Unit Standard 116345: Apply the principles of budgeting within a municipality Karel van der Molen
Group The full programme 1. Strategic Management; Budgeting Implementation & Performance Management 2. Municipal Accounting & Risk Management Modules 3. Strategic Planning & Multi Year Income & Expenditure Management 6. Budgeting Principles & Cycles 7. Financial Reports & Performance Management 8. Cash, Investment, Asset, Liability Management 4. Risk Management; Internal Control Framework Design and Audit Planning and Implementation 3. Governance & Legislation 1. Stakeholder Consultation & Ethics in Municipal Finance 4. & 5. Costing & Capital Planning; Municipal IT Support & Project Management 6. Supply Chain Management & Public Private Partnerships 2. Intergovernmental Fiscal Relations, Legislation & Policies affecting Municipal Financial Management 9. Capital Planning & Financing & Costing Principles 5. Managing Information Technology Resources in Municipal Finance 10. Municipal Supply Chain Management 11. Public Private Partnerships 2
116339 116340 116341 116342 116343 116344 116345 116346 116347 116348 116351 116353 116357 116358 116360 116361 116362 116363 116364 119331 119334 119341 119343 119348 119350 119352 The content 26 US - ID s: NQF Le 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 5 5 5 5 5 5 5 Credits 10 11 12 15 10 10 15 10 15 8 12 12 8 15 8 8 11 12 8 12 12 15 15 12 15 12 CMFM 48965 C C E C F C C C C F E C E C E E C C C Not applicable for CMFM Key Certificate SAQA ID - 48965-166 credits; F = Fundamental; C = Core; E = Elective (1) AccOff X X X X X X X X X X X X X X X X X X CFO X X X X X X X X X X X X X X X X X X X X SnrM X X X X X X X X X X X X X X X MidFin X X X X X X X X X X X X X X X SCMH X X X X X X X X X X X X X X X X SCMM X X X X X X X X X X 3
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Assignment
GROUP 1 Strategic management, budgeting implementation and performance management Module 6 Budgeting principles and cycles Unit standard SAQA 116345 Apply the principles of budgeting within a municipality
US 116345 Module Outline Chapter 1: Chapter 2: Chapter 3: Chapter 4: Chapter 5: Module outline; Introduction to municipal budgeting in South Africa; Integrating strategic planning, budgeting, implementation and performance management; Approaches to budgeting; and Standard municipal budget formats.
Chapter 2 MUNICIPAL BUDGETING
THE PURPOSE OF BUDGETING Plan to obtain resources (revenue) Plan how resources will be used (expenditure) Matching revenue with expenditure Must cover all activities of institution Goal is to meet objectives of institution
Definition of a budget A budget is n plan of action, expressed in monetary terms for a specific period, whereby limited resources are apportioned according to a basis of preferences towards unlimited needs. Thus it is: A plan of action through which the costs for a specific activity aimed at satisfying a specific need or needs are expressed in monetary terms for a given period. A plan based on specific methods and techniques to utilise scarce resources such as capital, labour, material and equipment to the best advantage of the community, thereby satisfying the needs of the community. A plan of action that indicates what income will be received from various sources. 10
Definition of budgeting A process whereby scarce resources are allocated to unlimited demands, a plan (in monetary terms) of operations for a specified period; or A financial plan for a specific period whereby specific amounts are allocated to specific purposes.
Budgeting contributes to strategy and accountability As a strategic tool budgets need to focus on non-financial as well as financial targets It must be linked to long-term targets in the strategic plan (IDP and Long-term financial plan) Reported in Annual Report 12
Municipal budgeting enables efficient allocation of resources Stakeholder participation is key to efficiently allocate limited resources Proper prioritization of projects Budget steering committee, Ward committees, Executive or Mayoral Committee. Multi-year budget approach resources can be stretched over a period of time
Municipal budgeting contributes to improved service delivery MFMA introducing performance based system which maximizes the municipality s ability to deliver services In municipal budgeting the focus is on outputs, IDP objectives and measurable performance objectives Measurable performance objectives that is linked to service delivery targets 3 year budget that is linked to service delivery targets Must adopt approach of continuous improvement (quality and cost control) 14
THE PLANNING, IMPLEMENTATION, MONITORING AND EVALUATION ASPECTS OF A BUDGET Budget preparation Budget implementation (including monitoring) Budget evaluation
PUBLIC EXPENDITURE MANAGEMENT The term includes a range of processes: Political Legislative Technical Participative Accountability PESTLE
AGGREGATE FISCAL DISCIPLINE Monitoring and controlling financial performance at a summary level departmental aggregates (MM, BTO, Infrastructure, etc.) strategic objective aggregates (Electricity, Water) accounting classification aggregates (Staff related, Social contract, R&M, General Expenditure.)
