BUDGET PREPARATION MODULE

Transcription

1 Public Financial Management BUDGET PREPARATION MODULE P A R T I C I P ANT BOOK October 2014 REPUBLIC OF KENYA NATIONAL TREASURY KENYA SCHOOL OF GOVERNMENT REPUBLIC OF KENYA MINISTRY OF DEVOLUTION AND PLANNING

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3 Public Financial Management BUDGET PREPARATION Module PARTICIPANT BOOK October 2014

4 Table of Contents Foreword... Acknowledgements... Abbreviations... i ii iii Introduction... 1 Aims and Objectives of the training... 1 Public Finance Management Curriculum Summary... 2 Target Participant Group... 4 Glossary and Resources... 4 Timings and Methodology... 4 Training Overview Budget Preparation... 5 Getting Started... 6 History of Budgeting in Kenya... 7 County Budget Cycle, Calendar and Conceptual Overview of Budgeting Key legislation, documents, roles and responsibilities in county budgeting County Budget Cycle and Calendar Legislative Approval Process Strategic vs. Operational Phases of budget preparation Introduction to Medium Term Expenditure Framework Introduction to Programme Based Budgeting Introduction to the Chart of Accounts (CoA) Public Participation in Budget Preparation Strategic Phase of Budgeting County Budget Circular County Integrated Development Plan County Budget Review and Outlook Paper (C-BROP) Sector Working Groups and Resource Allocation County Fiscal Strategy Paper (C-FSP)... 66

5 Operational Phase of Budgeting County Budget Circular/Budget call circular (budget estimates) Department Budget Estimates prepared A. Preparing the County Recurrent Budget B. Preparing the County Development Budget C. Budgeting for Appropriations-in-Aid (A-in-A) D. Budget Preparation Tools The Chart of Accounts and Programme Based Budgeting format Review, consolidate and submit Budget Estimates Conclusion Summary Assessment & Evaluation Glossary Resources Assessment Annexes Annex 1: Example Revenue Forecast Format, Example Sector Ceilings Annex 2: C-FSP Format Annex 3: Sector Working Group Report Format Annex 4a: Estimates of Recurrent Expenditure Annex 4b: Estimates of Development Expenditure Annex 5: FORMAT FOR PRESENTATION OF PROGRAMME BASED BUDGETS (PBB) Annex 6: Departmental/Sectoral Committees Annex 7: County Integrated Development Plan Chapter Outlines Annex 8: Template for costing of programs and activities

6 Foreword The Fourth Schedule of the Constitution of Kenya assigns the National Government the function of capacity building of counties. This mandate of the National Government has also been recognised and elaborated in the National Government Capacity Building Framework for County Governments. With regard to county public finance management (PFM) capacity building, this responsibility has been placed on the National Treasury. In order to effectively deliver on its mandate of building the capacity of county governments in PFM, the National Treasury developed a County PFM Training Curriculum and has in partnership with development partners embarked on the development of a number of County PFM Training Modules. The National Treasury intends to roll out training on PFM and make these modules accessible to all county governments. In this respect, the National Treasury will partner with the Kenya School of Government (KSG) to roll out the training of county State and public officers using the County PFM Modules as the primary training toolkit. These modules, besides standardizing the County PFM Training, will also ensure that those trained will also have reference material for use in their day-to-day operations. At the outset, training will be delivered by a pool of staff drawn from the National Treasury. In the medium and long-term, the National Treasury, in partnership with the Kenya School of Government will identify and train a pool of professionals, through scheduled training of trainers. This pool of professionals will then conduct future training of county PFM staff. For this purpose, each module includes a Training of Trainers guide in addition, to the participants guide. This Budget Preparation module, is among the first to be developed and is specifically designed to equip the county officials with the necessary skills and information, to help improve and strengthen their capacity in the preparation of county budgets. The module will be used to train officials drawn from the county executives as well as county legislatures and emphasizes the use of participatory and practical approaches to learning. I have no doubt that this county PFM Training modules will help to strengthen the capacity of county governments in public finance management and contribute towards enhancing prudent, accountable and transparent management of public resources. Henry K. Rotich, Cabinet Secretary National Treasury i

7 Acknowledgements This Budget Preparation module has been developed through the concerted effort of various institutions and professionals. We wish to express our gratitude to all those persons and institutions that contributed towards the development of this manual. In particular, I wish to acknowledge the role of the Budgetary Supply Department and the newly created Intergovernmental Fiscal Relations Department of the National Treasury in coordinating and providing technical guidance in the development of this Module. Much thanks to the Kenya School of Government (KSG) who provided quality control during the development of the module and for their commitment to include the Budget Preparation module as the main toolkit for county PFM training at the Kenya School of Government. We are equally grateful to World Bank through its Kenya Accountable Devolution Programme, for its support towards the development of this module. Special thanks to the pool of experts from the World Bank who worked tireless to ensure successful delivery of this module. Dr. Kamau Thugge, EBS Principal Secretary National Treasury ii

8 Abbreviations AOs Accounting Officers BROP Budget Review and Outlook Paper CA County Assembly C-BEF County Budget and Economic Forum CEC County Executive Committee CEC-MF County Executive Committee Member for Finance CEC-MP County Executive Committee Member for Planning CoB Controller of Budget CoK Constitution of Kenya (2010) CFPG County Fiscal Planning Group CRA Commission for Revenue Allocation CT County Treasury GDP Gross Domestic Product IBEC Inter-governmental Budget and Economic Council MTEF Medium Term Expenditure Framework NT National Treasury PBB Programme Based Budgeting PEM Public Expenditure Management PFM Public Finance Management PFMA Public Finance Management Act (2012) SWGs Sector Working Groups iii

9 Introduction Aims and Objectives of the training This Budget Preparation training is one component of the Public Finance Management Module. It aims to enhance general understanding of public financial management, and for the technical county staff empower them, the participants, to prepare timely, accurate and effective county budgets which address some key weaknesses encountered through the 2014/15 budget preparation period. The training will achieve this by increasing participants understanding of the budget preparation process and its related concepts, as well as the specific how to elements of budget preparation. Specific Objectives By the end of this training, participants should be able to better perform their roles and: Identify the different elements of the budget cycle and calendar, and plan work accordingly to ensure that they can comply with deadlines. Identify areas of challenges and what improvements may be necessary in their own county s budget preparation process and explore ways to achieve this. Clearly explain the different components of the budget preparation process, including key legislation, players and documents. Effectively manage the county budget preparation process for a smooth process of legislative approval. Identify specific places in budget preparation where public participation is needed,and explore and incorporate different mechanisms for public participation. Carry out the tasks associated with the Strategic Phase of budgeting, including revenue forecasting and ceiling setting, through the preparation of C-BROP and C- FSP documents and Sector Working Group Reports. Carry out the tasks associated with the Operational Phase of budgeting, including the preparation of detailed department budget estimates. For the officers, use the Chart of Accounts to code expenditure as part of preparing budget estimates. Identify how thecounty budget will incorporate the programme based budget for 2014/15.!It is important that each county/organization/entity using this manual ensures modifications are made in the delivery of the training to take account of local dynamics, to meet specific needs in public financial operations and applications in the target unit. 1

10 Specific training outcomes As an outcome, it is anticipated that participants will feel more confident in the budget preparation process, as a result of addressing weaknesses identified in the preparation of the 2014/15 budget, and will be motivated to implement what they have learned into their preparation of their county budget for 2014/15. Public Finance Management Curriculum Summary Component i) Constitutional and Legal Framework for PFM What is covered? Overview of the Constitutional and legal framework for PFM, including the Constitution of Kenya, 2010;PFM Act, 2012; CRA Act, 2011 among others Roles and responsibilities of national and county government PFM institutions Process/Role of County Assembly in approval and oversight of County Government s (CG) budget ii) Budget Preparation History of budgeting in Kenya Budget Cycle, Calendar and Conceptual Overview Strategic Phase of budget preparation Operational Phase of budget preparation!budget Preparation is the focus of this Participant Book. iii) Budget Execution Cash and Treasury Management: Revenue Management (Tax, non-tax): sources and modalities for optimizing capacity for raising revenue Grants and Donations Management Expenditure Management, including losses and write-offs Debt Management Procurement County Assets and Liabilities Management Role of the Controller of Budget iv) Financial Accounting, Recording and Reporting Role of Accounting Officers Financial Reports: types, content and timelines Standard Chart of Accounts and relationship with COFOG and GFS Integrated Financial Management Information System (IFMIS) 2

11 v) PFM in AGAs and SAGAs / Audit and Risk Management (Autonomous and Semi-Autonomous Government Agencies) vi) Inter- and Intragovernmental Fiscal Relations Internal Audit External Audit Process of Revenue Sharing Division of Revenue Bill and the County Allocation of Revenue Bill IGFR Institutions IBEC and Joint Technical Committee Stoppage of Funds Inter-governmental Reporting Budget Policy Statement vii) Monitoring and Evaluation Public Expenditure Review (PER) Public Expenditure Tracking Survey (PETS) Parliamentary and County Assembly oversight Performance measurement PFM and performance contracting Public participation Tools for public participation viii) Leadership and Integrity Chapter Six (Constitution of Kenya 2010) Ethics and Anti-corruption Act provisions Leadership and Integrity Act provisions Public Officer and Ethics Act provisions ix) Gender and Youth in Development Understanding gender, youth and persons with disabilities in development Government policies on gender, youth and persons with disabilities Preferences and Reservations for Women, Youth and Persons with Disabilities on public procurement Strategies for gender and youth mainstreaming 3

12 Target Participant Group This Budget Preparation training is designed for the following target groups: County Executive Committee Members for Finance Chief Officers/Accounting Officers of County Governments Staff of the department or departments of the County Treasury Clerks of the County Assemblies Members of County Assemblies Staff of city and municipal boards involved in public finance management Audit committee members Staff of County Departments and county government entities involved in public finance! Note that Sessions I and II of the trainingare targeted at all the above participants. Session III is largely targeted at County Assembly, County Treasury, and County Executive Committee. Session IV is largely targeted at county departments in preparing their budgets. Glossary and Resources There is a Glossary of relevant terms and their meanings included at the end of this Participant Book. You will find a list of useful Resources for further information at the end of this Participant Book. Timings and Methodology This Budget Preparation training has been designed as three (3) day training, but can be extended to four (4) days or more depending on the target audience (i.e. for different levels the time table can be adjusted). A timetable will be provided by your trainer. This training in Budget Preparation aims to be interactive and participatory. In addition to lecture/presentations, the following will be used: Group and plenary discussions Group exercises Brainstorm questions Example-based questions Written exercises 4

