Municipal Budget & Reporting Regulations

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 government’s 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. 7

8. 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 andstandards (MFMA, Regulations, Circulars and Guidelines) 8

9. 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 9

10. 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.

11. 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

16. 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

17. 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

18. 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

22. 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

23. 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

24. 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 24

25. 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

26. 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

27. 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

28. 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.

30. Overview – cont’d • 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

31. Annual budget documentation – Part 1 • Schedule A can be viewed as two parts • Part 1 covers • Mayor’s report • Resolutions • Executive summary • Annual budget tables (top level formats) • Part 1 provides an overall summary of the affect of the budget • The mayor’s 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

32. 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 manager’s 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 • Mayor’s 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

36. 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.

48. Table A3 Budgeted Financial Performance(revenue and expenditure by municipal vote) Enables Council to enforce a vote in accordance with the municipality’s 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