ALLOCATIVE EFFICIENCY Doing the right thing Government priorities Basic needs of the community
OPERATIONAL EFFICIENCY Doing the thing right Cost effective Efficient More for less
Human aspects in budget and report cycle Complex series of tasks Success depends on contribution of many individuals Need to eliminate possible negative impacts Can reduce risk through rules, policies, procedures etc. and ensuring accountability 20
Impact can vary Politicians may focus on objectives of political party Officials bound by rules and procedures Participants must have skills and capacity Roles and responsibilities must be clearly defined 21
Impact of human aspects on budget preparation process Potential Negative Impacts Councillors allocating resources for: personal benefit re-election Over budgeting by managers Suggested Solutions Performance budgeting: Measurable performance objectives are linked to IDP objectives Multi-year budgets focusing on sustainability Zero based budgeting Performance budgeting 22
Human aspects on budget implementation process Potential Negative Impacts Inability to spend budget and deliver services due to skills shortages Fraud and Corruption Awarding of contracts to associates Bribery Embezzlement Suggested Solutions Performance management, inyear reporting Performance auditing linked to staff bonuses Competency regulations Developing a public service ethic Internal controls Internal audit and audit committee Separation of roles and responsibilities Effective and accountable system of delegations
Human aspects on budget evaluations Potential Negative Impacts Annual Financial Statements are disclaimed or qualified due to lack of financial management skills Tendency to overstate performance in the Annual Report due to remuneration and recognition incentives Suggested Solutions Performance management, annual report and oversight report Performance auditing linked to staff bonuses Competency regulations Internships, mentoring and bursaries Oversight Report Prescribed format and content for annual report
INTERNAL CONTROLS, AUDIT COMMITTEES AND EXTERNAL AUDIT Management of financial systems and internal control procedures ACTIVITY: READ CHAPTERS 3, 6, 8 & 10 MFMA Internal audit and the audit committee ACTIVITY: READ SECTIONS 165 AND 166 OF MFMA
THE MFMA, BUDGET REFORM AND IMPROVED SERVICE DELIVERY 9.1 PRIOR TO THE MFMA 9.1.2. Budget Preparation 9.1.3. Budget Implementation and Monitoring 9.1.4. Budget Evaluation
REFORMS EMBODIED IN THE MFMA Separation in roles of executive councillors, non-executive councillors, officials i.e. award of tenders Politicians approve policy Managers manage Transparent financial affairs
EFFICIENT ALLOCATION OF RESOURCES CONTRIBUTES TO IMPROVED SERVICE DELIVERY! Priority setting Consultation with community and stakeholders Three budgets linked to clear agreed upon targets Measurable performance targets in SDBIP and performance agreements linked to targets in IDP and budget
A MORE STRATEGIC APPROACH TO BUDGETING PAST PRACTICES AND RELATED IMPROVEMENTS DIAGRAM 2e page 42-44
MULTI-YEAR BUDGETING
MAXIMISING SERVICE DELIVERY AND CONTINUOUS IMPROVEMENT
Performance driven approach
A performance culture KING III The six principles of ISO 38500 as reflected in the KING III report, define a rigorous framework for governing information and technology which, if adopted, will assist directors and top management to balance risk and encourage opportunities arising from the use of IT. Proper corporate governance of IT assists organisations ensure that IT use contributes positively to the performance of the organization.
A performance culture DISCIPLINED APPROACH ASSIGN RESOURCES IN LINE WITH STRATEGIC PRIORITIES ENCOURAGE OPERATIONAL EFFICIENCY
SUSTAINABILITY Sustainable local government is built on the basis of balanced budgets, as unfunded deficits are not allowed. Municipalities will have to take full responsibility for their actions and should not expect national or provincial government to bail out badly managed municipalities. Prioritising the level of service delivery and ensuring costs that are affordable to ratepayers as well as the continuation of routine maintenance will guarantee the sustainability of the service offered by the municipality.
