THE REVIEW OF THE 1991

LOCAL GOVERNMENT CODE

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

Presentation for League of City of the Philippines

26 August 2014
Crowne Plaza,
Scope of the Local Government
Code Review

SYMPOSIUM ON THE REVIEW

OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
Scope of LGC Review

The LGC review will focus on fiscal

provisions
1. Expenditure assignment
2. Revenue assignment & taxing powers
3. Intergovernmental fiscal transfers
4. LGU borrowing and credit finance
5. Creation of LGUs
6. Inter-LGU alliances/cooperation
7. Fiscal administration
Why is the LGC review focused on fiscal
provisions?
 They are critical to LGUs’ ability to deliver basic
services.

 It is important to conduct a review of the

provisions using a holistic framework.

 Many of specific topics identified are on the

priority list of various stakeholders.
1. Expenditure
Assignment

SYMPOSIUM ON THE REVIEW

OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
Expenditure Assignment – who does
what?
 Issues:
 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 mandates
 Results 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?

 Direction of reform (1)

 Clarifying expenditure responsibilities/functions
by distinguishing between fully devolved
functions and delegated functions (i.e., functions
which are related to the attainment of national
objectives but implementation of which at the
local level are assigned to LGUs)
 Making the distinction has implications on how functions are
financed
o fully devolved functions best financed through block grants and
own-source revenues
o delegated functions best financed through conditional transfers
Expenditure Assignment – who does what?

 Direction of reform (2)

 Revisit NG-LG and inter-LGU expenditure sharing
in the following sectors:
Health
Agriculture
Environment and natural resources
How do LGUs finance devolved
functions?
 Own-source revenues

 Intergovernmental fiscal transfers

 LGU borrowing and credit finance

2. Own-Source
Revenues
and Revenue
Assignment

SYMPOSIUM ON THE REVIEW

OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
Own-source revenues and revenue assignment
 Issues (1)
 Lack of productive source of local revenues ►
high LGU dependence on transfers ► weak
revenue autonomy ► perverse incentives and
weak accountability

 Promotes less than efficient and fiscally responsible

spending

 Allows LGUs not to impose taxes on their constituents

commensurate with the services they deliver, resulting
in weak local demand and accountability
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
Own-source revenues and revenue assignment
 Issues (2)
 Wide flexibility in taxes and fees that LGUs are
allowed to impose ► increased uncertainty on
part of local investors as local revenue codes
differ significantly from one location to another
 May hurt inflow of investments and local economic
growth

 Some LGUs impose nuisance taxes that increase

the cost of doing business and/or cause
inefficient allocation of resources without a
commensurate increase in revenue take
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
Own-source revenues and revenue assignment

Direction of reform (1)

 Identification of a closed positive list of local taxes,
fees, and charges over which LGUs have full
autonomy in setting tax rates

 Simplification of rate structure of local business taxes

 Indexation of tax rates, fees and charges that are

fixed in peso terms to inflation

 Revisit of situs provision (i.e., derivation basis) with

respect to local business tax
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
Own-source revenues and revenue assignment
 Direction of reform (2)
 Assign the conduct and approval of the general revision
of the schedule of market value of real property to the
national government while retaining full autonomy on
setting of assessment levels and real property tax rates to
LGUs

 Provide mechanism for administrative recourse in case of

disputes related to LGU taxing powers

 Assign more revenue-productive taxes to LGUs

Piggybacking on NG taxes like personal income tax
Green taxes
3. Intergovernmental
Fiscal Transfers

SYMPOSIUM ON THE REVIEW

OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
HOW DO LGUs PAY FOR DEVOLVED
SERVICES?
Intergovernmental Fiscal Transfers
 Issues (1)
 Intergovernmental transfers mainly take the form of
the IRA
Does IRA provide sufficient resources needed for LGUs to
deliver fully devolved services? (vertical balance issue)
Does the IRA assist fiscal equalization so that it provides
more resources to LGUs with greater needs and less to
LGUs with greater tax capacity?
Does IRA have disincentive effect on local revenue
generation?
 Lack of well-structured set of conditional transfers to
leverage national government policy objectives
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
Intergovernmental Fiscal Transfers