13 Training Overview Budget Preparation Session What is covered? Getting Started Welcomes, Introductions Aims, Objectives Expectations, Ground Rules Understanding the emerging challenges in the budget process Session I: History of Budgeting in Kenya Session II: Budget Cycle, Calendar and Conceptual Overview Overview of Key Budgeting Reforms in Kenya Key legislation in budgeting Exercise: Impact of Budget Reforms Questions for Discussion Overview of key players, documents, responsibilities Outline of budget cycle, budget calendar, legislative approval process Introducing MTEF and Programme Based Budgeting Introduction to Chart of Accounts Role of Public Participation in budgeting Session III: Strategic Phase of Budgeting Session IV: Operational Phase of Budgeting The County Integrated Development Plan Preparing the C-BROP Resource Envelope, Ceilings, Medium Term Budget Strategy Sector Working Groups and Sectoral Resource Allocation Preparing the C-FSP Preparing Detailed Budget Estimates recurrent and development budgets Preparing budget estimates according to Programme Based Budgeting formats Using the CoA to code expenditure. Module Conclusion Module Summary Assessment Exercise Evaluation 5

14 Getting Started Introductory Session Session Objectives: To create a comfortable and encouraging learning environment. To provide an overview of the training, including aims and objectives. To understand participants expectations of the training. To set some agreed ground rules for the training.!in this session you will get to know your trainer/s and the other participants. You will find out what the training involves and what you are expected to do. Here are some topics your trainer is likely to cover in this session: Welcome, Introductionsand Housekeeping Aims and Objectives of the training Training Overview and Timetable Relevant Documents Expectations and Ground Rules Understanding the challenges in the budget process Icebreaker Questions: Briefly discuss the following with your neighbour: What are your expectations of this training? What do you think you can contribute to this training? Discuss the following quote: If we all did the things we are capable of, we would astound ourselves. Thomas Edison,American inventor What do you think this quote is saying? How might it apply to this training? 6

15 History of Budgeting in Kenya Session I Session Objectives: By the end of this session participants will be able to: Identify how key budget reforms in Kenya since independence have influenced the current budgeting process at a national and local level. Discuss areas for improvement from their own county s budget for 2013/14 and identify possible ways ahead for 2014/15 and beyond. Concepts Box 1: Budgeting in Kenya Executive Branch, through the Minister for Finance, had total authority over budget and overall PFM for many years. Parliament debated budget proposals each year, but constitutionally could not increase any fiscal measures. Also, the budget could not be rejected, as this would lead to a vote of no confidence and hence require new elections. Such restrictions led to ineffective legislative budget oversight, and over time the need for a robust PFM system was recognized by government. For example, prior to the budget reforms, two separate budgets were prepared for each fiscal year; a recurrent and a development (or capital) budget. As the economy grew and became more complex, the need arose to change how resources were mobilized and allocated. Since independence, the budget process has gone through many reforms in an effort to improve PEM for better delivery of services to the citizens (see Table 1). In some cases, the need for reform was not locally driven, but came from external sources such as development partners, who had been providing Kenya with financial support. In addition, on the revenue side, since 1990 Kenya has carried out a wideranging tax modernisation program which has enabled Kenya to sustain a revenue to GDP ratio well above the sub-saharan average. This has been important for reducing dependency on aid to a manageable level. Source: PFM training curriculum document 7

16 Table 1: Key Budget Reforms since Independence Budget Reform Period Objective of Reform Success of reform and impact on today s budget process? Programme Review and Forward Budgeting (PRFB) Budget Rationalization Programme(BRP) Public Investment Programme (PIP) Kenya Tax Modernization Programme The Medium Term Expenditure Framework Process (MTEF) Programme Based Budgeting 1970s Achieving a linkage between the development agenda and the budget through a medium-term oriented budget process Introducing a mechanism of prioritization consistent with available recourses to priority programmes (address resource constraints). 1990s Linking the capital budget to future recurrent budgets through a mechanism of prioritizing project implementation. Since 1990 Modernize tax policy and administration. Shift emphasized on revenue mobilization to consumption. Simplify tax administration to lower cost of compliance and enforcement. Reduce excessive protection of local producers that was based on import substitution to encourage efficiency, innovation and competitiveness of local goods and services. Introduce computer-based enforcement and compliance Provide a link between policy, planning and budgeting through a coherent multi-year budgeting process Aims to deepen the MTEF approach by moving decision-making on resource allocation from line item to expected outputs. From line item to program and sub-program and outputs and performance targets. 8

17 Exercise 1: Impact of Budget Reforms The aim of the exercise is for you to think about the budget reforms which have been implemented in Kenya, and identify any impacts of these reforums that apply to today s budgeting process. 1. Work in groups of 4, as identified by your trainer. 2. Using information in Concepts Box 1, Table 1, Table 2, and any other relevant resource documents provided by your trainers, have a discussion around the budget reforms you have just learned about. You can jot down notes in the right-hand column of Table Some questions to guide your group discussion: How successful were these reforms in terms of improving the budgeting process in Kenya? Can you identify any examples from your experience and knowledge of today s budgeting process, that demonstrates an impact of these budget reforms? Are these impacts at the national level only, or do they also apply at the county level? 4. Report back to the wider group on 1 of the reforms that you discussed. Questions for Discussion The above exercise has given us an idea of why it can be useful to look backward to go forward. In the context of your own county, think about the 2013/14 budget currently being executed. In terms of the process of preparing this budget: What elements of the process worked well, and what could be improved for the preparation of the 2014/15 budget? What areas or elements of budget preparation for 2013/14 were most troublesome, and how could these issues be addressed for 2014/15? 9

18 Session II County Budget Cycle, Calendar and Conceptual Overview of Budgeting Session Objectives: By the end of this session participants will be able to: Identify the stages in the county budget cycle and calendar, including key calendar targets and the legislative approval process. Demonstrate an understanding of the concepts of MTEF, Programme Based Budget and the Chart of Accounts. Explain the importance of public participation in the budget preparation process and identify key opportunities for public input in this process. At the outset, it is important to understand that the county budgeting process fits within a wider Public Expenditure Management (PEM) cycle, as shown in Diagram 1 below: Diagram 1: The PEM Cycle and budget preparation In this training, we focus on this section of the PEM cycle. Prepare, present and review: National development plan Budget policy statement Medium-term expenditure framework Annual budget Release funds Procure goods, works and services Manage the wage bill Manage debts Formulate plans and budgets Execute budgets Audit and scrutinise budgets and reports Account and report Undertake internal audit Conduct procurement reviews, public expenditure reviews, service delivery surveys etc. Carry-out external audit Parliament provides oversight and scrutiny Account for expenditure Reconcile of accounting records Generate in-year and end of year financial and other reports Source: Adopted from 10

19 1. Key legislation, documents, roles and responsibilities in county budgeting Table 2: Quick Reference Key legislation for budget preparation Legislation Relevant Sections Constitution of Kenya (2010) Articles 201, 202, 203 on revenue sharing Article 207 County Revenue Fund Article 209 and Article 210 on tax allocation and taxation Article 212 (County Borrowing) Articles (Revenue Allocation) Articles 220,224, 227 (Budgets and Spending) Article 225 (Financial Control) Article 226 Accounts and audits Article 228, Controller Budget Article 229, Auditor-General Public Finance Management Act (2012) Sections (Responsibilities of the National Treasury with respect to the budget process) Sections (NationalGovernment BudgetProcess) Sections , (Responsibilities of county governments with respect to the county budget process, principles of PFM) Sections (Roles, responsibilities of Accounting Officers Sections Receivers and collectors of revenue Sections (The County Government Budget Process) Sections (The Process of Sharing Revenue) County Government Act (2012) Part VIII Citizen Participation Section 91 (c) Budget preparation and validation fora!you will learn more about relevant legislation in the training module: i) Constitutional and Legal Framework for PFM 11

20 Table 3: Quick Reference Key players in the county budgeting process (in alphabetical order) Initials Body What is their role? County Level Institutions AOs Accounting Lead the various County Sector Working Groups. Officers Are designated by the CEC-MF and are accountable to thecounty Assembly (CA) for financial management. Are responsible for accounting for moneyappropriated by County Assembly. Have powers to execute loan documents, manage assets and liabilities of CG and reallocate fundssubject to certain conditions. Ensure public resources are used in a way that is lawful and authorised and in an effective and efficient manner. Must ensure proper financial managementof the respective County Government entity. Lead role in preparing and submitting departmental budgets and in the budget preparation process. Approval of re-allocation of funds between programs, subject to limits set in the regulations. CEC Finance coordinates budgeting and PFM for cities and urban areas. CA County Assembly Approves/adopts key budget documents, including Integrated Development Plan, C-FSP, Debt Management Strategy, and Budget Estimates. Provides overall oversight over public finances at the County Government level. Ensure adherence by CEC and CG to Principles of Public Finance and the fiscal responsibility principles. Approves the establishment of other county public funds. Approves budget and revenue allocation for cities and urban areas. Oversight of accountability and compliance with legal requirements, e.g. accounting standards and other. Approves and oversees County Assembly Budget. Approves County Debt Strategy Paper which sets borrowing limits, details borrowing needs. 12

21 County Assembly Clerk C-BEF County Budget and Economic Forum CEC County Executive Committee CEC-MF County Executive Committee Member for Finance Submits the budget of the County Assembly, to the County Assembly for consideration and approval by 30April as per PFM Act 2012, 129(3). Also responsible for County Assembly Budget. May reallocate resources within Votes subject to 10% limit. A new structure at county level to serve asa consultative forum on county plans and budgets. It includes: County Governor as Chair Members of the CEC Representatives of a wide range of groups at county level including professionals, business, labour issues, women, persons with disabilities,the elderly and faith based groups. Specific responsibilities include consultations for the preparation of: County Development Plans, C-BROP, C-FSP. See PFMA (2012) Section 137, Establishment of Forum forconsultation by countygovernments Responsible for the social-political, policies, finance and execution aspects in a county. Coordinates preparation of CIDPS that guide budgeting, on approval implements both plan and budget. Approves C-BROP and C-FSP documents. Reviews the Annual Budget Estimatesbefore submission to the CA for approval. With the approval of County Assembly approves, is in charge of establishment and dissolution of a county corporation With the approval of County Assembly, approves the establishment of a county emergency fund. Responsible for proposing county PFM policies and managing the budget process of the County Government. See PFMA (2012) Sections Proposes revenue raisingmeasures, including borrowing subject to national government guarantee. Designates receivers of county revenues. Designates county accounting officers. Manages the County Revenue Fund. 13

