Improving revenue generation capabilities of LGUs PAM

MA. PAMELA P. QUIZON
Chief, Local Revenue Enforcement Division
Bureau of Local Government Finance

»“Honest and effective
governance—truly transparent,
disciplined and serving the
interest of the country and its
people” is the vision of the
Philippine government for the
Philippine public financial
management system (PFM).
(COA, DBM, and DOF, 2011)

»The public finance agencies of the Philippine
government are ―collectively committed to
promote fiscal responsibility and good
governance through transparency and
accountability in financial transactions in the
Philippine government.
(COA, DBM. and DOF, 2011)

» LGU growth lagging behind
population growth and
inflation.
» For the past decade the growth
of LGU revenues have failed to
catch up with the combined
growth of population as well as
prices.
» LGU revenues grew annually by
5.85% compared to the
combined growth of population
and prices of 6.46%.
Annual Growth Rates of LGU Sources of Revenues (in %)
2001-2010 Province City Municipality Total
Local Sources 7.65% 5.97% 4.72% 5.92%
IRA and other
grants and aids
5.12% 4.95% 6.49% 5.66%
All other
sources
4.13% 10.19% 10.36% 8.45%
Total Revenues 5.50% 5.73% 6.23% 5.85%
Adequacy of LGU Revenues
Annual Population
Growth Rate
2001-2010 1.88%
Annual Inflation rate 2001-2010 4.58%
Population Growth +
Inflation
2001-2010 6.46%

»Continued high dependence on
the Internal Revenue Allotment
(IRA).
»Dependence on the Internal
Revenue Allotment (IRA) and other
grants at all levels of LGUs remained
high – 75% for provinces, 79% for
municipalities, and 42% for cities.

» Local revenue sources negatively affected
by elections.
» LGU local revenue sources, especially local
tax collections, are negatively affected by a
3-year election related cycle. For the
different LGU levels, election-related
cyclical behaviors in different local revenue
sources have been observed (ADB, 2007):
˃ Provinces — real property tax (RPT),
business tax, fees and charges and
economic enterprises.
˃ Cities — economic enterprises, other
receipts
˃ Municipalities — RPT, business tax, fees
and charges and economic enterprises,
other receipts.

» Delay in updating of the
Schedule of Market Values
(SMV).
» The inability of most LGUs to
regularly enact updated
schedules of market values is
indicative of considerable
delay problems (10 to 20
years) associated with the
politicalization of the LGU SMV
updating process.
Year
Gross Value
Added in Real
Estate at Current
Prices
Gross Value
Added in Real
Estate at
Constant 2000
Prices
Implicit Price
Index for Real
Estate
(2000 = 100)
2001
356,982 333,272 107.11
2011
1,097,765 634,456 173.02
Annual
Growth
Rate
11.89% 6.65% 4.91%
Year
Taxable
Assessed Value
No. of Property
Units (PU)
Taxable
Value/PU
2001
1,245,954,783,602
30,398,830 40,987
2011
2,515,274,287,897
33,217,384 75,722
Annual
Growth
Rate
7.28% 0.89% 6.33%

» Institutional deficiencies.
Institutional bottlenecks like the
issue of titling delays for properties
covered by the Comprehensive
Agrarian Reform Program (CARP)
and system deficiencies like lack of
information sharing between LGU
departments
Year
Gross Value
Added
in Real Estate at
Current Prices
Gross Value
Added in Real
Estate at
Constant 2000
Prices
Implicit Price
Index for
Real Estate
(2000 = 100)
2001
356,982
333,272 107.11
2011
1,097,765
634,456 173.02
Annual
Growth Rate
11.89% 6.65% 4.91%
Year RPT Collection
No. of
Property Units
(PU)
Collection/PU
2001
16,842,815,948
30,398,830 554
2011
27,399,920,255
33,217,384 825
Annual Growth
Rate
4.99% 0.89% 4.06%

