Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

Eighteenth Congress
First Regular Session

HOUSE BILLNO. ease

Introduced by Representative JAKE VINCENT S, VILLA

EXPLANATORY NOTE

The last income reclassification of provinces, cities andmunicipalities was provided for
under Department of Finance (“DOF”) Department Order No. 23-08 in July 29, 2008.
More than ten (10) years have lapsed since the last income reclassification of provinces,
cities and municipalities.

In terms of legislation, the income classification of provinces, cities and municipalities
was by virtue of Executive Order No.249 which was issued on July 25, 1987. Said
Executive Order was issued by then President Corazon Aquino exercising legislative
powers following the EDSA revolution, Since then, there is no law enacted dealing with
the income reclassification of provinces, cities and municipalities.

From income classification through legislation and income reclassification through
promulgation of DOF Department Orders, the income reclassifications of local
governments have developed in such a way that these provinces, cities and
municipalitiesincomeclassare not truly reflective of their financial capability particularly
in generating locally-sourced revenue

It bears emphasis that despite the developments, the DOFis constrained to halt all request
for reclassification due to legal constraints as advised by the Department of Justice.

In order to address these issues, it is imperative for the DOF through its Secretary, to be
given unambiguous authority and mandate to undertake regular income reclassification of
provinces, cities and municipalities.



Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

Eighteenth Congress
First Regular Session

HOUSE BILL NO. 2058

Introduced by Representative JAKE VINCENT S. VILLA

AN ACT
INSTITUTIONALIZING THE INCOME CLASSIFICATION OF PROVINCES, CITIES
AND MUNICIPALITIES, AND FOR OTHER PURPOSES

Be it enactedby the Senexe and Howe of Representativein Congress assembled:

SECTION 1. Short Title. — This Act shall be known as the “7HE LOCAL
GOVERNMENT UNITS" INCOME CLASSIFICATION ACT OF 2019”.

SECTION 2. Declaration of Policy. — It is the policy of the State to provide an
equitable and rational systems of regular income classification of provinces, cities and
municipalities that will reflect realistically their respective financial positions.

SECTION 3. Definition of Terms. — As used in this Act, the following terms shall mean:

(a) Annual Regular Income refers to revenues, including fees and receipts
actually realized which are reported yearly on cash basis by provinces, cities and
municipalities from regular sources, including the Internal Revenue
Allotment (“TRA”) and other shares provided for in Sections 284, 290, and 291 of
Republic Act No, 7160, but exclusive of now-recurring receipts, such as national
aids, grants, financial assistance, loan proceeds, sales of assets, miscellaneous
income /receipts and similar others. For the purpose of this Act, shares from the
national wealth, excise tax on tobacco, incremental collection from value added tax
(VAT) under R.A. No. 7643, and the gross income tax paid by businesses and
enterprises in Special Economic Zones (ECOZONES) under R.A. No. 7916, as
amended, and such other shares as may be granted by law to the province, city, or
municipality, shall be considered as part of the annual regular income, The annual
regular income shall be computed from the Statement of Receipts and Expenditures
(“SRE”) maintained by the Bureau of Local Government Finance of the Department
of Finance

(b) Average Annual Regular Income refers to the sum of the “annual regular
income”, as herein defined, actually obtained by a province, city or 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.

SECTION 4. Income Classification of Provinces and Cities. — All provinces and cities
shall be classified into six (6) income classes according to income ranges and based on the
average annual regular income for three (3) fiscal years preceding the general income
reclassification, as follows:

(a) First Class provinces and cities — the provinces and cities that have obtained an
average annual income of Eight Hundred Million Pesos (P800,000,000.00) or more:
(b) Second Class provinces and cities — the provinces and cities that have obtained
an average annual income of Six Hundred Fifly Million Pesos (P650,000,000.00) or
more, but less than Eight Hundred Million Pesos (P800,000,000.00);

(c) Third Class provinces and cities — the provinces and cities that have obtained an
average annual income of Five Hundred Million Pesos (P500,000,000.00) or more
but less than Six Hundred Fifty Million Pesos (P650,000,000.00);

(d) Fourth Class provinces and cities — the provinces and cities that have obtained
an average annual income of Three Hundred Fifty Million Pesos (P350,000,000.00)
or more, but less than Five Hundred Million Pesos (P500,000,000.00);

(e) Fifth Class provinces and cities — the provinces and cities that have obtained an
average annual income of Two Hundred Million Pesos (P200,000,000.00) or more,
but less than Three Hundred Fifty Million Pesos (P350,000,000.00); and

(f) Sixth Class provinces and cities — the provinces and cities that have obtained an
average annual income of less than Two Hundred Million Pesos (P200,000,000.00),

SECTION 5. Income Classification of Municipalities. — All municipalities shall be
classified into six (6) income classes according to income ranges and based on the average
annual regular income for three (3) fiscal years preceding the general income
reclassification, as follows:

(a) First Class municipalities — the municipalities that have obtained an average
annual income of Ninety Million Pesos (P90,000,000.00) or more;

