This guide contains seven sections:
- Importance of effective municipal financial planning and management.
- What is financial management?
- The budgeting cycle and community participation
- Sources of municipal income
- Tariffs for municipal services
- Property rates
- Managing the money flow
Effective financial management can help municipalities to transform their local areas into a better place to live and work. Most councillors and members of the community know what municipal services they would like to have in their area. This dream of the ideal community is known as a "vision" for the municipality.
One of a councilor's greatest responsibilities is approving and regularly monitoring a municipality’s budget that provides money to implement the visions. This work should be done in consultation and co-operation with the ward committee. The community should be involved as much as possible in deciding what should be the spending priorities for the area they live in. Ward councillors and ward committees should report to ward meetings about the broad budget plans and consult the residents about programmes and projects that will affect them.
Without funds to implement the policies, councillors will not be able to "make a difference" or serve their communities well. Effective financial management ensures that there are funds available to implement council policies. This is a great responsibility as municipalities are responsible for managing large amounts of money and delivering services that affect people's lives every day. Councillors, committee members and officials all have a duty to ensure that these monies are managed carefully, transparently and honestly.
Good financial management is the key to local delivery – local activists and ward committee members should understand municipal finance and budgets so that they can engage councillors on the bigger debates about spending and development priorities.
The table below sets out the financial management processes that are used in municipalities.
WHAT IS IT?
- Working out what income the municipality will get and balancing this with the planned expenditure, by preparing detailed plans and forecasts.
- Putting in place controls to ensure that the income, capital and assets such as money, motor vehicles, computer equipment etc., are safeguarded against misuse, damage, loss or theft.
- Monitoring actual income and expenditure and comparing this to the budget, through regular financial reporting and corrective action when needed.
- Reporting financial results to all stakeholders by preparing municipal financial statements that are audited by the Auditor-General, who reports to Parliament.
Ward committees have the right (and duty!) to discuss, ask questions and make recommendations to the council on the best ways to generate income, to keep costs down, prevent corruption and safeguard the assets of the municipality. That is good financial management!
What is a budget?
A budget is a financial plan. It summarises, in financial figures, the activities planned for the forthcoming year by setting out the costs [expenses] of these activities, and where the income will come from to pay for the expenses.
The "Financial Year" and budget consultation
The financial year of South African municipalities runs from 1 July of each year to 30 June the following year. Municipalities must prepare budgets for each financial year. Council must approve these budgets before the new financial year begins, after proper planning and consultation with ward committees and other stakeholder groups in the area. For example, the budget for the financial year beginning in July 2002 must be approved before the end of June 2002. The draft budget should be ready a few months before so that it can be used for consultation. (Around March)
The approval of the budget is one of the most important tasks undertaken by councillors, after consultation with ward committees and other stakeholders.
Ward committees should carefully look at the parts of the budget that affect the people in their area. Ward councillors can also call ward meetings to discuss the budget. If your organisation is affected by the municipal budget and plans, invite a councillor to come and discuss the budget and plans with you. All members of the community also have the right to observe the special council meeting at which the budget is debated and voted on.
Types of budgets
There are two types of budgets: operating budget and capital budget.
Capital budget deals with big costs that you pay once to develop something, and how you will pay for this – for example putting in water pipes to a new township.
Operating budget deals with the day-to-day costs and income to deliver municipal services – for example the meter readers’ wages and maintenance work to keep the water flowing.
The operating budget – the municipality’s operating budget lists the planned operating expenditure (costs) and income, for the delivery of all services to the community.
Operating expenditure is the cost of goods and services from which there will be short-term benefit - that is, the services will be used up in less than one year.
For example, the payment of staff salaries results in a short-term benefit as salaried employees are paid monthly for one month's work. They could resign, next month, and the municipality would not have the benefit of their skills anymore. Examples of operating costs are salaries, wages, repairs and maintenance, telephones, petrol, stationery.
Operating income is the amount received for services delivered for a short-term period. For example, ratepayers pay rates monthly or annually as payment to their municipality for receiving municipal services. Examples of operating income are property rates, service charges, investment interest, and traffic fines.
The capital budget - The capital budget puts money aside, for planned expenditure on long-term purchases and big investments such as land, buildings, motor vehicles, equipment and office furniture that will be a municipal asset for more than a year - probably for many years to come.
A municipality's capital budget will list the estimated costs of all items of a capital nature such as the construction of roads, buildings and purchase of vehicles that are planned in that budget year.
