Financial Performance Indicators For Municipalities 2008

Financial Performance Indicators for Municipalities - Draft Report - UN-Habitat
August 2008
Developing Financial Performance Indicators for Municipalities

Draft Report
UN-Habitat August, 2008
By: Andy Wynne andywynne@btinternet.com Nafsiah Mohamed drkancil@yahoo.com Ravikant Joshi ravikant.joshi@gmail.com
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Developing Financial Performance Indicators for Municipalities

Draft Report Contents
1. Introduction....................................................................................................................................3 2. The objectives of municipal public financial management, the users of performance indicators and criteria for choosing indicators ..........................................................................................................................................................11 2.1 Objectives of municipal financial management .......................................................................11 2.2 The main users of municipal financial management performance indicators .........................18 2.3 Criteria for the selection of municipal financial management performance indicators...........20 3 State-of-the-art analysis of municipal financial management indicators in the world and the region...............................................................................................................................................23 4 Suggested core set of indicators on municipal financial management........................................54 5 Detailed financial performance indicators ..................................................................................62 6 Conclusions...................................................................................................................................72 Resource people and expert panel...................................................................................................74 Inception report................................................................................................................................76 Millennium Development Goals and Targets.................................................................................77 United Nations Global Compact.....................................................................................................78
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1. Introduction
"Not everything that can be counted counts, and not everything that counts can be counted" - Albert Einstein
The contradictions of the local government environment

We live in a world of contradictions. Industrialisation and economic development over the last couple of centuries has unleashed great wealth and potential for communication, travel and access to knowledge. But this potential is currently only available to a small minority of people. As the, then, Prime Minister of France, Jospin de Villepin, said when addressing the United Nations in October 2005: " Never has the world been so prosperous, however, inequalities have also never been so great!" More graphically, the United Nations Human Development Report 2005 noted that: One-fifth of humanity live in countries where many people think nothing of spending $2 a day on a cappuccino. Another fifth of humanity survive on less than $1 a day. (page 3) This inequality and the need to take action against it has been widely noted and accepted. Poverty reduction generally, and the Millennium Development Goals in particular, have been accepted as a common thread and objective for all public institutions. Poverty reduction has moved from being one possible policy option to the overarching goal of public institutions. It has changed from being one, normative, approach to the positive prescription of good practice by local government, at least in developing countries. Over the last 30 years, the globalisation we have witnessed has been associated with mass migration from the countryside to the worlds towns and cities: The world is witnessing unprecedented urban explosion. The urban population has more than quadrupled since 1950 amounting to 3.2 billion in 2005 and should reach 5 billion people in 2030 (about 60% of the World population). According to the UN, 95% of urban growth over the next 20 years will occur in Asia, Africa and to a lesser extent in South America (where the demographic urban transition has already taken place) and especially in small and medium size local governments. (UCLG 2007a, page1) As a result, since 2007, for the first time in human history, the majority of the worlds population have lived in cities and within the next twenty-five years it is estimated that twothirds of humanity will live in cities. This urbanisation should provide benefits with a greater diversity of life experience and cultural exposure. It should also enable the more efficient provision of education, health and other social services, however: Fast growing urbanization is giving rise to a major and pressing need for future infrastructure projects that are expected to cost some US$200 billion per year over the next 25 years. However, these infrastructure needs are currently being unmet. Failure to invest in infrastructure has already impacted severely upon the daily lives of millions of citizens in developing countries. If nothing is done, one human being in five will be living in a slum by 2020, especially in Africa and Asia. No longer can local governments and stakeholders afford to wait until a major crisis forces a massive
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uptake in local public infrastructure. Similar crises are sadly well underway in many countries - meeting the challenges they are certain to pose in the coming years means investing in the future now. (UCLG 2007a, page1) Municipal authorities or city governments have direct responsibility for the achievement of poverty reduction and the Millennium Development Goals and are deeply affected by three long-terms trends that have changed and are still changing our world: 1 Urbanization and Development 2 Decentralization 3 Globalization (UCLG 2007b, page 11) The adequate financing of city development and the management of these finances will be critical to the achievement of the Millennium Development Goals and sustainable development in a World free of poverty. This study aims to provide a contribution by identifying a set of core financial performance indicators which can be used to assess the quality of the financial management provided by our city authorities. Decentralization is a worldwide process (at least in aspiration), developing in all regions at the same time, it aims to provide more responsibilities and powers to municipalities, but does not necessarily provide them with adequate finances to provide for the pressing needs of their citizens. As a result, local governments face a number of pressing challenges. In 2002 UNHabitat identified a number of these challenges in their study of local democracy in East and Southern Africa, these are equally applicable in other regions, at least of the developing world: The need to ensure that the existing decentralized local government structures, systems and procedures are consolidated; The need to ensure that the proposed fiscal decentralization strategies becomes a reality; The need to enlarge the economic/revenue base of the local governments and to strengthen their revenue mobilization mechanisms; The need to mainstream gender concerns into the planning process, to strengthen participatory planning and to develop skills in preparing integrated districts' development plans and budgets; The need to treat capacity building for local governments as a continuous process, given the high turnover of councillors and council staff; and A clear definition of the roles of the various players in the decentralization programme.
(UN-HABITAT, 2002: page 111) The challenges that local governments face as a result of globalisation has been recognised by United Cities Local Government: Globalization, stated as an increasing global connectivity, integration and interdependence in the economic, social, technological, cultural, political, and ecological spheres, has a massive direct and indirect impact on local governments. (UCLG 2007b: page 12)
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Many of these impacts are positive and can enable local governments to provide a greater and more diverse range of high quality services to their citizens. They can also allow these services to be provided more efficiently. However local governments also face greater competition for the much needed investment which is required. This competitive environment can result in constrained and reduced financial policy choices and fiscal competition. As UCLG have noted (2007b, page 13): An enhanced competition amongst cities for attracting foreign direct investments, which requires high level urban infrastructure, can be witnessed. This competition is sharpened and made more critical by the limited sources of alternative finance which are available to local authorities. Thus Anwar Shah and Theresa Thompson (2004) have observed that: Local governments have very limited access to own source revenues such as property taxes and user charges and even for these limited tax bases, they typically have autonomy only with respect to rate setting within limits. (page 9) As a result, local governments, and especially those for our cities in developing countries, face great challenges in obtaining and effectively managing the financial resources to fulfil their responsibilities for poverty reduction and the provision of appropriate services to all their citizens. In addition, we must recognise that municipalities themselves are very varied, specifically in regard to their size and the financial resources which are made available to them. Lagos State, for example, serves a population of around 18 million. This is greater than the populations of many countries. In contrast, many local governments serve populations of a few thousand. Similarly the State of New York has a budget in excess of $80 billion whilst many local governments have to make do with a few thousand dollars.
The importance of an effective state

The first three-quarters of the twentieth century were a time where states held clear authority within their borders, and governments acquired growing functions that they delivered and performed directly. The post-1945 consensus was that the state was central to economic development. It was widely accepted that states had a direct and dominant role to play through the provision of education, health and other social services and the direct management of the commanding heights of the economy through a range of state owned industries. The latter part of the twentieth century and early twenty-first century have seen the emergence of dramatically different views on the role of government. Many influential players now consider it should perform fewer functions directly and provide more services in partnership with other actors, including the private and voluntary sectors. In addition, many states are now restrained by the requirements of international and regional bodies and the demands for local autonomy within the state. At first this new approach was rather crude, seeing the state as the main problem. As a result, the aim was to reduce the size of the state through widespread privatisation and to curtail its powers through liberalisation and deregulation. It was thought that the state should get out of the way and allow an efficient and dynamic private sector to develop. Since the end of the last century, a more nuanced approach has been adopted. It is now generally recognised that an effective state is central to development. However, in contrast to earlier views, the role of the state is now seen as providing the environment for development and poverty reduction, rather than achieving these goals directly. Thus in the World Development Report for 1997 the World Bank concluded that:
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An effective state is vital for the provision of goods and services and the rules and institutions that allow markets to flourish and people to lead healthier, happier lives. Without it, sustainable development, both economic and social, is impossible the state is central to economic and social development, not as a direct provider of growth but as a partner, catalyst and facilitator. (page 1) This report also recognised that the achievement of well-managed and effective states is a challenging task as: What makes for an effective state differs enormously for states at different stages of development (page 1) And that: No one-size-fits-all recipe for an effective state is being suggested here. (page 2/3) However, the report did feel able to identify the crucial aspects of any state which are necessary for it to be successful: The first job of states: Getting the fundamentals right Five fundamental tasks lie at the core of every governments mission, without which sustainable, shared, poverty reducing, development is impossible: Establishing a foundation of law Maintaining a non-distortionary policy environment Investing in basic social services and infrastructure Protecting the vulnerable Protecting the environment. (page 4)
In addition, it is now almost universally accepted that democracy and accountability are key attributes of states, national and local, which have to be developed, nurtured and maintained. Democracy and accountability are seen as being important in themselves, but they are also accepted as being vital in providing a sense of place, belonging and community. Again, although these objectives form part of the modern consensus, the precise manner in which they are to be achieved will differ from government to government and there remains some controversy over the general approaches that are to be adopted. Thus the World Bank Institute (2005, page 37) advises that: In the end, ones definition of accountability will depend on ones vision of the role of the state. If one conceptualizes the state as fundamentally an obstacle to development, as a predator that must be controlled in its unceasing desire to take over the market and the private sector, one will tend to grasp a more external, ex post, legal, hierarchical vision of government accountability. If one imagines the state as a possible facilitator of development, as a central actor in the provision of public goods and the stimulation of investment and citizen participation, one will lean towards a more ex ante, performance-based, proactive, horizontal concept of accountability.
The need for financial performance indicators

An additional challenge for any state to achieve its objectives is the lack of robust and dependable information which can inform policy choices and guide the management of its services. As UN Habitat (2006, page 7/8) has previously observed: Throughout the world cities are suffering from an acute crisis that hinders their capacity to develop sound policy and provide much-needed services to their residents: a crisis of accurate, useful information. Lacking detailed knowledge of the democratic,
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economic, cultural, physical and environmental dynamics in their cities, many planners and decision makers are operating in an environment of uncertainty, allocating resources to immediate and pressing issues rather than investing in progressive change over the long term. The costs of this widespread information crisis accrue in the form of expanding slums, decreasing forests and agricultural lands, deepening social problems and increasing insecurity. What city managers and citizens need to make better decisions is clear: increased local capacity for the collection, assessment and application of urban data. Reliable, up-to-date information on a meaningful set of indicators measurable attributes of local conditions, such as proportions of the population with access to basic services or the cost of housing in different parts of the city and the means to turn collected information into good policies and urban plans are the antidote to the information crisis. Local authorities and organisations, however, have been hindered by a lack of capacity, particularly in developing countries, for the collection and assessment of data, for its transformation into useful information and for its broad dissemination. This UN-Habitat report went on (page 21) to observe: Indicators are needed to: support the design of policies and programmes and monitor progress towards achieving local and global development goals; target resources more effectively; raise awareness of urban problems and mobilize community support; make local government more accountable to citizens. UN-Habitat has invested heavily in the development of approaches, methodologies and systems necessary to collect key local data for the effective management of local government. It has now recognised that a key challenge to the provision of effective housing and urban development in both developing and developed countries has been the lack of appropriate data at the city level to monitor the financial affairs of the local authority. Cities are shaped by their finances. However, there are no widely accepted tools to monitor municipal financial management. In determining the cause of the current urban problems and monitor the progress toward achieving sustainable urban development, it is increasingly necessary to have effective tools to analyse the financial performance and financial position of the municipal management of the cities. The development of appropriate municipal financial indicators, capacity building programmes and tools can also be used to assist with effectively reducing poverty, enhancing good governance, as well as to monitor the financial performance of municipalities. The following diagram indicates possible relationships between financial performance indicators and the goal of poverty reduction:
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In form ation
B etter credit rating m ay enhance borrow ing ability and hence resource m obilisation
Financial Inform ation
A ssess quality of financial system
Financial P erform ance Indicators
M ore optim al resource allocation decisions
Im proved resource m anagem ent
G oal P overty R eduction
The Development of Municipal Financial Management Indicators

In early 2008 UN-Habitat initiated a project to develop a suite of municipal financial management indicators and associated guidance. This report is one of the main outputs from this project. The main goals of this UN-Habitat project, on the Development of Municipal Financial Management Indicators, are to:
1. create a normative framework for global monitoring by designing an agreed set of

indicators on municipal finance; 2. build capacity in the field of municipal finance, including the development of finance indicators and tools in developing countries, particularly in Arab states, using the experience of the National Urban Observatory implemented by the Kingdom of Bahrain. 3. improve municipal finance through the dissemination of capacity building tools including model financial management for municipal government training and capacity building programmes. To achieve these goals the project is undertaking the following three main activities:
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Activity 1: Design of Municipal Financial Management Indicators This component aims to design a core set of operational municipal financial management indicators, with the idea that they can be universal enough to be used for global monitoring purposes within the Urban Indicators Programme. This process entails the following activities: i) ii) iii) iv) carry out a state-of-the-art analysis on municipal financial management indicators in the world and across the Arab the region; propose a core set of relevant indicators on municipal financial management; informally test the proposed indicators in relevant locals to ascertain their usefulness; evaluate their relevance in operational and conceptual terms with key stakeholders.
Activity 2: Document case studies, existing initiatives, best practices and model training programmes using related indicators on municipal financial management This component includes two main activities: i) undertake a rapid-analysis on the state of municipal finance in the region and municipal financial management indicators globally, highlighting existing and best practices document existing public financial reform initiatives taking note of best practices in the use of municipal finance indicators to good governance innovations and better urban management.
ii)
Activity 3: Design an Expert Group meeting which will identify practical approaches for strengthening capacity in municipal finance management through the development of indicators The expert group meeting will seek to examine approaches for strengthening the capacity of governments, local authorities, civil society and the private sector in data collection, use of the financial indicators and improving urban financial management. Participants are to be drawn from networks of urban observatories, National Statistic Offices and key stakeholders including local governments and municipal finance officials from selected countries. The expert group meeting will also be asked to review a draft training programme to be used prior to undertaking piloting of the indicators at a national level. The training programme will focus on capacity building in the use of the proposed indicators as well as addressing underlying systemic capacity gaps in local government financial management using UN-Habitats LGFM Training Series. This report aims to make a major contribution to the achievement of the objectives of the UNHabitat project on Development of Municipal Financial Management Indicators by delivering and reporting on the following objectives: i) ii) iii) carry out a state-of-the-art analysis on municipal financial management indicators in the world and across the Arab the region propose a core set of relevant indicators on municipal financial management undertake a rapid-analysis on the state of municipal finance in the region and municipal financial management indicators globally, highlighting existing and best
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practices iv) document existing public financial reform initiatives taking note of best practices in the use of municipal finance indicators to good governance innovations and better urban management.
The next main section of this paper discusses the core objectives of municipal financial management, considers the main users of our proposed performance indicators and the criteria which we have established for judging their selection. The following section proposes our suite of core performance indicators followed by a section on the subsidiary sets of performance indicators. The paper finishes with some conclusions.
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2. The objectives of municipal public financial management, the users of performance indicators and criteria for choosing indicators
the single most important output of the financial management process is information, reliable information. Without reliable information, elected men and women cant make good decisions and managers cant manage efficiently and effectively
UN-Habitat (2005) Key Competencies for Improving Local Governance, UN-Habitat and Open Society Initiative, volume 3, page 317
However, there is no point in providing financial information or more specifically developing, reporting or monitoring financial performance indicators in isolation. We have to consider what the indicators are designed to measure, who will use the indicators and the purposes for which they will use the indicators. It is only when we have decided on such issues that we can begin to develop suitable performance indicators which will suite our purposes. According to Joshi and Ray (2005, page 218) financial management of an urban local government includes the following five basic components: 1. Establishing the goals and objectives of the government. 2. Defining how success in meeting these goals and objectives will be measured. 3. Creating a plan for obtaining the funds needed to meet these goals and objectives. 4. Allocating the money to the various assets and programmes of the government while keeping the goals and objectives in mind. 5. Tracking results based on the defined success criteria and making necessary decisions based on these measurements. Any performance Indicator system for ULBs [urban local bodies] must be built around these five aspects. Building on this analysis, this section of our report assumes that financial performance indicators are designed to assist in an assessment of the extent to which a municipality or local government has achieved its financial management objectives. Thus we first review the range of possible objectives for local government financial management and agrees a set of objectives which our proposed performance indicators will be designed to measure. We then consider the spectrum of possible users for our proposed indicators and the criteria against which such indicators should be assessed.
2.1 Objectives of municipal financial management