22 CEC- MP County SWGs Establishes the necessary systems for cash management as provided in the law. Prepares and submits to County Assembly the Medium Term Debt Management Strategy.! The CEC-MF must ensure that the budget process is conducted in a manner and within a timeframe sufficient to permit the other participants in the process to meet the requirements of the CoK (2010) and PFMA (2012), includes ensuring the C-BROP, C-FSP are prepared and submitted to the County Assembly on time. CEC Member for Planning Submits the Integrated Development Plan to the CA for approval each year. Citizens Important role to participate in public hearings on the CIDP, C-BROP, Sector Reports and Budget Estimates. Important role in identifying community needs and priorities, through the country development plans planning process. Important role in providing oversight and feedback on programs and projects and in particular on the use of public resources. County Sector Working Groups County Departments are grouped into related sectors, (based on structure of County Government), depending on their mandates and functions. Groups must agree on: o Sectoral objectives, outputs and priorities, linked to the County Development Plan. o Activities, including the review and development of programmes and sub-programmes, and their costing. o Medium-term outputs and targets for the sector and estimate resource requirements for the sector. Groups need to link sharing of available resources to the critical priorities of the sector (referred to as sector resource sharing process ). The Sector Working group is chaired by the county chief officers with a convenor from the County Treasury. 14

23 CT County Treasury Has overall responsibility for managing the financial and economic affairs of the County Government. Prepares and submits the C-FSP to the CEC for approval. Submits County Debt Management Strategy to the CA. Drives the MTEF process, (the three-year rolling plan) working closely with relevant departments and institutions in the county and the department in charge of economic planning. Prepares Annual Budget Estimates for the County Government (CG)and coordinates the preparation and implementation of the CG budget. EnforcesFiscal Responsibility Principles at the CG level. Prepares budget, financial and fiscal reports and submits them to the CA and also publishes and publicizes them. Prepares budget, financial and fiscal reports and submits them to the CA and also publishes and publicizes them. Coordinates the process of finalizing the budget, including consultation with other stakeholders at the county. CFPG County Fisal Planning Group In charge of estimation of the county resource envelope. Responsible for developing draft C-BROP and C-FSP. Membership includes County Treasury, the department responsible for economic planning, and other relevant think tanks on revenue forecasting and economic issues. National Level Institutions CoB Controller of Budget Role is to oversee the implementation of budgets of national and county governments by authorising withdrawals from:the Consolidated Fund; The Equalisation Fund; The County Revenue Funds. CRA Commission for Revenue Allocation, (CRA) Recommends the basis for the equitable sharing of revenue between national and county governments and allocation among county governments (Article 216). 15

24 Recommends revenue enhancement measures for both levels. Proposes revision of revenue sharing/allocation formula. IBEC Inter-governmental Budget and Economic Council IBEC provides a means for consultationbetween the two tiers of government and among CGs on a broad range of economic and financial issues, including:borrowing and guarantees; budgets; development plans; cash disbursements; regulations to PFM Act, 2012; division of revenue. NT National Treasury Has overall responsibility for macroeconomic management, national economic policy. Responsible for overall revenue mobilization and debt guarantees to county governments. Prepares annual budget estimates of revenues and expenditures of the NG and coordinates the preparation and implementation of the NG budget. Prepares the Budget Policy Statementand the Budget Review and Outlook paper for the National Government. Enforcesfiscal responsibility principles at national level. Prepares the pre-and-post budget reports. N-BAC National Assembly Budget and Appropriation Committee Reviews and approves the BPS that sets policies and guides budgeting, vertical sharing of the nationally Raised Revenues, counties not to prejudice set economic policies. Provides general direction on budgetary matters. Monitors adherence to PFM principles and accountability by parliament, the Judiciary and National Government and other public entities. Reviews money bills including the Annual Division of Revenue, ensures adherence to PFM Financial principals in the Constitution and adherence to approved Fiscal framework. Reviews Annual Budget estimates of expenditure and revenue and introduces the annual andsupplementary Appropriations. 16

25 PBO Parliamentary Budget Office Provides professional advice on budgeting and overall PFM, finance and economic information to parliament (its advice on revenues affects overall resource envelope). Provides analysis on all bills that have an economic and financial impact. Reviews and advices relevant committees of parliament onlegislativeproposals for Division of Revenue and County Allocation of Revenue. Provides a technical bridge between the legislature, the executive and other national and international organisations with interest in budgetary and social economic matters. PDMO Public Debt Management Office S-F&BC Senate Finance and Budget Committee Advises on management of national government debt (in order to minimize risks). Advises on debt sustainability which impacts on guarantees to counties and public entities. Prepares and updates the annual Medium Term debt management strategy. Carries out on a regular basis a debt sustainability analysis. Processes the issuance of loan guarantees including assessment and management of risks in the National Government guarantee. Maintains and updates national debt including guarantees and any derivative financial instrument that government may enter into. Proposes to the senate the criteria for allocation of revenues among counties. Reviews the Annual Division of Revenue Bill when submitted to Senate by the National Assembly. Reviews and recommends to the senate the Annual County Allocation of Revenue Bill. Examines financial statement submitted to the senate. Monitors the adherence by the County entities to principles of public finance as set out in the constitution. Source: Some content in this table adapted frompowerpoint presentations developed by National Treasury Constitutional and legal framework for PFM and implication on County PFM, Kenya s new budget process and Implementation of the Public Finance Management Act,

26 Table 4: Quick Reference Key documents in the county budget preparation process Document What is it? Why is it produced? Who produces it and by when? County Budget Circular Issued each year, it provides initial instructions to guide the budget process for the coming year. The Budget Circular is an important communication tool for guiding counties in the budget preparation process for the coming year. Note: there is further guidance issued by the County Treasuryon detailed budgeting once budget ceilings are firmed up (i.e.after the C- FSP). See Session IV. It is produced by each County Treasury by 30 August each year. Note that the county budget circulars will vary both in content and timing, as long as they: Meet mandatory constitutional and legal deadlines, and Comply with gazette accounting standards. County Integrated Development Plans Annual Revisions ispart of Annual These are prepared each year and include: Strategic priorities for the medium term Programmes to be delivered Significant capital expenditure The County Integrated Development Plan is an important document for identifying: the main priorities of the county and their objectives the performance indicators, programmes and activities that are needed to meet the Prepared by CEC Member for Planning, with input from the County Budget and Economic Forum(C-BEF) and departments. Submitted to the CA by 1 September each year. How does this document progress the budget preparation cycle? Gives guidance on key timelines, procedures, policy areas and formats. Once this is issued, preparation of the C- BROP can commence. Information from the CIDP informs the County Sector Working Group Report and the Programme Based Budgeting process. See Session II, Part 6 and Session III, Part 2. 18

27 Budget Grants, transfers and subsidies to be made on behalf of CGs. County Budget Review and Outlook Paper (C- BROP) The C-BROP compares previous year s revenue and spending against what was planned in the budget. Sector Working Group Report A report which gives sector Vision and Mission, Strategic Goals of the sector. A review of the past performance of the sector, including a medium term priorities and financial plan objectives the costings of the prioritized activities. The C-BROP outlines: Actual fiscal performance in the previous year Updated economic and financial forecasts (showing any changes from the forecasts in the C-FSP from the previous year) Identification of broad policy priorities Indicative available resources to fund CG priorities. The purpose of the Sector Report is to outlining the prioritization of (costed) programmes and subprogrammes, expected outcomes, outputs and key performance indicators. The County Integrated Development Plan is an important Prepared by the County Treasury ( County Fiscal Planning Group). Submitted to CA by 30 September each year. Departments clustered into sectors, led by Accounting Officers. Groups convened in October, following preparation of C-BROP. C-BROP allows for the CEC to engage on expenditure strategies, as well as brief the CA on the budget process and economy of the county. Once indicative available resources are identified in the C- BROP, Sector Working Groups can meet to identify priorities for the coming year. The Sector Reports provide a basis for the departments to go through a process of sharing or allocating resources among themselves, on the basis 19

28 County Fiscal Strategy Paper (C-FSP) for the MTEF period. The report gives details of continuing projects and programs that need funding in coming fiscal year, which should be allocated funds before new ones. The C-FSP contains: Summary of revenue and expenditure performance for the FY to date. Assessment for the remainder of the current FY. Broad strategic priorities and policy goals (medium and long-term). Financial outlook on expenditures, revenues and borrowing for the medium term. document to inform the development of this report. A format for the Sector Working Group report is provided in Annex 3. of the sectoral review. This will then feed into the process of preparing departmental budget estimates, in the Operational Phase of budget preparation. The CFSP guides the formation of the budget for the coming financial year. It looks at projected revenue and expenditure and importantly, what proportion of the county s budget will be allocated to each sector. The Sector Working Group Reports will inform this process. Prepared by Country Treasury ( County Fiscal Planning Group) Prepared in time for review and approval by the CEC before submission to the CA by 28 February. The submission of the C- FSP signals the end of the Strategic Phase of budget preparation and the start of the Operational Phase. Further instructions are provided to counties on how to prepare the detailed budget estimates.!note: The C-FSP must be aligned with the national objectives in the Budget Policy Statement (BPS). The BPS is submitted for approval by on15 February, which gives counties two weeks to consider the national objectives in the BPS and align their own C-FSP accordingly, before submitting by the end of February. 20

29 County Debt Management Strategy This medium-term strategy states actual and likely liability for the county and how to deal with it. The debt management strategy outlines: The total stock of debt as at the date of the statement. The sources of loans made to the county government and risks associated with those loans. The assumptions underlying the debt management strategy; and an analysis of the sustainability of the amount of debt, both actual and potential. The County Debt Management Strategy is completed and submitted at the same time as the C-FSP, by 28 February. The County Debt Management Strategy complements the C-FSP in that it outlines how counties plan to deal with any inherited debt. Source: Some content in this table adapted from presentations Constitutional and legal framework for PFM and implication on County PFM, by A. Mwenda, National Treasury and Kenya s new budget process. 21

30 2. County Budget Cycle and Calendar Concepts Box: County Budget Cycle and Calendar The imperative for a county budgeting process is set down in key legislation including the Constitution of Kenya (2010) and the Public Finance Management Act (2012) (see Table 2). The budgeting process can be seen as a cycle (See Diagram 2), whereby the results of each year feed into the process for the following year. Linked to this budgeting cycle is a calendar (see Table 5; Diagram 3), which identifies target dates for the submission and approval of key budget documents. Many of these target dates for counties are aligned with key dates for the national budget. It is important to understand that the annual budgeting process ideally takes place using a Medium Term Expenditure Framework (MTEF)approach, which will be introduced later in this session. The Budget Calendar also identifies timeframes within which relevant documents must be published and publicized, in the interests of public participation. More details about public participation in the budgeting process will be provided later in this session. Table 5: County Budget Calendar Target Date (annually) Activity Relevant Legislation 30 August County Budget Circular Issued Issued by CEC-MF from each county. Budget Circular must also outline procedures for inviting the public to participate in the process. PFMA (2012) Section 128 (2) 1 September County Integrated Development Plan Submitted The CEC-MP submits the Development Plan to the County Assembly (CA) for approval. Copy of the plan to CRA and National Treasury (NT).!Within 7 days of submission to the CA, the CEC-MP must publish and publicize the plan. PFMA (2012) Section 126 (3) 22

