DIY Local Fiscal Administration

8/9/2019 DIY Local Fiscal Administration

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DIY Local Fiscal AdministrationLocal Fiscal Administration

By Yvonne T. Chua

Shortcomings in Local Finance Reporting

Journalists interviewed for this chapter acknowledge that analyzing and interpretingdata, and using them as a base for a story are among their waterloos. They add thatmany journalists also lack the capability to establish linkages, patterns and trendssignificant to a story.Reporting is limited to how much is the collection, how much is spent on a project orreceived by department, how much was spent for this so-and-so project, says Allan

Nawal, a reporter based in Davao del Sur. (Reporters) gloss over the figures.Few journalists can claim to having done a great deal and a great job of reportingon local government finance. Many areas are overlooked, says Labiste. Markets andother public enterprises, taxation and barangay planning are but a few of them.To close observers of local governance like Rood, coverage of local governancefinance is disappointing. Its either nonexistent, dismal or deeply ignorant, he says,

pointing out that of the various finance stories, budget stories more often land innewspapers and newscasts, but they generally lack substance. Its not even going

beyond the figures, just using the figures in keeping score in the fight between (theSanggunian) and the executive, he notes.Almost always, the journalists ignorance of finance and governance shows up in theircopies. This shortcoming is best illustrated when they report on borrowings of LGUs.One of the (manifestations of) deep ignorance is Debt is bad, so that one of the

surest ways to get into the newspapers about local government finance is if the LGUproposes to borrow, says Rood.He explains debt financing as an integral part of running a government. It doesntmake sense for a government to run entirely on current expenditures. Its like youdont buy a house with current expenditures; you borrow money to buy a house, hesays.Another obvious pitfall in local government finance reporting is the failure of most

journalists to provide background and context in their stories. If you look at the long-running controversy in Baguio about the increase in taxes, none of the stories thatcame out ever referred to what happened before, Rood says. To somebody whodoesnt follow these things, its impossible to learn whats going on by reading the

story aside from Councilor X said this and Judge Y said that.
http://www.i-site.ph/povertyaudit/


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Attempts to help journalists understand the nuances of local government financethrough training have been made, notably by the Evelio B. Javier Foundation Inc.Banacia says that a course he attended in Bohol helped improve his and his paperscoverage of city hall and capitol. He echoed what he learned to his editors andcolleagues once he returned to Cebu. The paper also built up its library collection to

include more materials on local governance, especially local government finance.But the courses are few and far between. Largely, learning has been an individualeffort. It would help to hold an orientation on local government finance, saysLabiste, who went to a similar course.Getting to Know the Basics

Short of attending such seminars, journalists who intend to do serious reporting onlocal government finance could start with this reading list: The Local Government Code of 1991 and its implementing rules and regulations Handbook of Local Fiscal Administration in the Philippines, published by the

National Center for Public Administration and Governance of the University of thePhilippines and the German Foundation for International Development

The Budget Operations Manual of the Commission on Audit (COA) and Departmentof Budget and Management (DBM) DBMs Local Government Budgeting Manual, which elaborates on the BudgetOperations Manual COAs Government Accounting and Auditing Manual, Barangay AccountingManual and circular and property and supply management GOLD occasional papers and Rapid Field Appraisal reportsThey would also find it worthwhile to look at circulars, regulations, opinions andother issuances from government agencies that have a bearing on local governmentfinance. Besides COA and DBM, the agencies include the Department of Finance(Bureau of Local Government Finance), Department of Interior and LocalGovernments (Bureau of Local Government Supervision) and the Office of thePresident.Reporting on local government finance also requires journalists to watch a fairly longlist of people at LGUs, a far cry from the days when about the only person worth

bothering was the local treasurer. Retired audit commissioner Sofronio Ursaldescribes the things he would do at the local treasury services of Cebu City, Cebu

province, Toledo City and Leyte province from the fifties to the mid-seventies: I seemyself typing invitations for public bidding, which was my first job in the localtreasury. I see myself journalizing an endless stream of disbursement and special

journal vouchers. I also recall having to pay, at the behest of our treasurer, labor

payrolls on day before an election ban. In another assignment I see myself supervisingthe preparation of a city budget. But among my most vivid memories was when I wasbitten by a dog while trying to collect a delinquent real property tax.Local treasurers also performed property management and procurement functions. Inall, Ursal says the treasurer at the time had a total of 17 fiscal and non-fiscalfunctions, including as deputy or agent of a number of national government agencies.That no longer holds today. Finance work at LGUs has been divided up amongseveral local officials. They include: The chief executive (the governor, mayor or barangay captain) has overallresponsibility for the collection, custody, disbursement and proper use of funds. The treasurer collects revenue due the local government by implementing tax and

related ordinances, keeps custody of the funds by depositing it in an officialdepository bank, and disburses the funds. The treasurer inspects private commercial


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and industrial establishments and examines books of accounts of businessmen for thepurpose of implementing tax ordinances. The assistant treasurer, if there is any,administers oaths on notices and notifications to those that are delinquent in payingreal property tax. The treasurer is appointed by the finance department from a list ofthree recommendees submitted by the mayor or governor.

The assessor conducts a periodic appraisal of real properties, maintains a taxmapping in preparation of tax rolls used by the treasurer, and prepares a schedule offair market value for the different classes of fair real properties. The assessor keepssworn statements declared by property owners, compiles house plans and theirclassification into kinds and types of property for assessment purposes, and issuescertified copies of assessment records or real property and related records. The budget officer consolidates and evaluates the budget proposal of variousoffices/units, assists the local chief executive in preparing the budget, and executesthe budget through the allotment system. The budget officer coordinates with the

planning and development coordinator in drawing up the development plan. The accountant is in charge of accounting and internal audit, prepares and submits

financial statements to the local chief executive and Sanggunian, and certifies to theavailability of budgetary allotment to which expenditures and obligations may becharged. The development council draws up the local development plan and investment plan. The planning and development coordinator links planning and budgeting, especiallyin the preparation of the development plan. The Sanggunian enacts legislative measures for revenue generation, allocation andregulation of business activities. The finance committee makes sure that the budget supports the programs identifiedin the development plan or the plan takes into account the financial capacity of a localgovernment unit. It is composed of the treasurer, budget officer and the planning anddevelopment coordinator. The general services officer buys the supplies and services an LGU needs. The bids and awards committee decides the winning bids and questions of awardson procurement and disposal of supplies or property. In provinces, towns and cities,the committee consists of the chief executive as the chairman, and the treasurer,accountant, budget officer, general service officer, head of office and occasionally aSanggunian member as members. In the barangay, the Sanggunian Barangay formsthe committee.The Budget

To figure out the priorities of a local government unit, examine its budget. That may

not be an inviting proposition for journalists, most of whom usually avoid numbersunless they are on a lotto ticket. But as Isaac Shapiro, international project director forthe Washington-based Center on Budget and Policy Priorities, points out, the budgetis the most important economic policy instrument for governments. Furthermore, hesays, it reflects a governments socioeconomic policy priorities by translating

policies and commitments into expenditure and revenue. As the main governmentinstrument for the distribution of income, it directly or indirectly affects the life of allcitizens.In the Philippines, budgets of local government units from the barangay to the

province must put into action multisectoral development plans initiated by localdevelopment councils and approved by the Sanggunian. The development plan

contains the summary of major development concerns and priorities of a localgovernment unit, its development vision and goals, strategies, projected revenues and


