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New Era University College of Business Administration

Local Government: Their Financing (REPORT OUTLINE) ELECTIVE 2 Public Finance Submitted by: Asotigue, El yne Pops Ferrer, Almie Gaitan, Nyssa Ramos, Mariah Tabayoyong, Rhona Viray, Aileen

February 7, 2014

EVOLUTION OF LOCAL GOVERNMENT Local government in the Philippines has its roots in the colonial administration of Spain, which lasted in the Philippines for 327 years. The establishment of Cebu Cit y in 1565 started the local government system. Three centuries under Spanish government were characterized by a highl y centralized regime. The Spanish Governor General in Manila governed the provinces and cities in the whole country. An important Spanish law on local governments was the Maura Law of 1893, which allowed Filipinos to vote for th eir local officials. After Spain, the United States came into power in the earl y 1900s and Filippinized local government administration. The Americans issued General Order No. 43 , which recognized local governments established by Spaniards. In the Commonwealth period (1935 -1940), Commonwealth Act No. 357 allowed women to exercise their suffrage and vote for local officials. The post war years (1946 to 1971) also saw several legisl ations aimed to strengthen local elections in the Philippines. The last 50 years of the twentieth century saw several developments towards decentralization. The Local Autonomy Act of 1959, the passage of the Barrio Charter and the Decentralization Act of 1967 were all incremental national legislation in response to the clamor for a self -rule concept. The Philippine Constitutions of 1972 and 1987 also significantl y influenced the movement for political devolution. The most significant constitutional provisio n (Article 10 on Local Government) is the following: " The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative and referendum, allocate among the different local government units their powers, responsibilities and resources and provide for the qualifications, election, appointment, removal, terms, salaries, powers, functions and duties of local officials and all other matters relating to the organization and operation of the local units ". The legislative initiative promoting local autonom y was strongl y supported by academics and public servants, who spearheaded the necessary reforms in changing the structure and organization of local governments, and included new functions to enable local governments to address a changing environment. The struggle for decentralization over the past 50 years culminated in the passage of the Local Government Code in October 1991. The Local Government Code is a most comprehensive document on local government touching on structures, functions and powers, including taxation and intergovernmental relations. The Local Government Code has been implemented for the last twelve years as part

of the continuing advocacy of the country for effective decentralization and a working local autonomy. MAIN FEATURE AND CHARACTERISTICS OF LOCAL GOVERNMENTS Local government categories and hierarchies The categories of local au thorities in the Philippines are as follows: 1 Metropolitan Government; 1 Autonomous Regional Government; 1 Special Administrative Region; 79 Provinces; 115 Cities; 1,420 Municipalities; and 43,000 Barangays Specific income categories and population size govern the classification of local governments from one t ype to another. The legal basis for such requirements is provided for in the Local Government Code. The Ministry of Finance decides upon the reclassification by income. The incremental income of a local government covering five years is the basis for upgrading local governments every five years. Local government structures and functions All levels of local government exercise the following general funct ions and powers: Efficient service delivery; Management of the environment; Economic development; and Povert y alleviation

The various provisions of the Local Government Code on provinces, cities, municipalities and barangays , all cite these funct ions. Enabling legislation from local councils may be initiated where necessary. The Local Government Code or Republic Act 7160 , contains the following four local government laws, defining the functions and powers of local governments: Section Section Section Section 468 447 458 398 Func tions Functions Functions Functions and and and and powers powers powers powers of of of of provinces (Provincial Law) municipalities (Municipal Law) cities (Cit y Law) barangays ( Barangay Law)

The functions and powers of the Metropolitan Manila Development Authorit y is defined in Republic Act 7924 , that of the Autonomous Region of Muslim Mindanao (ARMM) in RA 6649 and RA 6766 , and that of Cordillera Administration Region (CAR) in RA 6766 . All these sections have been standardized so that the respective functions and powers are similar. For example, provincial, cit y, municipal and barangay councils shall all enact ordinances and approve resolutions, appropriate funds, and pursue Section 16 (Gener al Welfare Clause) of the Local Government Code . Local governments are likewise empowered to exercise their corporate powers as provided for in Section 22 (corporate powers). This specific section provides that local governments as a corporation shall hav e the following powers: 1. To have continuous succession of its corporate name; 2. To sue and be sued; 3. To have and use a corporate seal; 4. To acquire and convey real or personal propert y; 5. To enter into contracts; and 6. To exercise such other powers as are granted to corporations, subject to limitations provided in the Local Government Code and other laws. Moreover, provinces, cities, municipalities and barangays shall: 1. Approve ordinances and pass resolutions nece ssary for the efficient and effective local government administration; 2. Generate and optimize the use of resources and revenues for the development plans, program objectives and priorities of the specific level of local government provided under Section 18 (Power to Generate and Appl y Resources of the Local Government Code ); 3. Subject to the provisions of Book II of the Local Government Code grant franchises, approve the issuances of permits or licenses or enact ordinances, and levy taxes, fees and charg es upon such conditions and for such purposes intended to promote the general welfare of the inhabitants; 4. Approve ordinances which shall ensure the efficient and effective delivery of basic services and facilities; and 5. Exercise such other powers and perform such other functions as may be prescribed by law or ordinance.

