FINANCIAL PERFORMANCE OF LOCAL AUTH
Ourities with emphasis of deficits

 ASSOC PROF DR NAFSIAH MOHAMED
ASSOC PROF DR RUHAYA ATAN
Faculty of Accountancy
UiTM Shah Alam

INTRODUCTION 

Malaysia is experiencing rapid economic development with a vision of becoming a developed country by the year 2020. In such an environment, the demand for public services is increasing but the resources available are limited. Various management and administrative reform efforts were implemented in the local authorities to upgrade the administrative machinery to meet the increasing needs and expectations of customers. Therefore, it has become increasingly important to assess the public sector agencies on their performance in meeting their objectives.

It is difficult to assess how well a local authority is performing because there is no owner with an equity stake in the local authority demanding or requiring measurement. There is no bottom-line of profitability or easily quantifiable outcomes that can be used as a benchmark. As a government agency, local authority is not focusing on profitability but rather on providing services for the well being of its community.  Even the public communities assess the performance of their local authority by looking at whether they have been served to their satisfactory level. The public is not so much concern whether the local authority is having sufficient resources or not since they expect that resources would come from the government.

However, assessing financial performance is important to gauge how well a local authority is fulfilling its objectives, how efficient their resources have been allocated, and how well they are positioning their organization financially. Any local authority is expected to control and manage their finance efficiently since financial support does not come entirely from the state or federal government. Government allocates limited financial resources to local authorities based on certain criteria such as the number of population in the local authorities’ jurisdiction. Local authorities should not depend too much on government grant and must find the means of increasing their revenues. This could be a major problem for some of the local authorities (Phang and Subramaniam, 2006).

Local authorities are accountable for performance of their organizations. The stakeholders who are interested to know their performance include the members of House of Representatives, the local authorities’ council members, the community or the tax payers the local authorities are serving, the public at large as well as the mass media. In recent years the media has taken an active role in highlighting many issues that concern the public interest, which demand the local authorities to be more accountable. The public does not get much information or explanations from their local authorities until some problem or issue cropped up and received the media coverage in the press or televisions. Because of this, the community is becoming more vocal in voicing their grouses over the services provided by their local authorities. They are also demanding clearer and greater accountability for the way the local authority makes decision and use their tax money.

Annual financial reports of local authorities that are audited by the Auditor General Department are the means for the local authorities to show their accountability to their stakeholders. This is fulfilling the public accountability as provided in Article 99 (4) of the Federal Constitution and Section 16 of the Financial Procedures Act 1957. However, not much information is made available in that report other than the audited financial statements. In addition, there have been a number of issues raised with regards to the published financial statements of the local authorities. Among them are timeliness of issuing the report, preparation of accounts not following a common accounting standard for public sector, and the quality of financial information reported that led to some of them getting qualified audit reports (Engku Ismail, 2006: Ambrin, 2006; Emilin and Asmah, 2004 and Nafsiah and Ruhaya, 2006).

The auditor general in his presentation at the last Conference of Accountants for the Local Authorities in Langkawi gave many examples of projects that have been wasted or abandoned. Also mentioned were the public services and amenities that were not properly taken care of. These are some of the examples of poor performance of local authorities. The implementation of key-performance-indicator (KPI) system to monitor and measure the performance of the public sector delivery system as proposed by the Federal Government is still at the infancy stage. Alternatively, performance of the local authorities could be observed from the financial statements they prepared for annual audit by the Auditor General Department. For the private sector, the income statement would show the bottom line figure of profit or loss for a certain financial year that is of most important to their stakeholders. For the local authorities we could refer to their Statement of Revenue and Expenditure that would show either a surplus or deficit of revenue over expenditure. To an ordinary person, deficit may simply mean the financial performance of that organization is not favourable. 

REsearch Objectives 

This study is intended to provide a general overview of the trends in the financial performance of Malaysian local authorities for the four years of 2001 to 2004. The study also provides further analysis of the local authorities that experienced deficit (excess of expenditures over revenues) for three or four consecutive years.

The findings of this study would be useful to managers of local authorities, particularly in reflecting their performance in undertaking their responsibilities. There are still a lot that can be done by them to improve their efficiency and effectiveness in meeting the demands of their stakeholders as well as achieving their objectives as government agency.

Research Methodology 

Currently, there are 145 local authorities that are made up of 10 city councils (CC), 33 municipal councils (MC) and 102 district councils (DC). 68 local authorities responded to the request for their annual financial reports. Financial reports from 42 of them are useable due to the availability of the reports for all the four years. The financial years selected is up to 2004 as the financial statements for 2005 have not yet been audited and made available to the public. The emphasis of the study and hence the scope of analysis is on the financial performance as shown in the Statement Revenues and Expenditure.