Complexity of local government finance
Public financial management can be considered to be more complex than the financial management of private sector companies. Private sector entities usually have the relatively simple objective of profit maximisation in order to increase the wealth of their shareholders. In contrast, public sector organisations usually have multiple and possibly conflicting objectives. Their overriding objective is to improve the welfare of their citizens. For local government this
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will involve the provision of services funded from contributions from the national government, local taxation, fees or charges and borrowing amongst other sources. Local governments typically also provide a greater range of services than private sector entities of the same size. This can include, for example, education, health, social services, housing, police, economic development and trading organisations. Private sector companies will usually provide goods and services for sale, whilst local governments will usually provide most of their services at no cost. Associated with this, there is no direct linkage between services provided and the cash the authority receives. In addition, the customers or clients of local government services are often poor and so suffer particular financial constraints and problems. In addition, local governments are expected to provide universal services (for example, basic education) with limited financial resources. These pressures are accentuated by the demands of poverty reduction and achievement of the MDGs as the introduction to this report has indicated. The Commonwealth Local Government Forum and ComHabitat (2007, page 2) have emphasised this point as follows: In tackling the issue of urban poverty, local governments are the main agencies in terms of squatter upgrading and the provision of public health. In addition in the majority of local government systems primary health and education are LG functions, i.e. local government is responsible for planning and siting of clinics and schools, if not paying the teachers and medics. In most government systems water supply is also a LG function. This is not only a political reality but is also supported by economic theory as being the appropriate level for these functions Local government financial management also includes a number of trade offs and possible conflicts between the different groups concerned. Thus, for example, a local government has to decide on the relative importance of the vastly different services which it provides, usually within the situation where the demands for the services are greatly in excess of the finances available to provide them. In addition, for example, there may be fundamental conflicts between local taxpayers and recipients of the councils services.
The core tasks of local government financial management

The State of City Finances Report 2007 produced by the South African Cities Network (South African Cities Network, 2007, page 2) identified the following two core rationales for municipal finance: Firstly, finance is about making choices regarding the allocation of scarce resources. What is the optimal level at which city residents and businesses should be taxed in order to provide public services? If taxes are too low there will be insufficient resources to run public services; but if they are too high, local economic activity will be stifled. How should resources best be spent? Backlogs and poverty need to be addressed. But the maintenance of existing infrastructure cannot be neglected. And, at the same time, resources need to be provided for the extension of public goods and services required to underpin new economic activity which will drive the economy and the creation of jobs. Secondly, finance shapes institutions. The mechanisms by which an organisation manages its finances, and the transparency and rigour with which it does so, have important institutional impacts. Most significantly, the mechanisms define the patterns of accountability which drive the actual functioning of institutions and the choices they make. For example, the more a city government raises its revenue from its own citizens and businesses, the more
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attentive it will tend to be to their needs, and the greater its incentive to act in ways which grow the economy and thus its own tax base. A city government which is financed by national grants has far less of an incentive to do so. This report then goes on to identify that whatever the actual functional range of their responsibilities, all city governments in South Africa (as elsewhere in the world) have three major financial imperatives a) Cities must operate and adequately maintain the existing service delivery infrastructure. This consists of systems of roads and storm-water drains, electricity distribution networks, water and sanitation systems, any public transport systems, as well as a myriad of other specific service delivery assets, which must be operated to deliver the services. The infrastructure must be maintained, so that service delivery life is optimised. The city cannot fail to look after its existing service infrastructure, since wasted assets will be very expensive to replace. The city must watch over its assets. b) Cities must construct new infrastructure and provide new services for growth. New and expanded service delivery infrastructure must be constructed and installed as required. The need for such new infrastructure arises from the increase in the number of households requiring adequate accommodation. Most importantly it also arises from the increasing scale of economic activity, and all that is required to support this (including infrastructure and services for industry, retail and other commerce, tourism, etc). The city must provide the infrastructure required for growth. c) Cities must provide housing and services for the poor. Given our history, South African cities are charged with a special developmental responsibility in respect of redistribution and service delivery to the urban poor. For city governments, this takes the form of ensuring the provision of subsidised or free municipal services and housing to poor households, as well as the more general municipal responsibility in respect of the urban environment. The city must provide subsidised urban services to the poor because of: basic humanity the rights of the poor public health and safety considerations the economic opportunities that such services provide for the poor. The city must provide for redistribution. (South African Cities Network, 2007, page 40) It may be assumed that providing services to the poor (funded from taxation of the rich) would be relatively unproblematical in terms of providing for redistribution and so poverty reduction. However, as Ritva Reinikka has graphically demonstrated (2006, slide 13), benefit incidence analysis of public spending on services such as health and education indicates that in many countries the richest quintile (20% of the population) may receive more than 20% of the value of the services. Although in some cases the poorest quintile did receive proportionately more of these services. So for example, on average the poorest and the richest quintiles benefited from approximately the same amount of primary health spending. In contrast, the poorest quintile received slightly more than 50% more than the richest quintile in terms of primary education. Reinikkas slide is shown below. The white lines show the proportion of benefit which would indicate no redistribution (20%). The red (or top) bars show the value of services actually received by the richest quintile and the blue (or bottom) bars show the value received by the poorest quintile.
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Core objectives of municipal financial management

In recent years, with the increased interest in the quality of public financial management, a number of studies have developed core objectives for public financial management. We review a number of these below and use them as a basis for developing a matrix of objectives to guide the development of our core set of municipal financial performance indicators. The traditional view of the functions or objectives of public finance is provided by Musgrave & Musgrave (1989, page 8). They identify the following three policy objectives of public finance: 1. The provision for social goods, or the process by which total resource use is divided between private and social goods and by which the mix of social goods is chosen. This provision may be termed the allocation function of budget policy 2. Adjustment of the distribution of income and wealth to ensure conformance with what society considers a fair or just state of distribution, here referred to as the distributive function. 3. The use of budget policy as a means of maintaining high employment, a reasonable degree of price stability, and an appropriate rate of economic growth, with allowances for effects on trade and the balance of payments. We refer to all these objectives as the stablization function. Some authors have argued that because of the relative ease with which individuals can relocate between local governments that the extent to which local governments are able to exercise local discretion with these functions is limited, especially for the distributive and stabilisation functions. (Stiglitz 2000). However, this will vary depending on the size of the
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municipality. Some governments have a larger population than many countries, for example, Lagos, with a population of around 18 million, is larger than many African countries. In its Public Expenditure Management Handbook (1998, page 2) the World Bank identified the three main objectives of public expenditure management as achieving: aggregate fiscal discipline resource allocation and use based on strategic priorities efficiency and effectiveness of programs and service delivery. These three objectives have been widely accepted although they could be criticised for being rather narrow in scope and normative or prescriptive in policy terms. Thus, for example, they do not refer to poverty reduction. In contrast, fiscal discipline or balanced budgets, a policy or political approach, is considered to be best practice although this may be in direct conflict with the need for significant capital investments in many municipalities. More recently Andrews and Shah (Shah 2003, page 3.22), in a World Bank assessment of local government performance in developing counties, identified the following five broad objectives: This paper asks the questions: What does a good local government look like in the developing world? What factors should one consider when evaluating local governments in such settings? In response to such questions five factors were identified as constituting the broad criteria evaluators of local governments should concentrate. Combining the discussion of each factor, a model local government would: Conform to legislation in process and structure Maintain its fiscal health (in outcomes and processes) Do the right things (be responsive) In the right way (with maximum efficiency) and Be accountable to its constituents (in processes and for its outputs and outcomes).
In a case study for another World Bank publication, Kusek and Rist (2004: page 190) identified the following objectives for public financial management in Egypt:
Prioritization of Expenditures. The current budget process does not include common approaches to encouraging prioritization such as providing budget ceilings or envelopes to encourage line ministries to prioritize budget requests. In addition, ad hoc budget negotiations and revisions during the year further undermine the implementation of budget priorities established by the Cabinet and the Peoples Assembly. Incentives for Efficient Service Delivery. The budget process does not reward efficient service delivery either in budget negotiations or through incentives such as sharing of savings or allowing greater flexibility in how resources may be used. Transparency. Information about the Egyptian budget is restricted to a high degree. The budget approved by the Peoples Assembly is not made public; sections of budget documents are made available on a need to know basis, basic financial statistics are not published or published in a very aggregated form and audit reports are narrowly disseminated and do not include information on the
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effectiveness and efficiency of expenditures.
Comprehensiveness. Responsibility for the preparation and execution of the Egyptian budget is divided between the Ministries of Finance and Planning... This makes responsible fiscal policy and realistic planning difficult since investment projects can have a large impact on overall budget levels and make it difficult to project recurrent cost requirements.
The PEFA Performance Measurement Framework is the most credible set of global public sector financial benchmarks to have been developed in recent years. It has now been used in nearly 70 countries. In addition, the Framework was being developed for use in sub-national governments as this report was being written. The PEFA Framework identifies the critical dimensions of performance of an open and orderly public financial management system as follows (2005: page 2): 1. Credibility of the budget - The budget is realistic and is implemented as intended 2. Comprehensiveness and transparency - The budget and the fiscal risk oversight are comprehensive, and fiscal and budget information is accessible to the public. 3. Policy-based budgeting - The budget is prepared with due regard to government policy. 4. Predictability and control in budget execution - The budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds. 5. Accounting, recording and reporting Adequate records and information are produced, maintained and disseminated to meet decision-making control, management and reporting purposes. 6. External scrutiny and audit - Arrangements for scrutiny of public finances and follow up by executive are operating. Whilst the PEFA Framework provides an authoritative set of standards for public financial management, especially in developing countries, they are limited as they do not consider poverty reduction, equity nor sustainable development. In addition, they are designed to be used by consultants to provide information of value to aid agencies. The performance indicators developed by this project are to be used by the municipalities themselves to assist with reporting the achievement of their financial objectives to their key stakeholders. Further consideration of the PEFA Framework is included in section three below. On the basis of these studies, our experience and guidance from our expert panel, we have agreed the following matrix to describe and analyse the core objectives of municipal or local government financial management. These nine key objectives of public financial management form the framework for the development of our range of performance indicators which could be used to assess the extent to which this full spectrum of objectives is being achieved.
Component 1 Resource management 1.1 Resource allocation
Explanation Allocation and re-allocation of resources through the budget process (including extra-budgetary funds) to achieve municipal policies and
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Financial Performance Indicators for Municipalities - Draft Report - UN-Habitat Component 1.2 Efficient and effective operations Explanation
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priorities, the provision of public goods and to foster greater equity Undertaking municipal operations as effectively and efficiently as possible; financial resources are made available, as planned and when required, information is provided to managers to enable them to make optimal decisions and exercise control Local management of fiscal risk to fund municipal services and investing in, and adequately maintaining, public infrastructure. This includes revenue and expenditure management; levels and impact of tax and non-tax revenues; long-term capital investment and financial planning; and debt management. Making financial and other information available to stakeholders (including the general public) in a format and time that facilitates transparency in municipal financial operations and civil society participation. Information is available in a format and time that enables municipal officials to be held accountable for their actions. Appropriate explanations are provided for any significant deviations from the agreed budget and other uses of resources. Civil society participation is enabled and encouraged. Poverty reduction is a priority, including achievement of the Millennium Development Goals, whilst complying with the UN Global Compact. Capacity building is provided for: 3 Fiduciary risk management Financial procedures and information enable the management of financial risk at acceptable levels, including internal financial control, measures to minimise fraud or corruption and internal audit Resources are managed in compliance with all relevant laws, regulations and standards; considerations of ethics, equity and propriety are fulfilled. Appropriate compliance and relationships are maintained with national funding and regulatory bodies Public oversight mechanisms, especially by independent audit, ombudsman and legislative review process. Timely review of financial resource use and regulatory compliance by the municipal council, civil society and other stakeholders. Significant findings by oversight bodies are promptly made public. 3.1 Financial control framework 3.2 Stewardship and regulatory compliance municipal employees the wider economy stakeholders including civil society
1.3 Fiscal management
Use of public resources
2.1 Transparency
2.2 Accountability
2.3 Poverty Reduction
3.3 Oversight
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2.2 The main users of municipal financial management performance indicators

