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Budget/Finance Primer

What is the current state budget?

You can find information on the current state budget at MMB’s budget and economic analysis webpage under the "Current" section on the "Forecasts and Updates" tab. State spending is divided into a series of separate funds, which are separate accounting divisions to keep track of certain revenues and expenditures that are specified in law. The General Fund receives the major state taxes on income, sales, corporate income, alcohol and tobacco, and the Legislature appropriates these funds for public purposes. Because the general fund is used for the general operations of the state, most of the budget decisions that are enacted into law during a legislative session are concerned with deciding how to spend money in the general fund. Other funds are often created to set aside certain revenues for special purposes. For example, taxes on motor vehicle sales, registrations, and gasoline are dedicated to special highway funds for road maintenance and construction. Hunting and fishing license fees are dedicated to the game & fish fund for fish and wildlife conservation programs. State law specifies several dozen separate funds that are used to segregate revenues and spending for various purposes.

How does the state budget it's money?

Minnesota enacts budgets for a two-year cycle (a biennium), beginning on July 1 of each odd-numbered year. The budget approved for the current biennium remains in effect from July 1, 2011 through June 30, 2013. 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 the Article XI, Sections 6 and 7 of the State Constitution 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 require a balanced budget: Minnesota Statutes § 16A.11 requires the Governor to submit a detailed balanced budget to the legislature and Minnesota Statutes § 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.

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.  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 submits his proposed capital budget 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 and cover emergencies such as tornado or flood relief.  However, this is not always the case.  The legislature enacted a relatively large bonding bill in the 2011 special session which was approximately $500 million.

Why does the state borrow money for capital projects?

Capital projects includes 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 (“GO”) 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. 

One of the state’s debt management guidelines requires that 40% of state GO bonds are to mature within five years and 70% within ten years.  This guideline was put in place to provide for fairly aggressive repayment of state GO borrowings.

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 forecasted 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 Budget and Economic Analysis page of the website.

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 executive branch’s budget agency (the Minnesota Department of Management and Budget, or MMB). 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 MMB. To prepare local impact notes, MMB often obtains data or input from representatives of local government units or associations. You can find completed local impact notes here.

Glossary

  • Appropriation — Authorization by the legislature to spend money from the state treasury for purposes established in law. Appropriations typically limit expenditures to a specific amount and purpose within a fiscal year or biennial period.
  • Biennial Appropriation — The authority to spend an appropriation in either year of a biennium.
  • Biennium — A two-year fiscal period. The Minnesota State biennium runs from July 1 of an odd numbered year to June 30 of the next odd-numbered year. The biennial budget planning horizon covers three biennia – adjustments to the current biennium, the proposed budget for the next biennium, and estimates for the following biennium.
  • Budgetary-Basis Reporting — Minnesota budgets on a modified-cash basis. That is, revenues are counted when received, expenditures when paid or encumbered.
  • Cancellations — Money appropriated but unspent at the end of a fiscal year or end of biennium. Such amounts are generally cancelled back to the state fund from which they were appropriated.
  • Direct Appropriation — Authorization by the legislature to spend money from the state treasury for purposes established in law. Appropriations typically limit expenditures to a specific amount and purpose within a fiscal year or biennial period.
  • Entitlement — A service or grant that, under state or federal law, must be provided to all eligible applicants.
  • Fiscal Year — One-year budget period that begins on July 1 and ends on June 30. The state fiscal year extends from July 1 through the next June 30. The federal fiscal year runs October 1 through September 30.
  • Forecast Changes — Adjustments made to the base or planning estimates in a forecasted program as a result of a new budget forecast that predicts expenditure changes.
  • Forecast Programs — Expenditure estimates in most areas are shown at the level of the appropriations made for FY 2008-09 by the 2007 legislature, 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.
  • Full-Time Equivalent (FTE) — A unit of measure of state employees: refers to the equivalent of one person working full time for one year (approximately 2,088 hours of paid staff time). Two persons working half time also count as one FTE.
  • Fund Balance or Fund Statement — Summary of revenues, expenditures, reserves and year-end balances for a fund or grouping of funds. Updated fund balances are prepared at the release of each state forecast, the release of the Governor’s budget, and at the end of each legislative session.
  • General Fund — The General Fund is the source of the state’s main operating funding and is used to support activities outlined in statute. Major revenue streams into the General Fund include state individual, corporate, and sales taxes among others. These are non-dedicated revenues and are available to be appropriated by the Legislature.
  • General Obligation Bonds — Bonds whose repayment is guaranteed by the "full faith and credit" of the state.
  • Legislative Tracking — Legislative fiscal staff spreadsheets that detail the budget passed by the legislative committees. Tracking provides a level of detail, but does not have the same legal implications as appropriation bill language.
  • Omnibus Bill (Order) — The state budget is enacted through nine major omnibus appropriation bills that are determined by legislative committee structures. State budget presentation is commonly presented to the Legislature in a format and order that parallels the last or proposed omnibus bill structure.
  • Open Appropriation — The authority to spend an unspecified amount of resources to meet a program's objective or a constitutional requirement. These resources are typically made available when an agency provides a forecast of the estimated need. Approval of the funding is made using agency estimates and documentation that establishes the funds in the accounting system. Rather than canceling at year-end, any excess dollars are processed as a reduction in the appropriation amount, rather than a cancellation.
  • Program/Activity — Minnesota utilizes program-type budgeting – that is, for budget presentation agencies are broken down into programs and sometime to a lower level of activities. Legislative appropriations are generally made at the program level.
  • Standing Appropriation — An appropriation made in statute (instead of session law) authorizing spending for a program of a pre-determined dollar amount for a specific period of time or indefinitely.
  • Statutory Appropriation — An appropriation made in statute (instead of session law) authorizing the ongoing spending for a program. In contrast to direct appropriations, statutory appropriations need not be reviewed every biennium for funding to continue. They are, however, presented and considered as part of the total operating budget.
  • Supplemental (Deficiency) Appropriations — Adjustments made on off-year legislative sessions to a previously enacted biennial budget. Commonly these represent budget changes designed to deal with projected budget shortfalls in the current year, any necessary reductions occasioned by state revenue forecast shortfalls, or increased allocations or initiatives allocating unexpected forecast balances.
  • Tail — Additional costs (or savings) that occurs in the future because a budget item in the current biennium is not fully implemented. Example: A program started in the last six months of this biennium might cost $100,000. If that program operates for a full 24 months next biennium, costing $400,000, then the current biennium budget decision is said to have a tail of $300,000.
  • Transfers — Authorized movement of monies between programs within an agency, between agencies for a designated purpose, between appropriations accounts within a fund or between state funds where authorized. By definition all transfers are two-sided, a source account (out) and a destination account (in).

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Budget & Fiscal Information