Sustainability and the MFMA 9.6.2. An early warning system 9.6.3 Analysing the financial implications of decisions 9.6.4 Financial accountability
The municipal budget and reporting cycle in South Africa
PAGE 53
Chapter 3 Integrating strategic planning, budgeting, implementation and performance management
RELATIONSHIP BETWEEN IDP, SECTOR PLANS AND BUDGET
Consultation: strategic
Consultation: sector specific
INTEGRATED IDP AND BUDGET PROCESSES
ACTIVITY PAGE 62 READ SECTIONS 21,68,87 OF THE MFMA
READ ACTIVITY PAGE 63
IMPLEMENTATION, THE SDBIP AND ANNUAL PERFORMANCE AGREEMENTS
Service delivery and budget implementation plan (SDBIP)
ACTIVITY PAGE 71 READ MFMA CIRCULAR 13 See next 3 slides
Page 1 of circular
Page 11 of circular
Page 12 of circular
ACTIVITY PAGE 71 READ SECTIONS 17,24,53,69 OF MFMA READ SECTION 57 OF MSA READ CHAPTER 12 OF MFMA READ SECTION 46 OF MSA
Consistent measurable performance objectives
ACTIVITY READ SECTION 54(1)(c) of MFMA
PAGE 74 ACTIVITY
RECONCILING THE BUDGET AND IDP 9.1 INTRODUCTION 9.2 COSTING THE IDP
DPLG IDP TOOLBOX 3 DIAGRAM 2f PAGE 77
RECONCILING THE BUDGET TO THE IDP
Chapter 4 Approaches to budgeting
Introduction Classification Approaches Accounting classification budgeting Programme budgeting Performance budgeting Forecasting approaches Incremental budgeting Zero based budgeting
ACCOUNTING CLASSIFICATION BUDGETING Line items compliant with GRAP Consistent with NT & AFS Diagram 4a page 92 Disadvantages Focus on input, no output or outcome No info re allocation between competing priorities No indication of split according to Org. Structure Assume expenditure is justifiable Overly restrictive on managers
ADVANTAGES OF USING ACCOUNTING CLASSIFICATION BUDGETING WITH OTHER APPROACHES: Line managers can compare for area of responsibility Excellent structure to control Revenue and Expenditure Can aggregate all municipal budgets Allows for measuring AFS to budget
PROGRAMME BUDGETING Budget according to programmes (activities) Vote IDP objective and sub goal Government Financial Statistics (GFS) functional classification DISADVANTAGES Impossible to aggregate municipal budgets Revenue and expenditure will be uncontrollable Does not allow for measurement against AFS
ADVANTAGES OF USING PROGRAMME BUDGETING WITH OTHER APPROACHES Considers outcomes to output leading to focus on services delivery Permits easy comparison of different programmes Mechanism to assess performance according to organisational structure, facilitates oversight role of councillors Provides justification as to activities that will carry on
PROGRAMME BUDGETING BY VOTE MFMA: vote = one of the main segments of budget NT Guide to Municipal Budgets: budget by vote = to enforce vote i.t.o. organisational structure - managers accountable Diagram 4b page 97 ADVANTAGES Senior managers can be held accountable Decisions can be made to allocate funds between votes Decisions can be made on adjusting budgets between votes
PROGRAMME BUDGETING BY IDP OBJECTIVE Indicates which IDP objectives generate revenue Highlights resources required to deliver measurable targets Diagram 4c page 99 ADVANTAGES Decision can be taken on allocating funds to competing priorities Actual financial performance can be assessed against budget for each IDP objective
PROGRAMME BUDGETING BY GFS GFS = international standard for classifying activities of government Diagram 4d page 100 ADVANTAGES Allow aggregation of all municipal budgets Allow consolidation with provincial and national departments Facilitate comparisons internationally Consistent historical comparison as it does change when the org. structure changes
PERFORMANCE BUDGETING Works hand in hand with programme budgeting Requires budgeting for outputs, outcomes and measurable performance objectives for each programme Diagrams 4f & 4g pages 103 & 104 ADVANTAGES Leads to more realistic IDP s Completes requirements necessary for assessing performance Mechanism to compare performance between internal units and external institutions Emphasises need to measure output as well as input DISADVANTAGES Some municipalities' services cannot be measured in output units or unit costs Requires resources to implement and maintain
PERFORMANCE AUDITING Flows from performance budget Examine output levels, input and unit costs Report on noteworthy variances in performance levels and ineffective expenditure patterns Performance bonuses should be subject to outcome of performance audit
FORECASTING APPROACHES Forecasting approaches page 107 Incremental budgeting Zero based budgeting
PREPARING A BUDGET USING THE VARIOUS APPROACHES
Diagram 4i page 112 Information to be included in a departmental SDBIP
Diagram 4j page 114 MFMA budget formats guide - July 2008 Excel templates
Chapter 5 Standard municipal budget formats
Introduction Core objective of financial reforms = improve ability to deliver basic services for all Achieved through improved financial sustainability Enhanced policy choices Medium-term planning Aim of standardisation to improve accountability
Why Standardisation? Stronger link between IDP and budget-showing targets Greater transparency councillor and community understanding of budget Greater accountability-result of greater transparency Greater accountability-same accounting classification as AFS Shortened times to complete budget, in-year reports, AFS, AR Easier aggregation National policy formulation is assisted, able to address inequality Need for surveys is reduced Oversight is assisted