Across the world, we find citizens are mobilizing, often locally, to demand better services. Not by shouting, but by counting. Making sure their governments spend effectively, and keep their promises.
World Bank (2004). From Shouting to Counting: A New Frontier in Social Development. Washington D.C.: The World Bank, page 2
There appears to have been an increased demand for public sector performance information in recent years. One view, shown by the above quotation, is that citizens have become more active and interested in asserting their rights as citizens (or customers). Another view (Putu et al 2007) explains the increased demand for performance information in terms of the recent public sector reform agenda (especially decentralisation and marketisation). They claim that the pressures for increased openness of local government, come from parties outside the public sector (e.g. international donors) as well as parties within the public sector (e.g. central government) (Putu et al 2007, page 8). They say that the demand for information arises as a result of the following modern developments:
central government wanting to monitor local government increased marketisation of public services spread of democratic elections and accountability to citizens anti-corruption programmes.
Their paper goes on to explain that one aspect of marketisation namely benchmarking leads, by definition, to a demand for performance information (direct effect). But also other aspects, such as contract management and public-private partnerships, are likely to lead to such a demand; namely a demand for performance information that can be used to assess whether the parties involved have lived up to the agreements that were made (direct effect). (Putu et al 2007, page 9) A wide range of users of municipal performance indicators may be identified. The Audit Commission (UK), one of the pioneer and key developers of such tools, has identified the following users of public performance information (Audit Commission 2000, page 6): service users: direct (visitors at the library, passport applicants or patients) and indirect (relatives and parents) the general public, including interest groups and the media central government politicians (local and central), local councillors auditors and inspectors managers at all levels in the organisation and staff.
Others (for example, the International Pubic Sector Accounting Standard Board) have identified the following additional potential users:
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funders, including, taxpayers and ratepayers, aid agencies, banks and other lenders (and credit rating agencies) regulators policy makers and their advisors, including consultants, academics, authors etc suppliers and creditors.
However, we consider that the primary group of users of financial performance indicators should be considered to be the electorate. This is the group which can make decisions on the basis of the information provided and so hold the government to account (through the ballot box) for the financial management of the municipality or local government. Other key user groups are elected representatives acting on behalf of the electorate, the press who inform the electorate and public sector employees (who are also electors). In addition, the regulators and the central government agencies responsible for funding local government will have a keen interest in the performance of local government. However, these entities have the power to define the particular information they require to monitor the outcomes of their local governments. The performance indicators we develop may assist with this process. Core users of municipal financial management performance indicators Primary group Secondary group The electorate Elected representatives The press Public sector employees
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2.3 Criteria for the selection of municipal financial management performance indicators
For most stakeholders in the nonprofit sector, measuring performance is elusive. Nonprofit managers and staff, funders, board members, potential clients, and members of the public seeking information are often frustrated by lengthy academic evaluations and complex, meaningless statistical analysis. At the same time, there is increasing pressure on nonprofits to account for and improve results. Although classic program evaluation is one response, practitioners and funders also need the tools, capacity, and standards to track and measure their own performance.
Urban Institute & The Center for What Works December 2006, Building a Common Outcome Framework to Measure Nonprofit Performance, page 3
To assist with this process, the Urban Institute (2006, page 6) identified the following basic criteria for assessing the quality of performance indicators: specific (unique, unambiguous); observable (practical, cost effective to collect, measurable); understandable (comprehensible); relevant (measured important dimensions, appropriate, related to program, of significance, predictive, timely); time bound (covered a specified period of time); and valid (provided reliable, accurate, unbiased, consistent, and verifiable data). This appears to be a variation on the traditional acronym of SMART describing the desirable attributes of performance indicators and targets as being Specific, Measurable, Achievable, Relevant, and Timed. In the US, the standard work on local government accounting, audit and financial reporting (Gauthier 2005, page 374) provided the following advice on performance measures: The GFOA believes that performance measures are an important component of longterm strategic planning and decision making and should be linked to government budgeting. At a minimum, performance measures should: be based on program goals and objectives that tie to a statement of program mission or purpose; measure program outcomes; provide for resource allocation comparisons over time; measure efficiency and effectiveness for continuous improvement; be verifiable, understandable, and timely; be consistent throughout the strategic plan, budget, accounting and reporting systems to the extent practical; be consistent over time; be reported internally and externally; be monitored and used in managerial decision-making processes; be limited to a number and degree of complexity that can provide an efficient and meaningful way to assess the effectiveness and efficiency of key programs; and be designed in such a way to motivate staff at all levels to contribute toward organizational improvement.
Other checklists have been specifically suggested to assess performance indicators in developing countries, for example, Kusek &Rist (2004, page 71) provided the following checklist:
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Is the indicator . . . 1. As direct as possible a reflection of the outcome itself? 2. Sufficiently precise to ensure objective measurement? 3. Calling for the most practical, cost-effective collection of data? 4. Sensitive to change in the outcome, but relatively unaffected by other changes? 5. Disaggregated as needed when reporting on the outcome? In addition, a recent global project to develop performance indicators for cities (Global City Indicators Program, 2008 - Annex 1, page 2.2) developed the following criteria: 1. Can be reported annually; 2. Readily comparable globally; 3. Link to public policy decision making; 4. Cost effective to collect (ideally already collected by most cities); 5. Meaningful to cities across the globe regardless of affluence, climate, etc.; 6. Understandable to lay public; and 7. Clear if change in indicator is good or bad. On the basis of these and other studies, our experience and guidance from our expert panel, we have agreed the following criteria to guide the design of our proposed municipal financial performance indicators:
Relevant and useful - the indicators should reflect and cover the main objectives of municipal financial management and wider sustainable development, they should be useful for monitoring, enabling accountability and facilitating improvements Clear and understandable - the indicators should be simple and precisely defined, and they should be accessible, easy to understand and unambiguous for users Cost effective - the costs of establishing and managing a robust and sustainable system of data collection should be reasonable given the expected benefits, where possible indicators should be based on existing information and data sources Capable of monitoring results- the indicators should enable the effective monitoring of the achievement of objectives, be verifiable and should be consistent overtime and between organisations.
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The above criteria are based on the basic criteria developed by David Shand in 1998 as quoted in the manuals published by the Asian Development Bank (1999) and the OECD (2001).
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3 State-of-the-art analysis of municipal financial management indicators in the world and the region
Introduction
We have chosen to review a selected number of suites of performance indicators which are used, or could potentially be used, to assess the quality of financial management in local governments. This section does not attempt to be comprehensive, but includes the main international examples and a range of national examples. The intention is to demonstrate the main approaches including the key aspects of financial management which are being or could be assessed. We have chosen to review the following sets of performance indicators: PEFA Performance Measurement Framework (2008)
Country Assessment and Action Plan (AAP) for HIPCs (2003) World Bank Country Policy and Institutional Assessments (2006)
United Nations Human Settlements Programme (2004)
Global City Indicators Program (2008) Australia New South Wales Department of Local Government (2008) IndiKit US (2003) Audit Commission Key lines of enquiry for use of resources 2007 (UK) France SFL & Forum (Avril 2008)
Direction Gnrale des Collections Locales (2008) Other sources of good practice and benchmarks for local government include: National Advisory Council on State and Local Budgeting (US) (1998) Best Practices in Public Budgeting, Government Finance Officers Association http://www.gfoa.org/services/nacslb/ (23 August 2008) IMF Code of Fiscal Transparency (2007) http://www.imf.org/external/np/pp/2007/eng/051507c.pdf (23 August 2008) OECD Best Practices For Budget Transparency (2001) http://www.olis.oecd.org/olis/2000doc.nsf/c5ce8ffa41835d64c125685d0053 00b0/c125692700623b74c1256a4d005c23be/$FILE/JT00107731.pdf Country Self-Assessment for the African Peer Review Mechanism http://www.eisa.org.za/aprm/pdf/APRM_Self_Assessment_Questionairre.pdf (23 August 2008)
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PEFA Secretariat (March 2008) Guidelines for application of the PEFA Performance Measurement Framework at Sub National Government Level, PEFA, Washington The PFM High-Level Performance Indicator Set
This is an adaptation of main PEFA benchmarks for sub-national governments. These have now been used in around 70 countries and are backed by the World Bank, IMF and a number of aid agencies. PEFA introduced its guidelines for sub-national government as follows (PEFA, 2008: page 2) Given the increasing importance of sub national government in resource allocation and service provision, the importance of an open and orderly PFM system is equally relevant at the sub national level A number of sub-national applications of PEFA have now been conducted either as part of an overall assessment of PFM in the country or as stand alone
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exercises for either one or more sub national entities. In order to ensure consistent and appropriate application of the indicators and a sound basis for the interpretation of the findings, the PEFA program decided to produce a set of practical and detailed guidelines for SN [sub-national] applications. The final version of the guidance is planned to be produced before the end of 2008.
Assessment against the agreed criteria:
Relevant and useful - the indicators should reflect and cover the main objectives of municipal financial management and wider sustainable development, they should be useful for monitoring, enabling accountability and facilitating improvements
In general, this set of performance indicators is considered to be relevant and useful. However, there appears to be an over emphasis on fiscal prudence and budgetary compliance (the first three performance indicators, for example, each cover aspects of this). In addition, there is no reference to poverty reduction, equity nor sustainable development, in the assessment of the performance indicators, as the guidance states: The Performance Measurement Framework does not involve fiscal or expenditure policy analysis, which would determine whether fiscal policy is sustainable, whether expenditures incurred through the budget have their desired effect on reducing poverty or achieving other policy objectives, or whether there is value for money achieved in service delivery. This would require detailed data analysis or utilization of country-specific indicators. The framework rather focuses on assessing the extent to which the PFM system is an enabling factor for achieving such outcomes. (PEFA 2005, page 3) The performance indicators are designed for the primary use of one specific set of users, donor aid agencies. Thus they will be of less relevance for general citizens or their representatives and do not necessarily enhance accountability or openness to these key stakeholder groups.
Clear and understandable - the indicators should be simple and precisely defined, and they should be accessible, easy to understand and unambiguous for users
The indicators are reasonably clear and precisely defined, but many of them have multiple dimensions. The PEFA Framework has been developed as a set of benchmarks rather than performance indicators. It provides a mechanism by which consultants can score the financial management systems of governments. In addition, some of the guidance is quite technical as it is to be used by technical public sector financial management consultants. As a result, the significance of the performance indicators may not be apparent to the general public and a non-technical audience, for example, local government councillors.
Cost effective - the costs of establishing and managing a robust and sustainable system of data collection should be reasonable given the expected benefits, where possible indicators should be based on existing information and data sources
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This set of performance indicators is designed to be produced by consultants rather than as part of the general reporting system of local government. As a result, they are relatively costly to produce and so questions arise on their sustainability.
Capable of monitoring results- the indicators should enable the effective monitoring of the achievement of objectives, be verifiable and should be consistent overtime and between organisations.
The performance indicators have been use across nearly 70 countries in monitoring the achievement of some objectives and so have high credibility and consistency, at least with their core users, aid agencies. However, their intermittent production, problems of accessibility for the public and restricted coverage of public financial management objectives mean that they are less effective at monitoring the overall achievement of municipal financial objectives. In addition, the PEFA Benchmarks are not necessarily comprehensive and do not cover all aspects of public financial management. For example they do not address issues of whether performance against goals is measured and reported, how the resource allocation process works, technical efficiency of the public financial management systems, etc.
Country Assessment and Action Plan (AAP) for HIPCs

PREM Public Sector Group and the Fiscal Affairs Department (2003) Country Assessment and Action Plan (AAP) for HIPCs Questionnaire, Benchmarks, Explanations, Standard Tables, The World Bank and IMF, Washington DC These performance indicators developed by the IMF and World Bank were a significant influence over the development of the PEFA Framework with 11 of the 16 indicators being mapped directly to the PEFA Framework (de Renzio & Dorotinsky, 2007). The following two indicators are concerned with poverty reduction which could usefully extend the remit of the PEFA Framework: Indicator 6 ~ Identification of poverty-reducing spending Indicator 13 ~ Regular fiscal reports track poverty reducing spending
In addition, it has been noted that, the extent of the poverty focus in developing country local government allocations is identified as a key outcomes indicator of responsiveness (Andrews & Shah 3.13). Further details on performance indicators 6 and 13 are provided below:
Indicator 6 ~ Identification of poverty-reducing spending Benchmark 6, Answer A: Poverty-reducing expenditures are clearly identified. Q6. What is the principal means for tracking poverty-reducing spending? a. Use of the existing budgetary or treasury accounting classification system (either preexisting or through the use of a so-called virtual poverty fund)
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b. Use of a separate institution (an actual poverty fund) c. Otherdescribe Explanation: The ability to identify poverty-reducing spending clearly is the sine-qua-non of receiving HIPC debt relief and is an important element of implementing PRSP objectives through the budget and for reallocating resources. Such tagging relies on public documentation of the budget items considered poverty reducing, given the PRSP. Beyond debt relief, a good classification system, clear identification of government policy priorities in resource allocation, and the ability to track whether these funding patterns occurred, are essential to sound PEM. The preferred approach to tagging involves the use of an existing classification system that complies with international standardswhere poverty reducing spending, as defined in the PRSP, is explicitly linked to the budget classification. In addition to this, tracking will require the identification of a base year, prior to the start of the debt relief, consistent with the classification schematic. Where comprehensive classification systems are not in place, some countries are tagging specific appropriations in their budget as poverty reducingthis has been named a virtual fund because it involves no separate institutional, governance, or execution devices from those used generally in budget management. Such virtual funds reduce the problems for tracking created by a lack of a comprehensive and robust functional or programmatic classification, and do not create the further problems often associated with separate institutional structures. Generally, they have involved the application of a special poverty-reducing code within a consolidated and reliably depicted line item budget. Establishing special tracking mechanisms for expenditures financed from HIPC resources only (answer c) does not meet the benchmark, as these mechanisms fail to provide sufficient information about the total poverty-reducing effort. The use of institutional poverty funds is generally considered to be poor practice, as it reflects considerable weaknesses in current classification and recording, and leads to fragmentation in the budget process. (PREM Public Sector Group and the Fiscal Affairs Department, 2003: page
17/18)
Indicator 13 ~ Regular fiscal reports track poverty reducing spending Benchmark 13, Answer A: Good-quality classification of poverty reducing spending is reflected in the in-year budget reports Q13. What in-year reports are published for tracking budget expenditure by function? a. Good-quality functional classification or virtual poverty fund is presented b. Functional or virtual poverty fund presentation is made in the in-year reports, but there are quality concerns with its compilation c. There is no routine expenditure tracking on a functional basis Explanation: Functional classification is necessary for making broad assessments of the extent to which the overall government spending program is pro-poor. In systems using a virtual poverty fund, or where the current expenditure system is robust and allows tracking of poverty-reducing
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spending, detailed information, equivalent to that produced by a more complete functional classification, should be easily and reliably produced on a regular basis. Alignment between the chart of accounts used to code actual payment transactions and the classification system related to function in the budget should allow good-quality information to be presented. In a properly developed program budgeting system, if ministries provide their detailed quarterly reports broken down to at least program level, they are providing sufficient information required for a functional presentation (monthly reports are preferable and any discrepancy from this should be noted in the narrative). When functional reporting relies on highlevel bridge tables, the information reported is more likely to suffer from quality problems. While the preference is for monthly budget reports to be made public, this is not necessary to meet the benchmark answer. (PREM Public Sector Group and the Fiscal Affairs Department,
2003, page 28)
World Bank Country Policy and Institutional Assessments

