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This presentation addresses the challenges of the existing funding model for local government and proposes strategies to mitigate them. It also provides an overview of SALGA's annual budget for the 2008/9 financial year and the Medium-Term Expenditure Framework.
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SALGA BUDGET 2008/9 to 2010/11 MTEF Period Presentation to Local Government Portfolio Committee – 11 March 2008 by the Chief Executive Officer, Mr. Xolile George
Structure of Presentation • Purpose of Presentation • Challenges of the existing funding model • Addressing the challenges of the current funding model • WHY should the challenges of the current funding model be addressed • Summary Budget 2008/9 • Legislative background • Sensitivity Analysis • Financial Performance • Basis of Allocation (Programme Costs) • Financial Position • Cash Flow Statement • Capital Investments
Purpose of Presentation • The purpose of this report is to: • Present to the Portfolio Committee on Local Government SALGA’s annual budget for the 2008/9 financial year and the two outer years of the Medium-Term Expenditure Framework. • To sensitise the Portfolio Committee of the Challenges faced by SALGA in respect of its funding model and present the mitigating actions.
Challenges of the current funding model • Sources of revenue • SALGA is primarily funded by its members, who are charged membership levies at the following rates: • Local municipalities are charged 0.4% of the annual ‘employee cost’ / ‘salaries’ budget; • District municipalities are charged 0.5% of the annual ‘employee cost’ / ‘salaries’ budget; • Metropolitan municipalities are charged a flat rate of R 6 million. • Membership levies constitutes over 70% of SALGA’s budget for the 2007/8 and still make-up the major revenue stream for SALGA in the 2008/9 budget (66%). • SALGA’s share from the national fiscas via a transfer from DPLG is R 22 million in the 2008/9 financial year representing 14% of total income. This amount grows by a rate of 6.4% and 6% in the subsequent years of the MTEF period to R 23.4 mil and R 24.9 mil respectively. • Although the appropriation for 2007/8 financial year is R 19 million, An amount of R 6.8 million was pre-paid to alleviate SALGA’s cash flow problems in the 2006/7 financial year.
Challenges of the current funding model Sources of revenue (continued) The other sources of income are meagre and unreliable, these comprise 10% of total income in the 2007/8 financial year. This revenue stream includes monies from the course facilitation fees, registration fees for NMA’s etc.; and sponsorships. The budget for the 2008/9 financial year includes an amount of R 19 mil for bad debts recovered from the old provincial associations. Collection levels The collectability of revenue raised also features amongst the challenges that SALGA faces. As at 29 Feb 2008 the collection levels for total debt are at 65% whilst the collection levels for the current year are 81%. Poor collection levels impacts negatively on the implementation of programmes in that some programmes must be curtailedduring the year to enable the organisation to stay afloat. The pre-payment of the R 6.8 million in the 2006/7 financial year that was appropriated for the 2007/8 financial year was as a direct result of the unreliability of membership levies.
Challenges of the current funding model Collection levels (continued) Various reasons are cited by our members for not paying timeously such as (i) cash flow problems, (ii) purported resignations from SALGA; and (iii) unrealistic settlement terms often going over various financial years for arrear debt. The debtors days (i.e. the period it takes SALGA to collect membership levies) are well over 8 months, i.e. 267 days in the 2006/7 financial year. As at 29 February 2008 the debtors days have increased to over 360 days. The effect of an unreliable funding source on working capital management requires that SALGA operate on an overdraft to be used as bridging finance whilst awaiting collections to materialise. This is specifically prohibited by the PFMA requiring approval by the Minister of Finance, furthermore interest levied is classified as fruitless and wasteful expenditure. Expenditure constraints – programme implementation The budget requests from the provincial offices and directorates as informed by SALGA’s Strategic Plan amounted to over R 70 million, of which only R 37 million could be funded from current resources.
