Minnesota budget 101: Where the money comes from, where it goes and how the state budget works

Advocacy

Dan Mulvaney, CPA (inactive), MBA, Sunbelt Business Advisors | December 2017/January 2018 Footnote

As commissioner of Minnesota Management and Budget (MMB), I serve Gov. Mark Dayton's administration in numerous roles. As chief financial officer, chief accounting officer and state controller, I am tasked with the development and advocacy of Gov. Dayton's budget proposals as well as the implementation, accounting and payroll of an $82 billion biennial budget for the state enterprise.

We know CPAs deal most directly with changes your clients experience in regard to tax law. But, we also know that business people around the state appreciate a stable and predictable state government in terms of anticipated revenues and services provided to our communities. One of my main responsibilities is to advise the governor and Legislature to maintain a consistent and reliable level of government so that wild changes in public policy are not necessary.

Here's a look at how Minnesota's budgeting process works, and where our revenues and expenditures stand today.

The budget process

Budgeting at the state level is a cyclical process. Minnesota adopts a biennial -- or two-year -- budget during odd-numbered years, and often makes adjustments during even-numbered years. In the summer and fall prior to presenting a budget to the Legislature, the governor considers budget proposals from state agencies and the community. In November, MMB determines the status of our budget -- quite simply, determining if we're in the red or the black. Then, in January, the governor uses the information from MMB and various budget requests to present his recommendations for a balanced budget to the Legislature.

During the legislative session, the governor's budget proposal, as well as alternative proposals from legislators, make their way through the committee process. The appropriation bills are debated, amended, negotiated, and passed by each body and sent to the governor. The governor can accept budget bills by signing them, rejecting them through his power of the veto, or veto portions of an appropriations bill.

Strong fiscal management

The Minnesota constitution requires that we have a balanced budget. A hallmark of Gov. Dayton's administration has been strong fiscal management. Seven years ago, we faced large deficits and owed billions of dollars to our schools. Today, the state has achieved:

  • Structurally balanced budgets over four-year time frames, not just two years.
  • Eight forecasts in a row projecting a budget surplus.
  • A budget reserve that is the largest in state history and recently formed the basis for Moody's report on Minnesota's preparedness to weather a recession.
  • The highest credit rating (AAA) by Fitch in 2016 and reaffirmed in 2017.

Economic impacts to the budget

Once the budget is adopted, economic conditions may change and the budget may need revisiting. MMB monitors changing economic conditions that may affect the state budget, including national trends in employment, inflation, income, production, etc., and state spending based on enrollment and cost trends.

In November and February of each year, MMB prepares a budget and economic forecast that adjusts projections for state revenues. These revenue and spending forecasts determine how much money is available for the current budget and what our budget status might look like in the future.

Budget and revenue projections have for the most part been stable recently. A new budget and economic impact will be released in early December.

Where does the money come from and go?

About 30 percent of the state budget comes from the federal government to help pay for our schools, roads and public health care programs. About 62 percent of the state budget comes from taxes, primarily income and sales taxes. The remaining 8 percent of the budget comes from other sources.

More than 80 percent of the state budget goes directly to schools, health care providers or as aid to local communities. The largest area of spending (43 percent) is health and human services, which includes caring for our elderly and disabled, child protection services and mental health services. The next largest area of spending (29 percent) is education (early education, K-12 schools, and colleges and universities). We spend about 10 percent of our budget on transportation (roads, bridges and buses). The rest of state government, including our courts and the Legislature, is funded with the remaining 18 percent of the budget.

When considering state spending, it's important to take into account Minnesota's population is growing. Between 2011 and 2016, it grew by 171,000 people, or 3.2 percent. With that growth comes increasing demand for services in health care and education. Despite the increased need for services, the price of government in Minnesota has fallen nearly 12 percent in the past 20 years. That means today, for each dollar Minnesotans have in income, about 15 cents goes to pay for state and local government services, compared to 18 cents in 1994. We expect that amount to continue to decline in the next four years.

Being experienced financial professionals with a specific expertise, CPAs can continue to play an important role in the formation of public policy. In addition to giving expert advice on tax policy, we encourage CPAs to advocate for a long-term, strategic and balanced budget where the state provides predictable levels of services. Stability and reliability are key to economic success at all levels of the economy.

You can learn more about the budget process or find documents at mn.gov/mmb.

 

Have questions?

Do you have questions or want to get involved in the legislative process? Contact Geno Fragnito at 952-885-5550 or gfragnito@mncpa.org.