Learner Guide Municipal budgeting and implementation. Unit Standard Title Plan a municipal budgeting and reporting cycle. Unit Standard ID

Transcription

1 Learner Guide Municipal budgeting and implementation Unit Standard Title Plan a municipal budgeting and reporting cycle Unit Standard ID

2 Notice This material has been developed by National Treasury as part of a broader skills development initiative to support the implementation of the Municipal Minimum Competency Regulations, Gazette 29967, June The material should be used as part of the broader context of curricular content and was designed to achieve the recognised municipal financial management qualifications Only those service providers that appear on the National Treasury website list of Service Providers and Modules are authorised to use this product, which must be used for the express purpose of providing approved learning programme(s) towards municipal competency regulations. Service providers will appear on this list only after formal accreditation in full or in part have been reviewed and approved in respect of related training by the National Treasury. Service Providers wishing to confirm if they have been listed as preferred service providers for use by municipalities should visit the National Treasury website at under Training and Validation which will be updated from time to time. Service Providers are not permitted to substantially amend or change this material without the express authorisation in writing of the National Treasury MFMA Implementation Unit. Any requests to amend or alter this publication must be submitted to mfma@treasury.gov.za, prior to the commencement of any training or activity that the material may relate to. Notwithstanding the above limitations, National Treasury encourages those Authorised Service Providers using this product to further develop the material with the inclusion of case studies and practical examples where appropriate, to enhance practical relevance for learners where possible. We remind you that this material has been provided as a resource to assist practitioners in local government to become qualified municipal finance management professionals, it is not intended to provide legal or other advice on which a municipality should rely on in fulfilling their statutory or social responsibilities. Other parties not referred to above, may use this material for training purposes only, provided that such purposes will be not for profit only, and prior approval is granted by National Treasury. MFMA Implementation Unit 3rd Floor, 40 Church Square, Pretoria September

3 Table of Content Module Outline UNIT STANDARD TITLE MODULE STRUCTURE UNIT STANDARD OUTCOMES UNIT STANDARD PURPOSE LEARNING ASSUMED TO BE IN PLACE UNIT STANDARD CONTENT UNIT STANDARD ASSESSMENT MODERATION REFERENCES Introduction to municipal budgeting and reporting cycle in South Africa LEARNING OUTCOMES KEY CONCEPTS LEARNING ASSUMED TO BE IN PLACE INTRODUCTION THE BUDGET AND REPORTING CYCLE A STRATEGIC APPROACH TO BUDGETING SEPARATION OF ROLES AND RESPONSIBILITIES ACCOUNTABILITY CYCLE CONSULTATIVE PROCESSES LEGISLATIVE FRAMEWORK ASSIGNMENTS ASSESSMENT CRITERIA Components of the budget and reporting cycle LEARNING OUTCOMES KEY CONCEPTS LEARNING ASSUMED TO BE IN PLACE INTRODUCTION BUDGET PREPARATION PROCESS BUDGET IMPLEMENTATION PROCESS

4 7. BUDGET EVALUATION PROCESS ASSIGNMENTS ASSESSMENT CRITERIA Roles and responsibilities in terms of the municipal budget and reporting cycle LEARNING OUTCOMES KEY CONCEPTS LEARNING ASSUMED TO BE IN PLACE INTRODUCTION ROLE OF THE COUNCIL ROLE OF THE MAYOR ROLE OF THE MUNICIPAL MANAGER (THE ACCOUNTING OFFICER) ROLES OF SENIOR MANAGERS AND OTHER OFFICIALS DELEGATIONS BY THE MUNICIPAL MANAGER ROLE OF THE CHIEF FINANCIAL OFFICER BUDGET AND TREASURY OFFICE ROLES AND RESPONSIBILITIES OF OTHER LEVELS OF GOVERNMENT ASSIGNMENTS ASSESSMENT CRITERIA Municipal finance management calendar LEARNING OUTCOMES KEY CONCEPTS LEARNING ASSUMED TO BE IN PLACE INTRODUCTION MUNICIPAL BUDGET AND REPORTING CALENDAR

5 Module Outline 1. UNIT STANDARD TITLE 1.1. Plan a municipal budgeting and reporting cycle, US MODULE STRUCTURE 2.1. Qualification: Certificate in Municipal Finance Management 2.2. Unit Standard: Plan a municipal budgeting and reporting cycle, US Credits: NQF level: Type: Core 2.6. Duration: 80 notional hours 2.7. The following table contains the unit standards required for qualification Certificate in Municipal Finance Management, NQF level 6 (SAQA ID 48965). Modules SAQA US ID Unit standard title Credit values Municipal legislative The Inter-governmental Fiscal 10 credits environment and policy NQF level 6 Relations Act in municipal financial management x South African legislation and 8 credits NQF level 6 policy affecting municipal financial management Cooperative Conduct stakeholder 8 credits Governance and NQF level 6 consultation around municipal stakeholder relations finance x Principles of ethics in a 10 credits NQF level 6 municipal environment Municipal financial x Conduct performance 12 credits reporting and NQF level 6 management in a South performance African municipal environment 4

6 Modules SAQA US ID Unit standard title Credit values management NQF level 6 Prepare and analyse municipal financial reports 12 credits Municipal strategic x Strategic planning process in a 15 credits planning and NQF level 6 South African municipality implementation x Apply approaches to 15 credits NQF level 6 managing municipal income and expenditure within a multiyear framework Managing risk in a Contribute to internal control 8 credits municipal context NQF level 6 and internal control evaluation framework Risk management in South 10 credits NQF level 6 African municipalities Contribute to audit planning 12 credits NQF level 5 and process in a South African municipality Municipal budgeting Apply the principles of 15 credits and implementation NQF level 5 budgeting within a municipality Municipal budgeting and 8 credits NQF level 6 reporting Management of Apply techniques and South 10 credits municipal assets and NQF level 6 African statutes to cash and liabilities investment management Manage a municipality s 11 credits NQF level 6 assets and liabilities Cost management and Contribute to capital planning 15 credits capital planning NQF level 6 and financing Apply costing principles to 11 credits NQF level 6 municipal operational and service-based costing 5

7 Modules SAQA US ID Unit standard title Credit values Manage information 8 credits NQF level 6 technology resources in a municipal finance environment Municipal supply chain Participate in the design and 12 credits management NQF level 6 implementation of municipal supply chain management Public-private Plan and implement public- 12 credits partnerships in NQF level 6 private partnerships for municipals service municipal service delivery delivery 2.8. Completion of this qualification provides a significant proportion of the unit standards required to meet the municipal competency levels. To meet the regulatory requirements for the minimum competency levels for prescribed positions in municipalities please refer to the local government: Municipal Finance Management Act: Municipal Regulations on Minimum Competency Levels at This unit standard may also be utilised in other qualifications. Refer to 3. UNIT STANDARD OUTCOMES 3.1. ON COMPLETION OF THIS UNIT STANDARD, YOU SHOULD BE ABLE TO: Advise on the application of the South African local government legislative framework for local government budgeting processes Advise on the timing of budget related events and the integration of budget related processes with budget processes to ensure compliance with the legislative requirements. 6

8 Ensure legal requirements that non-budget documentation is correctly referenced in budget documentation is complied with and vice versa Advise on the roles and responsibilities of financial and non-financial management and political executives in the budget process, which should contribute to the overall process of social and economic development. 4. UNIT STANDARD PURPOSE 4.1. This Unit Standard is intended for practitioners in local government who are involved in policy decision-making and strategic planning. Learners who are required to advise on the legislative mandate of municipalities from a provincial and national government perspective will also benefit from this Unit Standard The Unit Standard will contribute to social and economic transformation by equipping practitioners with skills in budgeting which could translate into better use of resources and improved delivery services. That is, the unit standard will contribute to understanding the vital role that local government plays in delivering basic services The scope of this unit standard covers the budget and reporting cycle in a municipality and in municipal entities. This unit standard provides considerable detail regarding the additional requirements where municipalities use municipal entities to deliver services. 5. LEARNING ASSUMED TO BE IN PLACE 5.1. IT IS ASSUMED THAT LEARNERS ARE COMPETENT IN: Communication at Level Mathematical Literacy at Level 4. 7

9 6. UNIT STANDARD CONTENT 6.1. Introduction to municipal budget and reporting cycle in South Africa 6.2. Components of the budget and reporting cycle 6.3. Roles and responsibilities in terms of the municipal budget and reporting cycle 6.4. Municipal finance management calendar 7. UNIT STANDARD ASSESSMENT 7.1. THE STRUCTURE OF THE ASSESSMENT IS AS FOLLOWS % Attendance % Participation in facilitated classroom environment % Presentation to class of selected assignment % Assignments % major assignment 7.2. ATTENDANCE (10%) The attendance mark shall be given for attending entire workshops. Attending a partial workshop will be assessed as non-attendance for that workshop. There are 6 workshops and full attendance for all six workshops will be awarded the full 10%. Attendance for 3 full workshops will be awarded 5% (3/6 * 10%). 8

10 7.3. PARTICIPATION (10%) To be eligible to receive a mark for participation the learner must demonstrate that they have successfully completed the MFMA learning modules assigned in the module notes. The facilitator must confirm this on the learner management database and award a zero for participation if the MFMA learning modules have not been completed A participation score out of 10 shall be given for each full workshop attended and the total divided by the number of full workshops attended to arrive at an average mark out of 10. As with attendance, the participation mark cannot be awarded for partial workshops attended. The facilitator will need to see that all learners are contributing to discussion in a way that demonstrates an understanding of the concepts and provides value to the discussion. < 5 Inadequate participation 5 6 Just adequate participation 7 Better than adequate participation 8 Good participation 9 10 Very good participation As an example, a learner attends 4 workshops and scores 5, 7, 6 and 10 for participation. Assuming they completed the required MFMA learning modules they would receive a participation mark of 7 (( ) / 4). If, however, the learner had not completed the required MFMA learning modules they would receive a participation mark of zero PRESENTATION OF SELECTED ASSIGNMENT (10%) In the first workshop the facilitator will nominate learners to present one assignment (not a major assignment). The facilitator will determine if some assignments may be presented by a group to ensure a fair distribution of assignments. However, all individual learners must make a presentation of 9

11 approximately 15 minutes. That presentation will be assessed based on the following: 5 marks for knowledge of subject and preparation of presentation 5 marks for presentation skills and leadership of discussion 7.5. ASSIGNMENTS (40%) Except for the two major assignments, the assignments at the end of each chapter are to be handed in to the facilitator at the beginning of the next workshop following the completion of the chapter MAJOR ASSIGNMENT (30%) The major assignment will count for 30% of the total assessment. Learners have two weeks to complete the assignment ASSESSMENT CRITERIA The assessment criteria are provided for each assignment Copying of the text is discouraged. Students should use their own words as much as possible to complete the activities The following areas should be considered: Originality, knowledge, insight, application, analysis ability, comprehension ASSESSMENT AND LEARNING METHODS Assessment for this module will be undertaken according to the five methods set out in section 7.1 above. It consists of A mark for attendance at class (workshop) 10

12 A mark for participation in class discussion activities A mark for presentation to class of one assignment A mark for turned in assignments A mark for turned in major assignment The suggested approach for teaching and learning is as follows: The module is split into 5 chapters. Chapter 1 is the module outline and contains general information. Chapters 2 5 contain the module learning material and assignments. Module outline Introduction to municipal budget and reporting cycle in South Africa Components of the budget and reporting cycle Roles and responsibilities in terms of the municipal budget and reporting cycle Municipal finance management calendar Chapters 2 4 consist of module notes, assigned additional reading and study activities, class discussion activities, assignments, and 1 Major assignment Chapter 5 consists of a reproduction of the municipal finance management calendar published by the National Treasury. 11

13 Learners are expected to review the module notes, complete assigned additional reading and study, and prepare for class discussion activities prior to each workshop Except for the major assignment, they are expected to complete the assignments after the workshop in which the material is covered and hand prepared answers in for marking at the commencement of the following workshop There is one major assignment which must be handed in for marking no later than one week after the final workshop. Estimated learning hours required Workshops 4 x 8 hours = 32 hours Individual Study 4 x 8 hours = 32 hours Major assignment = 16 hours Total = 80 notional hours Note that individual study includes reading the module notes, additional assigned reading, completing assigned MFMA learning modules, preparing answers to in class discussion activities and assignments. Workshop topic plan workshop 1 Chapter 2 workshop 2 First part of Chapter 3 workshop 3 Conclude Chapter 3 and Chapter 4 workshop 4 Chapter 5 Sample learning methodology Pre Workshop 1 Read through the module notes applicable to workshop 1 12

14 Complete any additional reading or study as required by the module notes (e.g. a module of MFMA learning) Complete the discussion activities these will be discussed in workshop 1 During Workshop 1 The facilitator will present the material in the module notes related to this workshop Discussion activities will be discussed by the group in the workshop at the relevant point Pre Workshop 2 Complete the assignments from workshop 1 to be handed in at workshop 2 Read through the module notes applicable to workshop 2 Complete any required additional reading or study as required by the module notes (e.g. a module of MFMA learning) Complete the discussion activities these will be discussed in workshop 2 During Workshop 2 Turn in answers to assignments from workshop 1 The learners who have selected assignments for presentation will make a 15 minute presentation to answer the chosen activity. 15 minutes will be allowed for discussion. The facilitator will present the material in the module notes related to this workshop Discussion activities will be discussed by the group in the workshop at the relevant point 13

15 Workshops 3 and 4 Same as workshop 2, also refer to the relevant chapters for further information under the heading Learning assumed to be in place. 8. MODERATION 8.1. This module has been designed to have marks for attendance, participation, a presentation, completed assignments (short and 1 major assignment). The assignments incorporate both formative and summative assessment. 14

16 9. REFERENCES 9.1. REFERENCES USED IN THIS MODULE: National Treasury website Local Government: Finance Management Act, No. 56 of Local Government: Municipal Budget and Reporting Regulations Local Government: Municipal Systems Act, No. 32 of The Constitution of the Republic of South Africa Chapter 7, Chapter 13 (sec 215 & 216), schedules 4 & White Paper on Local Government (National Treasury) MFMA Learning: Module 3 Budget Process Module 6 Annual Reporting 9.2. OTHER REFERENCES APPLICABLE TO LOCAL GOVERNMENT: Local Government: Municipal Structures Act, No. 117 of Local Government: Municipal Property Rates Act, No. 6 of Local Government: Municipal Demarcation Act, No. 51 of Intergovernmental Fiscal Relations Act, No. 97 of Intergovernmental Relations Framework Act, No. 13 of

17 Local Government Transitions Act Second Amendment Act, No 97 of Municipal Fiscal Powers and Functions Act, No 12 of MFMA Budget Format Guide July 2008 (National Treasury) Introductory Guide to the MFMA, Updated Edition August 2004 (National Treasury) A Guide to Municipal Financial Management for Councillors (National Treasury) Specimen Annual Financial Statements, June 2005 (National Treasury) Funding Compliance Guideline, March 2008 (National Treasury) National Treasury MFMA Circulars: Circular 42 Funding a Municipal Budget (30 March 2007) Circular 32 The Oversight Report (15 Mar 2006) Circular 28 Budget Content and Format (12 Dec 2005) Circular 19 Budget Process 2006/07 (15 Aug 2005) Circular 13 Service Delivery and Budget Implementation Plan (31 Jan 2005) Circular 10 Budget Process 2005/06 (8 Oct 2004) 16

18 TO EACH WORKSHOP, PLEASE BRING ALONG: MFMA pocket guide (National Treasury) Municipal Budget and Reporting Regulations The Constitution of the Republic of South Africa Local Government: Municipal Systems Act, Act 32 of 2000 as amended ACCESS TO: MFMA learning modules (National Treasury) 17

19 Introduction to municipal budgeting and reporting cycle in South Africa 1. LEARNING OUTCOMES 1.1. Understand the concept of the budget and reporting cycle in a municipal context and the legislative framework. 2. KEY CONCEPTS 2.1. Key stages of the budget and reporting cycle 2.2. Budget preparation process 2.3. Budget Implementation process 2.4. Budget evaluation process 2.5. Accountability cycle 2.6. IDP, sector plans, budget, SDBIP, adjustments budget, in-year reports, annual financial statements, annual reports, oversight reports 2.7. Monthly budget statements, quarterly reports, mid-year budget and performance assessment 2.8. Schedule of key deadlines 2.9. Medium Term Revenue and Expenditure Framework (MTREF) Municipal budget policy statement Consultation in terms of the budget and reporting cycle 18

20 3. LEARNING ASSUMED TO BE IN PLACE 3.1. Communication at level Mathematical literacy at level The learner is reminded that prior to attending a workshop on this chapter they must: read this chapter module notes; complete assigned reading or study which includes MFMA Learning modules bring completed answers to the activities/class discussion for this chapter for discussion during the workshop. 4. INTRODUCTION 4.1. A budgeting and reporting cycle is a sequence of interrelated events that occur throughout a budget period. The cycle is continuous and repetitive, meaning that events reoccur in a predictable and carefully planned sequence In the modern day local government context, a number of budget and reporting cycles are occurring concurrently and are interrelated, each informing and contributing to the other. This is because the cycle of budgeting spans beyond any given financial year generally commencing one year before the start of the financial year and concluding almost one year after the financial year end. 19

21 ENTITIES and the budget cycle Note that municipalities with municipal entities will have an added layer of complexity to deal with in planning the municipal budget and reporting cycle. The mayor of the municipality must coordinate the budget process including the inputs required from municipal entities. Notwithstanding the added complexities many of the concepts for planning a municipal budget and reporting process generally apply to municipal entities 5. THE BUDGET AND REPORTING CYCLE 5.1. Let s illustrate a single budget and reporting cycle for the 2008/09 financial year. Diagram 2a: A single budget and reporting cycle BUDGET PREPARATION PROCESS BUDGET IMPLEMENTION PROCESS BUDGET EVALUATION PROCESS 2008/09 BUDGET 1 Aug 07 May 08 2 Jul 08 Jun 09 3 Jul 09 Mar 10 DOCUMENTS & REPORTING IDP SP MTREF MBPS Schedule Key Deadlines SDBIP AB MBS QPR MBPA AFS AR OR BEC Key to abbreviations: IDP Integrated Development Plan SP Sector Plans MTREF Medium Term Revenue and Expenditure Framework MBPS Municipal Budget Policy Statement SDBIP Service Delivery and Budget Implementation Plan AB Adjustments Budget MBS Monthly Budget Statements, S.71 MFMA QPR Quarterly Performance Report, S.52(d) MFMA MBPA Mid-year Budget and Performance Assessment, S.72 MFMA AFS Annual Financial Statements AR Annual Report OR Oversight Report BEC Budget Evaluation Checklist 20

