Ann12_Virement Policy_1819_May2018

CITY OF CAPE TOWN
ISIXEKO SASEKAPA
STAD KAAPSTAD

ANNEXURE12

VIREMENT POLICY

2018/19 Budget (May 2018)

City of Cape Town - 2018/19 Budget (May 2018)
Annexure 12: Virement Policy

CONTENTS

1. DEFINITIONS AND ABBREVIATIONS.2

2. PROBLEM STATEMENT.4

3. DESIRED OUTCOMES.4

4. STRATEGIC FOCUS AREAS.5

5. ROLE PLAYERS AND STAKEHOLDERS.6

6. REGULATORY CONTEXT.7

7. GUIDING PRINCIPLES.8

8. OPERATING BUDGET VIREMENTS.9

9. CAPITAL BUDGET VIREMENTS.13

10. PROCESS AND ACCOUNTABILITY.14

11. COST CONTAINMENT MEASURES - MFMA CIRCULAR NO 82.14

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1. DEFINITIONS AND ABBREVIATIONS
Abbreviations

MFMA: Municipal Finance Management Act (Act 56 of 2003)

CFO: Chief Financial Officer

Definitions

Accounting Officer (MFMA)

(a) in relation to a municipality, means the municipal official referred to in
section 60”. The municipal manager of a municipality is the accounting
officer of the municipality for the purpose of this Act.

Approved Budget (MFMA)
means an annual budget-

(a) approved by a municipal council; or

(b) approved by a provincial or the national executive following an
intervention in terms of section 139 of the Constitution, and includes
such an annual budget as revised by an adjustments budget in terms of
section 28;”

Chief Financial Officer (MFMA)

“a person designated in terms of section 80(2)(a)”. A chief financial officer
is designated by the accounting officer of the municipality

Cost Centre

Cost centre is a cost collector which represents a logical point at which cost
(expenditure) is collected and managed by a responsible cost centre owner.
Cost element

Cost elements distinguish between primary and secondary cost elements.
Primary cost elements are expenditure items where costs are mainly
generated as a result of transactions with external service providers.
Secondary cost elements are utilised to reallocate cost by means of
assessments, internal billing or activity based recoveries.

Expenditure and Revenue Categories

Prescribed uniform classifications and formats for revenue and expenditure
items in compliance with the Municipal Budget and Reporting Regulations of
2009, mSCOA regulations and any relevant MFMA Circular issued by National
Treasury.

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Senior Managers

Section 56 of the Municipal Systems Act states inter alia “Appointment of
managers directly accountable to municipal managers - (a) a municipal
council, after consultation with the municipal manager, appoints a manager
directly accountable to the municipal manager...”

Financial year

The 12-month period between 1 July and 30 June.

Vote (MFMA)

(a) one of the main segments into which a budget of a municipality is
divided for the appropriation of money for the different departments
or functional areas of the municipality; and

(b) which specifies the total amount that is appropriated for the purposes
of the department or functional area concerned.”

A vote in the City of Cape Town is set at directorate level, with the exception
of tariff-funded services due to the closed account nature. In votes where
there are rates and tariff funded components within a vote, virements are only
allowed within the rates and tariff components respectively.

Virement

The process of transferring an approved budgetary provision from one
operating cost element or capital approval object to another within a vote or
tariff service during a municipal financial year.

Capital Approval Object is the level at which a project or programme is
approved by Council. Capital Approval Objects are linked to the following:

a. Major project - A project which consists of multiple coordinated,
related, interdependent and controlled components undertaken to
achieve an objective conforming to specific requirements.

b. Programme - Multiple independent projects of a similar nature
managed in an overall coordinated approach and approved as part
of a programme.

c. Routine Programme - Routine Programmes (Bulk Votes) are
defined as expenditure on routine, repetitive work essential for the
expansion of infrastructure and Plant & Equipment.

d. Project - A project is undertaken to achieve a specific objective and
conforms to specific requirements.

