Municipal Budget

1
Municipal Budget Reporting Regulations

• Rollout Presentation
• Chief Directorate Local Government Budget
  AnalysisINTERGOVERNMENTAL RELATIONS

January 2009
2
Outline

• Problem Statement
• Underlying Principles
• Legal Framework
• Background to reform
• Objective of reform
• Scope of the regulations
• Structure and content of regulations
• Technical aspects of document formats
• Technical aspects of budget tables
• Implementation strategy

3
Problem Statement

• 283 different municipal budgets despite efforts
  around Circular 28
• Makes aggregation of budget and other information
  very difficult
• Quality of municipal information is compromised
  due to lack of uniform classifications for
  revenue and expenditure items
• Most municipal budgets do not contain narrative
  information
• Lack of consistent information across the IDP,
  Budget, SDBIP, IYM and AFS
• Compromises monitoring and oversight by Councils,
  dplg, treasuries and legislatures
• Compromises governments ability to formulate
  coherent policies affecting local government, and
  its ability to use the budget as a redistribution
  tool to address poverty and inequality
• To compensate national departments send
  supplementary requests for information
• Financial Information - 15 400 questions
• Non-financial Information - 2 300 questions
• Municipal Councils probably make uniformed
  decisions in the absence of credible information
  and poor advice from officials

4
Underlying Principals

• Guided by the Constitution and the MFMA
• Promote transparency and accountability
• Strengthens the link between policy priorities,
  planning, budgeting, implementation and
  reporting
• Forms the basis for the Medium Term Revenue and
  Expenditure Framework for municipalities (MTREF)
• Facilitates inter-local government comparability
  (to demonstrate the effective use of resources
  and to inform allocation decisions)
• Consistent budget and reporting formats that will
  support GFS.

5
Accountability Cycle
6
Legal Framework
7
Constitutional requirements

• Section 215 (1) of the Constitution states that
• national, provincial and municipal budgets and
  budgetary processes must promote transparency,
  accountability and effective financial management
  of the economy, debt and the public sector.
• Section 215 (2) of the Constitution states that
• National legislation must prescribe -
• (a) the form of national, provincial and
  municipal budgets
• (b) when national and provincial budgets must be
  tabled and
• (c) that budgets in each sphere of government
  must show the sources of revenue and the way in
  which proposed expenditure will comply with
  national legislation.

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Constitutional requirements

• Section 216(1) of the Constitution states that
• national legislation must establish a national
  treasury and prescribe measures to ensure both
  transparency and expenditure control in each
  sphere of government, by introducing -
• Generally recognised accounting practice
• (GAMAP/GRAP OAG)
• (b) Uniform expenditure classifications and
• (Standard Chart of Accounts / General
  Leger)
• (c) Uniform treasury norms and standards
• (MFMA, Regulations, Circulars and Guidelines)

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Legislative requirements

• Section 17 of the MFMA
• An annual budget must be in a schedule in the
  prescribed format
• Sections 121, 122 and 125 of the MFMA
• Relate to municipal annual reports, preparation
  of financial statements and compulsory
  disclosures in financial statements each
  section includes a power for the Minister of
  Finance to prescribe the information required

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Legislative requirements

• Section 168 of the MFMA states that
• The Minister (of Finance), acting with the
  concurrence of the Cabinet member responsible for
  local government, may make regulations for, among
  other things -
• (a) any matter that may be prescribed and
• (c) a framework for regulating the exercise of
  municipal fiscal and tariff-fixing powers.

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Background to reform
12
Early reform

• Advance pilot testing began in 2000
• Included testing new budget formats
• Further worked and consultation done between 2001
  2005
• Circular 28 released December 2005
• Gives further guidance on budget formats
• Municipalities encouraged to apply to the
  2006/07, 2007/08 and 2008/09 budgets
• Circular 42 released March 2007
• Gives guidance on funding the budget
• Sets out the Funding Compliance Test

13
Latest developments

• Budget and Reporting Regulations drafted and
  consulted in 2007
• Technical reference group consultations
• MFMTAP advisors
• Selected municipal and entity CFOs
• Provincial Treasuries and Office of the
  Accountant General
• DPLG, SALGA, SARB, Stats SA, ASB and AG
• MFMA Joint Meeting
• 30 August 2007
• 22 November 2007
• 13 March 2008
• 27 written submissions received
• 3 workshops and several info sessions
• Formats released on Treasury website on 28 June
  2008
• Some feedback received