22 5.2. Diagram 2a shows that the 2008/09 cycle begins with the budget preparation process, which includes reviewing the IDP and preparing the budget and (SDBIP) documentation. The second phase of the cycle is the budget implementation process, which includes implementing and monitoring implementation. The third phase of the cycle is the budget evaluation process which includes the audited Annual Financial Statements, Annual Report and Oversight Report Now let s see how in practice, multiple budget and reporting cycles occur concurrently and demonstrate how at any one point in time the municipality will be operating in a different process of each of the three cycles. Diagram 2b below shows a typical municipal scenario where three budget and reporting cycles are in operation. Diagram 2b: Multiple budget and reporting cycles BUDGET PREPARATION PROCESS BUDGET IMPLEMENTATION PROCESS BUDGET EVALUATION PROCESS 2008/09 BUDGET 1 Aug 07 May 08 2 Jul 08 Jun 09 3 Jul 09 Mar /10 BUDGET 1 Aug 08 May 09 2 Jul 09 Jun 10 3 Jul 10 Mar /11 BUDGET 1 Aug 09 May 10 2 Jul 10 Jun 11 3 Jul 11 Mar 12 DOCUMENTS & REPORTING IDP SP MTREF MBPS Schedule Key Deadlines SDBIP AB MBS QPR MBPA AFS AR OR BEC 5.4. Diagram 2b shows the budget and reporting cycles for 2008/09, 2009/10 and 2010/11. The un-shaded area represents a particular point in time where the municipality is busy with it s: 21

23 budget preparation process for 2010/11; budget implementation process for 2009/10; and budget evaluation process for 2008/ Note how the date ranges in the un-shaded boxes overlap The diagram above also shows the key documentation that needs to be prepared for each of the three processes Note that throughout the three processes there are a range of technical activities which in the main are managed by the budget and treasury office. For example, these include: maintaining accounting and information systems for management, statutory and other requirements; maintaining systems of internal control and risk management; preparing budget estimates for recurring activities and new programmes / capital projects; identifying potential efficiency savings and alternative sources of revenue; testing funding compliance of the budget; providing budget documentation which facilitates prioritisation by council; preparing management reporting and providing advice; preparing in-year reports required for submission to the mayor, council and stakeholders supporting the council committees in place dealing with financial matters; and 22

24 preparing statutory reporting such as the 5.8. These technical activities are mentioned to provide the learner with insight into what sits behind the three budget and reporting processes but are not covered in detail by this unit standard The next chapter will consider the three processes (preparation, implementation, and evaluation) in detail. ACTIVITY / CLASS DISCUSSION: Consider the budget and reporting cycle in your municipality. Using those listed in the diagram above as a checklist, write down the documents and reports currently prepared. Which ones are not being prepared? Do you think there is a common understanding amongst the key role players that there are three processes going on at any one time? What could you do to improve that understanding? 23

25 5.10. MEDIUM TERM REVENUE AND EXPENDITURE FRAMEWORK (MTREF) As with the national and provincial governments, municipalities are required to table and adopt an annual budget covering three-years. Through a continuous cycle of forecasting, implementation and review municipalities must manage their finances across the three-year timeframe By adopting three-year budgets linked to longer-term goals contained in the IDP, municipalities can adopt more forward looking and better-informed approaches and make better judgements about the future priorities for capital development and service delivery in their communities SEVEN YEAR HORIZON During the budget prepartion process it is useful to consider a seven year horizon. In the diagram below a municipality is preparing the 2008/09 Budget, which is a Medium Term Revenue and Expentiture Framework (MTREF). A municipality bases its 2008/09 MTREF on the strategic direction in the IDP and information about past performance, including the current year and audited information on previous years This format above is consistent with National and Provincial budget requirements It provides for three years of audited outcome figures providing background trend verification. which overcomes the disadvantage that one year of audited history alone is not a sound basis of performance comparison. The additional information will improve the analysis of the budget as an early-warning mechanism and a forecasting tool. 24

26 Four columns are required for the year currently being implemented - Original Budget, Adjusted Budget, Full-year forecast and Pre-audit outcome. The term Full-year forecast is also known as estimated actual outcome. This information of recent trends and performance is vital for strategic decisions on the new budget. Furthermore, it is critical to note the importance of the original budget as this was the budget that was extensively consulted on. Significant differences between the original budget, adjusted budget and full year forecast would tend to indicate poor planning and unrealistic budgets Three columns are required for the medium term revenue and expenditure framework (MTREF), showing the budget year, and the projections for two years following the budget year. This is now a standard feature for municipalities In South Africa, the local, provincial and national spheres of government are required to focus on three simultaneous budget cycles. So while preparing the budget for the next three years, each is still implementing the current year s budget whilst also closing off and preparing financial statements and annual reports for the previous financial year Planning for a budget cycle requires an understanding of the sequence of events and the governance principals that underpin sound financial management. The following headings will discuss these important principals and the legislative framework behind the budget and reporting cycle. 6. A STRATEGIC APPROACH TO BUDGETING 6.1. At this point it is worth briefly noting the new focus on a strategic approach to budgeting Prior to the reforms of the Municipal Finance Management Act 2003 (MFMA) and Municipal Systems Act 2000 (MSA) municipal budgets focused on one-year of estimates and were based mainly on applying increments to the previous year s budget. The budgeting and planning processes were not integrated, often operating completely separately. Budgets were not presented to council in a summary form to highlight the financial implication of policy decisions. This 25

27 hampered effective policy and planning processes making consultation unwieldy; revenue and capital estimates were unrealistic, resulting in poor service-delivery performance and disappointing community expectations; and there appeared to be little or no linkage to a comprehensive long-term fiscal or financial strategy With the introduction of the MFMA these past practices have been addressed. The following extract provides a synopsis of the objective behind the change. Extract from the White Paper on Local Government, March 1998 Municipal budgets are a critical tool for re-focusing the resources and capacity of the municipality behind developmental goals. To this end, budgets must be developed in relation to the policies and programmes put forward in municipal integrated development plans. Given that resources are scarce, community participation in the development of both integrated development plans and municipal budgets is essential. Participation provides an opportunity for community groups to present their needs and concerns. It enables them to be involved in the process of prioritisation, and to understand and accept the trade-offs which need to be made between competing demands for resources. 7. SEPARATION OF ROLES AND RESPONSIBILITIES 7.1. Councillors have a constitutional role as politically elected representatives of the community, to approve policies and budgets proposed by the executive mayor or committee and then oversee the performance of the municipality in implementing these policies and budgets. For this reason, the MFMA assumes a separation between councillors serving on the executive (i.e. mayor or executive committee) and non-executive councillors. The executive mayor or executive committee are expected to provide the municipality with political leadership, by proposing policies, budgets and performance targets for the municipality and its officials. 26

28 7.2. The MFMA differentiates between the role of executive councillors and municipal officials by making the executive mayor or committee responsible for policy and outcomes and the municipal manager and other senior managers for implementation and outputs. The executive mayor or committee is expected to oversee the performance of its officials, using the service delivery and budget implementation plan (SDBIP) and monitoring performance through monthly progress reports. Non-executive councillors are expected to hold both the executive mayor or committee and the officials accountable for performance, on the basis of monthly, quarterly, mid-year and annual reports This separation of responsibilities between executive councillors, non-executive councillors and officials is important for good governance and is in line with modern practices of effective public management. The aim of the MFMA is to allow managers to manage, but to make them more accountable All these various roles are possible only because of the reporting requirements of the MFMA, as the MFMA recognises that effective service delivery is possible only with good-quality and timely management information. Such information allows management to be proactive, identifying and solving problems as they arise. Roles and responsibilities of the key players is discussed in detail in Chapter 5 of these module notes. 8. ACCOUNTABILITY CYCLE 8.1. The requirements for municipal budgeting in South Africa have undergone a significant modernization since Municipal budgeting is now seen as a strategic tool focusing on non-financial as well as financial targets. Targets in a municipal Integrated Development Plan (IDP) are linked to the targets in the: budget; the service delivery and budget implementation plan (SDBIP); and annual performance agreements of senior managers. 27

29 8.2. Once the three items above are finalised the SDBIP is used as a tool to implement the budget. Monitoring and evaluation of performance against budget is done through mid year and annual reporting. It s a constant process to review strategic direction, plan, implement, assess actual performance and discharge accountability At this point it is useful to consider some key definitions and concepts. The purposes of the definitions below are to give a brief introduction and not to teach everything there is to know. DEFINITIONS: IDP Budget SDBIP An Integrated Development Plan (IDP) is an all encompassing strategic plan for the municipality giving due regard to community needs and the strategic plans of other stakeholders such as national and provincial departments, public entities and other municipalities. It contains long term strategic goals and targets. In the municipal context a budget is a Medium Term Revenue and Expenditure Framework (MTREF) covering at least 7 years. Three years of audited history, the current year being implemented, the budget year and two outer year forecasts. The objective of the budget is to allocate limited resources to policy priorities set out in the IDP. The medium term aspect of a municipal budget facilitates a more strategic and sustainable result. The Service Delivery and Budget Implementation Plan, is more detailed than the budget. It is the operational plan required to implement the budget and will include quarterly service delivery targets and monthly targets for revenue and expenditure. Managers can use the SDBIP as an implementation tool and council can use it to assess performance. 28

30 DEFINITIONS: Adjustments Budget In-year Reports Annual Financial Statements Annual Report Oversight Report An adjustments budget is the mechanism to amend an approved budget under certain specified conditions. The most appropriate time for an adjustments budget would be together with the mid-year budget and performance review although other circumstances may require alternate timing and regulations will specify requirements. In-year reports for municipalities consist of monthly budget statements, quarterly reports and a mid-year budget and performance assessment. The annual financial statements of a municipality conform with accounting standards applicable to local government. They reflect the financial performance and financial position of a municipality and increasingly include information on non-financial performance. Annual Financial Statements must be audited and an audit opinion is expressed on their accuracy. The municipal annual report is a comprehensive public document that encompasses the audited financial statements and focuses on accountability for financial and non-financial performance against the targets in the SDBIP for the year completed. The municipal oversight report contains council s comments on the annual report and includes a statement approving, rejecting or referring the annual report back for revision and thus completing the accountability cycle Council has a key oversight role in order to ensure accountability to the community and other stakeholders. This process is known as the accountability cycle and is illustrated by the following diagrams. A basic knowledge of the definitions above will assist your understanding of the diagrams The first diagram focuses on the processes in the accountability cycle and the second diagram shows the roles and responsibilities in the accountability cycle. 29

31 ACTIVITY / STUDY: Take 5 minutes to study the first diagram referring back to key definitions and concepts. Think about the role of each step in terms of preparing, implementing and monitoring and evaluating the budget. ACTIVITY / STUDY: Take 5 minutes to study the second diagram whilst reading the explanatory text below the diagram. Think about the roles and responsibilities of each role player in terms of: budget preparation budget implementation (including monitoring) budget evaluation 30

32 Diagram 2c: Accountability cycle processes 31

33 Diagram 2d: Accountability cycle roles & responsibilities 8.6. The accountability cycle commences with policy direction from the community and other stakeholders through council to the municipal administration. In turn the administration is accountable to council for implementing policy. The council is accountable for performance to the community and other stakeholders. 9. CONSULTATIVE PROCESSES 9.1. Both the MSA and MFMA require extensive consultations with the local community and other stakeholders for important decisions like budgets, borrowing, IDPs, performance systems, and annual reports Section 16 of the MFMA requires the budget resolutions; proposed revisions to the IDP; budget related policies; and other required supporting documentation to be tabled before a full council meeting by 1 April (i.e. at least 90 days before the start of the budget year). This allows adequate time for consultation prior to 32

34 approval of the budget and ensures that councillors are aware of the budget implications so they can consult with their constituents The MFMA also requires consultation with relevant government departments and municipalities affected by the budget. Consultation with provincial and national sector departments such as, Agriculture, Health, Housing, Education, Welfare, Water Affairs and Mineral and Energy Affairs will ensure improved co-operative governance between the spheres. It is recommended that municipalities contact their Provincial Treasuries to coordinate consultation meetings with relevant provincial departments. This engagement will ensure better coordination, alignment and resource allocation from provincial and national governments District and local municipalities must consult each other when finalising plans and budgets to ensure that allocations between them are aligned, priorities are addressed and implementation is executed during the year. Historically, delays in project approval, spending and implementation have occurred undermining service delivery due to a lack of this early consultation. District municipalities must consult all municipalities within its area and must notify relevant municipalities of projected allocations, for the next three budget years, no later than 2 March (120 days prior to the start of the budget year). These allocations must be published with the draft municipal budget and will be audited by the Office of the Auditor- General to ensure consistency of amounts reflected in the transferring municipality and the recipient municipality The MFMA requires that municipalities submit their tabled and approved budgets to National Treasury and the relevant provincial treasury Municipalities will need to keep abreast of developments in the various sectors to ensure their budgets for water, sanitation, electricity etc are well informed. Municipal IDPs and budgets should inform and be informed by the development plans of sector departments to ensure a coordinated approach to infrastructure planning and service delivery. Furthermore, municipalities should have a good knowledge of all grants from government departments including their objectives, conditions and medium term allocations as gazetted. To assist municipalities in proper planning and budgeting all role-players are to provide information on 33

35 allocations in provincial budgets and the annual Division of Revenue Act around February and March that reflect transfers to municipalities over a multi year period Hence, it is critical that early on in the budget process, the mayor coordinates a schedule of key deadlines for all of the required meetings, workshops, community forums etc and makes this schedule public so that those being consulted are aware of their opportunities for input into the IDP and budget process. ACTIVITY / CLASS DISCUSSION: List the different consultative processes undertaken at your municipality. Are they considered as part of ONE overall process? 10. LEGISLATIVE FRAMEWORK For the purposes of planning a municipal budget and reporting cycle it is necessary to have a broad understanding of the legislative framework applicable to local government. The following discussion considers some of the more important aspects and synergies between the applicable legislation. Learners should understand the applicable legislation so that they are able to refer to specific requirements in practice The Municipal Finance Management Act (MFMA) must be read with other national legislation, particularly close linkages and alignment between the MFMA and the Municipal Systems Act (MSA). This should be recognised early on for a better understanding, correct interpretation and application of the two pieces of legislation. These two Acts are complementary to each other in many areas, and should therefore be read together. For example, chapter 5 of the MSA deals with IDPs and the preparatory process, whilst chapter 4 of the MFMA deals with budgets and their preparatory process. These two processes are however ONE 34

36 process, and not two separate processes, as the IDP and budget must be fully aligned and consistent with each other Other legislation impacting on local government includes, the Constitution of the Republic of South Africa, Intergovernmental Fiscal Relations Act, Structures Act, Demarcation Act, Property Rates Act, Water Services Act, Electricity Act, Transport Act, annual Division of Revenue Act, Municipal Fiscal Powers and Functions Act and their supporting regulations. Below we discuss only some of the main areas of linkages and alignment that must be considered CONSTITUTIONAL AMENDMENTS Areas of significance include recent amendments to the Constitution. The first relates to section 230A on borrowing, providing that loans may be raised for capital or current expenditure, with loans for current expenditure limited to use for bridging purposes during the fiscal year, and binding current and future councils to honour this decision. The other significant amendment relates to section 139 and deals with provincial interventions in a municipality. This allows the provincial executive to take appropriate steps in the event of a municipality s failure to fulfil an executive or legislative obligation, including the power to dissolve a council. The legislative obligation relates to the approval of a budget or other revenue-raising measures. This includes the imposition of a recovery plan in the case of an emergency when there is a persistent material breach of its obligations to provide basic services or to meet financial commitments THE MFMA AND THE MUNICIPAL SYSTEMS ACT Both the Municipal Systems Act and the MFMA deal with the internal processes, consultative processes, performance systems and reporting and accountability mechanisms. Parliament devoted a great deal of effort to ensure that the two Acts are totally consistent with each other, leading to amendments to the MSA. It is important to ensure that the MSA is read with the two sets of amendments, as per the Local Government Laws Amendment Act (Act 51 of 2002) and the MSA Amendment Act (Act 44 of 2003). 35

37 10.6. DEFINITIONS The first point to note is that the definitions in both the MSA and MFMA are similar, and there is much cross-referencing in the MFMA to definitions in the Municipal Systems Act. This applies to key definitions on municipal services, service delivery agreements, local community etc IDP AND BUDGETS The MFMA and the Municipal Systems Act contain practical synergies that relate to good governance, consultation and accountability issues. A direct interrelationship exists when a municipality contemplates its processes with regards planning and budgeting. The amendment to the Municipal Systems Act and the MFMA chapter on budgeting require that a revised IDP be adopted at the time of adopting the budget. It follows that, in practice, the planning and budgeting processes will commence together at least 10 months before the start of the municipal financial year, when the mayor announces the process for revising the IDP and preparation of budget. Also, the alignment of policies through the adoption of the budget and other related policies such as the levying of fees for municipal services is made more explicit at the time of drafting and adopting the budget PERFORMANCE SYSTEMS AND ANNUAL REPORTS Both the MFMA and MSA are built on the adoption by the municipality of a performance system. The budget of the municipality must contain performance targets and measurable objectives, which are set out at the beginning of the financial year (section 17 of the MFMA). Linked to these performance targets are the adoption of the annual service delivery and budget implementation plan (SDBIP) and annual performance agreement between the mayor (or executive committee) and municipal manager (refer to section 57 of the MSA as amended, and sections 53 and 69 of the MFMA) At the end of the financial year, the municipality must publish an annual report, reporting on both its financial and non-financial performance. Whilst the MFMA 36