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2. PROBLEM STATEMENT

2.1 Webster's New Millennium™ Dictionary of English defines “Virement” as “a
regulated transfer or re-allocation of money from one account to another,
especially public funds. ”

2.2 A virement represents a flexible mechanism to effect budgetary amendments
within a municipal financial year.

2.3 Changing circumstances and priorities during a financial year may give rise to
a need to virement (transfer) funds within Votes, as defined in the Municipal
Finance Management Act 56 of 2003 (MFMA). The treatment of such instances
may, however, be dependent on whether an adjustments budget is required or not.

3. DESIRED OUTCOMES

3.1 The aim of this policy is to give senior managers of directorates, greater flexibility
in managing their budget.

3.2 The Chief Financial Officer has a statutory duty to ensure that adequate policies
and procedures are in place to ensure an effective system of financial control.
A municipality’s virement policy and its underlying administrative process within
the system of delegations is one of these controls.

3.3 Section 81 (1 )(d) of the MFMA states inter alia that “The chief financial officer of
a municipality-...must advise senior managers and other senior officials in the
exercise of powers and duties assigned to them in terms of section 78 or
delegated to them in terms of section 79;”

3.4 It is the responsibility of each senior manager, to plan and conduct assigned
operations in a manner not to spend more funds than budgeted for and to ensure
that funds are utilised effectively and efficiently.

3.5 Section 78(1 )(b) of the MFMA states inter alia, “Each senior manager of a
municipality and each official of a municipality exercising financial management
responsibilities must take all reasonable steps within their respective areas of
responsibility to ensure-...(b) that the financial and other resources of the
municipality are utilised effectively, efficiently, economically and transparently;”

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3.6 This policy aims to provide guidelines to senior management in the use of
virements as a mechanism in their day-to-day management of their budgets. In
addition, it specifically aims to empower senior managers with an efficient
financial - and budgetary system to ensure optimum service delivery within
the current legislative framework of the MFMA and the City’s system of
delegations.

4. STRATEGIC FOCUS AREAS

The strategic focus areas of the City are enshrined in the City’s Integrated
Development Plan (IDP) known as the five pillars, namely, the opportunity city,
the well-run city, the safe city, the caring city and the inclusive city.

This policy supports the following strategic focus area.

Well-run City

Objective 5.a: Operational sustainability.

The five strategic focus areas provide a solid foundation for service delivery. The
strategic focus areas are the opportunity city, the safe city, the caring city and the
well-run city.

The City has also identified 11 priorities that span the five strategic focus areas.
By elevating these 11 priorities, it is expected that the strategic focus area
outcomes will be accelerated.

This policy supports the following strategic focus area:

Well-run City: This objective is about delivering services and creating value for
customers in an operationally sustainable manner based on evidenced led
decision making so that the City can remain financially stable and resilient to
shocks in a changing environment.

Objective 5.1: Operational sustainability.

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5. ROLE PLAYERS AND STAKEHOLDERS

5.1 Directorates and departments

• Responsible to initiate and submit completed virement to
Budgets department with required approval in terms of
System of Delegations.

• Responsible to notify budget department of completed
application for verification, approval and processing.

• To process virements for the approval by Director Budgets, within
the upper limit of virements for the operational votes of Executive
Directors/ Directors and authorized cost centre managers within a
single vote.

• To process virements for the approval by Director Budgets, within the upper limit of
virements within capital votes of Executive Directors/ Directors.

• Line finance manager must verify financial correctness and check that motivations
are sound.

5.2 Director Budgets

• To approve all virements in terms of the System of Delegations

• To override limitations within this policy

5.3 Executive Mayor

• To determine the maximum amount that the City Manager may authorise in
respect of the transfer of operational and capital expenditure (within a single
budget vote).

• To authorise the transfer of operational and capital expenditure (within a single
budget vote) over and above the maximum amount determined above.

5.4 Mayoral Committee Member for Finance

• To authorise the transfer of operational and capital expenditure (within a single budget
vote) in terms of System of Delegations.

5.5 Mayoral Committee Member for Finance

• The relevant MayCo member where applicable must be consulted about the
application for the virement of funds in terms of Council’s System of delegations.