14
Objective of reform
15
Objective of reform

• Improve LG spheres ability to deliver basic
  services to all through
• Improved financial sustainability
• Facilitation of medium term planning and policy
  choices on service delivery
• The regulations achieve this through
• Formalising norms and standards which will
  improve
• Credibility
• Sustainability
• Transparency
• Accuracy, and
• Reliability
• of budgets and in year reports of municipalities
  and entities

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Broad Objectives

• Forms part of the MFMA financial management
  reforms
• Ensure budgets are funded
• Information for determining municipalities
  financial status
• DoRA compliance without duplicated reporting
  regimes
• Achieve best practice
• Support the issuance of annual budget circular
• Achieve a standardised vote approval structure
• Promote ease of performance comparison and
  evaluation
• Promote simplicity ahead of complexity
• The cost of measurement and compliance is
  minimised
• Standardisation across local government
  nationally
• To promote improved serviced delivery
• Strengthen accountability, transparency and
  understandability
• Achieve, consistency and comparability with other
  spheres of government
• Meeting the challenge of future accounting reforms

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Consistency of formats

• Between budgets, adjustment budgets, and
  reporting
• All stakeholders can readily compare approved
  budget with actual results
• Budget formats and Annual Financial Statements
  alignment
• Between municipalities
• Municipalities may structure votes according to
  their needs
• Additional reporting by standardised
  classification allows comparison
• Easier aggregation for national accounts
• Greater consistency promotes improved councillor
  and community understanding
• Improved alignment with private sector
  requirements promotes
• Mobility of financial management skills between
  private and government sectors
• Greater understanding by financial institutions
  and credit rating agencies

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Scope of regulations
19
Scope of regulations

• The Municipal Budget and Reporting Regulations
  will apply to all municipalities and municipal
  entities, and cover their -
• Annual budgets
• Adjustments budgets
• In-year reports (to the Mayor)
• For each of the above the Regulations set out -
• Format (content and structure)
• Funding
• Process
• Non-compliance with time provisions.
• In addition, the Regulations cover -
• A Framework for unforeseen and unavoidable
  expenditure
• Unauthorised, irregular or fruitless and wasteful
  expenditure

20
Structure and content of regulations
21
Overview

• Consists of 6 chapters and 7 schedules
• Ch 1 Interpretation, object and application of
  these regulations
• Ch 2 Budget and budget related matters of
  municipalities
• Covering the requirements, process, content and
  structure of budgets and reports of
  municipalities
• Ch 3 - Budget and budget related matters of
  municipal entities
• Covering the requirements, process, content and
  structure of budgets and reports of municipal
  entities
• Ch 4 Non compliance with time provisions for
  budgets and reports
• Ch 5 Framework for unforeseen and unavoidable
  expenditure
• Ch 6 Unauthorised, irregular or fruitless and
  wasteful expenditure

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Ch 2 Budgets and budget related matters of
municipalities

• General provisions
• Budget related policies of municipalities
• Annual budgets of municipalities Schedule A
• Format, funding, process
• Adjustments budgets of municipalities Schedule
  B
• Format, funding, process
• In-year reports of municipalities Schedule C
• Format process
• Monthly budget statements
• Quarterly report
• Mid-year budget and performance assessment

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Ch 3 Budgets Budget related matters of
municipal entities

• General provisions
• Funding and reserves policies of municipal
  entities
• Annual budgets of municipal entities Schedule D
• Format, funding, process
• Adjustments budgets of municipal entities
  Schedule E
• Format, funding, process
• In-year reports of municipal entities Schedule
  F
• Format process
• Monthly budget statement
• Mid-year budget and performance assessment

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Ch 4 Non compliance with time provisions

• Processes and formats for application or
  notification, consideration and response related
  to
• Impending non-compliance by municipalities with
  time lines and deadlines concerning annual
  budgets
• Actual non-compliance by municipalities with time
  provisions concerning annual budgets and
  adjustments budgets
• Non-compliance by municipalities with time
  provisions concerning in-year reports
• Non-compliance by municipal entities with time
  provisions