38 focuses on financial performance (chapter 12), the MSA focuses on non-financial performance (section 46 of MSA as amended). The annual report will be considered by the municipal council using the process outlined in chapter 12 of the MFMA ROLES OF MAYOR, COUNCILLORS AND OFFICIALS Both the MSA and MFMA make common assumptions about the role of various stakeholders in the municipality. Such roles also inform the code of conduct for councillors and officials as set out in Schedules 1 and 2 of the MSA. In addition, if there are financial transgressions, financial misconduct provisions and criminal sanctions apply in terms of chapter 15 of the MFMA. Where councillors or officials transgress their role or code of conduct, strict provisions apply ASSIGNMENT OF FUNCTIONS Cooperation between governments is strengthened through these Acts, and when there is an assignment of a function or power to a municipality there must be comment by the Financial and Fiscal Commission and consultation with the Minister of Finance on the assignment, including possible liabilities. This aspect strengthens co-operative government and links with chapter 5 of the MFMA and directly impacts on the Division of Revenue Act. The other area of cooperation relates to the provision of services through service delivery agreements and the use of external mechanisms. An important area of alignment relates to the process of establishing an external mechanism to provide municipal services. The community consultation, assessments, capacity, feasibility studies, value for money, measurement of risk, projected borrowing and fiscal implications are all linked to the IDP and budget process OTHER LEGISLATION AND THE MFMA The earlier sections draw attention to those linkages with other legislation that set the foundations of the system and structure of local government, but also important is the sector-specific focus. Apart from the Constitution and Municipal Systems Act and other national local government legislation like the Local 37

39 Government: Municipal Structures Act, Property Rates Act and Municipal Demarcation, there are a number of national Acts of Parliament that impact on the MFMA. These include the following: Financial legislation like the Constitution of the Republic, Intergovernmental Fiscal Relations Act, Financial and Fiscal Relations Act, Preferential Procurement Policy Framework Act and the annual Division of Revenue Act Other local government legislation like the Municipal Structures Act, Demarcation Act and Property Rates Act Sectoral legislation like the Water Services Act, Electricity Act, Transport and Environment Acts The Remuneration of Political Office-bearers Act Planning legislation like the Land Development Objectives Act Labour legislation, including the Labour Relations Act, Skills Development Act, as well as pension and medical aid legislation The Intergovernmental Fiscal Relations Act establishes the process of consultation for budget allocations, including the role of the Budget Forum. The annual Division of Revenue Act is one of the important pieces of budget legislation for local government, as it provides national allocations for the local government sphere by municipality, for each of the coming three years The Financial and Fiscal Commission Act (FFC) is also important for the local sphere. Not only does it spell out the process for filling vacancies to the FFC, but also includes rigorous provisions in the revised section 5 on the role of the FFC before any new function is shifted to local government. This assignment clause should also be read with section 10 of the amended MSA. Some of the other pieces of legislation that impact on and should be read with the MFMA are the sectoral legislation relating to water and electricity and transport. The Water Services Act, Act 108 of 1997, contains provisions relating to norms and 38

40 standards, the development of plans and tariff mechanisms. Whilst the Electricity Act, Act 41 of 1987 (as amended), also contains provisions relating to the electricity regulator, it deals with aspects of licensing, the sale and supply of electricity within municipalities and tariffs. Note that where there is any conflict between such national legislation and the MFMA or MSA, it is the latter two Acts that take precedence, depending on the issue Particular note should be made of sections 42 and 43 of the MFMA, which take precedence over section 94(1)(c) and section 10 of the Water Services Act if a municipality properly consults (in terms of sections 33 and 46) with the relevant national departments when setting tariffs for long-term contracts. The applicability of these provisions and those in the MFMA especially that relating to budget preparation and consultation in chapter 4, co-operative government and pricing of bulk services in chapter 5 will assist in better management of processes whilst offering a mechanism for dispute resolution between organs of state. The MFMA requires that a structured process be followed to ensure that consultation is appropriately addressed. The improvement in the content and quality of municipal budgets will also assist. These provisions promote cooperative government between the national and local spheres in the tariff setting process. Sector departments will have to monitor the achievement of sector priorities The Property Rates Act contains further related provisions that deal with the adoption and contents of a rates policy, increases and their timing and documentation that must accompany the budget as outlined in the MFMA. It also requires alignment with community participatory processes and specifically publication of information with the budget. The period for which rates are levied is the same as the budget, unless imposed as part of a recovery plan. The limitation on increases in rates is directly aligned with the MFMA. There are also linkages with the supply chain management framework when securing the services of private providers in the execution of the municipal valuation exercise. 39

41 SUMMARY The above brief explanation should not be considered as exhaustive, but it highlights the linkages and synergies with the MFMA and other legislation. It also attempts to clarify the policies of government. It should serve as an illustration of the extent to which other pieces of legislation impact on the applicability of the MFMA and vice versa. ACTIVITY / CLASS DISCUSSION: What are the two main pieces of legislation impacting on the municipal budget and reporting cycle? Why have they been synchronised? 11. ASSIGNMENTS The following assignments are to be completed after the workshop on this chapter and handed in prior to, or at the beginning of, the next workshop ASSIGNMENT 2.1 (15 MARKS) Describe the budget and reporting cycle. Explain how the processes interrelate using an example ASSIGNMENT 2.2 (11 MARKS) In the context of the municipal budget and reporting cycle explain the need for separation of roles and responsibilities. 40

42 12. ASSESSMENT CRITERIA In terms of the regulatory framework for the municipal budget cycle, identify the roles and responsibilities of municipal political executives, accounting officers and senior managers in the budget preparation [SO1AC2] Include roles and responsibilities of Mayor, municipal manager, council, CFO, senior managers [SO1ACR1] Plan the tabling and adoption of a municipal budget as required by legislation [SO2AC1] 41

43 Components of the budget and reporting cycle 1. LEARNING OUTCOMES 1.1. Understand the components of the budget and reporting cycle in a municipal context. 2. KEY CONCEPTS 2.1. Budget preparation process Budget preparation process timeline Six steps to preparing a budget (Planning, Strategising, Preparing, Tabling, Approving, Finalising) Schedule of key deadlines Budget evaluation checklist Format of budget documentation to be tabled Consultation 2.2. Budget implementation process Using the budget and SDBIP to implement the budget Monthly budget statements Quarterly reports Mid year budget and performance assessments Adjustments budgets conditions and frequency 42

44 Shifting funds between multi-year appropriations 2.3. Budget evaluation process 2.4. Audited annual financial statements 2.5. Annual reports 2.6. Oversight reports 3. LEARNING ASSUMED TO BE IN PLACE 3.1. Prior to commencing this chapter of the module notes the learner must have completed the previous chapter(s) The learner is reminded that prior to attending a workshop on this chapter they must: read this chapter module notes; complete assigned reading or study which includes MFMA Learning modules bring completed answers to the activities/class discussion for this chapter for discussion during the workshop bring completed answers to the short assignments for the previous chapter to be handed in for marking. 4. INTRODUCTION 4.1. This chapter will consider the detail behind the budget and reporting cycle processes (preparation, implementation and evaluation). Chapter 5 will then 43

45 present a financial management calendar which incorporates all of the legislative requirements for the budget and reporting cycle. ACTIVITY / STUDY: Complete module 3 of MFMA Learning now. 5. BUDGET PREPARATION PROCESS 5.1. The budget preparation process will commence about 12 months before the start of the budget year. It is considered that a well-run budget preparation process that incorporates the IDP review will facilitate community input, encourage discussion, promote a better understanding of community needs, provide an opportunity for feedback and improve accountability and responsiveness to the needs of the local communities. It also positions the municipality to represent the needs of the community and to provide useful inputs to the relevant provincial and national department strategies and budgets for the provision of services such as schools, clinics, hospitals and police stations SIX STEPS TO PREPARING A BUDGET The following table sets out six distinct steps to the preparation of a budget. It is important to mention up front that consultation on the budget occurs throughout the preparation process. 44

46 Diagram 3a: Six steps to preparing a budget ACTIVITY / STUDY: Study the table above and refer to the budget preparation process timeline below. 45

47 Diagram 3b: Budget preparation process timeline Now let us consider each of the steps in more detail STEP 1: PLANNING The Mayor will lead a review of the previous budget process and incorporate findings into planning the next budget process. This step commences at the latest on the 1st of July and must be completed by no later than 31st of August with the tabling of the schedule of key deadlines Coordination of the budget preparation process Section 21 of the MFMA is the primary provision relating to the municipal budget preparation process. It requires the mayor to coordinate the processes for preparing the annual budget and for reviewing the Integrated Development Plan (IDP) and budget related policies. The mayor must table in council by 31 August (10 months before the start of the budget year) a schedule of key deadlines for various budget related activities spelled out in section 21. The accounting officer 46

48 is tasked by section 68 of the MFMA with assisting the mayor in developing and implementing the budget preparation process. The process should provide for both internal (within municipality) and external (local community and other stakeholder) consultations. ACTIVITY / READ: Read sections 21 and 68 of the MFMA The schedule of key deadlines (below) is an example that can be adapted to suit individual municipalities. Please note that where a specific time frame is shown in the example, it is a deadline requirement of the MFMA and must be complied with. Municipalities are advised to make public a simplified version of the schedule to ensure the community is aware of the timelines, process and opportunities and to have input to the IDP and budget. A simplified version of the schedule should be placed in local newspapers, newsletters and the municipal website alerting the public that more information on the budget process is available on the municipal website and in offices, including how the public can make an input into the budget process. ACTIVITY / STUDY: Spend 30 minutes studying the schedule of key deadlines below. Read each section of the appropriate Act referred to and note the definitions at the end of the schedule. 47

49 Diagram 3c: Time schedule of key deadlines TIME SCHEDULE OF KEY DEADLINES Mayor to Table in Council 10 Months Prior to Start of Budget Year Month Municipality Budget Year Mayor and Council / Entity Board Administration - Municipality and Entity July August Mayor begins planning for next three-year budget in accordance with co-ordination role of budget process MFMA s 53 Planning includes review of the previous years budget process and completion of the Budget Evaluation Checklist Mayor tables in Council a time schedule outlining key deadlines for: preparing, tabling and approving the budget; reviewing the IDP (as per s 34 of MSA) and budget related policies and consultation processes at least 10 months before the start of the budget year. MFMA s 21,22, 23; MSA s 34, Ch 4 as amended Mayor establishes committees and consultation forums for the budget process Accounting officers and senior officials of municipality and entities begin planning for next three-year budget MFMA s 68, 77 Accounting officers and senior officials of municipality and entities review options and contracts for service delivery MSA s

50 TIME SCHEDULE OF KEY DEADLINES Mayor to Table in Council 10 Months Prior to Start of Budget Year Month Municipality Budget Year Mayor and Council / Entity Board Administration - Municipality and Entity September Council through the IDP review process determines strategic objectives for service delivery and development for next threeyear budgets including review of provincial and national government sector and strategic plans Budget offices of municipality and entities determine revenue projections and proposed rate and service charges and drafts initial allocations to functions and departments for the next financial year after taking into account strategic objectives Engages with Provincial and National sector departments on sector specific programmes for alignment with municipalities plans (schools, libraries, clinics, water, electricity, roads, etc) October Accounting officer does initial review of national policies and budget plans and potential price increases of bulk resources with function and department officials MFMA s 35, 36, 42; MTBPS November Accounting officer reviews and drafts initial changes to IDP MSA s 34 December Council finalises tariff (rates and service charges) policies for next financial year MSA s 74, 75 Accounting officer and senior officials consolidate and prepare proposed budget and plans for next financial year taking into account previous years performance as per audited financial statements 49

51 TIME SCHEDULE OF KEY DEADLINES Mayor to Table in Council 10 Months Prior to Start of Budget Year Month Municipality Budget Year Mayor and Council / Entity Board Administration - Municipality and Entity January February Entity board of directors must approve and submit proposed budget and plans for next three-year budgets to parent municipality at least 150 days before the start of the budget year MFMA s 87(1) Council considers municipal entity proposed budget and service delivery plan and accepts or makes recommendations to the entity MFMA s 87(2) Accounting officer reviews proposed national and provincial allocations to municipality for incorporation into the draft budget for tabling. (Proposed national and provincial allocations for three years must be available by 20 January) MFMA s 36 Accounting officer finalises and submits to Mayor proposed budgets and plans for next three-year budgets taking into account the recent mid-year review and any corrective measures proposed as part of the oversight report for the previous years audited financial statements and annual report Accounting officer to notify relevant municipalities of projected allocations for next three budget years 120 days prior to start of budget year MFMA s 37(2) 50

52 TIME SCHEDULE OF KEY DEADLINES Mayor to Table in Council 10 Months Prior to Start of Budget Year Month Municipality Budget Year Mayor and Council / Entity Board Administration - Municipality and Entity March April Entity board of directors considers recommendations of parent municipality and submit revised budget by 22nd of month MFMA s 87(2) Mayor tables municipality budget, budgets of entities, resolutions, plans, and proposed revisions to IDP at least 90 days before start of budget year MFMA s 16, 22, 23, 87; MSA s 34 Consultation with national and provincial treasuries and finalise sector plans for water, sanitation, electricity etc MFMA s 21 Accounting officer publishes tabled budget, plans, and proposed revisions to IDP, invites local community comment and submits to NT, PT and others as prescribed MFMA s 22 & 37; MSA Ch 4 as amended Accounting officer reviews any changes in prices for bulk resources as communicated by 15 March MFMA s 42 Accounting officer assists the Mayor in revising budget documentation in accordance with consultative processes and taking into account the results from the third quarterly review of the current year 51

53 TIME SCHEDULE OF KEY DEADLINES Mayor to Table in Council 10 Months Prior to Start of Budget Year Month Municipality Budget Year Mayor and Council / Entity Board Administration - Municipality and Entity May Public hearings on the budget, and council debate. Council Accounting officer assists the Mayor in preparing the final budget consider views of the local community, NT, PT, other provincial documentation for consideration for approval at least 30 days before the and national organs of state and municipalities. Mayor to be start of the budget year taking into account consultative processes and provided with an opportunity to respond to submissions during any other new information of a material nature consultation and table amendments for council consideration. Council to consider approval of budget and plans at least 30 days before start of budget year. MFMA s 23, 24; MSA Ch 4 as amended Entity board of directors to approve the budget of the entity not later than 30 days before the start of the financial year, taking into account any hearings or recommendations of the council of the parent municipality MFMA s 87 52

54 TIME SCHEDULE OF KEY DEADLINES Mayor to Table in Council 10 Months Prior to Start of Budget Year Month Municipality Budget Year Mayor and Council / Entity Board Administration - Municipality and Entity June Council must approve annual budget by resolution, setting taxes Accounting officer submits to the mayor no later than 14 days after and tariffs, approving changes to IDP and budget related policies, approval of the budget a draft of the SDBIP and annual performance approving measurable performance objectives for revenue by agreements required by s 57(1)(b) of the MSA. source and expenditure by vote before start of budget year MFMA s 69; MSA s 57 MFMA s 16, 24, 26, 53 Accounting officers of municipality and entities publishes adopted budget Mayor must approve SDBIP within 28 days after approval of the and plans budget and ensure that annual performance contracts are MFMA s 75, 87 concluded in accordance with s 57(2) of the MSA. Mayor to ensure that the annual performance agreements are linked to the measurable performance objectives approved with the budget and SDBIP. The mayor submits the approved SDBIP and performance agreements to council, MEC for local government and makes public within 14 days after approval. MFMA s 53; MSA s 38-45, 57(2) Council must finalise a system of delegations. MFMA s 59, 79, 82; MSA s Abbreviations: IDP - Integrated Development Plan; MFMA - Local Government: Municipal Finance Management Act, No. 56 of 2003; MSA - Local Government: Municipal Systems Act, No. 32 of 2000, as amended; MTBPS - National Treasury annual publication, Medium Term Budget and Policy Statement; NT - National Treasury; PT - Provincial Treasuries; SDBIP - Service Delivery and Budget Implementation Plan 53

55 Review of previous budget process budget evaluation checklist While the MFMA does not explicitly require a review of the previous budget process, it is strongly recommended that this is undertaken in July (and completed by 31 August) by the mayor and municipal manager before determining the new schedule of key deadlines. Such a review can provide information about what worked well, what didn t, where to improve and issues to address for legislative compliance A Budget Evaluation Checklist (BEC) template has been developed and will assist municipalities to evaluate the budget process. This is available on the National Treasury website for learners that may be interested ( ENTITIES and planning the budget process Municipalities with entities will have a slightly more complex budget preparation process as they must include plan for coordination of entity budget preparation processes. The entity budget processes must be shaped by, and be within the framework of, the municipality s budget process. This will be coordinated by the mayor. In particular, it will be necessary to ensure that the entities strategic plan and budget is consistent with the direction of the parent municipality s IDP and budget STEP 2: STRATEGISING This step involves the review of the Integrated Development Plan and budget related policies through internal and external consultations. Internal consultation means consultation with staff within the municipality. External consultation means consultation with the community and other stakeholders. This step commences early in the process and carries on until October. 54

56 Review of IDP and budget related policies The Municipal Systems Act (MSA) and chapter 4 of the MFMA require that a revised IDP be adopted at the time of adopting the budget. Therefore, the process leading to the adoption of the 2005/06 budget and IDP must be incorporated into the one process, together with the approval of taxes, levies, user charges and budget related policies. This will ensure credible plans and budgets that are realistic and implementable. Furthermore, the IDP should be informing the entire budget, not just the capital budget, which has been the case prior to the MFMA coming into effect Budget related policies include but are not limited to policies on: tariff setting; credit control / debt collection; indigents; cost recovery; investment; borrowing; cash management; spending delegations or authorisations; other supply chain considerations such as purchasing limits for sole supplier versus quote or tender; and so on. Some of these are required to be passed as a by-law and may require significant planning before changes can be made. ACTIVITY / READ: Read the provisions of the Municipal Budget and Reporting Regulations Preparing and amending budget-related policies Internal consultations within the municipality The Budget process is consultative and the collective product of many role players within a municipality. If treated as an accounting exercise only, the mayor and accounting officer will have failed in their obligations to the municipality and the community. The budget process must involve all the senior managers and, importantly, it must be guided by the strategic priorities of the municipality. 55

