Local government in South Africa – part 5, finances

The second-last article in our local government series tackles the issue of finances. Funding from the national government is essential for the running of municipal administrations as well as the delivery of services to their communities. There are regulations that prescribe how the finances of municipalities should be run

Municipalities are required to provide services to the communities that they serve – for this they need a wide range of resources, including financial resources. Finances impact heavily on a municipality’s ability to deliver services effectively and efficiently. Municipalities are responsible for ensuring that they have access to financial resources and that they use these resources responsibly. 

Good financial management practises are essential to a municipality’s sustainability. If a municipality’s financial management is disorganised, its resources can be misdirected and abused, which in turn results in poor service delivery and an increase in the risk of corruption. Unfortunately, abuse of resources is a problem that is frequently reported to Corruption Watch.  

It is important to understand municipal financial management as it comprises a number of factors such as planning and budgeting, revenue and cash management, managing expenses, procurement, and asset management.

Each of these components contributes to ensuring that municipalities handle their finances in an effective, efficient and accountable manner.

Municipalities depend on two main sources for their income; they raise their own revenue and they receive money from national government.

Money allocated from the national budget

Section 227 of the Constitution states that municipalities are entitled to a share of the revenue raised nationally, so that they can perform the functions allocated to them. Municipalities receive funding from the national government, in accordance with the Division of Revenue Act of 2005. This ensures that funds are distributed equitably between the national, provincial and local government.

Although all municipalities generate their own income, they do not generate the same amount of income; therefore the portions that they receive from the national budget are not the same. Municipalities in poor areas that are not able to raise a lot of income rely heavily on the funds from national government. The value of the allotment will depend on various factors such as the size of the municipality’s low income population, the cost of basic services, and the municipality’s capacity to raise its own money.  

The government funds that municipalities receive are used for various functions such as assisting low income households to access basic services; sustaining the municipality’s operations; building infrastructure such as roads, houses, sporting facilities, water and sanitation; and training and mentoring officials to build their capacity to run the municipality efficiently.

However, Corruption Watch reporters reveal that some of this much-needed money is diverted into the pockets of unscrupulous officials, instead of being used to help the community, so that service delivery is compromised.

“The Municipal Officials have increased their Salaries by over 50% despite the municipality receiving 14 unqualified reports. The municipal Manager receives R950 000 and the CFO gets R900 000 excluding benefits when we include benefits they receive way over R1.2m p.a. Municipal workers are being paid cents,” wrote a concerned community representative.

“The is no service delivery people are struggling to get clean water. The town is smelly because sewage systems are not functioning well. Nepotism is one other thing that seems to be haunting the municipality. Family members of municipal officials are all being given jobs even if they dont meet the requirements,” the report continued.

Income raised by a municipality

Section 229 of the Constitution empowers municipalities to impose rates on property and charge tariffs and fees for the services that they provide. Municipalities acquire the majority of their income by charging rates and taxes. A municipality can impose:

• Property taxes – municipalities can impose rates and taxes on properties that are situated within its area. According to the Municipal Property Rates Act, municipalities can charge different rates for different categories of properties such as residential properties, industrial properties, commercial and business properties, and formal and informal settlements;
• Service charges – a municipality can charge for the services it provides such as electricity, water, refusal removal as well as for the use of municipal facilities such as recreation centres and sports grounds;  
• Fines – a municipality can also generate its income from fines such as traffic fines, penalties for the contravention of by-laws and penalties for overdue payment of services charges.

The Municipal Finance Management Act of 2003

Section 153 of the Constitution requires a municipality to structure and manage its administration, budgeting and planning, to prioritise the basic needs of the community, and to promote the social and economic development of the community. The Municipal Finance Management Act of 2003 (MFMA), with other legislation, ensures that municipalities comply with this constitutional duty.  

The MFMA was enacted to secure sound and sustainable financial management in municipalities. It does so by establishing standards and requirements for:

• managing revenue, expenditure, assets and liabilities in municipalities;
• budgeting and financial planning processes;
• borrowing;
• handling financial problems; and
• ensuring transparency and accountability in a municipality’s finances.

It also deals with a wide range of relevant issues including municipal bank accounts, investments, municipal debt, responsibilities of municipal officials and accounting officers, financial reporting and auditing, and dealing with financial misconduct within a municipality.

