6/10/2017 NOTE ORIENTATION. Unit Standard Apply the principles of budgeting within a municipality

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1 NOTE DIPLOMA IN PUBLIC ACCOUNTABILITY MODULE / Compliance and control 1 (4 UNIT STANDARDS) US Dr Len Mortimer Participants are advised to have access to: The respective learner guide, MFMA, PFMA The Constitution of the Republic of South Africa, Local Government: Municipal Systems Act, Act 32 of 2000 and the Local Government: Municipal Structures Act, Act 117 of During preparation/self study/watching the DVD material ORIENTATION IMPORTANT DATES TELEMATICS SESSION: CONTACT SESSIONS: 13 JULY 2017 (BELLVILLE) EXAMS: 1 ST AND CONCESSION ASSIGNMENT: Unit Standard Apply the principles of budgeting within a municipality 1

2 Unit standard details Structure: 15 credits on NQF level 5 Outcomes: On completion of this unit standard, you should be able to: OUTCOME 1: Demonstrate an awareness of the role of a budget in the municipal context. OUTCOME 2: Differentiate between formats of budgets used in a municipality. OUTCOME 3: Evaluate a municipal budgeting system. OUTCOME 4: Contribute to preparing a municipal budget that reflects an integrated development plan. OUTCOME 5: Differentiate between approaches to preparing a municipal budget. ASSESSMENT INSTRUCTIONS FOR TAKE HOME ASSIGNMENT and TEST Available on the website 2017/06/10 5 US Assignment: words Explain how your organisation: Budget by analysing the latest budget and budget process of your organisation and compare it to the required budget formats and approaches to arrive at your own conclusion if your organisation comply with the legislative and policy requirements for a legal and acceptable budget. Make use of source documents and use material in the assignment as credible evidence that you studied the budget and what it should comply with. US Assessment Plan Class test: 25 marks Test learner s understanding of: Budgeting and compliance to applicable financial and other legislation and regulations. Formats of budgets Link between strategic planning and budgeting Forecasting approaches. 2

3 Emphasis in this Unit Standard: Chapter 1 Emphasis in this Unit Standard: Chapter 2 1. Purpose of budgeting 2. Accountability cycle 3. Key stages of the budget and reporting cycle 4. Budget preparation 5. Budget implementation 6. Budget Evaluation 7. IDP, budget, SDBIP, adjustments budget, in-year reports, annual financial statements, annual reports, oversight reports 8. Public Expenditure Management: 1. aggregate fiscal discipline; 2. allocative efficiency; and 3. operational efficiency. 1. Consultation on the IDP and budget 2. Sector plans 3. IDP and Budget processes ONE process 4. Time schedule of key deadlines 5. Reconciliation of budget and IDP 6. SDBIP as an implementation tool 7. Process for Preparing and approving the SDBIP 8. Performance management 9. Performance auditing Emphasis in this Unit Standard: Chapter 3 Emphasis in this Unit Standard: Chapter 4 1. Accounting classification budgeting 2. Programme budgeting by vote 3. Programme budgeting by IDP objective 4. Programme budgeting by Government Finance Statistics functions 5. Performance budgeting 6. Incremental budgeting 7. Zero based budgeting 8. Combining the different approaches to prepare a municipal budget 1. Purpose of standardising budget formats 2. The standard format of the budget and supporting documentation 3. Standard columns for annual budget tables 4. Standard columns for adjustment budget tables 5. Standard columns for in-year reporting tables 6. Use of charts to convey information 3

4 Learning Outcomes CHAPTER 1 Introduction to municipal budgeting in South Africa Demonstrate an awareness of the role of a budget in the municipal context Key Concepts Introduction/Overview Purpose of budgeting Accountability cycle Key stages of the budget and reporting cycle Budget preparation Budget implementation Budget Evaluation IDP, budget, SDBIP, adjustments budget, in-year reports, annual financial statements, annual reports, oversight reports Public Expenditure Management: aggregate fiscal discipline; allocative efficiency; and operational efficiency. The concept of budgeting in the public sector is introduced (Public Expenditure Management)

