Budgetary Process

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• Budget And The Budgeting Process

  Budgeting for Integrated Development Planning Process
  In terms of section 25(1) of the Local Government Municipal Systems Act, Act No. 32 of 2000, a Municipality must undertake developmentally oriented planning.  It must adopt a single, inclusive and strategic plan in the form of the Integrated Development Plan (IDP) of a Municipality. This must form the policy framework and general basis on which annual budgets must be based. The Integrated Development Plan must be drafted and adopted in consultation with the local community. The costs for the Integrated Development Planning process have to be budgeted by the Municipality. This budget serves as a basis for applying for financial contributions from the Provincial and National level.
  
  Proposed Process for Integrated Development Planning
  
  In terms of the Integrated Development Planning Guide, the required resources have to be indicated in the 'Programme with Time Frame and Resource Requirements' for each major planning activity. Based on that table, the cost can be calculated and summarized by the type of expenditure. In case the total costs are unacceptably high, the Steering Committee will have to discuss ways and means to reduce costs either by looking for less costly ways and means to get a planning activity accomplished by slimming down on the way planning activities are designed. The prediction of all planning costs for the budget for the IDP process will be a tentative estimate.
  
  The annual budgets of a Municipality are both a legislative requirement in terms of the Municipal Finance Management Bill 2000, as well as a tool for planning and control. The financial year of local authorities covers the period 01 July of each year to 30 June of the following year.  The Local Government Transition Act, No 209 of 1993, as amended, section 10 G (3a) to (4d) deals with the budget.
  
  A Municipal Council must for each financial year, by way of an annual budget, appropriate money from its Revenue Fund for the requirements of the municipality (Municipal Finance Management Bill, 2000, chapter 4, paragraph 13). 
  
  The Municipality shall annually, before the start of the financial year (July) compile and approve a budget by a simple majority of its Council, consisting of:

  • Operating income and expenditure;
  • Capital expenditure which must reflect the source of finance, future capital charges, operating and maintenance costs as well as the consequential influence thereof on levies, rates and service charges (Local Government Transition Act No. 209 of 1993, as amended, Section 10G(3)(a)).
  • Special and trust fund budgets that consist of operating expenditure constituting a direct debit against a reserve or special fund. Capital expenditure is not included here as it is already included in the relevant capital budget (Refer to Comprehensive Information Package for KZN Municipalities on interim IDP's Volume 1). 
  •  A Municipality shall not budget for a year end deficit on its operating account (Local Government Transition Act No 209 of 1993, as amended, Section 10G(3)(b)(i)).

  Capital Budget:
  
  The Capital Budget specifies expenditure expected to be incurred to acquire or create assets. Items are categorised as assets if their useful life is in excess of one year or the purchase value exceeds R5 000.
  
  Capital expenditure can be financed from the following sources:

  • Loans: Internal and External;
  • Contributions from revenue;
  • Grants and subsidies ? mainly from Government;
  • Donations;
  • Service and management contracts;
  • Concessions; and
  • Tariff generation.

• Operating and Maintenance Budget

  An Operational Budget consists of all the income and expenditure relating to the normal activities of the Municipality (Refer to Annexure B, IIDP Guidelines-Template). This covers the expected day-to-day expenses incurred by the Council to provide services to the community and the expected income in the form of:

   

  • Regional services levies;
  • Property rates and taxes;
  • Service charges;
  • Rentals;
  • Subsidies;
  • Interest on investments;
  • Other - admission fees, parking fees, etc;
  • Grants, etc.

  A new accounting standard, Generally Accepted Municipal Accounting Practice (GAMAP), has been developed for South African Local Government. The Auditor-General prescribes a new format for financial statements based on GAMAP. The goal is to implement GAMAP in the 2002/2003 financial year-end.
  Implementation of GAMAP will enable the content and presentation of financial statement information to be consistent and so enable informed decision-making on risks and returns. It is therefore of utmost importance that the Municipal Manager and Chief Financial Officer apply GAMAP in the compilation of the budgets and the financial statements pertaining to the Municipality as well as the financial systems in use.
  
  Accountability/Responsibility
  
  Whilst the Municipal Manager is accountable and responsible for overall management, the Council is responsible for framing the budget prior to the financial year-end, in accordance with section 160 (1) Of the Constitution of South Africa, Act 108 of 1996., The Municipal  Finance Management Bill indicates that a Councillor  will be held responsible for compiling the Municipality?s draft annual budget, the consultative process and ultimately the submission to  the Council of the municipality.
  