 Issues (2)
 Reforming the system of intergovernmental
transfers …
Should be done in coordination with reform in revenue
assignment and expenditure assignment

Should not threaten macroeconomic and fiscal stability

Reforms, even if substantive, can be designed and

implemented in a marginal and sequential way so as not
to harm any LGU in the process
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
Intergovernmental Fiscal Transfers

 Direction of reform (1)

 Revisit vertical balance problem

 Introduce transfer mechanism that will take into

account disparities in revenue raising capacity of
LGUs in line with their expenditure needs
(equalization grant)
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
Intergovernmental Fiscal Transfers

 Direction of reform (2)

 Establish system of conditional transfers with well-
defined cost-sharing provisions and performance
indicators (especially with regards to delegated
functions)

 Review current provisions related to LGU share in

national wealth and national taxes for the purpose
of facilitating release, promoting more efficient
utilization and, possibly, promoting greater equity
4. LGU
Borrowing
and Credit
Finance

SYMPOSIUM ON THE REVIEW

OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
LGU Borrowing and Credit Finance

 Issues (1)
 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 infrastructure
Need to streamline procedures governing LGU access
to credit market
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
LGU Borrowing and Credit Finance
Issues (2)
 Important to manage fiscal risks arising from LGU
borrowing
Review Section 296 of LGC which allows LGUs to
borrow for the purpose of stabilizing finances
Improve measurement of LGU borrowing capacity

 Preference for gov’t financial institutions as LGU

depository bank (Section 311 of LGC) ► discourages
entry of private institutions in LGU credit market
Greater competition has potential to reduce LGU
borrowing cost
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
LGU Borrowing and Credit Finance

 Direction of reform (1)

 Require LGUs to repay loans not used to finance
capital investments (i.e., loans incurred to
stabilize finances) within the current fiscal year

Alternatively, limit use of LGU borrowing to the

financing of capital investment only (Golden Rule)
HOW DO LGUs PAY FOR DEVOLVED SERVICES?
LGU Borrowing and Credit Finance

 Direction of reform (2)

 Define the debt service ratio in terms of the net
operating surplus before interest payments and
capital expenditures instead of regular LGU income
to make ratio more aligned with LGUs’ capacity to
service their debt

 Liberalize Section 311 of LGC to remove preferential

treatment given to GFIs as LGU depository bank
5. Inter-LGU Alliances and Cooperation

SYMPOSIUM ON THE REVIEW

OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
Inter-LGU Alliances /Cooperation

 Issues
 Inter-LGU cooperation deemed necessary and critical
when delivery of devolved service involves:
 economies of scale (e.g., solid waste management, water supply)
 externalities or spillover effects (e.g., coastal resource
management, environmental management)

 Attempts at inter-LGU 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

 Direction of reform
 Clarify pre-requisite conditions related to the
formation of inter-LGU alliances

 Establish regulatory framework for said alliances

including legal personality of the same and
treatment in terms of fiscal administration,
accounting and reporting
 6. Creation of LGUs
SYMPOSIUM ON THE REVIEW
OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
Creation of LGUs

 Issues
 For various reasons, growing trend in favor of…
conversion of municipalities to cities
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
Creation of LGUs

 Direction of reform
 Amend existing LGC provisions that have unwittingly
incentivize such behavior

 Strengthen existing provisions that regulate creation

of new LGUs
7. Local
Fiscal
Administrati
on

SYMPOSIUM ON THE REVIEW

OF THE 1991 LOCAL GOVERNMENT CODE
Improving Lives Through Local Governance Reform:
Transparency, Accountability and Better Services
Local Fiscal Administration

Issues
 Some of the existing provisions of the LGC on
fiscal administration deemed antiquated, not
consistent with other laws enacted after the LGC,
etc.

Direction of reform
 Review provisions related to, among others:
Cap on personal services expenditures
Procurement
Next Steps

Technical studies
Further consultation
LGC Review Team

Bureau of Local Government Development,

Department of Interior and Local Government
Technical Review Team
 Rosario G. Manasan
 Antonio Avila Jr.
 Oscar Gomez Jr.
 Joy Valerie Lopez

Thank you very much!