57 The budget process should be preceded by a number of strategic and consultation processes within the municipality, involving the mayoral/executive committee and councillors. These processes are not legislated and are left to the discretion of each municipality The internal strategic consultation should be undertaken during September/October, with the mayor convening a meeting of the mayoral or executive committee and senior managers. The purpose is to determine the priorities of the municipality for the coming budget, taking into account the financial and political pressures facing the municipality. It should also consider what revisions should be considered to its current IDP. This process need not involve any non-executive councillors at this stage The above process ideally would culminate in a major council strategic workshop around the beginning of October involving the entire council (or if the council is too large, at least the chairpersons of all council committees). The purpose of the workshop is to gain understanding of budgetary pressures and to win the support of councillors to the budget priorities proposed by the mayor. It should be noted that at this stage the mayor and mayoral/executive committee determine the budget priorities the council should not be asked to vote on such priorities and the mayor should strive to only win the broad support of the council. The actual priorities will be approved by the council when it approves the budget and revisions to the IDP at the end of the process The budget priorities are tentative at this stage and offer a basis for consulting with internal stakeholders. It may be necessary for the mayor to revise the priorities following the consultation process. Note that external consultation with the community and other stakeholders is discussed under its own heading further on. ENTITIES and strategising Consultation and setting of priorities in the IDP must take into account all 56

58 services provided by the municipality whether through municipal departments or external mechanisms such as municipal entities STEP 3: PREPARING The preparation of the budget is a lengthy process spanning many months. It can be said to start in August at the time the mayor tables the schedule of key deadlines and concludes when the mayor approves the Service Delivery and Budget Implementation Plan and annual performance agreements with senior managers In practice the budget preparation process is an ongoing function where processes and budget years will overlap. There are generally three different budget processes operating in parallel all the time - reporting on the past year (e.g. annual reports and audited financial statements), current year implementation, and preparations for the coming budget year. Refer to diagram 2b which shows how there are always three budget and reporting cycles in progress at any one time Budget preparation includes the following: assessment of previous year performance and corrective action to be incorporated in the next budget; prioritising activities to be included in the annual budget and MTREF winning support for the priorities that will shape the way budget allocations will be determined; integration of strategic objectives with budget allocations; 57

59 appropriate planning and improved project management; assessing affordability of rates and service charges, and identifying poor households unable to afford such rates and charges; accurate estimation of revenue and expenditure projections Projecting the cost of existing routine activities Developing costed proposals for new programmes and capital projects; consultation and review of national, provincial and local priorities; testing of funding compliance to ensure budget is funded according to the MFMA; and preparing budget documentation Previous performance Throughout the budget process, and specifically at key times, consideration should be given to the effect that previous performance will have on the medium term plan and the current and forthcoming budgets. This should include past year and current year information Whilst the technical preparation of the Budget is undertaken by the municipal manager, senior managers and chief financial officer, it is important that the mayor meet with the municipal manager and CFO on a monthly basis after the priorities are set, particularly during November, January, February and March. Such political oversight is necessary to guide officials and to assist in making the hard trade-offs necessary to determine the budget A key step in preparing the budget occurs at the end of January, when the mayor is required to table the annual report for the past year and the mid-year report on the current financial year. 58

60 For example, on 31 January 2009, the mayor will be tabling the 2007/08 annual report, and will be submitting the mid-year report on the 2008/09 budget. This mid-year report will also inform the mayor and municipal manager on adjustments that need to be made to the 2008/09 current year budget. It is recommended that a municipal adjustment budget be tabled at the end of February 2009 which takes into account adjustments to be addressed in the current budget, such as under-collection of revenue, to address emergencies and adjustments in national and provincial allocations. All the above considerations must be used to determine the coming budget for the 2009/10 budget year STEP 4: TABLING The MFMA stipulates that the budget and revised Integrated Development Plan must be tabled together 90 days before the start of the budget year, together with the draft resolutions and budget related policies This step may commence as early as January and must be completed no later than 31 March Diagram 3d below illustrates the sequence of events to table the proposed budget and amendments to the IDP. Diagram 3d: Budget tabling and approval timeline Tabling of annual budgets To ensure facilitation of consultation the budget tabled for consultation (at least 90 days before the start of the budget year) must be in exactly the same format as the budget that is approved. Furthermore, the budget tabled for consultation 59

61 must also be realistic and capable of being implemented as tabled. That is, the budget must be funded according to section 18 of the MFMA such that all resources are available to implement the budget. Tabling a budget which could not be implemented is not useful as a consultation device. The next heading briefly considers funding the budget Note that the MFMA does not talk about submitting a draft budget to council. It rather talks about tabling the budget to council. The word draft has deliberately been omitted because it has connotations of something incomplete. The budget tabled for consultation must in fact be capable of implementation to ensure useful consultation can take place Further to the points above, the proposed resolutions which accompany the tabled budget must be the resolutions that would be required to approve the tabled budget. Referring to the previous paragraphs, the tabled budget is capable of being implemented and therefore the proposed resolutions would give effect to the budget if they were in fact resolved by council. Council will note these proposed resolutions but cannot pass them until consultation has been completed The draft service delivery and budget implementation plan is the operational plan that would need to be carried out if the tabled budget was approved as tabled. The formulation of this plan is necessary to arrive at a realistic budget for tabling. Its existence proves that the tabled budget could be implemented as tabled. The portfolio committee responsible for the budget may decide whether this detailed plan should be tabled to council alongside the budget Once the budget is tabled the local community must be invited to make written submissions to the council on the budget and to make representation at the council hearings. Key stakeholders like national and provincial departments (e.g. treasuries, local government, water, environment, health) should also be invited to submit written comments to the hearings. 60

62 The council may also wish to host special sessions with community organisations, business organisations and public sector institutions prior to convening the hearings on the budget The council is required to have hearings on the budget before it considers the budget for adoption. Such hearings can take the form of various committee hearings and should be convened soon after tabling the budget. The hearings may need to extend over a number of weeks, after which a full council meeting should be convened to consider and make recommendations arising out of the hearings process. The council must consider all the submissions and representations received during its hearings process. The mayor must be given an opportunity to respond to the recommendations (at that or a subsequent council meeting), and where necessary, to make revisions and amend the tabled budget Funding the budget A budget must be credible and funded according to section 18 of the MFMA. All projected revenue and expenditure must be realistically achievable and backed by documented evidence The Municipal Budget and Reporting regulations set out the requirements for funding the budget including the determination of realistic revenue and expenditure projections, and the funding of reserves The intent is that funding can only be included in the budget when it is properly documented and the funding is certain to eventuate. Budgets that make unrealistic service delivery promises by inclusion of unrealistic funding sources are not useful planning devices and only serve to falsely raise the expectations of the community Likewise, estimates of expenditure need to be based on past performance and realistic future assumptions. 61

63 ACTIVITY / READ: Read MFMA Circular 42 and the guideline MFMA Funding Compliance, 10 March 2008 which provide detailed guidance on funding of the budget. Note that municipalities must use the funding measurement self assessment to determine whether the budget is funded before it is tabled to council for consultation. National treasury and the relevant provincial treasury will independently assess whether budgets are funded according to the MFMA and reject those budgets that do not comply Publication of annual budgets for consultation The accounting officer must immediately (on the same day the documents are tabled) post the budget, revised IDP and all related documents onto the municipal website so that the budget is accessible to the public When making the tabled budget public for consultation the overarching requirement is that it is the documentation set out in Schedule A to the regulations that is made public. A key principle of the regulations is that for adequate consultation with a wide range of stakeholders it is critical that the minimum required documentation is standard for all municipalities and municipal entities This information must at a minimum be made available at municipal offices and placed on the municipal web site Additional information may be made public including budget summaries in alternate languages. Any additional information must however address both service delivery and financial implications for the medium term. This must at least include the previous year s actual outcome, the current years forecast outcome, the budget year and the following two years. It is important that 62

64 summary information which may be more accessible to large sections of the community demonstrate service delivery as well as financial implications and present a medium term view Submission of annual budgets after tabling for consultation Once the annual budget has been tabled for consultation it must immediately be submitted to National Treasury, the relevant provincial treasury and other municipalities affected by the annual budget. Submission to other organs of state is on receipt of a request The information submitted to National Treasury and the relevant provincial treasury must include the documentation as per Schedule A to the regulations in printed and electronic format. The draft service delivery and budget implementation plan must also be submitted in both printed and electronic format. Finally, the electronic budget return forms must be submitted Note that the regulation specifically separates requirements for publication and submission differentiating between the acts of making public and submitting. In each case the minimum documentation required includes the annual budget and supporting documentation set out according to Schedule A Format of annual budget documentation to be tabled and approved Of key importance is the notion that the format for the budget tabled for consultation must be the same as the format of the budget approved by council. This improves transparency during the consultation process, allows a clear comparison between the budget tabled for consultation and that which is finally approved, and demonstrates that the tabled budget is in fact credible and could realistically be implemented as is, should the consultation process result in no changes. The accountability cycle would be completely disrupted if Council were to consult on a budget that had a different format to the one approved Annual budgets for municipalities must be presented according to Schedule A to the Municipal Budget and Reporting Regulations and for entities according to 63

65 Schedule D. The sequence for presenting the annual budget documentation for a municipality follows a logical flow and for explanation purposes can be split into two parts. Part 1 provides an overall summary of the affect of the annual budget and is the same format for each schedule. Part 2 provides further detail. PART 1 of a municipal budget 1. Mayor s report 2. Resolutions 3. Executive summary 4. Annual budget tables (including charts and explanatory notes) The mayor s report will introduce the documentation tabled to council. It will be a very high level overview which covers key issues only and presents the political flavor. The executive summary on the other hand provides a summary of the affect of the entire budget. The annual budget tables are the main tables containing the budget amounts that will be approved in the resolutions. Additional tables will feature in Part 2 under the relevant heading. PART 2 of a municipal budget 4. Overview of annual budget process 5. Overview of alignment of annual budget with Integrated Development Plan 6. Measurable performance objectives and indicators 7. Overview of budget related policies 8. Overview of budget assumptions 9. Overview of budget funding 10. Expenditure on allocations and grant programmes 11. Allocations and grants made by the municipality 12. Councillor and board member allowances and employee benefits 64

66 13. Monthly targets for revenue, expenditure and cash flow 14. Annual budgets and SDBIPs internal departments 15. Annual budgets and SDAs entities and external mechanisms 16. Contracts having future budgetary implications 17. Capital expenditure details 18. Legislation compliance status 19. Other supporting documentation 20. Annual budgets of municipal entities attached 21. Municipal manager s quality certification Part 2 provides summary disclosure of key information relevant to the budget. While more detailed than the executive summary it will refer the reader to additional detailed documentation where necessary. For example, 8. Overview of budget related policies will not contain a copy of each policy but must include a reference on where to find that detail. ENTITIES and tabling Submission of annual budgets to parent municipality To ensure facilitation of consultation the entity budget submitted to the parent municipality (at least 150 days before the start of the budget year) must be in exactly the same format as the budget that is approved. If revisions are made taking into account any recommendations from the parent municipality, the revised annual budget must be submitted to the parent municipality at least 100 days before the start of the budget year. This process allows the annual budget of the municipal entity to be consolidated into the annual budget of the parent municipality to be tabled for consultation (at least 90 days prior to the start of the budget year). Furthermore, annual budgets of entities submitted to the parent 65

67 municipality must be realistic and capable of being implemented as submitted. Submitting a budget which could not be implemented is not useful as a consultation device. The proposed resolutions which accompany the submitted budget must be the resolutions that would be required to approve the submitted budget. Referring to the discussion above, the submitted budget is capable of being implemented and therefore the proposed resolutions would give effect to the budget if they were in fact resolved by the board. Note that the parent municipality will publish the municipal entity budgets along with the parent municipality budget for the purposes of consultation STEP 5: APPROVING After the mayor has responded to the recommendations and made amendments to the tabled budget, the full council must meet to consider the budget for approval no later than 31 May (30 days before the start of the budget year). This step may commence as early as March and must be completed prior to the start of the budget year Approval of capital projects There are two processes for approving capital projects depending on the total projected cost of the project compared to the total revenue budget. The intent is to allow approval by programme (a group of projects) in certain circumstances and streamline the approval and monitoring process while at the same time ensuring that large projects are considered individually. Where the cost of individual projects is greater than a certain percentage of revenue (as prescribed), those individual projects must be approved individually. 66

68 Consideration of the annual budget for approval Ideally the council should consider approving the budget, and related policies, at the same meeting that the mayor tables any revisions/amendments If the budget is not approved at that meeting it must be reconsidered at least within seven days and it must be continued to be reconsidered as often as necessary until it is approved before the start of the budget year. Generally as part of the municipal budget process a number of meeting dates will have been set aside to consider approval of the budget and ensure that adequate time is provided to achieve budget approval prior to the start of the budget year Failure to approve the budget before the start of the budget year will have serious operational consequences for the municipality (as no payments can be made without an approved budget) and could result in a section 139 constitutional intervention in terms of sections 25 and 26 of the MFMA. Should the municipality fail to approve the budget before the start of the budget year, the mayor must inform the MEC for Finance that the budget has not been approved To facilitate discussion and eventual approval, the mayor tables a report detailing the communities views on the tabled budget and comments received from stakeholders. The budget and supporting documentation as per Schedule A should be represented as amended to take into account where appropriate the comments received. This enables the council to see the budget that they are considering for approval Approval of annual budget Council must consider the annual budget and supporting documentation as set out in Schedule A and pass separate resolutions for at least the items covered in Schedule A under the heading Resolutions. 67

69 Publication of approved annual budget The requirements for publication of the approved budget are very similar to those for the budget tabled for consultation. For the approved budget, publication must also include information pertaining to the consultation that was undertaken Within five working days after the budget has been approved, it must be made public. The annual budget and supporting documentation set out according to Schedule A must be made public together with the consultation information set out in the regulations and the most recent version of the Integrated Development Plan This information must at a minimum be made available at municipal offices and placed on the municipal web site Additional information may be made public including budget summaries in alternate languages. Any additional information must however address both service delivery and financial implications for the medium term. This must at least include the previous year s actual outcome, the current years forecast outcome, the budget year and the following two years. It is important that summary information which may be more accessible to large sections of the community demonstrate service delivery as well as financial implications and present a medium term view Submission of approved annual budget Note that this requirement for submission of the approved budget is identical to the requirement for the submission of the budget tabled for consultation Once the annual budget has been approved it must immediately be submitted to National Treasury, the relevant provincial treasury and other municipalities affected by the annual budget. Submission to other organs of state is on receipt of a request. 68

70 The information submitted to National Treasury and the relevant provincial treasury must include the documentation as per Schedule A to the regulations in printed and electronic format. The draft service delivery and budget implementation plan must also be submitted in both printed and electronic format. Finally, the electronic budget return forms must be submitted Note that the regulation specifically separates requirements for publication and submission differentiating between the acts of making public and submitting. In each case the minimum documentation required includes the annual budget and supporting documentation set out according to Schedule A. ENTITIES and approving A revised municipal entity budget taking into account any recommendations from council should have already been tabled with the municipal budget. The board must approve the entity budget by 1 June. Approval of annual budget The entity board must consider the annual budget and supporting documentation as set out in Schedule D taking into account any hearings and recommendations received from the parent municipality. The board must pass separate resolutions for at least the items covered in Schedule D under the heading Resolutions. Publication of approved annual budget Immediately after the board of the municipal entity has approved the budget, the chief executive officer must submit the approved annual budget set out in accordance with Schedule D to the municipal manager of the parent municipality in both printed and electronic form. Concurrently, the chief executive officer must also submit to the municipal manager any additional information that the municipal council considers appropriate to facilitate public awareness about the annual budget. 69

71 The municipal manager is then required to make the above information public along with the annual budget of the parent municipality. Submission of approved annual budgets to National Treasury and others The municipal manager of the parent municipality is responsible for the submission of all entity annual budgets and supporting documentation STEP 6: FINALISING PLANS TO IMPLEMENT THE BUDGET This step of the budget preparation process involves the finalising of plans to implement the budget, through the approval of the Service Delivery and Budget Implementation Plan and the performance agreements for the municipal manager and other senior managers for the coming financial year. This step may commence as early as April and should ideally be completed prior to the start of the budget year. The timelines depicted here are generally absolute outer limits and municipalities are encouraged to complete processes earlier Once the budget is finalised, the process for implementation (or preparing to implement) commences The recommended approach to prepare the SDBIP is to develop implementation plans for each vote in the budget (departmental SDBIPs). The vote implementation plans would show: monthly projections of revenue by source and expenditure by vote; quarterly projections of measurable performance indicators; and service delivery targets. 70

72 The SDBIP approved with the budget or shortly after would be a summary of these plans. Diagram 3b below demonstrates how draft departmental SDBIPs roll up into the municipal SDBIP A delegations policy of spending authority on budget votes is critical for successful budget implementation and subsequent monitoring and evaluation. It is important that delegations required to give effect to sections 79, 82 and 106 of the MFMA are addressed. ACTIVITY / READ: Read sections 79, 82 and 106 of the MFMA Approval of SDBIP and annual performance agreements of senior managers Section 53(1)(c)(ii) of the MFMA states that the SDBIP must be approved by the mayor within 28 days of approval of the budget at the latest. And section 57(2)(a) of the Municipal Systems Act states that the annual performance agreements of senior managers must be concluded within one month of the start of the financial year. These time requirements are outer limits and it is recommended that the draft SDBIP and performance agreements be tabled with the budget and considered in conjunction with the budget approval, if possible. The MFMA and MSA allow extra time following budget approval for approval of the SDBIP and annual performance agreements in case there are changes that may need to be made following the consideration for approval of the budget. However, the time frames in the Act are maximum limits and a well planned and executed budget process should see the SDBIP and annual performance agreements approved shortly after if not at the same time as the budget. Note the requirement in the regulations under Tabling of annual budgets in municipal councils for the municipal manager to submit a draft SDBIP to the 71