LEGISLATIVE FRAMEWORK FOR STANDARDISING BUDGET FORMATS Constitution Sec 215(1):transparency, accountability, effective Sec 215(2):form of budgets, when tabled Sec 216(1):uniform norms, GRAP, CoA MFMA Sec 3: MFMA applies in case of inconsistencies in legislation Sec 17: budget in prescribed format Sec 121, 122, 125: AR, AFS, disclosures-prescribed format Sec 168: Minister may make regulations re budget, AFS, AR
STANDARDISATION OF BUDGET DOCUMENTATION SIMULTANEOUS STANDARDISATION AND FLEXIBILITY! Standardisation: key tables high level and standard for all Key tables use generic names Supporting tables standard but can expanded to suit local circumstances Future changes may be generic or supporting NT may issue full new set annually
Tabled Document vs. Published Document! Fundamental principle: Same document that is tabled, to NT, to PT, municipal offices, website, to stakeholders Everybody has same info, looking at the same thing Additional information may be distributed Summaries may be in alternate languages
Tabled Budget vs. Approved Budget Tabled budget for consultation must be same as approved budget, content is consulted upon Improves transparency Allows clear comparison between tabled and approved budgets Demonstrates tabled budget is credible Could be implemented should consultation not result in changes
Entity budget info included in municipal budget Need to convey total service delivery package to user/readers of budgets, in-year reports, AFS, AR Need to consolidate financial and non-financial info External service delivery mechanisms requires additional disclosures and accountability Council must therefore accept additional reporting burden to ensure funding and performance is transparent
FORMAT OF ANNUAL BUDGET DOCUMENTATION Municipalities: Schedule A Entities: Schedule D Sequence: Parts 1 & 2; Pages 130 & 131 Diagram 5b page 131
FORMAT OF ANNUAL BUDGET DOCUMENTATION Ten columns, seven year view Consistent feature: 10 columns, 7 year view Consistent with National and Provincial budgets Three years of audited outcome figures Extra 2 previous years provide background trend verification, 1 year not enough for performance comparison Additional information improve analyses as an early warning mechanism and forecasting tool Four columns required for current year Full year forecast also known as estimated actual outcome Recent trend and performance vital for strategic decisions Remember original budget was extensively consulted on Significant differences between original, adjusted and full year forecast indicate poor planning and unrealistic budgets Three columns for MTREF 85
FORMAT OF ADJUSTMENTS BUDGET DOCUMENTATION Similar principles to annual budget apply Municipalities: Schedule B Entities: Schedule E Diagram 5c page 132
FORMAT OF IN-YEAR REPORT DOCUMENTATION Municipalities: Schedule C Entities: Schedule F Diagram 5d page 133 Allows for more advanced forecasting Seasonality not taken into account Not appropriate for capital
STANDARD FORMATS FOR TABLES AND CHARTS As attached to regulations Each chart must be accompanied by explanation of trends
Thank you Karel van der Molen
FORMATIVE ACTIVITY GROUP 1 Take 5 minutes to study diagram 2c below, referring back to key definitions and concepts. Think about the role of each step in terms of preparing, implementing and monitoring and evaluating the budget. Consider how these processes contribute to aggregate fiscal discipline, allocative efficiency and operational efficiency. 90
Diagram 2c: Accountability cycle processes 33 91
Take 5 minutes to study diagram 2d below, whilst reading the explanatory text below the Diagram. Think about the role and responsibilities of each role player in terms of: FORMATIVE ACTIVITY GROUP 2 Budget preparation; Budget implementation and monitoring; Budget evaluation Consider how these role players contribute to aggregate fiscal discipline, allocative efficiency and operational efficiency. 92
Diagram 2d: Accountability cycle roles and responsibilities 34 93
FORMATIVE ACTIVITY Read sections 52, 54, 71 and 72 of the MFMA. Why do you think the MFMA puts so much emphasis on in-year reporting? 38 131
FORMATIVE ACTIVITY What does it mean if the audited annual financial statement have been disclaimed? What should stakeholders think of the financial status of a municipality whose statements have been disclaimed or heavily qualified? What does it say about the competency of the municipal manager, chief financial officer and finance staff in general? 38 132
FORMATIVE ACTIVITY What are the benefits of an annual report that focuses on a handful of positive, feel good stories? What should the real focus of an annual report be? Comment on the role of the oversight report in this regard. 38 133
Mayor must approve SDBIP within 28 days after approval of the budget and ensure that annual performance contracts are concluded in accordance with s 57(2) of the MSA. 97
Mayor to ensure that the annual performance agreements are linked to the measurable performance objectives approved with the budget and SDBIP.