The difference between the operating and capital budgets
A useful way for to look at the difference between operating and capital expenditure is to think about the purchase of a car. The purchase of a car is capital as the expected life of the motor vehicle is much more than one year. The cost of fuel and repairs only provide short-term benefit (less than a year) and therefore is operating expenditure.
The capital budget and operating budget have to be prepared and discussed together. This is important because planned expenditure that is included in the municipality’s capital budget will impact on the operating costs and income needed to "operate" the municipality’s assets, efficiently.
This link between capital and operating budgets can be explained by using the car example again. If you decide to buy a car, in addition to including funds for this in your capital budget, you are going to have to include money in the operating budget for tyres, driver’s wages, petrol, service and other operating expenses.
The increase in operating expenditure needs to be considered when making a decision on whether or not to buy a new car. If fuel, tyres, repairs and wages costs cannot be included in the operating budget because of insufficient funds to pay for them, then the municipality should not buy the car!
Municipalities must ensure that there will be adequate money to pay for their planned expenditure if they are to "balance the budget". There are various sources of income that can be used by municipalities to finance their expenditure. This section outlines the various sources of municipal income, and looks at ways of deciding which will be best for your municipality’s needs.
Main sources of capital budget financing
External loans - External loans (from a bank or other financial institution) are an expensive form of financing the capital budget because of the high interest rates in South Africa. External loans should only be used to finance the purchase of major capital items such as roads, buildings, sewerage works and water systems.
Internal loans - Many municipalities have internal "savings funds" such as Capital Development Funds or Consolidated Loan Fund. These funds can make internal loans to the municipality for the purchase or development of capital items, usually at a lower interest rate than for an external loan and the municipality is paying the interest back to its own "savings fund", which can later be used for another capital project.
Contributions from revenue - When purchasing a small capital item, the small total cost can be paid for from the operating income in the year of purchase. This financing source is known as "contributions from revenue". In most municipalities, this source of financing is used to pay for smaller capital items, such as one or two items of furniture and equipment. As no interest is payable, this source of financing is considerably cheaper than external or internal loans.
Government grants - Municipalities may apply to national government for grants for infrastructure development. The two main funds available are:
- CMIP [Consolidate Municipal Infrastructure Programme] – available from the Department of Provincial and Local Government
- Water Services Projects – available from the Department of Water Affairs.
Donations and public contributions - Local and foreign donors may sometimes donate a capital item or money to be used specifically for the purchase of a capital item, in a disadvantaged area. They may want publicity for their donation, which the municipality can arrange to acknowledge their sponsorship.
Public/Private Partnerships - Capital costs can be paid for by means of partnerships between the private sector and the municipality. In most cases the private sector partner will have a profit motive in the services and capital being financed, so the terms and conditions must be carefully defined, to protect the community's interests.
Main sources of operational budget financing
Property Rates - All people and businesses who own fixed property (land, houses, factories, and office blocks) in the municipal area are charged "Property Rates" - a yearly tax based on the value of each property. Rates income is used by the municipality to pay for the general services to all people, which cannot easily be charged to a specific service user as a "service charge" for example roads, pavements, parks, streetlights, storm water management, etc.
Service Charges / Tariffs - For specific services that can be directly charged to a house or factory, the principle of "user pays" should be adopted. That is, to charge a price or "tariff" for services such as water, electricity or approval of building plans; where the exact usage of the service can be measured, to the person or business who actually used that service.
Fines -Traffic fines, late library book fines, penalties for overdue payment of service charges: these fines are another source of income or "revenue" , while at the same time motivating users of services to have a culture of obeying democratic laws, rules and deadlines.
Equitable share - The equitable share is an amount of money that a municipality gets from national government each year. The constitution says that all revenue collected nationally must be divided equitably [fairly] between national, provincial and local spheres of government. The local government equitable share is meant to ensure that municipalities can provide basic service and develop their areas. The amount a municipality gets depends mainly on the number of low-income people in the area – rural municipalities usually get more. Most municipalities only get a small part of their operating budget from the equitable share.
A "tariff" means a service charge that the municipality charges for the use of services. The prices of these services should be affordable, to the people who use the services, and to the municipality itself. Ward committees should advise councillors on the services needed in the area, what is an affordable price (or "tariff") for the services, and how to ensure that people pay for their services. Community organisations should get involved in consultation meetings to discuss efficient and cost-effective service delivery.
Every year, as part of the budget preparation cycle, there should be a review of tariffs ("price list") for:
- basic services, such as water, electricity, sewerage or rubbish removal
- specialised services, such as the approval of building plans
- fines and penalties, such as for traffic fines or late payments, interest on arrears.
Decisions should be taking the following into account:
- Tariffs should be reasonable and affordable, for the people who use these services.