» Problematic real property
accounts Collection efficiencies
as of 2011 are still low primarily
because of problematic real
property accounts.
» Net of problematic accounts, the
collection efficiency in 2010
would have been 93.2%, but
because of the problematic
accounts, RPT collection
efficiency is a low of 56.10%.
Weighted average RPT
rate
2.1%
Gross Taxable Value
52,433,591,950
Collection efficiency
based on
gross taxable value
52.3%
Taxable value net of
problematic account 29,413,036,523
Net taxable values as
a % of gross taxable
value
56.10%
Collection efficiency
based on net taxable
value
93.2%

» Difficulty in capturing business income levels
for taxation.
The slow growth of business taxes is saddled by
problems related to the identification of new
businesses for taxation purposes and the
undervaluation of declared gross sales.
The full capture of business taxes is estimated
to have the potential to increase LGU business
tax revenue by a factor ranging from 1.5 to 2.0.
(ADB TA 7451, Aug. 2012).

»Track 1 - Proper Management of LGUs Taxing
and Revenue Raising Power
»Track 2 – Stimulate Progress through
Investments and Other Economic Activities
»Track 3 - Exercise of Corporate Powers and
Partnership Arrangements
»Track 4 – LGC Review and Amendments

1994 & succeeding
years = 40%
1993 = 35%
INTERNAL REVENUE ALLOTMENT
Gross Internal Revenue Collections based
on third preceding Calendar Year
Provinces
23%
Cities
23%
Municipalities
34%
Barangays
20%
50% Population (NSO)
25% Land Area (LMB)
25% Equal Sharing
(1) Total BRGY.SHARE – BRGYs. with 100
inhabitants = NET Brgy.Share
(2) Net Brgy.Share
1992 1993 1994 forward
40% Pop. 50% Pop. 60% Pop.
60% E.S. 50% E.S 40% E.S.
A. Base
B. Level
C. LGU Allocation
D. Intra LGU Allocation
1992 = 30%
CY 2015
Php 389.86B

• Means through which the national government support
the delivery official public services.
• Used to equalize or lessen disparities in fiscal capacities
among LGUs.
o More allotments can be given to LGUs with greater
needs and less resources.
• Allotments can influence the activities of LGUs.
oMore allotments can be given to help themselves by
collecting taxes efficiently.

»Central Transfers creates ”fiscal
illusion” in the form of a flypaper
effect” that is associated with lump
sum grant-transfers from the
national government like the IRA
and other shares from the national
wealth.

» Coverage
» Assessment
» Collection

»Updating Local Revenue Codes
»General Revision of Real Property Assessment
»Add new taxes, fees and charges using Section
186
»Revalidate/Reduce Exemptions

» Use of Presumptive Income Levels
» Updating the Unit Base Schedule of Market
Values
» Developing models for determination of fee
rates/ cost recovery
» Inspection of books of accounts

» Efficient delivery system (e.g. client satisfactions, simplification of
procedures)
» Computerized Assisted System
» Effective Tax Information (Social Marketing)
» Issuance of Demand Letters
» Field Collections (e.g. house to house, mall based collection)
» One Stop Shops
» Participation of Barangays (billing, identification of tax subjects)
» Enforcement of Civil and Administrative Remedies
» Sale at Public Auction

1. Anchor provisions on legal basis
2. Expand Coverage (explore section 182)
3. Elimination of unproductive bases of revenues/bases
which the LGU has no intentions of enforcing
4. Adjust/Update Rates (fixed rate, benchmarking, inflation,
cost of delivery)
5. Simplify Provisions (minimize requirements to the most
essential)
6. Increase transparency (those easily understood has
greater chances for voluntary compliance)
7. Input Economic Sensitivity (amount passed on)
8. Encourage or discourage activities (rate variation)

Year Inflation Rate Consumer Price Index
2002 2.97% 103.0
2003 3.45% 106.5
2004 5.98% 112.9
2005 7.63% 121.5
2006 6.24% 129.1
2007 2.81% 132.7
2008 9.30% 145.0
2009 3.25% 149.8
2010 3.83% 155.5
2011 4.65% 162.7
2012 3.20% 167.9
2013 3.30% 173.4
2014 (est.) 4.50% 181.2