31 30 September C-BROP Submitted The County Treasury (CT) prepares and submits the C-BROP to the CEC. CEC must review and approve within 14 days of submission.!within 7 days of approval by the CEC, the CT will arrange for the paper to be laid before the CA and subsequently publish and publicize the paper. PFMA (2012) Section 118 (1), (2) (a) (b) (c) (d), (3), (4) 31 December CRA makes recommendations on revenue sharing (vertical and horizontal). PFMA (2012) Section February C-FSP Submitted The CT prepares and submits the C-FSP to the CEC, allowing enough time for review and approval before submission to the CA by 28 February. The C-FSP is submitted to the CA for approval by 28 February and must be aligned to the BPS CA must review and adopt within 14 days of submission.!within 7 days of submission to the CA, the County Treasury publishes and publicizes the C-FSP. PFMA (2012) Section 117 (1), (6), (8) 28 February CT submits Debt Management Strategy of the county to the CA.!As soon as practicable after the statement has been submitted to the CA, the CEC-MF publishes and publicizes the statement and submits copies to the CRA and IBEC. PFMA (2012) Section 123 (1), (3) 30 April Budget Estimates Submitted CEC-MF submits the Budget Estimates to the CEC for approval, prior to submitting to the CA by 30 April. Budget Estimates must be submitted with all supporting documents and draft bills. The CEC-MF prepares and presents his/her PFMA (2012) Section 129, (1), (2), (3), (4) 23

32 comments on the budgetestimates (by 15 May).!As soon as practicable after the budget estimates and other document have been submitted to the CA, the CEC-MF publishes and publicizes the documents. 15 June CG to prepare and submit annual cash flow projections for the county to the CoB with copies to IBEC and NT. PFMA (2012) Section 127 (1) 30 June Budget Estimates Approval CA considers budget estimates and approves with or without amendments, in time for relevant appropriation law or laws required to implement the budget to be passed by 30 June. PFMA (2012) Section 131 (1) 30 June CA approves budget estimates and passes the Appropriation Bill. After approval of the budget, the CEC-MF is expected to consolidate, publish and publicize the budget within 21 days. PFM 2012, 131(5) Within 90 days of approval of Appropr n Bill The CEC-MF with approval from the CEC, submits the County Finance Bill to the CA, which sets out the revenue raising measures for the county government, together with a policy statement expounding on those measures. PFMA (2012) Section 133 On an as needed basis Submission of supplementary estimates by relevant County Executives to the Cabinet Secretary for Finance. Submission of the consolidated supplementary estimates to CA. Approval of supplementary estimates. PFMA (2012) Section 135!Details about the budget documents mentioned in the above budget calendar can be found in Table 4. 24

33 Diagram 2: Budget Cycle County Budget Preparation County Budget Circular issued New cycle commences Development Plans submitted Establishing county Strategic Phase resource envelope,revenue and debt limits Sector Working Groups and Resource Allocation Annual Audits Reports Oversight Budget Execution Cash flow reporting In-year reports Execution and reporting Accounting C-BROP C-FSP Legislative Approval Process Scrutiny and approval by Assembly County Finance Bill Supplementary Estimates Preparation of Departmental Budget Review by County Treasury and consolidation Submission to County Assembly Budget Approval Operational Phase Budget Estimates Submitted 25

34 Diagram 3: Budget Calendar County Budget Preparation Budget Circular issued by 30 August Development Plan submitted by 1 September Budget Estimates submitted by 30 April County Budget Circular Integrated Development Plan C- BROP C-FSP submitted by 28 February (also Debt Management Strategy) C-FSP Budget Estimates Strategic Phase Operational Phase C-BROP submitted by 30 September CRA recommendations on revenue sharing Budget Approval Appropriation Bill must be passed by 30 June 26

35 Diagram 4: Legislative Approval Process From Budget Estimates to Approval Budget Estimates 1. Submit estimates to CA by 30 April 2. Department Committees review and examine estimates 3. Department Committees consult with CEC, AOs and other stakeholders 7. CA adopts thereport andrecommendationsand approves estimates (with or without amendments) 6. BAC prepares a report and recommendations and submits to CA by first week of June 5. BAC holds public budget hearings 4. Committees submit report and recommendations to the Budget and Appropriations Committee (BAC). CEC-MF prepares and submits a memorandum to CA on the budget of the CAand recommendations by 15 May. 8. CEC-MF prepares Appropriation Billand submits to CA 9. BAC introduces Appropriation Bill 10. Appropriation Bill must be passed by 30 June Budget Approval 11. County Finance Bill 12. Supplementary Estimates 27

36 3. Legislative Approval Process 1. Submission of Estimates See PFMA (2012) Section 129, (1) (7); 130 (1) At least two months before the end of the financial year (i.e. before 30 April), the County Executive Committee Member for Finance (CEC-MF) submitsbudget estimates of the county government (and supporting documents) to the County Executive Committee (CEC). The CEC approves and then the CEC-MF submits estimates, supporting documents and Bills to the County Assembly (CA), by 30 April. At the same time, the County Assembly Clerk for the County Assembly prepares and submits the estimates of expenditure for the CA, with a copy submitted to CEC-MF. The budget estimates submitted should include all estimated revenue, as well as estimated expenditure, by Vote and by programme, clearly identifying both recurrent and development expenditures (See Quick Reference Box Budget Estimates in Session IV). The submission should be accompanied by supporting memorandum to justify or explain key decisions and demonstrate compliance with principles of fiscal responsibility (i.e. PFMA (2012) Section 107 (2)). 2. Departmental Committees Estimates stand committed to departmental committees for scrutiny and interrogation, in accordance with their respective mandates. See Annex 6 which gives the types of departmental committees found at the counties, based on their standing orders and their mandates. County Assemblies also establish PAC and PIC, which have the mandates for auditing. Depending on special needs, a county may establish special purpose committees. Committees are required to review and examine the estimates, prepare a report and submit to Budget and Appropriations Committee (BAC). 3. Departmental Committees consult with stakeholders During the process, the departmental committees may consult with CEC members, AOs and other stakeholders, as appropriate. 4. Committees report to BAC Departmental committees are required to consider, discuss and review the estimates, prepare a report and recommendations and submit to Budget and Appropriations Committee (BAC) within 21 days of being submitted to the CA. 28

37 The BAC is established under the standing orders for the County Assembly. The committee consists of not more than eight members. The functions of the committee include: coordination and control of the county budget, review of the budget of both the County Assembly and the county executive budget, review and approval of the County Fiscal Strategy Paper, examination of any budget related legislative proposal, introduction to the assembly of appropriations bill and evaluation of tax estimates, economic and budgetary policies and programs with direct outlays. 5. BAC holds public budget hearings The County BAC should take a lead role and hold county public budget hearings immediately after the estimates are laid before the CA. The public hearings are held in an accessible venue within the county. Depending on the area covered by the county they can be held in various urban centres, or just in one centre as the BAC shall determine. The hearings are structured in a manner to allow the public make their recommendations and views on the budget without much of an interruption. The date and venue should be adequately advertised within the county. Most hearings are one day and can be held in various centres simultaneously so long as in each venue there is a member of BAC taking a lead role. 6. BAC prepares report and recommendations BAC should collate views from the public hearings, including presentations by departmental committees, and prepare a report, recommendations and table them before CA. The BAC review, as well as the departmental committees, should seek answers to such questions as: i) Do the estimates comply with the PFM provisions in Constitution and the PFM Act? ii) Is it consistent with approved CIDP on needs and priorities iii) Are the recurrent estimates fully funded? iv) If there is a deficit, if there is, is the planned borrowing factored in approved Strategic Debt Management Strategy Paper already approved? v) Have the estimates taken into consideration the County Assembly resolutions in C-FSP? vi) Will the estimates lead to the accomplishment of the targets set out in the C- FSP? vii) Are critical spending areas (mandatory expenditures) taken care of? viii) Has the budget taken into consideration the previous audit recommendations? 29

38 Based on the analysis of such questions and results of consultations with key stakeholders, and other departmental committees, The BAC prepares its report and a recommendation on budget estimates, which it tablesbefore the County Assembly. The report by the BAC should be laid in the County Assembly latest by the first week of June. This is for the purposes of ensuring the report is debated and any amendments to the budget are agreed to, in order to facilitate the preparation and approval of the County Appropriation Bill, which constitutes legal authority to spend public money. Altering the Estimates See PFMA Section 131 (3) There are limitations on the power of the County Assembly to alter the estimates. The budget balance must remain the same, and any increases must be balanced by a corresponding reduction. According to the PFMA (2012), and also should be provided for in County Standing Orders, for the CA to make amendments and increase expenditure, this must be matched by a reduction elsewhere, as below: PFMA Section131(3) an amendment to the budget estimates may be made by the county assembly only if it is in accordance with the resolutions adopted regarding the County Fiscal Strategy Paper and if (a) any increase in expenditure in a proposed appropriation, is balanced by a reduction in expenditure in another proposed appropriation; and (b) any proposed reduction in expenditure is used to reduce the deficit. This is necessary for the BAC to safeguard the overall resource envelope, consistent with the C-FSP and to ensure that (as provided in the Constitution) there is prudence in the allocation and use of public resources. 7. County Assembly approves budget estimates See PFMA Section 131 (1), (5), (6) CA adopts the report and recommendations of the BAC, with or without amendments, and approves the budget estimates, in enough time for the relevant Appropriation Bill to be passed by 30 June. Not later than 21 days after CA has approved the budget estimates, the County Treasury shall consolidate the estimates and publish and publicize them. The CEC-MF shall take all reasonably practicable steps to ensure that theapproved budget estimates are prepared and published in aform that is clear and easily understood by, and readilyaccessible to, members of the public. 30

