MUNICIPAL
FINANCIAL
VIABILITY
Municipal Managers Network
28 February 2011
Overview
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State of municipal finances presented to 2009 Budget
Forum
2010 Budget Forum submissions
− Review of the LG Fiscal Framework
− Understanding Outstanding Municipal Debtors
− Local Business Tax
2011 Division of Revenue Act
Other matters of interest
Objective
• The outcome of this session is to confirm the
challenges, provide evidence and guide the
process for resolution of these issues
State of Municipal Finances
Background
• SALGA developed own database containing data on municipal AFS,
AO, service delivery and economic profiles, information on CFOs.
• Analysis of 2007 and 2008 financial performance and service delivery
presented to the 2009 Budget Forum focused on the following criteria:
Criteria
Service Delivery
Finances
Financial Management
Basis of Assessment
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Settlement characteristics
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Extent of backlogs for key services
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Identification of whether additional financial resources
are required
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Sufficiency of own revenue sources
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Sufficiency of government grants
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Efficiency of expenditure
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Key financial ratios
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Audit report findings
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Capacitation assessment
State of Municipal Finances
Background
In enabling comparisons to be made it was important that
certain common classifications had to be made and utilised
Municipal Sub-categories
Included
Typical Attributes
S1
A (metros) and aspirant metros
Dominated by a large urban (city)
centre
S2
Secondary cities, large regional town Larger and smaller towns typically
and small towns
surrounded by commercial farm land
S3
Mostly rural with no significant urban Mostly tradition rural areas, with little
centre
formal urban economy
S4
Districts which are not water services The districts for the S1s
authorities
metropolitan), S2 and S3s
S5
C2 districts which are water services
The districts for the S3s
authorities
Cat.
(non
The above categorisation was used commonly throughout the exercise and was also
used the emphasis the differentiation between the municipalities and provinces
State of Municipal Finances
Service Delivery
Settlement characteristics have a significant impact on municipal finances
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Municipalities that have a small number of households but the formal urban
component is relatively small face viability challenges
Conversely municipalities with high number of rural households and/or
informal settlements tend to have high levels of poverty and high backlogs
of services
Service delivery challenges have a significant impact on municipal finances
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Rural municipalities have limited revenue raising opportunities because of
the level of backlogs. Unable to generate revenue from the rendering of
services
Lack of densification in a rural environment impacts on economies of scale
in delivering services
It is unlikely that backlogs can be eliminated in the short-term with finances
available to municipalities
State of Municipal Finances
Finances (1)
Expenditure efficiencies
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Spending profiles of rural municipalities not easily ascertained from annual
financial statements. High, other categories
Roles and functions of rural municipalities and districts not clear
Expenditure likely to come under increased pressure with high input costs
post 2008, eg. Water and electricity costs
Revenue self sufficiency and government grants
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Rural municipalities and district municipalities receive substantial
government grants (in respect of districts, replacement of RSC levies)
Metros, aspirant metros and secondary cities have balanced revenue mixes
State of Municipal Finances
Finances (2)
Outcomes of revenue self sufficiency and grants
Criteria
Average rates revenue per
household
Large and
aspirant
metropolitan
cities
Secondary
Rural
cities, large
municipalities
regional and
peri-urban
towns
R2 612
R1 160
R128
District
municipalities
for the periurban
municipalities
Not applicable
District
municipalities
for the rural
municipalities
Not applicable
Average revenue selfsufficiency
84%
75%
28%
31%
20%
Government grants to total
operating revenue
21%
25%
68%
62%
79%
Operating revenue per
household
R14 349
R7 743
R2 017
Not applicable
Not applicable
Operating expenditure per
household
R13 034
R7 060
R2 014
Not applicable
Not applicable
State of Municipal Finances
Financial Management
Financial ratios characteristics
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Generally financial position is strong
 18 municipalities technically insolvent
 Significant financial variances in the rural municipalities
Borrowing levels generally low but secondary cities and rural municipalities have the
potential to borrow (assessment done on an individual basis) to supplement capital
financing
Generally cash flow strong
Financial management issues
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National issues to take into account:  Depth of audit reporting – recommend improvements to assist better
understanding of underlying causes
 GRAP accounting standards simplification – particularly around fair valuing and
complex issues
 Better understanding of the linkage between financial viability and audit
qualifications
Municipalities to consider leadership, local SCOPA and governance
2010 Budget Forum
Background
 SALGA made submissions to the Budget Forum with the objective of
engaging national and provincial stakeholders on the following areas:
– The Review of the LG Fiscal Framework
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Need for differentiation between municipalities
The Expenditure assignment of LG
The Revenue assignment of LG
LG’s share of nationally raised revenue (Vertical Division of Revenue)
The Local Government Equitable Share
Infrastructure Funding and Borrowing
Conditional Grants to LG
– Understanding Outstanding Municipal Debtors
• Nature and extent of debt owed to municipalities
• Why debt has grown over the last 6 years?