- Based on a sliding scale, so that everybody gets the basic amount free, then pay increasingly higher tariff amounts, for the amount of water or electricity they use. These higher-volume tariffs are essential, to cover the free basic supply to those who only use a little, to survive.
- Policy to deal with poor households that cannot afford to pay anything
- Fair to the municipality, to recover most (or all!) of the costs of providing the service to the people, so that the tariff income can pay for staff salaries, water pipe repairs, and to repay Eskom for their bulk supply of electricity to your municipality.
In South Africa (and in many other democratic countries), property rates are an important source of income for the municipality, to pay for the general services and facilities which the municipality provides to the people of the area.
- "Rates" are the property taxes that the municipality can raise from all people and businesses that own fixed property (land and buildings) in the municipal area, based on the estimated value of that property.
- The "Rate in the Rand" is set each year by council, as the "percentage" of the property value that the owner must pay to the municipality. The rate could be (for example) 2c in the Rand, so that if the value of someone’s land and house is R100 000, the property owner (or "ratepayer") must pay R2 000 in property tax (or "rates") to the municipality. Usually, this tax can be paid either annually, or in twelve, monthly instalments.
- The "Valuation Roll" for a municipality lists all the fixed properties in the municipal area, - who owns them and – what the official value of the land and building is.
It is important that these values are updated regularly, as your area develops, people improve their properties, and the price of land changes. Rates must be based on a fair, up-to-date value of each property; otherwise people could accuse your municipality of charging an unfair property tax on them.
Here are some important factors for your ward committee and council to remember about property rates:
Affordability - Property rates are a democratic form of taxation that is legally enforceable. Should ratepayers not pay their rates, municipalities are legally entitled to obtain a court order to sell the ratepayer’s property to enable the municipality to recover the unpaid rates, which they have budgeted for, to provide community services.
Although a form of taxation, ratepayers may not be able to afford to pay an extremely high level of rates. Affordability is therefore a very important factor to consider when approving the budget, otherwise there may be a rates boycott.
Impact on business organisations - Rates and service charges can be a significant cost to a business organisation in your area. If rates and services charges are too high, a business may relocate their factory or shops to other municipalities where the rates are lower. This could cause job losses or inconvenience to residents of your area.
The extent of cross-subsidisation - The extent of cross-subsidisation of rates (and service charge tariffs) is one of the more difficult factors to consider when approving the budget. Cross-subsidisation is the extent to which one group or (richer) ratepayers pay an additional amount so that other groups of (poorer) ratepayers can pay a lesser amount.
Rates Rebates - One way of cross-subsidising the property rates from richer to poorer ratepayers is for council to agree a "rebate" (like a "discount") for pensioners or small businesses. In other words, these groups will pay less than the normal rate for the real value of their property, provided that they can prove to the municipality that they are earning below a defined amount, that year.
"Money flow" or "cash flow" is the movement of money into and out of the municipality’s bank account, as money is received from ratepayers or paid out to staff and service providers. When more money flows in to the bank account than has to be paid out, the municipality has a "surplus" of money – and can proceed with planned development projects that have been planned in the budget.
When more money has to be paid out than the money that flows in, your municipality could be heading for big financial problems or go "bankrupt". The municipality can borrow money from the bank (overdraft), or from another sphere of government (a loan or grant), or increase the property rates and service charges (tariffs) which people must pay for local services to avoid the situation
None of these options is very good for your municipality’s reputation. Even though ward committees and community organisations are not involved in the municipality’s "cash flow management" you need to know how important it is to avoid a "negative cash flow", or "deficit". This is when the municipality owes more money than it has in the bank, and has to stop projects that it cannot afford to pay for. "Cash flow management" should be a regular item on the council meeting agendas and documents about this should be presented to council or ward committee meetings. Ask questions about how well the money flow is being planned, monitored and followed up, by the treasurer and executive committee or mayoral committee.
Ward Committee role
Your ward committee members all need to help achieve a "positive cash flow" for your municipality’s development projects, by:
- setting the example in paying your rates and service charges fully, and before the due date
- encouraging everybody in your community to pay their rates and service charges, on time
- challenging any waste of municipal money that you hear about, and asking for a proper explanation or investigation
- holding your councillor accountable for fighting corruption or wastage of municipal cash or other assets.
Municipal Service Delivery | Developmental Local Government | Integrated Development Planning for Local Government | Understanding Local Government | HIV and AIDS and Municipalities | Local Government Finances and Budgets | Accountability and Community Participation | Local Government Elections
This material may not be used for profit without permission from ETU