39 8. CEC-MF prepares the Appropriation Bill See PFMA Section 129 (7); Section 130 (2) Upon approval of the budget estimates by the CA, the CEC-MF shall prepare and submit a County Appropriation Bill to the CA, of the approved estimates. In preparing the annual Appropriation Bill to put before the CA, the CEC-MF shall ensure that the expenditure appropriations in the Bill are in a form that (a) is accurate, precise, informative and pertinent tobudget issues; and (b) clearly identifies the appropriations by Vote andprogramme. 9. BAC introduces the Appropriation Bill The PFMA and County Standing Orders provide that upon approval of the budget estimates by the CA, the BAC shall introduce the Appropriation Bill. That Bill should be in line with the House resolutions on the Budget and the BAC report. The Schedules attached to this Bill cannot be amended during debate in Assembly, unless: 1. The amendments have been referred back to the BAC. 2. Or are in conflict with the resolutions of the CA on the budget and those in the BAC report. Vote on AccountSee PFMA Section 134, (1), (2) / CoK Articles 221, 222 A Vote on Account is a precautionary measure intended to avert situations of county operations grinding to a halt due to delayed budget approval. It is provided for in PFMA Section 134 subsection (1) and states: If the County Appropriation Bill for a financial year has not been assented to, or is not likely to be assented to, by the beginning of that financial year [i.e. 1 July] a county assembly may authorise the withdrawal of money from the County Revenue Fund. It is important to note that the COK 222 contemplates existence of an appropriation bill, which if not assented to or unlikely to be assented justifies a Vote on Account. The appropriation bill must therefore be before the County Assembly. A Vote on Account can only be done under certain circumstances, as outlined in PFMA Section 134, subsection (2) (a) and (b): 31

40 (2) Money withdrawn under subsection (1) (a) may be used only for the purpose of meeting expenditure necessary to carry on the services of the county government during the financial year concerned, until such time as the relevant appropriation law is passed: and (b) may not exceed, in total, one-half of the amount included in the estimates of expenditure submitted to the county assembly for that year. The above is also upheld in the Constitution of Kenya (2010), Articles 221, 222. While these two articles refer to the process at National level, the same principles apply at county level. 10. The CA passes the Appropriation Bill As noted previously, this Bill must be passed by 30 June. 11. County Finance Bill See PFMA Section 132 (2), 133 The CEC-MF with approval from the CEC, submits the County Finance Bill to the CA, which sets out the revenue raising measures for the county government, together with a policy statement expounding on proposed measures. As part of preparing the Finance Bill CEC-MF to provide analysis of previous fiscal year performance, expected receipts and projections (see below). Proposed changes by the CA must ensure that total revenues remain the same as in the C-FSP, to avoid financing gaps. Recommendations of the CEC-MF on changes proposed by the CA are to be tabled in the CA. Within 90 days after the CA passes the Appropriation Bill, the CA must consider and approve the County Finance Bill (with or without amendments), otherwise it will contravene the law. Failure to approve Finance constitutes a serious breach since it may lead to unplanned deficit (not included in approved Debt Management Strategy). 32

41 Information for preparation of Finance Bill 1. A Finance Bill is based on existing revenue laws which it seeks to change. Comprehensive and up to date information on each of the existing revenue bases identifies: areas of weaknesses which need legal changes to firm up areas of potential increase of tax rate areas where tax needs change e.g. lowering the rate seek information from sector regulators (if necessary) consider cost implications to both enforcement and compliance 2. Consider compliance with constitution and law 3. Possible areas for taxing or levying fees/charges 4. Estimate possible receipts based on proposed rate and coverage 5. Review capacity to enforce/administer the changes, consider: possible changes in law human resources/skills needed Based assessed ability to enforce and collect, County Treasury seeks: approval from CEC on approval, the CEC-MF prepares the Bill submits Bill to County Assembly with supporting information 12. Supplementary Estimates See PFMA Section 135 (1) (7) The Constitution and PFMA provide leeway for the county government to prepare and submit Supplementary Estimates to the County Assembly in certain circumstances. The purpose of Supplementary Estimates is to: a) Regularise unforeseen and unexpected circumstances resulting in expenditures being incurred in the course of delivery of services, for example an outbreak of disease that needs an increase in allocation of drugs to hospitals, changes in the weather that may lead to intervention by county governments. Ideally, any expenditure that cannot wait until the next financial year. b) Finance cost escalations in ongoing services, for example an ongoing contract where the costs increase due to inflation and the project needs to be completed and all the bills paid within the financial year. 33

42 According to PFMA Section 135 (1), the county government may spend money that has not been appropriated if: o The amount appropriated is insufficient, or a need has arisen for expenditure for a purpose not appropriated by the County Appropriation Act. o Money has been withdrawn from the county government Emergency Fund. o Money set aside in approved budget could not be spent due to unavoidable circumstances and needs to be reallocated, e.g. delays due to procurement appeals. Approval for additional expenditure must be sought within two months after the first withdrawal of the money. The county government would submit a supplementary budget in support of additional expenditure to the CA. This must describe how the additional expenditure relates to fiscal responsibility principles and financial objectives. If the CA approves this additional expenditure, a Supplementary Appropriation Bill is introduced for appropriation of the money. Importantly, in any financial year, the county government may notspend more than ten percent (10%)of the amount appropriated by the CA for that year as additional expenditure (unless that CA has, in special circumstances, approved ahigher percentage).!for some examples of FY 2013/14 County Appropriation Bills and County Finance Bills go to: 34

43 Exercise 2: Meeting budget calendar targets Your role in the county budget preparation process requires you to carry out specific tasks by specific deadlines, as we have seen in budget calendar. This exercise aims to help you to think about how you and your county can be in a good position to meet the calendar budget targets. 1. Work in groups of 4 or 5 for this activity. Ideally you will work in a group with other people from your own county. 2. In your groups, look at the different stages provided in the budget calendar in Table 5 and answer the following questions: For our county s budget preparation for 2013/14, how well did we meet these calendar targets? If we did not meet these targets, what were some of the reasons why? 3. Now, in your groups, think about the budget preparation process for 2014/15 that you have recently commenced, and ask the following questions: How well have we met the calendar targets so far (for example, for our county s Budget Circular and C-BROP), and what could be improved? 4. Your task will be to create a brief work plan for the remainder of the 2014/15 budget cycle for your county, marking in key dates. Use the information provided in Tables 3, 4 and 5 and in Diagrams 2 and 3 to help you. Also refer to the key legislation if you have it available. Some guiding questions include: Who are the key people needed for each of the budget activities described in the budget calendar? Are we clear about our own roles in this budget preparation process? If something is due by X date, when do we need to start preparing? For example, the C-FSP must be submitted to the CA by 28 February. When should this start to be prepared? What are the possible constraints? What other activities are going on at the same time? What things might we need to help us meet our budget calendar targets? (For example, specific information or support). Is enabling law in place to enable county change tax rates/fees? 35

44 4. Strategic vs. Operational Phases of budget preparation Concepts Box: Strategic vs Operational Phases We can think of the budget preparation process as being in two phases Strategic and Operational (see Diagrams 2 and 3). The Strategic Phase starts with the issue of the Budget Circular and concludes with the finalisation of the C-FSP (August-February). Activities include: o o o o o o County Integrated Development Plan prepared and informs: the main priorities of the county and their objectives; the performance indicators, programmes and activities that are needed to meet the objectives; and costing of the prioritised activities. Preliminary resource envelope and budget strategy (C-BROP) submitted to CEC and CA. Approval by CEC and recommendations from CRA Sector Working Groups consult and prepare Sector Reports Sectoral Resource Allocation process C-FSP prepared, submitted and approved Upon the CFSP is approved then the ceilings for departments are firmed up and issued to the departments. The Operational Phase involves the preparation of Budget Estimates (March- April) and include: o o o Budget estimates prepared by departments, for recurrent and development budgets and according to programme based budgeting formats, as per requirements of PFM Act 2012 second schedule section 12. Budget estimates prepared by departments, which use the Chart of Accounts. Submission of budget estimates to the CEC and then to the CA for approval.!diagrams 5a and 5b below outline of who is involved in these two phases. Step by step guidance on these two phases will be given in Sessions IIIand IV. 36

45 Diagram 5a: Budget Cycle Strategic Phase Overview County Development Plan Strategic Phase C-BROP Establishing county resource envelope, revenue and ceilings. Sector Working Groups and Resource Allocation C-FSP County Fiscal Planning Group Estimates the resource envelope. Develops draft C-BROP and C-FSP. Membership from the County Treasury, Department of Economic Planning and others. County Sector Working Groups Agree on sector objectives and priorities, resulting from the County Development Plan. Departments are grouped into sectors according to mandates and functions. Allocate sector resources to departments. Citizens Involved in public hearings on the budget and its related documents, such as C-BROP and County Sector Reports. Engage with the budget preparation process through the County Executive Committee (CEC). County Executive Committee Responsible for socio-political and finance aspects in a county. Approves the C-BROP and C-FSP documents. Engages with the public on the budget process. 37

46 Diagram 5b: Budget Cycle Operational Phase Overview County Departments Prepare detailed budget estimates and submit to County Treasury for review and consolidation. Operational Phase Preparation of Departmental Budgets Review by the County Treasury and consolidation Submission to County Assembly Budget Estimates Submitted Budget Approval County Treasury Reviews and consolidates departmental budget estimates. Provides guidance to county departments on preparation of estimates, through means of a Budget Circular specifically on preparing budget estimates. CEC-MF Submits budget estimates to CEC and then to CA for their approval. Accounting Officers Lead the various County Sector Working Groups. Lead role in preparing and submitting departmental budgets. Implement recommendations of the County Assembly on the Audit Reports and any other. 38

47 5. Introduction to Medium Term Expenditure Framework Concepts Box: What is an MTEF? MTEF stands for Medium Term Expenditure Framework. It is an approach to budgeting that seeks to link policy, planning and budgeting. MTEF provides a framework for evaluating and allocating available resources, based on agreed policy priorities that are consistent with the national development objectives. A key element of a budget developed using an MTEF approach, is that expenditure estimates are set down for a three-year period that is, the coming budget year and the two years following. This is why it is referred to as a Medium Term Expenditure Framework. The MTEF approach supports a two-tier process of top down and bottom up, as shown below: Decide on parameters and set policy goals and targets e.g. County Fiscal Planning Group MTEF!The aim is to integrate the top down and bottom up processes. Needs identification and prioritisation e.g. citizens! It is important to understand that the MTEF is not a separate process from that outlined in the budget calendar and cycle above. Rather, the MTEF gives a framework in which to develop the county budget, in accordance with the budget calendar and cycle. Many of the activities associated with budget preparation within an MTEF are located in the Strategic Phase of budgeting. We will identify where elements of an MTEF link into the budget preparation process as we go through the step by step processes in Session III. 39

48 Concepts Box: Principles of MTEF The three key principles MTEF aims to achieve are the following, with the overarching goal of transparent and accountable government: Transparency and Accountability Fiscal Discipline Allocative Efficiency Predictability Fiscal Discipline is about ensuring that the availability of resources drive expenditure decisions and that resource mobilisation is conducted efficiently, effectively and equitably. In other words, spend within limits. Allocative Efficiency is about allocating available resources to agreed strategic priorities, both between and within sectors. In other words, spend where it is most needed, which requires sequencing. Predictability is about developing consistent and realistic systems and processes for resource estimation, projection, collection and disbursement. In other words, know what is available to spend. Questions for Discussion What experience have you had of developing a budget using an MTEF approach? Share your thoughts with the group. Based on your understanding and knowledge of MTEF, can you identify some reasons why it might be useful to adopt an MTEF approach to budgeting in other words, why do it? 40

