Bureau of Local Government Finance Opinion

January 28, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Honorable Helen C. de Castro Municipal Mayor Municipal Hall Bulan, Sorsogon Madam : This refers to Resolution No. 02, series of 2008, of the League of Municipalities of the Philippines (LMP)-Sorsogon Chapter, signed in your capacity as former LMP Secretary, requesting that all the component 5th Class municipalities of the Province of Sorsogon be re-classified to a higher income class level. In this regard, may we clarify that the Department of Finance (DOF) is mandated under Executive Order (E.O.) No. 249, dated July 25, 1987 and R.A. No. 7160 or the Local Government Code of 1991, to regularly review the income ranges of provinces, cities (except Manila and Quezon City as they are considered special cities) and municipalities, that serve as basis for their income classification to determine if they continue to conform with prevailing economic conditions and the over-all financial status of local governments. For the purpose, E.O. No. 249, defined "annual income" as revenues and receipts realized by provinces, cities and municipalities from local regular sources, including the Internal Revenue Allotment (IRA) and other statutory shares, but excludes non-recurring receipts, viz. : "Section 4. DEFINITION OF TERMS. AS USED IN THIS EXECUTIVE ORDER: "A. THE TERM 'ANNUAL INCOME' SHALL REFER TO REVENUES AND RECEIPTS REALIZED BY PROVINCES, CITIES AND MUNICIPALITIES FROM REGULAR SOURCES OF THE LOCAL GENERAL . . . FUNDS INCLUDING THE INTERNAL REVENUE AND SPECIFIC TAX ALLOTMENTS PROVIDED FOR IN PDs 144 AND 436, BOTH AS AMENDED, BUT EXCLUSIVE OF NON-RECURRING RECEIPTS, SUCH AS OTHER NATIONAL AIDS, GRANTS, FINANCIAL ASSISTANCE, LOAN PROCEEDS, SALES OF FIXED ASSETS, AND SIMILAR OTHERS." EcHaAC Thus, the component 5th Class municipalities of the Province of Sorsogon may be upgraded to a higher income class level depending upon their average annual regular income actually obtained within the four-year period covered by the general income re-classification. This means that the upgrading of the income classification of local government units is determined by their income performance. As stated, only regular income are considered in the re-classification. Regular income includes all locally generated income such as taxes, fees and charges, including the IRA and other statutory shares, but excludes non-recurring receipts such as loan proceeds, share from the sale of fixed assets, and similar others. An increase in IRA receipt coupled with increase in locally generated revenue collections will probably upgrade an LGU. The income classification of a local government unit serves as basis for the following: 1. Determination of the administrative and statutory aids, financial grants, and other forms of assistance to local governments; 2. Establishment of the salary scales and rates of allowances, per diems, and other emoluments that local government officials and personnel may be entitled to; 3. Implementation of personnel policies on promotions, transfers, details or secondments, and related matters at the local government levels; 4. Determination of the number of elective sanggunian members in the local government units; 5. Formulation and execution of local government budgetary policies; and 6. Determination of the financial capability of local government units to undertake developmental programs and priority projects. Likewise, please note the growing use of the income classifications of local government units, to wit: 1. Help banks and other financial institutions evaluate properly the financial mode of local government units; 2. Establish bank branches; 3. Determine health insurance coverage of local government personnel; and 4. Determine health needs of local government units. Meanwhile, the latest income classification of the component municipalities of the Province of Sorsogon which took effect on July 29, 2008, in pursuance of Department of Finance Order No. 23-08 (copy enclosed), providing for the adjusted income benchmarks for the re-classification, covering annual incomes for CYs 2004-2007, had been undertaken through this Bureau's Memorandum Circular No. 01-M(68)-08, dated November 14, 2008, copy also enclosed. TcDHSI We hope that the matter on the upgrading of income classification of municipalities is adequately explained herein. Thank you. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director