Analysis of Data 

The sample of financial statements of 42 local authorities consists of 3 City Councils (CC), 10 Municipal Councils (MC) and 29 District Councils (DC).

This section describes the general analysis of the whole sample of local authorities for the four-year periods. The next part of the section concentrates on the performance of local authorities that showed deficit of revenue for three and four consecutive years.  

General Analysis 

The descriptive analysis shows the number of local authorities that were having surplus or deficit of revenues over expenditures. Out of the sample of 42 local authorities for the period of four years, only 11 (26%) of them had never faced deficit in any of those years. Table 1 below shows that almost 79% of them were having surplus in 2001 and the number of those having deficit was only 9 or 21%.

TABLE 1: Number of LA having deficit and surplus 

 However in 2002, the number increased by 111%. From 2002 onwards, more than 40% of the local authorities had deficit in 3 consecutive years. 

 Graph 1: Four years trend of surplus and deficit. 

Graph 1 shows the trend of performance of the local authorities for four years. 

From 2001 to 2002 

The percentage of local authorities having surplus has decreased from 78.57% to 54.76% whilst the percentage of local authorities having deficit increased from 21.43% to 45.24%. In other words, the number local authorities having deficit had increased from 9 to 19. Even though in 2002, 3 of the 9 local authorities managed to improve and obtain surplus. 6 local authorities remain in deficit. In addition, 13 local authorities that were previously having surplus incurred deficit in 2002 (see Diagram 1).

                                   Diagram 1: Number of LA facing deficit in 2001 and 2002

From 2002 to 2003 

The number of local authorities having deficit and surplus remained the same. Even though the number of local authorities having deficit was still 19 for both 2002 and 2003, Diagram 2 shows that 7 of the 19 local authorities previously in deficit managed to improve and obtain surplus. The existing 12 local authorities continued to face deficit in 2003 and additional 7 local authorities that previously were having surplus now faced deficit (see Diagram 2).

 Diagram 2: Number of LA facing deficit in 2002 and 2003 

From 2003 to 2004 

The percentage of local authorities having surplus has increased from 54.76% to 59.52%) while the percentage of those having deficit has decreased from 45.24% to 40.48%. Diagram 3 showed that in 2003, 7 of the 19 local authorities managed to improve and obtain surplus. Even though there is a slight improvement in 2004, 12 existing local authorities continued to face deficit and additional 5 local authorities that previously were having surplus now faced deficit (see Diagram 3). 

  Diagram 3: Number of LA facing deficit in 2003 and 2004

The analyses show that some local authorities continue to face deficit whereas there are others that managed to pull out from the deficit and show surplus in their financial performance.

Analysis on Local Authorities having deficit 

Table 2 shows in every year, more than 50% of all the local authorities having deficits were District Councils. This reflects that the district councils are more likely to have less revenue to sustain their expenses as compared to the municipal councils. The city councils are less likely to face with deficit.

TABLE 2: Types of Local Authorities having deficit 

 Even though in 2002 and 2003 the number of local authorities with deficit were 19, and in 2004 has reduced to 17, further analysis shows that the increase in those years were not actually of the same local authorities.

The study finds that eight of the local authorities experienced deficit for three or four consecutive years. Graph 2 shows the local authorities that face such situations. One municipal council and two district councils had deficits for four consecutive years, while three municipal councils and two district councils showed deficit for three years consecutively.

Graph 2: Local Authorities with deficit (RM) in three and four consecutive years.

 Local authorities with deficit for four consecutive years 

The analysis shows the 3 local authorities that faced deficit for four consecutive years are Seberang Perai Municipal Council, Pasir Putih District Council and Jeli District Council.

TABLE 3: Local Authorities having deficit for four consecutive years 

 Table 3 shows that for Seberang Perai Municipal Council, deficits from 2001 to 2004 continuously increased. Pasir Putih District Council shows a decreasing deficit trend from 2002. Jeli District Council’s deficit in 2002 worsens 38 times more than that of 2001. Even though the performance showed some improvements in 2003 and 2004, the amount of deficit reduced still not encouraging.  

Local Authorities with deficit in three consecutive years 

The analysis shows the 5 local authorities with deficit for three consecutive years are Temerloh Municipal Council, Kuantan Municipal Council, Petaling Jaya Municipal Council, Padang Terap District Council and Pontian District Council.