73 mayor along with the budget to be tabled for consultation. This draft SDBIP must be able to be implemented to give effect to the budget tabled for consultation hence proving that the budget tabled for consultation is a useful consultation tool and could be implemented as tabled. Given this, a well planned budget process should provide for an updated SDBIP to be available with the budget to be considered for approval Publication of approved service delivery and budget implementation plan The service delivery and budget implementation plan (SDBIP) must be made public within five days after approval by the mayor Submission of approved SDBIP The municipal manager must submit to the National Treasury and the relevant provincial treasury, in both printed and electronic form the approved service delivery and budget implementation plan within five working days after the mayor has approved the plan. ENTITIES and finalising The entity budget must include a multi-year business plan (which is essentially an SDBIP for the entity) and it must be consistent with the SDBIP of the municipality. See MFMA section 87(5)(d) Alternative view of the budget preparation process The following diagram shows the budget preparation process from the perspective of various documents that are prepared and approved. 72

74 ACTIVITY / STUDY: Study the process flow indicated by the arrows in the diagram below. Refer to the explanation following the diagram. Diagram 3e: Documentation for budget preparation Reading the above diagram from left to right in the direction of the arrows: the council sets strategic direction and priorities for the municipality in the IDP; the municipal budget and treasury office prepares the municipal budget policy statement which shows allocations for revenue and expenditure including initial tariff modeling etc; prioritised IDP Goals and the municipal budget policy statement are used to prepare the draft departmental SDBIP s; the draft departmental SDBIP s are then consolidated to develop the draft SDBIP for the municipality; from the draft SDBIP a budget is prepared and tabled for consultation; 73

75 the budget is then approved by council subject to consultation and deliberation; and the municipal manager prepares the final draft SDBIP and draft annual performance agreements and submits them to the mayor for approval. The mayor approves the SDBIP and the annual performance agreements for the municipal manager and senior managers Note that the measurable performance objectives in the budget will link to the quarterly service delivery targets in the SDBIP and the annual performance agreements of the municipal manager and senior managers External consultations with the community and other stakeholders There are two external consultation processes envisaged in the MFMA and Municipal Systems Act The first external consultation process is informal, and open-ended, and relates to the preparation of the budget prior to tabling, which begins around October and includes the following: public meetings with residents and small businesses in local communities - to identify and prioritise the greatest local needs (e.g. housing, water, electricity, recreation facilities, schools, clinics, streets and street lighting, refuse removal, social services and related issues, crime and functioning of local police stations, etc). To obtain the views of the community the council should consider the use of ward committees to gain an understanding of the issues in each ward; meetings with key stakeholders (e.g. residents associations, NGOs, business organisations) - to identify community and business needs and concerns, including the level of municipal tariffs and charges; and consultations between the municipality and other municipalities, provincial and national departments and entities This first phase of informal or open-ended consultations ends when the mayor tables the budget and revisions to the IDP around the end of March. 74

76 The second external consultation process is more formal and takes place after the tabling of the draft budget, when the council convenes hearings on the draft budget and revisions to the IDP. The municipality must invite the public and stakeholder organisations to submit comments and submissions in response to the draft budget and revised IDP. Since specific proposals are contained in the draft budget and revised IDP the public comments and responses tend to be more directed to these proposals It should be noted that since municipalities are the closest interface between the community and government (all three spheres), they are best placed to consult communities on matters of a national and provincial function, such as policing, schools, clinics and housing - in a sense they are the eyes and ears of national and provincial governments. In this respect, it is important the municipalities and/or councillors act as a channel between local communities and the relevant national and provincial government departments and entities feeding information into the relevant department s budget process The IDP co-ordinates the needs of the community with respect to local services provided by all three spheres of government. It follows that the IDP of a municipality should differentiate between responsibilities one part related to municipal responsibilities and a second part relating to national and provincial responsibilities. The budget of the municipality can only fund municipal functions and services. In terms of provincial and national responsibilities, the municipal manager would co-ordinate with national and provincial departments advocating on behalf of the local community. 6. BUDGET IMPLEMENTATION PROCESS 6.1. We have now discussed the budget preparation process, the first of three processes in the budget and reporting cycle. Let s now consider the second process that deals with budget implementation This process covers implementing, monitoring and amending the budget. It is important to note that implementation, monitoring and amending are integrated, 75

77 they feed into each other. For our purposes we will discuss implementation first, then monitoring and finally amending, noting the integration throughout. Implementation: Implementation using the budget and SDBIP Monitoring Monthly budget statements Quarterly performance review Mid-year budget and performance assessment Amending: Adjustments budget 6.3. IMPLEMENTATION SDBIP and Budget The municipal manager is responsible for implementation of the budget and must take steps to ensure that all spending is in accordance with the budget and that revenue and expenditure are properly monitored To implement the budget, line managers will use the SDBIP in conjunction with the approved budget and supporting documentation. The SDBIP is the main implementation tool for line managers as it has more detail than the budget. However the budget is useful for implementation and plays a key role in monitoring and amending the budget The SDBIP is essentially the management and implementation tool which sets quarterly service delivery and monthly revenue and expenditure targets, and links each service delivery output to the budget of the municipality. It is a detailed plan for how the municipality will provide such services and the inputs and financial resources to be used. The SDBIP indicates the responsibilities and outputs for each of the departments and therefore the senior managers in the top 76

78 management team, the inputs to be used, and the time deadlines for each output The SDBIP targets agree to the targets in the performance agreements of the municipal manager and senior managers, including the outputs and deadlines for which they will be held responsible. The SDBIP should also provide all expenditure information (for capital projects and services) per municipal ward, so that each output can be broken down per ward, where this is possible, to support ward councillors in service delivery information The SDBIP is therefore used by line managers to implement the budget and performance can then be monitored through in-year reporting and evaluated through the annual report process MONITORING Introduction The system of reporting developed in the MFMA will assist in making available improved and regular internal and external information. Managers, as part of implementing policy, should use this opportunity to provide regular and relevant information in order to analyse performance and address shortcomings and improve internal controls and service delivery. Recommendations and explanations should assist the mayor and councillors to play their oversight roles, to monitor implementation of the budget and to make informed policy decisions The monthly, quarterly, mid-year and annual reports will always come with a lag, for example the first-quarter reports must be available by the 30th day of the month after the end of the first quarter. These reports should be made public after debate in council. At this meeting the in-year performance must be monitored and corrective action taken. It is important to note that the six month report together with the audit and oversight reports of the previous year will be presented to council by 25 January, allowing for the mayor to recommend and council to consider adjustments to the budget. 77

79 Financial transparency and ongoing performance - In order to achieve an effective oversight mechanism and the appropriate fiscal discipline and managerial accountability, financial management systems must provide sufficient transparency to accurately measure the ongoing performance of the municipality The Act facilitates this by requiring the municipality to develop measurable performance objectives for revenue and expenditure, taking into account the IDP, and to report against these measures in the mid-year and annual reports Monitoring progress and financial reporting - Managerial oversight of performance should operate in the first instance within the municipality itself. With this in mind, the Act has stipulated that certain reporting mechanisms must be established within a municipality to monitor the financial position of the municipality and review ongoing progress toward performance objectives In addition to this, and mindful of the role of national and provincial government, the Act requires the municipality to report on certain issues that identify problems as they arise, in order to ensure that, where required, prompt remedial action is taken by the province or National Treasury Non-financial reporting - In order to communicate performance effectively, reports must contain both financial and non-financial information. Non-financial information, such as subjective narratives on service delivery backlogs, the number of electricity and water connections and explanations of council policy on indigents and free basic services, will supplement financial data and key performance measures Variation from budget estimates - Generally, municipalities may incur expenditure only if it is in terms of the budget, within the limits of the amounts appropriated against each budget vote and in the case of capital expenditure, only if council has approved the project or programme. 78

80 Expenditure incurred outside of these parameters may be considered to be unauthorised or, in some cases, irregular or fruitless and wasteful. Unauthorised expenditure must be reported and may result in criminal proceedings In-year reporting This part deals with the process for the following in-year reports: Monthly budget statements; Quarterly reports; and Mid-year budget and performance assessments Prior to the compilation of an in-year report, the financial accounts must be closed and reconciled up to the end of the month being reported on. Without this, the municipal manager may find it difficult to sign the quality certificate and the information contained therein would be of limited use, if any Note that when preparing in-year reports municipalities and entities are required to compare actual against both the original annual budget and the latest approved adjustments budget. Comparison against the original annual budget is required to ensure accountability for promises made in the original budget Monthly budget statements must be prepared and submitted concurrently to the mayor, National Treasury and relevant provincial treasury within 10 working days of the end of the month The quarterly report on implementation of the budget submitted to council will contain the relevant monthly budget statement and additional performance information. It must be submitted to council within 30 days of the end of the quarter The mid-year budget and performance assessment to be submitted to council requires some additional disclosure over and above the normal quarterly report. 79

81 Hence submitting the mid-year assessment satisfies the requirements of submitting the December quarterly report. The mid-year assessment must be submitted to council by 31 January. ENTITIES and in-year reporting Monthly budget statements must within 7 days be submitted by the chief executive officer to the municipal manager of the parent municipality, the chairperson of the board of directors of the entity, and other municipalities affected. The municipal manager is then responsible for submission to National Treasury and the relevant provincial treasury along with the monthly budget statements of the parent municipality. For the month of December, additional performance information as specified for the mid-year budget and performance assessment must be added to the monthly budget statement and submitted to council along with the mid-year budget and performance assessment for the parent municipality. Municipal entities are not required to produce quarterly reports. However, the monthly budget statements must provide enough information for the parent municipality to prepare a consolidated quarterly report. Prior to the compilation of an in-year report, the financial accounts must be closed and reconciled up to the end of the month being reported on. Without this, the chief executive officer may find it difficult to sign the quality certificate and the information contained therein would be of limited use, if any. Note that when preparing in-year reports municipal entities are required to compare actual against both the original annual budget and the latest approved adjustments budget. Comparison against the original annual budget is required to ensure accountability for promises made in the original budget. The regulations cover the format and process for each of the two types of in-year reports. The following two paragraphs describe how the three types of in-year 80

82 reports are interrelated. Monthly budget statements must be prepared and submitted concurrently to the chairperson of the entity board and the municipal manager of the parent municipality. The municipal manager of the parent municipality must then prepare consolidated monthly budget statements. The municipal manager of the parent municipality must then make public and submit the entity monthly budget statements along with the consolidated monthly budget statements. The mid-year budget and performance assessment to be submitted to the board of the entity and the municipal manager requires some additional disclosure over and above the monthly budget statements Now let us consider each of the in-year reports in more detail Monthly budget statements of municipalities By the 10th working day of each month, the municipal manager must submit a report on budget progress to the mayor and the relevant provincial treasury Submission of monthly budget statements Monthly budget statements set out in accordance with Schedule C must be submitted by the municipal manager to the mayor, National Treasury, relevant provincial treasury and any municipality affected by the budget within 10 working days of the end of the month. On receiving the report, the mayor must take the appropriate steps to identify and resolve any financial problems that may be evident. The National Treasury may also specify other information to be submitted including electronic return forms. The monthly budget statements must also be submitted to any other organ of state upon request. 81

83 Publication of monthly budget statements The municipal manager must make the monthly budget statements in the format set out in Schedule C public on the municipality s web site and displayed at the municipality s head office, satellite offices and libraries within 5 working days of submitting them to the mayor. The municipal manager must also make public any other information the council considers appropriate to facilitate public awareness of the monthly budget statement Tabling of monthly budget statements After receiving the monthly budget statements the mayor may then table these before council and if so must include a mayor s report covering at least the minimum items where applicable as specified in Schedule C. Note that the MFMA requires submission and publication before tabling. ENTITIES and monthly budget statements Submission of monthly budget statements Monthly budget statements set out in accordance with Schedule F must be submitted within 7 working days after the end of the month by the chief executive officer to the municipal manager of the parent municipality, the chairperson of the entity board and other municipalities affected by the entity s annual budget. The Schedule F information must also be submitted to any other organ of state upon request. The municipal manager of the parent municipality must then consolidate any entity monthly budget statement information into the municipal monthly budget statements. The municipal manager must then submit, make public and table the consolidated monthly budget statements together with each individual entity monthly budget statement. Note that Schedule C which 82

84 provides the format for the municipal monthly budget statements requires each entity monthly budget statement to be attached Quarterly reports Submission of quarterly reports to council For the months of September, December, March and June, additional quarterly performance information must be added to the monthly budget statements and submitted to council along with a mayor s report on quarterly performance. This is due by the 30th day following the last month of each quarter, and must report on budget implementation and the municipality s financial position Publication of quarterly reports on implementation of the budget Quarterly reports on implementation as set out according to Schedule C must be made public on the municipality s web site and displayed at the municipality s head office, satellite offices and libraries within 5 working days of being submitted to council. Note that the monthly budget statements will already have been made public. The municipal manager must also make public any other information the council considers appropriate to facilitate public awareness of the monthly budget statement Submission of quarterly reports on implementation of the budget Quarterly reports on implementation as set out according to Schedule C must be submitted to the National Treasury and relevant provincial treasury within 5 working days of being submitted to council. Note that the monthly budget statements will already have been submitted. 83

85 Mid-year budget and performance assessment Submission of mid-year budget and performance assessment to mayor and treasuries By 25 January each year (and in addition to the monthly budget report), the municipal manager must submit a mid-year budget report and performance assessment (based on the council s service delivery and budget implementation plan) to the mayor, the National Treasury and relevant provincial treasury. This report may be used to inform the mayor of any need to consider an adjustments budget and should be used to inform the budget process for the following year. For the month of December, additional performance information as specified for the mid-year budget and performance assessment must be added to the monthly budget statement and submitted to council along with a mayor s report on the mid-year budget and performance assessment Publication of mid-year budget and performance assessment The municipal manager must make the mid-year budget and performance assessment in the format set out in Schedule C public on the municipality s web site and displayed at the municipality s head office, satellite offices and libraries within 5 working days of submitting them to the mayor. The municipal manager must also make public any other information the council considers appropriate to facilitate public awareness of the mid-year budget and performance assessment Submission of mid-year budget and performance assessment to council After receiving the mid-year budget and performance assessment and no later than 31 January, the mayor must submit it to council in the format as set in Schedule C. 84

86 Note that the MFMA requires submission to the mayor and treasuries, and publication before submission to council. This ensures a separation of roles and responsibilities and facilitates good governance. ENTITIES and mid-year budget and performance assessment For the month of December, additional performance information as specified for the mid-year budget and performance assessment must be added to the monthly budget statement and submitted to the entity board along with a chairperson s report on the mid-year budget and performance assessment. Submission of mid-year budget and performance assessment to parent municipality Mid-year budget and performance assessments set out in accordance with Schedule F must be submitted by the chief executive officer to the municipal manager of the parent municipality by 20 January. The municipal manager must then consolidate the entity assessments with the municipal assessment. By 25 January the municipal manager must submit to the mayor the consolidated mid-year budget and performance assessment with each entity mid-year assessment attached. Submission of mid-year budget and performance assessment to treasuries The municipal manager must include each entity mid-year budget and performance assessment in the format set out in Schedule F when it submits Schedule C to the National Treasury and relevant provincial treasury. Submission of mid-year budget and performance assessment to council After receiving the consolidated mid-year budget and performance assessment and the individual entity assessments and no later than 31 January, the mayor must submit these to council in the format as set out in Schedules C and F. 85

87 Publication of mid-year budget and performance assessment The municipal manager must make the consolidated mid-year budget and performance assessment in the format set out in Schedule C and each entity mid-year budget and performance assessment in the format of Schedule F public on the municipality s web site and displayed at the municipality s head office, satellite offices and libraries within 5 working days of submitting them to the mayor. The municipal manager must also make public any other information the council considers appropriate to facilitate public awareness of the mid-year budget and performance assessments of entities General in-year reporting obligations The municipal manager must advise the National Treasury, the relevant provincial treasury and the Auditor-General about all bank accounts as they are opened and must report to council, the provincial treasury and the Auditor- General the details of certain prescribed withdrawals each quarter. The municipal manager must also report on any unauthorised, irregular or fruitless and wasteful expenditure as it occurs and on any impending budget shortfalls or overspending Details of expenditure on staff benefits must be reported to council regularly. The mayor must also report to the MEC for local government any issue that necessitates provincial intervention as it arises. The chief executive officer of a municipal entity must provide the municipal manager of the parent municipality with regular reports on finance and performance AMENDING THE BUDGET ADJUSTMENTS BUDGET An adjustments budget is the mechanism to amend an approved budget under certain specified conditions. 86

88 It may be necessary on occasion for a council to consider a revision of its original budget, owing to material and significant changes in revenue collections, expenditure patterns, or forecasts thereof for the remainder of the financial year. It may not result in further increases in taxes and tariffs and it must contain appropriate justifications and supporting material when approved by council Adjustments budgets must be appropriately funded and supporting documentation must contain an explanation of how the adjustments budget is funded Municipalities should be practicing proper planning and reducing the need for adjustments budgets particularly in the light of the MFMA provisions for multiyear capital appropriations. With careful planning, realistic budgeting, and good implementation and monitoring practices municipalities should be able to limit adjustments budgets to once a year. The most appropriate time for a single adjustments budget is at the time of the mid-year budget and performance assessment Regulations on the adjustment budget specify the conditions and timeframes for tabling and approving adjustments budgets Timeframes for tabling of adjustments budgets Adjustments budgets can be split into five types. For explanation purposes these can be described as: Ordinary adjustments So called ordinary adjustments must only be made once and this must occur after the mid-year budget and performance assessment is tabled to council and before 28 February of the current year. Ordinary adjustments relate to those described in sub sections 28(2)(b),(d),(e), and (f) of the MFMA as follows: 87

