Municipal Budgeting and Financial Management

Municipal Budgeting and Financial Management

Presentation to Select Committee on Appropriations

Presenter: Carl Stroud | National Treasury | 15 July 2014

The Local Government Legislative Framework

Local government has specific Constitutional service delivery responsibilities…which include

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Water (potable) Electricity reticulationSanitationRefuse removal

CemeteriesFire fightingMunicipal health servicesMunicipal planningMunicipal roads

Storm waterTraffic and parkingBuilding regulations Municipal public transport

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Legal framework

The Constitution

Municipal Structures Act

Municipal Systems Act

Municipal Finance Management Act

Municipal Fiscal Powers & Functions Act

Municipal Property Rates Act

Various sector legislation

Aim of the MFMA

• Modernise local government budgeting and financial management processes and practices

• Improve financial governance by clarifying and separating roles and responsibilities of councilors vis-à-vis those of municipal officials

• Maximise municipal capacity to deliver services by attending to issues of efficiency, effectiveness and sustainability, and dealing with corruption

• Set-up the accountability cycle by ensuring proper linkages between IDPs, budgets, SDBIPs, in-year reports, annual financial statements, annual reports, oversight reports and audit reports

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The Budgeting and Financial Management Framework

Elements of financial management

• Municipal financial management involves:

– having and implementing appropriate budget related and financial management polices

– establish prescribed structures: BTO, SCM committees, internal audit

– keeping full and proper financial records

– putting in place processes to ensure sound budgeting, cash-flow management, financial reporting and asset management

– managing resources effectively, efficiently, and economically

– disciplinary or criminal proceedings in the case of financial misconduct

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General Functions of the CD: LGBA

Champion the Local Government Budget Reform

Agenda

Support the development of credible, funded and

sustainable LG budgets

Monitor the implementation of LG budgets and conditional grants – publish information

Ensure compliance and oversight with conditions of

DoRA (annual)

Support the Implementation of the MFMA and MBRR

• Initiate, facilitate and oversee all municipal budget reforms

• Support and advise municipalities on budget issues• Prepare annual budget circulars to guide budget preparation• Assess budgets prior to implementation (17 non-delegated)

• Monitor, oversee and report on municipal budget implementation• Collect, analyse and consolidate municipal information• Publish budget implementation information on a quarterly basis in

terms of S71 of the MFMA

• Monitor implementation of the intergovernmental grant system• Ensure the recovery of unspent and uncommitted conditional

grants

• Monitor compliance with budget related prescriptions in the MFMA • Assist in identifying municipalities in financial distress

In executing IGR’s mandate we have developed and implemented…• A comprehensive budgeting system for local government through the promulgation

of the Municipal Budget and Reporting Regulations

• A comprehensive in-year reporting framework for local government through the Section 71 in-year reporting framework and design of a LG Database hosted in the NT

• A comprehensive grant monitoring framework to ensure conditional grants are spent on achieving the overall policy objectives

• We consistently produce publications of financial performance for all 278 munis (budget information, quarterly performance, state of local government finances report etc.)

• Issued various regulations related to broader financial management

• Consistently issue guidelines to municipalities (MFMA Circulars)

• We also working on a:

• Revenue management system for local government

• Unified system solution (application) for local government

• Costing and tariff setting methodology and associated tools

• Incorporating of non-financial reporting into the in-year reporting framework

• SCOA for local government

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Key focus areas of the municipal budget reform process (high level initiatives only)

In-year monitoring and reporting

Commenced work on MBRR and standardised budget formats

Strengthen IYM and reporting and expand scope of publications

Piloting of MBRR with selected municipalities

Commenced mid-year budget assessment process


Implementation of the MBRR (July 2009)

2006/07 2007/08 2008/09 2009/10

Strengthen IYM and reporting incl. conditional grant performance

Strengthened mid-year assessments to include site visits (day 2)


Enforce implementation of MBRR

Mid-year assessments (3rd round) incl. site visits

Commenced municipal budget benchmark engagements

2010/11

Reforms

Transparency and Accountability


Enforce implementation of MBRR

Mid-year assessments (3rd round) incl. site visits

2nd municipal budget benchmark engagement

2011/12

Work-in-progress

• Standard Chart of Accounts (Gazette 22 April 2014 for full implementation 1 July 2017)

• Revenue Management and Enhancement Programme

• Tariff Setting and Costing

• Financial Systems

• Budget reform (further)

Routine Publications include…

• Consolidated MTREF budget information for all municipalities– Once a year and it takes 5 months to complete

