Prescribing New Income Brackets for the Reclassification of Provinces, Cities and Municipalities

November 20, 2001 DOF DEPARTMENT ORDER NO. 032-01 ( Declared Repealed by D.O. 29-16) TO : All Regional Directors for Local Government Finance, this Department; Provincial Governors, City Mayors, and Municipal Mayors; Members of Provincial, City and Municipal Sanggunians; Provincial, City and Municipal Treasurer; and Others Concerned SUBJECT : Prescribing New Income Brackets for the Reclassification of Provinces, Cities and Municipalities and Amending, for the purpose, Department Ord er No. 2 4-97, dated March 26, 1997, of this Department Rationale The income classification of provinces, cities and municipalities serves, among other purposes, as a basis for determining the financial capability of a local government unit to provide in full or in part the funding requirements of developmental projects and other priority needs of the locality. Thus, in the preparation of project studies and proposals, the income class of LGUs is used as a factor in the allocation of national or other financial grants. Likewise, the income classification of LGUs is also used to determine the maximum amount expendable for salaries and wages, as well as the salary scales and rates of allowances, per diems, and other emoluments that local government officials and personnel may be entitled to; the number of sanggunian members and the implementation of personnel policies on promotions, transfers, details or secondments and related matters at the local government levels. Upon application, however, of the classification scheme prescribed in Department Order No. 24-97 abovementioned, eighty-three percent (83%) of provinces and cities fall under the first (1st) class category. Clearly, the objectives and purposes of classifying LGUs according to their respective financial status and capabilities are negated and nullified. EAICTS Considering, therefore, the marked increases in the internal revenue allotment shares of LGUs and the corresponding improvements in their own tax collection performance, as reflected in the income statements for calendar years 1996 to 1999 certified to by the Commission on Audit, the income reclassification of all provinces, cities and municipalities shall be based on the revised income brackets provided herein. The proposed income brackets on the average was increased by seventy percent (70%), to net out the impact of IRA increases on LGU income for the past four (4) years, CYs 1996-1999. This scheme in effect would anchor the income reclassification on the LGUs' own-sourced revenue efforts, thus promoting greater local fiscal sustainability. SECTION 1. Definition of Terms . (a) The term "annual income" shall refer to revenues and receipts realized by provinces, cities and municipalities from regular sources of the local General Fund including the internal revenue allotment and other shares provided for in Section 284, 290, and 291 of the Code, but exclusive of nonrecurring receipts, such as other national aids, grants, financial assistance, loan proceeds, sales of assets, and similar others. (b) The term "average annual income" shall refer to the sum of the "annual income" as herein defined actually obtained by a province, city or municipality during the required number of consecutive calendar years immediately preceding the general classification of the local government units, divided by such number of calendar years as may be certified to by the Commission on Audit for purposes of reclassification. TEHIaA SECTION 2. Classification of Provinces, Cities and Municipalities . As provided for under Sections 1 and 2 of Executive Order No. 249 issued on July 25, 1987 by the President, provinces, cities and municipalities, except Manila and Quezon City which shall remain as Special Class cities, shall be divided into six (6) main classes according to the average annual income that they actually realized during the last four (4) calendar years immediately preceding the year of reclassification. Accordingly, on the basis of the financial statements of LGUs for CYs 1996-1999 as certified to by the Commission on Audit: a) The classification of Provinces shall be based on the following income brackets: Class Average Annual Income First P 255M or more Second P170M or more but less than P 255M Third P120M or more but less than P 170M Fourth P70M or more but less than P 120M Fifth P35M or more but less than P 70M Sixth Below P 35M b) The classification of Cities shall be based on the following income brackets: Class Average Annual Income First P205M or more Second P155M or more but less than P 205M Third P100M or more but less than P 155M Fourth P70M or more but less than P 100M Fifth P35M or more but less than P 70M Sixth Below P 35M c) The classification of Municipalities shall be based on the following income brackets: Class Average Annual Income First P35M or more Second P27M or more but less than P 35M Third P21M or more but less than P 27M Fourth P13M or more but less than P 21M Fifth P7M or more but less than P 13M Sixth Below P 7M The Bureau of Local Government Finance is hereby directed to reclassify provinces, cities (except Manila and Quezon City) and municipalities according to the foregoing incomes ranges and, for the purpose, issue appropriate circulars. SECTION 3. Period of General Reclassification of Provinces, Cities