10-month sales tax creates $40 million business loan fund

David Fettig | Managing Editor

Published December 1, 1989  | December 1989 issue

Faced with the fact that it is the most agriculturally dependent state in the nation, and following a boom-bust cycle in the '80s that decimated much of the ag industry, South Dakota decided to get into the business of economic development lending.

To raise funds for the venture, a 1-cent sales tax was passed by the State Legislature in 1987. In effect for 10 months, the tax hike created a $40 million pool of money known as the Revolving Economic Development & Initiative (REDI) Fund.

Two years later, in its September 1989 annual report, the Board of Economic Development said: "In 1989 the REDI Fund exceeded all expectations, making it one of the most successful economic development programs in the nation."

That's a biased appraisal, of course, but South Dakota officials believe they have the numbers to back up the boasting.

  • Through July 1, 1989, 73 loans totaling about $22 million were loaned to new or expanding businesses.
  • More than 2,900 people were working in new jobs created by businesses that received a REDI loan—that compares to 400 new jobs created by those same businesses in the year prior to the fund.
  • Within three years, those businesses are expected to create nearly 5,000 new full-time and 400 part-time jobs.
  • When the entire $40 million is loaned (in late 1991 or early 1992), more than 8,500 new jobs are expected to be created.

Additionally, state officials expect the new REDI Fund jobs to stimulate other businesses and create even more jobs.

The main attraction of the REDI Funds is the 3 percent interest rate that may account for up to 45 percent of the total loan; the other 55 percent would be matched by a private lender.

The REDI Fund's low interest rate has put pressure on neighboring states that compete with South Dakota for relocating companies. And even though South Dakota has received some notoriety through publicized cases of business relocations in recent years (Hutchinson Technology, for example), state officials maintain that the primary goal of the REDI Fund is not to lure out- of-state companies but to nurture in-state businesses.

Of the 73 REDI Fund loans, 60 percent have gone to expanding South Dakota companies, 20 percent to new companies and 20 percent to companies moving to the state. Also, about 28 percent of the loans have gone to the smallest communities in South Dakota (under 2,000 population), which make up 25 percent of the state's total population.

But despite the statistics, not all South Dakotans are supportive of the REDI Fund. Detractors maintain that most of the recent business expansions would have occurred regardless of the state-sponsored loan program. And, while Mark Schuler, REDI Fund coordinator and loan officer, agrees that many of the expansions or start-ups would have occurred anyway, he said the loans allowed the businesses to move more quickly.

Some businesses that planned to expand or start up in the coming years decided to move immediately, Schuler said, "and in most cases that was due to the availability of low-cost capital."

The REDI Fund detractors also maintain that many of the new jobs are low-wage positions—especially in rural areas. The Legislature's Democrats are expected to revive a bill in the 1990 session calling for a base wage of $5.50 for any business receiving a REDI Fund loan (South Dakota's governor, George Mickelson, who started the program, is a Republican).

However, the Board of Economic Development reports that, on average, REDI Fund firms were paying $7.40 per hour for all jobs and $6.06 for production workers. The state average for production workers is $5.40.

"We're really happy with the wages," Schuler said. "They're nowhere near the minimum wage; and we stress that those wages are what they're paid at the beginning. We look for that wage rate to rise."

Also, Schuler said that lower wages paid in smaller towns reflect the relative cost of living. "Five dollars in Sioux Falls is nice, but $5 in a small town has a much bigger impact. Besides, you can't hire anyone for $5 in Sioux Falls."

When REDI Fund loans are granted by the Board of Economic Development, Schuler said, they're granted with the support and approval of the affected local communities—otherwise the loans aren't made at all. Those local communities are the best judges of their own needs, he said.

"When a small town is willing to put its money on the line, that's real commitment, and that's what the board wants to see."