In enabling comparisons to be made it was important that ... - SALGA

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MUNICIPAL
FINANCIAL
VIABILITY



Municipal Managers Network


28 February 2011



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

Overview


The outcome of this session is to
confirm the
challenges, provide evidence and guide the
process for resolution of these issues

Objective

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

Basis

of

Assessment

Service

Delivery


Settlement

characteristics


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Finances


Sufficiency

of

own

revenue

sources


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Financial

Management


Audit

report

findings


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Cat
.

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

and

small

towns

Larger

and

smaller

towns

typically

surrounded

by

commercial

farm

land

S3

Mostly

rural

with

no

significant

urban

centre

Mostly

tradition

rural

areas,

with

little

formal

urban

economy

S4

Districts

which

are

not

water

services

authorities


The

districts

for

the

S
1
s

(non

metropolitan),

S
2

and

S
3
s

S5

C
2

districts

which

are

water

services

authorities

The

districts

for

the

S
3
s

In enabling comparisons to be made it was important that
certain common classifications had to be made and utilised

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

Background


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




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


Settlement characteristics
have
a significant impact on municipal finances

Service delivery challenges
have
a significant impact on municipal finances

State of Municipal Finances

Service Delivery


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



Revenue self sufficiency and government
grants


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

Expenditure efficiencies

State of Municipal Finances

Finances (1)

Criteria

Large and
aspirant
metropolitan
cities

Secondary
cities, large
regional
and
peri
-
urban
towns

Rural
municipalities

District
municipalities
for the
peri
-
urban
municipalities

District
municipalities
for the rural
municipalities

Average rates revenue per
household

R2 612

R1 160

R128

Not applicable

Not applicable

Average revenue self
-
sufficiency

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

Outcomes of
revenue self sufficiency and grants

State of Municipal Finances

Finances (2)


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 ratios characteristics

State of Municipal Finances

Financial Management

Financial management issues


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


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


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





2010 Budget Forum

Background

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


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 (1)

Revenue Assignment


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 revenue
-
raising instrument


Implementation of good practice
municipal taxes and surcharges



Classification

Average GVA per capita

Average rates revenue per
household

Metros


39,686


2,612

Secondary

cities


22,854


1,189

Rural

municipalities


4,184


157

Disparity in Fiscal Capacity
-

GVA (2004)

LG Fiscal Framework
Review (2)

Vertical Division of Revenue










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



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%
LG Fiscal Framework
Review (3)

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 (4)

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


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

LG Fiscal Framework
Review (5)


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 (1)

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

Other

6 719 936


23

11 972 952


21

Total by Revenue Source

28 996 324

100

56 395 025

100

Understanding Municipal
Debtors (2)

Composition of Debt
-

Debtors Profile by Customer Type

Debtors Profiles

2005

2010

R

%

R

%

Government

600 995

2

3 002 355

5

Business

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

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 (3)

Different accounting treatments for indigents (
fbs
)

Rates and
services
rendered on
credit

Not impaired


revenue and
debtor
recognised in
full

Only where
there is an
indigent
consumer

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


debtors’
high but provision for bad
debts also high

Impact on debtors


no
debtor recognised

Debtors


RXXXX

Provision


-
(RXX)

Net debtors

RXXX

Increases debtors’ balances
outstanding as provision ignored

Understanding Municipal
Debtors (5)

Property

Municipal
Billing
System

Line
Department

National

Provincial

Department
of Public
works

National

Provincial

Understanding Municipal
Debtors (4)

Government Property Rates Accounts

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 (6)

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.

Recommendations to Budget Forum

Understanding Municipal
Debtors (7)


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.

2010 Budget Forum

Local Business Tax


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 (1)

2011
DoRA

Transfers to LG

SALGA are involved in other areas in municipal finance, including:


Accounting Standards


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


Municipalities urged to cost audit fees with approved audit plan and if amount exceeds 1% to
expenditure apply to NT


Policy and Legislation review


Credit control and debt management policies


MFMA review


future focus









Other matters of


interest

Audit Outcomes


2008/09 (1)


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.


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%
ADVERSE
3%
4%
9%
9%
6%
AUDIT NOT FINALISED
13%
12%
8%
6%
4%
100%
100%
100%
100%
100%
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.

2010 LG projects:


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:


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


FFC Research