Operations Policy and Country Services (December 2006) Country Policy and Institutional Assessments, 2006 Assessment Questionnaire, World Bank, Washington http://siteresources.worldbank.org/IDA/Resources/CPIA2006Questionnaire.pdf The Country Policy and Institutional Assessment (CPIA) assesses the quality of a countrys present policy and institutional framework. Quality refers to how conducive that framework is to fostering poverty reduction, sustainable growth, and the effective use of development assistance. The questionnaires have been completed by World Bank country economists (and subject to a centralized review for comparability) each year since 1978 for countries in receipt of World Bank assistance. The indicators assess 16 dimensions of policy and institutional performance. Responses are coded on a 6-point scale. The results have been made public since 2005. The four dimensions that are relevant for public financial management are: Equity of Public Resource Use Quality of Budgetary and Financial Management Efficiency of Revenue Mobilization Transparency, Accountability, and Corruption in the Public Sector
Further details of the guidance for assessing each of these four dimensions are provide below: 8. Equity of Public Resource Use This criterion assesses the extent to which the pattern of public expenditures and revenue collection affects the poor and is consistent with national poverty reduction priorities. The assessment of the consistency of government spending with the poverty reduction priorities takes into account the extent to which: (a) individuals, groups, or localities that are poor, vulnerable, or have unequal access to services and opportunities are identified; (b) a national development strategy with explicit interventions to assist the groups identified in (a) has been adopted; and (c) the composition and incidence of public expenditures are tracked systematically and their results feedback into subsequent resource allocation decisions. The assessment of the revenue collection dimension takes into account the incidence of major taxes, e.g., whether they are progressive or regressive, and their alignment with the poverty reduction priorities. When relevant, expenditure and revenue collection trends at the national
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and sub-national levels should be considered. The expenditure component should receive two thirds of the weight in computing the overall rating. (Operations Policy and Country Services, December 2006: page 21) To receive a rating of 4, the following benchmarks must be achieved: 4 a. Public expenditures are generally aligned to poverty reduction. The poverty diagnosis generally identifies poor, vulnerable groups, and those lacking services. There are ongoing interventions targeted at identified groups, but implementation of the strategy is partial. Expenditures are tracked by category, program, and region. Benefit incidence analysis is uneven. Feedback of the analysis to subsequent expenditure allocations is increasing. b. Some egregious regressive revenue sources remain, but initiatives are underway to correct them and ensure that revenue generation is consistent with national poverty reduction priorities. (Operations Policy and Country Services, December 2006: page 22) 13. Quality of Budgetary and Financial Management This criterion assesses the extent to which there is: (a) a comprehensive and credible budget, linked to policy priorities; (b) effective financial management systems to ensure that the budget is implemented as intended in a controlled and predictable way; and (c) timely and accurate accounting and fiscal reporting, including timely and audited public accounts and effective arrangements for follow up. Each of these three dimensions should be rated separately. For the overall rating for this criterion, these three dimensions should receive equal weighting. (Operations Policy and Country Services, December 2006: page 34) To receive a rating of 4, the following benchmarks must be achieved: 4 a. Policies and priorities are broadly reflected in the budget. Some elements of forward budget planning are in place. The budget is formulated in consultation with spending ministries, from a sufficiently early stage in the budget preparation process. The budget classification system is comprehensive, but different from international standards. Less than 10% of funds controlled by the executive are outside the budget. b. Actual expenditures deviate from the amounts budgeted by more than 10 percent on many broad budget categories. Budget monitoring and control systems exist, but there are some deficiencies. Payment arrears may exist but are less than 5% of total expenditures. c. Reconciliation of banking and fiscal records is undertaken satisfactorily, on a monthly basis. In-year budget reports are prepared quarterly less than 6 weeks after the end of the period, with reasonably accurate data, broken down to at least program or functional level. There are delays (e.g., more than 6 months) in preparation of the public accounts. The accounts are audited in a timely and professional manner, but few meaningful actions are taken on budget reports or audit findings. (Operations Policy and Country Services, December 2006: page 35) 14. Efficiency of Revenue Mobilization This criterion assesses the overall pattern of revenue mobilization--not only the tax structure as it exists on paper, but revenue from all sources as they are actually collected. Separate subratings should be provided for (a) tax policy and; (b) tax administration. For the overall rating, these two dimensions should receive equal weighting. (Operations Policy and Country Services, December 2006: page 37) To receive a rating of 4, the following benchmarks must be achieved:
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4 a. A significant amount of revenue is being generated by low-distortion taxes such as retail sales/VAT, property, etc. VAT has not been fully operational to include activities at the retail stage. Non-trivial amounts of revenue are generated from company and personal income taxes. Tax base is broad and exemptions are moderate and made time-bound, especially for promotion schemes. Trade taxes have few and low rates. b. Tax administration is solid, cost of revenue generation has been reduced and there are relatively few cases of corruption and political interference. Eligibility for preferential rates and exemptions is largely transparent. (Operations Policy and Country Services, December 2006: page 38). 16. Transparency, Accountability, and Corruption in the Public Sector This criterion assesses the extent to which the executive can be held accountable for its use of funds and the results of its actions by the electorate and by the legislature and judiciary, and the extent to which public employees within the executive are required to account for the use of resources, administrative decisions, and results obtained. Both levels of accountability are enhanced by transparency in decision-making, public audit institutions, access to relevant and timely information, and public and media scrutiny. A high degree of accountability and transparency discourages corruption, or the abuse of public office for private gain. National and sub-national governments should be appropriately weighted. Each of three dimensions should be rated separately: (a) the accountability of the executive to oversight institutions and of public employees for their performance; (b) access of civil society to information on public affairs; and (c) state capture by narrow vested interests. For the overall rating, these three dimensions should receive equal weighting. A rating for each dimension should be provided in the write-up along with its justification. (Operations Policy and Country Services, December 2006: page 41) To receive a rating of 4, the following benchmarks must be achieved: 4 a. External accountability mechanisms limit somewhat the degree to which special interests can divert resources or influence policy making through illicit and non-transparent means. Risks and opportunities for corruption within the executive are reduced through adequate monitoring and reporting lines. b. Decision making is generally transparent. Government actively attempts to distribute relevant information to the public, although capacity may be a constraint. Significant parts of the media operate outside the influence of government or powerful business interests, and media publicity provides some deterrent against unethical behavior. c. Conflict of interest and ethics rules exist and the prospect of sanctions has some effect on the extent to which public officials shape policies to further their own private interests.
The indicators could provide a broad coverage of the main objectives of municipal financial management although they are designed to assess the wider objectives of public administration by central government. The indicators largely cover the aspects subject to the
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PEFA assessments, except for the eighth indicator on the Equity of Public Resource Use which would provide a useful extension to the PEFA benchmarks.
The indicators are designed to be used by professional economists and each has several dimensions and so are not simple for the general public to access or understand. However, the indicators are precisely defined.
The World Bank Country Policy and Institutional Assessments are designed to be assessed by World Bank staff although, where appropriate pre-existing data and information sources are used.
The indicators have been used for nearly 30 years with limited revisions and so provide a valuable time series analysis of conditions in developing countries. They would require some adaptation to be used in industrialised countries.
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United Nations Human Settlements Programme (2004)

United Nations Human Settlements Programme (August 2004) Urban Indicators Guidelines: Monitoring the Habitat Agenda and the Millennium Development Goals, UN Habitat, Nairobi http://www.cityindicators.org/Deliverables/urban_indicators_guidelines_12-4-20071029798.pdf (14 May 2008) UN-Habitat has been a pioneer in the collection of urban indicators for more than 15 years. As the above publication indicates: UN-HABITAT has been a pioneer organization in the collection of urban indicators. In 1991, it initiated the Housing Indicators Programme, focussing on monitoring shelter performances. It then became Urban Indicators Programme in 1993 in order to focus on a larger range of urban issues. The programme produced two main databases in 1996 and 2001 (Global Urban Indicators Databases I and II), presented at the Habitat II Conference and the Istanbul +5 which helped establishing regional trends in key urban issues. In the Habitat Agenda (result of the 1996 Habitat II Conference, Member States and the Habitat Agenda Partners have requested that UN-HABITAT continue monitoring urban conditions worldwide. They have also committed themselves to monitor their own urban conditions overtime and report on their trends regularly. The next Global Urban Indicators Database (III) will continue to address the Habitat Agenda key issues, with a specific focus on the Millennium Development Goals, particularly, its Target 11 on the improvement of slum dwellers. For this new phase, data will be collected through different mechanisms. For the Africa Region, workshops will be held in order to gather experts to agree on key results for the region using a sample of urban agglomerations. Data experts will be selected from National Statistics Offices, Ministries responsible for urban issues at the National level, Municipal and Metropolitan authorities representing urban agglomerations. (UN-Habitat, 2004: Page 3/4)
UN-Habitat is now building on this experience by taking a lead on the project to develop financial performance indicators for municipalities. In addition, the above publication contains one indicator and one checklist element of a financial nature. These are:
Indicator 20: Local government revenue Check-list 9: Transparency and accountability.
Details of these two aspects of the urban indicators are provided below:
Indicator 20: Local government revenue
Habitat Agenda Goal: Promote decentralisation and strengthen local authorities Rationale:
Sustainable human settlements can be achieved through the effective decentralization of responsibilities, policy management, decision-making authority and sufficient resources (Habitat Agenda, paragraph 177). The amount of local government revenue is an important indicator, which determines the level of effectiveness of local authorities. The level of revenue is an important piece of information which indicates the level of income which municipalities are able to raise from their residents, the business and industries and from higher levels of government. In some cities, the high level of revenue and investment is due to the fact that local governments are responsible for virtually the whole range of local services.
Definition:
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total local government revenue from all sources in US dollars annually, both capital and recurrent, for all local governments in the metropolitan area, averaged over the last three years (2000, 2001, 2003), divided by the population.
Methodology:
Information should be obtained from the local authorities department dealing with the budget. Local government revenue is the total local government sources of funds in US dollars annually, both capital and recurrent, for the metropolitan area, divided by population (three year average, using the period 2000- 2003). It usually includes:
Taxes: municipal rates and levies, any local taxes on the transfer of property, and any other taxes
such as entertainment or hotel taxes, motor vehicle taxes, and taxes on business, which do not reflect the direct provision of services.
User charges: local government charges for services provided, such as water, refuse collection,
building permits. Betterment levies are also be included.
Other own source: interest and principal received, sales of capital items, but not donations, voluntary
contributions or aid.
Transfer: formula driven payments (such as repatriation of income tax) or other grant donations from
national or state governments.
Loans: borrowing from all sources, including bonds. Other may include donations or aid.
If it is not available for the total for the whole metropolitan area, revenues of the different municipalities composing the metropolitan area may be added for each year and divided by the total population of reference.
Check-list 9: Transparency and accountability

Habitat Agenda Goal: Ensure transparent, accountable and efficient governance of towns, cities and metropolitan
areas
Rationale:
Ensuring transparent and accountable Governments is part of the general goal of enablement and participation. Governments are committed to the strategy of enabling all key actors in the public, private and community sectors to play an effective role in human settlements and shelter development (Habitat Agenda, paragraph 44). In order to do so, they have committed themselves to the objectives of enabling local leadership, promoting democratic rule, exercising public authority and using public resources in order to ensure transparent and accountable governance of towns, cities and metropolitan areas. Indication that transparency and accountability are ensured can be answered through the existence of regular independent auditing and municipal accounts, publication of contracts and tenders for municipal services, sanctions against faults of civil servants, laws on disclosure of potential conflicts of interest.
Definition:
Level of transparency and accountability as measured by the questions below:
Are the following processes followed by the local authorities ? 1. Regular independent auditing of municipal accounts 2. Formal publication of contracts and tenders for municipal services 3. Formal publication of budgets and accounts 4. Sanctions against faults of civil servants 5. A local hotline to receive complaints and information on corruption 6. A local agency to investigate and report cases of corruption Methodology:
Information should be obtained from the local authorities officials or the Ministry responsible for Local Governments and checked with representative of NGOs dealing with governance issues.
yes/no yes/no yes/no yes/no yes/no yes/no
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1. Auditing of municipal account should be regular (annual or biannual). They should also be conducted by independent auditors. 2-3. There should be institutionalised mechanisms which ensure that contracts and tenders for municipal services are always published in order to ensure an adequate competitive transparent and open process in contracting. 4. There should also be institutionalised mechanisms which ensure systematic sanctions against faults of civil servants at all levels.
Gender:
One must make sure that both men and women are involved in existing mechanisms and processes which ensure openness and accountability at the municipal level.
The indicators cover a limited range of the objectives for the financial management of local government. However, especially the check-list on transparency and accountability provides some useful pointers on international best practice which would supplement the PEFA Framework.
The indicators are precisely designed and careful explanations are provided. They appear simple and easy to understand for users. They should be accessible and unambiguous for the general public.
The data required for these two performance indicators should be readily available for most local governments.
The indicators should be useful for monitoring results in the limited range of financial management objectives which they aim to cover.
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Global City Indicators Program

Global City Indicators Program (2008) Global City Indicators Program Report Part of a Program to Assist Cities in Developing an Integrated Approach for Measuring City Performance http://www.cityindicators.org/Deliverables/Final%20Indicators%20Report%203_21_08_4-232008-924597.pdf This project builds on considerable existing work, especially that of UN-HABITATs Urban Indicators Programme... The program proposes to build on these and other existing indicator programs to encourage the development of a standardized set of city indicators. The indicators would be sufficiently standardized to enable cross-city comparisons and third-party verification. The indicators should be simple, inexpensive to collect and ideally results should be published annually in order to maximize usefulness. (page i) The Government of Japan has funded the development of this program in concert with the World Bank www.cityindicators.org (24 August 2008) The project is still in development and some of the performance indicators are still to be reviewed and revised. The indicators are grouped into 22 themes, three of which are relevant to this financial performance indicators project: Finance Core: Debt service ratio (debt service expenditures as a percent of a municipality's own-source revenue) Support Indicators: Tax collected as percentage of tax billed Own-source revenue as a percent of total revenues Capital spending as percentage of total expenditures Governance Core indicator: Accountability and Transparency (percent of maximum score) Support Indicator: Percentage of city government workforce that is women/minorities in proportion to city population composition Social Equity Core indicator: Percentage of city population living in poverty
Assessment against our agreed criteria
Relevant and useful - the indicators should reflect and cover the main objectives of municipal financial management and wider
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sustainable development, they should be useful for monitoring, enabling accountability and facilitating improvements
These indicators are part of a much wider core set of city indicators. Thus the ones of a financial nature only cover a limited range of the objectives we have agreed for financial management in local government. The relevant indicators are useful as a challenge to the core financial performance indicators that we select.
The indicators are mainly clear and understandable by the general public although detailed definitions and explanations do not yet appear to be available.
Where possible, the performance indicators are based on existing information and data sources. They have been based on existing practice where possible and are in the process of being extended to all the cities which are tailing the performance indicators.
The aim is that the finally agreed performance indicators will from an International Standard which is to be registered with the ISO. Widespread adoption of these performance indicators will facilitate effective monitoring of a range of public services to cities and the conditions of their citizens. The development of more detailed financial performance indicators may effectively supplement this initiative.
Australia, New South Wales Department of Local Government Department of Local Government (NSW), Comparative Information on NSW Local Government Councils 2005/2006, (accessed 19 May 2008) http://www.dlg.nsw.gov.au/dlg/dlghome/documents/Comparatives/Comparatives_2005-06.pdf This set of municipal management performance indicators covers nine local government services including rating (property taxation and other income) and financial. These have been developed for a general audience and the report is the 16th edition so the indicator sets have stood the test of time. However, the performance indicators appear to be rather technical for a general audience and concentrate on aspects which would be of interest to credit rating agencies or others interested in the financial prudence of local governments. This publication provides comparative information on the performance of all local councils in NSW. It is designed to help both the community and councils assess the performance of their council across a broad range of activities. Page 3
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This information is divided into the following categories: rating financial corporate library services domestic waste management and recycling services planning and development services environmental management and health services recreation and leisure services community services. Each category has its own key performance indicator(s). For each key performance indicator there is: an introductory section explaining how the indicator is calculated an analysis of comparative performance for 2003/04, 2004/05 and 2005/06 detailed results for each council. Page 5 This publication contains 2003/04, 2004/05 and 2005/06 comparative performance information for all councils in New South Wales. It is the 16th edition and builds on past publications. The key performance indicators have been chosen to monitor performance across a broad spectrum of activities and are kept under constant review. When assessing or comparing the performances of councils, it is important to remember that local circumstances can influence how well a council provides its services. There are often good reasons why it is harder or more costly to provide certain services in some local government areas than in others or why a different mix of services may be delivered. In some cases, councils may have made conscious decisions to provide lower or higher levels of services depending on local needs. The council profiles will help you assess the comparative performance information. Page 10 The following eleven performance indicators (in the two areas of rating and financial) are relevant for an assessment of public financial management: Average rate per assessment Outstanding rates and annual charges Percentage movement in rates and annual charges revenue from previous year Percentage movement in user charges and fees revenue from previous year Sources of income from continuing operations1 Total continuing operations income per capita Dissection of expenses from continuing operations Total expenses from continuing operations per capita Current ratio (unrestricted) Debt service ratio Capital expenditure ratio. A selection of these indicators could form a useful complement to the PEFA benchmarks in assessing the area of fiscal management. Details of the definitions of each of these eleven performance indicators are provided below:
With the introduction to local government financial reporting of the Australian Equivalent to International Financial Reporting Standard (AEIFRS) in 2005/06, all activities before capital expenditure are now referred to as continuing operations. Prior to 2005/06, these activities were referred to as ordinary activities.
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Rating
There are four key performance indicators for rating. Average rate per assessment Outstanding rates and annual charges Percentage movement in rates and annual charges revenue from previous year Percentage movement in user charges and fees revenue from previous year Average rate per assessment Rates are an important source of a councils revenue. This indicator highlights the relative level of a councils residential, farmland and business rates. It does not include water and sewerage rates or domestic waste management charges. The formula used for this indicator is:
Total residential/farmland/business rates revenue Number of rateable residential/farmland/business properties
(page 25)
Outstanding rates and annual charges