• Quarterly Section 71 reports– 2 month process

• State of Municipal Finances report – annually– Used for Parliamentary oversight

• Over and under expenditure report to Parliament– Annually

• Local Government Budgets and Expenditure Review– Biennial and it takes 18 months to complete

• Report on the Tabling of budgets to Parliament– Compliance with deadlines for the tabling and approving of municipal budgets

– annually

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The LG accountability cycle

IDP

Budget

SDBIP

In-year Reporting

Annual Financial

Statements

Annual Report

5 year Strategy

Three year Budget

Annual Plan to Implement

Standard Chart of Accounts (SCOA)

Monitoring

Oversight Reports

Focus of MBRR

Focus of MBRRNext P

roje

ct

IDP

Budget

SDBIP

In-year Reporting

Annual Financial

Statements

Annual Report

5 year Strategy

Three year Budget

Annual Plan to Implement

Standard Chart of Accounts (SCOA)

Monitoring

Oversight Reports

Focus of MBRR

Focus of MBRRNext P

roje

ct

Greatest Impact

How has our work impacted on the LG sphere

• Quality local government information input into national policy debates• Information comparable across all municipalities to aid resource

allocation decisions

• Ensuring credible budgeting process is a key ingredient to improving

financial management.– Facilitate the alignment of the budget to national priorities with the aim of improving service

delivery outcomes

– Over time, one should be able to draw a direct correlation between the work LGBA is doing

(credible budget process) and the audit outcomes

• Prevention of municipal financial difficulties before they occur (e.g. budget analysis as an early warning tool) together with S71 reports

– E.g. Msunduzi and NMBM

– Basis of recovery planning if there are difficulties

• All the efforts is to improve the link between policy formulation, planning, budgeting, implementation, reporting and monitoring

Local Government Budget Process

What is involved in the budget process?

• Align budget with:―Constitutional mandate – delivery of basic services―Municipal priorities expressed in the IDP―National and provincial priorities―Sector department plans

• Community consultation on IDP and draft budget

• Consultation with bulk electricity and water suppliers

• Mindful of risks which may prevent the municipality from achieving its priorities outlined in the IDP

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Budget Process timeline

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Schedule of Key Dates in the municipal financial year (1)

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Municipal Financial Year : 01 July to 30 June

Budget Process (incl. planning, preparation, consultation and adoption of annual budget)

Activity Deadline Reference*

Table Budget Process timetable in Council 31 August (10 months prior to start of fin.yr)

S 21(b)

Table draft budget in Council 31 March (90 days prior to start of fin. yr) S 16(2), 17 & 87 (3)

Council to consider annual budget for approval 31 May (30 days prior to start of fin.yr) S 24(1)

Approve annual budget by Council resolution 30 June 16(1), 24(2), & 53 (1)

In-year Monitoring and Reporting Processes

Submit monthly S71 report to Mayor, PT and NT Within 10 working days of the start of the month

S71 (1), (2), (3), (4)

Mayor to table Quarterly S71 report in Council Quarterly

NT to publish S71 information on a quarterly basis Quarterly (within 45 days of end of quarter)

Mid-year Budget and Performance Assessment 25 January S72 (1)

Table Adjustments Budget in Council 28 February S72(3)

* MFMA reference

Schedule of Key Dates in the municipal financial year (2)

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Annual Financial Statements and Annual Reports

Activity Deadline Reference*

Submit AFS and Annual PR to Auditor General (no entities)

31 August S126 (1) (a)

Submit consolidated AFS to AG (entities) 30 September S126 (1) (b)

Audited Financial Statements received from AG 30 November S126 (3)

Table Annual Report in Council 31 January S127 (2)

* MFMA reference

Municipal own revenuesTransfers and Grants

Direct transfers

The WHOLE local government fiscal framework is designed to finance municipalities

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Municipal operating

budget

Municipal capital budget

Equitable share & RSC levy

replacement grant

National / provincial operating grants

Operating revenues

Rates and taxes

Sources of capital funding

Service charges

Municipal borrowing

National / provincial infrastructure grants

Surplus / cash-backed reserves

Indirect transfers

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Revenue lost due to lack of fiscal effort

“Leakages”

