Beyond Assessed Values: South Dakota Schools Face a Funding Crossroads
Property taxes in South Dakota, especially assessment valuation growth, continue to be topics of discussion for homeowners, school officials, and state legislators. This article highlights differences in school district assessment growth (and ultimately tax revenue growth) and changes in school district funding needs over the last few years. While assessment growth has been a major talking point, changes in federal funding that impact South Dakota schools may mean more reliance on property taxes, local funding efforts, and sales taxes vis-à-vis the state aid formula than in previous years. South Dakota regularly employs rate caps, revenue caps, and assessment growth caps on property tax revenues in different contexts.
School district property taxes are unique in South Dakota for a few reasons. Foremost, unlike other tax districts (e.g. cities and counties), school districts do not have a revenue cap. Secondly, school district general fund levies use statewide levy caps that are determined using statewide assessed value growth rates. Finally, the statewide caps are different for the three main property types (agricultural (AG), owner-occupied (OO), and other (OTH)). ‘Other’ property often means commercial, but it is more generally non-agricultural and non-owner-occupied, so second homes, speculative property, and vacation property fall into this category. For completeness, there are additional property types that consistently make up around 3% of assessed value in addition to the main three.
Why Assessed Values Matter to School District Property Tax Payments
Property tax payments from homeowners are determined in two parts – the assessed value of property times the property tax millage (measured in $1 per $1,000). Overlapping taxing districts (e.g. cities and counties) use the same assessed value but have different millage rates that add together for the total. Each taxing districts’ levies (plus ‘other’ levies and ‘excess’ levies, if applicable) appear on the homeowner’s annual property tax bill. Then, household-specific abatements, exemptions, and other allowances can reduce the ‘nominal total levy’ to the ‘effective total levy’, the rate that is actually used to determine tax payments.
Assessed values are typically equalized to 85% of market value, so local housing market fluctuations proportionally determine assessed value growth. Related, the assessment ratio is the fraction of assessed value to market value at a particular point in time, which usually is close to 85% in weighted averages of all property in a district but can fluctuate with market conditions. When the county assessor does a reassessment of a property for tax purposes (often not every year), the assessment ratio is equal to the equalization rate for that property.
Revenue caps for cities, counties, and most other taxing districts mean that rising assessed values will be offset by lower millage rates, keeping property tax revenue constant over time (plus an adjustment for inflation). School districts, however, do not have a revenue cap. Instead, the maximum millage rate for each property type is capped based on statewide assessment growth, but assessment growth itself is allowed to fluctuate within school districts. Importantly, the proportional rate caps across property type applies only to the “general fund”, the primary account for most expenses (e.g. teacher compensation) and “excess levies” (e.g. general fund opt outs). So ‘other’ levies for capital outlays, bonds, and TIFs in the school district have flat rates across property types.
Taken together, housing market conditions are the major reason for differences in school district tax revenue growth in the state. High price growth increases assessed values proportionally by the equalization rate. Thus, all else equal, homeowners in housing markets with rapid price growth pay more school district property taxes than areas with slower price growth. The school district portion of the property tax bill is the only one that would be drastically different from year to year from housing market impacts due to not having a revenue cap.
SB216 in 2025 created a carve out such that improvements of up to 40% of assessed value will not be counted as new taxable value for the district. Improvements up to 40% still impact individual homeowners’ tax payments, but they do not increase overall assessed value (and thus tax revenue) for the school district. The AG, OO, and OTH max millage rates have been falling in recent years due to consistent assessment growth. However, if an economic downturn caused house prices to fall, it is possible that the implied assessment cap from SB216 could necessitate increases in those max millages to maintain funding. Plainly, OO taxpayers could end up paying a larger portion of a smaller tax base (opposite of the typical recent pattern) if house prices were to fall enough.
