Funding and Finalising the Budget in mSCOA 2016 IMFO CONFERENCE 4th October 2016 Funding and Finalising the Budget in mSCOA Presented by: Kashnee Sewnarain KZN mSCOA Project Manager

Agenda The impact of mSCOA Regulation on Budgeting Understanding the Fund Segment Overview of the process for preparation of an mSCOA compliant budget Determining funding sources for the budget Finalising the budget in mSCOA Impact on business processes

The impact of mSCOA Regulation on Budgeting Problem Statement Every municipality manages and reports its financial affairs in accordance with its own organisational structure and unique chart of accounts; The budget is therefore prepared on this basis and this impacts on National Government’s ability to formulate coherent policies due to limited transparency, comparability, and accuracy of data; Inadequate standardisation and alignment of the local government accountability cycle from IDP to the Budget, SDBIP, In year reporting, annual financial statements, and annual report; Budgets are generally prepared based on incremental budgeting, with limited zero base budgeting principles applied; Evaluation of budgets often indicate that budgets are underfunded, and this often results in cash flow management constraints; Revenue targets is often unrealistic and non cash items are often inadequately budgeted for Solution National Treasury issued Government Gazette No 37577 on 22 April 2014, Municipal Regulations on Standard Chart of Accounts, which is effective 01 July 2017.

Impact of mSCOA Regulation on Budgeting Objective of the Regulation To provide a national standard for uniform recording and classification of municipal budget and financial information at a transactional level by providing a Standardised Chart of Accounts: aligned to budget formats and accounting standards with those of national and provincial government; enable uniform information sets across the whole of government to better inform national policy coordination and reporting, benchmarking and performance measurement. Additional objectives Improved data quality and credibility therefore improving Council and management decision making; Standardisation of key business processes and consistency in management of municipal finances; Improved transparency, accountability and governance through uniform recording of transactions at a posting level; Enabling deeper data analysis and sector comparisons to improve financial performance; The standardisation of the account classification to facilitate mobility in financial skills within local government and to enhance the ability of local government to attract and retain skilled personnel.

Impact of mSCOA Regulation on Budgeting Project Function Item Fund Regional Indicator Costing Municipal Standard Classification NERSA/COGTA Requirements - linked to procurement planning Internal management decision making GFS Reporting National Treasury reporting on Service Delivery mSCOA SEGMENTS INCLUDED IN BUDGETING Tariff setting GRAP Requirements Cash Flow Management and Consolidation of Financial Statements for Government Community information and Council decision making

Impact of mSCOA Regulation on Budgeting Project Function Item Fund Regional Indicator Costing Municipal Standard Classification “To which project does this expenditure contribute?” “To which cost centre does the transaction get allocated, based on your organisational structure?” “Against which function and sub-function should the transaction being recorded?” mSCOA SEGMENTS INCLUDED IN BUDGETING “Should the cost be reallocated to functions rendering the service?” “What is being bought or money received for?” “In which region does the service get delivered?” “Against which source of funding should the transaction be allocated?”

Impact of mSCOA Regulation on Budgeting Seven segments that are to be complied with on a transaction (posting) level, and in turn this implies that the budget must be prepared using all segments. Integrated Development Plan (IDP) must include both capital and operational projects, and the Project, Function and Region Segments as per mSCOA tables Budgeting will need to be driven from the Project Segment, and it is no longer an item based budgeting process mSCOA implementation is driven from the IDP and Budgeting Process – if incorrectly applied, it is likely to impact negatively on daily transacting and in turn, service delivery SCOA Version 6.0 has been released by National Treasury, and it is required that the 2017/18 Financial Year Budget must be prepared using this version Capacitation in mSCOA knowledge for all business units is significant requirement for successful implementation Preparation of the 2017/18 Budget should commence in October 2016 in order to allow National and Provincial Treasuries in support municipalities in this regard.