Policy constraints on fiscal potential

Effective and efficient

expenditure

Managing delivery

Non-priority wants

Budgeted expenditure

choices

Institutional set up

Basic services

Other important services

Mandates

Actual service delivery

Non-priority wants


Basic services

Other services

Mandates

Theft and graft

Inefficient procurement

Under-spending

Bad managementRevenue forgone

Poor debt management

Low tariffs

Poor billing

Priority of LG in vertical divisions

Allowed taxes

Assignment of functions

Design of ES Formula

Rates and taxes

Service charge

revenue

Conditional transfers

Revenue choices

and collection

Borrowing

Equitable share

Rates and taxes

Service charges

Conditional transfers

LG Fiscal Framework

Borrowing

Equitable share

Non-priority wants

Demand for basic services

Demand for other

important services

National and provincial mandates

Community needs and

wants


At the heart of local government is managing

finances to deliver services

Local Government:Monitoring, Reporting and

Accountability

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Broad Observations

• Aim:

To provide government with timely information on the state of municipalities finances that highlights possible areas of risk so that such risks can be investigated and mitigated before they give rise to serious problems

Features of an early warning system

Reporting cycle summary

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S 71 Monthly Reports

Audit Report from AG

S72 Mid Year Assessment &

AR tabled

AFS& PR to AG

Consolidated AFS and PR

to AG

Jan Feb Mar Apr May JunJul Aug Sep Oct Nov Dec

Mayoral Quarterly Report




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Broad Observations

• Role of monthly reports is to report on the status of budget implementation at the end of each month

• It is published no later than 10 working days after month end

• Format prescribed in the Municipal Budget and Reporting Regulations

• May be tabled in council• Serves as an early warning system to management to take

decisions so municipal objectives can be archived• Sent to provincial treasury and National Treasury

Monthly budget statements (section 71)

THANK YOU

Annexure A:Section 71 Publication for 3rd

Quarter 2013/14

Coverage 3rd Quarter 2013/14 Results

Number % Number % Number %

Adverse opinion 19 7% 11 4% 8 3%

Disclaimer of opinion 104 37% 110 39% 81 29%

Qualified 73 26% 63 22% 47 17%

Unqualified - Emphasis of Matter items 54 19% 91 32% 107 38%

Unqualified - No findings 1 0% 4 1% 4 1%

Audits Outstanding 32 11% 4 1% 36 13%

Total 283 100% 283 100% 283 100%

2006/07 2007/08

Audit Opinion

2008/09

Section 71 coverageSection 71 coverage• 278 municipalities in the 3rd quarter

Section 71 sign-off documents receivedSection 71 sign-off documents received• Non-delegated municipalities 13 signed

• Delegated municipalities

• Eastern Cape 25 of 42

• Free State 15 of 23

• Gauteng 4 of 9

• KwaZulu-Natal 52 of 58

• Limpopo 13 of 29

• Mpumalanga 11 of 20

• Northern Cape 24 of 31

• North West 17 of 21

• Western Cape 28 of 28

Total 189 of 261 (72%)

Conditional Grant sign-off documents receivedConditional Grant sign-off documents received• 195 submitted signed verification

• 278 submitted electronic verification

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Broad Observations

• Overview:– Presentation presents local government spending trends for the three

quarters of the municipal financial year 2013/14 as at 30 June 2014

Summary:– In respect of revenue, aggregate billing is 70.6% or R219.16 billion of the

total adjusted revenue budget of R310.4 billion – At 31 March 2014, municipalities had spent 63% or R197.8 billion of the

total adjusted budget of R314.2 billion

• Expenditure as at 31 March 2014:• Category A: 65.4 % of total adjusted budget • Category B: 60.5 % of total adjusted budget • Category C: 56.0 % of total adjusted budget

• Composition of Expenditure:• Operating Expenditure: 67.6%• Capital Expenditure: 43.8%

General observations

Expenditure as per 3rd Quarter results(31 March 2014)

