Workshop: IDP and Municipal Budgeting. What you need to know. (17 April 2024)

This excellent resource was prepared by Mare-Lise Fourie, a Municipal Finance Consultant. Mare-Lise was a keynote speaker at a webinar we hosted titled IDP and Municipal Budgeting. What you need to know. You can access the webinar below. Mare-Lise is the former City Treasurer of Pretoria and co-author of the definitive must read for all municipal accounting officers – Municipal Finance and Accounting, now in its third edition. OUTA has on numerous occasions asked Mare-Lise for assistance on budget and IDP analysis. 

Government in South Africa is constituted as national, provincial and local spheres of government which are distinctive, inter-dependent and interrelated. (S40 of the Constitution)

A municipality has the right to govern, on its own initiative, the local government affairs of its community, subject to national and provincial legislation, as provided for in the Constitution. (S151(1))

A municipality has executive and legislative authority in respect of and has the right to administer the local government matters listed in Part B of Schedules 4 and 5 of the Constitution. (S151(2) of the Constitution) The manner in which such authority is exercised include –

• The development and adoption of policies, plans, strategies and programmes
• The preparation, approval and implementation of budgets
• Imposing and recovering rates, service fees, etc.

A municipality must strive, within its financial and administrative capacity to achieve the objects of local government (S152) which include the following –

• To ensure the provision of services to communities in a sustainable manner
• Encourage the involvement of communities and community organisations in the matters of local government.

A municipality consists of three principal stakeholders – Council, administration and the community (S2 MSA)

Municipalities are creatures of statute – almost everything it does is prescribed in legislation (Acts and Regulations)

The budgetary process consists of three steps –

• Step 1: Prepare/review the IDP.
• Step 2: Prepare the initial/draft SDBIP to inform the budget.
• Step 3: Compile the annual budget.

Step 1: Prepare/review the IDP

Integrated Development Planning is described in the Municipal Systems Act (S35) as the “principal strategic planning instrument which guides and informs all planning and development and all decisions with regard to planning, management and development, in the municipality.” An IDP is linked to an elective term of a municipality (5 years) (S25 MSA) but it must be reviewed annually in accordance with an assessment of its performance measurements and to the extent that changing circumstances demand. (S34 MSA)

(Chapter 5 of the Local Government: Municipal Systems Act, 2000 (Act 32 of 2000) and the Local Government: Municipal Planning and Performance Regulations, 2001)

The core components (S26 of MSA) of the IDP are as follows:

• The municipality’s vision for the long-term development of the municipality
• An assessment of the existing level of development in the municipality
• The council’s development priorities and objectives for its elective term
• The council’s development strategies
• A spatial development framework
• The council’s operational strategies
• Applicable disaster management plan
• A financial plan
• Key performance indicators and performance targets to measure performance of development priorities and objectives that must be monitored and reported regularly to council, and the public and appropriate organs of state. This must also serve as an early warning indicator of under-performance. (S41)

The detail in the IDP must also identify the institutional framework including an organogram, investment initiatives, development initiatives and all known projects, plans and programs by any organ of state (R2)

Only a member or committee of council may introduce a proposal for amending the IDP in council which must be aligned to the prescribed framework and subject to a memorandum setting out the reasons. Reasonable notice of an amendment must be given to members of the council and the amendment must be published for public comment for a period of at least 21 days in a manner that allows the public an opportunity to make representations with regard to the proposed amendments. (R3)

The IDP must inform the municipality’s annual budget that must be based on the development priorities and objectives as well as the performance targets set by the municipality. It must also be used to prepare action plans for the implementation of strategies identified by the municipality.

Step 2: The Service delivery and Budget Implementation Plan (SDBIP)

The SDBIP is defined in the MFMA as a detailed plan for implementing the municipality’s delivery of services and its annual budget.

It must indicate projections for each month of revenue to be collected by source, operational and capital expenses by vote and service delivery targets and performance indicators for each quarter.

A draft SDBIP should be prepared in the initial stages of the budgeting process as a rough outline to give effect to the priorities for the annual budget. The SDBIP will have to be continually adapted during the budget process because of, for example, financial constraints (restrictions or realistic limits to increases in rates and tariffs or access to capital finance) and performance constraints such as available officials and assets.

