Adjustment Budget Report

This adjustment budget has been compiled in terms ofSection 28 of the Municipal Finance Management Act (MFMA), read with Part 4 of the Municipal Budget and Reporting Regulations which deals with adjustment budgets of municipalities. Section 28(2) of the MFMA states that:

(2) An adjustments budget-

  1. must adjust the revenue and expenditure estimates downwards if there is material under-collection of revenue during the current year;
  2. may appropriate additional revenues that have become available over and above those anticipated in the annual budget, but only to revise or accelerate spending programmes already budgeted for (in other words, there should not be new projects or programmes in the adjustments budget)
  3. may, within a prescribed framework, authorise unforeseen and unavoidable expenditure [recommended] by the mayor of the municipality
  4. may authorise the utilisation of projected savings in one vote towards spending under another vote
  5. may authorise the spending of funds that were unspent at the end of the past financial year where the under-spending could not reasonably have been foreseen at the time to include projected roll-overs when the annual budget for the current year was approved by council
  6. may correct any errors in the annual budget; and
  7. may provide for any other expenditure within a prescribed framework

The following key factors were taken into consideration when preparing and compiling the 2015/16 adjustments budget, namely:

  1. The mid-year budget and performance assessment report compiled in terms of Section 72 of the MFMA
  2. The monthly budget statements published in terms of Section 71 of the MFMA
  3. The comments received from the KwaZulu-Natal Provincial Treasury on the 2015/16 approved budget.
  4. The submissions received from HODs
  5. Unforeseen and unavoidable expenditure incurred

Other key issues which were taken into consideration to ensure a Credible Budget were

  1. Funds were allocated to activities which are consistent with the revised IDP and vice versa ensuring the IDP is realistically achievable given the financial constraints of the Municipality.
  2. Objectives are achievable in terms of the agreed service delivery and performance targets.
  3. Financial estimates comprise of revenue and expenditure projections that are consistent with current and past performance and supported by documented evidence of future assumptions;
  4. The increased expenditure does not jeopardize the financial viability of the municipality i.e. ensures that the financial position is maintained within generally accepted budget limits and that obligations can be met in the short, medium and long term.
  5. The collection rate for services charges increased substantially.

The main challenges experienced during the compilation of the 2015/16 adjustments budget can be summarised as follows

  • The ongoing difficulties in the national and local economy, particularly the rising cost of living as measured by CPIX
  • A drastic increase of Electrification Counter-finding vote by more-than 200%
  • The need to reprioritise projects and expenditure within the existing resource given the cash flow realities of the municipality.

The rates and tariffs for various municipal services are not increased in this adjustments budget in line with Section 28(6) of the MFMA, however the rates were recalculated to arrive at an achievable amount based on actual received to date.

The 2015/16 adjustments budget will be available on the municipality’s website, and hard copies will be made available at municipal offices and municipal library.

The table below shows the additional operating revenues that are realistically anticipated and/ or confirmed

Revenue Type / Approved Budget / Adjusted Budget / Increase/ Decrease
Property Rates / R 10080000.00 / R 13087000.00 / R 3007000.00
Refuse Removal / R 981000.00 / R 981000.00 / R 0
Traffic Fines / R 168743.00 / R 168743.00 / R 0
Licences and Permits / R 1211000.00 / R 1211000.00 / R 0
Vat Refund / R 9252040.00 / R 5822334.00 / -R 3429706.00
Other Revenue / R 8309608.00 / R 8757262.00 / R 447654.00
Transfer-Operational Grants / R 78638000.00 / R 78638000.00 / R 0
Transfer- Capital / R 26074000.00 / R 26074000.00 / R 0
Total / R 134714391.00 / R 134739339.00 / R 24948.00

Table 1 above shows that the operating revenue in the adjusted budget increased by R 24948.00.

