THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

Results of Nationwide Consultations on the Review of the Local Government Code of

1991

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

Result of Consultations

Island-wide consultations in Luzon, Visayas and Mindanao attended by close to 400 LGU chief executives, council members, and officers

Smaller meetings with selected officials of Leagues of Provinces, Cities, Municipalities, Vice Governors, Councilors, Vice Mayors, ULAP, Provincial Board Members

Meetings with technical staff of ULAP, League of Provinces, League of Cities and League of Municipalities

Consultations with business sector (PCCI, TMAP, BAP, BPO sector, etc.)

Initial consultations with national government agencies

Scope of LGC Review

1. Expenditure assignment

2. Revenue assignment and taxing powers

3. Intergovernmental fiscal transfers

4. LGU borrowing and credit finance

5. Creation of LGUs

6. Inter-local cooperation/alliances

7. Fiscal administration

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

1. Expenditure Assignment

Expenditure Assignment – who does what?Issue:

Overlapping and, at times, unclear assignment of functions across various levels of government (NG and different levels of LGUs) Results in waste of resources

Unfunded mandatesResults in relevant services not being delivered at all or not

delivered in sufficient quantities

In either case, the welfare of local communities is adversely affected.

Expenditure Assignment – who does what? Proposed amendment

Amend Section 17 (a) of the 1991 LGC by inserting a proviso that will differentiate between fully devolved functions and delegated functions o Fully devolved functions are those for which exclusive responsibility for

service provision is assigned to.o Delegated functions are those for which the national government has

primary responsibility for provision but which are implemented by LGUs; delegated functions typically associated with national objectives and/ or externalities

Delegated functions are best financed through conditional transfers

Stakeholder support Consistent with PFM reform of NG; Strong support in principle from

LGUs in Luzon, Visayas and Mindanao consultations; League officials want to see details of delineation

* Studies now on-going with respect to functional assignment in health, environment and natural resources; study on agriculture to follow.

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

2. Own-Source Revenuesand Revenue Assignment

Own-source revenues and revenue assignmentOverarching issues

Lack of productive source of local revenues high LGU ►dependence on transfers weak revenue autonomy ► ►perverse incentives and weak accountability

Wide flexibility in taxes/ fees that LGUs are allowed to impose discourages prospective investors in local ►economy

Revenue assignment - Schedule of market value (SMV) of real property

Specific issue Outdated schedule of fair market value of real property in

many provinces and cities o SMV at least 2 cycles behind in 59% of provinces & 72% of cities in

2014

Need to strengthen real property valuation standards to promote integrity and fairness of RPT system

Revenue assignment - SMV

Proposed Amendment Amend Sections 212 and Section 214 so as to assign the

approval of the schedule of market values of real properties situated in each province/ city/ MM municipality to the Department of Finance instead of requiring that schedule of market value be enacted into an ordinance by the local Sanggunians

Retain LGUs’ autonomy in setting assessment levels for RPT purposes (Section 218) and setting real property tax rates (Sections 232, 233, 235 and 236)

Revenue assignment - SMV

Impact If SMVs of all provinces and cities were to be fully updated,

potential RPT revenues for all provinces in the aggregate will increase by 97% (or PhP 9.6 billion) while RPT revenues for all cities as group will increase by 138% (or PhP 40.8 billion) for a total of PhP 50.3 billion, other things being equal

Stakeholder support DOF priority bill strong support from LGUs in Visayas and Mindanao

consultations o LCP National Assembly passed resolution support this proposal

General support from business sector Number of bills filed in Congress (e.g., Sarmiento bill)

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

3. Intergovernmental Fiscal Transfers

Issue Perception on part of LGUs that IRA does not provide

sufficient resources needed for LGUs to deliver fully devolved services

Proposed amendment (from LGU consultations) Amend Sec. 284 of LGC such that the IRA shall be set equal to

40%-50% of all national taxes (i.e., including collections of both BIR and BOC in the base)

Intergovernmental Fiscal Transfers – IRA increase

Impact Incremental revenue impact (based on actual NG tax collections in

2012)o Inclusion of VAT/ excise tax collections of BOC in base (Mandanas petition) –

