Budget Reserve Report
Economic Analysis produces three reports per year required by Minnesota Statute, the Budget Reserve Report and two Revenue Forecast Uncertainty Reports. The Budget Reserve Report (below) is published in September and provides the target budget reserve level that would be adequate to manage the underlying risks in Minnesota’s revenue system. The Revenue Forecast Uncertainty Report is published two weeks after each forecast and provides the range in which we can expect revenues to fall at the close of the current biennium.
Latest Budget Reserve Report
September 30, 2020
Budget Reserve Recommendation. To adequately manage the underlying risks in Minnesota’s general fund tax revenue system, Minnesota Management and Budget (MMB), in accordance with Minnesota Statutes section 16A.152 subd.8, recommends a budget reserve target of 4.8 percent1 of the current biennium’s general fund non-dedicated revenues, or a $2.143 billion budget reserve for the 2020-21 biennium.2 At the end of the 2020 regular and special legislative sessions, Minnesota’s projected FY 2020-21 budget reserve was $2.377 billion.
The recommended reserve percentage is based on MMB’s assessment of volatility in Minnesota’s revenue system. We examine the variability over time of the state’s major tax bases and changes in the composition of tax revenues. The recommended reserve percentage assumes the budget is structurally balanced through the remainder of the biennium, and policymakers desire a 95 percent level of confidence that a biennial deficit generated by revenue volatility will not exceed the budget reserve.
We have reviewed the revenue volatility model and updated it to reflect an additional year of data. Note that the update does not include the impact of the 2020 economic downturn on tax base volatility, because data reflecting that impact is not yet available. The result of our analysis is an estimated degree of revenue system volatility that is slightly lower than what we found last year, driven by declining volatility in the bases of the individual income tax and general sales taxes. Consequently, we have decreased the recommended percentage of revenues to 4.8 percent from the 4.9 percent recommendation in our September 2019 report.
The recommended reserve level of $2.143 billion is derived by multiplying the recommended reserve percentage by the latest estimate of current biennium general fund non-dedicated revenue. In May, we reduced our revenue projection from the prior forecast. Together with the lower recommended percentage, the lower revenue projection reduces the recommended size of the reserve from the prior level.
The target is for the budget reserve account alone. Minnesota also has a cash flow account, which is intended to offset potential cash shortages caused by a mismatch between monthly revenue collections and spending. The cash flow account is currently funded at $350 million.
1Rounded to the nearest tenth of a percent.
2Based on end of 2020 regular and special legislative sessions General Fund Balance Analysis.
Current Volatility Report
Minnesota statute requires Minnesota Management and Budget to “develop and annually review a methodology for evaluating the adequacy of the budget reserve based on the volatility of Minnesota’s general fund revenue structure. Volatility is the amount that a data series varies from its trend growth path. In this presentation, State Economist Laura Kalambokidis, provides an overview of the methodology used to calculate the recommended size of the budget reserve as a percentage of general fund net non-dedicated revenues. This information was presented to the Minnesota Senate Finance Committee on January 24, 2019. Presentation Slides (pdf) | Report (pdf)
How Much is Enough? Prevailing Revenue Volatility & State Budget Reserve
Most state governments (including Minnesota) use rainy day funds to cushion against fiscal stress caused by changing economic conditions and tax policy preferences. This presentation summarizes MMB's empirical method for estimating an appropriate size rainy day fund for Minnesota based on prevailing cyclical volatility of the state's revenue system. It was made by MMB Economist Matt Schoeppner to the FTA Revenue Estimating Conference in Tampa, Florida on September 30, 2015.
Minnesota's Revenue Volatility
Every state tax system has some inherent revenue volatility. Most states (including Minnesota) manage the associated risk with rainy day reserves. This presentation (1) presents data on revenue volatility, trend growth, and the share of total general fund revenues for each major source of Minnesota general fund revenue, (2) reviews the primary drivers of increased revenue volatility since the mid-1990s, and (3) discusses how analysis of Minnesota's revenue volatility informs MMB's budget reserve recommendations. It was made by State Economist Laura Kalambokidis to the the Minnesota House Taxes Committee on January 22, 2015.
Presentation Slides (pdf) Prepared Remarks (pdf)
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