How are Local Opt-Outs are Affecting Local Property Tax Rates?

Public school districts in South Dakota face a complex set of budgetary restrictions (e.g. recent minimum teacher salary increases, the state aid formula, etc.) so changes in policy that impact other potential funding sources may also have implications on school districts. This article gives some background on property tax revenue “opt outs” in South Dakota in the context of recent law changes, a cross-section of the most recent fiscal year, and a time series going back more than a decade.

Background on Opt Outs

In short, an “opt out” means that a school district (or other taxing district) determines that it cannot operate based on the projected property tax revenue so they have the option to collect more revenue through ‘excess levies’. The typical formula for districts with a revenue cap is to start with amount of property taxes collected last year, add to that any new taxable property from recent improvements or expansions of buildings and residences, and add an adjustment for inflation. School district ‘general funds’ do not have a formal opt out, but other funds financed through property taxes do. The increase for new taxable property maintains the district’s ability to meet the needs of both existing and new residents, while the inflation adjustment maintains the buying power of the revenues collected so that the actual services provided do not diminish due to price increases.

There are three main types of ‘caps’ for property taxes, and South Dakota taxing districts use all three in different contexts. A revenue cap is on the amount of tax revenue collected (tax assessed value times millage levy). The most common situation is when assessed values increase over time, as has been the case in South Dakota, which means millage levies must decrease to not exceed the revenue cap. A rate or millage cap sets a maximum on the rate at which tax assessed property can be taxed. Rate caps exist for certain school districts funds, and most of those are uniform across the state. Finally, an assessment cap is a maximum allowable increase or growth rate for tax assessed valuations. Assessment caps have been frequently debated in the State Legislature in recent years. Often, multiple types of caps are used in conjunction with each other as needs change or laws evolve over time.

School district general funds are responsible for regular operating expenses and payroll (e.g. teacher salaries). These specific funds have rate caps, not revenue caps. So there are state maximum property tax millage rates but no actual limit on the amount of revenue collected. That means that changes in assessed value growth relative to the state average (used to set the maximum millage levies) is an essential nuance to be aware of. School districts with high assessed value growth and the same maximum millage levy will also have property tax revenue growth, especially relative to slower assessment growth areas.

Since school districts rely so closely on property taxes to cover costs of public education in South Dakota, any unexpected changes in costs present challenges when the primary source of funding is capped or otherwise inhibited. The opt out choice (and other excess levies, in general) can allow for more flexible financing options for school districts over and above the state aid funding formula and other sources outside the formula, if agreed upon by the local government and constituents. That said, opting out does not necessarily mean a better student experience, and vice versa. Student needs and district budgets vary for all school districts. Districts that are on South Dakota Reservations are not subject to the same set of property taxes as other public school districts, which impacts their financing options and budget decisions.

School districts opt out by a two-thirds vote of the governing board. At the time of announcement, the board states the amount of the opt out and the term in years. If a petition of 5% of the registered voters in a district arises within 20 days of the first notice of the opt out, the opt out goes to a simple majority vote among registered voters. Keep in mind, of course, the number of registered voters varies across school districts, and some may have more practical challenges completing a petition. Unless the school district requires additional funds over and above their previous opt out amount, they do not need to vote again at any point during the specified term. All school districts are currently allowed to opt out of the general fund limitations. The overall process to opt out is fairly similar, with some nuance and differences in publicizing requirements, for other taxing districts.

The map shows the number of opt out years for each public school district since 2012. Opt outs are less common in West River school districts and in the north-central part of the state, but there are exceptions in either case. West River school districts tend to be larger in geographic area and often have more K12 enrollment, which are likely related to each other. Areas with high assessment growth relative to the state average are less likely to require additional funding through opt outs.

Recent Laws and School District Levies

Property tax changes from this spring’s historic 100th Legislative Session (specifically, SB 216) further capped district-level assessed valuation growth, capped the types of improvements that can be taxed, and provided more guidance for financing bonds and capital outlays. Any improvements to owner-occupied property that increase value less than 40% are not taxable improvements for the district, but those improvements will still impact individual homeowners’ assessed values. Opt outs and/or higher opt out dollar volumes may become more common in the future as a result of the increased revenue constraints.