49 6. Introduction to Programme Based Budgeting Concepts Box: What is Programme Based Budgeting? Programme Based Budgeting (PBB) is an approach to budgeting where the expenditures are planned, authorised and executed in the form of outcomes-based programmes. This means that the focus of the budget shifts from inputs, to the intended outputs and outcomes of the budget. PBB is a new process for Kenya. FY 2013/14 was the first year of budgets prepared and presented as programme based budgets at national level. FY 2014/15 will be the first year of doing so at the county level. See PFMA (2012) Second Schedule, Section 12. According to PFMA (2012) Section 38, the budget formats shall include: o All expenditures by vote and by programme, clearly identifying both recurrent and development expenditures (see (1) (b) (v)). o The appropriations by vote and by programme (see 3 (b)). A PBB is different from traditional line item budgets in a few ways: o The PBB still has recurrent and development expenditures, but these are presented under specific programmes, which aim to achieve certain outcomes. This way, we have more of an idea what the expenditure is actually trying to achieve. o Each county department submits their budget estimates within a PBB format. A PBB must also include narrative information, which explains what a department is trying to achieve through its budget. See Annex 5 for an example of the PBB format from Treasury Circular No. 11/13. The County Treasury should also, in its Budget Circular, outline guidelines and formats for PBB for the coming budget year. There is also an example and practical exercise on converting a line item budget to a Programme Based Budget, see Session IV, Exercise 5: Karibu County Programme Based Budget.!The National Treasury has prepared a Programme Based Budgeting Manual which can be downloaded from the Treasury website at a hard copy from the National Treasury. Participants are advised to obtain copies of the PBB Guide or Manual. 41

50 Concepts Box: What is Programme Based Budgeting? (continued) Because the PBB needs to outline programme objectives, targets and performance indicators and link expenditure to these things there is a need for very strong links between the planning and budgeting processes. In addition, the planning process helps to prioritise what is included in the budget. This is important because public need will always exceed available resources, thus a trade-off, or prioritisation process is required, which should involve public participation. Once prioritisation is done, the budget becomes a tool to implement plans that can deliver desired results. The Parliament will appropriate at Vote level both recurrent and Development as set out in the Constitution thus it is important for the programs to be broken down into recurrent and into development A sample appropriation bill is included in the annexes. As such, the County Integrated Development Plan (CIDP) is very important for the development of the PBB, as the plan should identify: o the main priorities of the county and their objectives o the performance indicators, programmes and activities that are needed to meet the objectives o costing of the prioritised activities. See Session III, Part 2 for more information and Diagram 6 below, which illustrates the Programme Based Budget Hierarchy, showing how activities link to outputs and strategic objectives.! Also refer to PFMA (2012) Section 126, for what the plan should include: (a) strategic priorities for the medium term that reflect the county government s priorities and plans; (b) a description of how the county government is responding to changes in the financial and economic environment; (c) programmes to be delivered with details for each programme of (i) the strategic priorities to which the programme will contribute; (ii) the services or goods to be provided; (iii) measurable indicators of performance where feasible; and (iv) the budget allocated to the programme; (d) payments to be made on behalf of the county government, including details of any grants,benefits and subsidies that are to be paid; (e) a description of significant capital developments; (f) a detailed description of proposals with respect to the development of physical, 42

51 Diagram 6: Programme Based Budgeting Hierarchy The hierarchical structure Indicators What is it? GoK desired outcomes in Vision 2030 The hierarchical structure Strategic MDA objective Strategic objective GoK desired outcomes in Vision 2030 Strategic MDA objective Strategic objective Programmes Indicators for each outcome Indicators What is it? Indicator 1 Indicator 2 Indicator 3 Indicators for each objective An objective is a broad statement reflecting the desired Indicators for each objective v Indicator 1 v Indicator 2 4 v Indicator 3 5 Indicator 6 An outcome is a change brought about by a GoK intervention. It may have several indicators and strategic objectives behavioural change in service An users objective or the is institution a broad statement (the reflecting benefit). the A single desired objective behavioural may change have several in service indicators users or and the institution. several outputs A single objective may have several indicators and outputs Outputs Outputs Outputs Sub-programmes Indicators for for each each output An output is a deliverable that v Indicator 4 7 v Indicator 5 8 v Indicator 6 9 measures production or An quantity output is provided. a deliverable It may that measures constitute production one of the or quantity following: provided. an infrastructure; It may constitute or the result infrastructure of a series of or activities. the result of A a single series of output activities may have several indicators and several activities Activities Activities Activities Activities An An activity activity is a is step a step in the in the process required process to required transform to inputs transform to outputs inputs to outputs v Cost A v Cost B v Cost C An input is a resource used to perform An input is a resource used to work or provide services perform work or provide services v Planned start date v Actual start date v Planned completion date v Actual completion date Implementation Implementation monitoring monitoring Budgeting by line Budgeting item (and by line GFS item code) (and GFS code) and monitoring and of the monitoring timing of of the the timing of the activity. This is activity. the operational This is the side operational of side of a plan a plan 43

52 7. Introduction to the Chart of Accounts (CoA) Concepts Box: What is the Chart of Accounts? The Kenyan Government has been over the years restructuring its budget to suit international standards for financial management, by adopting some of the principles contained in the Government Financial Statistics Manual (GFS 2001). The migration to GFS 2001 was done in the 2005/06 budget. This resulted into the adoption of new classification of economic activities within the budget process. Further, the government has now adopted a new Chart of Accounts (COA). The COA consists of the cost centre, program, project and economic classification. The COA is important because it allows for consistency in all aspects of budgeting, including execution control and monitoring, accounting, comparability and reporting. A COA illustrates the various headings under which an organisation s transactions are classified, analysed and recorded. Not only does it create a simple and straightforward recording of process, but a well-constructed chart of accounts also provides standard account heads for budgeting and budgetary control purposes. The chart of accounts is being introduced to enhance government accounting and financial reporting. It is a new system for recording of financial transactions. Institutions connected to IFMIS are already linked to the COAs and the codes are already uploaded in the system. Reports to be generated are customised in the system. Efforts are being made to ensure the entities not yet on IFMIS prepare and produce their financial reports using COA codes. The current COA has seven segments: namely: (i) Class: recurrent, development etc. (ii) Vote: appropriation entity e.g. Ministry/Department (iii) Administrative: also known as the cost centre (iv) Source of Finance (v) Program (vi) Economic: The HOW /input (vii) Geographical 44

53 Concepts Box: What is the Chart of Accounts? Based on these segments, the coding structure has been shaped such that data on government spending is captured and recorded based on each of the seven segments. The new coding structure shapes the way government expenditure is to be classified and used to generate required budget and financial reports. This is a sure departure from the previous fragmented and shallow coding structures which did not disclose critical information on government revenues and spending for analytical purposes.new COAs will enable government inform itself, report on a timely basis to Parliament and let citizens who are taxpayers know how their money has been used. The new COAs fits in the new devolved system of government, and so by extension in the Constitution and the PFM Act, Though system introduces some fundamental changes, it is not doing away with some of the current functionalities, which will be retained and used across the seven segments. It is sufficient to say the COAs will make the budget more credible, transparent and comprehensive which is in line with best practices of planning, budgeting, control, monitoring and evaluation. It will also provide consistency in the treatment of financial transactions and reporting across county governments and their entities.! Importantly, there are some specific examples and exercises on using the Chart of Accounts provided in Session IV, Part 2. 45

54 8. Public Participation in Budget Preparation Concepts Box: Public Participation in Budget Preparation Public participation is emphasised in legislation as an important element of budget preparation. For example, see the following excerpt from the (Draft) Public Finance (Administration and Management) Regulations (2013), Section 9 Openness and Accountability. (3) Subject to sections 126 (1), 128 and 131 (2) of the Act [PFMA], Treasuries shall arrange for effective public participation during the development of their annual budget estimates, including the publication of citizens budgets, which explain and summarize the budget proposals. Public participation is also critical for: achieving public or citizen ownership and support of government programs and projects ensuring needs-based policy formulation and planning efficient resource allocation and utilization achievement of target outputs and outcomes promoting accountable public financial management. In budget preparation there are two key points at which public participation should be sought: 1. In the Strategic Phase, public hearings on the C-BROP and Sectoral Reports 2. In the Operational Phase, public hearings on the budget estimates. There are several avenues for communicating engaging with the public, these includes; invite written submissions, Media (modern i.e. print, television radio and traditional), Public Meetings and Websites (county departments websites)! Importantly, this stakeholder involvement in the budget preparation process must be documented, (see Treasury Circular 11/2013, 29 Public Participation / Stakeholder Involvement). Questions for Discussion What are some of the mechanisms you know of for effective public participation, in county government processes generally, and budget preparation specifically? Look at Diagram 7 below, which presents some options for public participation. Can you identify any specific examples from your county where public participation takes place according to the diagram? And what documents can be availed? 46

55 Diagram 7: Opportunities and Options for Public Participation in the planning and budgeting process specific examples Needs identified and prioritised for County Development Plan Policy review, evaluation reformulation Policy setting, needs identification Analysis and impact assessments, prioritisation Representations to CA on the Development Plan. Public Hearings on C-BROP and Sector Reports. Policy implementation when reports and outcomes are prepared and publicised Decision-making choices on priorities, instruments and resource allocation During CRA recommendations on revenue sharing, Division and Allocation of Revenue. During budget execution, monitoring and reporting. For example, CoB report and PERs when they are published. When parliament consults citizens on legislative proposals for division of revenue During County Assembly Committee forums after Estimates are submitted. 47

56 Strategic Phase of Budgeting Session III Session Objectives: By the end of this session participants will be able to: Outline the budget preparation process, from CIDP to C-FSP. Conduct specific tasks within the Strategic Phase of budget preparation, including preparing the C-BROP, budget strategy and C-FSP. The Strategic Phase of budget preparation starts with the issue of the Budget Circular and concludes with the finalization of the C-FSP (August-February). Main activities of this phase include: o o o o o o o County Integrated Development Plan prepared and submitted. Preliminary resource envelope and budget strategy (C-BROP) submitted to CEC and CA. Approval by CEC and recommendations from CRA (which ultimately informs revenue sharing ceilings). Sector Working groups consult and prepare Sector Reports. Sectoral Resource Allocation process. C-FSP prepared, submitted and approved. One of the critical activities of this phase is the Programme Performance Reviews/Public Expenditure Review. This should take place July September. The reviews provide a basis for formulating the ensuing MTEF budget. Note that Programme Performance Reviews and Public Expenditure Reviews should be reflected in the Sector Working Group Reports under Chapter 2: Performance Expenditure Review. See Annex 3 for a format for the Sector Working Group Reports. See Diagram 8below for an overview of the Strategic Phase of budget preparation, including key target dates. 48

