Municipal Finance Management Bill: Constitutional discussion

Meeting report

Mr Momoniat, Mr Kahla, Adv Grove, all from National Treasury were present. Professor Christina Murray was present at the request of National Treasury.

The constitutional discussion continued from Point 33 in the Trengrove opinion. This section looks at the provisions which impose sanctions for unauthorised expenditure and financial misconduct.

Trengrove highlights clause 22(1) and (3) that provides that certain functionaries are liable for unauthorised expenditure and also clauses 110-114 that deal with financial misconduct.

Ms Hogan pointed out that Trengrove in Point 34 says that the clauses are not unconstitutional because Parliament has the general power to legislate (section 44(1)(a)) and that the clauses regulates executive authority as envisaged by section 155(7). He says that the provisions do not infringe section 151(4).

The chair noted that certain members have problems with this line of reasoning but said that the committee could move on.

The next section in the Trengrove opinion looks at the provisions apportioning financial responsibility. Trengrove lists the various clauses in the opinion and again concludes that it is probably not unconstitutional.

Ms Taljaard referred to clause 41(2)(b) that states that a delegation by a municipal manager to an official must be subject to certain limitation that Treasury may impose. She said that Unterhalter is of the view that the provision is outside section 155(7).

Ms Hogan replied that the 155(7) discussion was touched on yesterday and wanted to move on.

The next section in the Trengrove opinion deals with the Powers which are conferred upon National Treasury in the Bill. Ms Hogan said that Unterhalter has interesting things to say on this matter but said that the Trengrove opinion will be used as a basis for discussion because it is more comprehensive in that it considers many clauses.

Point 37 draws a distinction between the existence of the power and the way in which the power is exercised.

Ms Hogan asked for this to be clarified.

Prof. Murray replied that the first question is whether a power exists. Thereafter you see how the power is exercised and if the exercise of the power is acceptable or not.

Ms Hogan commented that the power could be constitutional but the way in which it is exercised might not be.

Ms Taljaard (DP) asked if a provision could not be drafted in a way where one could see that it is unconstitutional.

Prof. Murray replied that that in most cases one would want to be able to look at the power that is conferred by legislation and say that it is too broad and exceeds the Constitution. In certain cases there can only be a suspicion that a provision might be open to misuse. She said that a concern of the committee would be to limit the possible misuse at the outset. But there are cases where it is impossible to draft a provision that covers everything and therefore it has to be left to regulation to deal with the detail.

The opinion in Point 38 & 39 looks at the background of where the Treasury comes from. Treasury is established in terms of the PFMA. Trengrove then says that Treasury has powers in terms of section 216(2) to enforce compliance with certain measures enacted by national legislation in terms of sub (1). Trengrove goes through many provisions that confer power on Treasury. The Committee considered these clauses and the comments by Trengrove.

Clause 5(2)(a)(ii)
This clause gives Treasury the power to monitor whether municipalities comply with clauses 16 and 20. 16 & 20 are the provisions relating to the municipal budgets. Trengrove argues later that clauses 16 and 20 are not unconstitutional so finds no problem with clause 5(2)(a)(ii).

Clause 5(2)(a)(i)
When he looks at clause 5(2)(a)(i) he finds a potential problem. The clause says that Treasury can monitor whether the budget of the municipality is consistent with the national government's fiscal policy framework and macro-economic policy. He says that if the Bill imposes an obligation for the municipality to adhere to national fiscal policy then the clause will be unconstitutional because local government is an independent sphere. He finds however that the Bill does not impose this obligation and concludes that the clause is probably not unconstitutional based on this interpretation of the Bill.

Ms Hogan disagreed with this finding and that local government is independent. She referred to section 40(1) where it is stated that spheres of government are interdependent. She also said that Trengrove does not take into account section 229(2) that states that when municipalities raise revenue they must comply with national fiscal policy. National government is further given the power to regulate in this area.

Ms Taljaard asked if section 229 only applies to revenue raising or if it could be applied broadly to economic policy.

Mr Kahla used the example of a budget being outside the norms and standards as prescribes by Treasury and said that Treasury would have the power in terms of section 216 to withhold funds. He also referred to section 229 that says that the municipal taxing power must not compromise national economic policy and that it may be regulated. On his reading of the Constitution he found it difficult to figure out how Trengrove reaches his opinion.

