Benchmarking Study:

Local Financial Management Framework

for Good Governance*

RUFO R. MENDOZA, Ph.D.

Ateneo School of Government

Ateneo de Manila University

45th Annual Conference and Meeting

PHILIPPINE ECONOMIC SOCIETY

Nov. 14-16, 2007

*draws largely from the research of the Economic Policy Reform and Advocacy project

of the USAID and the Ateneo de Manila University

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Introduction

• Over a decade of Local Government Code of

1991: an opportune time to examine the

progress of LGUs in managing their finances

– LGC governs the conduct and management of

financial affairs, transactions, and operations

– LGC outlines the fundamental principles in local

fiscal administration

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• Minimal efforts to examine LGUs’ compliance to legal provisions

• Mechanisms for innovations and excellence in handling financial responsibilities not adequately in place

• Champions of sound LFM not given appropriate attention and rewards

wasted opportunities for coming out with norms and standards that may be adopted and replicated by

other LGUs.

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Local Financial Management as a System

FUNCTIONAL AREAS

• TREASURY

• ACCOUNTING

• BUDGETING

• Other Finance-Related

Areas

FINANCIAL PERFORMANCE

• Liquidity

• Activity

• Cost Efficiency

• Profitability • Leverage

• Stability

GOOD GOVERNANCE

• Transparency

• Accountability

• Predictability

• Participation

F E E D B A C K S

SYSTEM COMPONENTS PERFORMANCE

MEASUREMENT OVERARCHING GOALS E

X

T

E

R

N

A

L

E

N

V

I

R

O

N

M

E

N

T

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Methodology

COMPONENT A

IDENTIFYING PRACTICES COMPONENT B

AWARD SYSTEM

Phase 1

Identify key

measures of

financial

performance

Phase 3

Identify current

good practices

in LFM

(utilizing shortlist

of LGUs from

Phase 2)

Phase 4

Develop a

framework for

assessing LFM

in LGUs

Phase 5

Establish an

award system

in LFM

Phase 2

Select a shortlist

of relatively

high-performing

LGUs

(utilizing key

measures from

Phase 1)

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Key Measures of Financial Performance

Revenue Indicators

1 Local Revenues per capita = Total local revenue collection / LGU population

2 IRA dependency ratio = IRA revenues / Total revenue collection

Expenditure Indicators

3 Expenditures per capita = Total expenditures / LGU population

4 Personal services ceiling = Expenditures for personal services / Total

revenue collection

Liquidity Indicators

5 Current ratio = Current assets / Current liabilities

6 Quick ratio = (Cash + Very short-term assets) / Current liabilities

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Asset Turnover Indicators

7 Total asset turnover = Internally-generated revenues / Total assets

8 Fixed asset turnover = Internally-generated revenues / Net fixed assets

Leverage Indicators

9 Debt to asset ratio = Total debt / Total assets

10 Debt servicing ratio = Debt service payments / Total revenue collection

Profitability Indicators

11 Return on assets = Increase in equity / Total assets

12 Enterprises profitability rate = Net income (loss) of economic enterprises /

Total gross income of economic enterprises

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Shortlist of LGUs for Field Research

Provinces Cities Municipalities

Laguna Antipolo, Rizal Agoo, La Union

La Union Iligan, Lanao del

Norte Kalibo, Aklan

North Cotabato Iloilo, Iloilo Limay, Bataan

Rizal Olongapo,

Zambales Sampaloc, Quezon

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FINANCIAL MANAGEMENT

PRACTICES

ORGANIZATIONAL COMPETENCIES

BENCHMARKS

• identified with high frequency of responses during the field research

• identified both in the literature review and the field research

• mandated by oversight agencies

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1. Functionality of the LFC (All functional areas)

Compliance with the duties of the LFC specified in Section 316

of the Local Government Code of 1991

Maintenance of regular meeting schedule for LFC to periodically

review financial issues of the LGU.

Legal mandate &

high frequency (12)

High frequency (9)

PROPOSED BENCHMARKS

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2. Generation of Revenue from Traditional Sources

(Treasury functional area)

Utilization of all applicable revenue sources provided

for by the Code

Information and education campaigns to reach out to

the taxpayer community, inform and educate them of

their obligation to pay taxes, and provide them with

information on tax information

Computerized tax-mapping utilizing geographical

information systems or other systems to facilitate

accurate mapping of real property and business

taxpayers. This also involves the computerization of

records

High frequency (12)

Indicated by literature

review & field research

Indicated by literature

review & field research

PROPOSED BENCHMARKS

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Real property tax practices

Aggressive implementation of judicial remedies

Public auction of delinquent properties

Deputization of Barangays to disseminate information

and collect real property taxes

Business tax practices

Aggressive implementation of judicial remedies

Adoption of presumptive income level approach to

estimating minimum levels of gross income for

different types of businesses

Establishment of a one-stop shop so that business

permits and taxes can be processed in one day

Indicated by literature

review & field research

Indicated by literature

review & field research

PROPOSED BENCHMARKS

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3. Nontraditional Sources of Funds

(Treasury functional area)

Maximization of revenues from LGU assets (such as

income from various user fees, special parking areas,

renting out equipment, leasing property, etc.)

