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Municipal Budget & Reporting Regulations

Rollout Presentation

Chief Directorate: Local Government Budget AnalysisINTERGOVERNMENTAL RELATIONS

January 2009

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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

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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 questionsNon-financial Information - 2 300 questions

• Municipal Councils probably make uniformed decisions in the absence of credible information and poor advice from officials

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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.

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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

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Legal Framework

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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 -

(a) 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

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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

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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

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Objective of reform

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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 throughFormalising 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

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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

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Structure and content of regulations

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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 municipalitiesCovering the requirements, process, content and structure of budgets and reports of municipalities

Ch 3 - Budget and budget related matters of municipal entitiesCovering 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

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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 – 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

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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

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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 manager’s quality certification

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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

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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

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Tables for – Annual Budgets

Adjustments 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

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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

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Annual Budget Tables

Table A1 Budget SummaryTable 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 fundingTable A6 Budgeted Financial PositionTable A7 Budgeted Cash FlowsTable A8 Cash backed reserves/accumulated surplus

reconciliationTable A9 Asset ManagementTable A10 Basic service delivery measurement

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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

2004/05 2005/06 2006/07

Audited Outcome

Audited Outcome

Audited Outcome

Original Budget

Adjusted Budget

Full Year Forecast

Budget Year 2008/09

Budget Year +1 2009/10

Budget Year +2 2010/11

2008/09 Medium Term Revenue & Expenditure Framework

Current Year 2007/08

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Adjustments Budget Tables

Table B1 Adjustments Budget SummaryTable 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

fundingTable B6 Adjustments Budget Financial PositionTable B7 Adjustments Budget Cash FlowsTable B8 Cash backed reserves/accumulated surplus

reconciliationTable B9 Asset ManagementTable B10 Basic service delivery measurement

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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

Budget Year +1 YYYY/YY

Budget Year +2 YYYY/YY

Original Budget

Prior Adjusted

Accum. Funds

Multi-year capital

Unfore. Unavoid.

Nat. or Prov. Govt

Other Adjusts.

Total Adjusts.Adjusted Budget

Adjusted Budget

Adjusted Budget

3 4 5 6 7 8 9 10

A A1 B C D E F G H

Current Year - Adjustments Budget - Month YYYY

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In-year Reports

Table C1 s71 Monthly Budget Statement SummaryTable 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

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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

Preceding year

Current Year

Audited Outcome

Original Budget

Adjusted Budget

Monthly actual

YearTD actualYearTD budget

YTD variance YTD varianceFull Year Forecast

%

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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

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Technical aspects of tables for the Annual Budget

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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.

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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 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

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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

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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

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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

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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)

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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

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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 R&M standards

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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

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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

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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

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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

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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

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ImplementationStrategy

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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

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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

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• 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

Status of Budget and Reporting Regulations