5 THE PURPOSE OF BUDGETING A budget is n plan of action, expressed in monetary terms for a specific period, whereby limited resources are apportioned according to a basis of preferences towards unlimited needs. Thus it is: A plan of action through which the costs for a specific activity aimed at satisfying a specific need or needs are expressed in monetary terms for a given period. THE PLANNING, IMPLEMENTATION, MONITORING AND EVALUATION ASPECTS OF A BUDGET Budget preparation Budget implementation (including monitoring) Budget evaluation A plan based on specific methods and techniques to utilise scarce resources such as capital, labour, material and equipment to the best advantage of the community, thereby satisfying the needs of the community. A plan of action that indicates what income will be received from various sources PUBLIC EXPENDITURE MANAGEMENT Political Legislative Technical Participative Accountability AGGREGATE FISCAL DISCIPLINE Refers to process of monitoring and controlling financial performance at a summary level. Adequate funding, targets should be realistic, actual performance against targets. Budgets are summarised as: departmental aggregates; strategic objective aggregates; and accounting classification aggregates

6 ALLOCATIVE EFFICIENCY OPERATIONAL EFFICIENCY Doing the right thing Doing the thing right SUMMARY The three principles of Public Expenditure Management can be summarised as follows: expenditure budgets to deliver services are funded by realistic revenue budgets over the medium term. That is, expenditure budgets are affordable (aggregate fiscal discipline); service delivery and therefore spending should be allocated according to the needs of the community taking into account national and provincial as well as local priorities (allocative efficiency); and spending should deliver the intended services and related outcomes at the least cost (operational efficiency). IMPACT OF HUMAN ASPECTS IN THE BUDGET AND REPORTING CYCLE Budget contributed by various parties. Potential for negative impact on budget by humans PEM attempt to eliminate risk of negative impact

7 Impact of Human Aspects on Budget Preparation Process: Impact can vary Politicians may focus on objectives of political party Officials bound by rules and procedures Participants must have skills and capacity Potential Negative Impacts Councillors allocating resources for: personal benefit re-election Over budgeting by managers Suggested Solutions Performance budgeting: Measurable performance objectives are linked to IDP objectives Multi-year budgets focusing on sustainability Zero based budgeting Performance budgeting Roles and responsibilities must be clearly defined Impact Implementation Process: Human Aspects on Budget Evaluations: Potential Negative Impacts Inability to spend budget and deliver services due to skills shortages Fraud and Corruption Awarding of contracts to associates Bribery Embezzlement Suggested Solutions Performance management, inyear reporting Performance auditing linked to staff bonuses Competency regulations Developing a public service ethic Internal controls Internal audit & audit committee Separation of roles and responsibilities Effective and accountable system of delegations 26 Potential Negative Impacts Annual Financial Statements are disclaimed or qualified due to lack of financial management skills Tendency to overstate performance in the Annual Report due to remuneration and recognition incentives Suggested Solutions Performance management, annual report and oversight report Performance auditing linked to staff bonuses Competency regulations Internships, mentoring and bursaries Oversight Report Prescribed format and content for annual report 27 7

8 BUDGETING IN THE MUNICIPAL CONTEXT IN SOUTH AFRICA ACCOUNTABILITY CYCLE As a strategic tool budgets need to focus on non-financial as well as financial targets Example non-financial = Time period taken to complete collaborator items) Example financial = Allocation to capital and operating project items It must be linked to long-term targets in the strategic plan (IDP & Long-term financial plan) Reported in Annual Report 28 KEY DEFINITIONS Preparation: IDP BUDGET Implementation SDBIP ADJUSTMENT BUDGET IN-YEAR REPORTS Evaluation: AFS Annual report Oversight report ACCOUNTABILITY CYCLE PROCESS ACCOUNTABILITY CYCLE ROLES AND RESPONSIBILITIES

