THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services
Dec 18, 2015
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!