This indicator assesses the effectiveness of a councils revenue collection. The percentage of rates and annual charges that are unpaid at the end of a financial year is a measure of how well a council is managing debt recovery. Rates and annual charges are usually levied at the beginning of the financial year (31 July at the latest). They can be paid as a single amount or in four equal instalments. The final instalment is due by 31 May. There is no benchmark for the level of outstanding rates and annual charges. The lower the percentage, the less income is tied up in receivables and the more revenue there is available for council purposes. The formula used for this indicator is:
Outstanding rates and annual charges x 100 Annual Revenue from rates and annual charges
(page 42)
Percentage movement in rates and annual charges revenue from previous year
This indicator shows the increase or decrease in revenue from rates and annual charges. A councils income from rates and annual charges (except water, sewerage and domestic waste) is limited by the rate-pegging percentage determined by the NSW Government. If a council can show that special circumstances exist, they may be given approval (subject to Ministerial approval) to increase their annual general revenue by more than the general ratepegging variation. Water and sewerage rates and charges are set by each council and are not limited by rate-pegging. Domestic waste charges are not limited by rate-pegging but they must not exceed the cost of providing the service. The formula used for this indicator is:
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x 100
2005/06 rates and annual charges 2004/05 rates and annual charges 2004/05 rates and annual charges
(page 48)
Percentage movement in user charges and fees revenue from previous year
This indicator shows the increase or decrease in revenue from user charges and fees. User charges and fees are levied at councils discretion and are not subject to rate-pegging. The formula used for this indicator is:
2005/06 user charges and fees 2004/05 user charges and fees x 100 2004/05 user charges and fees
(page 54)
Financial
There are seven key performance indicators for financial.
Sources of income from continuing operations2 Total continuing operations income per capita Dissection of expenses from continuing operations Total expenses from continuing operations per capita Current ratio (unrestricted) Debt service ratio Capital expenditure ratio
Sources of income from continuing operations

The main sources of a councils revenue are: rates and annual charges user charges and fees interest grants contributions and donations other revenues e.g. fines, external works, business activities.
Rates and annual charges revenue is generally the most important source of revenue for councils, followed by grant revenue. These sources of revenue are relatively stable from year to year and allow councils to plan and use sound financial budgeting methods to achieve their objectives. User charges are commonly levied on water usage, trade waste and extra domestic waste management collection. Fees are generally charged for goods or services, providing information and in connection with a councils regulatory functions. This indicator assesses the degree of dependence on alternative sources of revenue, both continuing operations and capital. It shows the different sources of revenue as a percentage of
With the introduction to local government financial reporting of the Australian Equivalent to International Financial Reporting Standard (AEIFRS) in 2005/06, all activities before capital expenditure are now referred to as continuing operations. Prior to 2005/06, these activities were referred to as ordinary activities.
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total revenue. It does not include gains from the sale of assets and gains from joint ventures and associates. The formula used for this indicator is:
Y x 100 Total revenue
Where Y is the source of revenue eg rates and annual charges, user charges and fees, interest, grants (including capital), contributions and donations (including capital) and other revenues. (page 61)
Total continuing operations income per capita

Total continuing operations income per capita is another way of analysing revenues received by a council. Revenue depends on the number of people living and working within an area. It is also affected by ratepegging (rates), development activity (developer contributions) and the extent of user pays type services (charges and fees). This indicator measures the total continuing operations income before capital per head of population. It shows the revenue available to service the needs of the community. It does not include water and sewerage rates. The formula used for this indicator is:
Total continuing operations income before capital receipts Estimated resident population within council boundaries
(page 74)
Key performance indicator
Dissection of expenses from continuing operations

This indicator assesses the expenditure patterns of councils. A councils possible expenditure needs to include: employee costs materials and contracts borrowing costs depreciation impairment other expenses. Employee costs include wages and salaries (including fringe benefits), annual leave, annual leave loading, long service leave, sick leave, gratuities, post employment benefits other than superannuation and employment oncosts. Materials and contracts include inputs required to complete work by the council. Anything from gravel for roads to printing and stationery could be included. Borrowing costs relate to the cost of borrowing to complete work by the council. Depreciation is recognition of the costs of holding an asset that has a limited useful life.
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Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. Impairment is included in expenses with the introduction of the Australian Equivalent International Financial Reporting Standard (AEIFRS) in 2005/06 to local government financial reporting. As a result, it is important to be aware that, for some councils, the expenses data for 2005/06 may not directly comparable with the results for 2003/04 and 2004/05. The indicator does not include loss from the sale of assets and loss from joint venture and associates. The formula used for this indicator is:
E x 100 Total ordinary expenditure
Where E is the type of expense eg employee costs, materials and contracts, borrowing costs, depreciation, impairment or other expenses. (page 80) Total expenses from continuing operations per capita This indicator measures the total expenses from continuing operations per head of population before excluding capital expenditure. It does not include water and sewerage rates. The formula used for this indicator is:
Total expenses from continuing operations Estimated resident population within council boundaries (page 94)
Current ratio (unrestricted)

This indicator is a measure of a councils ability to meet its financial obligations such as paying for goods and services supplied. It assesses the level of liquidity and the ability to satisfy obligations as they fall due in the short term. A ratio of 1.5:1 indicates that unrestricted current assets are available on hand to meet unrestricted current liabilities. If the ratio is less than 1.5:1, the ratio is unsatisfactory and council may be unable to meet its short term commitments. A ratio of between 1.5:1 and 2:1 is satisfactory and shows that a council has sufficient liquid assets on hand to meet its short term liabilities. A ratio of 2:1 or better is generally viewed by the industry as good. Unrestricted current assets are those where there is no form of restriction imposed by regulations or some other externally imposed requirement. Restricted current assets have restrictions on their use eg developer contributions, RTA contributions, water and sewerage rates, charges and grants, and domestic waste management charges. The formula used for this indicator is:
Current assets less all current external restrictions Current liabilities less current specific purpose liabilities
(page 100)
Debt service ratio

This indicator assesses the degree to which revenues from continuing operations are committed to the repayment of debt. It is generally higher for councils in growth areas where
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loans have been required to fund infrastructure such as roads and water and sewerage works. Debt service costs include debt redemption from revenue, transfers to sinking funds and bank overdraft interest. There is no set benchmark for the debt service ratio. The use of loan funds for infrastructure improvements and other capital purposes is considered to be a prudent financial strategy allowing for contribution to the cost of the asset through its life by the community. When assessing this financial indicator, the ratio may be compared over a number of years in conjunction with other financial performance ratios such as the current ratio. The formula used for this indicator is: (page 107)
Net debt service cost x 100 Income from continuing operations
The performance indicators have a restricted scope related to revenue collection and fiscal prudence. The link between the financial performance indicators and the more general objectives of local government financial management and poverty reduction are not particularly clear. The performance indicators will have a restricted use due to their limited scope and concentration on the one dimension of fiscal management.
The performance indicators score well against this criterion, they were designed to be used by the public although there is some use of technical accounting terms.
The performance indicators score well against this criterion, at least for the jurisdictions for which they were designed.
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The performance indicators score well against this criterion. The performance indicators have been used over a number of years and so have demonstrated their robustness over time. They have been developed for a specific jurisdiction (New South Wales, Australia) and so may present challenges when applying in other jurisdictions with different legal or fiscal environments.
The IndiKit: Municipal Financial Indicators (US)

Hough, James A. (2003) The IndiKit: The Municipal Financial Indicators Evaluation Kit - EDocument, ICMA, Washington, DC http://www.mtas.tennessee.edu/KnowledgeBase.nsf/0/D70C6BF2C02C61B08525739400512 417?OpenDocument (19 May 2008) This set of performance indicators was originally designed for a small local government whose staff did not have the benefit of experience or training in public financial management. Later editions were adapted for a national audience. So they benefit from being relatively simple, in addition they are supported by the International City/County Management Association (ICMA). However, they are limited in scope, rather like the Australian example above. The ten indicators included in The Indikit were chosen based on their importance to financial stability and the availability of data in any local government. Thus they aim to assess the financial condition of a local government rather than the full spectrum of its financial management. As the guide explains: Perhaps a description of The IndiKit should start by saying that it is not a comprehensive financial management program or tool. The IndiKit does provide the local government administrator with a starting point for financial trend monitoring: it explains what to examine on an annual basis to identify trends in revenues and expenditures. It provides an orderly, easy-to-use format for gathering multi-year data that will instantly calculate a number of distinctive ratios. These ratios can then be used to show where the local government has been headed in the last five years. (page 6) The ten indicator sheets are designed to present the concept of each indicator (in ratio format), a warning trend, and the display of the data used in the calculation(s). The author also provides the following advice on the use of the performance indicators: If, after calculating an indicator, you observe a warning trend, try to identify the causes using the following questions: Why is this happening? (try to identify the cause or causes) Is it important? (assess the significance of the trend) What can be done? (devise an action strategy) (page 16) The 10 indicators chosen for the IndiKit cover the following aspects of financial condition: Revenue Indicators 1. Revenues per Capita 2. Intergovernmental Revenues 3. Tax Revenues 4. Uncollected Property Taxes Expenditure Indicators 5. Expenditures per Capita 6. Expenditures by Function Operating Position Indicators 7. Operating Deficit or Surplus
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8. Fund Balances Debt Indicator 9. Long Term Debt to Assessed Value Unfunded Liability Indicator 10. Unfunded Pension Liability
Revenue Indicators
Revenues determine the capacity of a local government to provide service. Important issues to consider in revenue analysis are growth, flexibility, dependability, diversity, administration, and elasticity. (Definition: an elastic revenue can be defined as one that directly responds to changes in inflation and the economic base; i.e., as inflation and the economic base increase, elastic revenues increase in roughly the same or greater proportion, whereas, if inflation declines or the economic base shrinks, elastic revenues drop in proportion.) (page 17) The key concept of net operating revenues, is defined by the guide as follows: Net operating revenues are those portions of gross operating revenues that are available for general municipal operations. Therefore, net operating revenues are the total revenues to the general, special revenue, and debt service funds before any interfund transfer and less those revenues legally restricted to capital improvements or other special purposes, as explained below in subsections A, B, and C. Enterprise and internal service funds should be analyzed separately. (page 10)
1. Revenues per capita Formula: Net operating revenues (constant dollars) Population Warning Trend: Decreasing net operating revenues per capita (constant dollars) Net revenue source % Property Tax Sales Tax Intergovernmental Revenues x y User fees and charges Miscellaneous z a b Total 2. Intergovernmental revenues Formula: Intergovernmental operating revenues Gross operating revenues Warning Trend: Increasing amount of intergovernmental operating revenues as a percentage of gross operating revenues 3. Tax revenues Formula:
Property tax revenues (constant dollars)
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Financial Performance Indicators for Municipalities - Draft Report - UN-Habitat Warning Trend: Decline in property tax revenues (constant dollars) 4. Uncollected property taxes Formula: Uncollected property taxes Net property tax levy
August 2008
Warning Trend: Increasing amount of uncollected property taxes as a percentage of net property tax levy
Expenditure Indicators
Expenditures are a rough measure of a local governments service output. Generally, the more a local government spends in constant dollars, the more services it is providing, although this axiom does not take into account how effective the services are or how efficiently they are delivered. To determine whether a government is living within its revenues, the first issue to consider is expenditure growth rate. Page 22
5. Expenditure per capita Formula: Net operating expenditures (constant dollars) Population Warning Trend: Increasing net operating expenditures per capita (constant dollars) 6. Expenditure by function Formula: General and administrative expenditures (and other functions) Total net operating expenditures Warning Trends: Increasing general and administrative expenditures as a percentage of total net operating expenditures Increasing operating expenditures for one function as a percentage of total net operating expenses.
Functions used (generally in the US) are: General and Administrative Highways and Roads Public Safety Retirement Debt Service Judicial Capital Outlay Health and Welfare Intergovernmental
Operating Position Indicators

The term operating position refers to a local governments ability to (1) balance its budget on a current basis, (2) maintain reserves for emergencies, and (3) have sufficient liquidity to pay its bills on time. Page 26
7. Operating deficit (surplus) Formula: General Fund Operating deficit or surplus Net operating revenues Warning Trend: Increasing General Fund operating deficit as a percentage of net operating revenues
8. Fund balances Formula: Unreserved fund balances Net Operating Revenues

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Warning Trend: Declining unreserved fund balances as a percentage of operating revenues 9. Long term debt Alternatives per assessed, per population or per income Formula: Net bonded long-term debt Assessed valuation
Warning Trend: Increasing net direct bonded long-term debt as a percentage of (assessed valuation)
An unfunded liability is one that has been incurred during the current or a prior year, that does not have to be paid until a future year, and for which reserves have not been set aside. It is similar to long-term debt in that it represents a legal commitment to pay at some time in the future. If such obligations are permitted to grow over a long period of time, they can have a substantial effect on a local governments financial condition. Financial managers generally watch two types of unfunded liability: pension liability and post employment benefits (compensated employee leave upon termination and health insurance benefits for retirees). Both have significant potential to affect a local government's financial condition because (1) they do not show up in the ordinary financial records in a way that makes their impact easy to assess, and (2) they accumulate gradually over time. Pensions and post employment benefits liabilities may go unnoticed until they have created severe problems. Many municipalities also operate under a state mandated public employee retirement system that should be considered at some point in time for any unfunded liability situations. Page 31/32
10. Un-funded pension liability Formula: unfunded pension liability salaries and wages
Warning Trend: Increasing unfunded pension liability as a percentage of salaries and wages
The performance indicators have a restricted scope related to revenue collection, expenditure and fiscal prudence. The link between the financial performance indicators and the more general objectives of local government financial management and poverty reduction are not particularly clear. The performance indicators will have a restricted use due to their limited scope and concentration on the one dimension of fiscal management.
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The performance indicators score well against this criterion. A detailed explanation is provided of their calculation and warning trends are provided for changes over time. They were originally designed to be used by local government officials, but their simplicity would allow their reasonably easy use by the public.
The performance indicators score well against this criterion, at least for the jurisdictions for which they were designed where common definitions and bases of analysis are in use. They were originally designed for small local governments with limited financial capacity.
Capable of monitoring results - the indicators should enable the effective monitoring of the achievement of objectives, be verifiable and should be consistent overtime and between organisations.
The performance indicators score well against this criterion. The performance indicators have been used and refined over a number of years and so have demonstrated their robustness over time. They have been developed for a specific jurisdiction (USA local government) and so may present challenges when applying in other jurisdictions with different legal or fiscal environments.
Audit Commission - Key lines of enquiry (UK)

