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Fund Balance

MnDOT Policy FM006
View/print signed policy (PDF)

Policy statement

The trunk highway fund should maintain an undesignated, unreserved fund balance of not less than the sum of:

  • 6 percent of annual projected state revenues to the fund, plus
  • 2 percent of authorized but unissued debt, plus
  • An amount estimated for the future debt service funding shortfalls for years where debt service is projected to exceed 20 percent of annual state revenues.

If any forecast projects that the fund balance target will not be met, MnDOT will propose actions, including biennial budget submissions that achieve the target by the end of the next biennium, unless the commissioner finds that an emergency warrants a longer period of adjustment.

Reason for policy

As described in the definition of fund balance, the amount of estimated revenue is a major factor in determining the estimated fund balance. The revenue used to calculate a fund balance is always based on a mixture of estimated and actual revenue for a given accounting period. Although unlikely, events could occur to substantially impact the receipt of actual revenue, such as major disruption of petroleum supplies and substantial economic recession. Therefore, policy is needed to provide an adequate level of reserve to protect against a major shortfall in revenue.

Federal revenues have added uncertainty due to the possibility of delayed congressional action or inaction. In addition, the federal aid highway program is largely funded by receipts to the Federal Highway Trust Fund, which receives most of its revenue from federal motor fuel taxes. A major disruption to fuel supplies could result in reduced motor fuel tax revenue, which might result in reduced federal highway funding being made available to Minnesota.

Excessive use of Federal Advance Construction Agreements could affect future federal revenue in that large amounts of funding might be needed for “conversions,” thereby reducing the amount of funding available for current year federal aid agreements.

Another reason for this policy is to provide resources that could be used to address unexpected contingencies. As an example, $14 million of appropriations from the trunk highway fund were provided by the legislature in the summer of 2012 to assist with various flood relief efforts. Having a sufficient fund balance made this action financially feasible.

Prudent business practice is to have adequate fund balance to protect against uncertainty and volatility of receipt of revenue. As an example Budget Trends Study Commission report presented to the legislature in January 2009 recommended a budget reserve consisting of 4.1% to 4.6% of two year revenues for the general fund.

Also, legislation was passed in 2010 added statutory language requiring that MnDOT develop a debt management policy that, among financial issues requires: “… management of trunk highway fund balance impacts, Minnesota Statute 167.60, "Debt-Financing Management Policy."

Who needs to know this policy

The commissioner and deputy commissioner need to be aware of this policy, because it provides a policy constraint in budget deliberations. The Chief Financial Officer, and the Director of the Office of Finance, along with his direct reports, needs to fully understand the policy and the potential actions that might result. Additionally, the Division Directors, Government Affairs Director, the Capital Programs & Performance Measures Director, District Engineers, Office Directors must also be well-informed with the policy and the subsequent budget implications.

Procedures

The Budget Director and staff prepare a formal fund statement for the trunk highway fund in November and February of every fiscal year. The fund statement covers the current fiscal year and either three or four fiscal years in the future. A fund balance is calculated as part of preparing each of these statements. This statement provides the basis for evaluating the fund balance and any budget proposals under consideration in conjunction with this policy. In addition MnDOT’s financial reporting group prepares ongoing, unofficial financial statements and, in conjunction with Minnesota Management & Budget (MMB), year-end formal financial statements. These are reviewed to see if any major changes in the fund balance have occurred. Trends related to external factors that might affect future revenues (e.g., the price of petroleum in world markets) are also regularly monitored.

Definitions

Budgetary Basis

Revenue is based on the amounts attributable to a fiscal year. This is usually very similar to actual receipts, with the exception of federal revenue, which is based on the amount of federal aid agreements, rather than actual receipts from the Federal Highway Administration. Actual federal receipts are usually only a portion of the total federal aid agreement. Expenditures are typically the total amount of actual expenditures plus encumbrances.

Federal Aid Advance Construction Agreements

Federal aid advance construction agreements are a special type of federal aid agreement. Typically rather than receiving reimbursement on a concurrent basis, reimbursement occurs in future periods of time or future years, with the agreements based on future federal aid amounts expected to be allocated to MnDOT. Actual reimbursement, often referred to as a “conversion,” is typically a lump sum amount, representing reimbursement of costs incurred in the previous period or previous years. When conversion happens in future years after actual expenditures, the amount of the current year’s federal aid funding is reduced.

Federal Aid Agreements

Federal aid agreements are executed on a project-by-project basis between MnDOT and the Federal Highway Administration. They provide for reimbursement of project costs on a concurrent basis (that is, reimbursement of project costs is provided on a scheduled basis, usually weekly). The total dollar amount of an agreement is the maximum amount of reimbursement that will be provided. Reimbursement is typically for 80% of eligible costs. Since the entire amount of a project encumbrance is recognized as an expenditure on a budgetary basis, so too is the entire amount of the federal aid agreement for the same project.

