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Financing Operating Budget of Local Government
- 1. Financing the Operating Budget of Local Governments Strengthening The Financial Foundation of Local Government Training of Trainers Workshop June 4- 15 2007 Nadi, Fiji Based on Financial Management Training Series- UNHSP Dr Ravikant Joshi
- 2. Relationship of FOP with other aspects Financial Policy Making Financial Planning Policy Citizens Participation Policy Evaluating Financial Condition Operating Budget Policy Asset Management Policy Performance Measurement Policy Accounting Policy Financing CIP Policy Capital Investment Plan Policy Financing Op. Budget Policy Procurement When and how LG officials will be held accountable for use of resources Help the LG determine future use of resources Define when, where, why and how citizens should participate When financial problems are beginning, an early warning system How the LG will use current year resources Evaluate ability of taxes, fees to fund the delivery of services How LG officials will provide capital investment to community Use of current and long term financing for capital investment Foundation for accounting, reporting, finance and budgeting system Determine how LG resources will be spent Helps to determine best use of its Assets
- 3. “all of the functions that go into estimating, collecting, administering and investing revenues to ensure that there are sufficient monies available on an on-going basis to finance the operating budget the yearly plan for accomplishing goals and objectives of the LG through day-to-day operations.” “Financing Op Budget” Fiscal Equivalence Segregation of Duties Citizen Participation no one person should ever be placed in a situation to carry out or conceal an error or irregularity without timely detection by others the normal course of carrying out their duties and responsibilities. citizens-voters- consumers should pay for what they get and get what they pay for” Financial Planning and Forecasting GFS Revenue Classification Performance Measures
- 4. IMF’s GSF Revenue Classification Revenue – is an increase in net worth resulting from a transaction. Four main sources for general governments ◼ Taxes and other compulsory transfers imposed by government units ◼ Property Income derived from ownership of assets ◼ Sales of goods and services and ◼ Voluntary transfers received from other units
- 5. GFS Revenue Classification System 1 Revenues 11 Taxes ◼ 111 Taxes on income, profits, and capital gains ▪ 1111 Payable by individuals ▪ 1112 Payable by corporations and other enterprises ▪ 1113 Unallocable ▪ 112 Taxes on payroll and workforce ◼ 113 Taxes on property ▪ 1131 Recurrent taxes on immovable property ▪ 1132 Recurrent taxes on net wealth ▪ 1133 Estate, inheritance and gift taxes ▪ 1134 Taxes on financial and capital transactions ▪ 1135 Other nonrecurrent taxes on property ▪ 1136 Other recurrent taxes on property ◼ 114 Taxes on goods and services ▪ 1141 General taxes on goods and services ▪ 11411 Value-added taxes ▪ 11412 Sales taxes ▪ 11413 Turnover and other general taxes on goods and services ▪ 1142 Excises ▪ 1143 Profits of fiscal monopolies ▪ 1144 Taxes on specific services 1145 Taxes on use of goods and on permission to use goods or perform activities ▪ 11451 Motor vehicle taxes ▪ 11452 Other taxes on use of goods and on per mission to use goods or perform activities ▪ 1146 Other taxes on goods and services ◼ 115 Taxes on international trade and transactions ▪ 1151 Customs and other import duties ▪ 1152 Taxes on exports ▪ 1153 Profits of export or monopolies ▪ 1154 Exchange profits ▪ 1155 Exchange taxes ▪ 1156 Other taxes on international trade and transactions ▪ 116 Other taxes ▪ 1161 Payable solely by ▪ business ▪ 1162 Payable by other than business or unidentifiable
- 6. Revenue Structure Goals Basic goals that the revenue structure should attempt to achieve ◼ Acceptability ◼ Adequacy and Stability ◼ Self Sufficiency ◼ Cost Efficiency ◼ Revenue Diversity ◼ Equity ◼ Economic Neutrality ◼ Administrative Feasibility Revenue Source Rate Political Acceptability Yield Adequacy Admn Feasibility Revenue Diversity Economic Neutrality Summary Revenue Evaluation Matrix Who collects local taxes is not very important but who decides them
- 7. Typical LG Revenues User Charge and Fees Taxes Franchise Agreements Property Taxes Excise Taxes Income Taxes Consumpt ion Taxes Grants Service Fees Public Prices Specific benefit taxes BOT Conces sion Op Contra ct Betterment/ Special Assessment PPP
- 8. Learning Application Go to Page No 230, Vol 2
- 9. Revenue Structures for Developing Countries Most of LGs simply do not have the flexibility or autonomy to determine what revenues are available to them, at what level. It is some higher level of government that is making these decisions. In a long term you probably will have the opportunity to influence decisions that can change LG revenue options Use revenue evaluation matrix presented earlier