  The Chief Financial Officer and the Councillor responsible for financial matters must at least four months before the beginning of the financial year, prepare a draft consolidated annual budget, incorporating the budgets of the various sections in the Municipality for that financial year.(Municipal Finance Management Bill, 2000, chapter 4, paragraph 15(1)
  
  Principles
  
  A Municipality shall not budget for a year-end deficit on its operating account (Local Government Transition Act No. 209 of 1993, as amended, Section 10G(3)(b)(i)).
  
  The Municipal Annual Budget:

  • Must be in accordance with a format as may be prescribed);
  • Must be balanced to ensure that the total amount appropriated in terms of the budget does not exceed the realistically anticipated revenue; and
  • May not exceed a growth factor as determined by the National Treasury (Municipal Finance
  • Management Bill, 2000, chapter 4, paragraph 14(1)(a)-(c)).

  The Municipal Annual Budget must at least contain:

  • Estimates of all revenue expected to be received during the financial year to which the budget relates;
  • Estimates of current expenditure for that financial year, broken down per vote as may be appropriate for the Municipality concerned;
  • Estimates of interest and debt servicing charges, and any repayments of loans;
  • Estimates of capital expenditure for that financial year and the projected financial implications of that expenditure for future financial years;
  • Proposals for financing any deficit incurred for that financial year via short term borrowing provided that provision for the repayment of this debt is made within end of the respective financial year,
  • An indication of intentions regarding borrowing and other forms of public liability, that will increase the Municipality's debt during that financial year and future financial years;

  The projected:

  • Revenue for the previous financial year;
  • Expenditure for the previous financial year, broken down per vote;
  • Borrowing for the previous financial year; and,
  • Funding flows from the Municipality to Municipal entities under its ownership control and from such Municipal entities to the Municipality, during the previous financial year);

  The actual:

  • Revenue for the year preceding the previous financial year;
  • Expenditure for that financial year, broken down per vote;
  • Borrowing for that financial year; and
  • Funding flow from the Municipality to Municipal entities under its ownership and control and from such Municipal entities to the Municipality, during that financial year; and

  Any other information as may be prescribed, including any multi-year budget information (Municipal Finance Management Bill, 2000, chapter 4, paragraph 14(2)(a)-(i)).
  
  When an annual budget is tabled in the Municipal Council, the Municipal Manager must submit measurable objectives for each vote in the budget (Municipal Finance Management Bill, 2000, chapter 4, paragraph 14(3)).
  
  The National Treasury, after consulting the relevant Provincial Government / Treasury, may withhold funds due to a Municipality from the National Revenue Fund, if the Municipality fails to comply with a provision of this section or any other applicable treasury norms and standards established in terms of section 216 of the Constitution (Municipal Finance Management Bill, 2000, chapter 4, paragraph 14(4)). 

• Budgetary process

  Preparation of Current Budget (Municipal Finance Management Bill, Sections 14 and 15)

  The following are required for the drafting of the budget:

  • Copies of existing budgets must be obtained and their approval by the National Treasury / Provincial Government must be verified.
  • Preparation and issue of instructions to all Heads of Sections in the Municipality budget should include:

  1. A timetable for the completion and approval of the budget;
  2. Reference to the specific Council resolutions concerning Council?s policies and objectives;
  3. Likely percentage increases in salaries and wages for the new financial year;
  4. Guidelines in the overall increase in expenditure permitted for each department; and
  5. Guidelines issued annually by the National Treasury / Provincial Government.

  All departments must prepare departmental business plans for the short and medium term. These plans will contain budgets for the same period. The financial plans will be detail actual and potential sources of funding from internal and external sources. The departmental requirements are based on the individual departments' short and medium plans that flow from the IDP. Once the departmental draft budgets have been done and Key Performance Indicators identified, the department must submit it for consolidation to the Municipal Manager.
  
  The Councillor/committee responsible for financial matters must then:

  • Allow the public access to the draft budget by making it available at the main administrative office of the Municipality (Municipal Finance Management Bill, 2000, chapter 4, paragraph 15(2));
  • Allow the public to submit written comments and representations to the Municipality (Municipal Finance Management Bill, 2000, chapter 4, paragraph 15(2)); and
  • Table the draft budget before the Municipal Council for discussions and public hearings (Municipal Finance Management Bill, 2000, chapter 4, paragraph 15(2)).

  The Councillor/committee responsible for financial matters must submit a copy of the Municipality's draft budget to:

  • The National Treasury, in the case of a Municipality whose name appears on a list published by the Minister by notice in the Government Gazette;
  • The Provincial Government, in the case of a Local Municipality and District Municipality, whether such names appear on the list referred to in above;
  • The District Municipality in whose area it belongs, in the case of a Local Municipality; and;
  • The Local Municipalities in its area, in the case of a District Municipality (Municipal Finance Management Bill, 2000, chapter 4, paragraph 15(3)).