Ms Taljaard commented that section 229 makes it clear that on the revenue side certain powers exist but she was not convinced that on the expenditure side it is clear. She referred to the Unterhalter opinion that expresses the view that compliance of the budget with national economic policy was not a uniform norm and standard.

Mr Kahla had no doubt that it is a uniform norm and standard. If there is a measure in terms of section 216(1) that needs to be complied with, then Treasury can in terms of section 216(2) enforce compliance by withholding funds.

Prof. Murray said that clause 5(2)(a)(i) & (ii) must be considered separately. She said that the first sub clause relates to monitoring. There was nothing in the Bill that allows Treasury to take action if a budget is not consistent with national economic policy. In her view this was a restrained use of Treasury's power because she felt that national government does have the competence to legislate and act in the area of national economic policy. This was so because national economic policy is about the economics of the country as a whole. She referred to the first certification judgment that stated that national economic policy is the exclusive competence of national government. There are also many provisions in the Constitution that gives national government the overriding power when it comes to economic policy and section 229 was just one such example. she concluded by saying that the intention of the Constitution as a whole suggests that the provision could even go further than it does. The question of when the line is crossed i.e. when Treasury starts to determine the day to day running of the municipality was not for the Prof. to answer.

In respect of sub (ii), it says that Treasury must monitor compliance of clause 16 & 20. These clauses do impose obligations on local government. These clauses relate broadly to the format of the budget and also caps the budget. Prof. Murray was of the view that a MEC could enforce compliance of clauses 16 & 20 via section 139 and that the constitutionality of clause 5(2)(a)(ii) would depend on many issues like what a norm and standard is and the interpretation of section 155(7).

Prof. Murray also wanted to comment on clauses 5(2)(h) & (i) because she said that it could be too broad if the breach referred to does not fall under section 216.

Ms Hogan said that Treasury had undertook to look at these clauses and make it clear that funds will only be withheld if there is a breach of section 216 because at the moment Treasury is given the power to withhold funds if there is a breach of the Act.

Commenting on what the Prof. had said Ms Hogan told the committee that they have been told that Treasury has got the power to sanction a municipality to enforce compliance with clause 5(2)(a)(i). This would not be unconstitutional.

Ms Taljaard replied that it would still depend on the interpretation of section 216(1).

Ms Hogan asked for clarity if local government must comply with the economic policy of national government.

Prof. Murray said yes, but the Bill did not require this.

Ms Hogan said that there should therefore be clause that imposes a sanction for non-compliance of clause 5(2)(a)(i). At the moment nobody seems to agree with the view in the Trengrove opinion on this clause and the committee must decide if the clause must be enforced.

Ms Taljaard commented that the question still remains whether the power will encroach section 41(1)(g) and 151(4).

Adv. Grove replied that he had indicated yesterday that the courts interpret section 151(4) very narrowly. An extreme step like taking away the power of Treasury to budget would be a contravention of 151(4).

Ms Hogan said that the discussion had given the committee a better understanding of the opinion, that they do not necessarily agree with it and wanted to move on.

Clause 5(2)(b)
This clause gives Treasury the power to monitor expenditure and revenue to see if it is within budget. Again Trengrove says because there is no sanction power it is probably not unconstitutional.

Ms Hogan asked if Treasury has the power to sanction if the revenue and expenditure is not within budget.

Prof. Murray replied that if it is a norm and standard then treasury could enforce compliance.

Mr Momoniat wanted to ask a very general question. He wanted to know if a resident could go to court to ask that a municipality obey a law that it is breaching. He felt that if a resident could then surely Treasury could as well.

Prof. Murray answered his question in the affirmative.

Ms Taljaard commented that individuals and the Treasury were completely different.
She said that section 216 is the source of the sanctioning power and Trengrove expresses concerns about the power. She wanted to know why Trengrove has these concerns.

Adv Grove replied that section 216 is not the sole source of the power in that parliament could give Treasury other powers. He said that he disagreed with the Trengrove opinion and that the member should ask Adv. Trengrove for his reasons.

Prof. Murray referred to Point 47.4 of the Trengrove opinion and said that the paragraph suggests that he does not have as big a problem with clause 5(2)(b) as is suggested.