• What proportion of the debt is realistically recoverable?
– Local Business Tax
• Work-in-progress towards application to Minister of Finance
LG Fiscal Framework
Review (1)
Differentiation
•
A commonly accepted categorization of municipalities should be developed and be
used to review roles and functions of certain categories of municipalities, in amending
the Local Government Equitable Share formula and in targeting certain conditional grants.
Expenditure Assignment
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Finalisation of the Provincial and Local Government Policy review, initiated by
COGTA in July 2007, restructuring of the electricity distribution industry.
Housing accreditation.
Funding arrangements for the National Land Transport Act.
The local government fiscal review should ensure that issues around unfunded
mandates are resolved. Some unfunded mandates have already been costed (such
as library services in the Western Cape and Ethekwini). Others should still be
quantified. FFC research currently.
Studies should be conducted into the accurate long term costs of municipal service
delivery, which can vary substantially across municipalities in different service
delivery contexts.
LG Fiscal Framework
Review (2)
Disparity in Fiscal Capacity - GVA (2004)
Classification
Metros
Secondary cities
Rural municipalities
Average GVA per capita
39,686
22,854
4,184
Average rates revenue per
household
2,612
1,189
157
Revenue Assignment
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Ways should be explored to extend the general fuel level sharing approach across more
municipalities beyond just the metros, exploring the viability of also utilising other bases such as
transfer duties
Implementation of a Local Business Tax should be expedited.
Replacement of RSC levy replacement grant for district municipalities by a suitable revenueraising instrument
Implementation of good practice municipal taxes and surcharges
LG Fiscal Framework
Review (3)
Vertical Division of Revenue
Division of nationally raised revenue, 2007/08 - 2013/14
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14
Outcome
Revised
Medium-term estimates
R million
estimates
Division of revenue between spheres
National departments
242 580 289 236 345 366 359 120 380 154 408 439 439 049
Provinces
207 504 246 836 293 164 323 080 357 929 380 450 404 251
Local Government
38 482
45 487
51 537
61 152
70 171
77 029
82 317
Total
488 566 581 559 690 067 743 352 808 254 865 918 925 617
Percentage share
National departments
49.7%
49.7%
50.0%
48.3%
47.0%
47.2%
47.4%
Provinces
42.5%
42.4%
42.5%
43.5%
44.3%
43.9%
43.7%
Local Government
7.9%
7.8%
7.5%
8.2%
8.7%
8.9%
8.9%
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There should be a systematic review of baselines to ensure that:
– revenue allocations to local government as a whole are congruent with its full
range of developmental and service delivery responsibilities
– and the vertical share of local government meets the increasing demand for
municipal services
This should be coupled with efforts to build the capacity of weaker municipalities to
spend efficiently and effectively
LG Fiscal Framework
Review (4)
Local Government Equitable Share
• Increase institutional capacity support to smaller and mainly rural municipalities
• Activate the development component of the LGES formula should be reviewed
• The Basic Services component needs to be expanded to include other services
• Review the poverty line that is currently at R800 total monthly household income
Infrastructure funding and borrowing
• The extent of rehabilitation backlogs should be quantified.
• Funding should be set aside for refurbishment and upgrade of existing
infrastructure.
• Own-revenue sources (e.g. Local Business Tax) is essential to allow borrowing
Conditional Grants
• There is no reporting on non-financial achievements and limited awareness of
grants
• SALGA concerned that review of grant baselines are not informed by proper
research. The FFC has made various important recommendations to government in
2010.
• Capacity development programs should be aligned to each stage of the
developmental transition of municipalities – more effective use and to be more
consultative
LG Fiscal Framework
Review (5)
SALGA recommendations to the Budget Forum:
• Supports the rapid implementation of a more comprehensive review
of all the elements of the municipal fiscal framework over the medium
term.
• Brings speedily to closure a number of protracted national processes
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Policy review
Electricity distribution restructuring (post EDI dissolution)
Single public service
Housing accreditation of municipalities and the funding of the new Land
Transport Act
• Appoints an independent commission to arrive at long term solutions,
ensuring maximum stakeholder participation and transparency
Understanding Municipal
Debtors (1)
• The objective of this submission to the Budget Forum was to
present to the Minister of finance the complexity of municipal
debt and proposals to address it
• The submission covered the following:
1. Nature and extent of debt owed to municipalities
What is the composition of the debt?