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expenditures, public investment, requirements, maps and other visual aids, andphysical and zoning plans for three to 10 years. The council also puts out the localdevelopment investment plan, which estimates the three- to 10-year level ofinvestment development, matches programs and projects against estimatedinvestments, and identifies funding sources. A third output is the annual investment

plan, which contains a list of priority programs, projects and activities to beimplemented during a specific budget year.The law mandates multisectoral participation in development planning. That explainsthe composition of the development council at the different levels. NGOrepresentation constitutes one-fourth of the council membership. Chaired by the localchief executive, the councils executive committee consists of: Province: governor, representatives of city and municipal mayors, chairman of theSangguniang Panlalawigans appropriations committee, president of the provincialleague of barangays, NGO representatives City or municipality: mayor, chairman of the Sagguniang Panglunsod/Bayansappropriations committee, president of the city/municipal league of barangays, NGO

representatives. Barangay: punong barangay, representative of Sangguniang Barangay, NGOrepresentativesLike the budget of the national government, the law on local budget is clear: Nomoney can be paid out of the local treasury without an appropriations ordinance orlaw. Likewise, local budgets are framed in two parts (income and expenditures) andgo through five stages (preparation, legislation/authorization, review, execution andaccountability).The development plan has important functions during the various phases of the budgetcycle. During budget preparation, it is used to determine expenditure and sectoralceilings, formulate the functions and project activities, and determine cost estimates.During budget review, it is used to verify consistency of the budget with approvedactivities, goals and objectives. During budget execution, the plan is the basis fordetermining activities to be undertaken during the period. In the budget accountability

phase, it sets the standards against which the performance can be measured. Budgetpreparation normally begins after local government units receive from the DBM acircular advising them of their internal revenue allotment or the IRA. This usuallyhappens on June 15 of every year or earlier. Thanks to the Local Government Code,the share of local governments in the IRA has risen to 40 percent from an average of11 to 12 percent before 1991.At around the same time as the IRA advisory release, the development council

furnishes the local finance committee with copies of the development plan,development investment plan and annual investment plan. That means the plans mustbe in place by the end of May and have been approved by the Sanggunian. Theaccountant, meanwhile, turns over the necessary financial data to the chief executivethrough the finance committee. The treasurer submits a certified statement coveringthe income and expenditures of the preceding year, the actual income andexpenditures of the first two quarters of the current year, and the estimated incomeand expenditures for the last two quarters of the current year. Other inputs to the

budget making process include information supplied by the national government andstate corporations on their programs and projects.Made up of the treasurer, budget officer and planning and development officer, the

finance committees job is to project the income the city or province expects in thecoming year, set ceilings for spending, and recommend tax and revenue measures and


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borrowings. Its recommendations form the basis of the guidelines that the mayor orgovernor later issues to department or unit heads in drafting their own budget

proposals.The budget call follows: The mayor or governor asks the heads of various offices anddepartments to submit their budget proposals. The budget proposals that department

heads hand in to the mayor or governor weeks later are accompanied by informationabout their offices objectives, functions and projects; organizational charts andstaffing patterns, showing plantilla positions with their corresponding salaries; andaccomplishment reports for the preceding two years. The proposals find their way tothe finance committee, which then comes up with a consolidated budget due forsubmission to the mayor or governor for review on or before July 15. The mayor orgovernor conducts budget hearings as he sees fit.On October 16 each year, the mayor or governor presents for legislation the executive

budget to the Sanggunian or the local lawmaking body. Failure to meet this deadlinemeans criminal and administrative charges for the slowpoke official.Three documents make up the executive budget: a budget message stressing the

significance of the proposed budget in relation to the local development plan, asummary of the local governments planned activities and a summary of financialstatements showing the actual and estimated income and expenditures in the

preceding, current and ensuing year. The last document includes information aboutthe city, town or provinces obligations and indebtedness, a summary of statutory andcontractual obligations and other financial statements that show the localgovernments financial condition.The Sanggunian holds a series of public hearings on the budget before buckling downto review the executive branchs proposal. Like Congress, the local legislature candecrease or delete an item in the budget, but cannot increase total appropriations

proposed by the local chief executive or include new items, except to provide forstatutory or contractual obligations that have not been included in the executive

budget, or if the items provided are deficient in amounts. Even then, such additionalprovision should not result in an excess of the total appropriations in the executivebudget.The enactment process follows the sequence of sponsorship first and secondreadings and passage. The law mandates the Sanggunian to enact an appropriationsordinance not later than December 31. The mayor or governor subsequently approvesor vetoes the ordinance.If no budget is approved, the Sanggunian continues holding sessions, withoutadditional pay for its members, until the ordinance gets the green light. If there is still

no approved budget after 90 days, the appropriations ordinance of the preceding yearis considered reenacted and remains in force until the local council okays the newbudget. Specifically, only the appropriations for salaries and wages for existingpositions, statutory and contractual obligations and essential operating expenses in theannual and supplemental budgets for the preceding year are considered reenacted.Like the President, mayors and governors enjoy the power to veto any item of theappropriations ordinance or resolution directing payment of money or creatingliability without affecting the other parts of the measure. They exercise the line-itemveto only once on an appropriations ordinance or an item in it.Local governments are by no means limited to the annual budget. The Sanggunian can

pass a supplemental budget in times of public calamity by realigning items in the

appropriations ordinance. The source of funds must be indicated. The local legislaturecan also enact a supplemental budget to cover other expenditures as long as the local


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budget officer certifies that money is available for the purpose. The supplementalbudget is enacted in the same way as the regular budget.Despite devolution, the national government has not really let go of LGUs especiallywhen it comes to money. An important phase in the budgeting process is the reviewdone by the DBM central office of appropriations ordinances enacted in cities and

municipalities within Metro Manila and regional DBM offices of budgets enacted inprovinces and highly urbanized cities. The Sangguniang Panlalawigan reviews thebudgets of towns and cities under it, while the Sangguniang Panlungsod or Bayanlooks at the budgets of the barangays that comprise the city or town.The local government submits copies of the annual budget, appropriations ordinance,local development plan and investment program, along with the organizationalstructure and staff pattern to the reviewing bodies. Given 90 days to act, the reviewing

bodies can declare the ordinance inoperative in whole or in part, and may disallowspecific items in excess of the amounts.Essentially, the budget review is to ensure that the budget is balanced (read: projectedexpenditures do not exceed projected income), covers statutory and contractual

obligations, and earmarks the sums mandated by law for certain expenditures such asthe calamity fund (five percent of the budget), aid to barangays (not less than P1,000

per barangay) and development projects or the Development Fund (20 percent of theIRA).The review is also intended to make sure that spending limits are not breached. Debtservicing, for example, is limited to 20 percent of the LGUs regular income;

personnel services appropriations, 45 percent for first- to third-class cities andmunicipalities and 55 percent for fourth- to sixth-class; and discretionary funds ofgovernors and mayors, two percent of actual receipts from real property tax collectedin the preceding year.Local governments are given from January 1 to December 31 to execute the budget.At the end of the year, money unspent by a local government unit reverts to itsgeneral fund and must await an appropriations ordinance before it can be used.Appropriations for capital outlay, however, are the exception.The last phase in the budget process is budget accountability. The estimated andactual income and expenditures are recorded and reported and operations of localgovernments are evaluated or audited against planned targets.Why Some Budgets Are Defective

The Local Government Code sets the ideal scenario, complete with checks andbalances, under which local budgets are to be enacted. But a great divide existsbetween theory and practice. Local governance experts say a number of local budgets

are plain unresponsive to public needs and even prone to corruption. Because thebudget is supposed to implement the local development plan, local officials shouldgive the most weight to this document when they prepare the budget: Journalistsshould give the plan more than a cursory glance as well, since it can give them a fairlygood idea of the LGUs socioeconomic priorities in the short and long run.Few local governments, however, actually base their budgets on development plans,according to Eddie Dorotan, former mayor of Irosin, Sorsogon and now adevelopment management consultant of the Ford Foundation. In the first place, henotes, most planning and development councils fail to come up with them. In fact,data from the DILG show that only 53 of the 78 provinces and 54 of 83 cities havedevelopment councils.

Some LGU budgets have also been found to lean heavily toward infrastructureprojects instead of development projects, because of kickbacks offered to local


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officials, says Dorotan.Transparency is hardly to be expected of local officials as well. Contents of the

budget and public transactions are often kept secret even when the public, includingjournalists, have a right to them. Reporting requirements are also often violated.Dorotan says even national government agencies are guilty of withholding

information from local governments and their constituents about their programs andprojects. Senators and congressmen at times also disrupt development planning andthe local budgeting system by embarking on projects using their pork barrel fundswithout consulting LGUs. Youd know about the project only when its already

being done or finished, Dorotan says.In some places, mayors and governors are known to railroad the whole budgetary

process. Except for the local treasurer who is appointed by the finance department andthe staff of the Sanggunian who are appointed by the vice mayor or vice governor, alllocal officials and employees owe their appointments to the mayor or governor. Thelocal chief executives have no qualms replacing local officials with whom they dontsee eye to eye, and that includes members of the finance committee.