» RPT is the biggest and most potent
source of revenues
» It is indexed on immovable (land,
building, machineries and other
structures)
» It benefits all levels of LGU
» It supports elementary and high school
education through SEF
» Real property values floats with inflation
and development

Valuation
» Updating the schedule of values closer to market level
» Identification of new structures (taxmapping , barangay –based support)
» Capture the changes in the land use classification
» Conduct of general revision of real property assessments
» Computer assisted mass appraisal and assessment records system
» Improving capacity of Assessment Offices
Collection
» Information and education campaign (barangay/school based support)
» Efficient distribution of notices of delinquencies
» Policies to improve tax effort (incentives like discounts and relief, payment in kind etc)
» Enforcement of civil and administrative remedies
» Conduct of sale at public auction
» Bundling of taxes

The LGU’s Role in Stimulating Progress:
• Provider of economic infrastructure
• Enabler – the creator of a business friendly
environment for sustainable development
• Planner and promoter of in-bound
investments - bringing in investments
creates more jobs, increase productivity,
generates resources for the government
and leads to improving the quality of life in
the communities.

»Steps in pursuing
economic activities:
˃ Plan
˃ Organize
˃ Implement

Economic
Dynamism
Size of economy,
Growth of Economy
and Investments,
Employment, Prices,
Productivity,
Business Groups,
Financial Deepening
Government
Efficiency
Transparency and
Accountability, Public
Finance, Recognition
of Performance /
Governance
Responsiveness to
Business and Basic
Government Services
Infrastructure
Basic
Infrastructure,
Technology
Infrastructure
and Social
Infrastructure.

Overall
Rank
Overall
Score
City/ Region
Rank
Economic
Dynamism
Government
Efficiency
Infrastructure
1 53.242 Makati, NCR 2 4 4
2 49.363 Cagayan de Oro, Region X 9 5 2
3 49.075 Naga City, Region V 4 1 18
4 47.717 Davao City, Region XI 11 13 1
5 45.465 Marikina City, NCR 19 16 3
6 45.003 Iloilo City, Region VI 23 2 7
7 43.686 Cebu City, Region VII 10 55 5
8 43.148 Manila, NCR 3 56 10
9 43.021 Valenzuela City, NCR 7 23 11
10 42.703 Paranaque City 1 93 13

1. Updated and approved LGU Plans
2. Structure leading local economic
investment and incentive promotion
3. Local policies and ordinances consistent
with national investment policies
4. Streamlined transactional services
5. LGU Roadmap to attract investments
and generate employment
6. Active partnership with business sector
7. Infrastructure to basic local businesses
2/12/2015 For Discussion

»The significant borrowings of LGUs triggered
the development of local economic
infrastructure like public markets,
slaughterhouses, transport terminals & post-
harvest facilities
»The operation of most of these local
economic enterprises is usually subsidized by
the LGUs
»The challenge is to make local economic
enterprises “revenue positive” or viable

˃ Public-Private Partnership
+ Power & Water Utilities Joint Venture
Project of Bohol Province
+ Bulacan Toll & Packaging Center
undertaken with the private sector to
promote micro-small-medium
enterprises
+ Mandaluyong Public Market
˃ Bond Flotation
+ Boracay-Aklan Provincial Bonds for
Tourism Development
˃ Inter-local Cooperation (LGU Initiative)
+ Inter-LGU cooperation of Metro Naga
Development Council
+ Gingoog Bay Development Council
(LGUs share a common resource
base)
+ Partido Development Authority in
Camarines Sur created by an act of
Congress providing legal
framework for inter-LGU
cooperation
˃ Corporatization of Basic Services
(Congressional Initiative)
+ La Union Medical Center - an act of
Congress corporatizing La Union
Provincial Hospital
˃ Corporatization of Public Utility (LGU
Initiative)
+ Corporatization of Misamis Oriental
Telephone System (MISORTEL) as
initiated by the Misamis Oriental
Province to ensure efficiency &
viability of MISORTEL. The
corporation has been registered
with SEC.

