1. A Brief History (3-Decades) of General Fund Budget Reserves Kristin Dybdal Team Leader, Budget Division Department of Finance & Employee Relations July 22, 2008

2. Statutory Basics MN Statutes 16A.152 governs the budget reserve and cash flow accounts Reserves are designated on budgetary statements and are appropriated by the Legislature Reserve levels are set and capped by statute When fully funded, the combined budget reserve and cash flow accounts total a little more than $1B on a $35B budget

3. Related Issues If a deficit is projected, once the budget reserve is depleted, the commissioner of finance may, with the Governor’s approval, unallot to balance the budget Replenishing reserves by statutory forecast triggers has been a tool since the 1980’s; forecast balances automatically restore reserves up to the “ceiling” In addition to reserves, GAAP balance is another measure for assessing state’s financial health – the GAAP balance accrues the impact of accounting shifts

4. 1980’s The budget reserve account was created in 1981, but not funded until 1983 Limit was set at 2.5% of biennial appropriations Funding was tied to ending balance at close of a biennium In event of a deficit, statute permitted use of reserve, unallotment, or any combination Reserve and shift-buybacks tied to forecast triggers in 1989, reserve ceiling set at 5% of biennial spending Built budget reserve balance to $550M by 1989

5. 1990’s Reserves partially reduced in ‘90-91; amount and ceiling reduced in ’92-93 to balance the budget Expanded to “budget & cash flow account” in 1993, cash flow account separated in 1995 Statutes expanded to specify how to handle surpluses and deficits Principles enacted governing use and restoration of reserve based on economic cycle, not budget cycle During 1996 – 1998, handful of funding from reserve to finance emergency spending (energy assistance, floods, crop insurance, 1837 treaty)

6. 2000’s Budget reserve increased to $653M in 2001 Dedicated, temporary “special” reserves also created (School Aid Increase, LGA Reform, Tax Relief accounts) Exhausted budget and cash flow reserves in 2002-03 sessions, along with using school aid shifts $1 billion tobacco endowment fund provided one-time cash inflow for cash flow needs 2003 session restored reserve to $300M, then $521M. Forecast balances restored reserve to $653M by end of FY 2005, and reversed $1 billion in school aid shifts.

7. Current Situation 2008 session used $500M of budget reserve $153M is left in the budget reserve; $350M is in the cash flow account At this level, the combined reserves are 1.4 percent of the budget for the biennium, and 2.9 percent of FY 2009 spending Lower reserves, means lower cash balances. Unlike 2002, no endowments exist to offset cash shortfalls. Restoring reserves in the FY 2010-11 budget adds to challenge for the upcoming biennium.

8. Reserves in Context 1989200220072009 Budget Reserve and Cash Flow Reserve $550 M$0 M$1,053 M$503 M Biennial Spending$11.5 B$26.6 B$31.5 B$34.6 B Percentage of Reserves to Spending 4.8%0%3.3%1.4%