57 Diagram 8: Strategic Phase of Budget Preparation Budget Circular issued by 30 August Development Plan submitted by 1 September Sector Working Groups and Draft Sector Reports prepared (Oct) County Budget Circular Public Hearings on C- BROP and Sector Reports (Nov) Integrated Development Plan C-BROP C-FSP C-BROP submitted by 30 September C-FSP submitted by 28 February (also Debt Management Strategy) Strategic Phase Resource envelope is firmed up. Departments undertake the revenue allocating process. 49

58 1. County Budget Circular When: Who: Purpose: Issued by 30 August each year Prepared by County Treasury Gives guidance on key timelines, procedures, policy areas and formats. Note that the county budget circulars will vary both in content and timing, as long as they: Meet mandatory constitutional and legal deadlines, and Comply with gazette accounting standards. Below is an example of the headings for the National Budget Circular for 2014/ /17 (Treasury Circular No. 11/2013) Guidelines for the preparation of the Medium Term Expenditure Framework (MTEF) Budget for the Period 2014/ /17 I. PURPOSE II. BACKGROUND III. OVERVIEW OF RECENT ECONOMIC DEVELOPMENTS IV. SPECIFIC GUIDELINES (a) Medium Term Development Strategy (b) Timeframe and Reorganisation of Sector Working Groups (SWGs) (c) Programme Performance Review (PPR) (d) ProgrammeBased Budgeting (PBB) (e) Prioritization and Allocation of Resources (f) Capital Projects (g) Public Participation/Stakeholder Involvement V. SUBMISSION OF BUDGET PROPOSALS VI. CONCLUSION 50

59 2. County Integrated Development Plan When: Who: Purpose: Submitted to CA by 1 September each year Prepared by CEC Member for Planning, with input from C-BEF and departments Identifies and prioritizes citizen needs: the main priorities of the county and their objectives. the performance indicators, programmes and activities that are needed to meet the objectives. costing of the prioritized activities. Below are the chapter outlines for a County Integrated Development Plan, taken from the Guidelines for preparation of County Integrated Plans, prepared by the Ministry of Devolution and Planning (May 2013). Annex 7 contains more detail on what is required in each of the chapters, with a particular focus on Chapter 7: County Development Priority Programmes and Projects and Chapter 8: Implementation, Monitoring and Evaluation. CIDP CHAPTER OUTLINES Chapter 1: County General Information Chapter 2: County Socio-Economic Development, Challenges and Strategies Chapter 3: County Spatial Framework Chapter 4: Linkage with other Plans Chapter 5: Institutional Framework Chapter 6: Resource Mobilization Framework Chapter 7: County Development Priority Programmes and Projects Chapter 8: Implementation, Monitoring and Evaluation There are four main steps that are followed in developing the strategic plan, namely: i) Identification of the vision and mission: The county must have a medium term and long-term vision that should be closely linked to the National Vision currently documented as Vision A vision is defined as the longterm dream to attain excellence, whereas the Mission is the more or less the plan on how to accomplish the Vision. 51

60 ii) Situation Analysis: Here the key issue is to take stock of current status to identify the weaknesses and the strengths of county. In planning the first questions to ask include: what are the currently issues? what advantages do we have?, what do we need to do? This is the historical perspective which each county is expected to scan and identify its issues, problems or weaknesses, together with what is already in place. iii) Identification of priorities and strategies necessary to achieve the vision Focusing on what needs to be done to achieve the target goals in medium term and how to get there and achieve the set goals. iv) Identification of key performance indicators together with programs and activities necessary to deliver on the policy goals and objectives. If there are no performance targets, it is difficult to achieve the desired results, which leads to failure of the strategic plans. It is therefore necessary to identify outputs together with the necessary inputs and set the milestones and benchmarks to be achieved at each stage. v) Costing of the Plan. Whatever the county plans to do, programs, projects, must be costed using the current costing framework that is used in the budget process. The figure below demonstrates the relation between long-term policy strategy, the medium-term plan and the budget. More information on the links between planning and budgeting can also be found in Session II, Part 6. 52

61 Links between Policy, Planning and Budgeting Long-term Policyobjectives Annual Reporting, Accounting, Auditing Medium-term Plan sets out strategic outputs Assessment of outputs, results & outcomes Budget Cycle Budgeting, allocation & approval Annual plan, activities, resource needs, deliverables Budget execution & Reports 53

62 3. County Budget Review and Outlook Paper (C-BROP) When: Who: Purpose: Submitted to CA by 30 September each year. Prepared by Country Treasury (County Fiscal Planning Group). Outlines: Actual fiscal performance in the previous year, compared to what was planned in the budget. Updated economic and financial forecasts (showing any changes from the forecasts in the C-FSP from the previousyear). Identification of broad policy priorities. Indicative available resources to fund CG priorities (indicative ceilings). Estimating the Resource Envelope: National vs County processes National The establishment of a comprehensive process to determine available resources is critical to decisions on setting expenditure ceilings. At the Macro level there are issues related to the wide economy such as the movement or the changes in prices of goods (inflation), the cost of money (interest rates) and the overall economic growth. The main variables that influence the budget at the national level often include: the projected/envisaged economic growth for the period under consideration; target inflation rate; exchange rate, and balance of payments; and other macro variables thatthat may affect government s ability to mobilize resources and the impact of expenditures. County At the county level, on the other side, the bulk of revenue resources to fund the budget are from transfers from the nationally collected revenues, with a smaller portion coming from own revenue sources which not as difficult to estimate. Counties can use previous years revenue forecasts as a starting point, but also should factor in changes to their own source revenues. For example, a widening of the tax base in the county, or more efficient revenue collection systems will have an impact on levels of own source revenue. These indicative levels are firmed up as part of developing the County Fiscal Strategy Paper, which is finalized after the CRA has given recommendations forrevenue allocation for the coming year. 54

63 !While the national government is estimating the resources and expenditure limits, the counties are expected to carry out a similar exercise but at a lower scale, with fewer areas of revenue estimates and expenditure. The diagram below demonstrates the development of the macro framework at the county level. Links between Macro Framework at County and National levels and the budget National policies and strategies (Articles 209 (5), 220) National economicpolicy goals and objectives Medium-term Plan sets priorities sequences programs & projects costs activities County Development Plan Estimation of Resource Envelope and County Expenditure Priorities CBROP Developed The County Fiscal Strategy paper finalized and submitted to CA Finalization of County Sector Reports and holding of Public Hearing Presentation of CBROP to County Assembly 55

64 The C-BROP is an evaluation document that seeks to assess past performance, both financial and non-financial to inform the next budget. It covers also covers consistency between what was approved and what was done. In new dispensation, it covers with fiscal responsibility principles. The C-BROP covers sector ceilings as part of review, for coming fiscal year this is covered by CFSP. Counties are expected to issue guidelines on preparation of their C-BROPs but there should be a common approach. The format of the County BROP is prepared along same parameters as the National BROP, but must necessarily reflect county diversity and priorities and allocated functions. Example Contents: (National) Budget Review and Outlook Paper, September 2013 I. INTRODUCTION Objective of the BROP II. REVIEW OF FISCAL PERFORMANCE IN 2012/13 A.Overview B. 2012/13 Fiscal Performance C. Implication of 2012/13 fiscal performance III. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK A.Recent Economic Developments B. Macroeconomic outlook and policies C. Medium Term Fiscal Framework D.Risks to the outlook IV. RESOURCE ALLOCATION FRAMEWORK A.Adjustment to 2014/15 Budget B. Medium-Term Expenditure Framework V. CONCLUSION AND NEXT STEPS Annex Table 1:Main Macroeconomic Indicators, 2014/ /17 Annex Table 2:Central Government Operations, 2014/ /17 (in billion of KSh) Annex Table 3:Central Government Operations, 2014/ /17 (in percent of GDP) Annex Table 4: Total Sector Ceilings for MTEF 2014/ /17 Annex Table 5: Recurrent Sector Ceilings for the MTEF Period 2014/ /17 (KSh.Mn) Annex Table 6: Development Sector Ceilings for the MTEF Period 2014/ /17 Annex Table 7: Summary of Strategic Interventions Annex Table 8: Budget Calendar for 2014/15 MTEF budget The full National BROP for 2013 can be found at 56

65 Resource Envelope and Budget Ceilings Concepts Box: Resource Envelope and Expenditure Ceilings The resource envelope is the total amount of money available to a county government for spending in any one year. It is composed of: i) revenues raised in a county which will depend on each county s ability to mobilize taxes, fees and charges ii) funds transferred from National Treasury, both unconditional and conditional iii) affordable borrowing for the year iv) any other receipts, from donors etc. The County Fiscal Planning Group is responsible for establishing the resource envelope and expenditure targets (ceilings). This activity is done as part of developing the C-BROP document. Estimates of available financial resources (the resource envelope) are determined by forecasting the following: County share of revenue from the National Government. County Own Source Revenue: revenues generated within the county, from taxes and non-tax sources, e.g. fees/charges Grants from the Equalization Fund Conditional and nonconditional grants from the national government Domestic Borrowing Potential external support (grants and loans) Source: Information adapted from presentation Constitutional and legal framework for PFM and implication on County PFM, by A. Mwenda, National Treasury, slide 12. See Annex 1 for example expenditure ceilings. 57

66 Revenue forecasting!accurate revenue forecasting is essential for a county to gain a realistic picture of what resources it will have available in the coming budget year, and ideally the following two years. An example format for a revenue forecast is provided below. Counties can use previous years revenue forecasts as a starting point, but also should factor in changes to their own source revenues. For example, a widening of the tax base in the county, or more efficient revenue collection systems will have an impact on levels of own source revenue. Ideally, counties will estimate their own source revenue for the coming budget year and the following two. Example: Revenue Forecast Format Details Previous Actual to date 1 Own Source revenue: Taxes Property Rates Taxes Other Trade Licences Other fees and charges Year (12/13) Year (13/14) The different types of own source revenue should be outlined. Forecast Forecast Forecast Year (14/15) Year (15/16) Year (16/17) 2 Shareable Revenue proposed in the BPS 3 Grants from Development Partners 4 Conditional Grants Total Revenue Proposed funding from any external sources, such as donors, should also be reflected in the revenue forecast. Much of a county s revenue comes from transfers from the national government. It is important to use the correct figures given in the County Allocation of Revenue Bill. Note that at the time of preparing the C-BROP (September), the CRA will not have made its recommendations about allocation of revenue (December). However, an indication can be given from the previous year s figures, which can be adjusted once the new figures are released. 58