˃Strong political will with entrepreneurial
mind set
˃Stakeholders participation
+Transparency
+Accountability
+Empowerment
˃Capacity building/ technical assistance
˃Selection of appropriate financing option
˃Peace and order
˃Political harmony

» Vague policy/legal framework
˃Lack of roadmap for LGUs to establish and
disengage in the operation of LEEs
˃Vague legal basis of LGUs to establish LGU
corporations
˃Absence of clear-cut guidelines for LGUs to
enter into joint venture with private sector

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

SYMPOSIUM ON THE REVIEW
OF THE 1991 LOCAL GOVERNMENT CODE

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

 They are critical to LGUs’ ability to deliver basic
services.
 It is important to conduct a review of the
provisions using a holistic framework.

1. Expenditure
Assignment

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.

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  if this happens there will be no need for Section
17 (f) except when said Section is interpreted in the context of
conditional transfers
Consultation result – agreement in LVM

Other amendments suggested during the
consultations (1)
 Reassign responsibility for solid waste
management, specifically operation of sanitary
landfill to province (LVM)
 Delete Sections 147 (1) (xi), 458 (1) (xi) and 468 (1)
(xi) of the LGC authorizing the LGUs to provide
for additional allowances and other benefits to
judges, prosecutors, and other national
government agency officials operating in LGUs
(LVM)

consultations (2)
 Full disclosure of allocation for field offices of
NGAs operating in LGUs per budgets of said
NGAs (like DepEd, PNP, etc.) in GAA (VM)

 Own-source revenues
 Intergovernmental fiscal transfers
 LGU borrowing and credit finance

2. 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

 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 and fees that
increase the cost of doing business and/or cause
inefficient allocation of resources without a
commensurate increase in revenue take

 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
(LVM)
 Indexation of tax rates, fees and charges that are
fixed in peso terms to inflation (LVM)
 Revisit of situs provision (i.e., derivation basis) with
respect to local business tax (agreement in principle
with LVM but M support for Escudero bill)

 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 (LVM)
 Provide mechanism for administrative recourse in case of
disputes related to LGU taxing powers – Amend Section
195 (M)
 Assign more revenue-productive taxes to LGUs
 Piggybacking on NG taxes like personal income tax
 Green taxes

consultation
 Repeal provisions of other legislation effectively
amending Section 193 re tax exemptions of GOCCs, etc.
(LVM)
 Provide that LGUs may require establishments to submit/
open their book of accounts (VM)

3. 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

 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) (LVM)
Provided it is funded from additional transfers from the
current 40% share of IRA in national internal revenue
taxes

 Establish system of conditional transfers with well-
defined cost-sharing provisions and performance
indicators (especially with regards to delegated
functions) [LVM – conditional transfers to be
performance based]

 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
In VM, suggestion to provide for direct remittance/
payments to LGUs by GOCC/ private companies of their
share in national wealth

 Other amendments suggested in consultations
 Increase fixed share of LGUs in national taxes
Amend Section 284 by replacing “national internal
revenue taxes” with “national taxes” (LVM)
Increase share of IRA in national internal revenue taxes
from 40% to 50% (LVM)
Clarify that the term “national internal revenue taxes” in
Section 284 include VAT/ excise tax collections of the BOC
as in the case filed by Cong Mandanas in the SC (VM)
 Provide conditional transfers to LGUs for the
protection of municipal waters (VM)
 Liberalize provision regarding utilization of share in
NW (VM)

4. 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

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
LGU Borrowing and Credit Finance

 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) [L]

 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
(LVM)

 Other suggestions made during consultations
 Monetary Board approval should be removed/
facilitated (LVM)
 Streamline regulatory processes related to approval
of LGU borrowing (LVM)

5. Inter-LGU Alliances and 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 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.

