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

2. 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

3. 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

4. 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

5. Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services 1. Expenditure Assignment

6. 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 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.

7. 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.

8. Expenditure Assignment – LGU budget support to NGAs  Issue:  LGU “subsidy” to national government agencies strain LGU finances  Proposed Amendment  Amend Sections 447 (1) (xi), 458 (1) (xi), and 468 (1) (xi) of the 1991 LGC so as to explicitly prohibit LGUs from granting additional allowances and other benefits to judges, prosecutors, and other national government officials stationed in or assigned to the municipality, city and province, respectively.  Evidence  LGUs subsidy to NGAs between 0.5%-1.5% of their budgets on the average in 2012  Stakeholder support  Strong support from LGUs in Luzon, Visayas and Mindanao consultations

9. Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services 2. Own-Source Revenues and Revenue Assignment

10. Own-source revenues and revenue assignment  Overarching 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

11. 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

12. 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)

13. 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)

14. Revenue assignment – Local business tax rate schedule  Specific issue  Different graduated local business tax rate schedule for different types of business complicates local tax administration  Structure is regressive, imposing higher effective tax rates on smaller businesses relative to larger ones  Disparities in effective tax rates with respect to size and type of business tend to provide a venue for tax evasion

15. Revenue assignment – Local business tax rate schedule  Proposed amendment  Amend Section 143 by simplifying the graduated business tax applicable to various types of businesses to a single tax rate not exceeding 1.5% of the gross sales/receipts of the preceding year for both cities and municipalities  Impact  Recent study by USAID INVEST Project in 2012 indicates effective tax rates in 66 cities sampled equal to 0.8% on the average; vary from 0.2% to 1.6%  Revenue impact of proposal is PhP 36 billion for cities and PhP 4.6 billion for municipalities  Stakeholder support  Business sector support with flat LBT rate but thinks 1.5% is too high  House bill along this line file in Congress (Cong. Abu)

16. Revenue assignment – Indexation of peso denominated local taxes  Specific issue  Revenue from local taxes with peso-denominated tax rate (set at a maximum of PhP 300 for professional tax and PhP 500 for delivery vans in 1991) eroded by inflation over time  Proposed amendment  Insert paragraph in Sec. 191 of LGC: “In case of fixed taxes prescribed in this Code, the maximum allowable rate may be adjusted not more than once every 3 years based on the average annual inflation rate based on CPI as certified by the Philippine Statistics Authority

17. Revenue assignment – Indexation of peso denominated local taxes  Impact  Revenue impact estimated to be equal to PhP 40 million for professional tax and PhP 393 million for tax on delivery van  Stakeholder support  Some support from LGU Luzon consultation  Business sector agree with indexation in principle but argue that tax on delivery vans increase cost of doing business

18. Revenue assignment – Local business tax on plantations and sugar centrals  Specific Issue  LGU host of plantations of business enterprises with integrated production systems not able to receive share in local business tax  Proposed Amendment  Impose local business tax on plantations and sugar centrals of business enterprises operating integrated production systems based on the value of production.  Stakeholder Impact  LGU support in Luzon, Visayas and Mindanao consultation  Business sector argue this will result in double taxation

19. Revenue assignment – Administrative remedy for taxpayers in cases of disputes on local taxes  Specific Issue  Lack of administrative recourse for taxpayers in cases of disputes on local taxes ► current situation expensive for taxpayers because they have to go to court immediately  Proposed Amendment  Amend Sec. 195 of the LGC on protest of assessment and Sec. 196 on claim for refund of tax credit to provide an administrative mechanism for appeal of the assessment of taxes decided by the local treasurer to the Department of Finance/Bureau of Local Government Finance.  Stakeholder Impact  Supported from business sector (e.g., PCCI)  Some support from BLGF

20. Revenue assignment – Piggybacking on personal income tax  Specific Issue  LGUs (particularly provinces) need more revenue productive taxes  Proposed amendment to community tax becomes more relevant if/ when proposals to reduce personal income tax rate succeeds to offset resulting reduction in IRA  Community tax – low but not insignificant revenue yield  Proposed Amendment  Amend Sec. 157 of the LGC to: o increase the community tax (to be renamed residence tax) from P1 to P10 for every P1000 income for individuals o remove the cap of P5,000 on tax due o and transfer the collection of the same to the BIR  Delete Sec. 158 which imposes community tax on juridical persons

21. Revenue assignment – Piggybacking on personal income tax  Impact  Estimated revenue impact = PhP 10 billion – PhP 13 billion  Stakeholder support  LGUs not supportive of earlier proposals to abolish Community tax and would rather strengthen said tax  Some in business sector prefer piggyback on marginal income tax rate; some think 1% is too high

22. Revenue assignment – LGU power to levy fees and charges  Specific Issue  Complaints of “exorbitant” local fees an charges  Complaints regarding too many fees and charges  Proposed Amendment  Insert paragraph at the end of Sec. 147. “The Department of Interior and Local Government (DILG) and the Department of Finance (DOF) shall jointly issue guidelines to determine the amount of reasonable fees LGUs can impose (based on the cost of regulation, inspection and licensing using cost accounting framework)  Stakeholder support  Some support from business sector  Support from BLGF

23. Revenue assignment – Withdrawal of exemptions from LBT and RPT  Specific Issue  Exemptions from LBT and RPT currently provided under the LGC erodes local tax revenue  Proposed Amendment  Amend Sec. 193 by withdrawing exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations and other similar government agencies IN THE PERFORMANCE OF THEIR PROPRIETARY FUNCTIONS, water districts, and electric cooperative (except those registered CDA)  Stakeholder support  Support from LGUs in Mindanao consultation