Recent Trends Surrounding Assessed Values
The first figure shows the inflation-adjusted growth rates among the three different types of property for the most recent few years of available data from the South Dakota Department of Revenue (DOR). In addition, state totals for assessed value, state aid paid to school districts, and state-determined ‘need’ are included. A positive number indicates that assessed values are increasing from the previous year over and above inflation, while negatives imply the opposite.
Year-over-year, in real terms, agricultural valuations have been falling and becoming a smaller share of property tax revenue, around a third of overall assessed value. At the same time, owner-occupied and other property showed drastic upticks from 2022 to 2023, then growth leveled off (though assessed values continue to increase with more predictable growth rates). While growth rates offer no direct comparison to dollar volumes, ‘need’ growth was stable last year while state aid growth fell, which is suggestive of local efforts making up a larger portion of school district funding. Inflation adjustments give a more reliable picture of the magnitudes with which to think about policy. For reference, in non-inflation-adjusted terms, the state average assessment growth was around 10.7% in 2024 – agricultural property grew around 1.2%, owner-occupied property grew around 17.7%, and other property grew around 14.3%.
School District Funding
School districts receive funding from three primary sources – property taxes, state aid (using the state aid formula), and Other Local Efforts (“OLEs”) to address funding ‘needs’. School/local ‘needs’ (i.e. roughly, planned expenses) are determined using the state aid formula based on enrollment, target teacher ratios (i.e. the number of teachers necessary for anticipated enrollment), teacher compensation (salary plus benefits), and overhead costs (as a fixed fraction of teacher compensation). The South Dakota Department of Education (DOE) has the exact formula with the most current year’s calculator tool, and more information can be found on the State Aid page at SD DOE.
If schools don’t raise enough funds locally through property taxes and OLEs, the state aid formula reconciles the difference so schools can continue to operate at a formulaic standard. Simply, State Aid = Need – Property Taxes – OLEs. This process makes school budgeting more predictable, prevents rapid changes in school district services to students, and leads to equitable support of schools when local funding falls short. Naturally, districts with high assessed value growth and/or large OLEs receive less state aid in a given year. According to the DOE Lead-Deadwood 40-1, Hill City 51-2, Elk Mountain 16-2, Custer 16-1, and Agar-Blunt-Onida 58-3 had no state aid last year, while Hoven 53-2 is on an alternative state aid formula. For districts that did not receive state aid, their OLEs and property taxes more than exceeded the estimated need based on the formula.
Though they offset, for most school districts, the sum of property taxes and state aid make up the overwhelming majority of the budget to address planned expenses. Last year, in aggregate, property taxes were around 57% of school funding while OLEs made up around 14%, meaning the remainder was state aid of around 29%. In inflation-adjusted terms, statewide assessed values have grown over the last five years around 7.4% (five-year total from 2020-2024), statewide school district ‘needs’ have grown around 6.4%, and state aid has risen 1%. The formula implies that OLEs have grown a total of around 2% over the last five years (1% = 6.4% – 7.4% – OLE). However, just last year, OLEs grew around 6.9% which is much higher than previous years. Given the sunset of several federal grants and other changes to federal funding, school districts should expect OLEs to diminish drastically in coming years, meaning more reliance on property taxes and state aid starting as early as this fall.
Trends in Other Local Efforts (OLEs)
OLEs include a wide variety of sources (e.g. utility taxes, bank franchise taxes, renewable facility taxes, private donations, admissions/ticket revenue for activities, federal Title grants, leases with county/state governments, etc.), but not every school district has access to the several dozen possible local effort channels. This is especially true of land leases (concentrated in Harding County), mineral leases (almost exclusively West River), grazing contracts (exclusively West River), forestry (concentrated in Custer, Elk Mountain, and Hill City schools), and wetlands (almost exclusively East River). There are other school-level choices like transportation fees (exclusively in the Sioux Falls metro), donations from private sources (heavily concentrated in Rapid City, Sioux Falls, Brookings, and Yankton schools), and use agreements for jointly-used facilities (like in Rapid City and Yankton).
