Municipal Budgeting and Financial Management

1. Municipal Budgeting and Financial Management Presentation to Select Committee on Appropriations Presenter: Carl Stroud| National Treasury | 15 July 2014

2. The Local Government Legislative Framework

3. Local government has specific Constitutional service delivery responsibilities…which include

4. 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

5. 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

6. The Budgeting and Financial Management Framework

7. 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

8. Champion the Local Government Budget Reform Agenda General Functions of the CD: LGBA • Monitor compliance with budget related prescriptions in the MFMA • Assist in identifying municipalities in financial distress • 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 Support the Implementation of the MFMA and MBRR Ensure compliance and oversight with conditions of DoRA (annual) Support the development of credible, funded and sustainable LG budgets Monitor the implementation of LG budgets and conditional grants – publish information

9. 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

10. Key focus areas of the municipal budget reform process (high level initiatives only) Work-in-progress Reforms • 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) Strengthen IYM and reporting and expand scope of publications Strengthen IYM and reporting and expand scope of publications Strengthen IYM and reporting and expand scope of publications Strengthen IYM and reporting and expand scope of publications Enforce implementation of MBRR Enforce implementation of MBRR Strengthen IYM and reporting incl. conditional grant performance Piloting of MBRR with selected municipalities Implementation of the MBRR (July 2009) Mid-year assessments (3rd round) incl. site visits Mid-year assessments (3rd round) incl. site visits 2nd municipal budget benchmark engagement Commenced municipal budget benchmark engagements Strengthened mid-year assessments to include site visits (day 2) Commenced mid-year budget assessment process In-year monitoring and reporting Commenced work on MBRR and standardised budget formats 2011/12 2008/09 2009/10 2010/11 2006/07 2007/08 Transparency and Accountability

11. 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 11

12. The LG accountability cycle Greatest Impact

13. 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

14. Local Government Budget Process

15. 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

16. Budget Process timeline

17. Schedule of Key Dates in the municipal financial year (1) Municipal Financial Year : 01 July to 30 June * MFMA reference

18. Schedule of Key Dates in the municipal financial year (2) * MFMA reference

19. The WHOLE local government fiscal framework is designed to finance municipalities Transfers and Grants Municipal own revenues Direct transfers Operating revenues Equitable share & RSC levy replacement grant Rates and taxes Municipal operating budget National / provincial operating grants Service charges Sources of capital funding National / provincial infrastructure grants Surplus / cash-backed reserves Municipal borrowing Indirect transfers Municipal capital budget

20. At the heart of local government is managing finances to deliver services Assignment of functions Allowed taxes Priority of LG in vertical divisions Non-priority wants Low tariffs Design of ES Formula Poor billing Poor debt management Theft and graft Policy constraints on fiscal potential Revenue forgone Bad management Inefficient procurement Demand for other important services Revenue lost due to lack of fiscal effort Conditional transfers Under-spending Borrowing “Leakages” Non-priority wants Service charges National and provincial mandates Conditional transfers Other important services Borrowing Rates and taxes Effective and efficient expenditure Non-priority wants Demand for basic services Service charge revenue Mandates Other services Rates and taxes Basic services Mandates Basic services Equitable share Equitable share Institutional set up Institutional set up Institutional set up LG Fiscal Framework Revenue choices and collection Budgeted expenditure choices Actual service delivery Community needs and wants Managing delivery

21. Local Government:Monitoring, Reporting and Accountability

22. 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

23. Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Mayoral Quarterly Report Mayoral Quarterly Report Mayoral Quarterly Report Mayoral Quarterly Report AFS& PR to AG Consolidated AFS and PR to AG Reporting cycle summary Audit Report from AG S72 Mid Year Assessment & AR tabled S 71 Monthly Reports

24. 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)

25. THANK YOU

26. Annexure A:Section 71 Publication for 3rd Quarter 2013/14

27. Coverage 3rd Quarter 2013/14 Results

28. 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

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

30. Analysis of Debtors and Creditors3rdQuarter 2013/14 Results

31. Borrowing and Investment Instruments • 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

32. General observations: conditional grants • 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

33. General observations: Conditional Grants • 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

34. Broad observations: Conditional Grants • 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%

35. 3rd Quarter performance of municipal conditional grants

36. 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 42.1percent 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.

37. Metros: Conditional Grants Performance

38. Key NT publications

39. What to look for in quarterly Section 71 publications? • Who is not reporting? Name and shame! • Cash position of municipalities • Whose end-of-quarter bank balances indicate risks? • What is the trend since the last quarter? • Revenue trends • Can’t see much – because reporting on billings • Needs to be seen in relation to growth in debtors • Operating expenditure trends • Are municipalities ‘overspending’ against quarterly benchmarks? • Capital expenditure trends • Are municipalities ‘under spending’ against quarterly benchmarks? • Growth in debtors • Growth in creditors • Spending against conditional grants • Munis should prioritise spending these funds because of the ‘use it or loose it’ policy • Additional information added to the reporting set