Gov. Dennis Daugaard would normally be proud to list South Dakota as No. 1 in the nation.
But the state's top ranking for having the highest percentage of its budget made up of certain discretionary federal grants leaves it in a fragile position as possibly huge federal budget cuts threaten, Daugaard said.
Speaking in Rapid City on Wednesday, the governor said the well-publicized "fiscal cliff" looming in politically divided Washington, D.C., had the potential to the vulnerable federal grants to South Dakota by $29 million if Congress and the president can't find a solution by the end of the year.
And given the size of the federal spending deficit and mounting national debt, it's hard to say how many cuts in federal assistance the state could face in month and years to come, Daugaard said.
"I think we should be prepared for cuts that must come unless taxes are raised very substantially," he said, speaking to about 200 people at the 2012 Governor's Luncheon sponsored by the Rapid City Area Chamber of Commerce. "And by substantially, I'm talking 30 to 40 percent."
The governor's presentation was a recap of the cautious budget message he gave Tuesday to state legislators in Pierre, in preparation for the start of the 2013 legislative session next month. While noting that the state has recovered above the national average from a recession that didn't hit here as hard as in many states, Daugaard urged caution in state-government spending.
Reductions in federal funding are inevitable, he said. And South Dakota is particularly vulnerable in some areas because it gets 10.3 percent of its total budget from the vulnerable discretionary grants, which are part of a larger pool of federal funds in the state budget.
On average, the discretionary federal grants Daugaard spoke of make up 6.6 of the budget in other states.
If Congress and the president fail to reach a budget settlement, automatic across-the-board budget cuts could be imposed under federal law. And federal grants like those South Dakota receives could get reduced.
Daugaard said a study examining state impacts of the cuts by the Pew Research Center indicate that South Dakota would lose $29 million in that process. How much the state could end up losing over time is impossible to estimate, with most of it beyond South Dakota's control, he said.
Making long-term commitments such as increasing aid to schools and higher payments to Medicaid providers should be done cautiously, Daugaard said. He is proposing 3 percent increases in those areas in the next budget, which will fall well short of making up for reductions he and Republican lawmakers pushed through in 2011 to help eliminate a $127 million structural deficit in the state budget.
Lawmakers should be careful to avoid chancy financial commitments now, Daugaard said.
"Because we live in a time of much uncertainty, I believe we should wait and see what actions are taken by our president and Congress in the coming months, and what it could do to our economy," he said.
That all makes sense to Republican state Rep. Mike Verchio, R-Hill City, who attended the luncheon and agrees with the governor that cautious spending is still essential, even as economic times seem to improve in South Dakota.
"An awful lot of the legislators I've talked to have the heart to try to do more for K-12 education and medical providers," Verchio said "But in all reality I don't think anybody can stick their necks out at this point. Who knows what's going to happen in Washington, D.C.?"
The across-the-board cuts under the federal sequestration process would take effect on Jan. 2, six days before the start of the 2013 South Dakota legislative session. As the clock ticks, legislators watch negotiations in Washington, D.C., and wonder how the coming budget will be affected.
Daugaard's budget plan projects a balance of $26 million for the current fiscal year and the next. But if things go bad with federal funding, it could take all of that and more just to make up the difference, Verchio said.
"The whole world might change by the first of the year," he said. "By the time we get there everything could be great, or it could be a heck of a lot worse."
Democrats in the Legislature had a different reaction this week. House Democratic leader Bernie Hunhoff of Yankton said Wednesday that it's important to push forward with initiatives that have long-lasting benefits to the state and great financial returns over time.
Those include quality education and health care, and potential federal budget cuts shouldn't scare South Dakota away from needed financial commitments, Hunhoff said.
"We need to be aware of external circumstances, but we can't let them turn us into Chicken Little where we're scared to act," he said. "We need to plan for the future. We need to make smart investments."
Hunhoff said considering South Dakota's $4 billion budget, even a potential $29 million cut from the federal government isn't earth-shaking.
"None of that is startling in a $4 billion budget," he said. "Sure, $20 million is a lot of money. But we get windfalls of $20 million in one-time monies all the time. This isn't a show-stopper."