9 INTERNAL CONTROLS, AUDIT COMMITTEES AND EXTERNAL AUDIT Management of financial systems and internal control procedures ACTIVITY: READ CHAPTERS 8, 3 &6, 10 MFMA Internal audit and the audit committee ACTIVITY: READ SECTIONS 165 AND 166 OF MFMA THE MFMA, BUDGET REFORM AND IMPROVED SERVICE DELIVERY 9.1 PRIOR TO THE MFMA Budget Preparation Budget Implementation and Monitoring Budget Evaluation 35, REFORMS EMBODIED IN THE MFMA A MORE STRATEGIC APPROACH TO BUDGETING PAST PRACTICES AND RELATED IMPROVEMENTS DIAGRAM 2e Comparison between past and post MFMA ito Preparation Implementation Evaluation

10 MULTI YEAR BUDGETING MULTI-YEAR BUDGETING Three year budgets MTREF Performance culture Focus on 5 years at a time Diagram 2f- next slide illustrate 5 years 45 MAXIMISING SERVICE DELIVERY AND CONTINUOUS IMPROVEMENT PERFORMANCE DRIVEN APPROACH

11 A PERFORMANCE CULTURE A PERFORMANCE CULTURE MFMA- norms and standards Similar to King II and King III Ethical and performance based culture- not purely rules based Mayors and managers should be mindful of this The reforms aim at building institutional structure and place emphasis on DISCIPLINED APPROACH ASSIGN RESOURCES IN LINE WITH STRATEGIC PRIORITIES ENCOURAGE OPERATIONAL EFFICIENCY SUSTAINABILITY SUSTAINABILITY AND THE MFMA Sustainable local government is built on the basis of balanced budgets, as unfunded deficits are not allowed. Municipalities will have to take full responsibility for their actions and should not expect national or provincial government to bail out badly managed municipalities. Prioritising the level of service delivery and ensuring costs that are affordable to ratepayers as well as the continuation of routine maintenance will guarantee the sustainability of the service offered by the municipality Purpose of MFMA to improve financial management Grants- More sustainable approach An early warning system Analysing the financial implications of decisions Financial accountability

12 THE MUNICIPAL BUDGET AND REPORTING CYCLE IN SOUTH AFRICA PAGE LEARNING OUTCOMES CHAPTER 2 Contribute to preparing a municipal budget that reflects an integrated development plan INTEGRATING STRATEGIC PLANNING, BUDGETING, IMPLEMENTATION AND PERFORMANCE MANAGEMENT

13 KEY CONCEPTS INTRODUCTION/OVERVIEW Consultation on the IDP and budget Sector plans IDP and Budget processes ONE process Time schedule of key deadlines Reconciliation of budget and IDP SDBIP as an implementation tool Process for Preparing and approving the SDBIP Performance management Performance auditing The discussion and diagrams on the accountability cycle give insight into the integration of strategic planning budgeting and performance management RELATIONSHIP BETWEEN IDP, SECTOR PLANS AND BUDGET CONSULTATION: STRATEGIC Diagram 3a Define sector as broad government sectors: Water, housing, health

14 CONSULTATION: SECTOR SPECIFIC Diagram 3b ACTIVITY/CLASS DISCUSSION Page INTEGRATED IDP AND BUDGET PROCESSES IDP and budget revision- same process Well run budget process- community participation Section 21 MFMA Mayor to coordinate ACTIVITY/CLASS DISCUSSION Page 62 READ SECTIONS 21,68,87 OF THE MFMA

15 IMPLEMENTATION, THE SDBIP AND ANNUAL PERFORMANCE AGREEMENTS ACTIVITY/CLASS DISCUSSION Page 63 READ and schedule of key deadlines, refer to Act and definitions Pages Budget approved, Mayor to approve SDBIP, performance agreements SDBIP is..implementation, monitoring Page 70 council role in SDBIP Service delivery and budget implementation plan (SDBIP) ACTIVITY/CLASS DISCUSSION Page 71 READ MFMA CIRCULAR 13 See next 3 slides 70 15

