SIXTEENTH CONGRESS OF THE 
REPUBLIC OF THE PHILIPPINES 
Second Regular Session 
SENATE 
Senate Bill No. 2664 
Introduced by Senator FERDINAND R. MARCOS, JR. 
'15 
FES 23 P 6 :05 
AN ACT INSTITUTIONALIZING THE INCOME CLASSIFICATION OF PROVINCES, CITIES 
AND MUNICIPALITIES, AND FOR OTHER PURPOSES 
EXPLANATORY NOTE 
From the time local governments had been established in the Philippines, 
they had always been classified, based on income, for certain purposes, among 
which are the determination of their financial capability, the establishment of 
the salary scales of local government officials and personnel and the 
determination of the number of Sanggunian or local council members. 
The income classification of local government units (lGUs) is based on 
Executive Order No. 249 issued on July 25, 1987 by then President Corazon 
Aquino. Subsequent lGU income reclassifications had been carried out through 
the promulgation of Department of Finance (DOF) Orders, the most recent of 
which is DOF Order No. 23-08, which was issued on July 29, 2008. 
Through time, however, the income reclassifications of local governments 
have evolved in such a way that an lGU's income class is not truly reflective of 
its financial capability particularly in generating locally sourced revenues 
because of the heavy reliance on the Internal Revenue Allotment (IRA) in setting 
the income ranges for the different classes. With the phased doubling of the IRA 
under the local Government Code, it has become the biggest component of 
the annual regular income, which is the basis for classifying the income class of 
lGUs. As a result, lGUs at every level have tended to cluster in the higher classes 
while very few are classified in the lower classes. In addition, the wide disparities 
in the taxing capacities of lGUs and given further that this factor has a limited 
effect on the lGUs' current classification, the present system does not truly 
reflect the lGUs' financial capabilities and their relationship to each other within 
the same level. 
It is noteworthy to state that on 21 September 2012, the Department of 
Justice issued a legal opinion that under EO 249, "the Secretary of Finance has 
the authority to reclassify, every four years, all provinces, cities (except Quezon 
City and Manila) and municipalities based on the schedule of their annual 
income during the last four consecutive calendar years, but his authority with 
respect to revising or modifying such schedule of income or "income ranges" 
only extends to recommending such appropriate changes or revisions to the 
proper authority. 
x x x "the proper authority" to modify, revise or amend the 
applicable provisions of law is the Philippine legislature, namely, the two houses 
of Congress". 


In order to address these issues, it is imperative under this proposed law to 
give the Secretary of Finance a clear and unambiguous mandate and authority 
to determine the income brackets and to undertake the regular income 
reclassification of provinces, cities and municipalities, so that LGUs can be better 
aligned with national government financial and fiscal pOlicies. 
For the reasons cited above, the early passage of this bill is earnestly 
requested. 
FERDINAN 
R. MJRCOS, JR. 


SIXTEENTH CONGRESS OF THE 
REPUBLIC OF THE PHILIPPINES 
Second Regular Session 
SENATE 
Senate Bill No. 2664 
Introduced by SENATOR FERDINAND R. MARCOS, JR. 
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AN ACT INSTITUTIONALIZING THE INCOME CLASSIFICATION OF PROVINCES, CITIES AND 
MUNICIPALITIES, AND FOR OTHER PURPOSES 
Be it enacted by the Senate and House of Representatives of the Philippines in 
Congress assembled: 
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SEC. 1. Short Tifle. - This Act shall be known as the "THE LOCAL GOVERNMENT 
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UNITS' INCOME CLASSIFICATION ACT." 
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SEC. 2. 
Declaration of Policy. - It is the policy of the State to provide an 
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equitable and rational system of regular income classification of provinces, cities and 
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municipalities that will reflect realistically their respective financial positions. 
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SEC. 3. Definition ofTerms. - As used in this Act, the following terms shall mean: 
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(a) Annual Regular Income refers to revenues, including fees and receipts 
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actually realized which are reported yearly on cash basis by provinces, cities 
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and municipalities from regular sources, including the Intemal Revenue 
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Allotment (IRA) and other shares provided for in Sections 284, 290, and 291 of 
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Republic Act No. 7160, but exclusive of non-recurring receipts, such as 
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national aids, grants, financial assistance, loan proceeds, sales of assets, 
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miscellaneous income/receipts and similar others. For the purpose of this Act, 
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shares from national wealth, excise tax on tobacco, incremental collection 
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from value added tax (VAT) under R. A. No. 7643, and the gross income tax 
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paid by businesses and enterprises in Special Economic Zones (ECOZONES) 
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under R. A. No. 7916, as amended, and such other shares as may be granted 
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by law to the province, city, or municipality, shall be considered as part of the 
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annual regular income. The annual regular income shall be computed from 
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the Statement of Receipts and Expenditures (SRE) maintained by the Bureau 
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of Local Govemment Finance of the Department of Finance. 
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(b) Average Annual Regular Income refers to the sum of the "annual regular 
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income", as herein defined, actually obtained by a province, city or 


