The Importance of Effective Municipal Budget Management

The Municipal Finance Management Act aims to secure sound and sustainable financial management in municipalities, writes Zama Soji, the Public Finance Management Key Expert at the Vuthela iLembe LED Programme which is helping municipalities to improve Revenue Management, Asset and Budget Management, Supply Chain Management and Audit/ Risk Management.

Sound management of a municipality’s financial affairs – professionalism, transparently and honesty
– can provide a better place to live and work for communities.

Municipal financial management involves managing a range of interrelated components: planning and
budgeting; revenue; cash and expenditure management; procurement; asset management; and reporting and oversight. Each component contributes to ensuring that expenditure is developmental, effective and efficient and that municipalities can be held accountable to achieve service delivery. Section 152 of the Constitution states as one of the key objectives of local government the provision of services to communities in a sustainable manner. 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 spend economic development. Key to municipal financial management
is monitoring the budget that provides money to deliver services that affect people’s lives every day. Without funds to implement the policies, the municipality will not be able to “make a  difference” or serve communities well.

The municipal budget
In order to ensure effective financial management, accountability and reporting within an organisation, the community’s needs drive the budget process, based on available resources and capacity within the municipality. Budgeting involves projecting the revenue base to be realised by the municipality and determining planned expenditure to address community needs, by preparing detailed plans and forecasts. According to the MFMA, a municipality may only incur expenditure in terms of an approved budget, and any expenditure incurred in excess or outside the purposes of the budgeted amount is considered to be unauthorised expenditure. It is, therefore, necessary that the community’s needs and operational requirements of the municipality are prioritised and budgeted for, based on available funds and resources. This requires that the annual budget must be aligned with the municipality’s Integrated
Development Plan (IDP). Municipal officials have a crucial role in ensuring credible budgets are prepared.
There are two types of municipal budgets, capital budget and operating budget.

The capital budget deals with significant, medium to long-term costs that must be incurred to develop or enhance infrastructure and equipment, for example, putting in water pipes to a new township. A municipality’s capital budget will list the estimated costs of all items of a capital nature such as the construction of roads and buildings, and the purchase of vehicles that are planned in that budget year.
The operating budget comprises income and expenditure. It deals with the day-to-day costs to deliver all
municipal services to the community – for example the salaries and wages, printing and stationery, security, and operations and maintenance to ensure delivery of services.
The operating income is the money collected from rates and taxes, service charges, interest, and traffic fines, among other things. Adequate repairs and maintenance expenditure is crucial to ensure that infrastructure assets are maintained in accordance with a maintenance plan, to enable the assets of the community to provide the services efficiently for years to come. Infrastructure must be maintained so
that service delivery is not affected and National Treasury recommends that for every R10 spent on building/ replacing infrastructure, R0.80 should be spent every year on repairs and maintenance. This translates into a Repairs and Maintenance budget that should be eight percent of the value of property, plant and equipment.

Spending on capital budgets
Capital spending includes spending on infrastructure projects like new water pipes or building a library. Under-spending on a capital budget can lead to under-delivery of basic services. National Treasury has introduced financial indicator norms, and the indicator on capital spending looks at the percentage by which actual spending falls short of the budget for capital expenses. Persistent underspending may be due to under-resourced municipalities which cannot manage large projects on time. According to National Treasury financial norms, municipalities should aim to spend at least 95 percent of their capital budgets and failure to spend even 85 percent is a clear warning sign. A major weakness of many municipalities is the ability to compile credible capital budgets or to manage the implementation of their infrastructure programmes.