Municipal Finance Management Bill: Constitutional discussion

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Finance Standing Committee

17 June 2002
Chairperson: Ms Hogan (ANC)
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Meeting Summary

The Committee considered the constitutional issues that had been raised by the legal opinions. The Chair directed that the point of departure was to see what the Constitution says to get a general understanding, and then to consider the issues raised by the public. The Committee used the Trengrove opinion as the basis for discussion. The constitutional discussion was not completed and will be continued at the next meeting.

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.

Mr Momoniat gave a short introductory presentation. He said that the first issue was the constitutional basis of the MFM Bill. He referred to the Trengrove opinion that states that the basis of the Bill is section 155(7) of the Constitution that gives national government the executive and legislative authority to see to the effective performance by municipalities of their functions. Also section 164 provides that national or provincial legislation can prescribe on any matter not dealt with in the Constitution.

Laying the basis for the Bill Mr Momoniat then said that section 215 and section 216(1) gives the Treasury certain powers to determine the format of budgets and prescribe uniform norms and standards etc. For this reason parliament does have the power to legislate in respect of municipal finances with the limitation that it does not impede the municipality's executive authority and from performing its functions as stated in section 151(4) of the Constitution.

He continued and said that there are different types of national legislation. One type can deprive the municipality of its executive authority and this would be unconstitutional. The other type regulates. He said that both Trengrove and Unterhalter deal with regulation of the local sphere. Both agree that regulation is okay as long as it does not exceed the limitation mentioned earlier.

Mr Momoniat listed the powers of National Treasury as those contained in section 216(1), the duty to determine the budget format and implementation, monitor, cap budgets and withhold funds. The Committee has asked Treasury to look specifically at what was a Treasury norm and standard especially in the light of clause 106. He said that it can be but not limited to issues like cash management, management of bank accounts, accounting and reporting, and various other budget issues.

Mr Momoniat cited the Fedsure Judgement (1999) where the Constitutional Court said that municipalities have the power to govern subject to national and provincial legislation. Such legislation must not exceed the limitation.

Referring to the submissions that have been raised, he said that those relate to impermissible duties imposed on municipalities, impermissible actions by Treasury, provisions that disempower municipalities, the apportioning of financial responsibility, the powers of treasury and the financial emergencies that will be amended.

Ms Hogan turned to the Trengrove opinion as a starting point to see what the Constitution says about local government. She referred to point seven that states that both the executive and legislative authority is vested in the municipal council. Point 7 lists the constitutional powers of the municipality. She said that the municipalities have these powers but in terms of section 44 and section 164 Parliament can pass legislation in respect of municipal finances. The right of national and provincial government to regulate local government exercise of power is contained in section 155(7). She then referred to the Trengrove opinion that views the term 'regulate' as control or govern. She concluded by saying that it is clear that local government is subject to national legislation but it can govern its own affairs.

She added that in addition to sections that give power to national government to regulate the exercise of power of local government, sections 151(4) and 41(1)(g) protect local government. She asked if this was more or less the constitutional framework.

Adv Grove replied that the framework was covered but added that Treasury is relying on section 155(7) and section 216 for the constitutionality of the Bill.

Ms Taljaard (DP) said that the critical test is the tension between section 151(4) / 41(1)(g) and 155(7). She added that the question is whether the regulation goes to far.

Adv Grove agreed that a tension does exist but said that such tensions are common throughout the Constitution and not just in those sections. He said that section 41(1)(g) applies to the exercise of powers of by a sphere of government and not to the power itself and thus does not affect the constitutionality of the Bill. He referred to the Constitutional Court Judgment that dealt with the Structures Act and said that 151(4) was narrowly interpreted and 155(7) was given a very broad interpretation. He said that members should use this approach as a guideline.

Ms Hogan said that she wanted to move on because the question was whether the powers that are given to Treasury are unconstitutional.

Mr Smith (IFP) referred to section 155(7) and said that it does not refer to anything about municipal finances. It refers to matters listed in schedule 4 & 5.

Mr Kahla referred to section 44(3) that empowers parliament to pass national legislation that is incidental matters and municipal finance is considered as an incidental matter.

Ms Hogan moving on to the powers of National Treasury highlighted section 215 and section 216. She referred to the Unterhalter opinion that expresses the view that clause 106 of the Bill goes beyond what a Treasury norm and standard is. She said that at this stage he is the only person that thinks so but the concept of the norm and standard is the heart of the debate.

Ms Taljaard added that an important consideration is what areas of section 216 can be regulated in terns of 155(7) because each time Trengrove highlights a potential problem then 155(7) is used as an antidote. The crucial issue is whether the power falls within section 216.