Clause 5(2)(c)
The clause empowers Treasury to prescribe uniform norms and standards for municipalities and municipal entities. It goes further to say that Treasury can prescribe financial management in municipalities and municipal entities.

Trengrove finds that the clause is probably falls within the scope of section 216 because it says that national legislation must ensure transparency and expenditure control by introducing treasury norms and standards.

The Bill says that Treasury must prescribe, but the Constitution says that national legislation must prescribe the norms and standards. He asks the question whether parliament can delegate the function to Treasury or whether Parliament themselves must prescribe the norms and standards. He says that section 239 says that national legislation also means delegated unless the context otherwise. Because section 216(1) does not prohibit the delegation he concludes that the clause is probably not an unconstitutional delegation of power.

Ms Hogan felt that the approach adopted in the clause is open ended and preferred the way it is framed in the PFMA.

Adv Grove agreed.

Ms Hogan said that the Constitution states that parliament must develop the uniform norms and standards. At this stage the committee has not explored what norms and standards are. Also nothing stops parliament from dealing with issues of financial management even if it is not a uniform norm and standard. She said that a debate is needed at all spheres about what a uniform norm and standard is and what is the scope of financial management that is needed in legislation. This is needed because in the legal opinions many clauses are seen not to be uniform norms and standards. Also if Treasury could give their view of what a uniform norm and standard is, it will assist the committee in see to what extent a clause is unconstitutional.

Mr Momoniat said that what is in the Bill are norms and standards. It was not just clause 106 that was norms and standards. Clause 106 just adds the detail. An example is the provisions on procurement. The Bill gives the framework and says that councillors cannot serve on the tender committee. All the detail is in regulation. He added that a process should be developed where regulations are tabled in parliament.

Ms Mahlangu (ANC) felt that the explanation by Mr Momoniat covered her because all the regulation could not be put in the Bill but agreed that there should be a mechanism that brings the regulations to Parliament. She added that at the moment there is a debate in Parliament on how to deal with delegated legislation.

Ms Hogan said that Mr Momoniat provided clarity but one still needed to know what a uniform norm and standard is.

Prof. Murray replied that the norm and standard can be formal or substantive. The formal would be something like the format of the budget. The substantive would be the capping of the budget for example. She said that Unterhalter states that a uniform norm and standard is also a substantive measure. The Prof. agrees with this view.

Ms Hogan commented that there is agreement that Parliament can assign the power to Treasury to develop the uniform norms and standards but a framework must be provided so that Treasury does not exercise a carte blanche. Therefore there must be a clause than links a norm and standard to what is in the Bill. She asked if everything in chapter 3 - chapter 11 were norms and standards.

Adv Grove replied that one cannot generalise in that way. As long as what is contained in the Bill can be justified constitutionally then it is fine.

Ms Hogan said that for this reason she asked if chapter 3 - 11 were uniform norms and standards because financial management referred to a whole range of other things that were not uniform norms and standards. She asked if clause 5(2)(c) would be deleted or if the clause would be retained with a reference to what a uniform norm and standard is.

Adv Grove said that the clause can be taken out and Treasury can do what is needed in terms of clause 106.

Ms Taljaard said that clause 106 did not just relate to section 216.

Ms Hogan said that she did not understand the status of clause 106 because it related to w whole range of things that were not norms and standards. The clause also relies on section 155(7).

Mr Momoniat replied that everyone agrees that the detail should not be in the Bill. He reminded the committee that Treasury is looking at the clause and redrafting it.

Ms Hogan indicated that she was still not clear what distinguished a power emanating from section 216 and the regulatory power in section 155(7).

Prof. Murray replied that there is only one reason why the two are distinguished. Section 216 gives the power to Treasury to intervene while for section 155(7) enforcement, intervention is only permissible by a MEC.

Ms Hogan said that this distinction was an important one.

Mr Smith (IFP) asked if it was possible to define uniform norm and standard in the definition section. He was concerned that Treasury would make everything a uniform norm and standard so that they could intervene.

Adv Grove said that he would be reluctant to define the term because it was a constitutional term. He said that the constitutional court had said in the past that it was up to the court to define constitutional terms, not legislatures. He said that the framework should be established whereby Treasury could prescribe the additional norms and standards.

