While several municipalities have improved their financial status over the past year, 86 of South Africa’s 278 municipalities were financially distressed as at June 30.

National Treasury’s latest report on local government’s finances, released this week, showed this was an improvement on the 95 financially distressed municipalities reported in the prior year.

However, this illustrated that municipalities were still struggling with ineffective governance structures, weak revenue management, limited multiyear budgeting, particularly as 34 municipalities were “almost classified” as financially distressed and would require “closer monitoring” in future.

“There are a few instances where there is improvement, but one may argue that challenges seem to outweigh the positive findings,” the Treasury said in its 'State of Local Government and Financial Management' report, outlining the common challenges experienced.

These included poor cash flow management, low capital spending on infrastructure, an increase in debtors, a lack of credible budgeting, limited revenue streams and ineffective governance structures, which undermined the administration of municipalities.

The State of Local Government and Financial Management also showed that many municipalities were experiencing persistent cash-flow problems – an indicator of severe underlying financial problems, as 40 municipalities recorded negative cash balances at June 30.

This emerged as Treasury reported a continued increase in the levels of irregular, unauthorised and wasteful expenditures.

Over the past three years, irregular expenditure jumped from R6.7-billion to R11.6-billion, while unauthorised expenditure by 170 municipalities remained substantial at R9.2-billion. Fruitless expenditure during the period reached R815-million.

Meanwhile, Treasury reported that 22 municipalities, mostly in the Western Cape and KwaZulu-Natal, attained unqualified opinion without findings during the 2012/13 financial year – the best performance in five financial years.

The number of unqualified audit opinions with findings declined from 112 in 2008/09 to 99 in the 2012/13 financial year, while qualified audit opinions increased from 48 to 78 over the same period.

The number of municipalities receiving disclaimers declined significantly from 105 in the 2008/09 financial year to 58 in 2012/13, which Treasury believed could be an indication that municipalities were “gradually getting acquainted with the legislation and other key prescripts”.

The report also pointed to the fluctuating patterns of adverse opinions, with ten municipalities recording adverse opinions in 2008/09, which declined to four in 2011/12 before increasing to eight during the 2012/13 financial year.

“[Also] of significance is the increase in outstanding audits over the past five years. For instance, during the first three years of the period under review, the outcome is nil, while three and 13 municipalities delayed their audits in 2011/12 and 2012/13 respectively,” the report noted.

Despite this, the number of outstanding audits remained below the level of the previous five years when, on average, 20 or more municipalities had their audits outstanding.

Treasury added that a direct correlation was found between the absence of a permanent municipal manager or CFO and the audit outcomes, with a significant number of those in the top jobs within the municipalities in an acting position.

Where both the municipal manager and the CFO were in acting positions, the report showed that five municipalities received unqualified opinions with findings, two municipalities received a qualified audit opinion, five local municipalities received a disclaimer opinion and one local municipality’s audit could not be finalised within the legislated period.

The report on the state of local government finances revealed that 47 municipalities – 17% – had acting municipal managers, while 44 – 16% – had acting CFOs.

Between 2012 and 2014, the number of municipalities with acting municipal managers decreased from 83 to 47, while the number of municipalities with acting CFOs declined from 75 to 44.

“The instances where both roles were in acting capacity have also halved from 37 to 18 municipalities,” the report said, noting that ongoing instability in municipalities continued to have a negative impact on service delivery to communities.

“The instability manifests at a number of levels, including the inability to make even basic managerial decisions, including delays in the appointment of service providers which could lead to low capital budget spending,” the report explained.

CAPITAL AND OPERATIONAL BUDGET SPENDING
The report recorded operational budget overspending above 25% at 64 municipalities, while 30 municipalities recorded overspending below 10%.

It also showed a general increase in the number of local municipalities underspending their operational budgets.

Thirty-three municipalities underspent their operational budget by less than 10%, while 32 municipalities underspent between 10% and 25% and 25 municipalities underspent their operational budgets by more than 25%.

“The trends reflected demonstrate that municipal councils adopt over optimistic operational budgets,” Treasury commented.

Meanwhile, the total adjusted capital infrastructure programme for the 2013/14 financial year was R61.8-billion, of which R48-billion, or 78%, was spent by June 30.

Metropolitan municipalities’ underspent their capital budgets by R3.9-billion during the year – a deterioration on last year’s underspending of R2-billion.

“Furthermore, a repeat observation from last year is that most metropolitans underspent their capital budgets between 10% and 30%. However, the number of districts that underspent capital budgets declined in this period.”