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Ch 5 Framework for unforeseen unavoidable
expenditure

• Unforeseen and unavoidable expenditure by
  municipalities
• Types of expenditure that may be authorised as
  unforeseen or unavoidable
• Monetary limits allowed to be authorised
• Unforeseen and unavoidable expenditure by
  municipal entities
• Approval of unforeseen and unavoidable
  expenditure

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Ch 6 Unauthorized, irregular or fruitless and
wasteful expenditure

• Unauthorized, irregular or fruitless and wasteful
  expenditure by municipalities
• Issues to be considered by council committee
• Irregular or fruitless and wasteful expenditure
  by municipal entities
• Recovery of irregular or fruitless and wasteful
  expenditure
• Board may not delegate authority to certify
  expenditure as irrecoverable

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Schedules to the municipal budget and reporting
regulations

• Schedule A Annual Budget and Supporting
  Documentation of Municipalities
• Schedule B Adjustments Budget and Supporting
  Documentation of Municipalities
• Schedule C In-year Reports of Municipalities
• Schedule D Annual Budget and Supporting
  Documentation of Municipal Entities
• Schedule E Adjustments Budget and Supporting
  Documentation of Municipal Entities
• Schedule F In-year Reports of Municipal Entities
• Schedule G Extensions and Non-compliance with
  Time Provisions

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Technical aspects of document formats
29
Overview

• Schedules A, B and C provide
• Structure and content for annual budget,
  adjustments budget and in-year reports for
  municipalities
• Prescribe the main tables
• Schedules D, E and F provide
• Structure and content for annual budget,
  adjustments budget and in-year reports for
  municipal entities
• Prescribe the main tables
• Documentation must present the content described
  in the exact sequence shown in the schedules to
  improve
• Credibility
• Sustainability
• Transparency
• Accuracy and
• Reliability.

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Overview contd

• The format and content of documentation as
  described in the regulations and schedules must
  be the same for
• Tabling to council
• Submission to National Treasury and provincial
  treasuries
• Making public at municipal offices and on the
  municipal website
• Distribution to other stakeholders
• Council may distribute additional information in
  other summary formats for enhanced consultation
  including summaries in alternate languages
• The annual budget documentation tabled to council
  for consultation purposes must be in the same
  format as the final approved budget. And must be
  funded according to the requirements of the
  regulations

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Annual budget documentation Part 1

• Schedule A can be viewed as two parts
• Part 1 covers
• Mayors report
• Resolutions
• Executive summary
• Annual budget tables (top level formats)
• Part 1 provides an overall summary of the affect
  of the budget
• The mayors report introduces the documentation
  to council and is politically orientated
• The executive summary covers the entire budget
  and summarises the content of part 2
• The annual budget tables contain the amounts to
  be approved by resolution

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Annual budget documentation Part 2

• Part 2 provides more detail and covers
• Overview of annual budget process
• Overview of alignment of annual budget with
  Integrated Development Plan
• Measurable performance objectives and indicators
• Overview of budget related policies
• Overview of budget Assumptions
• Overview of budget funding
• Expenditure on allocations and grant programmes
• Allocations and grants made by the municipality
• Councillor and board member allowances and
  employee benefits
• Monthly targets for revenue, expenditure and cash
  flow
• Annual budgets and SDBIPs internal departments
• Annual budgets and SDAs entities and external
  mechanisms
• Contracts having future budgetary implications
• Capital expenditure details
• Legislation compliance status
• Other supporting documentation
• Annual budgets of municipal entities attached
• Municipal managers quality certification

33
Tables, charts and explanatory notes

• Key tables must be represented by charts for ease
  of understanding of trends, anomalies and
  components
• Each table and chart must be accompanied by an
  explanation of the trends and anomalies depicted
• Formats for tables will be issued for strict
  compliance
• Formats for charts will be issued as guidance
• However, charts must demonstrate component
  breakdown, total trend and trend of components

34
Schedules B - F

• Schedules B F each have two parts
• Part 1 is always the same
• Mayors report
• Resolutions
• Executive summary
• Tables (incl. charts and explanatory notes)
• Part 2 differs for each schedule based on need
  for supporting information

35
Tables for Annual BudgetsAdjustments
BudgetsIn-year Reports
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Overview