Table 1. Functions of Local Government Officials Local Chief Executives Supervise performance local Deputies department's Oversee the local bureaucracy General supervision over component local governments

Formulate plans and programmes Preside council over the local

legislative Exercise regulatory powers through the council Review local ordinances

Approve local budget

The structures of local governments are both governed by the Local Government Code and by local ordinance passed by the local government concern. A province must, for example, have a governor who is elected at large. The vice governor acts as presiding officer of the provincial legislative council and all these offices are mandated by the Local Government Code . In the case of cities, whether it is highl y urbanized or component cities, each has a cit y mayor, a vice mayor which presides over the cit y legislat ive council, and members of which, including the mayor and the vice-mayor are elected for a three -year term. Elected local officials are allowed onl y tenure of a three -year term or a total of nine consecutive years in the office as provided for in the Cons titution. In the case of municipalities, the position of mayor, the vice -mayor as well as the members of the municipal legislative council is likewise mandatory structures in the Code . The barangay government likewise has the barangay captain and six memb ers of the barangay council, all of who are also elected at the barangay level. All local governments are empowered by the Local Government Code to create their own departments and offices based on the principle of affordabilit y and actual need. The legal relationship between local governments and parastatal bodies is minimal. However, the relationship between parastatal bodies and local government is closer in the implementation of plans and programs of investment and development programs in areas where t hese plans and programs are located in specific local governments. Local councils generall y formulate laws and other regulatory measures. These regulatory measures are operationalized in the form of ordinances, proclamations, resolutions and/or other admi nistrative forms. The process of

legislation is usually based on identified needs of the municipalit y concerning development, peace and order or in the promotion of economic project activities including requirements in the social welfare clause provision o f the Local Government Code . When the local council tackles vital ordinances, such as increasing local taxes, closure of local roads and other issues vital to the communit y, the regulatory measures or proposed ordinances undergo a series of public hearings . These ensure that the communit y is aware of the measures, and participate in the formulation of laws to be implemented in response. This process makes people consciousl y aware of the actions of local authorities, which are regulatory in nature. LOCAL GOVERNMENT FINANCES Intergovernmental fiscal relations Fiscal relations between national and local government centre on the following major areas of fiscal administration:

Allotment of internal revenue shares; Shares of local governments in national wealth ex ploitation; Shares of earnings of government agencies or government -owned or controlled corporations engaged in the utilization and development of national wealth; Local government borrowing; and Review of local government budgets. SALIENT FEATURES OF PHIL IPPINE DECENTRALIZATION

1. Devolution (Political Decentralization) 2. Powers and responsibilities are decentralized to elected local governments 3. Transfer of responsibilit y, decision -making, resources and revenue generation to local level that is autonomous and i ndependent from the devolving authorit y.

SOURCES OF LOCAL GOVERNMENT FUNDS AND REVENUES Local government taxation and other fiscal matters include real propert y taxation, shares of local governments in the proceeds of national taxes, credit financing and local budgets including propert y and suppl y management. Some illustrative revenue raising powers of local governments are listed below: Provinces Real propert y tax; 25 per cent. Tax on transfer of real propert y ownership; 10 -15 per cent of the prope rt y assessment.

Tax on business of printing and publication; no less than 1 per cent but no more than 10 per cent. Franchise tax; percentage based on total gross income. Sand and gravel tax; - computed based on cubic meters of sand and gravel collected based on the tax level authorized in the tax ordinance. Professional tax; 5 -15 per cent. Amusement tax on admission; 3 per cent. Annual fixed tax per delivery truck or van of manufacturers or producers of or dealers in certain products. Tax rates vary on the regulations of the local government concerned. Municipalities Tax on business; based on the volume of business of the applicant. Fees and charges; will be fixed by the local council or the cit y which have the power to levy a rate. Fishe ry rental or fees and charges; stipulated in the Local Tax Code and municipalities and coastal areas. Fees for sealing and licensing of weights and measures; dependent on the tax code of local governments concerned. Communit y tax computed based on th e income of individual citizens. Cities The cit y may levy and collect taxes, fees and other impositions that the province or municipalit y may levy and collect. There is not much variation with the taxing powers of the provinces and municipalities, excep t that the rates in cities are much higher than those of the provinces of municipalities. Barangays Taxes and fees; like the power to tax in the province, cities and municipalities, the taxing power of barangays are also defined in the Local Government Code. However, barangay government collects simple taxes like fees in the issuance of personal identification, barangay share is 15 per cent of the total Real Propert y collection incities and municipalities that can also tax livestock such as cockfighting. Service charges: barangays may impose and collect fees on services rendered by an agency as part of the regulatory power of the barangay government. Contributions: barangay likewise are empowered to receive con tributions from the private sectors, financial institutions and the like. Internal Revenue Allotment Local governments have their shares in the national internal revenue taxes, representing 40 per cent) of the total internal revenue collections based on th e third preceding year. The distribution of the Internal Revenue Allotment to local governments is as follows:

