MnDOT Policy FM006
View/print signed policy (PDF)
The Minnesota Department of Transportation (MnDOT) will propose actions based on forecast projections, 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.
The trunk highway fund should maintain an undesignated, unreserved fund balance of not less than the sum:
- 6 percent of annual projected state revenues to the fund, plus
- 2 percent of authorized but unissued debt, plus
- Debt service projection that exceeds 20 percent of annual state revenues as estimated for the future debt service-funding shortfall.
The amount of estimated revenue is a major factor in determining the estimated fund balance, based on a mixture of estimated and actual revenue for a given accounting period. To provide an adequate level of reserve to protect against a major shortfall in revenue, circumstances considered:
- Delayed congressional action or inaction regarding federal revenues creates uncertainly.
- A major disruption to fuel supplies could result in reduced motor fuel tax revenue, which might result in reduced federal highway funding made available to Minnesota. Reduced federal motor receipts for fuel tax revenue that fund the federal aid highway program to the Federal Highway Trust Fund may be affected.
- Excessive use of Federal Advance Construction Agreements could affect future federal revenue in that large amounts of funding needed for “conversions”, may reduce the amount of funding available for current year federal aid agreements.
- Unexpected contingencies such as providing flood relief efforts necessitate a sufficient fund balance to enable MnDOT to take action as required.
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.
In addition, legislation passed in 2010 added statutory language requiring that the department develop a debt management policy. The MnDOT Debt Management Policy addresses of trunk highway fund balance impacts, as required by Minnesota Statute 167.60, "Debt-Financing Management Policy”.
- Deputy Commissioner/Chief Engineer
- Deputy Commissioner/COO/CFO
- Financial Controller & Director, Financial Management
- Division Directors
- Director, Government Affairs
- Director, Transportation System Management
- District Engineers, Office Directors
- 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, utilizing a fund balance calculation. 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. Ongoing monitoring checks for major changes in the fund balance as well as observing trends related to external factors that might affect future revenues (e.g., the price of petroleum in world markets).
Revenue based on the amounts attributable to a fiscal year. This is usually very similar to actual receipts, with the exception of federal revenue, 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. 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 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. Reduction of Federal aid funding for the current year occurs when conversion happens in future years after actual expenditures.
Federal Aid Agreements
Federal Aid Agreements between MnDOT and the Federal Highway Administration, approved on a project-by-project basis and project costs reimbursed on a scheduled basis. The total dollar amount of an agreement is the maximum amount of reimbursement. Reimbursement is typically for 80% of eligible costs. Since the entire amount of a project encumbrance is an expenditure on a budgetary basis, so too is the entire amount of the federal aid agreement for the same project.
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 the appropriation, 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 for expenditures on highway construction projects; cash reimbursement occurs for actual expenditures on a concurrent basis, but the total amount of the agreement is revenue and included in the fund balance calculation.
Trunk Highway Bonds
Trunk Highway bonds are bonds authorized by the legislature under the Minnesota Constitution, Article XIV, Sec. 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 and used to construct, maintain, and operate Minnesota’s trunk highway infrastructure. Annual transfers to the Minnesota Management & Budget (MMB) debt service account occur.
Trunk Highway Fund Debt Service
Required by the constitution, debt service payment of principal and interest on trunk highway bonds comes from the Trunk Highway Fund. In practice, a transfer occurs in November of each year from the Trunk Highway Fund to the trunk highway bond account (in the state bond fund), for actual payments of debt service. Required repayments of loans originate from the transportation revolving loan fund for trunk highway purposes. Repayments of money advanced by local governments by agreement for the purposes of trunk highway construction projects. Debt service on trunk highway bonds will usually start at lower levels compared with total cost of projects, because sales based on estimated cash needs for each project, not the total project cost. The amount of debt service declines because principal on bonds by only 5% each year when the total amount is sold.
- 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 (MMB).
- 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.
Financial Controller & Director, Financial Management
- Ensure the accurate calculation on the level of fund balance for the Trunk Highway Fund. The preparation of formal fund statements occurs for this fund in November and February of each fiscal year.
- Ensure that all procedures and reporting comply with this policy including regular reporting of balances.
What factors might affect the size of the fund balance during the course of a year or biennium, and how will it affect an approved budget based on an adequate fund balance?
The primary factor is the possibility of actual revenues being different from the estimated amounts. If revenue is less than forecasted and estimated spending 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. In addition, projected debt service costs for the fund may 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 occur 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?
The sale of authorized bonds could result in an increase in the debt service required in future fiscal years, which would correspondingly reduce the fund balance.
How could an 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 authorization for trunk highway bonds, even if MnDOT did not propose or support such action. Due to external conditions (e.g., major disruption of petroleum supplies) in future years there could be reductions to state revenues to the trunk highway fund. The required debt service on already issued bonds would remain the same and could increase the debt service percentage to greater than 20%.
Policy FM006 – Fund Balance, established 3-21-2013
Policy 2.3 – Fund Balance, established 7-1-2010
Responsible Senior Officer
Financial Controller & Director
Office of Financial Management