• Main tables are prescribed as part of the
  Schedules
• Supporting tables are issued by way of guidance
• All tables comply with the provisions in the
  regulations
• Main tables are prescribed and so cannot be
  changed
• Supporting tables can be amended while still
  complying with the regulations
• Specimen tables have been prepared to demonstrate
  actual completion
• Working excel models with links have been
  prepared for municipalities to enter their
  details and to promote comparability
• 7 years view, aligned to National and Provincial
  formats

37
Simultaneous standardisation flexibility

• Standardisation and flexibility is achieved
  concurrently
• Key, high level tables are standard
• Generic items and labels are used
• Generic items are further explained in supporting
  tables
• Supporting tables are partly standardised and can
  be expanded to suit local circumstances
• Future changes in disclosure requirements (due to
  accounting standard changes for example) can be
  met within generic items on the key tables or the
  supporting tables
• Should supporting tables need to be modified,
  National Treasury will re-issue them

38
Annual Budget Tables

• Table A1 Budget Summary
• Table A2 Budgeted Financial Performance (revenue
  and expenditure by standard classification)
• Table A3 Budgeted Financial Performance (revenue
  and expenditure by municipal vote)
• Table A4 Budgeted Financial Performance (revenue
  and expenditure)
• Table A5 Budgeted Capital Expenditure by vote,
  standard classification and funding
• Table A6 Budgeted Financial Position
• Table A7 Budgeted Cash Flows
• Table A8 Cash backed reserves/accumulated surplus
  reconciliation
• Table A9 Asset Management
• Table A10 Basic service delivery measurement

39
Annual budget columns

• Consistent with national and provincial
  requirements
• 3 years of audited outcome (an addition of 2
  years)
• Main amendment to circular 28 will improve
  forecasting
• 1 yr of audited history not sufficient for
  performance comparison
• 3 Columns required for yr currently being
  implemented
• Recent trend info vital for strategic decisions
  on the new budget
• Original budget is critical as it represents
  promises made and consulted on when setting the
  budget
• Significant differences between original budget,
  adjusted budget and full yr forecast indicate
  poor planning and unrealistic budgets.
• The MTREF is now a standard feature for
  municipalities

40
Adjustments Budget Tables

• Table B1 Adjustments Budget Summary
• Table B2 Adjustments Budget Financial
  Performance (revenue and expenditure by municipal
  vote)
• Table B3 Adjustments Budget Financial
  Performance (standard classification)
• Table B4 Adjustments Budget Financial
  Performance (revenue and expenditure)
• Table B5 Adjustments Capital Expenditure Budget
  by vote and funding
• Table B6 Adjustments Budget Financial Position
• Table B7 Adjustments Budget Cash Flows
• Table B8 Cash backed reserves/accumulated
  surplus reconciliation
• Table B9 Asset Management
• Table B10 Basic service delivery measurement

41
Adjustments budget columns

• First 2 columns show original budget and prior
  adjusted budget
• Next 4 columns show specific adjustments
• Total adjustments represents columns 4 8
• The adjusted budget represents columns 3 9
• The 2 outer year adjusted budget columns allow
  for shifting of funds between multi-year
  appropriations for capital as per section 33 of
  the MFMA

42
In-year Reports

• Table C1 s71 Monthly Budget Statement Summary
• Table C2 Monthly Budget Statement - Financial
  Performance (revenue and expenditure by municipal
  vote)
• Table C3 Monthly Budget Statement - Financial
  Performance (standard classification)
• Table C4 Monthly Budget Statement - Financial
  Performance (revenue and expenditure)
• Table C5 Monthly Budget Statement - Capital
  Expenditure (municipal vote, standard
  classification and funding)
• Table C6 Monthly Budget Statement - Financial
  Position
• Table C7 Monthly Budget Statement - Cash Flow

43
In-year reporting columns

• The preceding year audited outcome is provided
  for comparison with the original budget, adjusted
  budget and full year forecast columns
• Provision of year to date budget requires budgets
  to be timed, establishes monthly performance
  targets and encourages a more advanced approach
  to forecasting than is generally currently
  employed
• Year to date variance percentage is a more
  appropriate measurement of performance than a
  percentage of full year budget as takes into
  account seasonality and actual targets set

