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The State Budget Process

The state has a biennial budget. The biennium begins July 1 of each odd-numbered year, and ends June 30 of the next odd-numbered year. The legislature makes the major tax and spending decisions for the biennium in the spring preceding the beginning of the biennium.

Each biennium consists of two fiscal years. The state fiscal year begins July 1 and ends the following June 30. The fiscal year is name for the calendar year in which the fiscal year ends. For example, fiscal year 2017 begins July 1, 2016 and ends June 30, 2017.

In Minnesota, the executive branch has primary responsibility for proposing a budget. Acting as the agent of the governor, Minnesota Management and Budget has the lead role in overall state budget preparation. The department also supervises the expenditure of funds appropriated by the legislature. What follows are highlights of the process.


The Department of Management and Budget (MMB) supervises the process under which the governor submits a proposed budget to the legislature in January of each odd-numbered year.

State law requires the governor to submit a proposed state budget to the legislature by the end of January in each odd-numbered year. The new governor has three more weeks to submit a first budget. MMB, under direction of the governor, supervises agency budget preparation in the fall of the preceding year. This supervision may take several approaches:

  • The department may give agencies general direction, such as not to request any money for inflationary adjustments, or to cut base budgets by specified amounts.
  • The department gives agencies instructions on how to format budget documents, to ensure consistency among requests and the kind of information submitted to the legislature.
  • The department reviews all agency budget requests, and has the key role in helping the governor determine what will go into the "governor's recommendations" for the state budget.

The governor's budget is only a recommendation to the legislature. Typically, however, legislative committees rely heavily on the governor's budget document as a starting point for their deliberations. Minn. Stat., secs. 16A.10-16A.11.

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The state constitution requires a balanced budget each biennium.

The balanced budget requirement is not stated explicitly in the state constitution. Rather, it derives from the limits on borrowing contained in the constitution. The state may issue debt only for specified purposes. Borrowing money to pay for a deficit at the end of the biennium is not one of these purposes. Thus the budget must be in balance at the end of the biennium. Minn. Const., art. XI, sec 5.

Each biennium the legislature enacts tax and spending bills that it believes will result in a balanced budget for the biennium. That is, the amount appropriated by the legislature does not exceed the amount of anticipated revenues. The amount of taxing and spending is based on revenue and expenditure projections issued by MMB. Minn. Stat. sec., 16A.103.

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The legislature has developed several tools to help ensure that the state budget will remain in balance during the biennium.

The revenue and expenditure projections used as the basis for the biennial budget depend heavily on predictions of national economic trends. Variations in these national trends during the biennium can cause projected state revenues to exceed or lag behind original projections.

The legislature has enacted mechanisms to help avoid budget deficits, even if there are variations from the original economic forecasts that provided the basis for taxing and spending decisions:

  • The legislature has created a budget reserve, by appropriating fewer dollars than the amount of anticipated general fund revenues.
  • The legislature has given the governor general authority to reduce appropriations if the budget reserve is used up, and anticipated general fund revenues cannot meet general fund expenditures. This appropriation reduction process is known as "unallotment." Minn. Stat., sec. 16A.152.
  • On occasion, the legislature has given the governor specific unallotment instructions to be carried out in the event of projected revenue shortfalls.

The governor can also call the legislature into special session to deal with a projected budget shortfall. During the special session, the legislature reduces expenditures or raises taxes to provide a balanced budget.

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The state constitution provides that no money may be paid out of the state treasury, except pursuant to an appropriation by law.

Thus, money can be paid out of the state treasury only according to a bill that is passed by the legislature and signed by the governor. The governor has authority to veto an item of appropriation from a bill that contains several items of appropriation without vetoing the entire bill. Minn. Const., art. XI, sec. 1.