 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

 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

 Direction of reform
 Amend existing LGC provisions that have unwittingly incentivize such
behavior
 Strengthen existing provisions that regulate creation of new LGUs
 Adjust income requirements for the creation/ conversion of highly
urbanized cities, provinces and municipalities to make consistent with RA
9009 which provided new income criteria for the creation of component
cities (V)
 Make stricter requirements for creation of LGUs (L)

 Other suggestions raised during consultations
 Include other criteria (e.g., level of urbanization, competitiveness, potential
for growth, poverty incidence, etc.) in addition to income, land area and
population (LVM)
 Re “IRA-less” barangays,
 Provide IRA even to barangays that are created by Sanggunian (V)
 Only barangays created by Congress should be given IRA (M)

7. 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
Full disclosure/ transparency (LVM)
Creation and operation of local economic enterprise
Authorize DOF to undertake income classification of LGUs
and update income classification of LGUs (LVM)

1. LGUs’ exercise of corporate powers must be inspired by some guiding principles
˃ LGUs’ role in economic development is to be an enabler and creator of a
conducive environment for sustainable development
˃ LGUs are more effective if they play the catalytic and regulatory roles and do not
compete with the private sector
˃ LGUs should act primarily as planner, broker and promoter of inward
investments. LGUs can play the role of investor in basic enterprises where
private sector is absent.
2. LGUs operation of local economic enterprises could be viewed as two-pronged
─ As stand-alone investment by improving returns realized directly from the
use/operation of such enterprise
─ As a catalyst for economic growth by utilizing the enterprise as a strategic &
deliberate tool for local economic development
3. LGUs operating public economic enterprises must have a well-defined exit
strategy

» The LGU FSS shall be used to set the
criteria and system on the regular
performance fiscal and financial
performance assessment of local
government units.
» LGUs were evaluated in the areas of
revenue generation capacity, local
collection growth, expenditure
management, and reportorial
compliance.

Summary per Region of LGUs Score in Fiscal Sustainability
Scorecard Region 2012
Region XI 55.57
Region III 55.51
CAR 53.58
Region VII 51.58
Region X 51.46
CARAGA 50.98
Region VI 49.64
Region I 48.88
Region IX 45.90
NCR 44.95
Region IV-A 43.07
Region XII 39.56
Region VIII 36.46
Region V 31.00
Region II 28.86
Region IV-B 25.53

Summary per Region of LGUs Score in Fiscal Sustainability
Scorecard
Region
2012
Excellent Very Good Good Average
CAR 3 (4%) 8 (10%) 12 (14%) 28 (34%)
NCR 1 (6%) 3 (18%) 2 (12%) 4 (24%)
Region I 3 (2%) 19 (15%) 25 (20%) 31 (25%)
Region II 1 (1%) 4 (4%) 8 (9%) 22 (24%)
Region III 7 (5%) 23 (17%) 23 (17%) 38 (28%)
Region IV-A 14 (10%) 12 (9%) 21 (15%) 27 (19%)
Region IV-B 1 (1%) 1 (1%) 6 (9%) 10 (14%)
Region V 0 (0%) 7 (6%) 9 (8%) 17 (14%)
Region VI 1 (1%) 12 (9%) 25 (18%) 28 (20%)
Region VII 7 (5%) 24 (18%) 29 (21%) 28 (21%)
Region VIII 1 (1%) 1 (1%) 15 (10%) 33 (22%)
Region IX 0 (0%) 6 (5%) 19 (16%) 30 (25%)
Region X 3 (3%) 10 (10%) 16 (16%) 27 (28%)
Region XI 2 (2%) 11 (21%) 9 (17%) 11 (21%)
Region XII 0 (0%) 2 (2%) 15 (12%) 27 (22%)
CARAGA 2 (3%) 5 (6%) 14 (18%) 23 (29%)

Improving revenue generation capabilities of LGUs PAM

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