Often, a school district’s OLEs depend on the local resources and economic development in that area, both of which have massive disparities given South Dakota’s geographically diverse and often concentrated natural resources. School districts and local residents weigh complex incentives determining OLEs. On one hand, having more OLEs reduces actual state aid paid one-for-one, so there could be a mismatch of incentives to expand OLEs for school districts since doing so may not result in a larger school budget. On the other hand, having more OLEs means less exposure to fluctuations in state budgets and changes to the state aid formula, primarily funded through sales taxes with a heavy reliance on consumer spending behavior and tourism. Generally, more OLEs ease constraints of the state government, allowing more funding to go to other budget items or allowing less need for sales tax revenue.
In aggregate, federal Title grants are the largest portions of local efforts, though there is variation across school districts. The most substantial two of these Title grants in South Dakota go to improving academic achievement for disadvantaged students (Title I) and improving training and recruitment for teachers (Title II). Title I by itself is regularly around 20% of all OLEs for South Dakota schools, the single largest component of OLEs in aggregate.
More recently, aid from the Elementary and Secondary School Emergency Relief Fund (ESSER) offset some costs related to the Covid-19 pandemic. Initial funding came from the CARES Act in March 2020 (“ESSER I”) and ended in September 2022. Funding was expanded starting in December of 2020 from the CRRSA Act (“ESSER II”) which ended September 2023. One more expansion came in March 2021 (“ARP ESSER” or “ESSER III”), which ended September 2024.
During the time that both were operational, ESSER II & III were the second and third largest components of OLEs (behind Title I grants), respectively, and were together around 22% of all OLEs in 2022. For comparison, the ESSER funding sources were almost as large as Title I & II grants combined. The sunset of ESSER funding means that around 2% of all school district funding (not just OLEs) in South Dakota now must be made up. This will need to come either at the school district level with property taxes and OLEs or at the state level through the state aid formula.
Assessed Value Growth Trends by School District
The first set of three maps contains growth rates from 2018-2019 (pre-Covid), 2021-2022 (during peak inflation), and 2023-2024 (the most recent available data), respectively. The growth rates are year-over-year changes that are normalized to the statewide average for each year. So negative growth rates only indicate that school districts did not grow as fast as the state average – not necessarily that assessed values fell nor that schools are financially struggling, and vice versa. The data come from annual Property Tax Statistical Reports provided by the SD DOR. South Dakota Reservations have different rules regarding property taxes so they may be directly comparable to other districts in this context. Recall, assessed values are equalized to 85% of market value, so hot housing markets have high assessed value growth.
The highest assessed value growth rates across from 2018 to 2024 are concentrated around the Sioux Falls metro (though not including Sioux Falls 49-5 proper), the Rapid City metro, and in the Black Hills, and the pattern is becoming more apparent over time. Northeast South Dakota school districts also have consistent assessment growth. Generally, school districts on the interior of the state away from other state borders and away from state population centers have slower growth. Also, assessment growth rates are relatively comparable among neighboring school districts, suggesting some spillovers in housing market prices could be present. Pre-Covid, Oglala Lakota 65-1, Harrisburg 41-2, and a few school districts along the North Dakota border had the highest total assessed value growth.
During the high inflation of 2021 and 2022, the pattern along the North Dakota border inverted dramatically. At the same time, the pattern of assessment growth became much more condensed in the Black Hills and around the Sioux Falls metro. East central school districts, in the region halfway between the Minnesota border and the Missouri River, had a mixed experience during this time – some had more growth than Pre-Covid while others’ assessed value growth shrank. Some schools along the Missouri River in the southern part of the state also inverted their Pre-Covid pattern, turning into assessed-value growers. In the Black Hills, assessed values in Belle Fourche 09-1, Douglas 51-1, Custer 16-1, and Hot Springs 23-2 grew the most. Lennox 41-4, Tri-Valley 49-6, and Tea 41-5 have some of the highest assessed growth in the Sioux Falls metro during this time.