The ideal situation is one in which the finance committee acts as a body that will doits job of setting targets and spending ceilings. But what usually happens, saysDorotan, is that only the mayor and just one committee member the treasurer or the

budget officer determine the shape of the budget.As long as the mayor or governor has the numbers in the local legislature, the budgetgets approved without sweat. Legislators eschew public hearings in favor of caucuseswhere compromises are struck. But the budget proposal may have a rough going if themayor or governor lacks the backing of either majority of the local legislature or thevice mayor, who is the Sanggunians presiding officer.Mark Joseph, an opposition councilor in Makati City, knows only too well the

problems of which Dorotan speaks. He still vividly remembers how he and the citysonly other opposition councilor, Robert Dean Barbers, were excluded every step ofthe way when the 1999 budget was drawn up. As councilors, were supposed tosubmit our budget to the local finance committee by July 15, says Joseph. The letteradvising us to submit our budgets was dated July 28. We got the letter on October 16,when the budget was supposed to have already been submitted by the mayor to theSanggunian.Even then, he says. Mayor Elenita C. Binay submitted the budget to Sanggunian amonth after the deadline, and furnished the council only with the executive summary.He adds, Ive never seen the local development plan and public investment plan. Iveasked for them but have not been furnished copies. Theyre state secrets.

The council supposedly held budget hearings, but notified Joseph and Barbers the dayafter the hearings. The two opposition councilors finally got a chance to look at thebudget when it was presented for second and third readings. Barbers and I were allset to question the budget, says Joseph. But (Vice Mayor) Edu (Manzano) didntshow up so (Councilor Johnny) Wilson presided. He talked at the rate of 120 miles

per hour. Before we knew it, the budget had been passed; it took less than a minute.When we said we had not asked our questions, we were told that the debate wasclosed.The council naturally passed the budget without accompanying documents such as the

public investment program, development plan and procurement program because,says Joseph, none was ever submitted in the first place.

While the budget review is important to guard against deviations from the law, localchief executives often succeed in convincing regional DBM offices or the provincial


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budget officers to discard this step. According to Dorotan, it takes only a few words todo that. He says, The governor will go to the DBM and say, Thats already done.Going Beyond the Numbers

The issues and problems raised by Dorotan and other local governance experts showthe importance of going beyond what reporters typically do during the budget process:

file stories that say nothing else beyond comparing this years figures with thepreceding years. At the very least, a report on the adoption of a local budget shouldcontain the following: Amount to be spent New or increased taxes, higher license and permit fees and other income that will benecessary to meet expenditures, cuts, if any, to be made in such taxes, fees or fines Comparison with preceding year or years Justification for increases sought, cuts made Rate of current spending, under or over budget of previous year Patterns behind the submission and subsequent adjustments, such as politicalmotives, pressure groups, history

Consequences of budget for agencies, departments, business, the public.Lest readers are lulled to sleep by such number-heavy discussions, journalists couldenliven the coverage of development planning and budget making. The following lists

just some of the ways to do this: Examine participation in development planning, and report both good and bad news.Some of the bad news: NGOs and other groups are shut out from the process; sham

NGOs or those established by the government to give a semblance of multisectoralparticipation get accredited to the development council; no public hearings are held;no development plan is ever drafted. And some of the good news: NGOs get to

participate not only in development planning, but in other aspects of local governanceas in the case of Naga City. Development planning is truly participatory and bottom-up, as in the case of Toboso in Negros Occidental. Deal with the development plan at the barangay level. Or barangay-ize the plan, asRood puts it. Plans at the city, town and provincial level tend to overwhelm becausethe wish lists by then become long and unwieldy. A good approach is to explain whatthe development plan means to a barangay. A new school? More medicines at thehealth center? Why the need? Or pick a marginalized community, comb through theresources they have or dont have and see how it copes. Are they losers orwinners? The development plan can also be cut up the geographically or by sector sothat stories hit people where they live. Journalists can actually write a series. Check if the investment program would indeed attract new investors and if the LGU

would end up losing or gaining from the programs and the incentives they have linedup. Labistes paper pays close attention to Hollos annual investment program,especially now that retail business is down. We want to find out how they intend toget Iloilo out of the doldrums, she says. Nawal says he looks at agro-industrialcenters being encouraged under Davao del Surs annual investment program not onlyfor additional income they would generate but also their impact on the environment.How will the factories dump their wastes? Will they build wastewater treatmentfacilities? Look for variance between the development plan and budget, and the budget and itsexecution. Orejas keeps a copy of Pampangas development plan and budget close by.She has learned from experience that making a story out of the development plan for

the Inquirer is hardly a worthwhile activity, but she has found the plan and budget tobe a handy reference when monitoring development projects and operations of the


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province and the cities and towns under it. Any deviations should be a red flag, shesays. Sit patiently through the budget hearings until the budget takes its final shape. Afterall, deliberations last only a couple of months (from mid-October to end-December)unless the Sanggunian fails to enact an appropriations ordinance. In sanggunians

where there is healthy opposition, sparks fly when budget proposals come under fireand are in danger of being slashed. Banacia suggests widening the discussion toinclude reactions and positions of stakeholders not present during the hearings,especially when drastic actions are taken or proposed barangay residents, localgovernment officials and employees, sectoral groups, contractors. What happens to

plans and targets? Whos happy or unhappy? Who has the upper hand? Who is put ata disadvantage? Why? Are politics involved? What are the alternatives? Sometimes,

journalists come up with interesting stories by simply reporting where budgethearings are held in homes and restaurants, for example, as was the case inPampanga before 1998. Determine who gets the lions share in the budget and probe why. This is how

Nawal usually begins most of his budget stories. He is hardly surprised when thegeneral services office, which handles the procurement of materials for health,education and other vital agencies, gets the biggest chunk of the budget. But when thegovernor is given the next biggest slice, a lot of questions pop in his head. He also

begins to wonder the governor may have up his sleeve, especially in an election year. See how the budget addresses what Labiste calls flashpoints or pressing concernsin an LGU. In Iloilo, these include flood control and drainage, squatter relocation,health and urbanization, and salaries. According to Labiste, many journalists overlookthe issues and stay glued to personalities or lump-sum figures. Look at the budgeting trends. An exercise worth engaging in to compare the budgetsof different local governments to find out discrepancies in spending for say, suppliesor infrastructure projects. Why is Town A paying 50 percent more than nearby TownB for the same bottle of cough syrup from the same company?Where the Money Comes From

One vital question that the reporter should know the answer to before asking any morequeries, though, is: Where do local governments get the money to fund their budgets?First, theres the central government from which they draw their annual internalrevenue allotment or IRA and their share from the national wealth. Then, LGUs canon their own slap taxes like real property and business taxes, impose fees forregulating and inspecting businesses and activities, and collect charges for servicesand goods they provide to the public. Local governments also operate public

enterprises like markets and slaughterhouses. Finally, since the implementation of theLocal Government Code, LGUs are increasingly turning to nontraditional sources ofrevenues: credit financing or borrowings, build-operate-transfer schemes and bondflotation.Wherever the money comes from, there are two things to bear in mind: One, anymoney a local government officer receives officially in any capacity or on anyoccasion must be accounted for as local funds. Two, every LGU officer who keeps thelocal fund must be properly bonded and is accountable and responsible for the fundsin his or her safekeeping. Of all their sources of funding, local governments areknown to be most fiercely protective of the IRA. This is the share of LGUs in thetaxes collected by the national government such as income taxes, value added tax,

excise taxes and capital gains tax. It is given to provinces, cities, towns and barangaysto enable them to effectively carry out the tasks that the national government


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transferred to them under the Code.The IRA has risen from 30 percent of the national taxes in 1992 to 35 percent in 1993and to 40 percent beginning in 1994. It is computed based on collections in the thirdfiscal year preceding the current year.The amount that a specific local government gets from the IRA varies. Of the LGUs

40 percent share, provinces and cities each get 23 percent, municipalities, 34 percent,and barangays, 20 percent. Population, land area and equal sharing also come into

play when computing a local governments share.Of the various issues that have come to be associated with the IRA, two are of note:the dependence of local governments on it and their struggle to keep their IRA intact.Many local governments remain dependent on the IRA as their funding source,especially provinces and municipalities. So dependent have these local governmentunits become to the IRA that it will not be surprising to find that a considerable chunkof their own budgets would be sourced from the IRA, say lawyers Vincent EdwardR. Festin and Marion J. Manuel in a paper, The IRA Cut: Threat of LocalGovernance and Democracy.