TABLE 4: Local Authorities having deficit for three consecutive years 

Table 4 shows that except for Pontian District Council, all the others were showing deficit continuously from 2002 onwards. Pontian District Council.shows the best improvement from a deficit of 1.4 million ringgit Malaysia in 2002 to only RM14, 653 deficits in the next year and eventually showing a surplus in 2004. 

Local Authority that had no improvements in four consecutive years 

The study finds that Seberang Perai Municipal Council has not shown any improvements in its financial performance throughout the periods under study. 

 Graph 3: Deficit of Seberang Perai Municipal Council

From 2001 to 2004, the amount of deficit increased from RM31, 566,661 to RM49, 937,967 (see Graph 2). Further analysis shows that the deficit was due to the increase in expense (see Table 5) that is not commensurate by the increase in revenues. 

TABLE 5: Percentage of expense over income of Seberang Perai Municipal Council 

 Analysis on the amount of grants received compared to the total revenues, shows that Seberang Perai Municipal Council received only a small percentage of grants every year (an average of less than 5%). As a municipal council, Seberang Perai is expected to have high amount of income, but it seems that their expenditure is much higher than the revenue. At the same time they could not depend on the grant from the government.

 Local Authority with improvement after three consecutive years of deficit 

Among the sample, only Pontian District Council has shown good improvement in 2004 after facing deficit for three consecutive years. Graph 4 and 5 shows the trend of its performance. 

 Graph 4: Surplus or deficit (RM) of Pontian District Council 

Graph 5: Income of Pontian District Council from 2001 - 2004. 

Further analysis shows that the income of Pontian has increased in 2003 and 2004. Table 6 discloses the amount of increase in income. The analysis also shows Pontian District Council received more annual grant in terms of percentage over their revenues, as compared to Seberang Perai Municipal Council. The average percentage is 8.12%. The amount of grant received has helped the district council to turn over to surplus.

                     TABLE 6: Percentage of expense over income and grant received by Pontian District Council 

According to Phang and Subramaniam (2006), the average revenues of local authorities in 2002 consist mainly of tax revenue (60.3%), grant (15.4%) and others. While average expenditures for that year were mainly made up of emoluments (32%), services and utilities (29%), rent (24%) and others. When these averages are compared to the performance of all the eight local authorities that were in deficit in that year, it is found that all the district councils received less revenue from tax, but the municipal councils received about the same average of revenue from tax. As for revenue from grant, all municipal councils received much less than the average figures whilst more district councils received a lot more than the average grants. This shows districts councils depend more on the grant as their major source of revenue. This could also imply that the municipal councils may still need more contributions from the government grant to ensure that they can afford to incur large amount of expenditures. Other than emolument, the big bulk of expenditures are for service and utilities. The analysis shows that most of the local authorities spent above average expenditure on service and utilities. In order to minimize the amount of deficit, local authorities should also be looking at reducing the high expenditure on service and utilities. For example, outsourcing the services should be carefully scrutinized to ensure value for money services. In the case of Seberang Perai Municipal Council, in view of small percentage of grant received, they have to find other sources of revenues or perhaps more efficient collection of revenues. 

CONCLUSION 

Local Authorities have the obligation to be accountable for their performance. Annual financial reports of local authorities that are audited by the Auditor General Department are the means for the local authorities to show their accountability to their stakeholders. There is no effective procedure of performance monitoring and reporting, though there has been a call for the implementation of key-performance-indicator (KPI) system to monitor the performance of public sector delivery system, by the Federal Government. This study evaluates the performance of local authorities through their Statement of Revenues and Expenditures.

The findings show that overall, only 11 out of 42 (26%) sample local authorities had never faced deficit in any of the four years of study. The other 31 local authorities had experienced having deficit, in which, 3 of them showed deficit for four consecutive years and 5 others showed three consecutive years of deficit. Further analyses show that though Municipal Councils received big amount of taxes and less amount of grant from the Government, they still incur high expenditure that led them to having deficits. Unlike the Municipal Councils, most of  District Councils  received high percentage of revenue from the grant than the tax, but still showing deficits over three or four years.

In conclusion, Local Authorities must show good performance even though they are not profit motivated. Their sources of revenue come from the public fund and their objectives are to serve the public’s interest. They must be accountable and manage their finances efficiently and ensure that the services provided meet the expectation of their stakeholders. Therefore, there must be efforts and actions taken to evaluate and rectify the continuous poor performance of the local authorities by the relevant parties.