89 appropriating additional revenues to accelerate spending programmes already budgeted for; moving savings from one vote to spend on another vote; authorising spending of funds unspent at the end of the previous year where the under spending could not have been foreseen at the time council approved the annual budget. (there is one exception covered by the second type of adjustment relating to government allocations. Refer to point 2 below); and correcting errors in the annual budget. It is intended that an adjustment budget for any of the reasons above should only need to be done once and that the most appropriate time is directly after the mid-year budget and performance assessment. In practice the mid-year budget and performance assessment and the adjustments budget would most likely be tabled to council at the same time. In terms of the third dot point, it is required that municipalities exercise proper planning at the time of approving the annual budget. In particular, it should be known which capital projects will not be completed at the end of the year and the expenditure should be appropriated in the next year s budget. Failure to do so will mean that the spending on the project must stop until an adjustments budget is passed in the middle of the year. Government allocations National and provincial adjustments budgets may occur outside of the timeframe for the municipal mid-year budget and performance assessment. In the case where a national or provincial adjustments budget adjusts allocations to a municipality, the municipality must table an adjustments budget within 30 days unless a longer period is otherwise approved by National Treasury. 88

90 Material under collection of revenue An adjustments budget must be approved at any time it becomes apparent that there will be a material under collection of revenue. The intent is that this provision should not be needed if the approved annual budget is realistic and funded according to section 18 of the MFMA. Use of this provision is an indication that the approved budget was not compliant with this section of the MFMA. While it is expected that municipalities should not need this provision if proper planning and budgeting has occurred, it is critical that the budget is adjusted at the first sign that there will be a material under collection of revenue. Unforeseeable and unavoidable expenditure An adjustments budget related to unforeseeable and or unavoidable expenditure must be tabled to council at the first available opportunity after the expenditure was incurred. Unauthorised expenditure An adjustments budget related to unauthorised expenditure must be tabled and approved during the financial year in which the unauthorised expenditure occurred Submission of municipal adjustments budgets Once the mayor has tabled an adjustments budget (in the format set out in the regulations) to council the municipal manager must submit it to National Treasury, the relevant provincial treasury, and any other municipality affected by the adjustment budget The municipal manager must also submit the adjustments budget to any other organ of state upon request. 89

91 Approval of adjustments budget A municipal council must consider the entire content of the adjustments budget and supporting documentation as set out in the regulations before approving the adjustments budget Council can only approve adjustments dealing with unforeseeable and unavoidable expenditure if the expenditure was authorised by the mayor in terms of Chapter 5 of the Municipal Budget and Reporting Regulations The resolutions for approving the adjustments budget must cover at least those set out in the regulations under the heading resolutions Subject to section 54(1)(c) of the MFMA, the mayor must revise the SDBIP provided that council has approved the revisions to the service delivery targets and performance indicators following the approval of the adjustments budget. ACTIVITY / READ: Read section 54(1)(c) of the MFMA Publication of approved adjustments budget The requirements for publication of the approved adjustments budget are very similar to those for the approved annual budget Within five working days after the adjustments budget has been approved, it must be made public. The adjustments budget and supporting documentation set out according to the regulations and any consequential amendment of the SDBIP must be made public. 90

92 This information must at a minimum be made available on the municipal web site and displayed at the municipality s head office, satellite offices and libraries Additional information may be made public including adjustments budget summaries in alternate languages Submission of approved adjustments budgets and other documents Within 5 working days after the adjustments budget has been approved, it must be submitted to National Treasury, the relevant provincial treasury and other municipalities affected by the annual budget. Submission to other organs of state is on receipt of a request The information submitted to National Treasury and the relevant provincial treasury must include the documentation as per the regulations in printed and electronic format. The amended service delivery and budget implementation plan must also be submitted where relevant in both printed and electronic format. National Treasury will also require electronic return forms to be submitted for the purposes of automatically recording information Note that the regulation specifically separates requirements for publication and submission differentiating between the acts of making public and submitting. In each case the minimum documentation required includes the adjustments budget and supporting documentation set out according to the regulations. ENTITIES and adjustments budgets In terms of process the regulations impose limitations on when an adjustments budget can be submitted to the board. Municipal entities should be practicing proper planning and reducing the need for adjustments budgets particularly in the light of the MFMA provisions for multi-year capital appropriations. With careful planning, realistic budgeting, and good implementation and monitoring practices municipal entities should be able to limit adjustments 91

93 budgets to once a year. And the most appropriate time for a single adjustments budget is at the time of the mid-year budget and performance assessment. Framework for tabling of adjustments budgets The allowable reasons for an adjustments budget for a municipal entity are more restrictive than for a municipality. Adjustments budgets can be split into four types. For explanation purposes these can be described as: Ordinary adjustments Ordinary adjustments relate to other as described in sub section 87(6)(d) of the MFMA and further defined in the regulations: Authorising spending of funds unspent at the end of the previous year where the under spending could not have been foreseen at the time council approved the annual budget. Correcting errors in the annual budget Ideally an adjustment budget for any of the reasons above should only need to be done once and that the most appropriate time is directly after the mid-year budget and performance assessment. In practice the midyear budget and performance assessment and the adjustments budget would most likely be submitted to the board at the same time. In terms of the first dot point, it is required that municipal entities exercise proper planning at the time of approving the annual budget. In particular, it should be known which capital projects will not be completed at the end of the year and the expenditure should be appropriated in the next year s budget. Failure to do so will mean that the spending on the project must stop until an adjustments budget is passed in the middle of the year. Note that an adjustments budget may not be approved to appropriate additional revenues unless they are additional allocations from the parent municipality. See point 2 below. Note that an adjustments budget may not be approved to move savings from one vote to another vote. 92

94 Allocations from the parent municipality If a parent municipality has planned well it should only pass one adjustments budget at the time of the mid-year budget and performance assessment. In the case where a municipal adjustments budget adjusts allocations to a municipal entity, the municipal entity must submit an adjustments budget to the board. Ideally this would occur within 30 days after the municipal council has authorised the additional funds. Material under collection of revenue Ideally an adjustments budget would be approved at any time it becomes apparent that there will be a material under collection of revenue. The intent is that this provision should not be needed if the approved annual budget is realistic and funded according to section 18 of the MFMA. Use of this provision is an indication that the approved budget was not compliant with this section of the MFMA. Where this provision is used, the National Treasury and or the relevant provincial treasury will investigate for possible non-compliance with the MFMA. While it is expected that municipal entities should not need this provision if proper planning and budgeting has occurred, it is critical that the budget is adjusted at the first sign that there will be a material under collection of revenue. Unforeseeable and unavoidable expenditure Ideally an adjustments budget related to unforeseeable and or unavoidable expenditure would be tabled to council at the first available opportunity after the expenditure approved by the mayor was incurred. Unauthorised expenditure: Note that there is no provision for approving an adjustments budget for unauthorised expenditure for a municipal entity. 93

95 Approval of adjustments budget The chief executive officer of the entity must submit a copy of the proposed adjustments budget set out in accordance with Schedule E to the mayor of the parent municipality at the same time as it is submitted to the board of the entity. Subject to 87(6) of the MFMA the board of the entity may only approve the adjustments budget after receiving written confirmation that the mayor has approved the adjustments budget. It may be necessary to revise the targets in the service delivery agreement. An entity board must consider the entire content of the adjustments budget and supporting documentation as set out in Schedule E before approving the adjustments budget. The board must approve or reject adjustments dealing with unforeseeable and unavoidable expenditure within 60 days of being submitted to the board and before the end of the current year. The resolutions for approving the adjustments budget must cover at least those set out in Schedule E under the heading resolutions. Publication of approved adjustments budget The requirements for publication of the approved adjustments budget are very similar to those for the approved annual budget. Immediately after the board of the municipal entity has approved the adjustments budget, the chief executive officer must submit the approved adjustments budget set out in accordance with Schedule E to the municipal manager of the parent municipality in both printed and electronic form. Concurrently, the chief executive officer must also submit to the municipal manager any additional information that the municipal council considers 94

96 appropriate to facilitate public awareness about the adjustments budget. The municipal manager is then required to make the above information public within five working days after the board of directors has approved the adjustments budget. Submission of approved adjustments budgets and other documents Within 5 working days of the end of each quarter, the municipal manager must submit any entity adjustments budgets to National Treasury and the relevant provincial treasury. This differs from the treatment of municipal adjustments budgets which must be submitted to National Treasury and provincial treasury when they are approved. The reason for this is to reduce the number of submissions required and consolidate submissions on a quarterly basis in the case of municipal entities. Within 5 working days of receipt of an entity adjustments budget, the municipal manager must submit the adjustments budget set out as per Schedule E to other municipalities affected by the annual budget of the entity regardless of whether the adjustments affect that municipality. The municipal manager must submit the adjustments budget set out as per Schedule E to other organs of state upon receipt of a request. The information submitted to National Treasury and the relevant provincial treasury must include the documentation as per Schedule E in printed and electronic format. Note that the regulation specifically separates requirements for publication and submission differentiating between the acts of making public and submitting. In each case the minimum documentation required includes the adjustments budget and supporting documentation set out according to Schedule E. 95

97 6.6. SHIFTING OF FUNDS BETWEEN MULTI-YEAR APPROPRIATIONS The MFMA, under section 16(3), allows council to approve multi-year appropriations for capital. Providing certain conditions are met, the budget may be amended during the year to shift funds between multi-year appropriations. Section 31 of the MFMA stipulates: 31. When funds for a capital programme are appropriated in terms of section 16 (3) for more than one financial year, expenditure for that programme during a financial year may exceed the amount of that year s appropriation for that programme, provided that (a) the increase does not exceed 20 per cent of that year s appropriation for the programme; (b) the increase is funded within the following year s appropriation for that programme; (c) the municipal manager certifies that (i) actual revenue for the financial year is expected to exceed budgeted revenue; and (ii) sufficient funds are available for the increase without incurring further borrowing beyond the annual budget limit; (d) prior written approval is obtained from the mayor for the increase; and (e) the documents referred to in paragraphs (c) and (d) are submitted to the relevant provincial treasury and the Auditor- General. 7. BUDGET EVALUATION PROCESS 7.1. We have discussed the first two processes in the budget and reporting cycle and we will now discuss the third process - budget evaluation This process takes place after the end of the budget year, although planning will start earlier. We will discuss the following components: Audited Annual Financial Statements; 96

98 Annual Report; Oversight Report; and Budget evaluation checklist The first three evaluate financial and service delivery performance against the promised performance in the budget and SDBIP. The fourth (Budget evaluation checklist) evaluates the budget process itself ANNUAL REPORTING TIMETABLE Diagram 3f below shows the annual reporting timetable. Study the timetable while referring to the following description: the Annual Financial Statements for the municipality and municipal entities are submitted to the Auditor-General by 31st August; for municipalities with municipal entities the Consolidated Annual Financial Statements must be submitted to the Auditor-General by 30th September; the Auditor-General must complete each audit within three months of receipt; the production of the annual report should commence no later than July so that the full annual report can be completed and tabled in council no later than 31st January as required by the MFMA; the entity Annual Report must be submitted to the Municipal Manager by 31 December each year or earlier date as agreed with the parent municipality; the Municipality s Annual Report must be tabled to council by 31 January each year; and 97

99 council must consider the annual report of the municipality and all entities and adopt an oversight report no later than two months from the date the annual report is tabled. Diagram 3f: Annual Reporting Timetable ACTIVITY / STUDY: Complete MFMA Learning module AUDITED ANNUAL FINANCIAL STATEMENTS The audited Annual Financial Statements are prepared according to Generally Recognised Accounting Practice (GRAP) and must be audited. It is important to note that one of the formats for presenting the budget is the same as the format used for the Annual Financial Statements. This facilitates evaluation of the budget, in other words it is possible to evaluate audited actual financial performance against the budget consulted with the community and adopted by 98

100 council. The Annual Report looks at non-financial performance as well and must include the audited Annual Financial Statements ANNUAL REPORTS Council is vested with the responsibility to oversee the performance of their respective municipality, as required by the Constitution, the Municipal Finance Management Act (MFMA) and Municipal Systems Act (MSA). This oversight responsibility of council is particularly important for the process of considering annual reports The MFMA and MSA recognise that council has a critical role to play to ensure better performance by municipal departments and entities. There now exists an explicit linkage between the strategic goals, set by council through the IDP, which are translated into the budget, and the delivery of those goals, which is reported in the Annual Report. It is important for council to ensure that the budget gives effect to priorities contained in the IDP. A good budget will lay a basis for better oversight and cement the contracts between the executive/council, the administration and the public Each municipality and each municipal entity must prepare an annual report for each financial year in accordance with the MFMA and MSA. The purpose of the annual report is to: provide a record of the activities of the municipality or entity; provide a report on performance in service delivery and against the budget; provide information that supports the revenue and expenditure decisions made; and promote accountability to the local community for decisions made Annual reports are the key reporting instruments for municipalities to report against the performance targets and budgets outlined in their strategic plans. 99

101 Annual reports are therefore required to contain information on service delivery and outcomes, in addition to financial statements. It is meant to be a backwardlooking document, focusing on performance in the financial year that has just ended. It must demonstrate how the budget was implemented and the results of service delivery operations for that financial year This requires the collection of information about the nature and extent of services provided, with references to key performance targets and actual performance data, explanations of variations and a narrative of policy and strategy When tabled, the annual report should include four main components, each of which has an important function in promoting governance and accountability. The main components are: the annual performance report as required by section 46 of the MSA; Annual Financial Statements submitted to the Auditor-General; the Auditor-General s audit report on the financial statements in terms of section 126(3) of the MFMA; and the Auditor-General s audit report on performance in terms of section 45(b) of the MSA OVERSIGHT REPORTS The oversight report is the final major step in the annual reporting process of a municipality. Section 129 of the MFMA requires the council to consider the annual reports of its municipality and municipal entities and to adopt an oversight report containing the council s comments on each annual report The oversight report must include a statement whether the council: has approved the annual report, with or without reservations; 100

102 has rejected the annual report; or has referred the annual report back for revision of those components that can be revised The oversight report is thus clearly distinguished from the annual report. The annual report is submitted to the council by the accounting officer and the mayor and is part of the process for discharging accountability by the executive and administration for their performance in achieving the goals set by council. The oversight report is a report of the municipal council and follows consideration and consultation on the annual report by the council itself. Thus the full accountability cycle is completed and the separation of powers is preserved to promote effective governance and accountability Understanding the annual report and determining conclusions A mechanism that facilitates better understanding of the annual report by all councillors is essential, as the MFMA requires that Council, and not the executive or administration, comment on the annual report and arrive at a decision To facilitate consideration of the annual report in its entirety the council should obtain the views of the Audit Committee, which is charged with providing council with, among other matters as prescribed, an authoritative and credible view of the financial position of the municipality or entity, its efficiency and effectiveness, performance management and the level of compliance with the MFMA, Division of Revenue Act (DORA) and other relevant legislation In order to approve the annual report without reservations, Council should be able to agree that the information contained in the report is a fair and reasonable record of the performance of the municipality and properly accounts for the actions of the municipality in the financial year reported upon. Approval means that the executive and administration have discharged in full, their accountability for decisions and actions and that their performance meets the criteria set by performance objectives and measures and is also acceptable to the community. 101

103 Should the Council have reservations on any matter in the report then these reservations should be outlined in the oversight report and the executive and administration should address these as determined by council A conclusion that the report is approved without reservations is the preferred outcome from the process. However, this conclusion should not be an outcome of only cursory examination of the report but should be as a result of a rigorous analysis by councillors with inputs from the public and other stakeholders Although the accounting officer is required to attend all meetings where the report is discussed to respond to questions, it is incumbent on all councillors to fully understand the report in order to identify matters that may require further information from the accounting officer Staff performance bonuses - To promote continuous improvement in the performance of the municipality and entities, it is strongly recommended that council reward performance in a manner that is commensurate with achievement of policy outcomes. Therefore, the payment of performance bonuses should be measurable with the extent of outcomes achieved. If the level of acceptance cannot be achieved then it follows that the performance of the administration has not met the objectives approved in the IDP, Budget and Service Delivery and Budget Implementation Plans. Where reservations exist, the seriousness of such should be taken into account before considering any part-payment of bonuses Meetings to discuss the annual report - A council meeting open to the public must be convened to discuss the annual report, at which the council addresses issues raised. The provincial MEC for local government must assess the statements to ensure that the council has addressed the appropriate issues and responded accordingly. Any omissions by the municipality must then be reported to the provincial legislature for further action The municipal manager must attend meetings and make the oversight report and minutes of the meeting available to the Auditor-General and the national and provincial government. 102

104 ENTITIES and oversight reports Where municipalities have one or more municipal entities, separate annual reports from the municipality and each of the entities will be tabled in council. Only the annual financial statements will be consolidated in the municipality report. Although each of the annual reports is to be considered by council it would be impractical to complete multiple oversight reports. It is recommended that council adopt one oversight report that provides comments on each of the annual reports. In this way council is able to reinforce the important linkages between the municipality and its entities, their close interrelationship in the provision of services and that performance of the municipality is an outcome of performance by the municipal administration and all the entities. 8. ASSIGNMENTS 8.1. The following learning activities are to be completed after the workshop on this chapter and handed in prior to, or at the beginning of, the next workshop ASSIGNMENT 3.1 (15 MARKS) Explain the main process characteristics of the following steps in the municipal budget preparation process with a few sentences on each: Planning (2 marks) Strategising (4 marks) Preparing (1 mark) Tabling (3 marks) Approving (1 mark) Finalising (4 marks) 103

105 8.3. ASSIGNMENT 3.2 (85 MARKS) Explain in detail the processes of tabling, approving and finalising the budget. Include discussion on: tabling the budget for consultation (14); publication of the budget tabled for consultation (4); submission of the tabled budget (8); submission of entity budgets to parent municipality (9) consideration of the budget for approval (9); publication of the approved budget (8); submission of the approved budget (9); Approval of entity budgets (3); Submission and publication of entity budgets (8); SDBIP and annual performance agreements of senior managers (11); and Entity multi-year business plan (2) Your answer should clearly articulate: The consultative aspects of the process; Why it s important to table documentation in the same format as the budget that will be approved; Why it s important for the table budget to be a budget that could be implemented and why draft unfunded budgets cannot be tabled to council; Why its important to have a draft SDBIP which underpins the tabled budget; and The benefits of approving the SDBIP and annual performance agreements before the start of the budget year. 104