Mr Momoniat relied that Treasury was not interested in intervention because they have better things to do. He said that the power of intervention that provinces have is important but the problem is that it never gets used or it gets used to late. The challenge is how this power of intervention is going to work.

Ms Hogan moved on to the next clause in the Trengrove opinion.

Clause 5(2)(d)
The clause read with clause 16(1)(d) deals with the power of Treasury to determine an annual growth factor. Trengrove says that this is afar reaching provision. He cites the Fedsure Judgment as authority for saying that it is not clear whether the municipalities power to determine a budget is a legislative or executive power. If it is executive then the clause is probably not constitutional because it is covered by section 155(7) and does not infringe section 151(4). If it is legislative in nature then it can fall under section 216(2) and Treasury can enforce compliance of that treasury norm and standard. At the end of the day it depends on how the power is exercised.

Ms Hogan said that the nature of the budget was discussed yesterday and moved on.

Clause 5(2)(e)
The clause gives Treasury to monitor compliance with generally accepted accounting practice. This falls under section 216.

Clause 5(2)(f)
In terms of this clause Treasury may assist in capacity building. Trengrove has no problem with this clause as it accords with section 154(1).

Ms Taljaard asked if the 'may' should rather be changed to 'must.'

Mr Smith replied that section 154 says hat national government 'must'. He added that in the Bill the may refers to Treasury and should stay as is.

Clause 5(2)(g)
Treasury is given the power to review any system of financial management in an municipality. This is a clause that Treasury will have a look at and it can be skipped for now.

Clause 5(2)(h)
The clause provides that Treasury has the power to stop transfers to municipalities in terms of section 216(2) or if there is a material breach of the Act. Trengrove says that the clause needs to be read down and interpreted as meaning that treasury will only stop transfers in terms of section 216 for it to be constitutional.

Mr Momoniat said that during discussions Treasury undertook to look at the wording and amend the clause to reflect the narrower meaning.

Ms Taljaard an Mr Smith felt that there should be a link between this section 216 power and the power of a MEC to intervene in terms of section 139. They felt that both actions could take place at the same time and this would not be desirable.

Adv Grove agreed that there should be consultation before Treasury acts in terms of section 216(2).

Ms Taljaard added that it is important to know what is a uniform norm and standard so that it is clear if a section 216(2) withholding or if a 139 intervention can be triggered.

Ms Hogan agreed.

Prof. Murray in principle agreed but had difficulty in defining in a constitutional term because the Constitutional Court has said that they define constitutional terms - not the legislature. He said that a section 216(2) withholding will seldom happen because the implications are frightening. One should not try to have a clear-cut definition in an area that is unclear.

Adv. Trengrove reads clause 5(2)(h) with clause 6. Ms Hogan said that Treasury had already indicated that they would look at clause 6 and make it more clear. This clause does not have to be dealt with now.

Clause 12(1)
The clause provides that Treasury may prescribe a framework. A municipality must conduct its cash management within this framework. The municipality can also invest and lend money that is not immediately required. Trengrove says that the framework could fall within the ambit of section 216(1) as being a treasury norm and standard. But even if it does not then it can fall under section 155(7) as regulating the executive power of the municipality. Again he says that the way in which the power is exercised could encroach on local government but the power itself is not unconstitutional.

Clause 17(5) and clause 20(5)
In terms of clause 17(3) a municipality must submit its budget in draft form to the Treasury. Clause 17(5) provides that the budget must take into account any guidelines and policy statements issued by Treasury.

Adv. Trengrove says that if a municipality was obliged to accept a recommendation then 17(5) would probably be unconstitutional. As the bill does not put this obligation on the municipality, Trengrove concludes that the clause is probably not unconstitutional.

Clause 20(5) refers to the Treasury recommendations around the adjustments budget and the same principle applies as above.

Adv. Trengrove goes on to deal with clause 106 that gives Treasury the power to make regulations or issue instructions and guidelines. Due to time constraints clause 106 will be discussed at the next sitting.

The meeting was adjourned.

