Department of Revenue says $31.7 million was over‑distributed to Legacy Fund; correction recorded

The Minnesota Department of Revenue told the Legacy Finance Committee on March 5 that it over‑distributed roughly $31.7 million to the Legacy Fund over about 15 years after Minnesota Lottery receipts were treated as subject to the Legacy sales‑tax allocation rather than routed to the general fund.

"On behalf of the Department of Revenue, I want to apologize to the Legacy Finance Committee and to the Legacy Fund," Commissioner Paul Marquardt said, acknowledging the error and telling members the mistake will complicate upcoming budget work.

Committee members were told the issue occurred because lottery receipts were filed on the sales‑tax variable‑rate line and the department historically multiplied the total reported on that line by the Legacy share (5.45 percent), rather than excluding the lottery portion before the Legacy calculation. Chief Financial Officer Maggie Rittenhouse said the department discovered the Minnesota Lottery was effectively an "in lieu of" tax and therefore should not have been included in the Legacy allocation.

Rittenhouse described the mechanics to the committee: each month the department takes the total reported on the variable‑rate line, multiplies it by the Legacy portion of the sales tax (the commissioner described that as 0.375 percentage points of the 6.875 percent sales tax, producing 5.45 percent of the variable‑line total) and transfers that share into Legacy accounts. Minnesota Lottery filing on the variable line meant a portion of those receipts — about $2.1 million per year, the department said — went to Legacy instead of the general fund. Over the period the department reviewed (back to about 2010) the cumulative total was about $31.7 million, which the department said equals about 6.4 percent of fiscal‑year 2024 Legacy receipts.

The Department of Revenue said it quantified the full amount in January and February and worked with Minnesota Management and Budget to reflect the correction in the February forecast. "We identified, we quantified this in February," Rittenhouse told members, noting staff had to reconstruct older records from before the department’s integrated tax and accounting systems.

Fiscal staff summarized how the adjustment affects the four Legacy accounts. "So it's 31.7 over the four funds. So it's like 10,470,000 to the Outdoor Heritage Fund as well as Clean Water Fund," a fiscal staff member who addressed the committee said, noting the department presented a consolidated‑fund, prior‑period adjustment to move the amounts back into the general fund. The fiscal staff member also cited the statutory 5 percent reserve requirement that constrains how much the Outdoor Heritage Fund can spread across a biennium.

Committee members asked whether employees would be disciplined and what new controls would prevent repetition. Marquardt and Rittenhouse said the department is revising internal procedures and instituting additional end‑of‑session reviews of statutes and distributions so taxing divisions and financial management staff coordinate when laws change. Rittenhouse described new annual reviews of distribution logic to catch anomalies if changes in law make prior assumptions invalid.

The department said no additional taxpayers were implicated and that the Minnesota Lottery "did nothing wrong," characterizing the problem as an internal misclassification and a lack of coordination between divisions. Marquardt said the department has corrected its distribution process going forward and that the accounting shift has already been posted as a prior‑period adjustment in the consolidated fund statement.

Committee members asked whether the shortfall would be spread over multiple years. Fiscal staff told the committee that distribution timing and statutory reserve rules limit how much the committee or Legislature could spread the correction and that some funds, notably Outdoor Heritage, may need to absorb the adjustment in the current fiscal year to meet statutory reserve obligations.

The department and fiscal staff offered to provide the committee with detailed charts showing the fiscal impact by fund and the consolidated‑fund statement entries the committee and members use in appropriation work. Commissioner Marquardt and CFO Rittenhouse left the committee meeting after their presentation; the committee followed with other scheduled agency presentations later in the session.

What happened next: the department said it has posted the accounting correction to move the $31.7 million back to the general fund and has changed internal procedures to prevent similar misallocations going forward. The committee received the presentation and asked follow‑up questions about forecast impacts and distribution timing.