karel van der molen - spl short courses

Unit Standard 116345: Apply the principles of budgeting within a municipality

Karel van der Molen

The full programme Group Modules

1. Strategic Management; Budgeting Implementation & Performance Management

3. Strategic Planning & Multi Year Income & Expenditure

Management

6. Budgeting Principles & Cycles

7. Financial Reports & Performance Management

2. Municipal Accounting & Risk

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

2. Intergovernmental Fiscal Relations, Legislation & Policies

affecting Municipal Financial Management

4. & 5. Costing & Capital

Planning; Municipal IT

Support & Project

Management

9. Capital Planning & Financing & Costing Principles

5. Managing Information Technology Resources in

Municipal Finance

6. Supply Chain Management &

Public Private Partnerships

10. Municipal Supply Chain Management

11. Public Private Partnerships 2

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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

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“Melissa wag vir jou” if you have not registered on the system. Do it today! Even we are scared of her ……

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: Module outline;

• Chapter 2: Introduction to municipal budgeting in South Africa;

• Chapter 3: Integrating strategic planning, budgeting, implementation and performance management;

• Chapter 4: Approaches to budgeting; and

• Chapter 5: 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.

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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

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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)

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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

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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

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Impact of human aspects on budget preparation process

Potential Negative Impacts Suggested Solutions

Councillors allocating resources for: personal benefit re-election

Performance budgeting: Measurable performance objectives are linked to IDP objectives Multi-year budgets focusing on sustainability

Over budgeting by managers Zero based budgeting Performance budgeting

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Human aspects on budget implementation process


Inability to spend budget and deliver services due to skills shortages

Performance management, in-year reporting Performance auditing linked to staff bonuses Competency regulations Developing a public service ethic

Fraud and Corruption Awarding of contracts to associates Bribery Embezzlement

Internal controls Internal audit and audit committee Separation of roles and responsibilities Effective and accountable system of delegations

Human aspects on budget evaluations


Annual Financial Statements are disclaimed or qualified due to lack of financial management skills

Performance management, annual report and oversight report Performance auditing linked to staff bonuses Competency regulations Internships, mentoring and bursaries

Tendency to overstate performance in the Annual Report due to remuneration and recognition incentives

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

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

ACTIVITY PAGE 63

• READ

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

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

ACTIVITY

• PAGE 74

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

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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

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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.

FORMATIVE ACTIVITY

GROUP 1

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Diagram 2c: Accountability cycle processes

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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:

• Budget preparation;

• Budget implementation and monitoring;

• Budget evaluation

Consider how these role players contribute to aggregate

fiscal discipline, allocative efficiency and operational

efficiency.

FORMATIVE ACTIVITY

GROUP 2

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Diagram 2d: Accountability cycle roles and

responsibilities

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131

Read sections 52, 54, 71 and 72 of the MFMA.

Why do you think the MFMA puts so much

emphasis on in-year reporting?

FORMATIVE ACTIVITY

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132

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?

FORMATIVE ACTIVITY

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133

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.

FORMATIVE ACTIVITY

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• 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.

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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)

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• 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

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• (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

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• 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.

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• 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.

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• 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.

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• 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:

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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???

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• 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

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• 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;

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• (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.

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