This change alters the already complex set of incentives for homeowners. Foremost, the change benefits homeowners at the cost of school districts due to the incentive to invest in home improvements that cannot be taxed to fund school districts. At the same time, homes with improvements have higher individual assessed values, and those houses would contribute slightly more to the district level cap which could provide a small tax break to homeowners who did not do any improvements. That said, assessed values can increase due to overall quality, condition, and build-up of the neighborhood, so assessed values can increase for houses who have not done any improvements as well. The qualitative implications of these changes on any individual homeowner’s tax payment would be situational, depending on their own wealth incentives for home improvements, their neighbor’s wealth incentives, the school district’s financing needs, total state assessed valuation changes, growth rate differentials of assessed values across their school district to other school districts, and others.

There are three property types in South Dakota for property tax purposes: agricultural, owner-occupied, and other. ‘Other’ property is a catchall for non-ag and non-owner-occupied, which typically implies commercial and/or income generating (e.g. businesses or rental residential units). Capital outlay levies are assigned uniformly across all property types and are intended to be spent on physical property, plant, and equipment for school districts. General fund levies in school districts, on the other hand, are assigned proportionally based on annual state maximums per type (determined by total state assessed value). This proportionality (and lack of a revenue cap) is unique to general fund levies in school districts, and the purposes of these funds are broadly related to operating expenses.

Generally, ag has the lowest maximum levy while ‘other’ property has the highest. This means that ag will pay a higher fraction of their (smaller) overall tax bill toward capital outlays than owner-occupied or other property, even though the levy (millage rate, per $1,000 of assessed value) is the same for all types. The same is true for all ‘other levies’ like special education and bonds that are assigned at uniform rates across property types. Conversely, opt outs toward the general fund are assigned proportionally to the maximums for each property type. The same is true for many tax increment financing (TIF) and discretionary levies (when they are not specifically for special education, anyway). More reliance on capital outlays and ‘other levies’ means changes in the composition of property tax bills will vary across types for that purpose.

Capital outlay levies have their own quirks and are subject to both a revenue cap and a rate cap. Some school districts are eligible to opt out of the revenue cap on this specific levy while others are not. Starting in 2021 (from SB 170 in 2020), schools were capped at collecting up to $3,400 in property tax revenue per enrolled student for the capital outlay fund, increasing annually at the lesser of CPI inflation or 3% (or, around $3,900 in 2025 given recent inflation tends). If a school district requires more capital outlay funds, they are allowed to opt out using an excess capital outlay levy, much the same as the general fund opt out process.

Excess levies (from opt out decisions) and capital outlay levies are highly correlated, likely due to legislative changes. Districts that had historically been below the per student revenue cap for the capital outlay fund that more recently require more funding are not eligible for an opt out of the capital outlay fund, but they can still opt out of the general fund to meet budgetary needs. That means that there is a strong inverse relationship between the capital outlay levies and general fund opt outs across the state. Put differently, many school districts with low capital outlay levies also have general fund opt outs. This ‘backfilling’ could be more out of necessity than choice, given the change in capital outlay opt out requirements relative to general fund opt outs. At the end of the fiscal year, a set fraction of capital outlay funds can be ‘flexed’ into the general fund. For example, this might happen if there were budgeted funds for facility improvements that ended up not being spent, so some of those funds could be used for regular operating costs.

The state aid formula is the primary tool that determines operating budgets for each public school district. It relies on target student/teacher ratios, teacher salaries and benefits packages, overhead, and the number of homeschoolers who compete in sanctioned athletics. Other sources outside the formula are local efforts such as county to school district transfer funds, utility taxes, renewable energy taxes, and banking franchise taxes. All these outside sources are locally based and vary by district. The South Dakota Department of Education (SD DOE) has the exact formula with a calculator tool available on on its site.