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5.6 Budget department

• Responsible to check and verify financial correctness and submit virement
application to director budgets for approval.

• The relevant section within the budget department will be responsible for
the processing of the virement application after approval in terms of System
of Delegations.

6. REGULATORY CONTEXT

The MFMA regulates as follows the incurring of expenditure against budgetary

provisions.

Section 15 - Appropriation of funds for expenditure

“A municipality may, except where otherwise provided in this Act, incur

expenditure only-

(a) in terms of an approved budget; and

(b) within the limits of the amounts appropriated for the different votes in an
approved budget. ”

Unauthorised Expenditure (MFMA Definition)

“in relation to a municipality, means any expenditure incurred by a municipality

otherwise than in accordance with section 15 or 11(3), and includes-

(a) overspending of the total amount appropriated in the municipality’s
approved budget;

(b) overspending of the total amount appropriated for a vote in the approved
budget;

(c) expenditure from a vote unrelated to the department or functional area
covered by the vote;

(d) expenditure of money appropriated for a specific purpose, otherwise than
for that specific purpose;

(e) spending of an allocation referred to in paragraph (b), (c) or (d) of
the definition of "allocation" otherwise than in accordance with any
conditions of the allocation; or

(f) a grant by the municipality otherwise than in accordance with this Act;”

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Overspending (MFMA Definition)

“(a) in relation to the budget of a municipality, means causing the operational or
capital expenditure incurred by the municipality during a financial year
to exceed the total amount appropriated in that year's budget for its
operational or capital expenditure, as the case may be;

(b) in relation to a vote, means causing expenditure under the vote to exceed
the amount appropriated for that vote; or

(c) in relation to expenditure under section 26, means causing expenditure
under that section to exceed the limits allowed in subsection (5) of that
section;”

Section 71 (1)(g)(iii) states inter alia “(1) The accounting officer of a municipality
must by no later than 10 working days after the end of each month submit to the
mayor of the municipality and the relevant provincial treasury a statement in
the prescribed format on the state of the municipality's budget reflecting the
following particulars for that month and for the financial year up to the end of that
month:...(g) when necessary, an explanation of-...(Hi) any remedial or corrective
steps taken or to be taken to ensure that projected revenue and expenditure
remain within the municipality's approved budget....”

7. GUIDING PRINCIPLES

7.1 The virement process represents the major mechanism to align and take
corrective (financial / budgetary) action within a directorate (vote) during a
financial year.

7.2 In terms of Section 17.2 of the MFMA a municipality’s budget is divided into
an operating and capital budget and consequently no virements are permitted
between Operating and Capital Budgets.

7.3 Virements across directorates (votes) are not permissible and will only be
effected via an adjustment budget.

7.4 Virements between Tariff- and Rate-funded functions are not allowed as Rates
and Trading funded services are balanced separately and transfers across these
services will result in an unbalanced budget between Rate- and Tariff-funded
services. Such transfers can only be adopted via an adjustment budget (per
MFMA Section 28).

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7.5 In order for a directorate (vote) to transfer funds from one cost element or capital
approval object to another cost element or capital approval object, an
underspent has to be identified within the monetary limitations of the approved
“giving” cost element or capital approval object allocations.

7.6 Sufficient, (non-committed) budgetary provision should be available within the
“giving” vote’s cost element or capital approval object concerned to give effect to
the budgetary transfer (virement). The transferring function must clearly indicate
to which cost element or capital approval object the budget provision will be
transferred to and provide a clear motivation why an underspent exists on the
sending element or capital approval object and the reason for the additional
requirement on the receiving element or project.

7.7 A proposed budgetary amendment, which will result in a change to the approved
total budget quantum or any other budgetary amendments not covered in this
policy, must be considered for adoption via an adjustments budget (per MFMA
Section 28).

7.8 Virements are allowed on previously approved projects, where expenditure took
place in prior years, but where final payments could not be effected due to the
exceptional circumstances.