The mayor submits the approved SDBIP and performance agreements to council, MEC for local government and makes public within 14 days after approval. Word approval twice used is confusing. MFMA s 53; MSA s 38-45, 57(2) 99
Budget processes and related matters 53. (1) The mayor of a municipality must (a) provide general political guidance over the budget process and the priorities that must guide the preparation of a budget; (b) co-ordinate the annual revision of the integrated development plan in terms of section 34 of the Municipal Systems Act and the preparation of the annual budget, and determine how the integrated development plan is to be taken into account or revised for the purposes of the budget; and 100
(c) take all reasonable steps to ensure (i) that the municipality approves its annual budget before the start of the budget year; (ii) that the municipality s service delivery and budget implementation plan is approved by the mayor within 28 days after the approval of the budget; and (iii) that the annual performance agreements as required in terms of section 57(1)(b) of the Municipal Systems Act for the municipal manager and all senior managers (aa) comply with this Act in order to promote sound financial management; (bb) are linked to the measurable performance objectives approved with 101
the budget and to the service delivery and budget implementation plan; and (cc) are concluded in accordance with section 57(2) of the Municipal Systems Act. (2) The mayor must promptly report to the municipal council and the MEC for finance in the province any delay in the tabling of an annual budget, the approval of the service delivery and budget implementation plan or the signing of the annual performance agreements. (3) The mayor must ensure (a) that the revenue and expenditure projections for each month and the service delivery targets and performance indicators for each quarter, as set out in the service delivery and budget implementation plan, are made public no later than 14 days after the approval of the service delivery and budget implementation plan; and (b) that the performance agreements of the municipal manager, senior managers and any other categories of officials as may be prescribed, are made public no later than 14 days after the approval of the municipality s service delivery and budget implementation plan. Copies of such performance agreements must be submitted to the council and the MEC for local government in the province. 102
42 Community involvement A municipality, through appropriate mechanisms, processes and procedures established in terms of Chapter 4, must involve the local community in the development, implementation and review of the municipality's performance management system, and, in particular, allow the community to participate in the setting of appropriate key performance indicators and performance targets for the municipality. 103
44 Notification of key performance indicators and performance targets A municipality, in a manner determined by its council, must make known, both internally and to the general public, the key performance indicators and performance targets set by it for purposes of its performance management system. 104
47 Reports by MEC (1) The MEC for local government must annually compile and submit to the provincial legislatures and the Minister a consolidated report on the performance of municipalities in the province. (2) The report must- (a) identify municipalities that under-performed during the year; (b) propose remedial action to be taken; and (c) be published in the Provincial Gazette. (3) The MEC for local government must submit a copy of the report to the National Council of Provinces. [Date of commencement of s. 47: 1 July 2001.] Report referred to: 105
S57:- MM and S56 managers (3) The employment contract referred to in subsection (1) (a) must include, subject to applicable labour legislation, details of duties, remuneration, benefits and other terms and conditions of employment. AG??? 106
Budgetary control and early identification of financial problems 54. (1) On receipt of a statement or report submitted by the accounting officer of the municipality in terms of section 71 or 72, the mayor must (a) consider the statement or report; (b) check whether the municipality s approved budget is implemented in accordance with the service delivery and budget implementation plan; (c) consider and, if necessary, make any revisions to the service delivery and 107
budget implementation plan, provided that revisions to the service delivery targets and performance indicators in the plan may only be made with the approval of the council following approval of an adjustments budget; (d) issue any appropriate instructions to the accounting officer to ensure (i) that the budget is implemented in accordance with the service delivery and budget implementation plan; and (ii) that spending of funds and revenue collection proceed in accordance with the budget; 108
(e) identify any financial problems facing the municipality, including any emerging or impending financial problems; and (f) in the case of a section 72 report, submit the report to the council by 31 January of each year. (2) If the municipality faces any serious financial problems, the mayor must (a) promptly respond to and initiate any remedial or corrective steps proposed by the accounting officer to deal with such problems, which may include (i) steps to reduce spending when revenue is anticipated to be less than projected in the municipality s approved budget; (ii) the tabling of an adjustments budget; or (iii) steps in terms of Chapter 13; and (b) alert the council and the MEC for local government in the province to those problems. (3) The mayor must ensure that any revisions of the service delivery and budget implementation plan are made public promptly. 109