106 8.4. ASSIGNMENT 3.3 (14 MARKS) List the contents of the municipal budget documentation in sequence as per the municipal budget and reporting regulations (1 mark). Describe how the two parts relate to each other and how each item may reference further detail (9 marks). Explain the reasons for standardising this format across all municipalities and for requiring it to be applicable to the tabled budget and approved budget. (4 marks) 8.5. ASSIGNMENT 3.4 (10 MARKS) What type of expenditure qualifies for shifting of multi-year appropriations? (1 mark) Why does the MFMA make provision for shifting of funds during the year between multi-year appropriations? (2 marks) List the conditions which must be satisfied before shifting funds between multi-year appropriations. (7 marks) 8.6. ASSIGNMENT 3.5 (14 MARKS) What is an adjustments budget? (3 marks) Why are limitations placed on the use of adjustments budgets? (6 marks) Explain the most appropriate time for an adjustments budget. (5 marks) 105

107 8.7. ASSIGNMENT 3.6 (21 MARKS) Explain the five allowable reasons for a municipal adjustments budget including the conditions related to timing: Ordinary adjustments (12 marks) National and provincial allocations (2 marks) Material under collection of revenue (5 marks) Unforseeable and unavoidable expenditure (1 mark) Unauthorised expenditure (1 mark) 8.8. ASSIGNMENT 3.7 (17 MARKS) Explain the four allowable reasons for a municipal entity adjustments budget. Ordinary adjustments (8 marks) Allocations from the parent municipality (2 marks) Material under collection of revenue (5 marks) Unforeseeable and unavoidable expenditure (2 marks) 8.9. ASSIGNMENT 3.8 (8 MARKS) In the context of the budget evaluation process, describe the annual reporting timetable. 106

108 8.10. MAJOR ASSIGNMENT (141 marks) The following standard marking scheme will be used (where indicated) in this assignment: < Inadequate discussion to various degrees Just adequate; very little use of budget implementation concepts Better than adequate, but some unclear points Fairly thorough and clear, one or two unclear points Very thorough discussion Where the standard marking scheme is not used generally there will be one (1) mark given for each point made. That is, the learner should make 5 points if the question is worth 5 marks. You are currently the chief finance officer of a municipality. You have been asked by the municipal manager to conduct a review of the budget implementation process in your municipality and prepare a report to be submitted back to the municipal manager. Structure your report according to the following headings. Report Quality (5 marks) 2 marks for professional report layout including formal report headings sub headings and recommendations. 3 marks for coherence of discussion and justification of conclusions. Executive summary (17 marks) The learner will: provide an introduction to the MFMA reforms around budget 107

109 implementation and monitoring (5) state that the purpose of the report is to review current implementation processes with a view to improving them (2) List the key findings in respect to current processes (5) List the recommendations for each of the key findings (5) Note that the executive summary should only highlight the broad requirements in the MFMA and regulations. It should provide a summary of the gaps in current processes and it should list all recommendations. Implementation (33 marks) The learner will: Provide an explanation of the MFMA and regulatory requirements (13) review the current situation in the municipality and identify gaps (10 standard marking scheme) make recommendations for improvement (10 standard marking scheme) Monitoring (39 marks) Under the four sub-headings below, the learner will: Provide an explanation of the MFMA and regulatory requirements (total 19) review the current situation in the municipality and identify gaps (total 10 - standard marking scheme) make recommendations for improvement (total 10 - standard marking scheme) Monitoring Introduction (12) Monthly budget statements (2) Quarterly report (2) Mid-year budget and performance assessment (3) [Note: A total of 10 marks are allocated for your discussion on gaps in 108

110 current processes for all the 4 areas above. Likewise, a total of 10 marks are allocated for your discussion on recommendations for all the 4 areas above.] Amending - Adjustments budgets (47 marks) The learner will: Provide an explanation of the MFMA and regulatory requirements (27) review the current situation in the municipality and identify gaps (10 - standard marking scheme) make recommendations for improvement (10 - standard marking scheme) Instructions: Where there is more than one learner for a particular municipality the facilitator will discuss options and agree on an alternative assignment. Attach existing process documentation as appendices and make reference where appropriate. Attach proposed process documentation which takes into account your recommendations as appendices and make reference where appropriate. This report may be provided to councillors and as such needs to be informative and clearly communicate requirements to non-finance professionals. Learners should clearly demonstrate that gaps exist through a coherent discussion using examples of current practice. If there appear to be no gaps in current processes the learner must justify this. Learners should provide a recommendation for each item identified in the gap review including areas where it has been reasoned that there are no gaps. The recommendation must be a clear direction for action to be taken should the recommendation be approved / endorsed. 109

111 Because gaps and the associated recommendations will be particular to each municipality marking will be consistent for each section and follow the standard marking scheme explained above 9. ASSESSMENT CRITERIA 9.1. Plan the tabling and adoption of a municipal budget as required by legislation [SO2AC1] 9.2. In line with the regulatory framework provide supporting documents that must be tabled with a municipal budget [SO2AC2] 9.3. Using the regulatory framework identify the funds that can be transferred between multi-year appropriations [SO2AC3] 9.4. In line with the regulatory framework recognise the conditions under which a municipal adjustments budget may be tabled [SO2AC4] 110

112 Roles and responsibilities in terms of the municipal budget and reporting cycle 1. LEARNING OUTCOMES 1.1. Identify the roles and responsibilities of municipal political executives and senior management required by the local government legislative framework for budgeting [SO1] 1.2. Comply with the conditions for municipal delegations [SO4] 1.3. Develop a legislatively compliant budget and treasury office [SO3] 2. KEY CONCEPTS 2.1. Separation of roles and responsibilities in terms of the budget and reporting cycle 2.2. Roles and responsibilities of the: council non-executive councillors mayor municipal manager senior managers and other officials chief financial officer budget and treasury office 111

113 municipal entities other spheres of government 2.3. Delegations by the municipal manager 3. LEARNING ASSUMED TO BE IN PLACE 3.1. Prior to commencing this chapter of the module notes the learner must have completed the previous chapter(s) The learner is reminded that prior to attending a workshop on this chapter they must: read this chapter module notes; complete assigned reading or study which includes MFMA Learning modules bring completed answers to the activities/class discussion for this chapter for discussion during the workshop bring completed answers to the short assignments for the previous chapter to be handed in for marking have started work on the major assignment. Some time during this workshop could be dedicated to discussing the major assignment. 4. INTRODUCTION 4.1. This chapter focuses on the roles and responsibilities of key players in the budget and reporting cycle and the delegation of these responsibilities in terms of the legislation. 112

114 4.2. The Municipal Finance Management Act (MFMA) establishes clear roles and responsibilities for financial management in municipalities. By clarifying and separating the roles and responsibilities of the executive mayor or committee, non-executive councillors and officials it puts in place a sound financial management framework The Act empowers the mayor (or executive committee) to provide political leadership by taking responsibility for policy and policy outcomes, and holds the municipal manager and other senior managers responsible for implementation and outputs. Non-executive councillors are empowered to play a key policyapproval and monitoring role through the municipal council The Act aims to enable managers to manage whilst making them more accountable through transparent reporting requirements. The challenge facing all stakeholders is to use the management information produced in terms of the Act to improve the efficiency and effectiveness of the municipality EMPOWERMENT, ACCOUNTABILITY AND OVERSIGHT One of the most important objectives underpinning the MFMA is that of developing a sound financial governance framework within every municipality. This means developing a comprehensive system clarifying (and separating) the responsibilities of mayors, councillors and officials. This framework is built around accountability and oversight, which are in turn possible only if there is a culture of transparency and regular reporting in that municipality Confusing or duplicating responsibility tends to weaken accountability and oversight mechanisms, hence the need for separating responsibilities. The executive mayor or committee is responsible for providing the municipality with political leadership, proposing policy and overseeing its implementation. The council retains responsibility for approving policy and exercising oversight over its mayor, and the administration is accountable to the council via the mayor. Officials are responsible for implementation and for providing the executive mayor or committee with professional advice. 113

115 Diagram 4a: The financial governance framework The council holds the mayor responsible for promised outcomes and the municipal manager for specific outputs. The mayor is expected to oversee and manage the municipal manager to ensure delivery on the agreed outputs, and the council must exercise oversight over the executive mayor or committee to ensure they fulfil this responsibility of oversight. The mayor must ensure that such outputs form part of the municipal manager s performance agreement, which must be revised at the start of the financial year so as to be consistent with the budget and the service delivery and budget implementation plan (SDBIP) For these reasons, the Act stipulates certain procedures and assigns specific responsibilities to the council, the mayor, councillors and municipal officials, in particular the municipal manager and chief financial officer. The MFMA, Municipal Systems Act and Municipal Structures Act are central to developing the governance framework within a municipality, clarifying and separating the roles of mayors, councillors and officials, and the system of accountability and oversight The MFMA together with the Municipal Systems Act and the Municipal Structures Act provides clear guidance on the roles and responsibilities of councillors and officials. Diagram 4b below (repeated from the introduction to this module) illustrates certain aspects of governance and accountability and the political and administrative structures required for accountability. 114

116 Diagram 4b: Political and administrative accountability The diagram shows policy direction from the community and other stakeholders through council to the municipal administration. In turn the administration is accountable to council for implementing policy. The council is accountable for performance to the community and other stakeholders In accordance with the financial governance principles discussed, the MFMA, together with the Municipal Systems Act, clearly establishes a separation of roles and responsibilities between the mayor and council and between the mayor and the municipal manager and other senior officials It thus creates a clearer and single line of authority between the council and the administration VARIATION BETWEEN MUNICIPALITIES The principles of transparency, accountability and oversight are identical for each and every municipality. However, the resources available and the capacity of municipalities will vary considerably, particularly between metropolitan and rural municipalities. The variations will dictate different approaches to systems 115

117 and processes that may be established by the council, mayor and municipal manager to ensure the principles are upheld. The number of officials employed and their skills, qualifications and experience will vary significantly between large and small municipalities. Some municipalities will have more committees than others and the roles will be different. Small municipalities are sometimes unable to separate roles and functions simply because there are insufficient employees It is important therefore that the municipal manager and the mayor in each municipality work with the CFO, senior managers, internal and external auditors to ensure that an appropriate and effective framework of accountability, transparency and oversight is established and maintained, to suit the individual circumstances of each municipality. 5. ROLE OF THE COUNCIL 5.1. The MFMA recognises the municipal council as the highest authority in the municipality and vests the council with significant powers of approval and oversight A council delegates its executive authority to the executive mayor or committee, but does not delegate its legislative powers and also retains its power to approve policy and budgets and to exercise oversight over the mayor in the implementation of policy, budgets and by-laws. As the representative body of the residents that it serves, it remains accountable to residents and to other stakeholders like businesses and provincial and national government ROLE OF THE NON-EXECUTIVE COUNCILOR Apart from the Speaker (where appointed), non-executive councillors generally function in a part-time capacity and are expected to play a political role in representing residents and other stakeholders in the municipality. Councillors provide the critical political linkage between the executive (mayor or executive committee) and the community. Councillors can therefore facilitate the consultative processes envisaged in both the MFMA and the Municipal Systems 116

118 Act, particularly with regard to budgets, IDPs, budget-related policies, tariffsetting for services, indigency policies, long-term borrowing and contracts The Municipal Systems Act and the MFMA also provide non-executive councillors with important recommendation and approval roles. They are expected to review, debate, modify and approve the policies recommended by the executive (mayor or committee). These include by-laws and policies on priorities that impact on council service delivery The Municipal Systems Act and the MFMA jointly establish the role of councillors to include oversight through council (or committee) meetings. Councillors ensure the establishment of effective operational and financial policies and procedures that will produce desired outcomes. To be effective in their role, councillors need to fully understand their oversight responsibilities. As overseers, they must refrain from involvement with the implementation of policies, procedures and directions that they have determined necessary for the community. Councillors cannot have an operational role, as this would interfere with the role of the executive (mayor or committee) and also weaken the accountability of officials to the council (since councillors cannot be both players and referee). This is in line with the role of elected representatives in Parliament and the provincial legislatures, who do not become involved in the day-to-day activities of the executive The approach of the MFMA is also consistent with the Code of Conduct set out in Schedule 1 of the Municipal Systems Act, which clearly requires councillor disclosure of conflicts of interest and prohibits councillor involvement in tender boards or the boards of municipal entities. ACTIVITY / READ: Read Schedule 1 of the MSA 117

119 The oversight role of councillors may be summarised as: setting the direction for municipal activities; setting policy parameters to guide these activities; setting strategic objectives and priorities stating what outcomes and outputs are to be achieved; monitoring the implementation of policies and priorities by evaluating reports of outputs and outcomes; ensuring that corrective action is taken where outputs deviate from plans; and accounting back to the community for performance in terms of objectives Given the importance of this oversight role, both the Municipal Systems Act and the MFMA protect the councillors policy-making role by separating it from the implementation role played by officials. Councillors are therefore not allowed to be members of either the boards of entities (section 93F of the Municipal Systems Act), audit committees (section 166(5) of the MFMA, or a tender or bid committee (section 117 of the MFMA). ACTIVITY / READ: Read section 93F of the MSA and sections 166(5) and 117 of the MFA Under the MFMA, the council is expected to undertake a number of financial management tasks to fulfill its oversight function. These include the following: considering and approving the annual budget and ensuring the budget and IDP are aligned; 118

120 approving budget-related policies on appropriate taxes, user charges, indigent policies, credit control and supply chain management; considering the views of the community and government regarding the budget and in establishing a municipal entity; reviewing the budget and performance of entities under council control; dealing with audit and annual reports, and adopting an oversight report once the report is received; considering capital projects and contracts with financial implications of more than three budget years; taking responsibility for incurring debt and determining security over debt (although some aspects of this may be delegated for short-term debt, subject to certain conditions); considering the sale, disposal or transfer of all capital assets (although this may be delegated to the municipal manager to a value determined by the council); reviewing unauthorised and unforeseen expenditure and reporting on unauthorised, irregular and fruitless and wasteful expenditure; and investigating allegations of financial misconduct and taking appropriate action where necessary ROLE OF COUNCIL COMMITTEES The MFMA also anticipates that each municipal council will strengthen its oversight role by forming portfolio committees within the council, to facilitate the oversight of financial performance. The Municipal Structures Act can be utilised in this respect, through sections 79 and 80, which allows a council to form various committees for the effective and efficient performance of any of its 119

121 functions or to exercise any of its powers. In terms of the financial function, most Councils will have in place portfolio committees that deal with finance and oversight matters. ACTIVITY / READ: Read section 79 and 80 of the MSA Membership of financial portfolio committees needs to be tailored to best suit the purpose and functions of each committee as determined by Council. Membership should consist of a mix of councillors and sufficient officials with expert knowledge in the functions of the committee. A finance committee would be chaired by the mayor or a councillor selected to assist the mayor with the finance responsibilities. Additional councillors can be appointed to ensure broad community needs are represented. The Municipal Manager and/ or Chief Financial Officer will be a member and also responsible for the executive support to the committee, along with other senior officials providing expert advice as appropriate to the functions of the committee. ACTIVITY / CLASS DISCUSSION: Review the purpose and function of all finance related and oversight committees in your municipality. In terms of each committee: Do you consider the balance of membership between councillors and financial experts (officials) is appropriate to ensure the needs of the community are represented and there is sound financial advice provided? If not, what changes would you recommend to the council? What powers, if any, have been delegated to the committee? List the powers that have been delegated and reference the legislation and section number that applies. 120

122 How do the committee s decisions get acted upon, who is responsible for ensuring decisions are carried out? 6. ROLE OF THE MAYOR 6.1. The MFMA assigns specific financial management powers and functions to the mayor. A number of possibilities exist in terms how these powers and functions are carried out. For the purpose of this discussion it is important to note that the MFMA assigns the responsibilities to the mayor and then defines what happens in certain circumstances as summarised below In the case where a municipality has an executive mayor, those powers and functions must be exercised by the executive mayor In the case where a municipality has an executive committee, those powers and functions must be exercised by the mayor in consultation with the executive committee In the case where there is no mayor, those powers and functions must be exercised by the councillor designated to exercise the powers and duties assigned to a mayor by the MFMA For the remainder of this discussion any reference to the term mayor will be in the context above As the executive authority of the council, the executive mayor or committee must provide political guidance over the policy, budget and financial affairs of the municipality and must ensure that the municipality complies with its obligations under the legislation. Without interfering in the day-to-day administration of the municipality, the mayor should monitor and oversee the municipal manager and senior managers to ensure that they are carrying out their duties in an appropriate manner. The key tools for doing so are the annual service delivery 121

123 and budget implementation plan (SDBIP) and the annual performance agreements with clear measurable outputs for each senior manager The mayor remains accountable to council for proposing and implementing policy and overseeing the implementation of this policy by the administration. The following are some of the responsibilities of the mayor: providing political guidance on the budget process; co-ordinating the budget process with the municipal manager; reviewing IDP and budget-related policies and ensuring consistency with the budget; ensuring that the municipality complies with the legislative deadlines for the tabling and approval of the budget; approving the service delivery and budget implementation plan and the performance agreements of the municipal manager and senior management; monitoring the financial performance of the municipality through monthly financial reports submitted by the municipal manager; providing council with quarterly budget reports, mid-year budget and performance assessments and taking action where necessary; reporting instances of potential or real non-compliance with the budget chapter of the MFMA or in relation to issues that may necessitate provincial intervention; tabling an adjustments budget; reporting instances of unforeseeable or unavoidable expenditure; guiding the municipality in its dealings with its municipal entities; and 122

