Houses under construction on Oct. 28, 2022 in Harrisburg, SD. (John Hult/South Dakota Searchlight)

South Dakota developers hoping to access $200 million in infrastructure funding to fill a 10,000-home gap in workforce housing will have another winter to wait.

The reason? Lawmakers passed a bill last winter intended to encourage new housing with no income restrictions, but voted to deposit the lion’s share of the money into a fund designed explicitly for income-restricted projects.

That mismatch between legislative intent and legislative language caused the South Dakota Housing Development Authority (HDA) to shelve $150 million in state funds over the summer. The situation is an outgrowth of a pitched rhetorical battle between Gov. Kristi Noem and lawmakers that saw her original proposal rewritten in the waning days of the 2022 legislative session. 

In September, the HDA also voted to hold off on awarding the federal dollars. That decision hit the brakes on $50 million in workforce housing projects across the state.

At this point, the money will sit until lawmakers agree on a fix during the next session, which begins in January.

“We just felt, out of an abundance of caution, to not go forward with any of it until we got clarification from the Legislature,” said Bill Hansen, a Sioux Falls Banker who chairs the HDA.

The path from a $200 million investment in housing to stalled progress was paved in March, when lawmakers moved the money to the HDA and away from the bill’s original sponsor, the Governor’s Office of Economic Development (GOED).

The move would ultimately serve to stall the impact of the funding. Even as she signed the bill, Gov. Noem released a statement questioning its functionality. She decried the outcome this month through spokesperson Tony Mangan, who wrote that “many legislators assured the Governor that this scheme would work, and she took them at their word and signed their bill.”

“We are disappointed but not surprised,” Noem said in a statement supplied by Mangan.

Adjustments alter intent

The funding originated with House Bill 1033, an outgrowth of a 2021 summer study on workforce housing. In the bill’s first hearing in February, Rep. Tim Goodwin, R-Rapid City, called the issue “the biggest problem in the state right now.”

“When you go around and you see all the help-wanted signs, there’s still going to be help-wanted signs until there’s places for people to live,” said Goodwin, who sat on the summer study committee.

The funds wouldn’t help pay for construction costs, lawmakers were told. Instead, they would cover up to a third of the costs of roads, water and sewer lines, and street lights in new developments, which have grown faster than home prices.

Those costs have become a significant burden in an era of supply chain disruptions and inflation pressure.

“Because infrastructure cost is borne by the developers, we have to do something that allows some stability,” housing industry lobbyist Dean Krogman said in February.

The original bill would have delegated the authority for awarding the funds to the Governor’s Office of Economic Development (GOED), stating expressly that the money would go to projects “not being subsidized by federal or state programs that specifically aim to increase access to affordable housing.”

“Many incentives exist for affordable housing. Few, if any, incentives exist for workforce housing,” GOED Finance Director Travis Dovre told lawmakers on the House State Affairs Committee.

The full House of Representatives passed the bill 41-27 just days after Dovre’s testimony. It sailed through the Senate Commerce and Energy Committee 6-1 a month later. The lone “no” vote came from Sen. Red Dawn Foster, D-Pine Ridge, who questioned the need for housing funds untethered to income.

The full Senate, however, re-wrote the bill. Instead of GOED, the amendment passed on March 7 put $150 million in state funds into the Housing Opportunity Fund, which can only be used for affordable housing. The authority to award another $50 million in federal American Rescue Plan Act (ARPA) money was also handed to the HDA.

The amended bill, signed by Gov. Noem on March 10, also directed 70% of the funds to be used in communities of 50,000 people or fewer. The changes on the Senate side were introduced by Sen. Casey Crabtree, R-Madison, in part to appease the concerns of House lawmakers. 

“Our friends in the House had suggested a 70/30 split,” Crabtree said on the Senate floor.

Sen. Crabtree said redirecting money to the HDA would avoid creating a new government program, and suggested the new language would help spark development. 

Goodwin, Crabtree and Dovre did not respond to requests for comment from South Dakota Searchlight.

Adjustments cause confusion

About two months after Noem signed the rewritten version of HB 1033 into law, the HDA took up the issue of its authority to disperse the funds. At its May 17 meeting, Director Lorraine Polack told commissioners that the Legislative Research Council’s executive board had voted to identify a mismatch between legislative intent and HDA authority. In June, after a closed-door executive session, the HDA board voted to pass a resolution that tabled the $150 million in state funds.

That left the $50 million in ARPA funds open to developers – at least initially. The board wrote rules for applications, and by September had accepted enough of them to award the entire pot of money to various housing projects across the state.

By September, though, Polack said the board had heard conflicting legal opinions on the federal funds – even as project managers primed to fold the funding into their budgets prepared to break ground.

“We did have enough applications that it would have used all of that $50 million,” Polack said earlier this month.

Polack declined to release the names and locations of those projects, citing a clause in South Dakota’s open records law that protects financial and proprietary information. 

The HDA’s September resolution on the $50 million mirrored the wording of its June decision on the larger pool of funds. 

“SDHDA staff are hereby instructed to take no further action with respect to the implementation of the Housing Infrastructure Financing Program until further clarification is provided by the South Dakota Legislature with respect to HB 1033,” the resolution states.

It was clear from legislative discussions, HDA Chair Hansen said, that lawmakers did not intend to help push along projects with income restrictions. Those projects are important in smaller communities that could attract new middle class workers if housing were available, Hansen said, but the HDA exists to support affordable housing. 

“I know, everybody has good intentions,” Hansen told South Dakota Searchlight. “But as you really dig into that bill, you’ve got different sides that are interpreting it differently. And unless it gets to be clear, we really don’t want to go forward and expose the Housing Authority to any liability, either.”

Next steps unclear

The HDA board members do not intend to propose legislation to clarify the situation, Chair Hansen and Director Polack said.

Who might bring that clarifying legislation and how easily it might pass are open questions. HB 1033 had its share of detractors during debate this spring, particularly among members of the House who self-identify as more conservative.

Rep. Taffy Howard, R-Rapid City, questioned the need for government involvement in the private sector. Housing funds simply serve to reward politically connected developers, she said. Several other representatives voiced similar concerns on the House floor, including Rep. Caleb Weis, R-Aberdeen.

The Aberdeen area is filled with developers who’ve built without government aid, Weis argued.

“The only thing that will happen if we pass this bill is that we’ll get to pick who gets to build,” he said.

In her signing statement on HB 1033 in March, Gov. Noem wrote that she “is hopeful that the Legislature will be able to deliver the needed statutory clarification before grants and loans will be made.”

This month, Noem’s spokesperson Tony Mangan wrote that the governor signed the bill in good faith and is disappointed by the delay in addressing “the demand for housing that we all know is a crisis.”

“Rather than work with Governor Noem on this plan, Senate leadership preferred to draft their own scheme … Unfortunately, we have now seen that this scheme did not work as Senate leadership stated it would, and the $200 million is lying dormant,” Mangan wrote.

Mangan said that Noem intends to work with the legislature on a potential solution.