and Municipalities. a. Upon the effectivity of the reclassification of provinces, cities and municipalities under the provisions of this Order, and in accordance with Section 3 of Executive Order No. 249 aforementioned, the general reclassification of LGUs shall be once every four (4) consecutive years. b. However, for newly converted/created/merged province, city or municipality, which has been in existence for a period of less than four (4) full calendar years of the general reclassification of LGUs as herein provided, shall be classified tentatively on the basis of its income for a full year immediately preceding its creation or conversion, subject to Section 2 hereof. SECTION 4. Adjustment of Income Classifications. As provided for, no adjustment of the income classification of any province, city or municipality shall be made oftener than once every four (4) consecutive years, except in cases of diminishing revenues, upon the occurrence of which, this Department may order at any time, the downward adjustment of the income classification of the LGUs concerned in accordance with the income ranges herein prescribed. SCEHaD SECTION 5. Repealing Clause. Department Order No. 24-97, dated March 26, 1997, and all other Orders Circulars or issuances of this Department which are inconsistent with, or contrary to, the provisions of this Order are hereby repealed and/or modified accordingly. The Regional Directors of the Bureau of Local Government Finance of this Department and the District Treasurers of Metro Manila are hereby directed to reproduce and distribute copies hereof to the Provincial, City and Municipal Treasurers within their respective jurisdictions. All Provincial, City and Municipal Treasurers, in turn, are hereby instructed to provide the local chief executive and Members of the Sanggunians of their respective stations with sufficient copies of this Order, for their information and guidance. This Order shall take effect immediately. (SGD.) JOSE ISIDRO N. CAMACHO Secretary Memorandum For : HON. JOSE ISIDRO N. CAMACHO Secretary, Department of Finance Thru : Undersecretary JUANITA D. AMATONG Subject : Department Order prescribing new income brackets for the reclassification of Provinces, Cities and Municipalities Date : November 20, 2001 Attached is the Department Order for the reclassification of provinces, cities and municipalities that would be effective immediately, increasing by seventy percent (70%) the existing income brackets under Department Order 24-97, to net out the impact of IRA increases on LGU income for the past four (4) years, CYs 1996-1999. The scheme in effect would anchor the income reclassification on the LGUs' own-sourced revenue efforts, thus, promoting greater local fiscal sustainability. It is informed that EO 249 states in its 1st WHEREAS that the "last reclassification of provinces, cities and municipalities took effect on July 1, 1982 without providing the source for its verification. Hence, the expected next general reclassification shall be on July 1, 1986. cAEDTa However, under Section 3 of EO 249, it stated "Provided, That the 1st classification under this Executive Order shall take effect on July 1, 1987. . . That no adjustment of classification shall be made oftener than once in four calendar years after the first general reclassification provided herein . . ." At the same time, the same section also provided that "the Secretary of Finance shall reclassify all provinces, cities, except Manila and Quezon City . . . , and municipalities on the basis of the average annual income derived during the last four consecutive years immediately preceding such classification. It again follows that the next reclassification shall be on July 1, 1991. Department Order No. 35-93 cites "Under Executive Order No. 249, dated July 25, 1987 of the President, the latest general reclassification of provinces, cities and municipalities took effect on July 1, 1991." Considering that the Local Government Code of 1991 took effect on January 1, 1992, said DO 35-93 quoted and utilized the provision under 2nd paragraph of Sec. 8 of said Code which states: "The income classification of local government units shall be updated within six (6) months from the effectivity of this Code to reflect the changes in their financial position resulting from the increased revenues as provided herein." As a consequence of such updating, income ranges for province, cities and municipalities were issued under said DO 35-93. Paragraph (d) of Section 2 of the same provides: "(d) In order to reconcile, therefore, the provisions of E O 2 49 and the Code . . . and to ensure that the LGUs may be benefited by the considerable increases in their respective shares from internal revenue allotments beginning January 1992, the next general reclassification of LGUs shall be made in CY 1993, to take effect on July 1, 1993, on the basis of the average annual income of LGUs for the four (4) calendar years 1989 to 1992." However DO No. 35-95 dated May 25, 1995 amended DO No. 35-93. The former DO (35-95) states that: "Department Ord er No. 3 5-93 dated June 16, 1993 prescribes the rules and regulations for updating the income classification of local government units (LGUs) pursuant to the provisions of Section 8 of the Local Government Code of 1991. However, the implementation of Department Order 35-93 resulted to the downgrading of many