Operational Operational BudgetBudget

Capital Capital BudgetBudget

Conditional Conditional GrantsGrants

Total Adjusted Budget R252.9 billion R61.3 billion R30.6 billion

Total expenditure: 31 March 2014 R170.9 billion R26.9 billion R13.3 billion

Percentage 67.6 % 43.8 % 53.3%

Expenditure per province

Eastern Cape

Free State

Gauteng

KwaZulu-Natal

Limpopo

Mpumalanga

North West

Northern Cape

Western Cape

72.1%

59.3%

69.0%

67.8%

69.7%

56.1%

61.9%

70.6%

68.2%

48.3%

43.2%

42.6%

51.2%

31.0%

36.9%

47.1%

45.3%

42.8%

61.1%

62.4%

46.7%

60.1%

46.1%

47.5%

56.9%

61.8%

41.4%

1. Analysis of Debtors and Creditors3rd Quarter 2013/14 Results

Quarter 4Quarter 4

2012/132012/13

Quarter 1Quarter 1

2013/142013/14

Quarter 2Quarter 2

2013/142013/14

Quarter 3Quarter 3

2013/142013/14

Quarter 3Quarter 3

2012/132012/13

Debtors age analysis

National

Metros

Secondary cities

R86.8

R48.6

R16.3

R90.5

R52.5

R16.4

R93.3

R51.9

R16.5

R 93.4

R 53.2

R 16.3

R87.2

R50.0

R14.8

Creditor age analysis

National

Metros

Secondary cities

R18.0

R10.9

R2.3

R16.4

R8.7

R3.1

R17.8

R9.2

R3.0

R 18.3

R 8.8

R 3.5

R14.7

R8.0

R2.6

Percentage creditors over 90 days

Eastern Cape

Free State

Gauteng

KwaZulu-Natal

Limpopo

Mpumalanga

North West

Northern Cape

Western Cape

19.6%

66.1%

1.0%

22.8%

53.6%

58.9%

44.9%

31.0%

0.5%

5%

60.8%

3.5%

25.6%

51.7%

49.3%

39.3%

56.7%

3.6%

14.3%

67.3%

2.9%

32.1%

44.3%

64.0%

44.1%

70.3%

4.1%

19.7%

76.2%

1.9%

31.7%

64.9%

63.9%

46.7%

66.9%

3.7%

63.0%

72.6%

71.4%

75.5%

77.3%

76.2%

83.6%

75.8%

69.3%

Borrowing and Investment Instruments

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Borrowings:

Borrowing instruments as at 31 March 2014 totalled as follows:

• Long term loans R34.1 billion

• Short term marketable bonds R9.9 billion

• Long term marketable bonds R6.4 billion

• Other short and long term loans R420 million

201 municipalities reported on 603 borrowing instruments of which 106 reported nil returns

Investments:

The total end balance for investments made by municipalities as at 31 March 2014 amount to

• Bank deposits R19.3 billion

• Guaranteed endowment policies R4.1 billion

• Negotiable certificates for deposits R2.5 billion

• Listed corporate bonds and smaller investments R 601 million

90 municipalities reported on 1679 investments

General observations: conditional grants

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• The Division of Revenue Act, 2013 (Act No.2 of 2013) allocated R80.4 billion in transfers to local government:

• Direct conditional grants R24.9 billion

• Equitable Share R40.6 billion

• USDG R9.1 billion

• Indirect conditional grants R5.5 billion

• The national adjustment gazette provided for an additional R39.6 million in transfers to local government. Included in the R39.6 million is R118 million allocated for the new grant, Municipal Disaster Recovery Grant.

• Administering departments transferred an amount of R24.8 billion by the end of the third quarter which constitute 99.4 per cent of the total direct conditional grants of R24.9 billion

• According to national departments municipalities had spent 49.3 per cent or R12.3 billion of the R33.3 billion (direct and indirect transfers)

• Aggregated expenditure reported by municipalities as at 31 March 2014 is 53.3 per cent or R13.3 billion of the R33.3 billion

General observations: Conditional Grants

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• In terms of the Division of Revenue Act No.2 of 2013 new grants were introduced in 2013/14:

• Public Transport Network Operations Grant• Integrated City Development Grant• Municipal Water Infrastructure Grant

• These grants are in support of Integrated Rapid Public Transport Network, Cities Support Programmes and to prioritise water supply to rural areas without services

• Integrated City Development Grant is the lowest performing grant in the third quarter and there are challenges like administration leading this low performance

Broad observations: Conditional Grants

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• The Expanded Public Works Programme Integrated Grant (EPWP) is the highest performing programme with expenditure of 83.2 % as reported by municipalities

• The following is the performance against the various grants:• MIG 59.1%• PTIG 39.1%• NDPG 44.7%• MSIG 64.2%• FMG 65.6%• RRAMS 57.7%• INEP 51.0%• EEDSM 28.9%• MDRG 49.2%• MWIG 30.1%• WSOS 54.1%• ISDG 64.1%• PTNOG 46.1%• ICDG 2.2%

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3rd Quarter performance of municipal conditional grants

R thousands

Approved payment schedule

Transferred to municipalities

for direct grants

Actual expenditure

National Department

Actual expenditure

by municipalities

Exp as % of Allocation National

Department

Exp as % of Allocation by municipalities

Direct transfers 25 023 418 24 816 027 12 298 598 13 305 057 49.3% 53.3%Infrastructure 22 186 889 22 110 925 10 967 799 11 658 168 49.4% 52.6%

