A provision buried in South Dakota's budget bill will raise costs for restaurants and food service businesses that work with state programs.
Most South Dakota restaurant owners don't realize that HB1326—the state's appropriations bill for ordinary expenses—contains a provision that directly affects their bottom line if they contract with state agencies.
The bill, which takes effect July 1, 2026, and runs through the fiscal year ending June 30, 2027, includes a 1.4% across-the-board compensation increase for state employees. That part is straightforward. But there's a second, less visible piece: a 1.4% "discretionary provider inflation" adjustment applied to Medicaid, behavioral health, developmental disabilities, long-term services, children's services, and other state-contracted providers.
Here's why that matters to your restaurant.
If your restaurant or food service operation contracts with the state—whether through Medicaid-funded meal programs, behavioral health facilities, developmental disability services, long-term care facilities, or children's services—this adjustment applies to you. You're classified as a state-contracted provider, and the 1.4% adjustment is how the state accounts for your rising costs.
In theory, that sounds fair. In practice, a flat 1.4% increase may not match your actual cost increases for labor, food, utilities, or supplies. If your real costs rise faster than 1.4%, you absorb the difference. If they rise slower, you don't get the full benefit.
The adjustment is discretionary, meaning the state legislature decided this percentage based on its own budget constraints, not on market data specific to food service or hospitality.
This provision appears in Section 4, (0117) Employee Compensation and Billing Pools, on Page 4 of HB1326. It becomes effective July 1, 2026, and applies through June 30, 2027.
If you currently hold a state contract, you should expect your reimbursement rates to reflect this 1.4% adjustment when the fiscal year begins. If you're considering bidding on a state contract, factor this rate into your proposal.
Review your current state contracts now. Calculate whether a 1.4% rate increase covers your anticipated costs for the 2026–2027 fiscal year. If you operate on thin margins—as many food service businesses do—even a small gap between the adjustment and your actual costs can matter.
If you're in a competitive bid situation for a state contract, understand that the 1.4% adjustment is fixed. Your pricing strategy needs to account for that ceiling.
Talk to your accountant or business advisor about how this affects your specific operation. State budget provisions like this one often go unnoticed until they're already in effect, and planning ahead gives you better options.
For a more detailed breakdown of how HB1326 affects your specific type of food service business, contact your local restaurant association or chamber of commerce for business-specific guidance.