In some areas, the lRA accounts for as much as 96 percent of total revenues and hasbecome a disincentive for LGUs to improve collection of local taxes, especially realproperty tax. The tax collection efficiency or the ratio of actual collections topotential collectibles of LGUs is dismal. The GOLD Project of the Associates inRural Development estimates this to range from 6.7 to 74.8 percent in the provinces itsampled. Meaning, for every peso supposed to be collected, only seven to 75 centavosare actually collected. In municipalities, collection efficiency ranges from 30 to 40

percent.Journalists can help readers understand the ills of dependency by illustratingdevelopment projects that could have been undertaken or expanded, or services thatcould have been delivered or improved had their local governments looked beyondthe IRA for funding.When the IRA Gets Cut

Overdependence on the IRA partly explains why local governments get easily upsetwhen the DBM delays the release of the money to them or when the nationalgovernment Malacaang and Congress, in particular tries to slash the sum that isdue them. But LGUs have other good and legal reasons to be offended.The law clearly requires the national government to automatically release the IRAdirectly to the provincial, city, municipal or barangay treasurer within five days afterthe end of every quarter, and bars the national government from imposing any lien orholdback. It also sets several tough conditions before the IRA can be cut:

There must be an unmanageable public sector deficit. Cuts on the IRA should come from the executive branch. A joint recommendationmust be submitted by three Cabinet secretaries finance, interior and localgovernment, and budget to the President. Before a recommendation is made, the Senate and the House of Representatives andthe leagues must be consulted. The IRA cannot be cut to less than 30 percent of the amount collected as internalrevenue taxes. Corresponding cuts must be made on other agencies, including cash and non-cash

budgetary aids to state corporations, government financial institutions, the Oil PriceStabilization Fund and the Central Bank. In recent years, local officials have been

caught in a struggle to keep their IRA intact, sometimes with little success. In 1997,the year the Asian financial crisis struck, President Fidel Ramos issued an


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administrative order that withheld 10 percent of the IRA without consulting theleagues and Congress and without premising his act on an unmanageable publicsector deficit, as required by the Local Government Code.The bickering among Congress, the President and local officials continued in theyears that followed, as did the reduction of the IRA by 10 percent. Then in December

1999, Senator John Osmea, chair of the Senate finance committee, cited the growingdeficit in calling for a cut in certain budgetary items or their classification asunprogrammed expenses. He proposed that the P121.7 billion originallyappropriated for the IRA be slashed by P30 billion.Angry local officials responded to the proposal by marching in the streets andthreatening a four-day work stoppage unless the P30 billion was restored as a regularappropriation. The protest action and a veiled threat by local officials to withholdsupport for President Joseph Estradas call for constitutional amendments forcedEstrada to persuade the Senate to reprogram the amount. But local officials werenot wholly triumphant: P10 billion of the P30 billion fell under unprogrammedfunds.

Local governments had real reason to rejoice, however, when the Supreme Court inJuly 2000 said Malacaang was barred from withholding their IRA. Responding tothe petition filed by Senator Aquilino Pimentel Jr. that questioned the legality ofRamoss order to reduce the IRA, the Court ruled that while the President may issueadvisories and seek (the LGUs) cooperation in solving economic difficulties, hecannot prevent them from performing their tasks and using available resources toachieve their goals. It further noted that the President had only the power ofsupervision, not control, over LGUs.Sharing in the National Wealth

On top the IRA, local governments that are blessed with natural wealth such asforests, fishing grounds, oil fields and mines share 40 percent of mining taxes,royalties, fishery and forestry charges and similar taxes, fees and charges, includingsurcharges, interests or finances collected by the national government. If the entitythat develops and uses the national wealth is a government-owned or -controlledcorporation, LGUs are entitled to one percent of its gross receipts in the precedingyear or 40 percent of taxes it would have paid if it were not exempt, or whichever ishigher. If the tax paid by a business has been remitted to the national treasury, thelocal governments share is distributed among the province (20 percent), city or town(45 percent) and barangay (30 percent). In highly urbanized or independent cities, thecity gets 65 percent and the barangay 35 percent. If the resources are located in two ormore local governments, sharing will be based on population (70 percent) and land

area (30 percent).The LGUs share in the national wealth, however, has created its own set of problems,largely owing to the Local Government Codes failure to provide for directremittances to local governments except for state corporations. As a result, the actualshare of local governments cannot be determined until tax payments have beenremitted to the national treasury and verified. These take time. If a business fails to

pay up, LGUs dont get their appropriate share. There have also been instances inwhich local governments quarreled over which should get the bigger slice of thenational wealth in their area.Some LGUs get a special share from other taxes collected by the nationalgovernment. For example, local governments that host ecozones get one percent of

the five percent gross income tax while areas flanking to the zones split another onepercent among themselves. The rest goes to the national government. In early 1998,


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Central Luzon newspapers were filled with stories about the conflict between theClark Development Corporation, operator of the dark economic zone, and mayors oftowns in Pampanga and Tarlac after the corporation failed to release their one percentshare.Virginia tobacco-growing areas, meanwhile, are guaranteed a share in the 15 percent

excise tax slapped on all local tobacco cigarettes. Local governments also get from 20to 50 percent from the excess collection in value-added tax. In addition, the nationalgovernment shoulders part of the insurance premiums of barangay officials and

provides subsistence allowances to barangay health workers.In Pampanga, though, the national government found itself butting heads over thelocal government over tax collection. In this instance, the quarrying tax, the collectionof which had been purely a local activity until President Estrada issued Proclamation66 that allowed the Department of Environment and Natural Resources (DENR) specifically the Natural Resources Development Corporation (NRDC) to step in,raise the tax from P40 to P300, and split the proceeds. The provincial government,towns and barangays protested that the new setup went against local autonomy and

cut into their revenues.Whether in the hands of the local or national government, the collection of quarryingfees was fraught with problems. The Ombudsman suspended Pampanga GovernorManuel Lito Lapid for collecting P120 when the fee was pegged at only P40. It saidthe illegally collected quarry taxes went to the personal pockets of the governor,two other provincial officials and his brother-in-law. The Lapid camp, citing thegovernors longstanding feud with President Estrada, charged persecution byMalacaang. Under the NRDC, reporters like Orejas found it difficult to determinerevenues collected from quarrying operations. Orejas came across inconsistent reports

put out by NRDC and discovered that receipts were being recycled.Aside from dissecting such disputes, journalists may also find it worthwhile toscrutinize how the proceeds from the share of national wealth are actually used. Thelaw provides that they must fund local development and livelihood projects. In thecase of money raised from the development and use of energy sources, 80 percent ofthe proceeds must be used to lower the cost of electricity in the local governmentwhere the source of energy is located. Is this, indeed, happening in theirneighborhood?Local Fees and Charges

Since the Local Government Code came into effect, many money-raisingopportunities have opened up to LGUs to lessen their dependence on national coffers.These include the collection of a variety of fees and charges.

Fees are paid to local governments in relation to the service rendered in regulating orinspecting business or activity such as the privilege to operate an establishment orpractice a profession. Fees are fixed by law.Charges cover service fees, user charges and direct charges that are paid in exchangefor certain services or consumption of goods sold or operated by LGUs.Local governments can pass an ordinance to adjust fees and charges whenever theircomputations show the rates have become low. Local fees and charges include: Regulatory fees in construction: building permit, plumbing permit, electrical permit,mechanical permit, occupancy permit, plumbing inspection, mechanical inspection,inspection fees, demolition, fire certification, sanitary permit. Regulatory fees in business: mayors permit, weights and measures, tricycle

operation, sanitary inspection, video tape rentals, storage of inflammable andcombustible material.