Most recently, the Southern Hills continued to have high assessed value growth, adding Hill City 51-2 and Rapid City 51-4 to the list of schools with the highest growth rates. While Sioux Falls 49-5 itself had assessed value growth, the largest growth rates are among other school districts in the metro, like Baltic 49-1, Brandon Valley 49-2, Garretson 49-4, and West Central 49-7. Pierre 32-2 has had increasing rapid assessment growth, which is a bit anomalous relative to its geographic neighbors. Gettysburg 53-1 and Hoven 53-2 are the only other districts along the interior Missouri River whose assessment values grew in the most recent year. Those south along the river reverted back to pre-Covid trends, lagging behind the state average, while those in the north bordering North Dakota were among the slowest assessed value growth areas.
Assessed Value Growth by Property Type
While looking at total assessed growth is useful for determining how school district finances are faring overall, differences by property type gives more information about how taxpayers are sharing the burden. The next three maps are from the most recent year of data and are roughly analogous to how the statewide max millage rates for each property type are determined. In each, the values show each school district’s assessment growth relative to the statewide growth rate for that specific property type in that year. So, there will be half with positive values (whose assessment growth is higher than the state average) and half with negative values (whose assessment growth is lower than the state average).
Since these are normalized to the state averages, a positive or negative value doesn’t necessarily indicate increasing or decreasing assessment growth. Two different perspectives can be used, but either should be done with caution since the state aid formula doesn’t account for unexpected school district-specific needs or expenses. Fast assessment growth implies more local resources for school districts but higher property tax payments for homeowners, and vice versa.
Relative to the maps above, there are less clear spatial patterns, indicating that the growth trends of each property type are much more sporadic than the overall assessed values. One explanation is that the various property types respond to different types market forces (e.g. suppliers of OO have different constraints than suppliers of AG, etc.). The juxtaposition of extremes in close geographic proximity when looking at property types shows how overall trends sometimes mask compositional effects underneath.
AG valuations lagged behind the state average mostly in pastureland West River and north central East River. At the same time, nearby areas saw the fastest growth, including the northern Black Hills and central East River. Sioux Falls 49-5 proper has some of the fastest growing AG assessed values as well. OO property assessed value grew fastest along state borders, except close to the Missouri River. The interior of the state saw that slowest assessment growth, generally lagging furthest behind the state average. SB216 in 2025 focused specifically on capping assessment growth for OO property, so assessed growth rates will be impacted in future years. Interior school districts show the same slow assessment growth for OTH property as for OO property. The southwest school districts have some of the highest concentrated growth.
Since OO property has been rising as a fraction of assessed value, over 40% of all South Dakota property now, the OO trend is the most influential when predicting overall assessment growth. Looking at the Sioux Falls metro, OO is moderately positive for most of the metro school districts. Despite fast AG growth, Sioux Falls 49-5 lags behind its surrounding school districts overall due to slow OO growth. That said, each district’s fraction of AG, OO, and OTH property as well as the other, smaller taxable property types will determine actual impacts. Looking at each component individually can be misleading when comparing to the totals, especially because districts all vary in the amount of each property type they contain.
Commentary, Causes, and Implications
With the sunsets of some federal sources, Title grants will become a larger portion of OLEs, but the future of Title grants has come into question recently as well due to different handling of the federal Department of Education. Diversifying funding sources and avoiding too much reliance on any one source can serve the same purpose as diversifying any portfolio – less avoidable risk. In addition to even more pressure on OLEs to keep pace with school district needs, property taxes and state aid funding will likely need to compensate to fill the gap in federal sources. In short, federal changes play a tangible role in funding South Dakota schools in ways that impact the typical taxpayer. Even though OLEs and state aid offset one-for-one, OLEs reduce the pressure on the state budget, which can mean more fiscal options for state funding toward other projects and/or less reliance on sales tax growth in the future. The same is true for property taxes. Theoretically speaking, property tax projections can be more reliable than sales taxes since they are more insulated to transient spending shocks.