- 10. Learning Application Go to Page No 232, Vol 2
- 11. Cost Finding- Framework for Setting Fees Costing ◼ looks at the cost of all resources used to provide services rather than expenditures made to operating budgets ◼ includes all costs of providing a service, not just those found in the budget or statements ◼ Focuses on the cost of the resources used to provide a service during a given period of time regardless of when cash disbursements made to purchase these resource Statutory Restriction Ability to Pay Administrative Costs of Billing Collection Costs Negative effects of charging for service Cost of Capital
- 12. Benefits of cost finding analysis Setting fees for services Maintaining the appropriate cost recovery level Choosing among alternative methods Demonstrating Identifying the causes of problems Identifying components
- 13. Steps in Cost Finding Determine Responsibilities Make cost study decisions Collect Cost information Use Results Price Service Improve Efficiency of service Improve contracting decisions
- 14. Short Term Financing Through ◼ Commercial banks ◼ Central government ◼ Underwriters By ◼ Direct bank loans ◼ Bond market Step 1 Assess Current Situation of LG Step 2 Develop Plan Step 3 Determine borrowing amount Step 4 Maintain relationship with bank Steps for Short-Term Financing – when and how much
- 15. Cash Budgeting for Op Budget Types of Cash Budgets ◼ Annual— projects cash flow and cash position on a monthly basis. The annual operating and capital investment budgets are used to determine the amount of cash needed for the month’s operations (payroll, supplies, materials, contract payments, capital outlay, etc.) and the excess cash available to purchase securities and to estimate interest earnings for the year. ◼ Monthly— provides estimates of cash inflows, disbursements, and resulting cash position on a weekly basis. These projections are used to monitor the annual cash budget and to make investment decisions with investments securities maturing in seven to ninety days. ◼ Weekly— estimates cash flows and cash position on a daily basis. Use these estimates for closely monitoring monthly cash flows and making investment decisions on securities maturing from overnight up to seven days. Daily monitoring of cash position can improve opportunities and lead to greater earnings.
- 16. Preparing a Cash Budget Select Approach Project Revenues Project Expenditures Prepare Cash Budget Apply Cash Budget Update Cash Budget Simple approach- Use bank statements- daily, weekly, monthly Complex approach- 2-3 year historical database Prepare 3 year receipt history Prepare monthly budget Adjust cash revenue projections Payroll Service/ Supply costs Debt service costs Capital investment outlay costs
- 17. Learning Application Go to Page No 253, Vol 2
- 18. Disbursement Techniques Cash Payments Bank Transfers Move funds between banks electronically over dedicated telephone lines Provide funds to pay employees or suppliers without bank accounts. Move funds between the LG bank accounts or to other bank accounts based on an “Order to Pay.” Internal Bank Transfers Disbursement Accounts Concentra tion Account increasing interest earnings by centralizing all LG monies in a single bank account. Direct Deposit direct deposit of payroll and payments to contractors Controlled Disburse ment account LGs can issue checks and establish a bank account outside of the local community thru commercial banking system
- 19. Learning Application Go to Page No 256, Vol 2
- 20. Revenue Survey Determine Responsibilities Design questionnaire Distribute questionnaire Analyse Data Prepare Report Staff Person Consultant Citizens’ Committee
- 21. Learning Application Go to Page No 260, Vol 2
- 22. Policies- Samples Revenue Collection Policy Delinquency Policies Revenue Structure Grants Security Investment Policies Expenditure Policies Reporting Systems Bank Relations Administrations Policies
- 23. Learning Application Go to Page No 263, Vol 2
- 24. Benefits Provides additional revenues through investment of idle or excess cash Forestalls need to raise taxes and fees, Reduces and may eliminate the need for short- term borrowing, Saves interest costs on borrowed money, Minimizes the cost to the LG of banking services, Improves the creditworthiness of the LG, Reduces transaction costs by having sufficient cash on hand, Improves the relationship with suppliers and contractors by paying bills in a timely manner, and Avoids penalty (late charges) costs that arise from being short of immediately available cash and not paying bills on time.
- 25. Obstacles and Risks Resistance to Change Time Required Lack of revenue Lack of knowledge of concepts and practices Few standards and benchmarks Inadequate accounting systems Legal restrictions
- 26. Learning Application Go to Page No 267, Vol 2
- 27. Advanced Financing Information Cash Management Investing Excess cash Internal Controls