Issue

Should the state expand the use of dedicated funds?

Policy

The Minnesota Chamber generally opposes the use of dedicated funds because, in most cases, they don’t receive the same scrutiny as the general fund. The Legislature will do a better job managing its limited resources if all programs have to compete for financing in the general fund.

If the Legislature debates creating a new dedicated fund, the Chamber recommends considering the following criteria regarding the fund’s revenue source, expenditures, oversight and excess balance. If a dedicated fund meets the criteria outlined below, the Chamber still may oppose its creation based on its purpose or its source of revenue. The Chamber will oppose creation of constitutionally dedicated funds that do not strictly meet the guidelines described below.

General application

• Dedicated funds should be established only if the state’s accounting system could not serve the same purpose.

Revenue source

• A clear relationship should exist between the source of revenue and the intended expenditure. The dedicated fund shall preferably be financed with user fees.

• The source of revenue should make the fund self-sustaining with no additional revenue source required in future years.

• The revenue source should not be indexed. Fees or taxes should be set to generate a fixed dollar amount, with legislative action necessary to change that amount.

Expenditures and Excess Balances

• Dedicated funds should be used for long-term projects such as public infrastructure.

• Dedicated funds should expend dollars through annual or biennial action of the Legislature.

• Dedicated funds used to finance operating budgets should not carry forward a positive balance that exceeds 10 percent of the fund’s annual expenditures. If a fund’s balance exceeds 10 percent of annual expenditures on June 30 of any year, the fund’s fee or tax rate should be reduced to eliminate the excess balance.

Oversight

• Dedicated funds used to finance operating budgets should be sunset every five years.

• The legislative auditor should review all dedicated funds every five years and recommend to the Legislature whether a dedicated fund is still necessary. The Legislature should use the report to determine whether to continue a fund’s dedicated status.

Business Impact

Dedicated funds, especially ones financed by business taxes or fees, have had mixed results for businesses. Some, like the Workforce Development Fund and the Solid Waste Fund, have had balances transferred to the general fund to be used for other programs or budget balancing rather than reducing the tax or fee to eliminate the overcollection. Curtailing the use of dedicated funds also will force more programs to compete for general fund financing. Over time, this should improve resource allocation. The 2004 legislation that gives the commissioner of finance the authority to eliminate some dedicated funds and to recommend to the Legislature that others be eliminated has the potential to address many of our concerns.