The financial management cycle

Regardless of where municipality gets its income, the money must be managed and accounted for. The financial management cycle of a municipality consists of four broad activities that take place annually, namely planning and budgeting, implementation, monitoring and evaluation:

• Planning and budgeting – using its IDP, a municipality determines its goals and development plans. It then uses a budget to set out its strategy for raising revenue and decides how it will allocate its resources to the activities outlined in its IDP;
• Implementation – it implements its plan by managing its income and expenditure;
• Monitoring – it will then report on how it utilised its financial resources by preparing monthly, quarterly and mid-year reports. The municipality monitors its financial and service delivery performance;
• Evaluating – finally, it must evaluate its financial position through financial statements and annual reports, which are also used as tools for exercising oversight over a municipality.

The municipal budget

A municipal budget is often described as the central policy and governance instrument in a municipality and the key device in controlling its expenditure. Following a budgeting process helps a municipality to make informed decisions about its income and expenditure.

 A budget indicates where the money will come from, how much will be received, and how it will be spent. According to the MFMA, a municipality may only incur expenditure in terms of an approved budget – otherwise it is classed as unauthorised expenditure. 

A municipal budget is complex. It must ensure that it meets the constitutional requirement to prioritise basic services and it must be aligned to the IDP. It must ensure that taxes and tariffs are fair and sustainable, that the municipality’s cash-flow projections are realistic, and that the budget provides for the maintenance and renewal of existing infrastructure.

The budgetary process

A municipality’s financial year starts at the beginning of July every year and ends at the end of June the following year. Section 21 of the MFMA requires the mayor of a municipality to co-ordinate the process of preparing a municipality’s annual budget.

A municipal budget cycle is set out in the MFMA and involves:

• a planning phase during which the mayor provides the council with a time schedule for the entire budgetary process;
• a preparation phase, which involves an analysis of the expected income and expenditure of the municipality, and an analysis of its policies and priorities;
• a tabling and consultation phase, when the mayor tables the proposed budget and all supporting documents, and conducts public consultations on the budget; and
• a revision and debate phase, when the tabled budget is revised, taking into account the input received from the public and relevant stakeholders.

The municipal council must then approve the budget before the start of the financial year and the budget must then be published.

Oversight and accountability

There are various structures and mechanisms in place to oversee the governance of funds in municipalities.

The mayor must provide guidance over the financial affairs of the municipality, and must monitor and oversee the responsibilities of accounting officers such as the municipal manager and the chief financial officer, while respecting their independence. The mayor must also report to the municipal council on the implementation of the budget as well as the financial affairs of the municipality.

The municipal manager is the accounting officer of a municipality, and has a wide range of financial management responsibilities including:

• ensuring that municipal resources are used effectively, efficiently and economically;
• ensuring that the records of the financial affairs of the municipality are kept in accordance with the prescribed norms and standards;
• ensuring that  unauthorised, irregular, fruitless and wasteful expenditure is prevented; and
• ensuring that disciplinary and criminal proceedings  are instituted against municipal officials who commit financial misconduct.

The municipal manager also assists and supports the mayor in his budgetary functions, and reports shortfalls and overspending in the municipal budget to the municipal council.

Reporting

Municipalities must submit different reports during the course of the financial year. These include monthly statements to the mayor on the state of the budget, mid-year reports to assess performance, and annual reports to report on the financial performance against the budget that was tabled.

A municipality must also prepare annual financial statements which must be submitted to the auditor-general. Municipal financial statements must be submitted for auditing two months after the end of the financial year.

A municipality is required to have an audit committee, which is appointed by the municipal council. The audit committee advises on matters such as accounting policies, performance management and risk management.

It may also have a public accounts committee, which consists of members from the municipal council. Its purpose is to ensure good governance in the municipality.

Financial misconduct

Chapter 15 of the MFMA regulates financial misconduct of municipal officials. The Act provides procedures and sanctions for municipal officials and accounting officers who commit acts of financial misconduct such as:

• contravening the MFMA;
• making unauthorised, irregular or fruitless and wasteful  expenditure; or
• providing incorrect or misleading information to the municipal council, mayor or auditor-general.

In such cases, a municipality is required to institute disciplinary proceedings against these officials and when necessary institute criminal proceedings. 

Public participation

In managing its finances, a municipality must know, understand and respond to the community’s needs. The municipality must encourage the community to engage in and influence the municipality’s financial affairs – this promotes transparency and also ensures that the community is adequately catered for.

The Municipal Systems Act requires the holding of public meetings before a budget is adopted by a municipal council, to ensure that the community’s input is taken into account. The Municipal Systems Act also requires a municipality to consult the community on various issues that impact on its finances, such as:

• the annual report;
• the disposal of assets; and
• the establishment of municipal entities.

A municipality must give the community regular feedback on its financial affairs. The municipality can communicate with people through various platforms such broadcasts on local radios stations, notices in local newspapers; it can put information on its website, use posters, flyers and newsletters or even hold public meetings.