16 PAGE 1 OF CIRCULAR PAGE 11 OF CIRCULAR PAGE 12 OF CIRCULAR PERFORMANCE MANAGEMENT AND PERFORMANCE AUDITING MFMA and Systems Act require PMS Budget must contain targets and objectives 71 16

17 CONSISTENT MEASURABLE PERFORMANCE OBJECTIVES ACTIVITY/CLASS DISCUSSION Page 71 and 72 READ SECTIONS 17,24,53,69 OF MFMA READ SECTION 57 OF MSA READ CHAPTER 12 OF MFMA READ SECTION 46 OF MSA 73 ACTIVITY/CLASS DISCUSSION Page 73 READ Section 54(1)(c) MFMA ACTIVITY/CLASS DISCUSSION Page 74 Targets in SDBIP and annual performance agreements? 17

18 RECONCILING THE BUDGET AND IDP DPLG IDP TOOLBOX INTRODUCTION P COSTING THE IDP P75 and 76 DIAGRAM 2f PAGE RECONCILING THE BUDGET TO THE IDP DIAGRAM 3G Page 79 Example of reconciliation IDP strategic objective and budget (revenue) Table A

19 DIAGRAM 3H DIAGRAM 3i Page 80 Example of reconciliation IDP strategic objective and budget (expenditure) Table A5 Page 81 Example of reconciliation IDP strategic objective and budget (capex) Table A6 CHAPTER 3 ACTIVITY/CLASS DISCUSSION Page 82 and 83 Approaches to budgeting 87 19

20 LEARNING OUTCOMES Evaluate the different approaches of budgeting used in a municipality Key Concepts Accounting classification budgeting Programme budgeting by vote Programme budgeting by IDP objective Programme budgeting by Government Finance Statistics functions Performance budgeting Incremental budgeting Zero based budgeting Combining the different approaches to prepare a municipal budget INTRODUCTION identify some of the common approaches to budgeting, explain their advantages and disadvantages to enable choices to be made regarding the most suitable approach for a particular circumstance, show how a combination of these approaches are used in modern municipal budgeting in South Africa. INTRODUCTION (CONTINUED) Classification Approaches Forecasting approaches

21 CLASSIFICATION APPROACHES CLASSIFICATION APPROACHES Accounting classification budgeting Programme budgeting according to: Performance budgeting Multiple formats Forecasting approaches: Incremental budgeting Zero based budgeting Accounting classification budgeting Programme budgeting according to GRAP compliant Vote IDP objective and sub goal Government Finance Statistics (GFS) functional classification

22 Performance budgeting Outcomes, outputs and measurable performance objectives for each programmes Help to analyse overall financial performance and financial position over time Budgets by vote-structure of organisation ACCOUNTING CLASSIFICATION BUDGETING LINE ITEM BUDGETING NT FORMAT Line managers construct budget for each accounting classification Example on page 92 Consolidated budget financial performance (revenue and exp) 6.4 Traditionally munis budgets were according accounting classification-every muni was different DISADVANTAGES OF USING ACCOUNTING CLASSIFICATION BUDGETING IN ISOLATION: ADVANTAGES OF USING ACCOUNTING CLASSIFICATION BUDGETING WITH OTHER APPROACHES:

23 PROGRAMME BUDGETING ACTIVITY/CLASS DISCUSSION This classifies the budget by programme or activity Vote IDP objective GFS Page PROGRAMME BUDGETING PROGRAMME BUDGETING BY VOTE DISADVANTAGES OF USING PROGRAMME BUDGETING IN ISOLATION: Impossible to aggregate ADVANTAGES OF USING PROGRAMME BUDGETING WITH OTHER APPROACHES: Focus on service delivery Section 1 of MFMA-vote= P97 example of Vote structure ADVANTAGES OF BUDGETING BY VOTE: Accountability