Appendix 1
THE TREASURY
LOCAL GOVERNMENT: MUNICIPAL FINANCE MANAGEMENT BILL
OPINION

INTRODUCTION
I have been asked to write an opinion on the constitutionality of the Municipal Finance Management Bill, 2002, as introduced in the National Assembly. In addition to the Bill, I have been given a copy of an opinion written for the Municipal Demarcation Board by Wim Trengrove and Alfred Cockrell dealing with the same question as well as the Summary of Submissions made on the Municipal Finance Management Bill' prepared for the parliamentary committee.

I agree with the Trengrove/Cockrell opinion. Accordingly I do not canvass all the aspects of the Bill here that maybe considered controversial. Instead I -

(i) draw attention to clause 46(1) about which Trengrove and Cockrell have not raised concerns but which I think may not pass constitutional muster;

(ii) comment on those provisions which the Trengrove/Cockrell opinion suggests may be unconstitutional (clauses 5(2)(h). 6 and 88 - 105); and

(iii) raise some concerns about the meaning of section 216(1) of the Constitution and its interpretation in the Bill.

I should reiterate a point that the Trengrove / Cockrell opinion stresses. It may be constitutional to grant the Treasury the powers set out in this Bill but they may nevertheless be exercised in an unconstitutional manner. This would have to be determined when the powers are exercised.

CLAUSE 46(1): ESTABLISHMENT OF MUNICIPAL ENTITIES
This clause allows municipalities to establish 'municipal entities' to provide a municipal service (para (a)). Municipal entities for other purposes may be established only for purposes that have been prescribed (para (b)).

This clause may be unduly restrictive. Whether or not it is depends, in part, on the way in which the phrase 'municipal services' is interpreted. If it is broadly interpreted to cover all constitutional functions of a municipality then the clause is more likely to pass muster because it would mean that there would be very few circumstances in which a municipality would have to rely on clause 46(1)(b). If, however, it is interpreted to cover only functions that arc more narrowly understood as 'services', such as those envisaged in section 152(1)(b) of the Constitution, for example, it would exclude some constitutional functions of municipalities (those envisaged in Constitution section 152(1)(c)-(e), for example). Under this interpretation a municipality would effectively be required to get permission to establish entities designed to promote social or economic development, for instance. This could be interpreted as depriving a municipality of its power to govern and would be unconstitutional.

PROVISIONS THAT THE TRENGROVE / COCKRELL OPINION SUGGESTS ARE UNCONSTITUTIONAL (OR PROBLEMATIC)

Clause 5(2)(h) (stopping funds)
This clause allows the national Treasury to stop funds to a municipality and municipal entities. As Trengrove and Cockrell note, it is broadly worded and would need to be 'read down' to conform with Constitution section 216 which permits the stopping of transfers of funds in certain circumstances only. To avoid confusion the clause could be redrafted more clearly.

Clause 6 (delegation of the power to stop funds)
As Trengrove and Cockrell point out, clause 6 purports to permit the Minister to delegate to other functionaries the power to stop a transfer of funds to municipalities. This would be unconstitutional. The clause could be read to mean that only delegations that pass constitutional muster are permissible but it would be better to add a provision stipulating that the power to stop funds under Constitution section 216 cannot be delegated.

Municipalities in a financial emergency (clauses 88 - 105)
Clauses 88 - 105 establish a plan for dealing with municipal financial emergencies. The Trengrove / Cockrell opinion suggests that the clauses are susceptible to two different interpretations. One would render the plan unconstitutional. This interpretation assumes that the financial recovery specialist appointed to 'rescue' municipalities in financial emergencies would have the power to implement the financial recovery plan without the approval of the Council. Trengrove and Cockrell give two reasons for the unconstitutionality of this arrangement:

(i) it would deprive the municipality of executive power - this is impermissible under Constitution section 155(7); and

(ii) it would also violate Constitution section 151(4) that disallows any legislation that compromises or impedes a municipality's power to exercise its powers.

To these two concerns I would add a third, related one that would be relevant if a budget is considered to have legislative elements: the arrangement would go beyond a regulation of executive powers (permitted by section 55(7)) and would involve an interference with law-making powers.

The second interpretation of clauses 88 - 105 that Trengrove and Cockrell offer interprets them as requiring Council approval of a plan devised by the specialist. On this interpretation, they suggest the Bill would be constitutional.