PhP 98.5 billiono 50% of BIR collection – PhP 97.3 billiono 50% of national internal revenue taxes incl. VAT/ excise tax collections of BOC –

PhP 122 billiono 50% of all national taxes – PhP 245 billion

Significant implications on macroeconomic flexibility Demand for increase may be mitigated by increase in LGU taxing

powers

Stakeholder support Very strong support from LGUs Many bills in House and Senate Mandanas petition pending at SC Opposition from DOF

Intergovernmental Fiscal Transfers – IRA increase

Issue IRA does not assist fiscal equalization in the sense of providing

more resources to LGUs with lower revenue capacity relative to their needs and less to LGUs with greater revenue capacity relative to their needs

Proposed amendment Amend Section 3 (d) to specifically introduce principle that

share of LGUs in national taxes shall take into account disparities in revenue raising capacity of LGUs in line with their expenditure needs (i.e., have equalization as an objective)

Intergovernmental Fiscal Transfers – Equalization grant

Impact can be designed and implemented in a marginal and

sequential manner so as not to harm any LGU in the process and without impacting negatively on NG flexibility

If distribution is calibrated relative to revenue capacity as measured by potential revenue, it will incentivize own-revenue generation

Stakeholder support Support from LGUs in Luzon, Visayas and Mindanao

consultation

Intergovernmental Fiscal Transfers – Equalization grant

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

4. LGU Borrowing and Credit Finance

Overarching issues Subnational borrowing important if LGUs are to be

enabled to finance lumpy investments on local infrastructure

At present, subnational borrowing is low relative to LGU financing for local infrastructureoNeed to streamline procedures governing LGU access

to credit market

LGU Borrowing and Credit Finance

Issue Preference for gov’t financial institutions as LGU depository

bank (Section 311 of LGC) ► discourages entry of private institutions in LGU credit marketo Greater competition has potential to reduce LGU borrowing cost

Proposed amendment Amend Sec. 311 so as to explicitly allow LGUs to open

depository account in PFIs if LGUs will be borrowing from PFIs without any need for prior government approval

Stakeholder support Strong support from LGUs in Luzon, Visayas and Mindanao Some support from business sector DOF does not support this

LGU Credit Finance – LGU deposits in PFIs

Issues Inter-LGU cooperation deemed necessary and critical

when delivery of devolved service involves:o economies of scale (e.g., solid waste management, water supply) o externalities or spillover effects (e.g., coastal resource

management, environmental management)

Attempts at inter-LGU cooperation to date have been hamstrung by questions related to how they will manage funds they have contributed to the alliance, how they can access financing from both credit and capital markets, etc.

Inter-LGU Alliances /Cooperation

Proposed amendment Establish regulatory framework for inter-local cooperation

and alliances; register ILCs in a National Registry to vest ILC with legal personality

Stakeholder support Some support from LGUs in Luzon an Mindanao

consultation

Inter-LGU Alliances /Cooperation

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

6. Creation of LGUs

Issues Growing trend in favor of…

o conversion of municipalities to citieso Breaking up of existing provinces/ municipalities/ barangays into

two or more new provinces/ municipalities/ barangays Such a trend tends to result in inefficiently sized jurisdictions

Proposed amendment Align income requirements for the creation/conversion of

highly urbanized city, province and municipality with that in RA 9009 which provides new income criteria for the creation of cities

Stakeholder support Support from LGUs in Luzon, Visayas and Mindanao

Creation of LGUs

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

7. Local Fiscal Administration

Issue Need to ensure transparency in LGU operations for greater

accountability

Proposed Amendment Legislate full disclosure policy for LGUs requiring them to

post documents relating to income, expenditures, procurement, loans, etc. in conspicuous places for transparency

Stakeholder support Strong support from LGUs in Luzon, Visayas and Mindanao

consultation House bill file in Congress

Local Fiscal Administration (1)

Issues Need to promote PFM by strengthening internal control

Proposed Amendment Amend Sec. 47 (b) to exclude “internal audit” from functions of

Accountant; Insert Section on the creation of Internal Audit Service as a

mandatory position

Stakeholder support Supported by DBM Some support from LGUs

Local Fiscal Administration (2)

Thank you very much!