There are two general ways in which the legislature appropriates money out of the state treasury:

  1. Direct appropriations: A direct appropriation refers to the practice of the legislature making an appropriation of a specified amount of money for a specified time period. For example, in an omnibus budget bill the legislature appropriates a specified amount of money to a state agency for each of the two fiscal years covered by the budget bill. Under such an appropriation, the agency may receive only the amount of money that has been appropriated, and only for the time period specified in the legislation. The appropriation is not part of permanent law, because it is effective only for a limited time period. The agency must receive a new appropriation in the next biennium to continue its program.
  2. Standing appropriations: A standing appropriation refers to the practice of the legislature writing an ongoing appropriation into permanent law. For example, in a permanent statute creating an agency, the legislature might provide that all fees that the agency collects are appropriated to the agency for purposes of agency programs. Because this appropriation is in permanent law, it does not need to be renewed every biennium. Instead, the agency will continue to receive funds under the appropriation unless the legislature changes the permanent law.

The legislature generally avoids standing appropriations because they tend to minimize regular opportunities for legislative oversight of agency operations. However, there are situations in which standing appropriations are considered desirable to assure smooth operation of state government. For example, the legislature provides a standing appropriation of federal funds received by state agencies, because the legislature does not know at the time it enacts appropriations what level of federal funding will be available.

A standing appropriation may be for a specified amount, but most standing appropriations are "open," meaning an indefinite amount. A typical appropriation of this type would provide that "All funds received by the agency (e.g. from a fee imposed under a program) are appropriated to the agency for purposes of the program."

General law allows agencies to carry forward unspent appropriations for operating expenses from the first year of a biennium into the second year of a biennium, with approval of the Commissioner of Management and Budget. Agencies generally may not carry forward unspent money from the last year of a biennium into a new biennium. Rather, unspent funds lapse back to the fund from which the appropriation was made. Minn. Stat., sec. 16A.28.

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Various "funds" exist within the state treasury. These funds are used to account separately for various pools of money in the treasury.

Examples of funds in the state treasury include:

  • General fund: The general fund, the largest fund in the state treasury, draws the most attention from legislature and the public. This fund accounts for all financial resources not required to be accounted for in another fund.
  • Special revenue funds: These funds account for money that according to law can be spent only for specific purposes. Examples of special revenue funds are the game and fish fund, the trunk highway fund, and federal funds.
  • Trust funds: These are funds in which the state acts as a fiduciary for other persons. Examples of trust funds include pension funds.
  • Enterprise funds: These funds earn revenue to meet their expenditures. An example is a fund used in the Office of Enterprise Technology to provide telecommunication and computer services to state agencies.
  • Debt service fund: Money in this fund pays for the state's general obligation long-term debt.

In all, there are nearly 100 separate funds in the state treasury. Some of these funds are broken into accounts, which segregate specific pools of money within funds.

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Laws and administrative procedures govern expenditure of appropriated money.

The legislature has enacted laws that control agency expenditure of money appropriated by the legislature. MMB has adopted administrative procedures to implement these laws. The most significant controls are the "allotment" and "encumbrance" systems.

  • MMB allots money to agencies. An allotment is a part of an appropriation, broken down into a smaller component that helps agencies keep track of different categories of expenditures.
  • Before an agency can spend money that is allotted to it, the agency must encumber the allotment. An encumbrance reserves a portion of an allotment for an expenditure.

The general purpose of the allotment and encumbrance system is to help keep track of agency spending, and to assure that agencies do not spend more than their appropriations. Minn. Stat., sec. 16A.15.

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The legislature has given state agencies certain authority to transfer appropriations.

As a general rule, a state agency may spend money only for the purpose for which the money was appropriated. However, the legislature has given agencies limited power to transfer appropriations. Agencies may transfer operational money (i.e., not grant funds) between programs within the same fund, if the transfer is consistent with legislative intent. If an appropriation specifies money to be spent for a particular item within an agency activity, that amount may not be transferred. Minn. Stat., sec. 16A.285.

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July 2016

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