With minimum teacher salaries increasing by state law (SB 127 from 2024), the state aid formula could change drastically for some districts, which would require more reliance on options like opt outs to compensate. A higher minimum salary is excellent news for teachers and meaningful progress toward keeping up with neighboring states. However, from the school district finance perspective, those districts already above the new minimum will not feel this change as much as those below the new minimum. School districts with historically low teacher salaries may have to share the expense of higher salaries with residents in the form of opt outs or other excess levies to comply with the new law. Teachers have a total compensation that is both salary and benefits, and the overall district budget would need to get larger (e.g. with an opt out) to allow for higher salaries while keeping everything else constant.

Opt Out Data from Last Year

In the 2024 fiscal year, 62 of the 148 public school districts imposed an excess levy (i.e. ‘opted out’), totaling almost $34.6 million dollars and averaging more than half a million per opt out district. This is roughly 2% of all property tax revenue from all taxing districts and about 4% of school district property tax revenue for all schools. Obviously, the fractions are larger just for opt out districts. Details are in the Pay 2024 Levies file on the SD DOE Legislature page.

Since needs vary by district, the opt out per student (and opt out dollars in general) will also be different. In addition, while opting out most likely increases property tax bills across property types, the number of taxpayers is not directly being controlled for here so there are migrational factors that could be influential. Simply put, there are households in every school district that pay school district property taxes but do not use public schools, and that district-specific fraction matters to the interpretation. For those reasons and others, normalizations per student should not be interpreted narrowly as ‘less is worse’ for students or ‘more is worse’ for taxpayers.

Opt out districts have about half of all public students in South Dakota, and opt out dollars translate to almost $500 per K12 student per opt out year in opt out districts. Opt out dollars are highly positively correlated with total enrollment, perhaps unsurprisingly, but do not necessarily scale proportionately in per student terms. Last year, among opt out districts, Brookings 05-1 had the least opt out dollars per student at $86 while Bowdle 22-1 had the most at $7,778. For the average opt out district across all property types, 34.6% of their general fund contributions (not the total property tax revenue) come specifically from the opt out. That proportion can be as low as 2.2% as in Madison Central 39-2 or as high as 136.1% (time and a third of the general fund levy revenue) as in Henry 14-2, which depends on the dollar amount of the opt out relative to the existing tax base.

Total levies start with the general fund maximum levies which vary by property type and are determined using total state assessed values (1.32 millage points for ag, 2.954 for owner-occupied, and 6.133 for other property). Again, general fund levies for school districts are the only levies for property taxes that have this proportionality. Then, levies like opt out needs, bond issues, and all the ‘other levies’ (listed below) are added from there. In general, overall total levies have decreased in South Dakota recently due to the mechanical relationship with market/assessed values to meet revenue caps – as house prices (and assessed values) increase (above the inflation allowance set by the state), the typical levy goes down to offset.

Table 1 shows selected summary statistics for total tax levies in school districts from the most recent fiscal year for the three property types and by opt out status. Opt out school districts naturally have higher overall levies due to the extra burden of the opt out. That said, the change in the actual tax payment also depends on assessment growth. The maximum tends to be further away from the average than the minimum which suggests that the school districts with the highest total levies are outliers.

The general fund, opt out, and capital outlay levies make up around 75% of the total levies on ag, 82% on owner-occupied, and 88% on other property. The remaining portions of the total levies are smaller categories designated as ‘other levies’ which include the state special education flat rate levy, special education TIFs, and bond redemptions. Of course, districts that did not opt out pay 0% toward funding the opt out since they, well, do not have one.

While opt out districts tend to have higher bond obligations as well as opt out burdens, this is driven by a few opt out school districts will relatively high bond levies. Conditional on having a bond levy, the average bond levy is around $0.993 per $1,000. There is quite a bit of variation in the opt out fractions of taxes paid for different property types from low to high. Among opt out districts, these fractions range from 0.50% of total levies up to 35.9% (more than a third) for Ag, 0.90% to 45.2% for owner-occupied, and 1.3% to 50.6% (more than half of taxes paid go to opt outs) for other property.