Municipal Infrastructure Grant 14 224 447 14 172 051 8 186 898 8 411 464 57.6% 59.1%Integrated National Electrif ication Programme 1 634 772 1 634 772 582 577 833 409 35.6% 51.0%Public Transport Infrastructure and Systems Grant 4 668 676 4 668 676 1 766 244 1 827 299 37.8% 39.1%Neighbourhood Development Partnership Grant 598 041 585 935 285 975 264 096 48.4% 44.7%Rural Roads Assets Management Systems Grant 52 205 52 205 24 907 30 100 47.7% 57.7%Energy Eff iciency and Demand Side Management Grant 180 722 180 720 17 742 52 296 9.8% 28.9%Municipal Disaster Recovery Grant 118 340 118 340 - 58 194 - 49.2%Municipal Drought Relief - - - - - - Rural Households Infrastructure Grant 106 721 106 721 - - - - Municipal Water Infrastructure Grant 602 965 591 505 103 456 181 310 17.2% 30.1%

Capacity and others 2 836 529 2 705 102 1 330 799 1 646 889 47.9% 59.3%Municipal Systems Improvement Grant 240 307 240 307 57 514 154 352 23.9% 64.2%Local Government Financial Management Grant 424 798 424 798 289 135 278 634 68.1% 65.6%Water Services Operating Subsidy Grant 420 945 420 945 143 377 227 548 34.1% 54.1%Expanded Pubic Works Programme Integrated Grant

610 674 599 247 361 059 507 942 59.1% 83.2%Infrastructure Skills Development Grant 98 500 98 500 71 845 63 163 72.9% 64.1%Integrated City Development Grant 40 000 40 000 - 869 - 2.2%2014 African Nations Championship Host City Operating Grant 120 000 - - 7 932 - 12.6%Public Transport Netw ork Operations Grant 881 305 881 305 407 869 406 449 46.3% 46.1%

Indirect transfers 5 596 317 - - - - - National Electrif ication Programme 2 141 026 - - - - -

Neighbourhood Development Partnership Grant 55 000 - - - - - Water Services Operating Subsidy Grant 138 894 - - - - -

Regional Bulk Infrastructure Grant 3 261 397 - - - - - Backlogs in w ater and sanitation at clinics and schools - - Backlogs in the electrif ication of clinics and schools - -

Electricity demand-side management - -

- -

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Metros: Conditional Grants Performance

• The 2013 Division of Revenue allocated R5.8 billion conditional grant funding towards metropolitan municipalities for the 2013/14 financial year

• An amount of R2.4 billion was transferred to metropolitan municipalities at the end of the 2nd quarter which makes up 42.1 per cent of the total CG to the metropolitan municipalities

• Actual expenditure as reported by national department amounted to R1.5 billion while metropolitan municipalities reported expenditure of R1.6 billion as at 31 December 2013

• The above performance excludes the USDG to metros.

Metros: Conditional Grants Performance

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Key NT publications

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Publication Legislative Deadline for information

Expected Publication

Date

Purpose

MTREF Budgets: Municipal 30 June November Overview of municipal budgets for MTREF period – aggregate and individual

Information on Personnel 30 June November /December

Information on municipal personnel numbers and expenditure

Tabling and adoption dates for municipal Budgets

31 March and 30 June December / January

Provides information on whether budgets were tabled and adopted timeously

S71 quarterly information 10 working days after end of each month

Quarterly Provides information on in-year performance against municipal budgets

State of Municipal finances report October Provides information on state of municipal finances and lists municipalities in financial distress

Local Government Budget and Expenditure Review

Biennial Provides information on trends in municipal finances over a 7 year period including topical issues affecting local government.

What to look for in quarterly Section 71 publications?

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• Who is not reporting? Name and shame!• Cash position of municipalities

o Whose end-of-quarter bank balances indicate risks?o What is the trend since the last quarter?

• Revenue trendso Can’t see much – because reporting on billingso Needs to be seen in relation to growth in debtors

• Operating expenditure trendso Are municipalities ‘overspending’ against quarterly benchmarks?

• Capital expenditure trendso Are municipalities ‘under spending’ against quarterly benchmarks?

• Growth in debtors• Growth in creditors• Spending against conditional grants

o Munis should prioritise spending these funds because of the ‘use it or loose it’ policy

• Additional information added to the reporting set

Documents

Municipal Budgeting and Financial Management