Ask the Budget Director

Britta Reitan, State of Minnesota budget director

I am Britta Reitan, State Budget Director.

The state budget is large and complex. And, some of the terms and concepts are unique to state government budgeting.

The following questions provide an overview of the basics of the budget. We are interested in hearing your thoughts or additional questions.

You may e-mail questions or comments to me at budget.finance.mmb@state.mn.us.

How large is the state's budget?

There are two important numbers for the state budget. The first is general fund spending. The general fund budget numbers are the numbers one is most likely to find frequently referenced in the media and news stories.

The general fund is the largest state fund where most state taxes are deposited and most state spending for major budget areas occurs. State forecasts and resulting projections of deficits or surpluses focus on the state general fund.

However, this does not represent total state spending. The general fund accounts for approximately 55 percent of total state spending. Other state funds, dedicated for specific purposes, as well as federal funding received by the state make up the additional spending.

State spending estimates for the general fund and all other funds are updated several times each year, for the most current estimates please visit the current operating budget summary.
What are the state's primary sources of revenue?

Income, sales, corporate income, and the statewide property tax are the four largest sources of general fund revenues. Revenue from other taxes including tobacco, alcohol, estate and lawful gambling along with non-tax revenue from fees, investment income and other sources is also deposited in the general fund.

Outside of the general fund, receipts from the federal government are the largest source of revenue followed by taxes, fees and other sources of revenues that are restricted to an explicit use by the constitution, statute or law.

In general, a diverse revenue system with broad-based taxes is more stable, more likely to align with economic activity, and likely to be less volatile.
How does the state budget its money?

Minnesota enacts budgets for a two-year cycle (a biennium), beginning on July 1 of each odd-numbered year and ending on June 30 of the next odd-numbered year. By law, the Governor must propose a biennial budget in January of odd numbered years. Once enacted by the Legislature, the budget can be modified in the off-year legislative session. As a result of state forecasts and other changes, it has become common for the Legislature to enact annual revisions to the state's biennial budget. These revisions are referred to as supplemental budgets.
Is the state budget required to be balanced?

Yes, this is both a constitutional and statutory requirement. According to Minnesota's State Constitution, Article XI, Sections 6 and 7 the state is prohibited from borrowing money for operating expenditures outside of the current two year budget period and requires the State Auditor to levy a property tax to cover any deficit at the end of a biennium.

Additionally, state statutes also require a balanced budget. Minnesota Statute 16A.11 requires the Governor to submit a detailed balanced budget to the Legislature and Minnesota Statute 16A.152, subdivision 4, requires the commissioner of Management and Budget, with the approval of the Governor and after consultation with the Legislature, to reduce state spending (allotments) if it is determined the state revenues for the current budget period will be less than state expenditures for that period.
How much revenue does the state receive annually from the federal government?

The state collected $11.976 billion in federal revenue in fiscal year, 2018. Although most public attention is focused on general fund revenues, a significant portion of revenue in the state budget is non-general funds. Non-general funds are receipts set-aside, or "dedicated" for specific purposes. For FY 2019, non-general fund revenues totaled $18.8 billion, or about 45 percent of total state revenues.

Federal grants are the largest source of non-general fund revenues. Frequently these grants do not come to the state as simple cash transfers. The federal government mandates many program requirements as conditions of the grants and often the states must provide matching funds. Entitlement programs such as Medical Assistance and Aid to Families with Dependent Children are example of programs that require a significant state contribution.
How much does the state have in reserves or "rainy day" funds?

The balance of the state’s general fund budget reserve can change, for the most current amount please see the current operating budget summary page. Just like a family's need to have emergency funds available for unexpected household costs, the state's general fund budget reserve is an important risk management tool to reduce disruptions in state services caused by declines in revenue or expenditure increases related to national economic cycles.The target balance of the state budget reserve is adjusted each year based on a recommendation based on the volatility of general fund revenue sources by the State Economist in the budget reserve report released every September. By statute, 33 percent of any positive unrestricted balance in the current biennium in the general fund is allocated to the budget reserve with each November forecast until the target is reached.

The state general fund also has a separate $350 million cash flow account - primarily to maintain sufficient cash balances during the year to manage significant timing differences in when revenues are collected and payments made.