44
Consolidation of municipality and entities

• 37 municipalities currently have entities
• Table formats provide for consolidation where
  required
• Municipalities must convey to readers of the
  documentation, information on the total service
  delivery package being provided through internal
  and external mechanisms
• Consolidated information must therefore be
  provided
• Parent information must be provided separately to
  facilitate approval of the parent municipality
  budget
• The Council must monitor consolidated in-year
  reports as well as for the parent municipality
• Adjustments budget documentation will be
  presented for the parent municipality only but be
  tabled to council along with the latest
  consolidated in-year report

45
Technical aspects of tables for the Annual
Budget
46
Table A1 Budget Summary

• Provides a 7-year view of the key aspects of the
  budget at a glance
• Key summary of revenue, expenditure, capital
  expenditure and funds sources, financial
  position, cash flows, cash backing, asset
  management and basic services
• Table does not need to be completed as it is
  linked to other budget tables.

47
Table A2 Budgeted Financial Performance (revenue
and expenditure by standard classification)

• The standard classification refers to a
  modified Government Finance Statistics (GFS)
  reporting structure.
• Modifications include
• Separation of the Budget and Treasury Office
• Separation of Corporate Services that were
  previously grouped with Finance.
• The aim of the standard classification approach
  is that all municipalities will approve a budget
  in one common format.
• The information must be read in conjunction with
  the other financial performance views
• The category of other has not been included, as
  its inclusion reduces the value of the
  information and prevents comparability between
  municipalities. Municipalities with other
  categories should display these items separately.
  

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Table A3 Budgeted Financial Performance (revenue
and expenditure by municipal vote)

• Enables Council to enforce a vote in accordance
  with the municipalitys organisational structure
  and to assign responsibility for the revenue and
  expenditure recorded against these votes
• Table A3 is protected and is not to be completed
  directly. Revenue and expenditure data should be
  entered at sub-vote level using Table A3A
• Table A3A is a working sheet only, and should not
  be included in a budget document

49
Table A4 Budgeted Financial Performance (revenue
and expenditure)

• A key aim for this view is to facilitate
  comparison between the annual results and the
  original budget to assess performance
• The purpose is to provide for generic items in
  the main table that will not need to be amended
  when accounting practices change.
• Supported by additional detail in Supporting
  Table SA1
• This view ensures consistency with annual
  reporting format requirements
• More detailed technical information in Budget
  Formats Guide

50
Table A5 Budgeted Capital Expenditure (by vote,
standard classification and funding )

• Table A5 brings together in one table a range of
  information that should be considered
  concurrently when approving the capital budget,
  namely
• capital expenditure by municipal vote
• capital expenditure by standard classification
• the funding sources necessary to fund the capital
  budget
• The MFMA provides that a municipality may approve
  multi-year capital budget appropriations.
• The format provides for the capital budget to be
  approved as a multi-year appropriation, as a
  single year appropriation (with two additional
  years of indicative estimates), or as a
  combination
• Total Capital Funding must balance with Total
  Capital Expenditure

51
Table A6 Budgeted Financial Position

• Aligned to GRAP1, which is generally aligned to
  the international convention which presents
  Assets less Liabilities as accounting Community
  Wealth
• Note that the municipal equivalent of equity is
  now described as Community Wealth/Equity.
• The order of items is aligned to the convention
  of showing items in order of liquidity
• Supported notes in Supporting Table SA3 which
  provides a detailed analysis of the major
  components

52
Table A7 Budgeted Cash Flows

• Table provides for
• Clear separation of receipts and payments within
  each cash flow category
• Clear separation of capital and operating
  receipts from Government, which enables cash from
  Ratepayers and other being used in the imputed
  collection rate calculation (refer Supporting
  Table SA10)
• Separation of borrowing and loan repayments (no
  set-off), to assist with MFMA compliance
  assessment regarding the use of long term
  borrowing (debt)

53
Table A8 Cash backed reserves/accumulated surplus
reconciliation

• This table meets the requirements of MFMA
  Circular 42
• Answers the question
• What are the predicted cash and investments that
  are available at the end of the budget years and
  how are those funds used?
• Budget Formats Guide outlines the steps the
  municipalities must complete to finalise this
  table