  The Councillor/committee responsible for financial matters must attend to the following matters as soon as the Council's discussions and the public hearings referred to above, have been completed):
  
  Prepare the budget for the financial year, taking into account: 

  • The considerations of and public hearings conducted by the Council on the draft budget;
  • Any public comment and representations received by the Municipality; and 
  • Any recommendations of the National Treasury and the relevant Provincial Government on the draft budget and any guidelines and policy statements issued by the National Treasury / Provincial Government;

  Table the budget before the Council for approval.
  
  The Councillor/committee responsible for financial matters must manage the budget process in a manner so as to ensure that the budget is tabled in the Council at least 30 days before the beginning of the financial year to which that budget relates (Municipal Finance Management Bill, 2000, chapter 4, paragraph 15(5)).
  
  The Director Finance will allocate final vote number to all budget items and supply the Municipal Manager and all departmental heads a copy of the budget with vote numbers and key performance indicators for each vote.
  
  A Municipality must approve its annual budget before the beginning of the financial year to which it relates (Municipal Finance Management Bill, 2000, chapter 4, paragraph 15(6)).
  
  The annual budget of a Municipality is approved by a decision taken by the Council of the Municipality, with a supporting vote of a majority of the members of the Council present at the meeting (Municipal Finance Management Bill, 2000, chapter 4, paragraph 16(1)).
  
  Failure to adopt a budget.
  
  If a Municipal Council fails to approve an annual budget by the majority required, the Council must reconsider the budget and again vote on the budget or an amended version thereof, within 14 days of the meeting that failed to approve the budget (Municipal Finance Management Bill, 2000, chapter 4, paragraph 16(2)).
  
  If a Municipal Council again fails to approve an annual budget by the required majority and, as a consequence of which, there is no approved annual budget at the beginning of the financial year to which it relates, funds may for the requirements of the Municipality be withdrawn from the Municipality's Revenue Fund in accordance with the requirements of 4.18 below (Municipal Finance Management Bill, 2000, chapter 4, paragraph 16(3)).
  
  If a Municipality's annual budget is not approved before the beginning of the financial year to which it relates, funds may, with the approval of the MEC for Local Government in the Province concerned, after consulting the MEC for Finance, be withdrawn from the Municipality's Revenue Fund in accordance with this section, for the requirements of the Municipality until the budget is approved,as follows;.
  
  May be:
  
  Used only to defray current expenditure in connection with matters for which funds were appropriated in the previous annual budget or adjustment budget; and
  
  May not:

  • During the first four months of that financial year, exceed one third of the total amount appropriated in the previous annual budget for current expenditure;
  • During each of the following months, exceed 8 per cent of the total    amount appropriated in the previous annual budget for current expenditure; and
  • In aggregate, exceed the total amount appropriated in the previous annual budget for current expenditure.
  • The funds provided for above, are not additional to funds appropriated for that financial year, and any funds withdrawn in terms of 4.20 above, must be regarded as forming part of the funds appropriated in the annual budget for that financial year (Municipal Finance Management Bill, 2000, chapter 4, paragraph 17(3)).

• Monitoring the Budget

  • The Chief Financial Officer must prepare monthly variance reports of actual expenditure to budgeted expenditure per Department for both the operating and Capital budget submission to Exco.
  • The Municipal Manager must present these reports to Council.
  • The three-year Capital Program prepared annually by the Municipal Manager shall be reviewed quarterly by the Council. This program must at all times be within the framework of the Municipal Integrated Development Plan
  • The Councillor /committee responsible for financial matters may table an adjustment budget before the Municipal Council as and when necessary, but must table an adjustment budget when this becomes necessary in the following instances (Municipal Finance Management Bill, 2000, chapter 4, paragraph 18(1)):
  • Due to the under-recovery of revenue;
  • To appropriate funds for the reduction of debt or the funding of capital projects; or
  • To provide for other matters that may be prescribed.

  Virement
  
  The municipality may not utilise a saving in the amount appropriated under a vote in a budget towards the defrayment of excess expenditure under another vote in the budget unless such utilisation is authorised in an adjustments budget If a budget appropriates funds for specific purposes within a vote, the provisions of subsection (1) apply to those specific appropriations as if they were separate votes.
  
  Information to be submitted by municipal managers
  
  The Municipal Manager of a municipality must submit to the National Treasury, the relevant provincial treasury or the Auditor-General, such information, returns, documents, explanations and motivations as may be prescribed or as the relevant treasury or the Auditor-General may require.  If the Municipal Manager is unable to comply with any of the responsibilities determined for municipal managers in this Part, the Municipal Manager must promptly report the inability, together with reasons, to the municipal council, the National Treasury and the relevant provincial treasury.