8. OPERATING BUDGET VIREMENTS

8.1 Budgetary allocations, adopted by Council for special purposes to which specific
council recommendations apply and which result from specific resolutions
adopted; are not allowed to be used as a source of virementation subject to
approval by Director Budgets.

Sound motivations should be provided for all virements

8.2 Specific virement limitations:

8.2.1 Employee related costs

(a) Virements are allowed between cost elements within this expenditure
category.

(b) Virements to and from this expenditure category are subject to the approval
of the Director: Budgets.

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(c) Virements are not allowed on the following elements but budgetary
alignments within the same elements are allowed:

(i) Unemployment Insurance Fund, Group life, Leave Pay, Long service
awards.

8.2.2 Remuneration of Councillors

(a) Virements within this expenditure category are allowed.

(b) No virements to and from items within this expenditure category are
allowed.

8.2.3 Contracted Services, Operational Expenditure and Other Materials

(a) Virements within or across these expenditure categories are allowed.

(b) Virements are allowed within expenditure items below and cannot be used as
source of funding

(c) Training related expenditure, Bargaining Council levy, Skills development levy,
Insurance related provisions, Contributions to Pensioners (Ex Gratia),
Provision for post-retirement medical aid, Continued Members.

(d) Virements are not allowed on the following elements:

(i) CIDS/MIDS, Capital Expenditure-relate, VAT, Transfers to and from
Insurance Fund, Transfers to and from Housing Fund.

(ii) Depreciation & Asset impairment, Debt Impairment

(iii) Scrapping of Assets/Stock and Loss on Sale of Assets

(iv) Bulk Purchases

(v) Finance Charges

(vi) Indigent Relief

(vii) Income Forgone

(viii) Appropriation Accounts

(e) Specific limitations applicable to repairs and maintenance provisions

(i) Repairs and maintenance provisions may not be used as a source for
virements.

(ii) Virements to increase repairs and maintenance provisions are
allowed from cost elements within and across Contracted
Services, Operational Expenditure and Other Materials
Virements on repairs and maintenance provisions can be only
processed via internal orders.

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8.2.4 Transfers and Grants (Grants and Sponsorships paid)

a) No virements are permitted to and from Grants-ln-Aid (GL 457100):
Grants-in-Aid Policy, except if supported by the Grants-ln-Aid
Committee (in line with the Grants-in-Aid Policy) and approved by
Council.

b) Virements on Grants/Sponsorships (GL 457200) are permitted only if
recommended and approved by Council (in line with the Grants-in-Aid
Policy) or the relevant delegated authority (in line with the System of
Delegations).

c) Virements to Sponsorships - Events (GL 457300) are permitted as long as
the total allocation is not exceeded as supported and recommended by the
relevant delegated authority.)

d) Virements from Sponsorships - Events (GL 457300) are permitted where:

(i) events are cancelled or scaled down,

(ii) savings on approved events are realised or;

(iii) For the reallocation of budgetary provision related to direct event
expenditure and internal service charges.

(iv) supported and recommended by the relevant delegated authority

e) Virements to and from Relief and Charitable contributions 457400 (Seel 2 of

MFMA) are permitted only if recommended and approved by Council resolution

or the relevant delegated authority.

8.3 Revenue

No virements allowed on Revenue elements from own revenue sources (internal revenue
sources).

Amendment to revenue provisions, must be adopted via an adjustments budget.

Virements on revenue elements funded from external grants are allowed, within the same
funding source and Vote, subject to the conditions of the grant.

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8.4 Secondary Operating Cost Elements

(a) No virements are permitted between Primary and Secondary cost
elements.

(b) Virements are allowed within the same secondary cost elements. The service

requestor and service provider must both endorse

such virements.

(c) Virements on Internal Utilities and Bulk Internal Utilities are permissible, on
condition that both revenue and expenditure element are amended
simultaneously and the period budgets are in sink.

(d) Virements are only permitted within the same cost element in the following
categories, provided that total approved budget on the cost element is not
increased:

(i) Activity Based Recoveries

(ii) Internal Utilities

(iii) Bulk Internal Utilities

(e) Virements are not permissible ©n Support Service Charges elements.