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Regulatory fees in non-business: marriage permit and solemnization, tax clearancefees, burial permit, impounding/sales of stray animals, exhumation/removal ofcadaver, police clearance, sheriffs fees, court fees, fiscals clearance, fees on holding

benefits, firearms permit, registration of large cattle. Service fees: secretarys certification fee, traffic violations, garbage, hospital fees,

overnight parking, terminal fee, tuition fees, parking fees, health services, physicalexamination fees. Receipts from economic enterprise: markets, hawkers, slaughterhouses, electric lightand power, cemeteries, waterworks system.Journalists can easily come across stories involving fixers that facilitate the releaseof permits and licenses in big towns and cities. More difficult to track are themishandling of collections, as well as massive payoffs to inspectors, collectors andlocal officials, especially by firms suspected of violating safety and sanitationrequirements. The fire that struck Ozone Disco in Quezon City in 1996 and left 166

people dead illustrates only too well how business establishments that brazenlyviolate the Building Code and local ordinances still manage to get the permits and

licenses to continue operating.What LGUs Can and Cannot Tax

Local governments are able generate their own funds through taxes as well. Taxesrefer to monetary contributions imposed on persons or property within the jurisdictionof the LGU to support government needs. They require legislation ordinances

before they can be imposed.Local governments are allowed a variety of taxes, ranging from real property tax tothe community tax that replaces the old residence tax or cedula.Taxes vary, depending again on the level of the LGU. Cities, for example, enjoy thewidest range of tax options: They can impose levies of both provinces and municipalties combined. At the same time, a province cannot collect taxes within the

jurisdiction of the city. In addition, the rates can be pegged at 50 percent higher in alltaxes except professional tax and amusement tax. These explain why municipalitiesare raring to become cities. Metro Manila towns enjoy the privileges granted to cities.The Local Government Code allows all local governments to adjust tax rates onceevery five years at a rate not exceeding 10 percent. Journalists should thus be cautiouswhen reporting campaign promises not to raise taxes. It is likely the politicians cantfulfill that pledge not when tax rates have been adjusted recently.The law also limits the taxing powers of local governments. For instance, they cannottax what the central government already taxes such as the documentary stamp andtaxes on inheritance. Neither can they tax the national government, its agencies and

other local governments. Also exempted from paying taxes to LGUs are sectors andsectors and activitiesWhat LGUs Cannot Tax

(Put in box all with buttons) Income tax, except on banks and other financial institutions Documentary stamp tax Taxes on estates, inheritance, gifts, legacies and other acquisition mortis causa Customs, duties, registration fees of vessel and wharfage on wharves, tonnage dues,except when wharves are constructed and maintained by LGUs out of its fund Taxes, fees or charges on goods carried into or out of, or passing through, theterritorial jurisdiction of LGUs

Taxes, fees or charges on agricultural or aquatic products, except when sold bymarginal farmers or fishermen


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Taxes on business enterprises certified to by the Board of Investments for six andfour years, respectively, from the date of registration Excise taxes on articles enumerated under the National Internal Revenue Code, andtaxes, fees or charges on petroleum products Percentage or VAT on sales, barters, or exchanges or similar transactions on goods

and services Taxes on the gross receipts of transportation contractors and persons engaged in thetransportation of passengers or freight by hire and common carriers by air, land andwater Taxes on premium paid by way of reinsurance or retrocession Taxes, fees or charges on motor vehicle registration and driving licenses and

permits, except on tricycles Taxes, fees or charges on exports Taxes, fees or charges on countryside and barangay business enterprises andcooperatives registered under the Cooperatives Code Taxes, fees or charges on the national government, its agencies and LGUs

Real Property TaxBy far, real property tax is considered as the most important of sources of revenues,accounting for slightly more than a third of local receipts. Local governments cancollect four types of real property tax, or a combination of these, provided they arecovered by appropriation ordinances Basic real property tax (at most one percent of assessed value in provinces and two

percent in cities and Metro Manila); Additional real property tax for the Special Education Fund (one percent for

provinces and one percent for cities and Metro Manila municipalities); Idle land tax (at most five percent in provinces and cities); and Special levy on land benefited by local public works (at most 60 percent of theactual cost of the projects and improvements in provinces in cities).Exempted from taxation are real property owned by the government or charitableinstitutions, churches, convents, mosques, nonprofit or religious cemeteries and lands,

buildings, and improvements used for religious, charitable or educational purposes;machineries and equipment used by local water districts and government-owned orcontrolled corporations to supply and distribute water or generate and transmit electric

power; real property owned by registered cooperatives; and machinery and equipmentused for pollution and environmental protection.Local officials, though, rarely make full and good use of provisions of the law to raiserevenues. Orly Baleal, former planning and development officer of Orani, Bataan,

says most shunt aside proposals to impose new taxes or even the maximumallowable rates because they are politically unpopular. They have also been found tobe soft in collecting taxes and running after tax delinquencies. Many LGUs hardlyworry because they always have the IRA to fall back on.Local governments, for example, collected only 63.44 percent of potential basic real

property tax in 1998, according to the COA. In Mindanao, the collection rate reachedas low as zero in Lanao del Sur and 6.92 percent in the Autonomous Region ofMuslim Mindanao. Rood suggests that journalists produce reports on the arrears,specifically where they are, as wake-up calls for negligent or complacent localofficials. But he notes that the weak tax collection is partly due to the unrealisticallylow targets set by the Department of Finance. As a result, local officials do not even

know they are collecting only half of what they could and should.When 1998 drew to a close, real property tax delinquencies of local governments


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nationwide had ballooned to P1.21 billion. This happened despite remedies availableto local governments such as administrative and court actions against personal or real

property of delinquent owners. Journalists do not have to look far for interestingstories to write about tax delinquencies. They would do well to ask: Who owes thelocal government? How long have they managed to get away with their

delinquencies? Why?They can also try to find out why local governments have failed miserably incollecting tax delinquencies. Some problems, as it turns out, would have been easy tosolve. Take this town where delinquent taxes of P182 million remained uncollectedonly because the municipal treasurer omitted to post notices of delinquent real

property taxes at the municipal hall and conspicuous public places, and publish the listin newspapers, as required by a municipal ordinance. The increase in the real

property tax delinquency has far-reaching implications in terms of accelerating socio-economic growth, says the COA. This will deter the planned program and project ofLGUs because of inadequate funding requirements. This ultimately shows howcomplacent to some extent are some of our local officials, particularly in their efforts

to generate more revenues for their respective areas of responsibility.Other issues in real property taxation that should serve as red flags to journalists are: Tax discounts: Are they granted in excess of the limitation provided under the LocalGovernment Code, thus resulting in an undercollection of tax? Fines, penalties and interests on unpaid taxes: Have they been condoned by anordinance thus depriving the local government of additional income, as in the case ofa city? Payments of delinquent taxes: Are they applied to the current year despitenonpayment of their prior years tax obligations? Payments of current taxes on

properties with delinquencies should not be accepted. Any payment made by aproperty owner should be applied first to delinquencies until the current tax can beaccepted. Tax mapping: Has the lack of capability to conduct tax mapping impaired an LGUstax collection effort? Valuation and assessment: Are properties sitting next to each other valueddifferently? How are properties of friends and relatives of the sanggunian valued? Towhom do the properties belong? Remember, it is the Sanggunian that approves

property values. Tax collection: Is tax payment accepted publicly under supervised conditions? Dofield collectors commit abuses like extortion? Remittance: Are taxes collected remitted to the concerned agencies? For example,

Paraaque failed to turn over trust liabilities amounting to P220 million to theconcerned agencies. In one city, local officials remitted to the Bureau of InternalRevenue only P99,951.24 in taxes withheld, leaving a balance of P125 million, thusdepriving the national government of the immediate use of the funds. Official receipts: How does the local government acknowledge tax payments andremittances of tax proceeds? In one town, the COA found 15 official receipts wereactually falsified to reduce the amount of remittance. The amount that appeared in theoriginal and duplicate copies showed disparity ranging from P15,000 to P40,000. Thediscrepancy totaled P157 million. Fund juggling or diversion: Does the local government use the tax for the purpose itwas collected? In Quezon City, for example, 80 percent of P9.9 million realty tax that

was supposed to go to the Special Education Fund or SEF went instead to the GeneralFund, a clear case of what the COA said was illegal diversion. (The General Fund


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absorbs all obligations not specifically declared by law to be payable from any otherfunds.) In many local governments, the SEF is being used for non-educational

purposes such as salaries or allowances of non-school employees. The law says theSEF should be used to operate and maintain public schools such as the constructionand repair of school buildings, facilities and equipment; educational researches;

purchase of books and periodicals; and sports development.The Real Property-Paper Chase

