One man’s idea spurred South Dakota’s transformation into a business magnet

Minnesota and South Dakota have been feuding for years about which state offers the best corporate environment. The governors of the two states have taken periodic barbs at one another, claiming their state offers the best place to do business. South Dakota appears to have won a recent round in the battle, AcroTech Midwest of Brainerd having announced last week that it will close its Minnesota plant and set up shop in South Dakota.

Before 1980, South Dakota was no threat to Minnesota. Although the state has never bothered to collect a corporate or personal income tax, South Dakota was largely an overlooked outpost on the plains. The man who transformed South Dakota into a magnet for businesses was Thomas M. Reardon, who died August 11 at the age of 90. Reardon is the person who initiated the efforts that led to Citibank’s arrival in Sioux Falls in 1980. That was the first major corporation to come to the state in decades. It spurred meteoric growth in state’s financial services industry, which ultimately attracted other businesses, such as office supply ventures and computer companies. Sioux Falls and the rest of the state clearly have enjoyed disproportionate economic development during the last two and a half decades – some of it at the expense of neighboring states like Minnesota.

Reardon was the long-time chairman and founder of Western Bank, a leading Sioux Falls bank until U.S. Bank purchased it in 1995. In the late 1970s, the Federal Reserve was raising interest rates, driving mortgages to more than 9 percent by 1979. Rules that limited what banks could pay for deposits were being phased out, but the rules about what banks could charge for loans remained in place. South Dakota, like most states at the time, had usury laws that limited what banks could charge for loans. Doug Hajek, a Sioux Falls attorney who worked for Reardon at the time, explained to me that Reardon thought it was about time to get rid of the usury laws.

Reardon served on the legislative committee of the South Dakota Bankers Association and at the committee’s November meeting in 1979, he proposed eliminating the usury law. It was a controversial proposal and Hajek, who was at that meeting, said much discussion followed but the committee ultimately voted to adopt it as an industry position. Lobbyists went to work, and within several weeks, the South Dakota House of Representatives passed a bill exempting banks and other regulated lenders from the state’s usury limits.

No one knew at the time that Citibank was watching, but it was. The nation’s largest bank was losing millions of dollars per year on its credit card operations because of strict usury limits in place in New York, where the bank was based. Citibank was looking for a new home for its credit card business, where it could charge any rate it deemed appropriate. Citibank representatives contacted S.D. Gov. Bill Janklow and told him that if the state adopted the usury exemption legislation, it would move to South Dakota. Janklow, who originally had been against the legislation, changed gears and became one of its biggest advocates.

The legislature, indeed, passed the bill and Janklow signed it into law with fanfare. Although advocates for the law touted its potential for economic development, the idea of letting banks charge whatever they wanted for loans was controversial. Lawmakers were comfortable with the bill, however, because the Federal Reserve had recently implemented its Regulation Z, a rule that required banks to provide detailed disclosure of the exact costs of all loans to customers. With the clear communication of costs, the legislature decided that interest rates could be negotiated between lenders and borrowers without statutory limitations posed by the state.

Citibank held up its end of the deal and came to Sioux Falls, bringing about 3,200 jobs. That opened a floodgate of economic development for the state, and many other companies have come to South Dakota in the last 24 years. Some have even come from Minnesota.