Table 2 below shows the application of the increase in revenue

Expenditure Type / Approved Budget / Adjusted Budget / Increase/ decrease
Employee Related cost / R 29 428 526 / R 29 165 276 / -R 36 753.00
Councillors Allowance / R 7 413 026 / R 7 413 026 / 0
Depreciation / R 5 000 000 / R 6 500 000 / R 1 500000.00
Other Materials/ Repairs and Maintenance / R 6 684 647 / R 5 901894 / -R 782 753
Other Expenditure/ General Expenses / R 37 543 608 / R 35 964398 / -R 1579210.00
Total / R 86 069807.00 / R 84944 594 / -R 898716.00

The comparison between Tables 1 and 2 shows that the operating income increases by R 24974.00 whereas the operating expenditure decreased by R 898 716.00. It should be noted that the significant increase of R 1.5 million in expenditure is attributable to the provision for depreciation and asset impairment. This amount is not cash and as such does not affect the funding of the budget.

With regard to capital funding, the municipality was allocated the MIG amounting to R21041000 million. Electrification Grant funding allocated was R 5 million from energy.

Explanatory notes to MBRR Table B1 - Budget Summary

  1. Table B1 is the adjustments budget summary and provides a concise overview of the municipality’s budget from all of the major financial perspectives (operating, capital expenditure, financial position, cash flow, and MFMA funding compliance)
  2. The table provides an overview of the amounts approved by Council for operating performance, resources deployed to capital expenditure, financial position, cash and funding compliance, as well as the municipality’s commitment to eliminating basic service delivery backlogs
  3. Financial management reforms emphasise the importance of the municipal budget being funded. This requires the simultaneous assessment of the Financial Performance, Financial Position and Cash Flow Budgets, along with the Capital Budget. The Budget Summary provides the key information in this regard
  4. An appropriate rates calculation was needed to adjust rates which was at 9 million (collection) during mid-year, which indicated the need of review of rates calculation. In the adjustment budget rates were reviewed and recalculatedfrom R 12 million to 16 million.
  5. Other Revenue has been drastically reduced/ decreased to R 15 million because of Vat refund figure which has been reduced to R5 million
  6. Interest on investment original budget was R 895000.00, increased to R 1.5 million. The decision to increase this vote was informed by investment figures and interest received to date.
  7. Penalties were not included in the original budget, R 160000.00 has been included for penalties.

Explanatory notes to MBRR Table B2 - Budgeted Financial Performance (revenue andexpenditure by standard classification)

  1. Table B2 is a view of the budgeted financial performance in relation to revenue and expenditure per standard classification. The modified GFS standard classification divides the municipal services into 15 functional areas. Municipal revenue, operating expenditure and capital expenditure are then classified in terms of each of these functional areas which enable the National Treasury to compile ‘whole of government’ reports.
  2. Table 5MBRR Table B3 - Budgeted Financial Performance (revenue and expenditure by municipal vote)
  3. BTO revenue has increased a bit because of Rates and interest on investment increase however affected by huge decrease of vat refund.
  4. A slight decrease in Corporate Services caused by Sundry income (Tender fees) and Insurance claims projected were higher than anticipated.
  5. A decrease in income for Protection Services for 2015/16 financial year affected the entire municipality income. This is as a result of suspension of some of licensing activities when theconstruction of urban roads was taking place and low fines collection rate.

Explanatory notes to MBRR Table B3 - Budgeted Financial Performance (revenue andexpenditure by municipal vote)

  1. Table B3 is a view of the budgeted financial performance in relation to the revenue and expenditure per municipal vote. This table facilitates the view of the budgeted operating performance in relation to the organisational structure of the municipality. This means it is possible to present the operating surplus or deficit of a vote; and
  2. The table shows that the BTO is the largest generator of revenue, particularly from Rates and service charges whereas technical Services department is the largest department incurring operating expenditure. The department is the largest consuming due to its department size as well as its responsibilities of service delivery.
  3. Human Resources department expenditure increased because of increase in Security service provision.

Table 6 MBRRTable B4 - Budgeted Financial Performance (revenue and expenditure)

Explanatory notes to Table B4 - Budgeted Financial Performance (revenue andexpenditure)

  1. After receiving comments from Treasury for a small/ minimum figure of deprecation, depreciation has been increased by R 1.5 million. Increase in deprecation is still not enough when compared to R 24 million audited financial statement figure.