Understanding the Fund Segment Identifies the various sources of funding to finance both capital and operational expenditure Source of funding to be allocated against all revenue and expenditure transactions (budget, ordered, invoiced, payments made/received) Funding segment is the determinant segment that will be used to validate: The adequacy of funding of a budget The funding of day to day transactions being incurred Budgeting and managing cash flow Further used to prepare consolidated financial statements for the whole of government Financial systems will be modified to produce cash flow reports using “bank” as an attribute/flag within the system, focusing on the funding segment. Normal cash management principles should be applied to determine the adequacy of funding of municipality budgets and day to day cash management using the information from the fund segment Non-Funding Transactions are non-cash transactions, such as depreciation, impairment, provisions Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

Understanding the Fund Segment Operational Revenue Transfers and Subsidies Borrowing Cash backed reserves Capital Transfer from operational revenue to Capital Transfers and subsidies Non funding transactions Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

Understanding the Fund Segment Operational Revenue General Revenue Disposal of PPE Equitable Share Fines, Penalties and Forfeits Interest, Rent and Dividend on Land Licenses and Permits Rental from Fixed Assets Agency Services Service Charges Taxes (Property Rates) Sale of Goods and Rendering of Services Fuel Levy Transfer to capital funds Operational Revenue Commercial Services Abattoirs Airports City Parks, Reserves and Gardens Civic and Open Air Theatres Convention Centers Development Agencies Fresh Produce Market Property Agencies Quarries Sand-mining Tourism Urban Transport Zoo's and Museums Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

Understanding the Fund Segment Operational: Transfers and Subsidies Allocation in kind Department Agencies and Accounts Social Security Funds Provincial Department Agencies National Department Agencies District Municipalities (by Province and by Function) Foreign Government and International Organisations Households Employee Social Benefits Social Security Payments Social Assistance Other Transfers (Cash) National Government Non-profit organisations Private Enterprises Provincial Government Public Corporations Higher Education Institutions Operational: Transfers and Subsidies Monetary allocations Department Agencies and Accounts Social Security Funds Provincial Department Agencies National Department Agencies District Municipalities (by Province and by Function) Foreign Government and International Organisations Households Employee Social Benefits Social Security Payments Social Assistance Other Transfers (Cash) National Government National Revenue Fund Non-profit organisations Private Enterprises Provincial Government Public Corporations Higher Education Institutions Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

Understanding the Fund Segment Capital: Transfers and Subsidies Allocation in kind Department Agencies and Accounts Social Security Funds Provincial Department Agencies National Department Agencies District Municipalities (by Province and by Function) Foreign Government and International Organisations Households Employee Social Benefits Social Security Payments Social Assistance Other Transfers (Cash) National Government Non-profit organisations Private Enterprises Provincial Government Public Corporations Higher Education Institutions Capital: Transfers and Subsidies Monetary allocations Department Agencies and Accounts Social Security Funds Provincial Department Agencies National Department Agencies District Municipalities (by Province and by Function) Foreign Government and International Organisations Households Employee Social Benefits Social Security Payments Social Assistance Other Transfers (Cash) National Government Non-profit organisations Private Enterprises Provincial Government Public Corporations Higher Education Institutions Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

Understanding the Fund Segment Operational: Borrowing Current Annuity loans Bankers Acceptance Certificate Bank Overdraft Derivative Financial Liability Finance lease Government Loans Local Registered Stock Marketable Bonds Non-annuity loans Non-marketable bonds PPP Liabilities Securities Capital: Borrowing Non-Current Annuity loans Bankers Acceptance Certificate Derivative Financial Liability Finance lease Government Loans Local Registered Stock Marketable Bonds Non-annuity loans Non-marketable bonds PPP Liabilities Securities Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

Overview of the process for preparation of an mSCOA compliant budget Budget process timetable needs to incorporate mSCOA requirements including the timeframes to ensure quality review on mSCOA budgetary compliance; Finalise the process of unpacking the current general ledger or budget in terms of the Chart, (performed by the respective business units) which should form the foundation for the 2017/18 budget preparation by end of October 2016; Financial Management System Budgeting module to be utilised in preparing the detailed mSCOA budget from October 2016 (no longer prepared on excel spreadsheets); Review the project segment to identify all capital and operational projects relevant to the municipality and ensure that these are included and appropriately recorded in the IDP. Further include Region and Function for each project in the IDP; Upload the IDP to the Financial Management System and link each strategic objective and developmental priority to a project in the system; Each functional unit is to prepare their budget using a zero based approach with reference to supporting documentation such as repairs and maintenance plans, payroll information, operational project plans, asset registers, valuation roll etc.