Addressing the challenges of the current funding model Strategies to mitigate unreliable funding sources Key amongst measures identified by SALGA to mitigate or address the effect of poor collection levels is to levy interest on outstanding membership levies. It is anticipated that interest levied would hasten payment in that the MFMA also requires municipalities to disclose any interest paid as fruitless and wasteful expenditure. Intensify the vigorous implementation of debt collection procedures. Re-look the funding mechanism i.e. the formula itself so as to augment the revenue generation capacity for SALGA. This is primarily because the flat rate levied to Metropolitan municipalities diminishes year-on-year in real terms when considering the effect of inflation. However, the arrear debt is as a result of a formula which was thought too expensive/exorbitant by some metropolitan municipality members. Thus any formula review process must take into account the service delivery obligations of members and consider the current payment levels. The most feasible and practical measure is to increase the fiscal allocation that SALGA receives from National government. It is hoped that National government via DPLG match the funding levels currently maintained by the Local sphere of government.
WHY should the challenges of the current funding model be addressed • Why should these strategies be considered? • SALGA’s obligations have increased and the scope has widened, when considering the leading role that SALGA must discharge in realising the 5 Year Local Government Strategic Agenda (5YLGSA) – in that SALGA must: • Local Government Capacity Building – implement the Gender Equity Framework for Local Government; • Municipal Transformation and Organisational Development – intervene and assist members in achieving equity targets as regards women in senior management positions; and ensure that members develop and implement Organisational Performance Management Systems. • Good Governance and Public Participation – lead the functionality of Ward Committees through targeted training. • Furthermore, the January 2008 Cabinet Lekgotla and the State of the Nation address of 8 February 2008 re-enforced these imperatives.
WHY should the challenges of the current funding model be addressed Why should these strategies be considered ? (cont.) SALGA is and must embark on a business processes re-modeling so at to permanently address some of the shortcomings raised by the Auditor-General. These inter alia include the roll-out of a Performance Management System which requires that performance ‘beyond the call of duty be rewarded’; roll-out of an Enterprise Resource Planning so as to streamline business process; enhance internal control mechanisms; eliminate inefficiencies and improve the support we provide to our members with system driven data bases (information management) and implement a monitoring and evaluation system for efficient and reliable reporting. Good Governance requires that SALGA be consultative internally and externally. Internal consultation of the nine (9) PEC’s and Finance and Corporate Services Working Groups requires that Budget Lekgotla’s be convened so as to ensure that organisation-wide cohesion is attained for the successful implementation of SALGA’s strategic key performance areas. All of these programmes and interventions require resources which at current funding levels must be curtailed to balance the budget.
Summary Budget 2008/9 Synopsis of Projected Income – 2008/9 A realistic projection of income yielded a total income of R171 million, of which the majority is from the membership levies. The government grants comprise the fiscal transfer from the National Department (DPLG) of R22 million. Other income includes an amount of R19 million which it is anticipated to be bad debts recovered from the old provincial association days. The interest income is a projection of interest to be levied to members on outstanding membership levies in line with constitutional amendment of April 2007. The major expenditure categories are ‘Employee related costs’, followed by ‘Programme costs’ and ‘Administrative overheads’.
Summary Budget 2008/9 Synopsis of Projected expenditure – 2008/9 The allocation of total amount to be expended is distributed to Provinces and Directorates as reflected above. The above average share for Finance & Corporate Services are as a result of once-off anticipated expenditure, to improve reporting systems, internal controls and address issues raised by the Auditor General.
Legislative Background • It is a legal requirement in terms of Section 53(3)(1) of the PFMA that SALGA must not budget for a deficit and may not accumulate surpluses unless prior written approval of the National Treasury is obtained. Furthermore, PFMA Treasury Regulation 29.1.1(g) stipulates that an annual budget must include: • projections of revenue, expenditure and borrowings; • asset and liability management; • cash flow projections; • capital expenditure programmes; and • dividend policies. • The headings below briefly discuss the above mentioned bulleted requirements, where applicable:
Sensitivity Analysis • The existing funding model is inadequate to satisfy all of SALGA’s funding requirements, as such a process is currently unfolding to revisit the Membership levy formula and lobbying the national government for additional funding. Assumptions: • The collection levels for Membership levies are more than the constitutionally provided days of 30 instead the budget is based on 90 days. Based on historical statistics it is advisable to base the assumptions closer to reality for the budget to be credible i.e. realistic. [2006/7 financial year ~ 250 days] • The creditor payment terms are also more than the recommended 30 days they are projected at 90 days, so as to manage working capital effectively.