(b) Second Class municipalities — the municipalities that have obtained an average
annual income of Eighty Million Pesos (P80,000,000.00) or more, but less than
Ninety Million Pesos (P90,000,000.00);

(c) Third Class municipalities — the municipalities that have obtained an average
annual income of Sixty Million Pesos (P60,000,000.00) or more but less than Eighty
Million Pesos (P80,000,000.00);

(d) Fourth Class municipalities — the municipalities that have obtained an average
annual income of Forty Million Pesos (P40,000,000.00) or more but less than Sixty
Million Pesos (P60,000,000.00);

(c) Fifth Class municipalities — the municipalities that have obtained an average
annual income of Thirty Million Pesos (P30,000,000.00) or more but less than
Forty Million Pesos (P40,000,000.00); and


(1) Sixth Class municipalities — the municipalities that have obtained an average
annual income of less than Thirty Million Pesos (P30,000,000.00)

SECTION 6. Administrative Authority of the Secretary of Finance. — The Secretary of
Finance shall have the authority to set the income ranges and undertake the regular
income reclassification of all provinces, cities and municipalities once every three (3)
fiscal years, in order that the income classification of local government units conforms
with the prevailing economic conditions andthe overall financial status of the local
governments,

SECTION 7. Period of Income Reclassification. — a) The Secretary of Finance shall
undertake the first general income reclassification of all Provinces, cities and
municipalities within six (6) months after the effectivity of this Act, and every three (3)
years thereafter. In cases of diminishing revenues, the Secretary of Finance may order the
re-computation and revision of the income classification of provinces, cities and
municipalities to reflect the actual financial situation of the local government units,

b) However, a province, city or municipality, which has been in existence for a period of
less than three (3) fiscal years immediately preceding the general income reclassification
of local government units, as herein provided, shall be classified on the basis of its average
annual regular income during such lesser number of fiscal years.

©) Ifa province or municipality is created before the year of the general reclassification of
local government units, it shall be classified on the basis of the aggregate net share of
income from regular sources actually realized from its component cities and municipalities
in the case of a province, or its component barangays in the case of a municipality, plus
the corresponding estimated IRA of the newly created province or municipality pursuant
to Section 285 of Republic Act No. 7160, during the fiscal year immediately preceding its
creation.

4d) The rule prescribed under the immediately preceding paragraph shall likewise apply to
a municipality that is converted into a city, or a city that is created out of existing
municipalities and/or barangays

SECTION 8. Uses of Income Classification. - The income classification of provinces,
cities and municipalities shall, among other purposes, serve as basis for

a) The determination of administrative and statutory aids, financial grants, and
other forms of assistance to local governments;

b) The determination of the financial capability of local government units to
undertake developmental programs and priority projects; and

©) Such other purposes as provided under existing laws and regulations.

SECTION 9. Guidelines In Cases Where A Fourth Or Lower Become Class Province,
City Or Municipality Receives A Third Or Higher Income Class Designation As A Result
Of The General Income Reclassification. ~ A Fourth or lower income class province, city
or municipality which gets either a First, Second or Third income class designation from


the general reclassification provided herein shall cease to provide for additional personal
services and maintain its existing personnel complement prior to the reclassification,
pursuant to civil service rules and regulations; Provided, that in case of personnel
transfers, resignations or deaths, the local government shall not cause the filling up of the
vacant position nor provide for its funding until the succeeding general reclassification;
and Provided, further, that in case the local government shall still exceed the limitations
provided in Section 325 of the LGC despite the maintenance of the status quo after it first
received a First, Second or Third income class designation as provided herein, this shall
not be considered in violation of Section 325 of the LGC.

SECTION 10, Effectivity of the Income Reclassification. — All income reclassification
of provinces, cities, and municipalities pursuant to this Act shall be effective on January
Ist of the immediate succeeding year.

SECTION 11. Implementing Rules And Regulations (IRR). — The Secretary of Finance
shall promulgate rules and regulations within three (3) months after the effectivity of this
Act, and may continue to issue guidelines to carry out the provisions of this Act.

SECTION 12. Saving Clause. — All existing income classifications of provinces, cities
and municipalities shall continue to be in force and effect until superseded by the issuance
of a new income classification by the Secretary of Finance pursuant to this Act.

SECTION 13. Suppletory Application of Existing Laws. — The provisions of Republic
Act No. 7160, otherwise known as the Local Government Code of 1991, and other laws
consistent with this Act shall have suppletory effect.

SECTION 14. Repealing Clause. Executive Order No. 249, dated July 25, 1987 is
hereby repealed. All laws, presidential decrees, executive orders, presidential
proclamations, rules and regulations or parts thereof contrary to or inconsistent with this
Act are hereby repealed, superseded or modified accordingly.

SECTION 15. Separability Clause. — If, for any reason, any section or provision of this
Act is held unconstitutional or invalid, the other sections or provisions hereof shall not be
affected thereby

SECTION 16. Effectivity. ~ This Act shall take effect fifteen (15) days after its complete
publication in at least two (2) newspapers of general circulation.

Approved,