In addition to the budget reserve and cash flow account, the stadium reserve account is also maintained within the general fund. The stadium reserve account was established with the legislation allowing state resources to be spent on the construction of U.S. Bank Stadium. Resources in the stadium reserve account can be made available for state stadium obligations and other payments.
How is the budget related to the economic forecast?

MMB provides revenue and expenditure forecasts twice a year. These forecasts are used to determine the size of any deficit or surplus in the state's budget. The November forecast is used to set the starting point for the budget, and is the basis for the Governor's recommendations. The February forecast incorporates additional data and is used by the Legislature and the Governor to set the enacted budget.

Expenditure estimates in most spending areas are shown at the level of appropriations set in current law, plus any authorized spending carried forward from prior years. Entitlement programs--such as K-12 general education, intergovernmental aids, health care, and family support--are forecast based on expected changes ineligibility, enrollment, and average costs. Wage and price inflation is included in the revenue estimates, which are based on current law tax rates. It is not included in projected current law expenditures.

Forecast documents can be found under the Forecasts and Updates section of the Economic Analysis unit.
How can I obtain additional information on specific state agencies and programs?

The inventory of state agencies, programs, and activities is a good starting point. This information, prepared with the biennial budget, provides descriptive information on the nature, purpose and performance of state programs and activities. The information normally includes a link to an individual agency's website - along with a contact for additional information. Alternatively, the FY 2020-21 Enacted Budget provides additional information on agency operations.
What is a capital budget?

The state's expenditures for capital projects are unlike the operating budget, where expenses are compared to revenues and the budget must be balanced every year. Instead, the Legislature passes capital investment legislation, commonly referred to as "bonding bills", to finance the state's land purchase and building construction projects. MMB issues 20-year general obligation bonds to pay for the projects and programs in the bonding bills. The Governor and legislators do consider how much money will have to come from the general fund every year to pay principal and interest on the bonds when they are determining how large they want bonding bills to be.

Typically, the legislature passes larger bonding bills in even-numbered year sessions. To prepare for that, MMB asks state agencies and local governments to submit requests for appropriations for capital projects in the spring of each odd-numbered year. These requests are compiled and submitted to the legislature on a preliminary basis on July 15 of odd-numbered years and in their final form on January 15 of each even-numbered year. The Governor's proposed capital budget is submitted to the legislature along with the January 15 submission.

The Legislature also frequently enacts bonding bills in the "off" odd-numbered year sessions, which are typically smaller in size. For more information of the capital budget, go to the capital budget home page.
Why does the state borrow money for capital projects?

Capital projects include land and buildings and improvements to buildings, such as additions and major renovations. These kinds of assets have useful lives of 20 years or more. Because land acquisition and new building construction are frequently very expensive and would be difficult to fund in one year, the state borrows money to pay for most of its capital projects by issuing general obligation ("G.O.") bonds.

This is similar to how an individual takes out a mortgage loan to buy a home. Under the state constitution, the bonds cannot be outstanding for more than 20 years. This provision makes sure that the length of the loan does not exceed the expected life of the assets financed by the bonds, which would not be sound fiscal policy.
What is a fiscal note?

Fiscal notes are documents that estimate the budgetary impact, including costs, savings or changes in revenue, of proposed legislation (referred to as bills). The chairs of the House of Representatives Ways and Means Committee, the Senate Finance Committee, or committees to which a bill has been referred may request that fiscal notes be completed for a bill. Fiscal notes are typically prepared by executive branch agencies affected by bills.

All fiscal notes must be approved by the Legislative Budget Office (LBO), prior to then the fiscal notes were approved by Minnesota Management and Budget. You can find completed fiscal notes here.
What is a local impact note?

Local impact notes estimate the local financial impact on each type of political subdivision that would result from proposed legislation. Political subdivisions include local units of government such as cities, counties, and school districts. Local impact notes may be requested by the chair or ranking minority member of the House or Senate Tax Committee, the House Ways and Means Committee, or the Senate Finance Committee.

The law assigns responsibility for coordinating local impact notes to the Legislative Budget Office.

You can find completed local impact notes here.
What is a "revenue note"?

Estimates for the cost of proposed legislative changes to state taxes, or local aids and property tax credit programs, follow a different course than fiscal notes. Chairs of the legislative tax committee may request revenue analyses directly from the Department of Revenue on proposed tax bill provisions and language. Revenue's tax research and property tax division completes and publishes revenue analyses for tax provisions of various house and senate bill.

Completed revenue analyses can be found here on the Department of Revenues web site.