Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City
SEVENTEENTH CONGRESS

Second Regular Session

House Bill No._ 6767

Introduced by Representative Jose Enrique S. Garcia III

EXPLANATORY NOTE

Executive Order (E.0.) No. 249 dated 25 July 1987 classified local government
units (LGUs), namely provinces, cities (except Manila and Quezon City, which are
Special Class Cities), and municipalities into six income classes based on their
average annual income for the last four years immediately preceding the
reclassification.

At present, it serves as basis for the determination of the financial capability of
LGUs to provide in part or in full the funding requirements of developmental
projects and other priority needs in their locality. Moreover, it is used to determine
the maximum amount expendable for salaries and wages, the salary scales and rates
of allowances, per diems, and other emoluments that local 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. Thus, the LGU income classification is necessary in determining national
allocations or other financial grants.

The Department of Finance (DOF) implements E.O. 249 through DOF
Orders’, the latest of which is DOF Order No. 23-08, promulgated on 29 July 2008.
‘The Secretary of Finance Periodically revises the income thresholds for each level of
LGU as set by E.O. 249. Section 9 of the E.O. provides that the Secretary of Finance
shall have the authority to review the income ranges provided in the E.O. at least
once every four years after its implementation and “recommend such appropriate
changes or revisions to the proper authority in order that the income classification of
local government units may continue to conform with prevailing economic
conditions and the overall financial status of local governments.”

* Section 3, E.0. 249


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 capabilities as well as its relationship with other LGUs within the same
level. The present classification, particularly for provinces and cities, is skewed in
favor of the higher classes. With the phased doubling of the Internal Revenue
Allotment (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. Consequently, more LGUs are classified under higher classes
while very few are classified in the lower classes. In addition, there exists a wide
disparity in the taxing capacities of LGUs.

There should have been another reclassification in 2012, but this was held in
abeyance in view of the issue whether or not the Secretary of Finance has the
authority not only to reclassify all provinces, cities (except Manila and Quezon City),
and municipalities once every four years, but also to readjust or revise the income
ranges or benchmarks as set forth under E.O. 249. Thus, the reclassification of LGUs
is three years overdue and the last year covered in the computation of the average
annual income is 2006, making the revenue figures nine years old.

This bill aims to address these issues by proposing the following reforms: (i)
grant clear authority to the Secretary of Finance to set income targets and undertake
the periodic income reclassification of LGUs; (ii) conduct the reclassification by DOF
every three (3) years to synchronize with the term of local elective officials; and (iii)
the use of the DOF-BLGF’s Statement of Receipts and Expenditures for setting the
income ranges for the purpose of LGU income reclassification.

This will enable the DOF to effectively and systematically determine the LGU
financial capability and fiscal position that are reflective of the economy and the state
of local development. In return, the LGUs can also better position themselves in line
with the National Government's financial and fiscal policies.

In view of the foregoing, the passage of this bill is earnestly sought.
anne

JOSE ENRIQUE S. GARCIA III
(d District, Bataan


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Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

SEVENTEENTH CONGRESS
Second Regular Session

6767

House Bill No.

Introduced by Representative Jose Enrique S. Garcia III

AN ACT
INSTITUITONALIZING 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:

SECTION 1. Short Title. — This Act shall be known as the “The Local
Government Units Income Classification Act of 2017.”

SECTION 2. Declaration of Policy. - It is the policy of the State to
Provide an equitable and rational system 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 (IRA) and other shares provided for in Sections 284,
290, and 291 of Republic Act (R.A.) No. 7160, otherwise known as the
Local Government Code of 1991 (LGC), but exclusive of non-recurring
receipts, such as national aids, grants, financial assistance, loan proceeds,


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sales of assets, miscellaneous income/; receipts, and similar others. For the
purpose of this Act, shares from 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, of a province, city, or municipality for a
particular number of fiscal years preceding the year of general income
reclassification of local government units as provided in Section 4 hereof,
divided by the same number of fiscal years.

(©) Local Government Units (LGUs) refer to the following political
subdivisions of the State — 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 Fifty 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


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(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);

(©) 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

( 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);

(©) 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);


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(e) 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

(f) 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 undertake the regular income
reclassification of all provinces, cities, and municipalities once every three (3) fiscal
years, in order that the income classification of LGUs conforms with the income
ranges provided in this Act.

The Secretary of Finance shall also have the authority to recommend to the
Congress revisions to the income ranges provided in this Act that would better reflect
the prevailing economic conditions and the 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
LGUs.

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 LGUs, as herein provided, shall be classified on the basis of its
average annual regular income during such lesser number of fiscal years.

©) If a province or municipality is created before the year of the general
reclassification of LGUs, 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 R.A. No. 7160, during the fiscal year
immediately preceding its creation.

d) 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 LGUs to undertake
developmental programs and priority projects;

©) The number and compensation of. employees of LGUs; and,

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

SECTION 9. Guidelines in Cases Where a Fourth or Lower Income
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, further, 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, finally, 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.


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SECTION 10. Effectivity of the Income Reclassification. — All income
reclassification of provinces, cities, and municipalities pursuant to this Act shall be
effective on January 1* 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 R.A. No. 7160, and other laws consistent with this Act shall have
suppletory effect.

SECTION 14. Repealing Clause. - Executive Order No. 249 dated 25 July
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. — Any portion or provision of this Act
that may be declared unconstitutional or invalid shall not have the effect of nullifying
other portions or provisions hereof, as long as such remaining portions or provisions
can still subsist and be given effect in their entirety.

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

Approved.