(f) No virements permitted on departmental insurance premiums, COID or
Internal Capital Charges,

8.5 Ward Allocations Projects

All conditions under” Operating Budget Virements” section above should be met,
as well as the following when virementing between ward allocation projects

(a) Only virements between existing projects approved by Council, within the same

Subcouncil and within the same directorate will be permitted.

(b) Virements will only be considered if supported by the relevant Subcouncil (Subcouncil
resolution), project managers and directorate/department finance managers.

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9. CAPITAL BUDGET VIREMENTS

9.1 Only virements which relate to capital approval objects, approved as part of
annual or adjustments budgets, will be permitted.

9.2 No virements of which the affect will be to add “new” capital approval objects onto
the Capital Budget, will be allowed, with the exception of those associated with
insurance claim settlements.

9.3 Should the total project cost (TPC) of an individual project be increased by a
virement, the amended TPC must be included in the next available Adjustments
Budget opportunity or draft budget process, unless 9.4 applies.

9.4 No virement will be allowed, on an individual or major project where the total
project cost is increased and the project will be completed in the currentfinancial
year, unless the amended TPC can be approved in a subsequent adjustment
Budget. If no further adjustment budget process is available, this amendment can
be done via a report to Council.

9.5 Virements must be between capital approval objects of similar major funding
sources (e.g. EFF <-► EFF).

9.6 Implementation of the capital project from which funds are viremented may not
be prejudiced (i.e. must not hinder completion of the capital project).

Motivations for virements should clearly state why funds are available on the sending
approval object and the reason why the additional funds are required on the receiving
approval object.

9.7 Secondary Capital Cost Elements:

(a) Virements are permissible only within the same cost elements of different projects,
(i) The service requestor and service provider must endorse such virements.

(b) Proposed secondary capital expenditure virements must be approved by the
Director: Budgets. No virement will be approved which negatively impacts on
secondary cost plans; i.e. no virement will be approved from a sender WBS
element where the remaining overall budgetary provision on the sender WBS
element is insufficient to cover the approved secondary cost plan.

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9.8 Ward Allocations Projects:

Only virements between existing projects approved by Council, within the same
Subcouncil, and within the same directorate will be permitted,

Virements will only be considered if supported by the relevant Subcouncil (Subcouncil
resolution), project managers and directorate/department finance managers of the
projects involved

Motivations for virements should clearly state why funds are available on the sending
approval object and the reason why the additional funds are required on the receiving
approval object.

10. PROCESS AND ACCOUNTABILITY

10.1 Accountability to ensure that virement application are completed in accordance
with Council’s virement policy, system of delegations and are not in

conflict with the directorate’s strategic objectives and rests with the head of the
relevant directorate.

10.2 Duly completed virement applications is to be effected by the Corporate Budgets
department.

10.3 Virements approved and processed will be reported for information to the
Executive Mayor on a quarterly basis or as part of an adjustments budget.

11. COST CONTAINMENT MEASURES - MFMA CIRCULAR NO 82

National Treasury MFMA Circular No 82 Annexure A presents cost containment
measures that accounting officers and chief finance officers must consider in order
to contain operational costs and eliminate non-essential expenditure.

Cost containment measures will be applicable on various items as indicated in
MFMA Circular No 82. The following is applicable

1) Virements in the elements/expenditure items below are subject to the
Executive Director/Commissioner/City Manager’s support.

I. Consultants

II. Office furnishing

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2) Virements to top up the following expenditure items will be reviewed and
motivations duly scrutinised.

I. Travel and subsistence

II. Vehicle Hire

III. Use of credit and debit cards

IV. Catering costs

V. Events, advertising and sponsorships

VI. Conferences, meetings, study tours, etc.

VII. Staff study, perks and suspension costs

12. EVALUATION AND REVIEW

12.1 This policy shall be implemented once approved by Council.

12.2 This policy must be reviewed on an annual basis.

12.3 Changes in and legislation must be taken into account for future amendments

to this policy.

12.4 Any amendments to the policy must be submitted to Council for approval.

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