Republic of the Philippines
HOUSE OF REPRESENTATIVES.
Quezon City

SIXTEENTH CONGRESS
Second Regular Session

HOUSE BILL NO. 5656

Introduced by: HON. FRANCIS HERALD AGUINALDO ABAYA

EXPLANATORY NOTE

From the time local govemments 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 goverment officials and personnel and the determination of the number of
Sanggunian or local council members.

The most recent legislation providing for the income classification of local
government units (LGUs) is Executive Order No. 249 issued on July 25, 1987 by then
President Corazon Aquino exercising legislative powers after the EDSA revolution.
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 (issued on July 29, 2008).

‘Through time, however, the income reclassifications of local govemments 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.

In order to address these issues, it is imperative to give the Secretary of Finance
a clear and unambiguous authority and mandate, and the flexibility to undertake regular
income reclassification of provinces, cities and municipalities, so that LGUs can be
better aligned with national government financial and fiscal policies.

In view of the foregoing, immediate approval of this bill is earnestly sought

. Led
FRANCIS GERALD AGUINALDOABAYA

Representative, First District, Cavite

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Republic of the Philippines
HOUSE OF REPRESENTATIVES
Constitution Hills, Quezon City

SIXTEENTH CONGRESS
Second Regular Session

HOUSE BILL NO.

Introduced by: HON. FRANCIS GERALD AGUINALDO ABAYA

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 Congress of the
Philippines in session assembled:

SEC. 1. Short Title. — This Act shall be known as the "THE LOCAL GOVERNMENT
UNITS’ INCOME CLASSIFICATION ACT.”

SEC. 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

SEC. 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 No. 7160, but exclusive of non-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 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.

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(c) Local Government Units refer to the political subdivisions of the State,
namely, province, city or municipality

SEC. 4. Income Classification of Provinces, Cities and Municipalities. — All
provinces, cities and 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

SEC. 5. 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 and the overall financial status of
the local governments.

SEC. 6. 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

c) If a 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 Internal
Revenue Allotment (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

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.

SEC. 7. 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
c) Such other purposes as provided under existing laws and regulations.

SEC. 8. 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


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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

SEC. 9. 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.

SEC. 10. 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

SEC. 11, 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.

SEC. 12. 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.

SEC. 13. 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.

SEC. 14. 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.

SEC. 15. 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.

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