Determining Funding Sources for the Budget Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

Determining funding sources for the Budget Validate all municipal sources of funding against the Fund Segment therefore ensuring that all sources have been identified Review own source revenue including any assumptions made to ensure that estimations are based on sound calculations with supporting working papers Tariff modelling using the costing segment is useful – helps determine if the municipality is under recovering on services or whether tariffs are significantly higher than costs incurred Baseline amount to be determined for each function should remain within the allocation. Any additional costs above baseline must be specifically motivated Utilise function revenue to fund function expenditure – shortfall generally funded from equitable share and property rates Funding sources must be physical cash that will be received in the budget year – no utilisation of future grant allocations Budgeted Cash Flow Statement to be prepared from the Fund Segment data using bank as an attribute/flag

Finalising the Budget in mSCOA Council needs to clearly direct projects undertaken in terms of IDP for each year – cannot determine adhoc projects during the year Competing priorities and insufficient funds – Budget reductions to be determined on a project level, and not an item level Budget calculations should be driven from subsystems (debtors, payroll, assets etc) Funded Budget is when the Revenue > Expenditure based on cash flow, including asset and liabilities amounts (Funded segment) Budget schedules will be automatically generated on the system but municipalities are required to complete manual schedules and monthly reporting for the interim to ensure accuracy – most systems currently support this functionality

Finalising the Budget in mSCOA Budget data strings must be submitted to Provincial and National Treasuries for review and validation Municipalities and entities are required to provide the work in progress draft budgets to Provincial and National Treasuries by January 2017 for comment Draft 2017/18 budget is to be tabled in mSCOA format to Council by 31 March 2017 Variations will need to be determined in line with budget policy of municipality and processed on the financial system before unbudgeted or insufficient budget items are processed Where municipalities intend to go live prior to 1 July 2017 – Budget for 2016/17 FY must be broken down in mSCOA Requirements and loaded onto the system in order to transact against this budget.

Finalising the Budget in mSCOA IDP includes all Capital & Operational Projects Budget alignment to the IDP IDP Alignment of mSCOA for Projects, Function and Region Segments Budget to be prepared using seven segments QUALITY REVIEW 2017/18 MSCOA COMPLIANT BUDGET Electronic integration of budget between subsystems Budget to be prepared electronically using budget tool IDP and Budget data strings to be uploaded to portal for NT/PT validation Budget based on Version 6 of mSCOA Chart Seven segments correctly applied

Common Business Process Changes Zero based budgeting applied, with expenditure and income being justified Principles of budgeting and planning will have to be reinforced – retrain and refresher courses Budgeting must be in compliance with GRAP Subsystems will need to be integrated, inclusive of budget – transactions recorded at lowest possible level in compliance with mSCOA No longer general account descriptions - General ledger accounts increased substantially Property rates and debtors will need to be raised and classified according to types of properties on valuation roll Repairs and maintenance no longer an item, it is a project – more detailed budgeting and planning

Common Business Process Changes No longer special programmes – programmes must be specific and identifiable Customer receipting of ad hoc payments – elimination of general accounts - specific to type of payment being received and therefore budgeted amounts should be allocated Service delivery transactions and associated budget will have to be recorded by ward or by suburb Municipality needs to identify between core and noncore functions Asset management transactions will need to be recorded in compliance with GRAP at the time of transaction – no longer year end breakdown (e.g. depreciation and impairment to be recorded monthly)

Planning for Business Process Change Acquire individual knowledge – Training and Reading Transfer of knowledge within the organisation Each function unit compares current budgeting and accounting processes with mSCOA requirements Implement the changes within the organisation – change internal controls, revise documentation, communicate changes One on one coaching – improves understanding and application Planning process - Each functional unit presents on proposed changes

THANK YOU! Contact Details: LG.SCOA@treasury.gov.za