Audit Commission (November 2006) Key lines of enquiry for use of resources 2007 assessments, Audit Commission, London http://www.audit-commission.gov.uk/kloe/useofresourcekloe.asp (14 May 2008) In the UK a wide range of financial statistics are produced each year by the Department of Communities & Local Government (the ministry of local government) and the public sector accountancy body CIPFA, for example:
Department for Communities and Local Government (November 2007) Local Government Finance Key Facts Card, London http://www.local.communities.gov.uk/finance/stats/keystats/key.htm (14 May 2008) CIPFA (November 2007) Finance and General Statistics 2007-08, London http://www.cipfastats.net/uploads/Finance%20and%20General %20200708%20Commentary67200739147.pdf (14 May 2008)
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In addition, the Audit Commission, which is responsible for the audit of local government financial statements in England & Wales, is responsible for the inspection of the quality of services provided by local government through its Comprehensive Performance Assessment (CPA). CPA was introduced in 2002. CPA measures how well councils are delivering services for local people and communities. It looks at performance from a range of perspectives and combines a set of judgements to provide both a simply understood rating and a more complete picture of where to focus activity to secure improvement. Its strengths are that it results in a clear public rating on a local body's performance and provides the basis for a proportionate and risk-based approach to regulation. The key elements of the framework are:

Direction of travel; Use of resources; Service assessments; and Corporate assessment.
Use of Resources The use of resources assessment is conducted yearly at all councils by their external auditors. It is integrated with audit work carried out under the Code of Audit Practice. Auditors report scored judgements on five themes which look at how well a council manages its finances and delivers value for money. The scores are combined by a set of rules to produce an overall use of resources score for the Audit Commission. Auditors are required to form judgements for each of the five themes that comprise the overall use of resources assessment:
Financial reporting
1.1 The council produces annual accounts in accordance with relevant standards and timetables, supported by comprehensive working papers the councils accounts are compiled in accordance with statutory and professional reporting standards the councils accounts are supported by comprehensive working papers
the accounts and supporting working papers are prepared and approved in accordance with relevant timetables 1.2 The council promotes external accountability the council publishes its accounts in accordance with statutory requirements the council publishes summary accounts/annual report in a way that is accessible to the public
Financial management
2.1 The councils medium-term financial strategy, budgets and capital programme are soundly based and designed to deliver its strategic priorities the councils corporate business plan (that sets out its aims and objectives) is linked to its financial planning and management the councils budgets and capital programme are based on robust medium-term financial projections and risk assessments 2.2 The council manages performance against budgets the council has arrangements in place for monitoring performance against budgets, taking corrective action where appropriate, and reporting the results to senior officers and members the councils financial information systems meet users needs 2.3 The council manages its asset base
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the council has a capital strategy and fixed asset management plan the council reports to members on asset management the council is financially sound the council manages its levels of reserves and balances current spending plans match available resources the council has a risk management process in place
Financial standing
3.1 The council manages its spending within the available resources
Internal control
4.1 The council manages its significant business risks the risk management system covers partnership working 4.2 The council has arrangements in place to maintain a sound system of internal control the council reviews and reports on its system of internal control the council has an audit committee or equivalent and an internal audit function 4.3 The council has arrangements in place that are designed to promote and ensure probity and propriety in the conduct of its business the council has adopted codes of conduct and monitors compliance the councils arrangements to prevent and detect fraud and corruption are effective costs compare well with others allowing for external factors costs are commensurate with service delivery, performance and outcomes achieved
Value for money
5.1 The council currently achieves good value for money
costs reflect policy decisions 5.2 The council manages and improves value for money the council monitors and reviews value for money the council has improved value for money and achieved efficiency gains (limited to the last three years) procurement and other spending decisions take account of full longterm costs
The Audit Commission and auditors use the following scale to form their judgements: 4 = well above minimum requirements performing strongly; 3 = consistently above minimum requirements performing well; 2 = at only minimum requirements adequate performance; and 1 = below minimum requirements inadequate performance.
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The performance indicators are largely relevant and useful, but they do not cover the components of resource allocation or poverty reduction.
The performance indicators are clear, but their definition forms the basis for professional opinions by local government auditors and so general citizens may not clearly understand the implications of these indicators although the overall scores should provide a clear relative score.
The costs of producing these performance indicators are considered to be reasonable as their production is integrated in to the general work of the local government auditors.
These performance indicators are designed to monitor the quality of local government services in England & Wales from year to year and are produced by the entities external auditors and so are considered to be objective and verified.
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France
We have reviewed two sets of financial statistics which are produced for local governments in France 1. SFL & Forum (Avril 2008) Fiscalite 2008 Des Collectivites Locales Taux Dimposition, Paris http://195.154.199.177/sfl/rubdoc/doc?ID=809
These statistics provide an overview of the taxation, expenditure, income and debt of French local authorities. They concentrate on the financial changes over time. The following statistics are provided: Annual rate of increase of taxation by local authorities Annual rate of increase in the value of local authority expenditure (cost per inhabitant and percentage of the total): total investments (excluding costs of debt) administrative costs o salaries and wages o general costs o other revenue costs o financial charges o other administrative costs. Rate of increase of local authority income (cost per inhabitant and percentage of the total): total o taxes o grants & social contributions o other administrative income Level and costs of debt 2. Direction Gnrale des Collections Locales (2008), Les collectivits locales en chiffres 2008, Ministre de lintrieur, de loutre-mer et des collectivits territoriales, Paris http://www.dgcl.interieur.gouv.fr/publications/CL_en_chiffres_2008/accueil_CL_en_chif fres_2008.htm These statistics provide similar information to those provided above whilst providing more information, longer time series and data on different types of local government. The core financial statistics are in the following three chapters: Chapter 3: Local government finances in terms of national accounts 3.1 State and local government accounts in 2005 3.2 Evolution of the overall finances of local government 2000-2005 3.3 Local government finances and their agencies in 2005 3.4 Local government taxation in 2005 3.5 Local government finance in 2006: elements of evoluation
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3.6 Original local government budgets in 2007 3.7 Detailed information on departments and regions Chapter 4: Financial times series analysis 4.1 Local government 1996-2005 4.2 - Communes 1996-2005 4.3 Departments 1996-2005 4.4 - Regions 1996-2005 4.5 Evolution of the state budget from 2002 to 2006 4.6 Expenses for responsibilities transferred to local government 1999-2007 4.7 Budgetary data in euros per inhabitant Chapter 5: Local Taxation: 5.1 - The structure of local taxation in 2006 5.2 Analysis of overall local taxation in 2007 5.3 Evolution of four local direct taxes 1998 -2007 5.4 Taxes and contributions for the collection of household waste 5.5 Analysis of the basis for professional tax 5.6 State contributions to local direct taxation. Chapter 6 : Central government assistance to local government in 2008 6.1. Grants and subsidies of administrative support 6.2. Grants and subsidies of equipment 6.3. Financing of responsibilities transferred to local government 6.4. Legal assistance Chapter 7 : Local government debt 7.1 Local government debt 7.2 Local government debt ratio
These are statistics rather than performance indicators and as such cover a restricted scope of the financial objectives of local government relating to the levels of taxation, expenditure, income and debt. The more general objectives of local government financial management and poverty reduction are not covered. As a result, these statistics have a restricted use and do not readily assist in an assessment of the performance of local government.
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The statistics score well against this criterion as they are designed to be used by the general public.
The performance indicators score well against this criterion, at least for the jurisdictions for which they were designed where common definitions and bases of analysis are in use.
The performance indicators score well against this criterion. The performance indicators have been used for a number of years. They have been developed for a specific jurisdiction (French local government) and so may present challenges if utilised in other jurisdictions with different legal or fiscal environments.
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4 Suggested core set of indicators on municipal financial management

The various aspects of public financial management may be analysed as shown in the following table (as indicated in section 3 of this report). It is proposed that these nine key objectives of public financial management will form the framework for the development of a range of performance indicators which reflect the extent to which this full spectrum of objectives is being achieved.
Component 1 Resource management Local economic management of fiscal risk to fund municipal services, ensure full employment and stable prices, including financial balances, flows and the level of debt; levels and impact of tax and non-tax revenues; Allocation and re-allocation of resources through the budget process to achieve municipal policies and priorities, the provision of public goods and to foster greater equity Undertaking municipal operations as effectively and efficiently as possible; financial resources are made available, as planned and when required, information is provided to managers to enable them to make optimal decisions and exercise control Making information available to stakeholders (including the general public) in a format and time that facilitates transparency in municipal financial operations and civil society participation. Information is available in a format and time that enables municipal officials to be held accountable for their actions. Appropriate explanations are provided for any significant deviations from the agreed budget. Civil society participation is enabled and encouraged. Poverty reduction is a priority, including achievement of the Millennium Development Goals, whilst complying with the UN Global Compact. Capacity building is provided for: 3 Fiduciary risk management Financial procedures and information enable the management of financial risk at acceptable levels, including internal financial control, measures to minimise fraud or corruption and internal audit Resources are managed in compliance with all relevant laws, regulations and standards; considerations of ethics, equity and propriety are fulfilled. Appropriate compliance and relationships are maintained with national funding and regulatory bodies Public oversight mechanisms, especially by independent audit, ombudsman and legislative review process. Timely review of financial resource use and regulatory compliance by the municipal council, civil society and other stakeholders. Significant findings by oversight bodies are promptly made public. 3.1 Financial control framework 3.2 Stewardship and regulatory compliance municipal employees the wider economy stakeholders including civil society 1.1 Fiscal management Explanation
1.2 Resource allocation
1.3 Efficient and effective operations
Use of public resources
2.1 Transparency
2.2 Accountability
2.3 Poverty reduction
3.3 Oversight
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1.1 Objective:
1 Resource management Local economic management of fiscal risk to fund municipal services, ensure full employment and stable prices, including financial balances, flows and the level of debt; levels and impact of tax and non-tax revenues; 1.1 Fiscal management
Performance indicator:
Local government debt, capital investment and capital maintenance are adequately planned and managed 1. Average total deficit/surplus over the last three years 2. Total debt as a percentage of total recurrent income - total local government debt x 100 total recurrent income 3. Implementation of the capital maintenance and investment programme annual expenditure on capital maintenance and investment x 100 annual capital maintenance and investment budget
Explanation:
Many local governments use debt to fund their capital investment programme. The extent to which the level of debt is considered prudent is a political decision. However, if the debt to income ratio is increasing over the medium term this may suggest that fiscal risk is increasing. From the opposite perspective, local governments need to maintain their capital infrastructure. There should be a planned capital maintenance and capital investment programme which is actually implemented over the medium term. [detailed explanation of the calculation of each aspect of the performance indicator to be added later]
1.2 Objective:
1.2 Resource allocation Allocation and re-allocation of resources through the budget process to achieve municipal policies and priorities, the provision of public goods and to foster greater equity
Annual budgets are consistent with the municipalitys strategic plan and Millennium Development Goals and the budgets form a reasonable guide to actual payments and receipts. 4. The main thrust of the municipalitys strategic plan is actually implemented over the medium term (three to five years).
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5. Budget incidence analysis shows that the poorest quintile of the population receives benefits of at least 20 per cent of the local governments budget. 6. Aggregate expenditure out-turn compared to original approved budget - for only one of the last three years has actual expenditure been more than 10% different from the agreed budget 7. The average variance for the 10 main high-level budget headings (by administrative unit or functions) was less than 10% for two of the last three years (not including interest or foreign aid).
Explanation:
Local government financial management should be built around the budget which is the annual plan to implement the governments strategic priorities. Thus the extent to which the municipalities budget is a realistic plan for the coming financial year is a key indicator of the quality of the overall financial management of the municipality.
[detailed explanation of the calculation of each aspect of the performance indicator to be added later]
1.3 Objective:
1.3 Efficient and effective operations Undertaking municipal operations as effectively and efficiently as possible; financial resources are made available, as planned and when required, information is provided to managers to enable them to make optimal decisions and exercise control
Tax collection and other major income streams are effective, with any arrears being collected promptly. Departmental managers are aware of their budgets/cash allocations before the start of each quarter, quarterly budget reports are issued promptly and payments are generally made on time. 8. Over 75% of the tax arrears recorded at the end of each financial year are collected over the following financial year. 9. The key financial managers in departments/sections are informed of the level of spending available for their budget before the beginning of each quarter of the financial year. 10. Reasonably accurate budget reports are issued to budget managers within 6 weeks of the quarter end to assist with expenditure planning. 11. Staff were paid within two weeks of the end of the month for at least 10 of the previous 12 months. 12. At least 90% of municipal non-salary payments are made on time, within the accepted credit terms.
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Explanation:
The local government budget should be implemented efficiently and effectively. For this to occur the municipality should have timely access to the money it planned to receive. Managers should be aware of the money they will be able to spend and receive budget reports each month to further enable them to plan this task. This should enable the municipality to pay its staff and make other payments promptly as agreed. [detailed explanation of the calculation of each aspect of the performance indicator to be added later]
2.1 Objective:
2 Use of public resources Making information available to stakeholders (including the general public) in a format and time that facilitates transparency in municipal financial operations and civil society participation. 2.1 Transparency
Local government budgets are published before the start of each financial year and audited financial statements are published each year, in line with legislative requirements, and before the end of the following financial year. 13.The local governments budget was published before the start of the financial year for at least two of the last three years. 14. Audited financial statements were published for at least two of the last three years, in line with legislative requirements, and before the end of the following financial year.
Explanation:
The budget should be central to the finances of a local government. The annual budget should provide the authority for all receipts and payments, and so is the annual financial plan of the municipality. This plan should be published before the start of each financial year in a format which is accessible to the local population. The annual financial statements of the municipality essentially compare the actual receipts and payments with those proposed in the budget. The audit is an independent assessment of the extent to which the transactions were undertaken in line with the relevant laws and regulations and were accurately reflected in the financial statements. These two documents should be supplemented with additional information on the letting of significant contracts and the wealth of councillors and senior managers. This should help to ensure that fraud and corruption is minimised.
2.2 Objective:
2.2 Accountability Information is available in a format and time that enables municipal officials to be held accountable for their actions. Appropriate explanations are provided for any significant deviations from the agreed budget. Civil society participation is enabled and encouraged.
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An annual report is produced which describes the major achievements of the local government and significant variances from the budget.
15. An annual report was published for each of the last three years which described the major achievements of the local government and explained significant variances from its budget.
Explanation:
The annual report should detail the extent to which the municipality has implemented its strategic plans and explain any significant variances from the plans and the financial budgets. The local government councillors are can influence the strategic direction of the authority and play an active role in determining its annual financial budget.
2.3 Objective:
2.3 Poverty reduction Poverty reduction is a priority, including achievement of the Millennium Development Goals, whilst complying with the UN Global Compact. Capacity building is provided for: municipal employees the wider economy stakeholders including civil society
The local government devotes adequate financial resources to defined poverty reduction. This is centred on resources provided for primary education, primary health services and household water supplies. Local taxation is progressive. 16. Regular budget reports are published at least quarterly and identify defined poverty reduction expenditure including, for example, that received by primary schools, primary health centres and spent on providing household water supplies.
17. The percentage of the municipalities annual budget which is to be spent directly (not including overheads etc) on defined poverty reduction expenditure including, where relevent: primary health care units primary schools provision of household water and sanitation
18. The extent to which local taxation is progressive based on the last survey, the following ratio is more than 1.2 : local taxation paid as a % of gross income of the richest quintile local taxation paid as a % of gross income of the poorest quintile
Explanation:
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Poverty reduction generally, and the Millennium Development Goals in particular, have been accepted as a common policy thread and objective for all public institutions. Poverty reduction has moved from being one possible policy option to the overarching goal of public institutions. It has changed from being one, normative, approach to the positive prescription of good practice by local government. It is now accepted that local governments have a key role in poverty reduction. A reasonable proportion of their budget should be spent on services which actually benefit the poorer sections of the community. These services should be funded by progressive taxation with the richer people paying proportionally more of their income on these taxes. [detailed explanation of the calculation of each aspect of the performance indicator to be added later]
3.1 Objective:
3 Fiduciary risk management Financial procedures and information enable the management of financial risk at acceptable levels, including internal financial control, measures to minimise fraud or corruption and internal audit 3.1 Financial control framework
The municipalitys level of internal financial control is considered, by councillors and citizens, to be adequate.
19. Each year the council formally considers the main financial risks the municipality faces and reviews the arrangements to manage the key risks. 20. The audit report on the last annual financial statements did not contain any major adverse findings. 21. Over the last year, all municipal bank accounts were reconciled to the accounting and income records at least monthly, with suspense and advance accounts cleared at least annually.
Explanation:
Internal control is defined as a process, effected by management, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
effectiveness and efficiency of operations (basic operational objectives, reliability of financial reporting compliance with applicable laws and regulations.
performance goals and safeguarding resources)
Internal control should help to mitigate the risks of unwanted activities such as errors, irregularity and fraud. Internal controls will contribute towards accurate recording of events and transactions. They will also assist the organization in achieving objectives such as transparency, effectiveness and efficiency of operations, reliability of financial and management reporting and compliance with applicable laws and regulations.
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3.2 Objective:
3.2 Stewardship and regulatory compliance Resources are managed in compliance with all relevant laws, regulations and standards; considerations of ethics, equity and propriety are fulfilled. Appropriate compliance and relationships are maintained with national funding and regulatory bodies
The annual audit report does not include any major irregularities and there is little media coverage of alleged irregularities at the municipality. 22. The annual audit report for each of the last three years did not include any major irregularities.
23. There has not been any significant media coverage of financial irregularities in the municipality over the last year, including reports by oversight bodies.
Explanation:
Integrity comprises both straightforward dealing and completeness. It is based upon honesty and objectivity, and high standards of propriety and probity in the stewardship of public funds and resources, and management of an organisations affairs. It is dependent on the effectiveness of the control framework and on the personal standards and professionalism of the individuals within the organisation. It is reflected both in the organisations decision-making procedures and in the quality of its financial and performance reporting.
3.3 Objective:
3.3 Oversight Public oversight mechanisms, especially by independent audit, ombudsman and legislative review process. Timely review of financial resource use and regulatory compliance by the municipal council, civil society and other stakeholders. Significant findings by oversight bodies are promptly made public.
Independent reports from the municipalities auditors and other oversight bodies are promptly published. Regular quarterly and annual public meetings are held where the budget is discussed and financial reports are received. 24. Independent audit reports (and other reports from regulatory bodies) were made public promptly over the last year and were discussed by the council or a committee. 25. The council holds quarterly meetings, open to the public, staff and their trade unions to discuss the budget and receive financial reports.
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Explanation:
Oversight bodies can only be effective if their reports on the municipality are promptly made public and these reports are considered by the municipalitys council. Similarly, the councils budget and financial results need to be debated and to be made public. Such openness is necessary for the municipal officers to be effectively held to account by both the council and the public. [detailed explanation of the calculation of each aspect of the performance indicator to be added later]
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5 Detailed financial performance indicators