The MM must submit the final draft SDBIP within 14 days (S69 of MFMA) after the approval of the budget to the mayor who must approve it within 28 days. (S53 of MFMA) The MM must make public the approved SDBIP within 10 working days after the mayor has approved it but an invitation to invite the local community to submit written comments are subjective at best (“if appropriate” S21A of MSA)

The mayor must check if the budget is implemented in accordance with the SDBIP as reported in the monthly budget statements (S71) or the mid-year budget and performance assessment (S72). The mayor must consider any revisions of the SDBIP but revisions to the targets and indicators in the plan may only be made with the approval of council following the approval of the adjustments budget. (S54)

An integral input into the SDBIP is the performance agreements of the municipal manager and the senior management team.

The SDBIP is therefore strategically the municipality’s most important budget management tool in that it measures both compliance with the intended utilisation of allocated budgetary resources and the extent to which performance targets for each expenditure vote and revenue source are achieved by the managers responsible for these votes.

In summary, the SDBIP must inform the budget but is approved by the mayor after approval of the budget by council. Changes to the SDBIP relating to targets and indicators must be approved by council after approval of an adjustments budget.

The SDBIP’s for internal department, entities and other external mechanisms, interestingly, are listed as supporting documents to the annual budget for consideration and approval by council. Given that mayor only approves the SDBIP after the budget has been approved by council, it can be a draft SDBIP at best.

Step 3: The annual budget

The budget proses can be summarised as follows:

• Mayor of the municipality must establish a budget steering committee to provide technical assistance to the mayor with regard to the responsibilities of general political guidance over the budget process and the priorities that must guide the preparation of the budget (R4)
• The draft annual budget must be tabled in council at least 90 days (by 31 March) before the start of the financial year (S15)
• Tabled budget must immediately be made public and representations invited.
• Council to consider approving budget which must include views of local community, and the mayor’s responses 30 days before the start of the budget year.
• Council must approve the budget before the start of the budget year.

Municipal budgets are traditionally divided into votes which represents the principal activities of the municipality. However, National Treasury has standardised the format and require municipalities to also approve their budgets in the Government Finance Statistics Format (GFS) or standard classification.

A budget is divided into capital and operating components. The capital budget is concerned purely with the creation of fixed assets and can be financed from external loans, grants or own revenue.

The operating budget is funded from realistically anticipated revenues to be collected, cash-backed accumulated funds and operating grants (equitable share/fuel levy etc.)

When an annual budget is tabled, it must include the following documents (S17 of the MFMA):

• Draft resolutions to, inter alia, approve the budget and impose any municipal tax and setting any tariffs for the budget year.
• Measurable performance objectives for revenue from each source and for each vote taking into account the IDP
• Projection of cash flow by revenue source per month
• Any proposed amendments to the IDP
• Any proposed amendments to the budget-related policies
• Particulars of the municipality’s investments
• Prescribed budget information of municipal entities and particulars of proposed new entities
• Particulars of proposed service delivery agreements or amendments to existing agreements
• Particulars of allocations or grants to be made by the municipality
• Proposed cost of the salary, allowances and benefits of each political office bearer, councillors, municipal manager, CFO, each senior manager and any other official having a remuneration package equal to a senior manager
• Proposed cost of each member of the board of directors of entities, the CEO and each senior manager of the entity
• Any other supporting documentation as may be prescribed

The tabled budget (draft) must immediately be made public and invite the local community to submit representations (S22).  Chapter 4 of the Local Government: Municipal Systems Act, 2000 (Act 32 of 2000) applies.

I will touch on this a bit later.