Explanatory notes to Table B5 - Budgeted Capital Expenditure by vote, standardclassification and funding source

  1. Table B5 is a breakdown of the capital projects in relation to capital expenditure by municipal vote (single - year and single-year appropriations); capital expenditure by standard classification; and the funding sources necessary to fund the capital budget, including information on capital transfers from national and provincial departments.
  2. Single-year capital expenditure increase from R42.5 million to R49 million in the adjustment budget.
  3. An additional R 6 million has been added to fund capital projects that increases municipality’s own funding on capital projects to be R 23 million.
  4. Corporate Services: Technical department increased the total capital expenditure for the municipality.
  5. Increase is caused by the following
  • Electrification Counter funding R 5.3 million
  • Crèche R 700000.00

Table 8 MBRR Table B6 -Budgeted Financial Position

Explanatory notes to Table B6 - Budgeted Financial Position

  1. Table B6 is consistent with international standards of good financial management practice, and improves understandability for councillors and management of the impact of the budget on the statement of financial position (balance sheet)
  2. This format of presenting the statement of financial position is aligned to GRAP1, which is generally aligned to the international version which presents Assets less Liabilities as “accounting” Community Wealth. The order of items within each group illustrates items in order of liquidity; i.e. assets readily converted to cash, or liabilities immediately required to be met from cash, appear first
  3. Table A6 is supported by an extensive table of notes providing a detailed analysis of the major components of a number of items, including:
  • Call investments deposits
  • Consumer debtors
  • Property, plant and equipment
  • Trade and other payables
  • Provisions non-current liabilities
  • Changes in net assets; and
  • Reserves
  1. The municipal equivalent of equity is Community Wealth/Equity. The justification is that ownership and the net assets of the municipality belong to the community
  2. Any movement on the Budgeted Financial Performance or the Capital Budget will inevitably impact on the Budgeted Financial Position. As an example, the collection rate assumption will impact on the cash position of the municipality and subsequently inform the level of cash and cash equivalents at year end. Similarly, the collection rate assumption should inform the budget appropriation for debt impairment which in turn would impact on the provision for bad debt. These budget and planning assumptions form a critical link in determining the applicability and relevance of the budget as well as the determination of ratios and financial indicators. In addition the funding compliance assessment is informed directly by forecasting the statement of financial position.

Table 9MBRRTable B7 - Budgeted Cash Flow Statement

Explanatory notes to Table B7 - Budgeted Cash Flow Statement

  1. The budgeted cash flow statement is the first measurement in determining if the budget is funded.
  2. It shows the expected level of cash in-flow versus cash out-flow that is likely to result from the implementation of the budget.
  3. The net in cash held for the municipality was adjusted to R 39071 million.

Table 10 MBRR Table B8 - Cash Backed Reserves/Accumulated Surplus Reconciliation

Explanatory notes to Table B8 - Cash Backed Reserves/Accumulated Surplus Reconciliation

  1. The cash backed reserves/accumulated surplus reconciliation is aligned to the requirements of MFMA Circular 42 – Funding a Municipal Budget
  2. In essence the table evaluates the funding levels of the budget by firstly forecasting the cash and investments at year end and secondly reconciling the available funding to the liabilities/commitments that exist
  3. The outcome of this exercise would either be a surplus or deficit. A deficit would indicate that the applications exceed the cash and investments available and would be indicative of non-compliance with the MFMA requirements that the municipality’s budget must be “funded”
  4. Non-compliance with section 18 of the MFMA is assumed because a shortfall would indirectly indicate that the annual budget is not appropriately funded.
  5. The cash backed reserves total adjusted has accumulated surplus of R2.8 million.

Table 11 MBRR Table B9 - Asset Management

Explanatory notes to Table B9 - Asset Management

  1. Table B9 provides an overview of municipal capital allocations to building new assets and the renewal of existing assets, as well as spending on repairs and maintenance by asset class.
  2. The table shows that all of the capital allocations are for new assets.
  3. National Treasury has recommended that municipalities should allocate at least 40 per cent of their capital budget to the renewal of existing assets, and allocations to repairs and maintenance should be 8 per cent of PPE.
  4. As per this table the municipality is at 39.4%.

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