I fully agree with this reading of the Bill. I would also be concerned to leave the Bill as it is, without clarifying to which of the identified approaches the Bill is committed. In the light of the constitutional amendment concerning financial emergencies proposed (but not adopted) last year I assume that the drafters of the Bill would prefer the former approach. This approach reflects concerns that Council members will not always be committed to the type of financial measures that will promote the long term health of the municipality demanded by the Constitutional because the more immediate issues that are likely to have led the to problems faced by the municipality may continue to inform Council decisions.

A number of options arise:

- a constitutional amendment and textual amendments to clarify the intention of the Bill could secure the first interpretation identified by Trengrove and Cockrell.

- changes to the Bill could confirm that the second approach is intended (which protects Council decision-making)

- another approach could be devised.

WHAT IS COVERED BY SECTION 216(1) OF THE CONSTITUTION? ARE THE PROVISIONS OF THE BILL STOPPING THE TRANSFER OF FUNDS CONSTITUTIONAL?

Clause 5(2)(d) read with clause 16(I)(d)
These clauses envisage that the national Treasury will determine annual growth factors for municipalities. The constitutional question is whether these provisions which grant considerable power to the national sphere undermine municipal integrity in an impermissible way. As the Trengrove/Cockrell opinion notes, an assessment of the constitutionality of the provisions depends on the way in which we characterise the budget making power is it legislative or executive? If it is executive, as that opinion notes, clauses 5(2)(d) and 16(1 )(d) permit regulation of the executive authority of municipalities within the meaning of Constitution section 155(7) and are constitutional.
If the budget making power is legislative in character, clauses 5(2)(d) and 16(I)(d) could perhaps be interpreted to fall within the scope of Constitution section 216(1) and (2). That section permits the national Treasury to impose and enforce 'uniform treasury norms and standards'. But a limit on growth may not be a 'norm or standard' within the meaning of section 216(1). As far as I am aware, this section has not been interpreted judicially. However, in context, it is possible to argue that the 'transparency and expenditure control' envisaged by section 216 relate to formal accounting controls and not to matters that might be classified as policy such as growth rates.

Overall, however, it should be strained to argue that budget making is a purely legislative matter. It is perhaps better understood as a hybrid function, containing both legislative and executive elements. On this argument, the clauses may be permitted under Section 155(7) and would then be constitutional.

Clauses 77 and 81
Clause 77 permits the Minister to withhold the transfer of funds to a municipality if the municipal manger for that municipality failed to fulfil obligations relating to the submission and tabling of annual financial statements. Clause 81 allows the National Treasury to Stop funds if the municipality does not rectify adverse findings by the Auditor-General.

Clause 77 will be constitutional only if tile procedures relating to submission and tabling of statements are matters that fall under the list in Constitution section 2 16(1). Again it is not clear what generally recognised accounting practice' or 'uniform treasury norms and standards' will be taken to mean but they may not include the process referred to in clause 77 because -

(i) the process does not relate to the way in which statements are compiled and audited and thus does not fall under the establishment of 'generally recognised accounting practice' or 'uniform expenditure classifications'. and

(ii) the process seems not to concern 'treasury norms and standards' but, rather, the relationship between the municipality on tile one hand and the Auditor-General and Council on the other.

This matter might need clarification.

Moreover, clause 77 permits the Minister to stop transfer of funds after consulting the national Minister for Local Government. It will be seldom that this power could be constitutionally exercised following a consultation with the national Minister for Local Government alone. Protection of the integrity of the municipality seems to require consultation with the municipality as well and it may be advisable for tile clause either to state this explicitly or to note that attention needs to be paid to the integrity of the municipality when deciding to Stop funds. For instance, the Council may have taken steps to have the municipal manger replaced. Under such circumstances, action by the National Treasury is likely to be an infringement of the council's integrity.

Clause 81 deals more obviously with matters covered by Constitution section 216(1) although the accounting practices established by Treasury and those established by the Auditor-General may, conceivably, differ. Certainly, it would be unconstitutional to bind the Auditor-General to accept practices decided upon by Treasury for the audits which he or she controls. If the Auditor-General and Treasury do establish different practices, the provision would form the basis for the stoppage of funds only if the practices established by the Treasury are disregarded and errors are not remedied as fast as is required.

Christina Murray
5 May 2002