Water allocation systems are challenged by hydrologic droughts, which reduce available water supplies and can adversely affect human and environmental systems. To address this problem, drought management mechanisms have been instituted in jurisdictions around the world. Historically, these mechanisms have involved a crisis management or reactive approach. An important trend during the past decade in places such as the United States has been a shift to a more proactive approach, emphasizing drought preparedness and local involvement. Unfortunately, local capacity for drought planning is highly variable, with some local governments and organizations proving to be more capable than others of taking on new responsibilities. This paper reports on a study of drought planning and water allocation in the State of Minnesota. Factors facilitating and constraining local capacity for drought planning were identified using in-depth key informant interviews with state officials and members of two small Minnesota cities, combined with an analysis of pertinent documentation. A key factor contributing to the effectiveness of Minnesota's system is a water allocation system with explicit priorities during shortages, and provisions for restrictions. At the same time, the requirement that water suppliers create Public Water Supply Emergency Conservation Plans (PWSECP) clarifies the roles and responsibilities of key local actors. Unfortunately, the research revealed that mandated PWSECP are not always implemented, and that awareness of drought and drought planning measures in general may be poor at the local level. From the perspective of the two cities evaluated, factors that contributed to local capacity included sound financial and human resources, and (in some cases) effective vertical and horizontal linkages. This analysis of experiences in Minnesota highlights problems that can occur when senior governments establish policy frameworks that increase responsibilities at the local level without also addressing local capacity.