67 Commission on Revenue Allocation (CRA) The CRA uses a formula to develop proposal on revenue sharing among the counties and the basis of this formula is given below: Basis of Revenue Sharing among the Counties By a resolution passed on 22 nd November 2012, the National Assembly resolved in pursuant of Article 217 of the Constitution, the basis of revenue sharing shall be as follows: Parameters Percentage Weights 1 Population 45% 2 Poverty Index 20% 3 Land Area 8% 4 Basic Equal Share 25% 5 Fiscal Responsibility 2%!For more information, go to the CRA website: County-Governments.pdf A copy of the 2014 County Allocation of Revenue Bill is also available on the Treasury website at: 59

68 Developing an accurate revenue forecast Questions to ask Have we incorporated the correct figures on national transfers from the County Allocation of Resources Bill (Act)? Can we use last year s actual collection of local revenues with a realistic % growth projection? Things to consider The information from the Act should provide an accurate indication of revenue from national government and external funding for the coming year. This will depend on how accurate the figures for revenue collection are and how steady the rate of growth in these revenues is likely to be. In some counties where the local revenue collection process is not systematic, it may be difficult to make an accurate prediction in this way. Is there scope to increase the collection of own source revenues in any areas over the coming 3 years and if so, how is that likely to impact on the amount of local revenue in our forecast? What factors might affect the support our county receives from external donors in the next 3 years? This will require an assessment of the current methods of revenue collection and their efficiency. Such an analysis may point to opportunities for improved revenue collection, which could be reflected in the revenue forecast. This could include the presence of new donors, or changes to the way in which donors fund development work in the county. It will be important to have a good understanding of the external donors in the county and their proposed plans, in order to predict likely levels of support. What factors in the coming years might affect the amount our county receives from the national government? This will depend to an extent on how well the national government is able to predict its own revenues and communicate this information to the counties. 60

69 Concepts Box: Principles of Fiscal Responsibility Indicative ceilings set in the C-BROP (and later confirmed in the C-FSP) should follow the principles of fiscal discipline set out in the PFMA (2012) as below: FROM PFMA (2012), 107 (2) (2) In managing the county government s public finances, the County Treasury shall enforce the following fiscal responsibility principles- (a) the county government s recurrent expenditure shall not exceed the county government s totalrevenue; (b) over the medium term a minimum of thirty percent of the county government s budget shall be allocated to the development expenditure; (c) the county government s expenditure on wages and benefits for its public officers shall not exceed a percentage of the county government s total revenue as prescribed by the County Executive member for finance in regulations and approved bythe County Assembly; (d) over the medium term, the government s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure; (e) the county debt shall be maintained at a sustainable level as approved by county assembly; (f) the fiscal risks shall be managed prudently; and (g) a reasonable degree of predictability with respect to the level of tax rates and tax bases shall bemaintained, taking into account any tax reforms thatmay be made in the future. Questions for Discussion 1. Referring to (b) above, and according to Example: Karibu County Budget excerpt below, were they in accordance with the Act? What is the case in your own county for FY 2013/14? 2. Referring to (c)above, do you know what percentage is set in your own county for expenditure on wages and benefits for its public officers? 3. Regarding (d)above, what might be some problems associated with financing recurrent expenditure for the counties? 4. Regarding (e)above, what is the sustainable level of county debt approved by your County Assembly? 61

70 Example: Karibu County Budget 2013/14 The excerpt below from Karibu County s Budget for 2013/14 shows the expenditure for both the recurrent and development budgets (a), as well as revenue sources (b). a) 2013/14 Expenditure: Recurrent and Development Budgets Ksh TOTAL RECURRENT 5,868,328,000 Development - County Assembly 212,000,000 Development - Sub County Units 2,264,672,000 TOTAL DEVELOPMENT 2,476,672,000 TOTAL EXPENDITURE 8,345,000,000 b) 2013/14 Example of Revenue Summary TOTAL FROM LOCAL SOURCES 3,417,121,255 TRANSFERS Grants from share of National Revenue - Equitable Share 4,155,298,066 - Conditional grants 711,380,679 Unspent Balances returned to CRF Account 61,200,000 Total Transfers from National Government 4,927,878,745 GRAND TOTAL 8,345,000,000 Questions for Discussion 1. What proportion of Karibu County s revenue is from local sources? How does this figure compare with your own county? 2. How well established is your county s tax base, in terms of its predictability for forecasting local revenues into the medium term that is, beyond the next fiscal year? 3. What improvements could be made in your own county regarding widening the tax base, as well as improving revenue collection? What are some of the challenges of doing this? What are the benefits? 62

71 Example: Karibu County Budget 2013/14 (cont) c) Some examples of Karibu County s own source revenue collection for 2013/14 budget. HEALTH SERVICES Ksh HEALTH SERVICE MNGT UNIT Health centre service fees 15,000,000 Cost sharing 345,000,000 EPIDEMIC CONTROL INSPECTION UNIT Food handlers fees 3,300, Public health inspection/building plans 3,165, Food hygiene, licence fees 5,420, Liquor licences 550,000 CEMETARY UNIT Burial Fees 282,000 TOWN HALL &MOBILE CLINIC Vaccine certificates 2,231, Health centres Fees 277,600 COMMUNICABLE DISEASE CONTROL Malaria prevention service fees 20,

72 4. Sector Working Groups and Resource Allocation When: Who: Groups convened in October, following preparation of C-BROP. Departments clustered into sectors, led by Accounting Officers. Purpose: Agree on sector objectives, outputs and activities, including review and development of programmes, sub-programmes and their costing. Prepare and submit a Sector Report, outlining prioritization of (costed) programmes and sub-programmes, expected outcomes, outputs and key performance indicators. County Sector Working Groups, Public Hearings and Resource Allocation County Sector Working Groups The County Integrated Development Plan is used to guide this process. Counties should spend time on this stage to: o Identify key expected outputs and targets based on the plan. o Sequencing of the programs that are to be implemented in the medium term (consistent with the resource envelope). o Prepare County Sector Reports to illustrate i and ii. Public Hearings This process also involves public hearings, which use the C-BROP and County Sector Reports and aim to ensure the needs of citizens are considered and included in the budget. This stage would usually take place in October, with public hearings possibly held in November. Up to now, the ceilings are not disaggregated into departments rather they are set at sectoral level. Sectoral Resource Allocation The county departments within their sectors need to go through a process of sharing or allocating resources among themselves, on the basis of the sectoral review. This process is consensus based and driven by strategic needs and priorities.! See Annex 3 for a format for the Sector Working Group Reports and an example mechanism for resource allocation. 64

73 Exercise 3: Public Hearings on C-BROP and Sector Reports As we saw earlier, public hearings on the C-BROP and Sector Reports are an important part of the MTEF approach to budgeting. In your county, do these hearings take place? Or if not, what plans will you put in place for these hearings, for the next cycle of budget preparation? Work in groups of 4 or 5 and discuss the following questions about public hearings in your county. For example: What form is the public hearing for example, is a public meeting held? If so, when and where does it take place? Do people have access to the necessary information in advance of the public hearing? If not, how could this be done? Who presents information on behalf of the County? What kind of questions are the public able to ask? Importantly, what revisions or changes could be made, as a result of the public hearing? Are the public hearings in your county representative of a large cross-section of the community? If not, what could be done to ensure more groups are represented? What kind of information do you think is important for the public to know? For example, what kind of information in the C-BROP and Sector Working Group Reports might be of relevance to the wider public and why? See Annex 1 and Annex 3for some examples of the type of information that these reports contain. 65

74 5. County Fiscal Strategy Paper (C-FSP) When: Who: Prepared in time for review and approval by the CEC before submission to the CA by 28 February. Prepared by Country Treasury (County Fiscal Planning Group) with input through the County Budget and Economic Forum (C-BEF) as part of the consultative process. Purpose: Broad strategic priorities and policy goals (medium and long-term). Financial outlook on expenditures, revenues and borrowing for the medium term. The C-FSP is developed after the public hearings have been conducted and must be approved by the end of February.Once the C-FSP is approved, financial programming of the county budget (i.e. budget estimates) can now commence. County Treasury issues further instructions on preparing the detailed estimates of expenditure.this activity signals the conclusion of the Strategic Phase of Budget Preparation. See Annex 2 for example contents for a County Fiscal Strategy Paper. Questions for Discussion Your trainer will ask you to bring in a copy of your county s most recent C-FSP to analyse according to the following questions. Does our county s C-FSP look to the past, present and future? In other words, does it have: A summary of the implementation of the current year s budget to date, including both revenue collection and expenditure? (past) An explanation of how our budget is being adjusted to meet our targets for the year, if required? (present) An overview of the total revenue and expenditure for the next budget year, and ideally the following two? (future) An explanation of the budget allocations to each sector, which reflect the broad priorities of the county? (future) Ideas for these questions adapted from A county s fiscal strategy paper is the soul of budgeting past, present, future 22 March Available at: 66

75 Checklist: Strategic Phase of Budget Preparation This checklist can adapted and used as a tool when preparing the budget, to ensure all important steps are carried out for each phase. The detailed process would be listed in the Activity column, for reference and then checking off when completed. There is also room for any comments about the process, for example, information that was difficult to find, reasons for any deadlines missed etc. Activity County Budget Circular prepared and distributed by 30 August. and date completed Comments County Integrated Development Plan submitted by 1 September. County Budget Review and Outlook Paper prepared and submitted by 30 September. County Sector Working Group Reports prepared and submitted. County Fiscal Strategy Paper prepared and submitted by 28 February.!Note that the main activities of the Strategic Phase have been included here. This checklist can be copy-pasted and expanded to include other activities that are also part of the Strategic Phase of Budget Preparation. 67

76 Operational Phase of Budgeting Session IV Session Objectives: By the end of this session participants will be able to: Outline the budget preparation process, detailing the preparation of budget estimates. Conduct specific tasks within the Operational Phase of budget preparation, including preparation of the 2014/15 budget estimates according to relevant guidelines. The Operational Phase of budget preparation starts with the issue of a County Budget Circular giving guidance on preparing budget estimates and concludes with the submission of budget estimates to the County Executive Committee and subsequently to the County Assembly (March-April). Main activities of this phase include: o o o Detailed Budget Estimates prepared by departments. Review and consolidation of the estimates by Treasury. Submission of budget estimates to the CEC and then to the CA for approval. See Diagram 9 below for an overview of the Operational Phase of budget preparation, including key target dates. 68

77 Diagram 9: Operational Phase of Budget Preparation Budget Estimates submitted to the CA by 30 April Following approval of the C-FSP (end Feb), County Treasury issues further instructions on preparing the detailed estimates of expenditure, based on confirmed budget ceilings in the C-FSP. Budget Estimates Operational Phase Budget Approval Appropriation Bill must be passed by the CA by 30 June 69