Opt Out Trends since 2012

Of the 61 districts that opted out in 2024-2025, half of those have opt out dollars that translate to less than $1,000 opt out per K12 student, while the other half increase rather quickly up from $1,000 to almost $8,000 per student. Macro forces play a role. Generally, there was an uptick in opt out dollars immediately before Covid in all categories, and most schools had lower opt out dollars per student in 2022 (normalized in real terms to 2024 purchasing power) which is likely attributable to unexpectedly high inflation that year. The SD DOE Legislature page also has the History-OptOuts-24 file which has opt out dollar volume history going back to 2004. Due to the number of school district consolidations around the Great Recession, ‘recent’ trends will focus on 2012 and beyond when the number of school districts has been more stable.

Because the years of the opt out are determined at the onset, it is uncommon for opt outs to be only one year. In fact, no school district in the last 10 years has opted out for only one year then opted in the year after. This trend could be ascribed to increasing or unexpected district-level costs that, once recognized, are factored into the length of the opt out period by the district’s governing body. Put differently, if the changes in costs are substantial enough to require an opt out at all, they are also likely large enough to require multiple years of opt outs. Plus, having to specify the opt out amount and time in years beforehand often means nominal rigidity. That is, most districts receive the same amount of dollars from year to year from opt outs, but inflation makes subsequent years have less buying power. For example, Brookings 05-1 has had exactly $750,000 opt out volumes for each of the last twelve years, but the buying power of the most recent year is only around two-thirds of the first year given inflation over that time.

Sioux Falls 49-5 and Harrisburg 41-2 are, in enrollment terms, vastly larger than other schools in the Sioux Falls metro and have the largest opt out amounts (though not in per student terms). Sioux Falls 49-5 reduced its opt out dollar volume by 30% in 2016 for one year before returning to the previous level. At the same time, Harrisburg 41-2 increased its opt out dollar volume by 50%. These swings drive much of the overall trend across all districts due to the large dollar volume of opt outs in these two districts.

These districts plus a few others near Sioux Falls, like Tri-Valley 49-6 and West Central 49-7, totaled around $16 million in opt out tax revenue, close to half of the entire opt out dollars in the state. For context, those schools make up around 25% of all students in South Dakota. By contrast, Rapid City 51-4, the second largest district in the state, has not opted out in any year that data is available. That said, housing market trends in the Black Hills region probably translate to high assessed value growth relative to the state average and less need for any excess levies like opt outs. Furthermore, student needs vary across districts so neither opting out nor the dollar volume are indicative of the quality of amenities provided to students in any of the districts mentioned. An opt out means only that a school district believes it cannot operate under property tax revenue projections, and there are several situations, restrictions, and limitations for why that might be the case.

Regential Universities across the state also tend to have some of the largest school districts. As a results, there are some different needs placed on overlapping districts (e.g. county, city, etc.), and intergovernmental revenue transfers are common. That said, only Brookings 05-1 and Vermillion 13-1 contain universities within the regential system and have opted out since 2012.

What To Look For

Opt outs are a commonly used tool in South Dakota school districts as a means to address changes in budgetary needs. Changes to state law in the last two years from 2025 SB 216 and 2024 SB 127 as well as some others in the last decade may make opt outs even more common as school districts revenue sources are further restricted and costs are increasing. The exact levies (e.g. capital outlay versus general fund) that are opted out may influence changes in the fractions of property taxes paid across property types due to the proportionality in levies toward the general fund for school districts.

Opt out districts tend to have higher total levies, but the overall impact on actual property taxes paid is jointly determined by changes in assessed values. Higher assessed value growth areas will ultimately pay more school district-specific property taxes, but that also means that those school districts are less likely to require opt out dollars to finance their needs. Taken together, the composition of property tax payments may change due to the relationship between general fund levies, capital outlay levies, and excess levies (i.e. opt outs), but the change in the total property taxes paid will depend on each specific school district’s budgetary realities and housing market trends.