24 PROGRAMME BUDGETING BY IDP OBJECTIVE P 98 refer to Diagram 4c P99 ACTIVITY/CLASS DISCUSSION Page 98 ADVANTAGES OF BUDGETING BY IDP OBJECTIVE: P99 Information allow competing resources to motivate for PROGRAMME BUDGETING BY GFS The GFS is an international standard-allows for aggregation, comparison.. Diagram 4d on P100 ADVANTAGES OF BUDGETING BY GFS: Aggregation Consolidation Facilitate comparison Historical comparisons ACTIVITY/CLASS DISCUSSION Page

25 PERFORMANCE BUDGETING PERFORMANCE BUDGETING Perf budgeting closely with programme budgeting- Format on page 102 Diagram 4e explain Two examples are provided on pages that illustrate perf budgeting which is not classified by programme SUMMARY OF THE ADVANTAGES OF PERFORMANCE BUDGETING: Integrate strategic planning with budgeting Helps to assess performance Mechanism to compare performance Emphasis input and output PERFORMANCE BUDGETING DISADVANTAGES OF PERFORMANCE BUDGETING: Sometimes difficult to measure Additional resources required PERFORMANCE AUDITING Necessary because.. ACTIVITY/CLASS DISCUSSION Page

26 FORECASTING APPROACHES INCREMENTAL BUDGETING Forecasting approaches page 107 Incremental budgeting Zero based budgeting What is it. DISADVANTAGES OF INCREMENTAL BUDGETING IN ISOLATION It assumes ADVANTAGES OF INCREMENTAL BUDGETING IN CONJUNCTION WITH ZERO BASED BUDGETING Why does this approach work better Note page 108 ZERO-BASED BUDGETING Funding compliance guideline 10 March 2008 MFMA website What is it.. DISADVANTAGES OF USING ZERO BASED BUDGETING IN ISOLATION Cost, time, resources ADVANTAGES OF USING ZERO BASED BUDGETING IN CONJUNCTION WITH INCREMENTAL BUDGETING Cut out unnecessary, focus on core functions

27 PREPARING A BUDGET USING THE VARIOUS APPROACHES P111- ACTIVITY/CLASS DISCUSSION Page 110 DIAGRAM 4i PAGE 112 Information to be included in a dept SDBIP ACTIVITY/CLASS DISCUSSION Page

28 DIAGRAM 4J PAGE 114 MFMA budget formats guide July 2008 Excell templates ACTIVITY/CLASS DISCUSSION Page 114 LEARNING OUTCOMES CHAPTER 4 Standard municipal budget formats Differentiate between formats of budgets used in a municipality Evaluate the different formats / systems used in municipalities

29 KEY CONCEPTS Purpose of standardising budget formats The standard format of the budget and supporting documentation Standard columns for annual budget tables Standard columns for adjustment budget tables Standard columns for in-year reporting tables Use of charts to convey information INTRODUCTION This chapter will now consider municipal budget formats in more detail DIAGRAM 5a page 122 Standard formats ACTIVITY/CLASS DISCUSSION Page 124 How does standardised budget formats contribute to aggregate fiscal discipline, allocative efficiency and operational efficiency? 29

30 LEGISLATIVE FRAMEWORK FOR STANDARDISING BUDGET FORMATS STANDARDISATION OF BUDGET DOCUMENTATION Constitution S215 (1) and (2) S216 MFMA S3. S17 S121,122 and S Schedules A, B and C Principles bottom page STANDARDISATION OF BUDGET DOCUMENTATION SIMULTANEOUS STANDARDISATION AND FLEXIBILITY: FORMAT OF ANNUAL BUDGET DOCUMENTATION Page See schedule on page 130, sections to budget CONSOLIDATIONS OF PARENT MUNICIPALITIES AND MUNICIPAL ENTITIES:

31 ANNUAL BUDGET COLUMNS 10 columns and 7 year horizon FORMAT OF ADJUSTMENTS BUDGET DOCUMENTATION Adjustment budget columns P133 similarity to annual 132 FORMAT OF IN-YEAR REPORT DOCUMENTATION STANDARD FORMATS FOR TABLES AND CHARTS Diagram 5d In-year reporting columns P133 example

32 Thank you Len Mortimer 32