Fund Balance

The amount of estimated and actual revenue either projected or actually received by the trunk highway fund for a given fiscal year, less appropriations (made by legislature or through statutory provisions), or if after the end of a fiscal year, actual revenue minus the total amount of expenditures plus remaining encumbrances. For years beyond which appropriations are made, the fund balance is the estimated future revenues minus the amounts of expenditures, reserves, and other uses of revenue in the fund, projected for the end of a fiscal year. Revenue includes transfers from the Highway User Tax Distribution Fund (legally prescribed share of motor fuel tax, motor vehicle registration tax, and motor vehicle sales tax revenues), other ongoing revenue, and federal aid agreement revenue provided by the Federal Highway Administration. These agreements are typically for expenditures on highway construction projects; cash reimbursement is made for actual expenditures on a concurrent basis, but the total amount of the agreement is recognized as revenue and included in the fund balance calculation.

Trunk Highway Bonds

Trunk Highway bonds are bonds authorized by the legislature under authority of Minnesota Constitution, Article XIV, section 11, and Minnesota Statutes 167.50, the proceeds of which must be used for trunk highway purposes.

Trunk Highway Fund

This fund is the principal operating fund for MnDOT, and to some extent for the Department of Public Safety. It is a governmental fund that accounts for public monies used to construct, maintain, and operate Minnesota’s trunk highway transportation infrastructure. Annual transfers of funds to the MMB debt service account in the state debt service fund are also made from this fund.

Trunk Highway Fund Debt Service

Debt service (payment of principal and interest) on trunk highway bonds is required by the constitution to be paid from the Trunk Highway Fund. In practice a transfer is made in November of each year from the Trunk Highway Fund to a trunk highway bond account in the state bond fund, from which actual payments of debt service are made. Also included in MnDOT’s debt service budget are required repayments of loans made from the transportation revolving loan fund for trunk highway purposes, and repayments of money advanced by local governments by agreement for trunk highway construction projects. Debt service on trunk highway bonds will usually start at lower levels compared with total cost of projects, because sales are based on estimated cash needs for each project, not the total project cost. Also, once the total amount has been sold, the amount of debt service declines fairly slowly because principal on bonds is reduced by only 5% each year.

Responsibilities

Commissioner and Deputy Commissioner

Ensure that proposed budgets and other actions that might result in appropriations from the trunk highway fund are constrained by the level of fund balance prescribed by this policy. If legislative committees propose appropriations that would result in the fund balance being lower than recommended in this policy, communicate with appropriate legislative leaders and Minnesota Management & Budget.

Chief Financial Officer

Provide information to the Commissioner and Deputy Commissioner about the level of proposed additional appropriation authority that the policy can support. Assist in communicating concerns to legislative leadership as needed.

Director, Office of Finance

Ensure that the level of fund balance for the Trunk Highway Fund is accurately calculated in conjunction with the preparation of formal fund statements for this fund in November and February of each fiscal year. Ensure that all necessary procedures and reporting needed for compliance with this policy are carried out and that regular reporting of balances occurs.

Appendices

Frequently asked questions

If an approved budget is based on an adequate fund balance, what factors might affect the size of the fund balance during the course of a year or biennium?

The primary factor is the possibility of actual revenues being different than the estimated amounts. If revenue is less than forecasted and estimated spending is not changed, the fund balance will be lower than the forecasted amount.

Why is the level of the trunk highway fund balance recommended in this policy such a large number?

There is volatility to some degree in all four of the principal revenue sources for the trunk highway fund, and a substantial fund balance provides protection against adverse results. Also, projected debt service costs for the fund are projected to be substantial for a number of years, more than 17% of revenues (not including federal aid agreements) through 2020. It is important to have a substantial fund balance so that these legally required payments can be made without adversely affecting for other MnDOT programs.

Why does the policy include a provision related to 2% of the amount of authorized, but unissued trunk highway bonds?

Authorized bonds are legally allowed to be sold, resulting in an increase in the amount of debt service required in future fiscal years, which would correspondingly reduce the fund balance.

How could estimated debt service grow to a number greater than 20% of estimated state revenues to the trunk highway fund, since MnDOT has a separate policy that limits debt service to no more than 20% of state revenues?

Legislative action could provide additional trunk highway bond authorizations, even if MnDOT did not propose or support such action. Also, it is possible that state revenues to the trunk highway fund could be substantially reduced due to external conditions (e.g., major disruption of petroleum supplies) in future years, but the required debt service on already issued bonds would remain the same. This could increase the debt service percentage to greater than 20%.

Related information

This policy is highly related to the policies about Trunk Highway Fund Debt Management and the Use of Federal Highway Advance Construction Funding. Hyperlinks to be added.

History of policy updates or amendments

Supercedes

Policy 2.3 – Fund Balance, established 7-1-10

Effective date

Effective date as signed by responsible senior officer.

Ownership

Responsible Senior Officer

Tracy Hatch
Deputy Commissioner/COO/CFO
tracy.hatch@state.mn.us
651-366-4811

Policy Owner

Duane Leurquin
Director, Financial Management
duane.leurquin@state.mn.us
651-366-3165

Policy Contact

Kristi Schroedl
Budget Director
kristi.schroedl@state.mn.us
651-366-4859