Presentation to Local Government Portfolio Committee

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Presentation to Local Government Portfolio
Committee 11 March 2008 by the Chief Executive
Officer, Mr. Xolile George
SALGA BUDGET 2008/9 to 2010/11 MTEF Period
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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

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Purpose of Presentation

• The purpose of this report is to
• Present to the Portfolio Committee on Local
  Government SALGAs 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.

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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 SALGAs
  budget for the 2007/8 and still make-up the major
  revenue stream for SALGA in the 2008/9 budget
  (66).
• SALGAs 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 SALGAs cash flow
  problems in the 2006/7 financial year.

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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 NMAs 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
curtailed during 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.
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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 SALGAs Strategic Plan amounted to over R 70
million, of which only R 37 million could be
funded from current resources.
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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.
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WHY should the challenges of the current funding
model be addressed

• Why should these strategies be considered?
• SALGAs 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.

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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)
PECs and Finance and Corporate Services Working
Groups requires that Budget Lekgotlas be
convened so as to ensure that organisation-wide
cohesion is attained for the successful
implementation of SALGAs strategic key
performance areas. All of these programmes and
interventions require resources which at current
funding levels must be curtailed to balance the
budget.
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Summary Budget 2008/9
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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.
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Summary Budget 2008/9
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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.
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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

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Sensitivity Analysis

• The existing funding model is inadequate to
  satisfy all of SALGAs 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.

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SensitivityAnalysis
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SensitivityAnalysis
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Projected Financial Performance
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Revenue Distribution
Other income increases by over 100 due to
anticipated bad debts recovery written-off during
GALAs 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.
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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.

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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

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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 SALGAs strategic
  objectives.
• Consulting fees R3.6 mil increase due to
  escalating Auditor-Generals 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.

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Programme Costs
Basis of Allocation

• 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

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Non-Operating Expenditure / Income

• In line with the revised SALGAs 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.

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Projected Financial Position
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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 SALGAs future financial
  sustainability, alternative mechanisms to
  diversify SALGAs 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.

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Projected Cash Flow Statement
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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.

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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

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Outstanding Membership Levies As At 29 Feb 2008
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Thank You