LGUs, more particularly, provinces and cities. In order to rectify the situation, Department Order 35-93 is hereby amended to read as follows: . . ." HaIESC There was a change in the income bracket and the number of years on income realized as basis of the reclassification under said DO 35-95 reflected under Section 1 of which states: "As provided for in Sections 1 and 2 of Executive Or der No. 2 49 dated July 25, 1987, of the President, provinces, cities and municipalities shall be divided into six (6) main classes according to the average annual income that they actually realized during the last three (3) calendar years 1990 to 1992 . . . " (a) The classification of provinces and cities shall be based on the following income ranges: CLASS Under D O 3 5-93 Under D O 3 5-95 First P100 M or more P75 M or more Second P75 M or more but less than P100M P50 M or more but less than P75M Third P50 M or more but less than P75M P30 M or more but less than P50M Fourth P25 M or more but less than P50M P20 M or more but less than P30M Fifth P15 M or more but less than P25M P10 M or more but less than P20M Sixth Below P15 M Below P10 M (b) Municipalities shall be classified on the basis of the following income ranges: CLASS Under D O 3 5-93 Under D O 3 5-95 First P 15 M or more P15 M or more Second P 10M or more but less than P15M P10 M or more but less than P15M Third P 7M or more but less than P10M P7 M or more but less than P10M Fourth P 4M or more but less than P7M P4 M or more but less than P7M Fifth P 2M or more but less than P4M P2 M or more but less than P4M Sixth Below P2M Below P2M Furthermore, under Section 2 of the said DO 35-95 it provides: "Section 2. Period of General Reclassification of Local Government Units . The Bureau of Local Government Finance is hereby directed to reclassify provinces, cities and municipalities using the revised income brackets as prescribed above on the basis of the average income for three calendar years 1990 to 1992 duly certified by the Commission on Audit." Under Section 10 of the said DO 35-95 it states: "The reclassification of provinces, cities and municipalities under this Order shall take effect as of July 1, 1993, provided however that any salary increase arising therefrom shall not be effective earlier than July 1, 1995. The next general LGU classification shall be conducted in CY 1996 and every three (3) years thereafter . " Department Order No. 24-97 dated March 26, 1997 amended the income ranges for the classification of provinces, cities and municipalities under Section 1 thereof. The same section mandates that: "The Bureau of Local Government Finance is hereby directed to reclassify provinces, cities (except Manila and Quezon City) and municipalities according to the foregoing income ranges and, for the purpose, issue appropriate circulars . " HIaAED Under Section 7 of the DO 24-97, it provides: "Upon the effectivity of the reclassification of provinces, cities and municipalities under the provisions of this Order, and in accordance with Section 3 of Executive Or der No. 2 49 aforementioned, the general reclassification of LGUs shall be once every four (4) consecutive calendar years . " Section 8 of DO 24-97 provides: "The general reclassification of provinces, cities and municipalities pursuant to this Order shall be effective as of July 1, 1996." Hence, if the once every four (4) years reclassification will be observed under the latest DO 24-97 and not once every three (3) years as provided under DO 35-95, the next reclassification shall be in CY 2000. Thereafter Memorandum Circular No. 97-1 dated April 30, 1997 was issued by the Bureau dealing on the subject of "Reclassification of All Provinces Effective as of July 1, 1996" and Memorandum Circular No. 97-2 dated April 30, 1997 on the subject of "Reclassification of All Cities Effective as of July 1, 1996" and Memorandum Nos. 3(1 to 75) dealing on the reclassification of the municipalities per province on the different provinces. The latest reclassification of LGUs which is to take effect on July 1, 2000 did not push through for failure of the Department to issue a new set of income ranges that would consider the realized incomes of LGUs from CYs 1996 to 1999. Instead the Bureau of Local Government Finance of the Department issued Memorandum Order No. 01-2001 dated January 16, 2001 wherein pertinent portion of which states: "This Bureau deems it necessary to undertake a study on the different factors or criteria that will determine the actual financial conditions and capacity of LGUs. . . "For this purpose, and pending the final outcome of the study, the income classifications of LGUs under Department Or der No. 2 4-97 dated March 26, 1997 as implemented under the various Memorandum Circulars of this Bureau are hereby maintained until September 30, 2001. Thereafter, a new classifications shall be issued on the basis of the criteria to be adopted as a result of the study that has been conducted." IHCacT Attached is the Distribution Profile of LGUs resulting from the proposed and new income bracket as compared with the old income bracket under Department Order No. 24-97. The proposed "Department Order prescribing new income brackets for the reclassification of Province, Cities and Municipalities" will take effect upon the issuance of the Department Order for the purpose. (SGD.) BENJAMIN A. GERONIMO Executive Director