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municipality during the required number of fiscal years preceding the year of 
general income reclassification of local government units. divided by such 
number of fiscal years as provided in Section 4 hereof. 
(c) Local Government Units refer to the political subdivisions of the State. namely. 
province. city or municipality. 
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SEC. 4. Income Classification of Provinces. Cities and Municipalities. -
All 
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provinces. cities and municipalities shall be classified into six (6) income classes 
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according to income ranges and based on the average annual regular income for 
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three (3) fiscal years preceding the general income reclassification. 
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SEC. 5. Administrative Authority of the Secretary of Finance. - The Secretary of 
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Finance shall have the authority to set the income ranges and undertake the regular 
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income reclassification of all provinces. cities and municipalities once every three (3) 
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fiscal years. in order that the income classification of local government units conforms 
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with the prevailing economic conditions and the overall financial status of the local 
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governments. 
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SEC. 6. Period of Income Reclassification. - a) The Secretary of Finance shall 
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undertake the first general income reclassification of all provinces. cities and 
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municipalities within six (6) months after the effectivity of this Act. and every three (3) 
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years thereafter. In cases of diminishing revenues. the Secretary of Finance may order 
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the re-computation and revision of the income classification of provinces. cities and 
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municipalities to reflect the actual financial situation of the loca'! government units. 
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b) However. a province. city or municipality. which has been in existence for a 
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period of less than three (3) fiscal years immediately preceding the general income 
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reclassification of local government units. as herein provided. shall be classified on the 
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basis of its average annual regular income during such lesser number of fiscal years. 
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c) If a province or municipality is created before the year of the general 
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reclassification of local government units. it shall be classified on the basis of the 
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aggregate net share of income from regular sources actually realized from its 
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component cities and municipalities in the case of a province. or its component 
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barangays in the case of a municipality. plus the corresponding estimated Internal 
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Revenue Allotment (IRA) of the newly created province or municipality pursuant to 
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Section 285 of Republic Act No. 7160. during the fiscal year immediately preceding its 
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creation. 
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d) The rule prescribed under the immediately preceding paragraph shall likewise 
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apply to a municipality that is converted into a city. or a city that is created out of 
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existing municipalities and/or barangays. 
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SEC. 7. Uses of Income Classification. - The income classification of provinces, 
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cities and municipalities shall. among other purposes, serve as basis for: 
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a) The determination of administrative and statutory aids, financial grants, 
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and other forms of assistance to local governments; 
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b) The determination of the financial capability of local government units to 
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undertake developmental programs and priority projects; and 
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c) Such other purposes as provided under existing laws and regulations. 
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SEC. 8. Guidelines in Cases Where a Fourth or Lower Income Class Province, City 
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or Municipality Receives a Third or Higher Income Class Designation as a Result of the 
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General Income Reclassification. - A Fourth or lower income class province, city or 
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municipality which gets either a First, Second or Third income class designation from the 
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general reclassification provided herein shall cease to provide for additional personal 
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services and maintain its existing personnel complement prior to the reclassification, 
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pursuant to civil service rules and regulations; Provided, further, that in case of 
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personnel transfers, resignations or deaths, the local government shall not cause the 
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filling up of the vacant position nor provide for its funding until the succeeding general 
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reclassification; and Provided, finally, that in case the local government shall still 
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exceed the limitations provided in Section 325 of the LGC despite the maintenance of 
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the status quo after it first received a First, Second or Third income class designation as 
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provided herein, this shall not be considered in violation of Section 325 of the LGC. 
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SEC. 9. Effectivity of the Income Reclassification. - All income reclassification of 
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provinces, cities, and municipalities pursuant to this Act shall be effective on January lsI 
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of the immediate succeeding year. 
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SEC. 10. Implementing Rules and Regulations (lRR). -
The Secretary of Finance 
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shall promulgate rules and regulations within three (3) months after the effectivity of this 
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Act, and may continue to issue guidelines to carry out the provisions of this Act. 
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SEC. 11. Saving Clause. - All existing income classifications of provinces, cities 
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and municipalities shall continue to be in force and effect until superseded by the 
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issuance of a new income classification by the Secretary of Finance pursuant to this 
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Act. 
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SEC. 12. Suppletory Application of Existing Laws. - The provisions of Republic Act 
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No. 7160, otherwise known as the Local Government Code of 1991. and other laws 
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consistent with this Act shall have suppletory effect. 
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SEC. 13. Repealing Clause. - Executive Order No. 249, dated July 25, 1987 is 
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hereby repealed. All laws, presidential decrees, executive orders, presidential 
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proclamations, rules and regulations or parts thereof contrary to or inconsistent with this 
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Act are hereby repealed, superseded or modified accordingly. 
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SEC. 14. Separability Clause. - Any portion or provision of this Act that may be 
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declared unconstitutional or invalid shall not have the effect of nullifying other portions 
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or provisions hereof, as long as such remaining portions or provisions can still subsist and 
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be given effect in their entirety. 
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SEC. 15. Effectivity. - This Act shall take effect fifteen (15) days after its complete 
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publication in the Official Gazette or in at least two (2) newspapers of general 
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circulation. 
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Approved. 
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