a) b) c) d)

Provinces Twent y-three percent (23 %); Cities Twent y-three percent (23 %); Municipalities Thirt y-four percent (34 %) Barangays Twent y percent (20 %)

Provided however, that the share of each province, cit y and municipalit y is as follows:
a) b) c)

By population Fifty percent (50 %) By land area- Twenty-five (25%) By equal sharing Twent y-five (25%)

Provided, further, that the share of each barangay with population of not less than one hundred (100) inhabitants shall not be less than Eight y thousand Pesos (P80,000.00) per annum chargeable against from the twent y percent (20%) share of the barangay from the internal revenue on the basis o f the following formula: a.) On the first year of the effectivit y of this Code: (1) Population Fort y percent (40%); and (2) Equal Sharing Sixty Percent (60%);. b.) On the second year: (1) Population Fifty percent (50%); and (2) Equal Sharing Fift y Percent (50%). c.) On the third year: (1) Population Sixt y Percent (60%) (2) Equal Sharing Forty percent (40%); The Local Government Code provides that local governments shall have an equitable share in the proceeds derived from the utilization and development of national wealth within their respective areas and sharing these with the inhabitants by way of direct benefits (Section 289). Local governments, in addition to the internal revenue allotment, have a share of 40 per cent of the gross collection derived by the national government from the preceding fiscal year from mining taxes, royalties, forestry and fishery charges, other taxes, fees, or charges, including related surcharges, interests or fines and from its share in any co -production, joint venture or production sharing agreement in the utilization and development of the national wealth within their territorial jurisdictions (Sec tion 290).

Local governments likewise have a share based on the preceding fiscal year from the proceeds derived from any government agency or government -owned or controlled corporation engaged in the utilization and development of the national wealth base d on the following formula whichever will produce a higher share for the local government unit:

1 per cent of the gross sales or receipts of the preceding calendar year; or 40 per cent of the mining taxes, royalties, forestry and fishery charges and such other taxes, fees or charges, including related surcharges, interests, or fines the government agency or government -owned or controlled corporation would have paid if it were not otherwise exempt.

At the same time local governments are authorized to issue b onds, debentures, securities, collateral notes and other obligations to finance self -liquidating, income-producing development and livelihood projects. However the power given to local governments in the issuance of bonds and other long -term securities is subject to the rules and regulations of the Central Bank and the Securities and Exchange Commission. The Department of Budget and Management has the power to review appropriation ordinances of provinces, highl y urbanized cities, independent component citi es and the municipalities within the Metropolitan Manila Area. An important provision in local fiscal administration within the context of intergovernmental relations is a provision that national planning be bottom -up to ensure that the needs and aspiratio ns of the people, as articulated by the local governments in their respective local development plans, are considered in the formulation of budgets of national line agencies or offices. BARRIO TAXES Barangays are authorized to generate income from taxes o n stores or retailers with fixed business establishments and gross sales or receipts in the preceding year of P50,000 or less in cities and P30,000 or less in municipalities at the rate not exceeding one percent (1%) on such gross sales or receipts. A barangay can also collect income from the following: Service fees or charges for the use of barangay propert y or facilities; Barangay clearance fees; Fees or charges for the commercial breeding of fighting cocks and on cockpits and cockfights; Fees or charges on places of recreation with admission fees; Fees or charges for billboards, sign boards, neon signs and other outdoor advertisements; Toll fees or charges for the use of any public road, pier or wharf,