54
Table A9 Asset management

• Key elements on asset management brought together
  in one view
• capital expenditure, new asset expenditure,
  renewal expenditure asset value
  repairs/maintenance
• The format is specifically intended to highlight
• The level of resources being deployed for the
  renewal and maintenance of assets, relative to
  the resources being deployed for the acquisition
  and construction of new assets.
• The level of asset renewal relative to the level
  of depreciation.
• Adds clarity to the interrelationships between
  new expenditure and ongoing maintenance
  obligations and the need to maintain RM standards

55
Table 10 Basic service delivery measurement

• Transparent view of achievement of basic service
  targets
• Alignment to national imperatives
• Service standards, backlogs and free basic
  service levels identified
• Cost of free basic services declared allowing
  alignment to equitable share
• Progressive achievement of national targets
  encouraged

56
Role of Supporting Tables

• Provide background detail to the main tables
  main tables often just provide summaries of the
  supporting tables
• Supporting tables are not regulated and so can be
  more readily changed in response to changing
  accounting practice
• Some of the supporting tables provide for
  critical developments in the management of
  municipal finances
• MFMA funding compliance
• Supporting the Municipal Property Rates Act
• Supporting conditional grant control

57
Supporting Table SA10 MFMA funding compliance

• Funding compliance methodology i.t.o. Section 18
  19(1)(d) of the MFMA developed
• Follow up to Circular 42 (Funding the Budget)
  issued March 2007
• Methodology used to determine whether budget is
  sufficiently funded as opposed to balanced
• Methodology is a self-test component incorporated
  within budget formats
• Most of the calculations have been automated in
  the formats, so municipalities only have to
  interpret the results
• See MFMA Funding Compliance Guideline for
  detailed guidance

58
Supporting the Municipal Property Rates Act

• SA11 Property rates summary
• Transparent reflection of tax increases, their
  impact on revenue, valuation trends and the
  treatment of reductions, rebates and exemptions
• SA12-A13 Property rates by category
• Both the current year and the budget year data is
  required to ensure that the budget clearly
  illustrates trends and changes.
• SA14 Household bills
• a comparison of various municipal bills,
  indicating the cost implication on households of
  proposed rates and tariff changes

59
Supporting conditional grant control

• SA18 Transfers and grant receipts
• Ensures all transfer receipts are disclosed
• SA 19 Expenditure on transfers and grants
  programme
• Monitor timing of expenditure on individual
  grants
• Encourages better on time spending
• SA 20 Reconciliation of transfers, grant receipts
  and unspent funds
• Unspent grants reconciled between balances
  carried forward, amounts received and expenditure
  as shown in the Budgeted Financial Position

60
ImplementationStrategy
61
Reform too difficult?

• During the reform processes there have been
  complaints that the requirements are too
  difficult
• This position is not accepted by National
  Treasury
• MM, CFO's and their teams are required to attain
  a particular level of competency to carry out
  their duties. There has been ample opportunity
  for municipalities to progressively implement the
  reforms
• National Treasury will continue to support
  municipalities by
• strict enforcement of sanctions for
  non-compliance with competency levels and
  requirements of the legislation and regulations
• significant support mechanisms that empower
  municipal councillors and officials to fulfil
  their responsibilities

62
Implementation Strategy

• Formats represent end states
• Critical that implementation be staged to meet
  capacity to deliver
• National Treasury to support Provincial
  Treasuries
• NT and PTs to support municipalities
• Advanced implementation to be encouraged

63
Status of Budget and Reporting Regulations

• Budget and Reporting Regulations finally past
  legal scrutiny during early November 2008
• Regulations approved by the Minister of Finance
  on 4 december 2008
• Gazetted on 16 January 2009
• Public consultation processes and the
  Parliamentary scrutiny process will run
  concurrently
• Public comment period extended to 90 days
• Following the conclusion of both these processes,
  a final version of the Regulations and formats
  will be prepared and submitted to the Minister
  for final approval before promulgation towards
  the end of March 2009
• Implementation Strategy
• target date for implementation
• 1 July 2009 (2009 Budget) for the 27 high
  capacity municipalities (six metros and 21
  secondary cities) and
• 1 July 2010 (2010 Budget) for all other
  municipalities.
• Message already communicated to all
  municipalities on 27 June 2008