Journalists can be aided by a wealth of records if they wish to look up a real propertyor examine issues related to the realty tax in a locality. The documents are generallyeasy to access from the assessors and treasurers offices, especially if the operationsof the local government have been automated.Local governments that have done or are doing tax mapping carry various maps,ranging from cadastral surveys, engineering maps to barangay maps and isolatedsurveys, to help them identify the location, boundaries, dimensions, size, ownership,existence of structure and title or taxable and exempt properties. The output of taxmapping should be of interest as well: Municipal, barangay and section index maps;

parcellary index maps with appropriate labels; and a tax map control roll matching themap parcel with its characteristics and ownership data.The assessors office classifies real property as either residential, agricultural,commercial, industrial, mineral, timberland or special, and sub-classifies them as firstclass, second class, and so on. It then produces a schedule of fair and current marketvalues for lands and buildings. The Local Government Code requires that schedules to

be published in a newspaper of general circulation in the locality or posted in theprovincial capital, city or municipal hall and in two other conspicuous public places.The field appraisal and assessment sheet serves as the basis for preparing the taxdeclaration, or the owners notice of assessment, and assessment roll, which isconverted to a tax roll and becomes the basis for preparing the tax bill or real propertytax order of payment. Each property carries a property identification number or PIN,which makes it easy for the local government to retrieve the tax declaration andassessment report. Local governments also keep ownership record forms or ORF,which are controlled alphabetically to respond to cases where the taxpayer will knowonly the name of the property owner. Assessment transactions and cancellations areentered in chronological order into the Journal of Assessments. The document isuseful in checking dubious assessments and can provide insights on cancellationsmade during a period of natural disasters such as destruction inflicted by a typhoon orother calamities.Every semester the assessor submits a report of all assessments, as well as

cancellations and modifications of assessments, to the mayor or governor and theSanggunian. A general revision of real property assessment is supposed to beconducted every three years. Finding out delinquent real properties should not bedifficult either. The law requires local governments to update the list of delinquentreal properties. The list specifies the name of the property or person, the location,description and value of the property, and taxes due. The treasurer must post noticesof delinquency at the main entrance of the capitol and the municipal buildings and inother accessible places and publish them once a week for two consecutive weeks innewspapers of general circulation within the locality.Journalists must not overlook the role of the Sanggunian when it comes to the real

property tax. After the assessors prepare the schedule of fair market value, it is the

Sanggunian that determines the assessment levels, tax rates, and fines, discounts andpenalties.


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Taxing BusinessesAll taxes imposed by local governments bear watching. But among the moreinteresting ones to keep an eye on is the tax on business, which is different from the

business permit. The annual tax is imposed on the act of operating a businessenterprise and computed on the basis of gross receipts. The local government prepares

a tax schedule for different business clusters such as manufacturers, wholesalers,exporters, retailers, contractors, banks and financial institutions, and peddlers.Journalists may find it fruitful to determine if the business lines are properlyidentified. Firms engaged in several lines of business (a wholesaler and retailer at thesame time, for example) are subject to tax separately. Misclassification can mean a

business is either shortchanging the local government or is being taxed excessively.The Local Government Code empowers local government to grant businesses variousincentives, including deferment or waiver of taxes and fees for a certain period, toattract investments. As journalists in Iloilo and some provinces have found out, theseincentives, especially so-called tax holidays, require close watching as they may notalways benefit the local government and its residents.

In Iloilo City, the Sanggunian passed an ordinance giving firms with a minimumcapital of P5 million a one-to three-year tax holiday retroactive to January 1999. Butlocal businessmen and residents overwhelmingly opposed the ordinance, saying noneof them stood to benefit from the measure. The reason: small industries withcapitalization of below P5 million form the bulk of Iloilo Citys economy. Theycharged that the ordinance was intended to benefit the newly opened SM City.As Labistes paper, the Visayas Examiner, dug deeper into the ordinance, ituncovered other things that were not quite right. One, it found that SM City hadlobbied hard for the measure and were, in fact, employing several relatives of someSanggunian members. Two Sanggunian members later admitted as much: one had asister and brother while another had a daughter working for SM City.The Visayas Examiner also reported that the ordinance was passed without the benefitof a public hearing. The council instead held one committee hearing. In addition, the

paper analyzed the impact of the tax holiday the city stood to lose P50 millionevery year for the next three yearsand explained the projected loss in terms of basicservices that would not be delivered to residents. In the end, the vice mayor andmayor did not sign the flawed ordinance.The tax holiday case in Iloilo City brought out SMs attempts to get similarconcessions in Bacoor, Cavite, Cagayan de Oro, and Pampanga. SM also ran into stiffopposition from businessmen in San Fernando and Mexico towns in Pampanga,where it asked for a 10-year tax holiday after deciding to build a mall on a 32-hectare

lot in the province.About 8,000 entrepreneurs petitioned the provincial government to junk theinvestment incentive codes of San Fernando and Mexico. The San Fernandoordinance gave businesses with more than P100 million in capital a four-year taxholiday on gross sales taxes and real property taxes, while Mexicos investment codeexempted big business from all taxes, except for regulatory fees, within the next sevenyears.The businessmen said the investment codes were pro-SM and pro-big business, anddiscriminated against small local businesses. While tax holidays were being obtainedfor and offered to SM City and big businesses, they said in a statement, local

businesses were slapped with a 600-percent increase on real property taxes and other

fees. The businessmen also said the implementing rules of the Local GovernmentCode exclude malls from the business enterprises entitled to tax exemptions.


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Consumers and entrepreneurs further complained that they were denied participationin the final deliberations on the San Fernando investment code. They said the codewas approved during a closed-door session held in the home of a municipal councilor.LGU, Inc.As a corporate entity, local governments can own and manage public enterprises. By

far, the most common types of enterprises operated by local governments are marketsand slaughterhouses, which are more profitable compared to other public utilities.Local governments can own and manage public buildings for lease to private parties,waterworks systems, vocational-technical schools, ferries and wharves, barangaymultipurpose halls, multipurpose pavements, grain or copra dryers, patios and other

post-harvest facilities, parking areas. The Department of Finance also allows localgovernments to operate electric power plants, irrigation systems, telephone systems,toll roads and bridges, commercial buildings, cold storage plants, cattle and hogmarkets, coliseums and sports complexes, radio stations, food terminals, fishery andfishing rights, beach houses, municipal hospitals.The questions suggested by the Handbook on Local Fiscal Administration to local

officials in deciding public enterprises to pursue are also worth raising by journalists.Is there a need for the project? Will it improve local conditions? Will it serve amajority of the community? Were feasibility studies conducted; especially on-sitedevelopment and financial viability? Did the LGU get approval from the Sanggunian?Journalists could also scrutinize the individuals or companies that local officials hireto help them operate the facilities. Friends, relatives and political supporters, perhaps?Are there talks of payoffs or conflict of interest in the awarding of rights ormanagement contracts? How well or badly are the enterprises run?Journalists can tell if an enterprise is profitable or losing by examining officialfinancial reports that appear as special accounts in the General Fund. Localgovernments keep separate accounts for each economic enterprise. Look at theincome generated from and the costs or expenditures in operating the enterprise. Butthere are hidden costs that are not reflected in the financial reports. Marketmanagement costs, for example, can be charged to office of the mayor or governor, orcollection costs to treasurers office. Remember, too, that if an enterprise turns in a

profit, the money can be used for improvement and repairs, and pay advances orloans. Any excess goes automatically to the General Fund.Journalists can mine a lot of stories just by checking out public markets. In one city,for example, a public market was gutted by fire and was cleared, rebuilt andmaintained by a company owned by close friends and associates of high-ranking localofficials. Some public markets are being privatized, causing vendors to complain

about the exorbitant goodwill money or leases private operators ask for. Allegationsof favoritism and irregularities have been raised against market committees inawarding market stalls. Dummies are sometimes used to obtain more stalls.In a city in the Visayas, the public market has been turned over to a market vendorscooperative. Unfortunately, the cooperative has proved ill-equipped to operate it. Inanother city, also in the Visayas, the vendors cooperative has turned into a cartel.Again, the Sanggunians role in the operations of public markets is too important for

journalists to overlook. The council is empowered to pass an ordinance setting theguidelines for the adjudication and regulation of market stalls. The awarding of stallsowned and operated by a local government may be provided for in an ordinance.Local governments, by ordinance, can impose goodwill fees on market stallholders,

after a public hearing. The Sanggunian may also create a market committee, whichshall the award or adjudicate vacant stalls.


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Loans by the Local GovernmentSince 1991, though, local governments have also been exploring nontraditional waysto raise money for their operations. They can issue bonds that guarantee creditors

payment of their principal investments and interests when the bonds mature. They cantap the private sector to finance, build, operate and maintain infrastructure projects.