124 tabling the annual report to council each year. ACTIVITY / READ: Read Chapter 7 of the MFMA 7. ROLE OF THE MUNICIPAL MANAGER (THE ACCOUNTING OFFICER) The municipal manager is responsible for the financial management of the municipality, ultimately ensuring that all financial systems are in place and are properly maintained The municipal manager is the accounting officer and the administrative authority for the municipality and is responsible for the implementation of approved council policy and the achievement of the objectives set out by the mayor. In the first instance the municipal manager is accountable to the mayor for the implementation of specific agreed outputs. In the second instance the municipal manager is accountable to the council for the overall administration of the municipality The municipal manager is therefore the key officer responsible to the mayor and council for the successful implementation of the legislation. In this capacity, the municipal manager must be fully aware of the legislative requirements in order to provide the mayor, councillors, senior officials and municipal entities with the appropriate guidance and advice on financial and budget issues Whilst the municipal manager may delegate many tasks to the chief financial officer or to other senior officials, this must be done carefully to ensure that all tasks are completed appropriately by those officials. 123

125 7.4. The municipal manager must project manage at the highest level the finance management function, establishing appropriate objectives for senior staff, project milestones, timeframes and responsibilities whilst managing those outputs effectively and regularly reporting back to the mayor and council on progress A skilled and well-rounded senior management team complemented with some financial management background and knowledge is desirable, since their roles and responsibilities, depending on the extent of delegations by the municipal manager, will greatly support the expeditious implementation of good financial management and governance. It is also appropriate to have the chief financial officer regularly update senior management on finance-related policies and areas of relevance The municipal manager is required to take on a number of specific responsibilities, which include, but are not limited to, the following: Budget preparation: assisting the mayor in preparing the budget; assisting in conducting community participation meetings; making public the draft budget; assisting in the preparation of budget-related policies ; making public the approved budget; developing and submitting the service delivery and budget implementation plan; submitting annual performance agreements for all senior managers; ensuring information is supplied to council and the public on debt proposals; 124

126 making public any proposal to establish or participate in a municipal entity; and making public and inviting comment on draft contracts with a term greater than three years Budget Implementation: implementing the approved budget; ensuring revenue collection and expenditure is in line with the budget; certifies where necessary to shift funds across budget years; administering all municipal bank accounts; developing and implementing a supply chain management policy; assisting the mayor in preparing the adjustment budget; reporting unauthorised, irregular or fruitless and wasteful expenditure; reporting impending shortfalls or overspending, and any overdraft position; reporting on monthly and mid-year budget progress; reporting other matters as prescribed, including staff expenditure; and monitoring entities to ensure that their reporting obligations are met Budget evaluation: providing an assessment of municipal performance for inclusion in the annual report; 125

127 preparing the annual financial statements for audit, verifying salaries and benefits paid; and making public the annual report and the council s oversight report. ACTIVITY / READ: Read Chapter 8, Part 1 of the MFMA 8. ROLES OF SENIOR MANAGERS AND OTHER OFFICIALS 8.1. TOP MANAGEMENT OF MUNICIPALITIES The top management of municipalities must assist the municipal manager in managing and coordinating the financial administration of the municipality. The top management consists of: municipal manager; chief financial officer; all the senior managers who are responsible for managing the respective votes of the municipality and to whom powers and duties for this purpose have been delegated in terms of section 79 of the MFMA; and any other senior official designated by the municipal manager. ACTIVITY / READ: Read section 77 of the MFMA 126

128 8.2. ROLE OF SENIOR MANAGERS AND OTHER OFFICIALS Subject to the directions of the municipal manager each senior manager and each official exercising financial management responsibilities must take all reasonable steps to ensure that: the municipal system of financial management and internal control is carried out diligently; the financial and other resources of the municipality are utilised effectively, efficiently, economically and transparently; any unauthorised, irregular or fruitless and wasteful expenditure and any other losses are prevented; all revenue due is collected; assets and liabilities are managed effectively and assets are safeguarded and maintained to the extent necessary; all information required by the municipal manager to comply with the MFMA is timeously submitted; and delegations by the municipal manager are complied with. ACTIVITY / READ: Read section 78 of the MFMA The role of the chief finance officer will be considered in more detail later in the context of the Budget and Treasury Office. For now let s consider broadly the 127

129 role that senior managers and other officials play in the budget and reporting cycle Budget preparation process During budget preparation process the strategic planning staff will work with the mayor, council and the senior management team to review the IDP and to establish priorities. Heads of departments and financial officials will assist in this process by providing valuable information such as estimates and cost benefit analysis advice The mayor coordinates the budget process. The municipal manager will pass on the municipal budget policy statement and the indicative allocations to the department heads and ask them to construct their departmental SDBIPs based on this information. Refer to diagram 3e (Departmental SDBIPs) Budget implementation process During the budget implementation process the officials of the Budget and Treasury Office will undertake day to day administration, reporting and maintain internal controls over the budget implementation. Senior managers and other officials will implement their budgets and monitor implementation Budget evaluation process During the budget evaluation process senior managers and other officials will assist with finalising their accounts and provide information on variations to the Budget and Treasury Office. The Budget and Treasury office will prepare the annual financial statements for audit, work with the external audit team, and guide the council, mayor and senior managers to review actual performance. The municipal manager and the officials within his or her department will prepare the annual report and the council, with support from strategic and corporate officials, will assist in the preparation of an oversight report. 128

130 9. DELEGATIONS BY THE MUNICIPAL MANAGER 9.1. Section 79 of the MFMA states that the accounting officer of the municipality: must develop an appropriate system of delegation that will maximise administrative and operational efficiency and provide adequate checks and balances in the municipality s financial administration; may in accordance with the system, delegate to a member of the municipality top management or any other official of the municipality: any of the powers or duties assigned to an accounting officer in terms of this Act any power or duties reasonably necessary to assist the accounting officer in complying with a duty which requires the accounting officer to take reasonable or appropriate steps to ensure the achievement of the aims of a specific provision of this Act; must regularly review delegations and amend or withdraw as necessary; and may not delegate to any political structure or political office bearer of the municipality The delegation: must be in writing; is subject to such limitations and conditions as the accounting officer may impose in a specific case; may either be to a specific individual or to the holder of a specific post in the municipality; 129

131 may authorise a member of the top management to sub-delegate the delegated power or duty to an official or the holder of a specific post in that member s area of responsibility; and does not divest the accounting officer of the responsibility concerning the exercise of the delegated power or the performance of the delegated duty The municipal manager may confirm, vary or revoke any decision taken in consequence of a delegation or sub-delegation in terms of the above. No such variation or revocation may detract from rights that may have accrued as a result of the decision. ACTIVITY / READ: Read section 79 of the MFMA 9.4. DELEGATIONS AND ACCOUNTABILITY Where an accounting officer delegates or sub-delegates any of the accounting officer responsibilities to other officials, and where they are properly qualified and have the necessary experience to play this role, those officials may be held accountable for any transgressions in exercising these accounting officer responsibilities. However, this does not exclude the municipal manager from being held ultimately accountable for the exercise of the delegated power or performance of the delegated duty DELEGATIONS TO BE IN WRITING In all instances, delegations must be in writing and may be subject to change or amendment. The municipal manager delegating the task should always ensure that appropriate systems are in place to guarantee that proper control and accountability remain with him or herself. Delegations should be limited and any delegation to junior officials should be avoided. 130

132 9.6. ENSURING THE SYSTEM OF DELEGATIONS IS OPERATING EFFECTIVELY AND EFFICIENTLY Further to a regular review of the system by the municipal manager, the annual performance agreements and the Service Delivery and Budget Implementation Plan (SDBIP) can be used to track appropriate operation of the system of delegations. Monthly budget statements, quarterly reports and mid-year budget and performance assessments provide valuable information on the implementation of the budget and service delivery. The municipal manager should use this information to look for problems in the delegation system SCHEDULE OF DELEGATIONS The municipal manager should keep a schedule of delegations which lists each power, duty or function being delegated and: a reference to the legislative or regulatory power for the delegation; the position making the delegation and or sub-delegation; and the specific individual or posts that the delegation or sub-delegation is being made to. ACTIVITY / CLASS DISCUSSION: Obtain a copy of the schedule of delegations for your municipality, in terms of the MFMS. Provide comment on the appropriateness of the schedule and whether it complies with the MFMA. What recommendations would you make to the municipal manager to address any shortfalls, if any? 131

133 10. ROLE OF THE CHIEF FINANCIAL OFFICER The chief financial officer (CFO) is a senior manager in terms of section 56 of the Municipal Systems Act and section 77 of the MFMA and is administratively in charge of the municipal Budget and Treasury Office. The MFMA requires each municipality to have a CFO, who is appointed by the municipal manager. Diagram 4c below illustrates the role of the CFO. Diagram 4c: Role of the Chief Financial Officer The roles of the CFO in terms of section 81 of the MFMA are: be administratively in charge of the Budget and Treasury Office; must advise the municipal manager on the exercise of power and duties assigned to the accounting officer in terms of the Act; must assist the municipal manager in the administration of the municipality s bank accounts and the preparation and implementation of the municipality s budget; 132

134 must advise senior managers and other officials in the exercise of powers and duties assigned to them in terms of section 78 or delegated to them in terms of section 79; and must perform such budgeting, accounting, analysis, financial reporting, cash management, debt management, supply chain management, financial management, review and other duties as may in terms of section 79 be delegated by the accounting officer to the CFO in terms of section The CFO is accountable to the municipal manager for the performance of these duties above In terms of the budget and reporting cycle, the CFO would in most cases, be responsible to the municipal manager for administering the budget preparation, implementation and evaluation of the budget. The CFO and officials in the Budget and Treasury Office provide support to enable the municipal manager to discharge his/ her responsibilities. 11. BUDGET AND TREASURY OFFICE As already discussed, the CFO is an integral member of the top management team of a municipality and heads the Budget and Treasury Office. Section 80 of the MFMA required every municipality to have a Burget and Treasury Office. Diagram 4d below shows how the Budget and Treasury Office reports to the CFO and provides support to all senior managers. 133

135 Diagram 4d: Structure of the Budget and Treasury Office ACTIVITY / READ: Read sections 80 to 83 of the MFMA which provides some guidance on the composition, delegations and competency levels relating to the Budget and Treasury Office The Budget and Treasury Office has many more powers than traditional municipal treasury departments, as its responsibilities go beyond traditional accounting or treasury functions like operating bank accounts, cash management, collecting revenue or overseeing revenue collection, authorising or making payments and preparing financial statements. In addition, the role involves playing a more strategic advisory role to the accounting officer and other senior officials, one that is forward-looking and takes the lead in the budgeting and planning processes. It is also expected to take on both a management (rather than administrative) role and an oversight role. The Budget 134

136 and Treasury Office will have a critical function in producing monthly management information for the municipal manager and mayor. ENTITIES and the Budget and Treasury Office A municipal entity is not required to establish a Budget and Treasury Office COMPETENCY LEVELS OF SENIOR MANAGERS AND FINANCE OFFICIALS The CFO plays a central role in implementing the financial requirements of the MFMA and will require the assistance of appropriately skilled finance staff. Section 83 of the MFMA requires all senior managers, including the CFO and municipal manager, and all financial officials to meet minimum prescribed financial management competency levels. The Municipal Regulations on Minimum Competency Levels specify the minimum levels of competency for specified positions within a municipality, including the CFO and finance officials. This should be enforced as part of employment contracts and form part of performance agreements The CFO therefore in addition to technical finance management skills, has to be a professional with strong management and leadership skills, providing strategic leadership for the budget and planning process. ENTITIES and competency levels in financial management: The Chief Executive Officer of a municipal entity is responsible for all financial management requirements of the MFMA. Entities are not required to appoint a CFO, however, in cases where a CFO is appointed by an entity the CFO must meet the minimum competency requirements that apply to a CFO in the Municipal Regulations on Minimum Competency Levels. 135

137 Not all officials in the Budget and Treasury Office will have financial skills and, conversely, not all financial staff will be situated in the Budget and Treasury Office. In many large municipalities, most major departments (e.g. water and sanitation) will need to have financial officials in those departments, outside the Budget and Treasury Office, but supported by the Budget and Treasury Office MOBILITY OF FINANCE OFFICIALS BETWEEN SPHERES OF GOVERNMENT A further important objective of the MFMA is to facilitate and promote the mobility of finance officials between all three spheres of government. The underlying approach of both the MFMA and the PFMA (Public Finance Management Act) is similar, and it is hoped that finance or treasury officials will generally have the expertise to implement both pieces of legislation Diagram 4e below illustrates how finance officials working in the three spheres will develop competencies that overlap and are portable across the spheres. We know that the while the three spheres are autonomous they are interlinked as they must interact with each other. Given this we can see how financial professionals in each sphere would require similar skills and knowledge to successfully carry out their duties. The interlinking of the spheres demonstrates the interaction between the three spheres of government and the interlinking of the rectangles demonstrates the commonalities of underlying reform principles in the legislation that governs the three spheres. 136

138 Diagram 4e: Mobility of public sector finance officials 12. ROLES AND RESPONSIBILITIES OF OTHER LEVELS OF GOVERNMENT The MFMA fosters a greater level of co-operation across (and within) the different spheres of government, based on systems of mutual support, information sharing and communication and coordination of activities each aiming to add value to the others constitutional responsibilities with a view to improving outcomes for all Municipalities and other organs of state must promote co-operative government; and municipalities must meet their financial commitments and provide other municipalities and provincial and national government with budget and financial information as required. They must inform neighbouring municipalities and provincial or national organs of state about any material financial and budget matters that may impact on them directly or indirectly (e.g. on their planning processes for related services). 137

139 12.2. The district municipality can play a role in the overall planning and co-ordination across municipalities within the district. It can do this by facilitating a strategic planning process for municipal budgets by coordinating consultation between the municipalities and between provincial and national departments when reviewing the IDPs and determining future priorities National and provincial treasuries will assist and support a municipality s compliance with the MFMA, notwithstanding the municipality s own responsibilities in this regard, and will help to build a municipality s capacity and help identify and resolve its financial problems where necessary. National and provincial governments are required to publish three-year local government grant allocations per municipality, with their budgets, to allow municipalities to devise strategic plans for their activities The Act also establishes a timeframe for national departments to advise municipalities of any tax and tariff capping policies and provides for national or provincial departments that supply bulk resources to municipalities, like electricity and water, to consult those municipalities about their price-setting policies The Act also requires the mayor to report to national and provincial government any instance in which the municipality does not comply with the Act. It describes the consultative process required by municipalities on various financial matters and lays out the process for provincial interventions to resolve financial problems CO-OPERATIVE GOVERNMENT A summary of the framework for co-operative government is provided in diagram 4f below: 138

140 Diagram 4f: Co-operative government NATIONAL GOVERNMENT Assists and supports municipalities with compliance where appropriate, assists in building capacity by providing financial or technical assistance, issues guides, manuals and regulations and provides three-year grant allocation details PROVINCIAL GOVERNMENT Plays a co-ordinating role in implementation of the MFMA, assists and supports municipalities where appropriate, intervenes when financial problems become evident in municipalities LOCAL GOVERNMENT Provides the other spheres of government with appropriate financial and servicedelivery information, liaises with other municipalities and districts on strategic budget issues, provides provincial and national government with budget and financial information ENTITIES across spheres of government The financial management of all entities is regulated by the MFMA, unless the majority share in an entity is held by a national or provincial organ of state, in which case the Public Finance Management Act (PFMA) applies. 139

141 13. ASSIGNMENTS ASSIGNMENT 4.1 (36 MARKS) Explain the roles and responsibilities of the following during the municipal budget and reporting cycle (preparation, implementation, evaluation) non-executive councillors (7 marks); the executive (10 marks); the municipal manager (13 marks); the chief finance officer (3 marks); and other senior managers (3 marks) ASSIGNMENT 4.2 (5 MARKS) In terms of a schedule of delegations with regard to financial management responsibilities, what information should be on the schedule? ASSIGNMENT 4.3 (14 MARKS) Explain why and how the municipal manager delegates responsibilities. In your answer provide all of the legislative requirements including, for example, who the municipal manager can delegate to and what can be delegated. 140

142 13.4. ASSIGNMENT 4.4 (14 MARKS) Explain the role of the budget and treasury office, its composition including the head official and competency requirements for professional finance officials. 14. ASSESSMENT CRITERIA In terms of the regulatory framework for budget preparation, identify the roles and responsibilities of municipal political executives, accounting officers and senior managers in the budget preparation [SO1AC1] In terms of the regulatory framework for the municipal budget cycle, identify the roles and responsibilities of municipal political executives, accounting officers and senior managers in the budget preparation [SO1AC2] ** Include roles and responsibilities of Mayor, municipal manager, council, CFO, senior managers [SO1ACR1] Explain and apply the legislative conditions of municipal delegations including restrictions and conditions for delegations and role players [SO4AC1] Interpret the legislation in terms of the governing of a municipal treasury and budget office [SO3AC1] Evaluate whether a budget and treasury office complies with the relevant legislation [SO3AC2] 141

143 Municipal finance management calendar 1. LEARNING OUTCOMES 1.1. Plan a municipal budget calendar in accordance with the legislation [SO2] 2. KEY CONCEPTS 2.1. The learner will understand the chronological sequence of events to deliver a municipal budget, reports and related financial management processes. 3. LEARNING ASSUMED TO BE IN PLACE 3.1. Prior to commencing this chapter of the module notes the learner must have completed the previous chapter(s) The learner is reminded that prior to attending a workshop on this chapter they must: read this chapter module notes; complete assigned reading or study which includes MFMA Learning modules bring completed answers to the activities/class discussion for this chapter for discussion during the workshop bring completed answers to the short assignments for the previous chapter to be handed in for marking have substantially progressed work on the major assignment. Time in this workshop could be dedicated to discussing the major assignment which is due to be handed in one week later. 142

144 4. INTRODUCTION 4.1. The previous chapter considered the three processes in the budget and reporting cycle setting out the reasons for each and their timing in the cycle Budget preparation process Budget implementation process Budget evaluation process This chapter will provide the MFMA Finance Management Calendar published by the National Treasury. Learners are required to read through the calendar and take note of how the principles discussed in the previous chapters are put into practice. The calendar may be useful to the learner as a reference when completing the major assignment in Chapter The calendar that follows is a comprehensive chronological list of finance management actions throughout the year. It has been colour coded according to the following topics: 143

145 5. MUNICIPAL BUDGET AND REPORTING CALENDAR 144

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