Utilization of public-private partnerships (such as build-

lease-transfer and build-operate-transfer) to finance

public capital assets.

Utilization of bond flotation to finance large, revenue-

generating public capital assets.

Indicated by

literature review &

field research

Indicated by

literature review &

field research

Indicated by

literature review &

field research

PROPOSED BENCHMARKS

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4. Control Mechanisms on Fund Management

(Accounting and Treasury functional areas)

Compliance with COA guidelines on fund

management to ensure proper management

control over all transactions.

Legal mandate &

high frequency (12)

PROPOSED BENCHMARKS

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5. Local Budgeting

Compliance with DBM guidelines on budget

preparation, budget authorization, budget

review, budget execution, and budget

accountability

Legal mandate

& high frequency

(12)

PROPOSED BENCHMARKS

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6. Expenditure Management

Compliance with COA and DBM guidelines to

ensure proper management control over

expenditure management.

Maintenance of special appropriations in the

budget for debt service and remittances to national government agencies in order to

prioritize those expenditures.

Legal mandate &

high frequency (12)

Legal mandate &

high frequency (8)

PROPOSED BENCHMARKS

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7. Compliance with Accounting System and

Financial Reporting Standards

Compliance with the New Government

Accounting System of COA for accounting

and financial reporting. This includes the

implementation of the electronic NGAS system.

Wide availability of financial information in

publicly accessible locations.

Legal mandate &

high frequency (12)

Legal mandate &

high frequency (9)

PROPOSED BENCHMARKS

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8. Link between Planning and Budgeting

Preparation of budgets that operationalize local

plans, which are developed with multi-sectoral

participation as mandated by DILG and NEDA,

such as Local Development Plans, Local

Development Investment Plans, and Annual Investment Plans. This includes the

implementation of a Capital Investment Planning

process.

Legal mandate &

high frequency (9)

PROPOSED BENCHMARKS

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9. Practices on Procurement

Compliance with RA 9184 (Government Procurement Reform

Act) as mandated by DBM. This includes the

implementation of the electronic procurement system.

Legal mandate

PROPOSED BENCHMARKS

10. Financial Performance Management

Generation and analysis of regular revenue and expenditure

variance reports (weekly or monthly) to monitor the

financial performance of the LGU.

High frequency (8)

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1.Leadership Styles Innovative practices are encouraged among staff members during

regular meetings and in informal settings.

Individual staff targets are clarified during regular staff meetings.

High frequency (9)

High frequency (6)

2. Structure and Staffing Practices All new hires are required to undergo training and orientation

conducted by the department and by the Civil Service

Commission.

High frequency (6)

3. Rewards and Incentives

Productivity Incentive Programs are implemented, which provide

employees with token annual bonuses.

Model Employee or Employee of the Year awards are awarded to top performers.

High frequency (9)

High frequency (7)

PROPOSED BENCHMARKS

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4. Internal Process Improvements Regular staff meetings are utilized to identify bottlenecks and issues in work

processes. The Local Chief Executive also plays a critical role in initiating and endorsing process improvements in the LGU.

oHigh frequency (6)

5. Accountability Mechanisms Accountability for each staff member is based on job description and is

reviewed semi-annually during performance evaluations. Staff members are held accountable for their actions and are reprimanded as needed.

oHigh

frequency (8)

6. External Linkages Department heads of LFC are active members of their respective associations

(e.g. Philippine League of Local Treasurers), which serve as sources of continuing education and innovative ideas. Department heads of LFC

departments also maintain close ties with their fellow department heads in other LGUs in the region to share best practices.

Training opportunities are actively pursued for officers and staff to facilitate

capacity-building and skills development. These include trainings conducted by oversight national government agencies such as DOF, COA, and DBM.

oHigh

frequency (6) oHigh

frequency (6)

PROPOSED BENCHMARKS

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Recommendations

1. Establishing an award-giving body and system for recognizing LGUs with exemplary practices in local financial management.

3. Establishing quantitative benchmarks for LGU financial performance.

5. Further research on best practices for budgeting, accounting, and other finance-related areas.

7. Identifying good practices in LFM of Barangays

9. Focusing on LFM organizational competencies