Adv Grove replied that Adv Unterhalter had not taken into account the latest amendment to section 216(2). The new section reads:

 

'The National Treasury must enforce compliance with the measures established in terms of subsection (1), and may stop the transfer of funds to an organ of state if that organ of state commits a serious or persistent material breach of those measures.'

He added that one should not approach the Constitution by putting provisions in compartments. If a sanction can be found in another section of the Constitution the it is fine and this is what Trengrove did. If section 216 was lacking then he looked to see if an approach could be justified by another section.

Ms Taljaard replied that the new amendment had nothing to do with a norm and standard and that the relationship between section 155(7) and section 216 was vital in the Trengrove opinion.

Prof. Murray said that it would be a hopeless mission to try and get a definition for uniform norm and standard. She referred to a person from the US Treasury that said that a norm and standard can include a whole range of issues and that the focus of Treasuries in each country was different. In essence it is a broad terms and can mean anything. The question is how to pin it down in a South African context. To do this one must look at section 216, then the whole of chapter 13 and also the Constitution as a whole. When one takes this approach then it is clear that the Constitution says that when there are spheres there must be a division of revenue but also that the process is clear and controlled. Therefore section 216 is in the Constitution and as a result there are many provisions in the Bill that aims at achieving transparency and expenditure control.

She added that the Constitution recognises local government as a new and developing sphere that needs to be looked after. Textually the emphasis in 16 is uniformity so that when government exercises its control it does so in a uniform manner and not on an ad hoc basis.

The Court in the Structures Act matter referred specifically to section 216. The Act required municipal councils to appoint municipal managers and went further to dictate what a municipal manger should do. The legislation conferred huge powers. Prof. Murray said that 8 of the 12 Justices upheld the assumption of power and said that in terms of section 216(1)(a) it was permissible for government to set up structures to control municipal expenditure and said that the municipal manager was one such structure. The Professor said that she was surprised by the broad interpretation. The court also gave a wide interpretation to section 155(7).

Ms Hogan asked for guidance on the way forward. She wanted to know if the committee should go through everything or tale the word of 3 experts that say the bulk of the Bill is constitutional and just focus on areas that need addressing. The question was whether the committee accepts the opinions as correct and fair and just deal with issues that the experts raise as being unconstitutional.

Mr Smith was happy to proceed on the basis of accepting the word of the experts as long as they have looked at the whole Bill.

Ms Hogan suggested that the opinions of the experts are considered and see if anything else needs to be discussed.

Ms Taljaard agreed to looking at the opinions provided that further issues could be raised.

Ms Hogan then turned to the Trengrove opinion at page 25 where he starts dealing with the provisions of the Bill.

In respect of duties imposed on municipalities, Trengrove finds justification for it in the Constitution and conclude that clauses 15-21 and clauses 66 - 87 are probably not unconstitutional. He goes on to list various other duties imposed on municipalities that are not expressly envisaged in the Constitution. He says that parliament has the general power to legislate in respect of municipal finances [Section 44(1)(a)] and all those duties not envisaged in the Constitution can be regulated in terms of section 155(7). In his view this does not compromise or impede the municipality's ability to exercise its powers, that is, section 151(4) is not contravened. This is raised in points 27 - 29 of the Trengrove opinion.

Mr Smith referred to point 5 of the opinion that says that the Bill impacts on the executive and administrative powers of municipalities. He said that if a power is legislative then the whole opinion in respect of the constitutionality changes.

Ms Hogan added that 155(7) relates to the executive authority of a municipality and asked what happens with the budget that is a legislative act.

Prof. Murray using the example of the capping of the budget and replied that Unterhalter says this is OK in terms of section 216 of the Constitution. So the power does not need to be put into 155(7) thereby avoiding the issue of whether it is executive or legislative in nature.

Ms Taljaard commented that section 216 allows national government to interfere with a legislative function of the municipality and asked for one of the experts to comment on this.

Prof. Murray replied that just because the power to impose a spending limit would be a legislative function does not make it unconstitutional.

Mr Smith raised a concern about the specificity of the provisions listed under point 29 of the Trengrove opinion.

Ms Hogan was satisfied that they were constitutional but the question whether there is too much detail in respect of the budget, must be revisited.

The next matter dealt with in the Trengrove opinion is the provisions that disempower municipalities. The Committee was happy with the issues raised in point 30 and 31.

Point 32 deals with provisions that disempower municipalities in circumstances that are not expressly envisaged in the Bill. Trengrove lists those provisions that disempower municipalities but again says that it is probably not unconstitutional because of section 44(1)(a), section 155(7) and the fact that section 151(4) is not contravened.

Ms Taljaard commented that the Unterhalter opinion has a different view in respect of section 155(7).

Ms Hogan replied that it must be remembered that Trengrove does not just use section 155(7) but said that the Unterhalter opinion would be dealt with later.

The committee will continue with the constitutional discussion 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

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