And they can borrow from government financial institutions, private banks, otherlocal governments, and foreign sources.The Code lists infrastructure and socio-economic development projects, equipment,renovation of city and town halls, and purchase of lots as eligible for loans. Banksnormally lend to all local governments except the barangays. Journalists can tell that aloan transaction with a bank passed the proper procedures if: The project to be covered by a loan appears in the local development plan andannual investment plan. The mayor or governor secures authority from the Sanggunian to apply for a loan.The council must pass an ordinance identifying the purpose, source, amount, termsand conditions of the borrowing and the commitments of the local government, and

authorizing the mayor or governor to negotiate for and in behalf of the localgovernment and sign the legal documents. The debt service ceiling does not exceed 20 percent of the local governmentsannual regular budget.Often, banks set interest rates that are based on prime rate, the prevailing market rateor the 91-day treasury rate plus two percent. Local governments are allowed to put upthe following as security or collateral: its income, including the IRA, or net profitfrom the project being financed by the loan; chattel mortgage or equipment financed

by the loan; real estate mortgage or patrimonial property of the local government; andits bank deposits.Journalists may find other documents that accompany a local governments loanapplication helpful. These include the LGUs charter and profile, list of electiveofficials, certifications of available equity, COA-audited financial statements,summary of statutory and contractual obligations, actual and projected IRA, and

project specifics like feasibility studies and projected cash flow; quotations fromsuppliers, or survey of lease rates in neighboring areas for commercial building. Somelocal governments also submit Torrens titles, building plans and photographs asevidence of their security or collateral.The Code of Conduct and Ethical Standards for Public Officials and Employees orRepublic Act 6713 classifies loans obtained by a government entity as public records.But as Makati Councilor Joseph has found out, the guarantee is good only on paper, at

least in his city. When he tried to get hold of documents covering a P2.4 billion loanfor the construction of the city hall and a subsequent P1.5 billion loan, the council, ofwhich he is a member, was of no help. Neither would the bank give him a copy of thecontract, saying he was not listed as one of the contracting parties. Its ridiculous.The council approved the loan, but a member of the council could not get a copy ofthe loan, he says. Joseph finally got a copy of the loan through a friends help.Local governments can also borrow from other LGUs that have surplus funds. Amongthe questions journalists should ask are: Did the borrowing LGU enact a resolution or ordinance applying for a loan? Theordinance must define the name of the lending LGU and purpose of the loan, andempower the governor or mayor to negotiate and enter into the contract for the local

government. Did the treasurer of lending LGU certify that his town, city or province has


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surpluses that can be lent? Did the auditor attest to the certification? Did the Sanggunian meet to decide the amount to be loaned within the certifiedamount by the treasurer? Did the Sanggunian draw the terms and conditions? Did the ordinance define the amount, purpose, equity of the borrower, interest rates,grace periods, repayment schemes and security?

Was the loan contract signed by both the borrower and lender, then ratified by theirsanggunians? The contract is not valid if it has not been ratified.Besides the chief executive and Sanggunian, the auditors, budget officers andtreasurers of both LGUs should have copies of the documents listed above.With help from the national government, local governments have access to foreignloans and grants through the Municipal Development Fund or MDF. The special fundmakes available to LGUs various foreign loans, assistance or grants resulting fromagreements entered into by the national government with foreign governments andinternational lending institutions. It is managed by a policy governing boardcomposed of representatives from DBM, DILG, Department of Finance, Departmentof Public Works and Highways, and the National Economic Development Authority.

The MDF administrator is based at the Bureau of Local Government Finance of thefinance department.LGUs can also apply for Official Development Assistance or foreign aid obtainedfrom government agencies through diplomatic channels and officials representations.ODA takes the form of soft or confessional loans or grants. In this case, the localgovernment consults the national government and prepares a project proposal usingthe NEDA form. The local development council evaluates the project to ensure it isconsistent with the development and investment plans, after which the Sanggunianendorses it. The project proposal finds its way to the DILG, which, in turn, refers it tothe concerned national government agency for review. The proposal is returned to thelocal government then endorsed by the Sanggunian to the funding institution. Whenthe LGU submits the proposal to the funding institution, it furnishes copies of the

proposal to the local, regional and national offices of the DILG and NEDA.Unfortunately, when local governments borrow money, they are likely to get a bad

press. I think its a realistic goal to get people away from the debt is badframework. But the various forms of debt and credit finances are sort of very difficultto explain or bring down to the level of the ordinary person, says Rood. He alsonotes that journalists tend to encourage the notion that it is irregular for borrowers to

put up their IRA as security for loans. Theres nothing crooked about it. Banks holdtheir (LGUs) IRA because its guaranteed and the bank knows itll get paid.Bonds to Boost Revenues

Local governments also become borrowers whenever they issue bonds. Parties whopurchase the bonds become investors; they can be individuals, corporations orfinancial institutions.Towns and cities like Victorias, Claveria and Legazpi have floated bonds to boostlocal revenues. The Local Government Code is strict about the bonds that LGUs areallowed to issue. They should be revenue bonds, and not general obligation bondssuch as those intended to raise the salaries of employees or improve city halls. Issuing

bonds follows this process: The project to be supported by the bonds is identified and evaluated. The Sanggunian approves the project and authorizes the issuance of the bonds. A financial adviser is hired to help design the financial plan. An underwriting team

or middleman (banks, investment houses or brokers) is selected. Bond terms andconditions are negotiated. Documents and agreements are drawn up.


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The Sanggunian approves the final bond terms and includes them in the budget. Guarantees must be obtained from the Housing Insurance and GuaranteeCorporation for housing projects. Approval of the Department of Agrarian Reformmust be secured to convert land from agriculture to housing/commercial property. Underwriting documents are prepared and a prospectus is offered.

The LGU gets a favorable opinion from the Bangkok Sentral on the issuance of thebonds. A city or town gets the approval of the Sangguniang Panlalawigan. The LGU sells and bonds and pays investors when they mature.Build, Operate and Transfer SchemesIn recent years, a number of local governments have also been successful in gettingthe private sector to participate in financing, building, operating and maintainingroads, bridges, public markets and infrastructure projects under the Build-Operate-Transfer (BOT) scheme. (See Box)But LGUs still have a long way to go in getting the public to accept the privatesectors role in development and infrastructure projects. Notes Rood: If its a road,

people believe it must be government, and thats part of the trouble with BOT andprivatization. The average Filipino, like the average person in the world, doesntmuch like profit in the abstract. They dont mind if the company theyre working formakes money, but they dont like (some) other company (to be) making money inelectricity or roads. Theyre suspicious of the notion that the only way to get this roadis to allow somebody to build it and make a profit. Theyre more accustomed to thegovernment providing it. For journalists, the worries should start when localgovernments and contractors depart from normal procedures. Here are some questions

journalists can ask when reporting on BOT projects: Is project justified? Does it fill a need? Does it improve conditions in public health,safety and welfare? Is it useful to the large majority? Is it creating jobs? Does the project consider site and right-of-way acquisition and relocation issues,including availability of appropriately located LGU-owned land? What are the effects of local government master plans? Does the project have support of the community? What are environmental issues and potential cost implications? What is the possible social impact? Is it viable? Technically? Financially? Economically?Types of Build-Operate-and-Transfer Schemes(Put in box all with buttons)Local governments can consider using any of the following BOT variants:

Build-and-Transfer (BT): The private sector finances and constructs aninfrastructure or development facility. After its completion, the private sector turns itover to the LGU, which pays the contractor the total investment on the project. Build-Lease-and-Transfer (BLT): The private sector finances and builds the facility.When completed, the facility is leased by the local government for a fixed period afterwhich ownership is transferred to the LGU. Build-Operate-and-Transfer (BOT): The private sector finances, builds and operatesthe facility over a fixed term. During the period, the private sector charges facilityusers appropriate tolls, fees, rentals and charges not exceeding those proposed in its

bid or as negotiated and incorporated in the contract to enable the private firm torecoup its investment, operating and maintenance expenses. The private sector

transfers the facility to the LGU at the end of the fixed term, which shall not exceed50 years.