waterway, bridge, ferry, or telecommunications system funded and constructed by the barangay; Revenues from the operation of public utilities and barangay enterprises (markets, slaughterhouses, etc.); Fines (not exceeding P1,000) for the violation of barangay ordinances; and, P roceeds from the sale or lease of barangay propert y or from loans and grants secured by the barangay government A barangay is entitled to a share from the following revenues: Real propert y tax (RPT) collections of the province and cit y; Communit y tax collections when collected by the barangay; Internal revenue collections; The development and utilization of the national wealth; The proceeds of tax on sand, gravel, and other quarry sources; and, Tobacco excise tax pursuant to RA No. 7171. A barangay is entitled to a mandatory financial aid of not less than P1,000.00 from the provincial and cit y/municipal governments where the barangay is located. Likewise, a barangay is also entitled to receive voluntary donations, grants or aids from any pub lic or private entit y. However, the amount of donations, grants or aids received shall not be included in the budget. Disbursement therefrom shall not be made except for the purposes from which they are intended. Share of a barangay out of the proceeds f rom real property tax (RPT): In the case of provinces, twent y-five percent (25%) of the proceeds from RPT collections of the province shall accrue to the barangay where the propert y is located. In the case of cities and municipalities within the Metropolitan Manila Area, thirt y percent (30%) of the proceeds shall be distributed among the component barangays within the cit y/municipalit y where the propert y is located, as follows: 50% to the barangay where the propert y is located; and, 50% to be distributed equall y among all component barangays of the cit y/municipalit y.

Share of a barangay within a province/highly urbanized or independent city out of the proceeds from the development and utilization of national wealth: A barangay is entitled to thi rt y-five percent (35%) of the fort y percent (40%) share of the province or highl y urbanized or independent component cit y where it belongs. If the natural resources are located in two (2) or more barangays, their respective shares should be computed on the basis of:

a. Population - Sevent y percent (70%) b. Land area - Thirt y percent (30%) BASIS FOR DISTRIBUTING ALLOTMENT Significance of preparing a barangay budget Aside from being a financial plan, the barangay budget serves as an instrument for barangay officials to effectivel y manage the development of the barangay . A well-prepared barangay budget serves as basis for: Planning and policy adoption Program and project implementation Financial control Management information

Legal basis for barangay budgeting Sections 329 -334 (Barangay Budget) of the Local Government Code of 1991 (RA No. 7160) provide the basis for the collection, safekeeping and use of barangay funds. The aforesaid provisions govern the preparation, effectivit y, and review of the barangay budget, including the financia l procedures that the barangay shall observe. Compairing budget process at the barangay level compare with other levels of LGUs The budget process at the barangay level follows a similar process as in the other levels of local government units. The budge t process is a cycle that consists of the following phases: budget budget budget budget budget preparation legislation or authorization review execution and accountability

The different phases overlap with each other within a budget year. While the budget of a current year is being implemented, the barangay should also prepare the budget for the succeeding year. Also within a budget year, the barangay should prepare and submit accountabilit y reports for the past and current year.

Budget preparation The Punong Barangay, with the assistance of the Barangay Treasurer, prepares the barangay budget while the Barangay Treasurer is responsible for determining the estimated income to be used as a source of fund in the budget. Components of a barangay budget Estimates of income; and, Total appropriations covering current operating expenditures and capital outlays.

Mandatory obligations that should be provided in the barangay annual budget Appropriations for development projects of not less than 20% of the total IRA of the barangay for the budget year (Development Fund); Appropriations for Sangguniang Kabataan (SK) programs, projects and activities equivalent to 10% of the general fund of the barangay for the budget year (SK Fun d);

Appropriations for unforeseen expenditures arising from the occurrence of calamities at 5% of regular income for the budget year (Calamit y Fund); and Provision for the delivery of basic services pursuant to Section 17 of RA No. 7160, and effective local governance.

Appropriated for personal services of a barangay The barangay can appropriate not more than 55% of the total annual income actuall y realized during the next preceding fiscal year for personal services. The illustrative computation of FY 2000 PS is presented below:

Supplemental budget and its preparation (when it is prepared) A supplemental budget is a financial plan authorized by a legislative body through the enactment of an ordinance or law that authorizes the changes in the annual appropriation ordinance or law. It is prepared under the following circumstances: when funds are actuall y available as certified by the Barangay Treasurer; when new revenue sources (other than those identified in the annual budget) can support the ad ditional budgetary requirements; and In times of public calamit y. Funds are actuall y available when realized income exceeds estimated income as of any given day, month or quarter of the fiscal year. Funds are likewise deemed actuall y available when there are savings. For this purpose, savings refer to portions or balances as of any given point in the fiscal year of any programmed or allotted appropriation which remain free of any obligation or encumbrances and which are still available after the sati sfactory completion or the unavoidable discontinuance or abandonment of the work, activit y or purpose for which the appropriations was originall y authorized. Savings may also result from

unobligated compensation and related cost pertaining to vacant positi ons and leaves of absence without pay of local personnel receiving salaries. Discretionary fund Onl y the Punong Barangay is entitled to a discretionary fund to be used for public purposes and for other miscellaneous expenses related to the official functions of the Punong Barangay. The annual appropriation for discretionary purposes of the Punong Barangay shall not exceed two percent (2%) of actual receipts derived from basic real propert y tax in the next preceeding calendar year.