Revenue Distribution ‘Other income’ increases by over 100% due to anticipated bad debts recovery written-off during GALA’s days. Membership Levies remain the main source of income, although slightly decreased at 66% For the 2006/7 financial year, Membership levies accounted for approximately 80% of total income.
Revenue Analysis • The projected revenue growth rate for the 2008/9 financial year is 31.3%. • Membership levies growth rate is 10.7% which is in line CPIX plus 5% being the inflationary increase for municipal employee costs. Membership levies contribution constitute 66% of total revenue in the projections for 2008/9, this is slightly down when compared to the 2007/8 financial year where membership levies constituted 79% of total revenue. • Although ’Government grants’ real growth rate is 7.8%, due to an advance paid and recognized in the 2006/7 financial year relating to 2007/8 the growth rate for the 2008/9 financial year is 61.7%. • ‘Other income’ being the main contributor with a growth rate over 100% this is due to anticipated bad debts recovery.
Expenditure Distribution • Of the total budgeted expenditure of R169.7 mil for the 2008/9 financial year, the major categories are: • Employee related costs – R89.4 mil • Programme costs – 37.4 mil • Admin costs – R24.3 mil • The 2007/8 financial year consists of 9 months, due to SALGA aligning its financial year to that PFMA public entities. • Employee related costs – R64.7 mil • Programme costs – R21.9 mil • Admin costs – R21.9 mil
Expenditure Analysis • The expenditure growth of R 47.8 million in the 2008/9 by category is further explained by the following: • Employee related costs – an increase of R24.7 mil due to headcount increases (29 additional employees); provision performance bonuses and normal inflationary increase. • Administrative expenses – increase of R2.4 million • Depreciation and amortization – increase of R 0.8 mil due to capital asset acquisitions. • Programme costs – increase of R 15.5 mil to fund programmes aligned with SALGA’s strategic objectives. • Consulting fees – R3.6 mil increase due to escalating Auditor-General’s fees. • Repairs and Maintenance – R0.4 million as part of asset maintenance. • Contracted Services – R0.5 mil increase in line with the escalation clauses in the Security and Insurance contracts.
Basis of Allocation Programme Costs • The residual amount after accounting for all committed recurrent expenses viz. salaries; office accommodation rental; water and lights etc. for the 2008/9 financial year is R37,378,000 and allocated as follows:
Non-Operating Expenditure / Income • In line with the revised SALGA’s constitution as at April 2007, interest is to be levied on outstanding Membership Levies. • The projected interest income amount for the 2008/9 financial year is R11 mil.
Solvency & Liquidity • The organization is solvent and financially stable for the planning year as well as for the two outer years of the medium-term expenditure framework. • In terms of liquidity, the projection reflects that the organization is liquid FINANCIAL SUSTAINABILITY • In order to secure SALGA’s future financial sustainability, alternative mechanisms to diversify SALGA’s funding model are critical. Although the current formula is being revisited, any huge increases in Membership levies may distabilise our members, thus the interim measure is to lobby the DPLG for more equitable share transfer.
Application of Funds • The cash generated by operations during the 2008/9 financial year of R10.8 million is to be absorbed by capital investments. The organization remains financially stable over the MTEF period with positive cash reserves.
Capital Investments • Planned computer equipment acquisitions amount to R 10.4 mil which include amongst others, an integrated Enterprise Resource Planning (ERP) system; computer hardware; and software etc. • The planned acquisition of motor vehicles is for SALGA fleet. • The acquisition of Furniture and fittings plus office equipment accords with budgeted headcount increases, the organization plans to recruit 29 additional employees during the 2008/9 planning year