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Build-Own-Operate (BOO): The project proponent finances, contracts, owns,operates and maintains the facility, and collects tolls, fees, rentals or other chargesfrom users. Build-Transfer-and Operate (BTO): The contractor builds the facility on a turn-key

basis, assuming cost overruns, delays and specified performance risks. Once the

facility is commissioned satisfactorily, the title is transferred to the LGU. But theprivate entity operates the facility on behalf of the implementing agency under anagreement. Contract-Add-and-Operate (CAO): The project proponent adds to an existingfacility that it is renting from the local government and operates the expanded projectover an agreed franchise period. There may or may not be a transfer arrangement onthe added facility. Develop-Operate-and-Transfer (DOT): The contractor develops adjoining propertyand enjoy benefits of investment such as higher property or rent values. Rehabilitate-Operate-Transfer (ROT): A facility is turned over to the private sectorto refurbish, operate and maintain for a franchise period, at the expiry of which the

facility is turned over to the government. Rehabilitate-Own-and Operate (ROO): Similar to the ROT, except no timelimitation is imposed on ownership by the franchise holder. Did the Sanggunian authorize the mayor or governor to negotiate for the project? How is the project proponent selected? Through public bidding? Through anunsolicited proposal? If the project is the result of an unsolicited proposal, watch out.Chances are the proposal did not go through reviews made during the projectformulation phase. Is there a notice to proceed to the successful bidder? Is the notice issued within 15days of contract approval? Is the project built according to specifications? Is it delivering the intended volume or level of service? Do the target beneficiaries make corresponding payments?Where the Money GoesThe funds collected through all these efforts are bound to be spent on something ormore accurately perhaps, many things. The budget is supposed to give at least ageneral idea where the money will go.The budget often lumps the money for various projects under broad categories, say,different road and bridge projects under Capital Outlay. Local governments usuallyreport expenditures by fund (General Fund, Special Education Fund, Trust Fund),allotment class (Personal Services, Maintenance and other Operating Expenditures,

and Capital Outlay), and by function (General Public Services, Economic Services,Health Services, Education, Culture, Sports and Manpower Development, OtherPurposes, Housing and Community Development, and Social Welfare Services).Beyond that, no specifics are given. This is why it is important for journalists to talkto the heads of the offices and agencies to determine what they are spending themoney on.Local governments are given from January 1 to December 31 to execute the budget.But because of their heavy dependence on the IRA as their source of revenues,activities often pick up after the DBM has issued to the cities, town and provincestheir quarterly advice of allotment (AA) for the IRA and, more importantly, themonthly notice of cash allotment (NCA). The latter advises mayors, governors and

barangay leaders that the money representing their share in the IRA has beentransferred to the LGUs bank account.


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To get money released for specific items means going through a bureaucratic maze. Itcan happen only after the local budget officer certifies the existence of theappropriations, the accountant obligates the money, the treasurer certifies toavailability of funds, and the mayor or governor approves the release.There are also a lot of legal dos and donts. For instance, while a local government

can spend on school children and support livelihood projects of NGOs, it is prohibitedfrom spending for religious or private purposes. The law also says local governmentscannot juggle funds, spend more than uncollected estimated revenues, make new

positions and salary increases retroactive, incur overdrafts at the end of the year, andpay contractors in advance for undelivered goods or services. Local governments arenot supposed to use trust funds for purposes other than for which the trust wascreated, or spend for reception and entertainment except those allowed by law orauthorized by the President, or for the reception of visiting foreign dignitaries ormembers of foreign missions.The Local Procurement ProcessOne thing about the government procurement process is that nearly every step is

accompanied by a piece of paper. For a journalist looking at local government deals,any process that is not performed or any document that is not filled out or filled outimproperly should be a red flag.The rules on procurement are stringent. They are spelled out in the Local GovernmentCode and COA circular No. 92-386, or the Rules and Regulations on Supply andProperty Management in the Local Governments.A local government, for example, cannot buy supplies or real property unless this isincluded in the approved annual procurement program or is an emergency purchase.The total estimated cost of the program itself cannot exceed the total appropriationsauthorized for the acquisition of supplies or property for the year, althoughsupplementary and amendatory programs are allowed.The program, prepared by the local chief executive (the barangay captain, mayor orgovernor), is based on the annual procurement plans handed in by the heads ofdepartments. The plan is an itemized list showing the kind, estimated quantity,estimated cost, description of supplies or property together with the balance on handthe department requires for the year.COA requires separate plans and programs for supplies or property; non-expendablesupplies or articles that are not consumed in use such as weapons, vehicles, machines,tools and instruments; nonpersonal services, which include repairing, cleaning,redecorating or rental of personal property and furnishing of necessary repair parts orother supplies as part of the services performed; and materials for infrastructure

projects.The general services officer in the province and city, or the treasurer in themunicipality and barangay, buys on the local governments behalf. But no order can

be placed without a written requisition of the department head, who certifies thesupplys necessity for official use. Each requisition comes with a request forobligation and allotment.Before the local chief executive approves the requisition, there must first be a stringof certifications. The department head certifies the validity, propriety and legality ofthe funding. The budget officer certifies that the appropriations exist. The accountantcertifies that the expenditure has been obligated. The treasurer certifies the funds thathave been obligated are available,

An advice of allotment issued by the budget officer is the green light for thedepartment head to fill out the requisition and issue voucher for supplies that are


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carried in stock or the purchase request for those not carried in stock. Copies of theforms are furnished the general services officer, treasurer and the requisitioningdepartment. At this point, reporters may want to determine if requisitions are split toevade the required approval of higher authorities or circumvent control measures.The Code specifies public bidding as the primary mode of procurement. It also

mandates the creation of a committee on bids and awards, which will decide thewinning bids and questions of awards on procurement and disposal of supplies or

property. This committee consists of the local chief executive as the chair, and thetreasurer, accountant, budget officer, general services officer, head of office andoccasionally a sanggunian as members. In the barangay, the Sangguniang Barangaymakes up the committee.Usually, the general services officer or the treasurer acts as secretariat to thecommittee and keeps records of the minutes of meetings. The same official puts outthe call for bids. The call or invitation for bids must be posted in at least three publiclyaccessible and conspicuous places such as the barangay hall or public market atleast 10 days before the opening of bids. This invitation must contain the complete

description and technical specifications of supplies or property, terms and conditionsof participants and award, and the terms of delivery and payment. For infrastructure

projects, the invitation must have the program of work. Local governments may alsopublish the notice of bidding in a newspaper of general circulation.The general services officer or treasurer is required to maintain a list of bidders in thelocality indexed and cross-indexed by supplies categories. Bidders fill out bid formsin which they declare their business interests, submit quotations, and indicate the

brand name and country of origin of the manufacturer of the supplies.The COA sets the bidders bond at five percent of the total amount of the tender butlimits it to P20,000 at most per proposal. A winning bidder who refuses to accept theaward without justifiable reason forfeits the bond and will be barred from

participating in future biddings. Tenders are good for 60 days. Bids are submitted insealed envelopes. Bidders may be required to submit a sample as well. All submitted

bids are opened at the time, date and place set in the call forbids, in the presence ofthe provincial, city or municipal auditor or his representative who needs to initial andsecure copies of the bids. The proceedings are open to the public. The bids are thenabstracted and certified as to their correctness and authenticity by the committee onawards and the auditor. Defective bids may be considered to determine whether itwould be advisable to hold a rebidding or waive the defects. Whenever the price in adefective bid is lower by at least 10 percent, the bidder who offered the nondefective

bid will be asked reduce his price to that of the defective bid. If he consents, the

award goes to him at the reduced price.The lowest complying and responsible bid that meets all the terms and conditions ofthe contract is declared winner by the committee on bids and awards. COA requiresthat the decision be recorded and posted at a prominent place in the provincial capitalor the city or municipal or barangay hall.Winners and losers alike should be notified of the acceptance of their bids. The bondsof the unsuccessful bidders are then released; the losers should acknowledge thereturn of the bond. The winners bond, in turn, gets a receipt and may be released onlywhen the bidder enters into a contract and files a performance bond.The winning bidder is then issued a purchase order or contract, which must have thefollowing information: the office to which the account will be charged and the

requisition number; the name and address of the supplier or contractor; the office towhich the delivery will be made; complete descriptions and specifications of the


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supplies or property, including the nature and quality of the items; a penalty clause forlate or nondelivery; the quantity and unit price; the period of delivery; the shippingterms and conditions and other conditions of delivery; the date of effectivity andtermination of the contract; and the conditions regarding importation.Contracts involving more than P10,000 require that the winner put up a performance

bond, equivalent to a tenth of the value of the purchase order or contract.

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