Many of the Southern Hills school districts are fully funded by local efforts (property taxes and OLEs), which are also some of the only ones that have forestry in their OLE portfolio. Of course, there are multiple perspectives on whether full local funding is ‘good’ or ‘bad’. From the standpoint of homeowners, there is a question of why the school district is being ‘over-funded’. One potential argument would be that property taxes are ‘too high’ relative to state-determined need. The state aid formula does use some assumptions (e.g. a constant overhead rate, whether it be for ease, tractability, etc.) that may not reflect realities in every school district, so actual ‘need’ may not be reflected in the formula’s prediction. From the fully-locally-funded school district’s perspective, students may enjoy benefits and opportunities in their school district that are well over and above the target student experience implied by the state aid formula. Additionally, teacher compensation may be higher, attracting talented teachers to the school district. Opt outs and excess levies are uncommon in the Black Hills, which is largely attributable to high assessment value growth and large OLEs.
The Black Hills housing market could be experiencing price pressure from both supply and demand sides. Housing supply could be constrained for a variety of reasons, including National Forests, state parks, difficult terrain, and rocky soil common in the region. This means building houses in certain areas is either difficult or impossible relative to other areas in South Dakota, increasing the costs of construction and driving up prices. High prices incentivize construction, but the length of the building process means that prices now are not as influential as expected future prices. There is plenty of competition on the demand side, with the Rapid City metro being one of the highest population growth areas in the region. Some of that could still be driven by Covid-era trends of remote work where people are more selective about their physical location and/or out-of-state homebuyers placing bids on listed houses ‘sight unseen’. Prices are growing faster than inflation in the Black Hills, so the number of sales would determine whether the supply-side or demand-side impacts are larger.
The Sioux Falls metro has its own draws for growth at the intersection of two interstates and home to a variety of financial services and banking capital. New developments on the outskirts of the city mean the housing stock is younger and more appealing. Urban sprawl means that there is access to amenities, restaurants, and shopping centers on most edges of the city, inviting a shorter drive from the surrounding communities. Jefferson High School opened in the 2021-22 school year which addressed crowding concerns but still increased need for Sioux Falls 49-5 further.
Generally, AG property has been making up a smaller fraction of assessed values in recent years. OO property has had faster assessed value growth than AG and OTH property, but a combination of factors could explain much of that trend. First, it could be that OO property has had more growth in market prices proportionally impacting assessment growth. Second, it could be compositional effects of property switching from one type to another. Either the amount of OO property is increasing faster than AG or OTH as new developments arise, and/or rezoning is turning AG property into OO and OTH property. Remember, OTH property still gets taxed at a much higher rate than OO, the lowest rates are for AG, and all rates have been falling recently.
From the homeowner perspective, if assessments grow quickly, the school district portion of the property tax payment will grow in dollar volume and as a fraction of the overall payment since other overlapping taxing districts are subject to revenue caps. So, living in a high growth area for an extended period can present personal finance challenges or concerns of fairness, especially if the homeowner has made no upgrades that improve the function of the housing unit as a domicile. That said, assessed value growth comes from market value growth, which also means a large financial return upon sale of the house. So, increases in property taxes can reflect the potential of selling for a substantial payoff at the time of sale. In other words, long-term homeowners living in high-growth areas have the downside of higher ongoing costs of living in the same house, but they also have high potential upside of a sale far above purchase price (due to assessment and market value growth), in inflation-adjusted terms, on a house that is also more likely to have less mortgage term left.
There is no doubt that perspective matters when it comes to property taxes and publicly-funded benefits like public schools. What is seen as a benefit to one side will usually be a detriment to the other. As such, the findings presented ought to be interpreted with caution and in context since looking at overall assessment growth could miss information about school districts that are not captured in assessed values. As house price growth in South Dakota stabilizes in the post-Covid period, assessed value growth is also likely to level out.