1 Resource management Local economic management of fiscal risk to fund municipal services, ensure full employment and stable prices, including financial balances, flows and the level of debt; levels and impact of tax and non-tax revenues;
1.1 Fiscal management
Local government cash-flows, debt and levels of taxation are adequately planned and managed PEFA performance indicator: 9. Oversight of aggregate fiscal risk from other public sector entities. Annual reports are produced of the municipalitys total risk from its entities, from, for example, failing to service debts, guarantees, operational losses, expenditure arrears or unfunded pension obligations Other performance indicators: Total revenue per person in the municipality and the trend over the last five years Total debt per capita and as a percentage of total expenditure and the trend over the last five years. Debt service ratio (debt service expenditures as a percent of a municipality's own-source revenue) [Global City Indicators Program] Per capita and percentage of municipal income from: [UCLG] National government Aid & debt relief Own collection Local borrowing Own-source revenue as a percent of total revenues [Global City Indicators Program] From an Indian study, dependence on national government is considered high if it is more than 40% (Sandeep Thakur 2006) Per capita and percentage of municipal expenditure on: recurrent maintainence of capital assets capital expenditure (UCLG background paper) Capital spending as percentage of total expenditures [Global City Indicators Program] There should be adequate spending on asset maintenance and investment in capital infrastructure. Medium terms plans should be implemented as expected and trends over time should be reasonably stable New borrowing as a percentage of capital expenditure. [UCLG] New borrowing should generally be less than or equal to capital expenditure.
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Detail on nature of loans: [UCLG] Percentage more than 10/20 years long Percentage at more than one percentage point below bank rate/commercial rate Borrowing should be mainly for capital investment (over the medium term) and so the term of the loans should approximate to the physical life or to the period of benefit of the capital asset. Borrowing short-term and at high rates of interest suggests that this is not adequately planned. Aid and debt relief received by municipal authorities as percentage of total national aid/debt (at least 20%) [UCLG]
1.2 Resource allocation
Allocation and re-allocation of resources through the budget process to achieve municipal policies and priorities, the provision of public goods and to foster greater equity
Annual budgets are consistent with the municipalitys strategic plan and Millennium Development Goals The municipal budget forms a reasonable guide to actual payments and receipts during the relevant year.
PEFA performance indicators: 1. Aggregate expenditure out-turn compared to original approved budget For only one of the last three years has actual expenditure been more than 10% different from the agreed budget 2. Composition of expenditure out-turn compared to original approved budget For only one of the last three years has detailed (by organisation or function) expenditure been more than 5% more than the total expenditure variance 3. Aggregate revenue out-turn compared to original approved budget Local revenue collection has been 95% or more of the agreed budget for at least two of the last three years Other performance indicators: Annual expenditure by the local government per inhabitant. Percentage expenditure agreed to be spent on items related to poverty reduction. Local taxation is progressive with the poorest quintile of the population paying less than 10 percent of the local governments taxation income. 13 4 a. Policies and priorities are broadly reflected in the budget. Some elements of forward budget planning are in place. The budget is formulated in consultation with spending ministries, from a sufficiently early stage in the budget preparation process. The budget classification system is comprehensive, but different from international standards. Less than 10% of funds controlled by the executive are outside the budget. (IMF & World Bank CPIA) 8 4 a. Public expenditures are generally aligned to poverty reduction. The poverty diagnosis generally identifies poor, vulnerable groups, and those lacking services. There are ongoing
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interventions targeted at identified groups, but implementation of the strategy is partial. Expenditures are tracked by category, program, and region. Benefit incidence analysis is uneven. Feedback of the analysis to subsequent expenditure allocations is increasing. (IMF & World Bank CPIA) 8 b. Some egregious regressive revenue sources remain, but initiatives are underway to correct them and ensure that revenue generation is consistent with national poverty reduction priorities. (IMF & World Bank CPIA)
1.3 Efficient and effective operations Undertaking municipal operations as effectively and efficiently as possible; financial resources are made available, as planned and when required, information is provided to managers to enable them to make optimal decisions and exercise control
Tax collection is effective, with over 75% of tax arrears being collected within the following financial year. Departments are aware of their budgets/cash allocations before the start of each quarter, quarterly budget reports are issued promptly and payments are generally made on time.
PEFA performance indicators: 4. Stock and monitoring of expenditure payment arrears. At least 90% of municipal payments are made on time 13 Transparency of Taxpayer Obligations and Liabilities Taxpayers have access to clear and comprehensive information about their potential tax liabilities and there are functioning appeal mechanisms 14 Effectiveness of measures for taxpayer registration and tax assessment Measures for taxpayer registration and tax assessments are effective with links between systems for different taxes and other municipal databases 15 Effectiveness in collection of tax payments Tax collection is effective, with over 75% of tax arrears being collected within the following financial year 16. Predictability in the availability of funds for commitment of expenditures Cash flow forecasts are prepared and updated at least quarterly and departments are informed of any changes to their budgetary allocations before the start of each quarter 24. Quality and timeliness of in-year budget reports. Reasonably accurate budget reports are produced each quarter and issued within 6 weeks of the quarter end Other performance indicators: 13 4 b. Actual expenditures deviate from the amounts budgeted by more than 10 percent on many broad budget categories. Budget monitoring and control systems exist, but there are some deficiencies. Payment arrears may exist but are less than 5% of total expenditures. (IMF & World Bank CPIA) 14 b. Tax administration is solid, cost of revenue generation has been reduced and there are relatively few cases of corruption and political interference. Eligibility for preferential rates and exemptions is largely transparent. (IMF & World Bank CPIA)
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There is a large taxpayers section in the revenue department which monitors the tax liabilities and payments of the most significant tax payers. The poorest quintile of the population is largely exempt from taxation, at least direct taxation. Percentage of tax payers paying taxes on time.
Use of public resources Making information available to stakeholders (including the general public) in a format and time that facilitates transparency in municipal financial operations and civil society participation.
2.1 Transparency
A summary of the local government budget is made public each year Financial statements are produced each year in line with legislative requirements Openness is required to ensure that stakeholders can have confidence in the decision-making processes and actions of public sector organisations, in the management of their activities, and in the individuals within them. Being open through meaningful consultation with stakeholders and communication of full, accurate and clear information leads to effective and timely action and stands up to necessary scrutiny. Computers and the Internet should allow greater openness and access to information.
PEFA performance indicators: 5. Classification of the Budget The municipal budget & financial statements are analysed by organisation, economic and functional classifications 7. Extent of unreported government operations. Unreported (extra-budgetary) expenditure is less than 5% of total municipal expenditure 8. Transparency of Inter-Governmental Fiscal Relations Local government allocations are transparent and announced well before their budgets are agreed 10. Public Access to key fiscal information The public is provided with access to comprehensive financial information about the municipality each year 25. Quality and timeliness of annual financial statements Annual financial statements of all the municipalitys operations are prepared in line with suitable accounting standards are issued for audit within 8 months of the year end Other performance indicators: 16. Transparency, Accountability, and Corruption in the Public Sector 16 b. Decision making is generally transparent. Government actively attempts to distribute relevant information to the public, although capacity may be a constraint. (IMF & World Bank CPIA) Are the following processes followed by the local authorities ? UN-Habitat (2004) 2. Formal publication of contracts and tenders for municipal services (this is also encouraged by PEFA PI-10) yes/no
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Senior managers and councillors report their wealth each year and after all elections. The public reports are made available in the most appropriate local language (REPOA (2005)
Declaration of interests
All members of the senior management team should complete an annual declaration of interests including: other paid employment or directorships ownership of land or buildings, vehicles, investments and any cash or bank balances political interests if an officer or standing in any elections. The above interests should also be provided for the manager's spouse, siblings (brothers or sisters) and children. Managers should also declare any relatives (above plus cousins, uncles, aunts, nephews, nieces, parents) of the manager or their spouse who work for the same Organisation. The register should be available for inspection during office hours by any member of the public and a copy sent to the Auditor-General and the trade unions representing any of the organisation's employees.
2.2 Accountability
Information is available in a format and time that enables municipal officials to be held accountable for their actions. Appropriate explanations are provided for any significant deviations from the agreed budget. Civil society participation is enabled and encouraged.
An annual report is published which describes the major achievements of the local government and explains significant variances from the annual financial budget and its plans Accountability is the process whereby public sector organisations, and the individuals within them, are responsible for their decisions and actions, including their stewardship of public funds and all aspects of performance, and submit themselves to appropriate external scrutiny. It is achieved by all parties having a clear understanding of those responsibilities, and having clearly defined roles through a robust structure. In effect, accountability is the obligation to answer for a responsibility conferred. PEFA performance indicators: 6. Comprehensiveness of information included in budget documentation. Comprehensive information is provided to the Council when the budget is to be agreed 11. Orderliness and participation in the annual budget process Councillors participate in the annual budgetary process by approving the expenditure ceilings (the budget circular) and the budget was agreed before the start of the financial year in at least two of the last three years 12. Multi-year perspective in fiscal planning, expenditure policy and budgeting Forecasts are produced for the main budgetary categories (economic and functional or sectoral) for the following three years and any variances with the budgets for these years are monitored and explained 27. Legislative scrutiny of the annual budget law The Council has at least a month to consider its annual budget and clear rules are applied for any revisions necessary during the year Other performance indicators: 16. Transparency, Accountability, and Corruption in the Public Sector 16 4 a. External accountability mechanisms limit somewhat the degree to which special interests can divert resources or influence policy making through illicit and non-transparent means. Risks and opportunities for corruption within the executive are reduced through adequate monitoring and reporting lines. (IMF & World Bank CPIA) Are the following processes followed by the local authorities ? 4. Sanctions against faults of civil servants UN-Habitat (2004) yes/no
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5. A local hotline to receive complaints and information on corruption 6. A local agency to investigate and report cases of corruption
yes/no yes/no
Sanctions for making payments outside the official authorised budget or appropriations are adequately enforced. Other failures to follow legal and regularity requirements results in appropriate action. An objective, balanced and understandable annual report is published promptly. Suitable nonfinancial performance measures are monitored and reported. Includes a statement on specific standards or codes of governance. The local government recognises and negotiates with the appropriate trade unions. Social accountability is encouraged through, for example, the use of participatory budgeting, social audits, citizen reports cards, expenditure tracking and community score cards [look at: Manchester paper on public sector accountability]
Trade unions: can provide effective strengthening of accountability, openness etc. Also protection for those for are working against bribery (grand)
and help to reduce poor wages which are a major cause of petty corruption.
2.3 Poverty reduction
Poverty reduction is a priority, including achievement of the Millennium Development Goals, whilst complying with the UN Global Compact. Financial capacity building is provided for: municipal employees the wider economy stakeholders including civil society
The local government devotes adequate financial resources to defined poverty reduction. This is centred on resources provided for primary education, primary health services and household water supplies.
PEFA performance indicator: 23. Availability of information on resources received by service delivery units Accounting systems provide reliable information on the total resources received by primary schools (or primary health centres) or special surveys have been undertaken in the last three years and the results reported to the Council Other performance indicators: Indicator 6 ~ Identification of poverty-reducing spending (PREM Public Sector Group & the Fiscal Affairs Department 2003) The existing budget classification system clearly identifies poverty reducing spending, as defined in the Poverty Reduction Strategy Paper or municipal strategic plan. Indicator 13 ~ Regular fiscal reports track poverty reducing spending (PREM Public Sector Group & the Fiscal Affairs Department 2003) Regular budget reports are published at least quarterly and identify defined poverty reduction expenditure. 8. Equity of Public Resource Use (World Bank CPIA)
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4 a. Public expenditures are generally aligned to poverty reduction. The poverty diagnosis generally identifies poor, vulnerable groups, and those lacking services. There are ongoing interventions targeted at identified groups, but implementation of the strategy is partial. Expenditures are tracked by category, program, and region. Benefit incidence analysis is uneven. Feedback of the analysis to subsequent expenditure allocations is increasing. b. Some egregious regressive revenue sources remain, but initiatives are underway to correct them and ensure that revenue generation is consistent with national poverty reduction priorities. The percentage of the municipalities annual budget which is spent directly on (not including overheads etc): primary health care units primary schools provision of household water and sanitation. Money released to primary schools and health centres is reported on their notice boards. The extent to which taxation is actually progressive poorest 10/20 % pay at least 10 percentage points less than the richest 10/20% of the population Charges for services provided by primary health care units, primary schools and the provision of household water and sanitation are minimal (less than 5% of the budget for these services). The budget adequately reflects appropriate spending on: women children minority groups.
The proportion of the local governments employees who are women, and those from minority groups. The local government provides opportunities for appropriate staff to receive financial training. Local training institutions are utilised for this training and also train other individuals from the locality. The local government complies with the UN Global Compact and such compliance is a condition for contracting with the municipality.
3 Fiduciary risk management Financial procedures and information enable the management of financial risk at acceptable levels, including internal financial control, measures to minimise fraud or corruption and internal audit
3.1 Financial control framework
The municipalitys level of internal financial control is considered, by councillors and citizens, to be adequate. Each year the council formally considers the main financial risks the municipality faces and reviews the arrangements to manage the key risks.
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Internal control should help to mitigate the risks of unwanted activities such as errors, irregularity and fraud. Internal controls will contribute towards accurate recording of events and transactions. They will also assist the organization in achieving objectives such as transparency, effectiveness and efficiency of operations, reliability of financial and management reporting and compliance with applicable laws and regulations. PEFA performance indicators: 17. Recording and management of cash balances, debt and guarantees The municipalitys total debt level is monitored at least quarterly, its cash balances at least weekly and any new loans or guarantees are authorised centrally 18. Effectiveness of payroll controls Any changes to the payroll are supported by documentation of changes to personnel records, are clearly authorised and usually actioned within three months 19. Competition, value for money and controls in procurement At least 50% of contracts above the threshold are subject to open competition and the others are justified in line with regulations, there is a complaints procedure for contract letting 20. Effectiveness of internal controls for non-salary expenditure Internal controls for non-salary expenditure are effective, understood and usually applied 21. Effectiveness of internal audit Most departments are covered by internal audit which uses a systematic approach and promptly issues reports which usually result in appropriate action 22. Timeliness and regularity of accounts reconciliation Reconciliations of all municipal bank accounts are completed at least monthly with suspense and advance accounts cleared at least annually Other performance indicators: 13 4 c. Reconciliation of banking and fiscal records is undertaken satisfactorily, on a monthly basis. In-year budget reports are prepared quarterly less than 6 weeks after the end of the period, with reasonably accurate data, broken down to at least program or functional level. There are delays (e.g., more than 6 months) in preparation of the public accounts. The accounts are audited in a timely and professional manner, but few meaningful actions are taken on budget reports or audit findings. (IMF & World Bank CPIA) Proper segregation of duties is maintained, the following three tasks are undertaken by separate staff and/or sections: authorisation of local purchase orders or invoices for payment receipt or custody of the goods or services maintenance of the purchase ledger, cash book and other accounting records. An annual listing of authorised tax rates, custom fees and other fees and charges should be publicly available. All cash revenue should be receipted and promptly banked intact. Income records and receipts should be independently reconciled to the bank statements on a regular basis and inconsistencies adequately investigated.
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A regular summary of all income received (with comparisons to previous year) and 'arrears of revenue' return should be provided to the Accountant-General and the Auditor-General at least once a month. Formal bank reconciliations should be undertaken by staff who are not responsible for maintaining the cash book at least once a month. The bank balances recorded on the bank statements should be clearly balanced to the amounts recorded in the cash books. Any differences should be investigated and cleared by senior officers.
3.2 Stewardship and regulatory compliance Resources are managed in compliance with all relevant laws, regulations and standards; considerations of ethics, equity and propriety are fulfilled. Appropriate compliance and relationships are maintained with national funding and regulatory bodies
The annual external audit report on the financial statements does not have any major findings. There has not been any significant media coverage of financial irregularities in the municipality over the last year. PEFA performance indicator: 26. Scope, nature and follow-up of external audit Municipal entities representing at least 75% of its expenditure are audited annually and the annual financial statements with the audit report are submitted to the Council within 10 months of the end of the financial year Other performance indicators: 16 c. Conflict of interest and ethics rules exist and the prospect of sanctions has some effect on the extent to which public officials shape policies to further their own private interests. (IMF & World Bank CPIA) There are formal codes of conduct for staff and councillors, covering such matters as conflicts of interest, giving and receiving of gifts, business trips, hospitality, entertainment, use of agents and facilitation payments. The appropriate trade unions are recognised and are provided with the necessary support to organise effectively. The municipality has effective whistle blowing arrangements which include a telephone hotline and an appeal process independent of the municipalities management to deal with staff complaints. The municipality has an effective complaints procedure which includes referral to a council committee if necessary and regular reports to the council on any complaints which have been received. The national regulatory authorities does not have any significant concern about the extent to which the municipality complies with the relevant financial laws and regulations.
Whistle blowing and Complaints Procedures All public sector organisations should be required to adopt suitable whistle blowing and complaints procedures. Such procedures should aim to encourage staff and others to raise appropriate concerns and provide clear avenues for these concerns or complaints to be raised internally and externally to the organisation. These policies should ensure that staff and others who raise concerns receive a response, are not victimised and are informed about how their concerns are dealt with. There should be clear appeal procedures which include external input. Whistle blowing hot lines should be set up and monitored centrally.
3.3 Oversight
Public oversight mechanisms, especially by independent audit,