Why has debt grown from approx R30bn to R56bn over 6 years?
What portion of debt is realistically recoverable?
2. Proposals to address Challenges
How to contain the growth in Debtors
What can National Treasury and other stakeholders do
3. Concluding comments
Issues to be agreed between SALGA & National Treasury for action
Understanding Municipal
Debtors (2)
Composition of debt - Debtor’s by Income Source
Revenue Source
2005
2010
R
%
R
%
Water Tariffs
7 658 506
26
15 634 639
28
Electricity Tariffs
3 378 774
12
7 956 664
14
Rates (Property Rates)
6 781 355
23
12 026 853
21
Sewerage / Sanitation Tariffs
1 344 497
5
3 957 851
7
Refuse Removal Tariffs
1 749 875
6
3 612 737
6
Housing (Rental Income)
986 365
3
1 096 094
2
RSC Levies
377 016
1
137 237
0
6 719 936
23
100
11 972 952
21
100
Other
Total by Revenue Source
28 996 324
56 395 025
Understanding Municipal
Debtors (3)
Composition of Debt - Debtors Profile by Customer Type
Debtors Profiles
2005
2010
R
%
R
%
600 995
2
3 002 355
5
3 099 456
11
6 583 555
12
Households
12 517 870
45
31 688 354
56
Other
11 481 080
41
15 120 761
27
Total
27 699 402
100
56 395 025
100
Government
Business
Understanding Municipal
Debtors (3)
Nature and Extent of debt owed to municipalities
• Focus on metros and secondary cities will address 75% of total debt
and medium and small towns should also get some focused attention
(proportionally)
• Household and Other debt customer types require more focus
• Water, Other and property rates are the income sources that require
most focus
• Insufficient detailed data and non-uniformity of data parameters leaves
gaps in analysis of debt
• Interest component is complex and unclear
• Inconsistent reporting (some only report from 120 days or less)
• Most municipalities (using IAS 36/39) recognise revenue for
indigents and FBS – resulting in this increasing debtors provisions
(non implementation of Grap 9)
Understanding Municipal
Debtors (5)
Different accounting treatments for indigents (fbs)
Debtors
Provision
Net debtors
RXXXX
-(RXX)
RXXX
Increases debtors’ balances
outstanding as provision ignored
Rates and
services
rendered on
credit
Only where
there is an
indigent
consumer
Not impaired –
revenue and
debtor
recognised in
full
Impact on debtors – debtors’
high but provision for bad
debts also high
IAS 36/39:
Recognise
revenue/debtors at
transactional value.
Impair through a
provision
Don’t recognise
the revenue as it
is not probable
that Municipality
will receive
revenue (GRAP 9)
Impact on debtors – no
debtor recognised
Understanding Municipal
Debtors (4)
Government Property Rates Accounts
Property
Municipal
Billing
System
Department
of Public
works
Line
Department
National
Provincial
National
Provincial
Understanding Municipal
Debtors (6)
Why has debt grown from R30-R56bn over 6 years?
1. 100% collection rate not possible because services provided to the poor
and other practicalities (eg. national policies of providing services to all,
business liquidations). Debtors’ balances will grow annually as a result
2. Challenges to data integrity and incorrect billing remains a problems
3. Accounting treatment and reporting not uniform … treatment of equitable
share – reported debt may be growing
4. Balance sheet impact of debt – manifests ito surpluses but not realisable
as cash therefore contributing to cash flow crisis (paper surplus)
5. Insufficient and insignificant bad debt write-off
6. Interest on debt is growing – adding interest to irrecoverable balances
merely increases the amount outstanding
Understanding Municipal
Debtors (7)
Recommendations to Budget Forum
1.
That the Budget Forum mandates NT to:
a)
Include revenue recognition in the Budget Reforms
b)
Use Net Debtors (instead of Gross) for reporting purposes because the
financial effect is more realistic. (R56bn vs R33bn)
c)
Implement GRAP 9 (revenue recognition on services to the poor as well
as raising interest) to ensure that revenue that will not be recovered is
not recognized at all
d)
Encourage implementation of accounting standards on debtors’
impairments
e)
Provide guidelines to outline writing off irrecoverable debt
2.
That the Budget Forum encourage support be given to municipalities for
better debtors’ and customer profiling
3.
That NT and Public Works establish a task team to simplify billing and
payments for government-owned properties (government debt) and update
asset registers.