24. Revenue assignment – LGU power to grant tax exemptions and tax incentives  Specific Issue  Inconsistency between Sec. 192 of LGC and Article 282 of IRR  Need to clarify LGU power to grant tax incentives so as to prevent unnecessary loss of revenue

25. Revenue assignment – LGU power to grant tax exemptions and tax incentives  Proposed Amendment  Amend Sec. 193 to read: Authority to local tax exemption privileges - Local governments units may, through ordinances duly approved, grant tax exemptions, incentives, or reliefs FOR THE PURPOSE OF PROMOTING OR ENCOURAGING INVESTMENTS IN THEIR JURISDICTIONS, under such terms and conditions as they may deem necessary, PROVIDED THAT THE DURATION OF SUCH INCENTIVES SHALL NOT EXCEED 5 YEARS FROM THE DATE OF REGISTRATION; PROVIDED FURTHER THAT SUCH INCENTIVE SHALL BE AVAILED ONLY ONCE.  Stakeholder support  Some support from business sector

26. Revenue assignment – LGU share in gross income tax on locators of PEZA, other ecozones and TIEZA  Specific Issue  Varying share of LGUs in gross income tax on locators  While LGUs did concur with establishment of ecozones, they belatedly realize that their share from gross income is not enough given losses in LBT and/or RPT  Proposed Amendment  Set share of LGUs in gross income tax equal to 3% (out of the 5% gross income tax on locators) uniformly for PEZA, other ecozones and TIEZA  Stakeholder support  Support from LGUs in Luzon and Visayas consultation

27. Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services 3. Intergovernmental Fiscal Transfers

28.  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

29.  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 billion o 50% of BIR collection – PhP 97.3 billion o 50% of national internal revenue taxes incl. VAT/ excise tax collections of BOC – PhP 122 billion o 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

30.  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

31.  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

32.  Issue  Many ad hoc grants implemented by NGAs allegedly in support of national objectives  Some debate on appropriateness of said grants  Proposed amendment  Introduce provision in LGC to establish system of conditional transfers with well-defined cost-sharing provisions and performance indicators in support of to delegated functions  Impact  Budgetary impact may not be significant given allocations currently included in budget for devolved functions  Stakeholder support  Strong support from LGUs in Luzon, Visayas and Mindanao consultations Intergovernmental Fiscal Transfers – Conditional grants

33.  Issue  Limitations on utilization of share in national wealth esp. that related to share from energy related undertakings  Proposed amendment  Liberalize the utilization of the LGU share in national wealth by removing the fix share (80%) prescribed in Section 294 of the LGC to be devoted to lowering the cost of electricity in the LGU  Stakeholder support  Strong support from LGUs in Visayas and Mindanao consultations Liberalize utilization in share in national wealth

34. Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services 4. LGU Borrowing and Credit Finance

35.  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 infrastructure o Need to streamline procedures governing LGU access to credit market LGU Borrowing and Credit Finance

36.  Issue  Need to better manage fiscal risks arising from LGU borrowing arising from Review Section 296 of LGC which allows LGUs to borrow for the purpose of stabilizing finances  Proposed amendment  Amend Section 297 of 1991 LGC to explicitly prohibit LGU borrowing for non-capital expenditures (Golden Rule)  Stakeholder support  LGU support in Luzon consultation LGU Credit Finance – Golden rule

37.  Issue  Need to better manage fiscal risks arising from LGU borrowing by improving measurement of LGU borrowing capacity by aligning measure to LGUs’ capacity to service their debt  Proposed amendment  Amend Section 324 (b) so as to define the debt service ratio not in relation to regular LGU income ratio as provided in LGC at present but in relation to the net operating surplus before interest payments and capital expenditures (i.e., current revenues less current expenditures net of interest payments) instead  Impact  Overall estimated borrowing capacity based on present measure and proposed measure roughly the same LGU Credit Finance – Measure of LGU borrowing capacity

38.  Issue  Preference for gov’t financial institutions as LGU depository bank (Section 311 of LGC) ► discourages entry of private institutions in LGU credit market o 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

39.  Issue  Some last termer LCEs tend to max out LGU borrowing capacity leaving incoming LCEs little leeway to undertake own development initiatives  Proposed amendment  Mandatory public hearing and publication of proposed loan amount and purpose prior to Sanggunian authorization to secure loan  Stakeholder support  Some support from LGUs in Luzon, Visayas and Mindanao for limiting borrowing of last termer LCEs  Some opposition of business sector LGU Borrowing and Credit Finance – “excessive” borrowing of last termer LCEs

40. Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services 5. Inter-LGU Alliances and Cooperation

41.  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

42.  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

43. Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services 6. Creation of LGUs

44.  Issues  Growing trend in favor of… o conversion of municipalities to cities o 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

45. Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services 7. Local Fiscal Administration

46.  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)

47.  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)

48.  Issues  Many Local Sanggunians fail to pass Appropriation Ordinance in a timely manner  Proposed Amendment  Sanction members of Local Sanggunian for failure to enact said Ordinance before the start of the Budget Year o Sanction in the form of not being allowed to receive remuneration  Stakeholder support  Supported by DBM Local Fiscal Administration (3)

49.  Issues  Many local economic enterprises are operating at a loss  Proposed Amendment  Amend Section 22 (d) such the setting up and operation of LEEs shall be subject to regulation to be issued by the national government  Stakeholder support  Supported by DBM Local Fiscal Administration (4)

50. Thank you very much!