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ombudsman and legislative review process. Timely review of financial resource use and regulatory compliance by the municipal council, civil society and other stakeholders. Significant findings by oversight bodies are promptly made public.
Independent audit reports (and other reports from regulatory bodies) are made public each year in line with legislative requirements and are discussed by the council or a committee PEFA performance indicator: 28. Legislative scrutiny of external audit reports The Council considers the annual external audit report and this is considered in detail by a specialist Committee which ensures that suitable action is taken Other performance indicators: External audits are performed, their reports published and posted regularly as required by law (Wunsch 2006). The municipalitys external auditor has adequate independence, is not appointed by, does not report to and, if necessary, is not dismissed by the management of the municipality. The external auditors have an adequate budget. The external auditor's annual report is publicly available and editorially independent of the local governments financial department and the Council. Suitable auditing standards and quality control procedures are followed. The council holds quarterly meetings, open to the public, staff and their trade unions to discuss the budget and receive financial reports. Meetings of the councils finance committee are open to the public. Significant reports by national regulatory bodies are discussed by the council and made public.
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6 Conclusions
Municipalities face great challenges in meeting their responsibilities for improving the welfare of their citizens and achieving a world free from poverty. Effective financial management can facilitate the achievement of these complex and sometimes contradictory objectives. Performance indicators can be useful tools in this respect. We hope that the indicators we have developed and explained in this report will help municipalities to monitor and so improve their financial functions. However, the production of performance indicators should not be an end in itself. As Audit Commission (2000) said: Indicators should be used within a wider framework of performance measurement systems, performance management and overall strategic management of services. (page 5) The results indicated by performance indicated by performance indicators require careful investigation and cannot be the sole basis for informing management decisions. Key decision makers should avoid using measures as a substitute for expert knowledge about, or direct management of, programs. At best, measures should be placed in a management-by-exception frame, where they are regarded as indicators that will serve to signal the need to investigate further. This will trigger a larger process of organizational learning and adoption than can take place based on the measures alone. All users should recognize the weaknesses of measures and should seek and develop program performance information sources beyond the formal measurement system. (Kravchuk & Shack 1996: page 357) The Urban Institute & The Center for What Works (1996: page 15) developed more extensive advise on the use of performance indicators: Outcome information seldom, if ever, tells why the outcomes have occurred. Your program will seldom be 100 percent responsible for those outcomes. Inevitably, other factors, both external and internal, will affect outcomes. However, outcome information is vital for indicating what needs to be done to improve future outcomes. Your choice of outcome indicators to track should not be determined by the extent of your influence over the outcome but the importance of the outcome for your clients. Outcome data should be used to identify where results are going well and where not so well. When not going well, the program needs to attempt to find out why. This process is what leads to continuous program learning and program improvement. Outcome information is much more useful if the measures are tabulated for various categories of customers/clients, for example, by gender, age group, and race/ethnicity, income level, etc. It may be wise to start tracking only a very small number of the indicators, especially if you have had only very little experience with such data collection and have very limited resources. Not all outcomes or indicators listed will be relevant to every organization. Once your organization becomes more comfortable with outcome measurement, then more outcomes and indicators can be added to the system. Review the list of outcome indicators for the program that most closely matches, but also check out the common framework to see if the more general set suggests other relevant indicators.
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Selecting which outcomes and indicators to monitor is crucial. Sessions with staff and board members, and perhaps clients, to discuss what outcomes and outcome indicators your program should monitor will be important and will keep all aware of the outcome measurement efforts. The staff and board members will be the persons most able to use the findings to improve services. Some of the most important client outcomes and outcome indicators will require new data collection procedures (such as determining the extent to which improved client conditions have been sustained for at least, say 6 or 12 months, after service to the client has been completed). Nonprofit organizations should not give up too quickly on implementing such data collection procedures. Often, surprisingly inexpensive procedures can be used, especially if the program has any type of aftercare process.
Finally it is important to recognise that just using performance indicators will influence the way that people work and change their priorities what gets measured gets done. So it is important that the actual performance indicators that are adopted by a particular organisation are chosen carefully to reflect their particular priorities. It is also important to review and amend the performance indicators which are used from time to time to ensure that they still reflect best practice. On that note, we would hope that the suite of performance indicators we have developed will be widely used to increase the level of comparability between municipalities. If they are found to be useful they will themselves have to be periodically reviewed and updated we would welcome your thoughts and comments to assist with this process.
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Annex A
Resource people and expert panel

The core resource people for this project were:
Andy Wynne public financial management advisor, UK andywynne@btinternet.com Nafsiah Mohamed professor of accounting, Malaysia - drkancil@yahoo.com Ravikant Joshi urban financial management, India - ravikant.joshi@gmail.com
Other members of the expert stakeholder panel were: Lamia Moubayed Bissat director of public sector training institute, Lebanon lamiam@if.org.lb Trevor Bull - infrastructure policy and institutional specialist, Australia & Thailand trevorbull@csloxinfo.com James Chan financial reporting specialist, USA and China - jimchan@uic.edu Gordon Ferrier CIPFA (accounting body, predominantly local government), UK and South Africa Gordon.Ferrier@cipfa.org Ato Ghartey public financial management consultant, West Africa atoghartey@4u.com.gh Jesse Hughes consultant and academic, USA - jhughes@odu.edu George A. Larbi - public sector specialist, World Bank, Nigeria - glarbi@worldbank.org Margaret Alividza consultant Kenya <margaretalividza@yahoo.com> Anja Linda - fiscal decentralisation & municipal finance expert, Arab world anjalinder@yahoo.se Thomas Meekel - Project Manager, United Cities and Local Governments t.meekel@cities-localgovernments.org Cherif Merrouche Senior Lecturer, Algeria and UK - M.C.Merrouche@gcal.ac.uk Michael Parry financial management consultant, UK michael.parry@wyginternational.com Hassan Ouda financial consultant, Egypt and Gulf States hassanouda@hotmail.com Carole Pretorius financial management consultant, UK carolepretorius@btinternet.com
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Ramesh Ramanathan Chair Technical Advisory Group Jawaharlal Nehru National Urban Renewal Mission Government of India ramesh@janaagraha.org; www.janaagraha.org S R Ramanujam Director Urban Infrastructure CRISIL Risk and Infrastructure Solutions Ltd Mumbai India sramanujam@crisil.com www.crisil.com Sanjukta Ray public sector financial performance management expert, India ray.sanjukta@gmail.com Ahmed Taha M Saghier Ministry of Interior, Sudan abuomama@yahoo.com Alan Yorke - management consultant, South Africa - alan@akhile.co.za John Ruggini - Manager, Government Finance Officers Association, USA jruggini@gfoa.org
The UN-Habitat officer responsible for this project is: John Hogan, Human Settlements Officer Training and Capacity Building Branch, UN-HABITAT PO Box 30030, Nairobi, KENYA 00100 Email: john.hogan@unhabitat.org Tel: (254 20) 762-3185 Fax: (254 20) 762-3092 The co-ordinator in Bahrain is: Falah Al-Kubaisy
Research & Development Advisor, Ministry of Municipalities & Agriculture Affairs, P.O. BOX 53, Manama BAHRAIN Mobile: +973 3 66 55 644, Email: falah11@hotmail.com and fkubaisy@mun.gov.bh
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Annex B
Inception report
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August 2008
Annex C
Millennium Development Goals and Targets

www.developmentgoals.org
Goal 1. Eradicate extreme poverty and hunger Target 1. Reduce by half the proportion of people living on less than a dollar a day Target 2. Reduce by half the proportion of people who suffer from hunger Goal 2. Achieve universal primary education Target 3. Ensure that all boys and girls complete a full course of primary schooling Goal 3. Promote gender equality and empower women Target 4. Eliminate gender disparity in primary and secondary education preferably by 2005, and at all levels by 2015 Goal 4. Reduce child mortality Target 5. Reduce by two thirds the mortality rate among children under five Goal 5. Improve maternal health Target 6. Reduce by three quarters the maternal mortality ratio Goal 6. Combat HIV/AIDS, malaria and other diseases Target 7. Halt and begin to reverse the spread of HIV/AIDS Target 8. Halt and begin to reverse the incidence of malaria and other major diseases Goal 7. Ensure environmental sustainability Target 9. Integrate the principles of sustainable development into country policies and programmes; reverse loss of environmental resources Target 10. Reduce by half the proportion of people without sustainable access to safe drinking water Target 11. Achieve significant improvement in lives of at least 100 million slum dwellers, by 2020 Goal 8. Develop a global partnership for development Target 12. Develop further an open trading and financial system that is rule-based, predictable and nondiscriminatory. Includes a commitment to good governance, development and poverty reduction nationally and internationally Target 13. Address the least developed countries special needs. This includes tariff- and quota-free access for their exports; enhanced debt relief for heavily indebted poor countries; cancellation of official bilateral debt; and more generous official development assistance for countries committed to poverty reduction Target 14. Address the special needs of landlocked and small island developing States Target 15. Deal comprehensively with developing countries debt problems through national and international measures to make debt sustainable in the long term Target 16. In cooperation with the developing countries, develop decent and productive work for youth Target 17. In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries Target 18. In cooperation with the private sector, make available the benefits of new technologies especially information and communications technologies.
Page 77
August 2008
Annex D
United Nations Global Compact

http://www.unglobalcompact.org/ The Global Compact's ten principles in the areas of human rights, labour, the environment and anti-corruption enjoy universal consensus and are derived from:
The Universal Declaration of Human Rights http://www.un.org/Overview/rights.html The International Labour Organization's Declaration on Fundamental Principles and Rights at Work http://www.ilo.org/public/english/standards/decl/declaration/text/ The Rio Declaration on Environment and Development http://www.un.org/esa/sustdev/agenda21.htm The United Nations Convention Against Corruption http://www.unodc.org/unodc/en/crime_convention_corruption.html
The Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment, and anti-corruption: Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2: make sure that they are not complicit in human rights abuses. Labour Standards Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour; Principle 5: the effective abolition of child labour; and Principle 6: the elimination of discrimination in respect of employment and occupation. Environment Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies. Anti-Corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.
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Financial Performance Indicators For Municipalities 2008

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Financial Performance Indicators for Municipalities - Draft Report - UN-Habitat

Developing Financial Performance Indicators for Municipalities

UN-Habitat August, 2008

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Financial Inform ation

A ssess quality of financial system