2010 Budget Forum
Local Business Tax
• SALGA submitted a proposal to introduce a local business
tax as a second general tax revenue source for local
governments to the Budget Forum in October 2009.
• Several Metro Councils in partnership with SALGA have
initiated a project to prepare formal applications in terms of
the Municipal Fiscal Powers & Functions Act (2007)
(MFPFA) to introduce a local business tax for economic
infrastructure and services.
• SALGA presented work-in-progress on the application to the
2010 Budget Forum.
• It is envisaged that a formal application will be submitted to
the Minister of Finance later this year.
2011 DoRA
Transfers to LG (1)
• LG’s share of nationally raised revenue increased slightly to 8.7% from 8.2% in 2010/11.
• Tight fiscus reduced growth in LGES to 8.3% p.a. over 2011 MTEF (9.3%, 2008 MTEF)
− Concern as bulk prices and number of indigents have increased
− However, smaller municipalities receive more for institutional capacity
• Infrastructure transfers increase 9.7% p.a. over 2011 MTEF (8%, 2008 MTEF)
- Higher growth in infrastructure transfers than LGES imply more pressure on repairs and
maintenance
- Faster growth mainly result of Urban Settlements Development Grant (Housing + MIG
(Cities) allocations)
- Other Concerns:
 Neighbourhood Development Grant reduction - poses challenges to some cities that
have already planned certain projects;
 Electricity Demand-side Management Grant reaches final year in 2011/12 and SALGA
will work together with DoE to motivate for extension
 An unallocated Municipal Disaster Grant is a new grant to make funding immediately
available following disasters. It will be administered by the National Disaster
Management Centre in CoGTA
 The Rural Transport and Infrastructure Grant has been increased to improve data
collection on the condition of rural roads to inform better planning and delivery of
projects
2011 DoRA
Transfers to LG
Other matters of
interest
SALGA are involved in other areas in municipal finance, including:
• Accounting Standards
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Assess cost and capacity for compliance (esp Grap 17) - lobby for differentiated accounting standards
• Budget Weeks – SALGA workshops on financial management and sharing of good
practices on revenue management and audit improvements
• Councillor Training – develop targeted training for Mayors, MMC: Finance, MPACs
and ordinary councillors.
• Municipal Property Rates Act Amendment – Develop a position paper and engage the
parliamentary processes
• Budgeting and payment of audit fees
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Municipalities urged to cost audit fees with approved audit plan and if amount exceeds 1% to
expenditure apply to NT
• Policy and Legislation review
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Credit control and debt management policies
MFMA review – future focus
Audit Outcomes
2008/09 (1)
2008/09
2007/2008
2006/2007
2005/2006
2004/2005
UNQUALIFIED
39%
33%
19%
18%
23%
QUALIFIED
17%
19%
25%
22%
27%
DISCLAIMER
29%
33%
39%
45%
41%
3%
4%
9%
9%
6%
13%
12%
8%
6%
4%
100%
100%
100%
100%
100%
ADVERSE
AUDIT NOT FINALISED
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Overall improvement in audit outcomes, however:
– Disclaimers and Adverse opinions have decline from 41% to 29% and 6% to 3%
respectively.
– While there is improvement there remain a high number of unqualified audits with matters
of emphasis.
– Audits outcomes however do not address:
 The adequacy of the funding of the municipal budget;
 The allocative efficiency of the municipality’s spending priorities;
 The quality of the municipality’s revenue management capabilities;
 The effectiveness of municipal spending; and
 The sustainability of the municipality’s capital budget and debt burden.
Audit Outcomes
2008/09 (3)
• SALGA will support further improvements in line with AG
recommendations:
– Encourage training of Councillors and senior municipal officials to
establish adequate leadership and oversight;
– Assist with establishment of effective governance arrangements
through support of MPACs and DAFFs;
– Continuous engagement with national stakeholders to make
available appropriate financial resources, personnel and systems for
municipalities to improve audit outcomes.
FFC Research
2010 LG projects:
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Measuring the efficiency of local government expenditures: an FDH analysis of a
sample of South African municipalities
Estimating the factors that influence municipal expenditures
Municipal consumer debt in South Africa
Estimating the economic and fiscal costs of inappropriate land use patterns
Climate change and environmental sustainability in urban areas
Budget and spending performance of local government
Possible 2011 projects:
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Estimating municipal fiscal capacity
Gender dynamics in local government
Environmental sustainability in rural areas
Exploring service delivery options and strategies for local government
Deriving cost functions to inform subsidies in the LGES formula
Assessing the human capital constraints in local government
Developing indices to assess municipal budgets