The troubled Amathole district municipality (ADM) has been warned it faces danger of losing some of its funding from the national government if it fails to deal with unauthorised, irregular and wasteful expenditure.
This is while the municipality has been red-flagged by National Treasury for adopting an unfunded budget for the medium-term revenue expenditure framework period.
An unfunded budget is a financial plan where the total planned expenditures exceed the expected revenue and available cash.
This means an organisation has committed to spending money on projects and services without having a realistic and confirmed source of income to pay for them.
The consequences can include legal non-compliance, risks to service delivery and financial instability.
A confidential letter from National Treasury, dated October 3, to municipal manager Bhekisisa Mthembu, warned of challenges ADM would face as a result of adopting an unfunded budget.
National Treasury also warned that should ADM fail to deal with its unprocessed expenditure, it risked losing funds in terms of section 216 (2) of the constitution.
The section allows national government to withhold funds from a municipality if it commits a serious or persistent material breach of any measures of the Municipal Finance Management Act (MFMA).
The letter was confirmed on Friday by ADM spokesperson Sisa Msiwa, who said it “highlights concerns over our unfunded 2025/26 MTEF budget”.
“The ADM’s total operating and capital budget for this financial year stands at R2.6bn, adopted due to persistent revenue challenges, including low collection rates, and historical arrears with bulk suppliers like Amatola Water Board,” Msiwa said.
“This pragmatic approach ensures we maintain essential services, such as water and sanitation for our population of 871,601, without immediate cuts that could harm communities.
“Given our proactive commitment and ongoing collaboration with national and provincial treasuries, it’s unlikely that funds will be withheld.”
ADM views the engagement with National Treasury as a positive step towards stronger financial governance and accountability.
In the letter signed by National Treasury’s chief director of local government budget analysis, Jan Hattingh, the municipality was told to submit soon their updated budget funding plan, “indicating the corrective measures that will be implemented to achieve a funded budget within a period of three years”.
“Our records show that your municipality has adopted an unfunded budget for the 2025/26 period which is in contravention with section 18 of the MFMA,” Hattingh wrote.
“The adoption of an unfunded budget is against the resolutions taken by both the August 2021 budget council and August 2020 budget forum.
“It was observed over the previous year that adopting an unfunded budget is indicative that the municipality will experience cash flow challenges during the year, which ultimately contributes to a transgression of the legal prescripts for payments to creditors within 30 days of receiving the invoice as per section 65 (2)(e) of the MFMA.
“The practice of municipalities not paying their bulk suppliers is now placing the financial viability of large state-owned enterprises at risk.”
Municipalities that have adopted an unfunded budget have been forced by Treasury to later adopt budget funding plans to outline how they would turn their financial woes around.
Hattingh said it had been noted by National Treasury that ADM had adopted unfunded budgets in previous years, and later adopted a budget funding plan.
However, he added that it had been observed over the years that municipalities were adopting such budget funding plans “as a mere compliance exercise”, and that there was “very little progress made to turn around from an unfunded to a funded budget position”.
While Hattingh said his institution would no longer accept any new unfunded budgets for the 2025/26 financial year, he urged ADM to submit their updated budget funding plan for the previous years.
Such plans, Hattingh said, should indicate corrective measures that would be implemented to achieve a funded budget.
“This may include measurable targets in terms of improvement in the collection rate and cost containment initiatives,” he said.
“The municipality, by implication the accounting officer and ultimately the municipal council, must ensure that all steps are taken to rectify this situation.”
“This may require the municipality to make unpleasant and unpopular decisions regarding operating revenues and expenditure projections immediately.
“The National Treasury acknowledges that the municipality is presented with several dynamic challenges in achieving a funded budget status and that collection levels are compromised.
“It is therefore critical that expenditure is aligned to realistic collection levels.”
ADM’s failure to process some of their expenditure, Hattingh said, would force National Treasury to take appropriate steps, which includes the stopping of funds.
“Failure to resolve these transgressions can be construed as an act of financial misconduct,” Hatting warned.
“If the municipal manager and CFO fail to comply with the above directive, this will be regarded as a deliberate contravention of the MFMA, and National Treasury reserves the right to lay charges of financial misconduct against these officials.”
Msiwa said: “While ADM has faced similar unfunded budgets in previous years, largely due to these revenue and debt constraints, significant progress has been achieved through our budget funding plan, which targets revenue improvements and cost controls to reduce the funding gap annually, and achieve a fully funded position within the next three-year cycle.
“ADM is making strong strides, in servicing debts and creditors effectively, and holding over R100m in reserves, as clear proof of our determination towards financial sustainability.”
Daily Dispatch
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