily by fuel taxes.
The end of the ARPA cycle brings two types of consequences. The first is operational: programs funded with emergency money (from tourism marketing to public health laboratories) must now either have their funding shifted to the general fund, secure new special funding sources, or simply shut down. The cuts are already visible in the FY 2027 budget: $8.75 million less in federal tourism funds, $8 million less in health, $2.6 million less in education.
The second consequence is structural, because without the cushion of those resources, any changes in federal Medicaid, transportation, or education policies reverberate directly in the state budget, with no buffer. That is the exposure that most public administrators in Pierre are watching most closely at the moment.
The three programs to watch are: first, changes to the FMAP formula (which defines how much the federal government pays for Medicaid); second, changes to Medicaid eligibility conditions (which affect how many people the state must serve); and third, variations in federal appropriations for transportation and education. Together, these three blocks represent nearly 80% of all federal funds received by South Dakota.
Federal dependency is not, in itself, a problem. All American states receive federal resources, and none of them, according to the Tax Foundation, can finance their own road spending on their own. What varies is the degree of exposure and the capacity to absorb shocks when the rules change in Washington. South Dakota has a balanced budget requirement under its constitution, which means that any reduction in federal funds must be offset — through cuts, tax increases, or some combination of the two. In the end, decisions made by legislators more than a thousand miles away determine part of what South Dakota pays.