Council must consider the budget submissions (S23) and the mayor’s responses and if necessary, revise the budget before considering the approval of the budget 30 days (by 31 May) before the start of the financial year. If council fails to approve the budget it must reconsider it within 7 days. This process must be repeated until it is approved. The council MUST approve the budget before the start of the budget year (1 July) or face serious consequences. (S26)

National Treasury issued MFMA Municipal Budget Circulars 126 dated 7 December 2023 and 128 dated 8 March 2024 for the 2024/25 MTREF to provide guidance to municipalities in the preparation of the budget. The following issues are considered relevant:

• CPI is estimated at 4,9% for 2024/25 and 4,6% in the two outer years. Municipalities are encouraged to keep tariff increases within the CPI range.
• The National Energy Regulator of South Africa (NERSA) is responsible for the price determination of the bulk costs of electricity. Bulk electricity costs are therefore to be calculated using an increase of 12.7% in the 2024/25 financial year.
• Municipalities are urged to consider projecting salary and wage increases that would reflect their affordability given the current economic challenges.
• Municipalities must budget for the actual cost of councillor remuneration in accordance with the Government Gazette on the Remuneration of Public Office Bearers Act: Determination of Upper Limits of Salaries, Allowances and Benefits of different members of municipal councils published annually between December and January by the Department of Cooperative Governance and Traditional Affairs. (CoGTA)
• Budgets must be funded – realistically anticipated revenues to be collected. (Refer payment levels)

A budget must be credible. It must satisfy two fundamental criteria:

• Strategically credible –
• It must reflect the developmental, administrative and service delivery priorities and objectives set in the IDP;
• It should accommodate the results of the consultation processes;
• It should have been prepared in accordance with all the municipality’s budget-related policies.
• Financially credible (Funded budget)–
• It must reflect realistically likely operating and capital expenditure, revenues and capital finance; (Debt impairment!)
• Income and expenditure, both operating and capital, must be properly matched.

A third and equally important consideration is affordability. It is the product of realistically rates and service charges which essentially determines the total of operating expenses which may sensibly be budgeted for.  Choices have to be made here!

When preparing a budget you have to start with the funding or income. Revenue to be collected on the operating budget and available funding for capital projects before expenditure can be allocated. Equally, consideration must be given to the impact of capital expenditure on the operating budget – depreciation, maintenance, operating, etc.

Table of contents of budget for consideration and approval by council (Schedule A S2):

Part 1 – Annual budget

• Mayor’s report (S3)
• Resolutions (S4)
• Executive summary (S5)
• Annual budget tables (S6 and S7) – 10 prescribed tables for the municipality plus 10 tables for the consolidated budget (municipality plus entities)

The prescribed format of the annual budget is captured as follows in Schedule A First Attachment (municipal budget) and Schedule A Second Attachment (consolidated budget):

• Current year:
• Original budget
• Adjusted budget
• Full year forecast
• Medium-term revenue and expenditure framework (MTREF)
• Budget year
• Budget year +1
• Budget year +2
• Comparative actual results
• Audit outcome – Current year -1
• Audit outcome – Current year -2
• Audit outcome – Current year – 3

Thus 7 years…

Part 2 – Supporting documentation (S10-S31)

• Overview of annual budget process
• Overview of alignment of annual budget and IDP
• Measurable performance objectives and indicators
• Overview of budget-related policies
• Overview of budget assumptions
• Overview of budget funding
• Expenditure on allocations and grant programmes
• Allocation of grants made by the municipality
• Councillor and board member allowances and benefits
• Monthly targets for revenue, expenditure and cash flow
• Annual budgets and SDBIP’s for internal department, entities and other external mechanisms
• Contracts having future budgetary implications
• Capital expenditure detail
• Legislation compliance status
• Other supporting documents
• Annual budgets of entities attached to municipal budget
• Municipal manager quality certifications

The Municipal Budget and Reporting Regulations issued in accordance with the MFMA contain descriptions of each of these supporting documents to be included in the budget.

Community Participation (Chapter 4 MSA)

A municipality must develop a culture of municipal governance that compliments formal representative government with a system of participatory governance. For this purpose a municipality must encourage and create conditions for the community to participate in the affairs of the municipality, including –

• The preparation, implementation and review of the IDP
• The monitoring and review of its performance
• The preparation of its budget
• Contribute to building capacity of the community

Participation by the community must take place through mechanisms, processes and procedures for participation in municipal governance.

Council or a committee of council may not exclude the public when considering or voting on a budget or amendment to IDP tabled in Council.