NINETEENTH CONGRESS OF THE 
REPUBLIC OF THE PHILIPPINES 
First Regular Session
SENATE
S. No. 2165
Jennie
of t!j? prarj;
23 MAY-9 PI 57
RI:CE1V£D EV:
(In substitution of Senate Bill Nos. 1530, 1913 and 2067)
Prepared by the Committee on Local Government joint with the Committee on 
Finance, with Senators Ejercito, Revilla Jr, Gatchalian, and Villanueva, as authors
thereof
AN ACT
INSTITUTIONALIZING THE AUTOMATIC INCOME CLASSIFICATION OF 
PROVINCES, CITIES AND MUNICIPALITIES, AND FOR OTHER PURPOSES
Be it enacted by the Senate and the House of Representatives of the Phiiippines in 
Congress assembied:
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Section 1. Short Titie. - This Act shall be known as the "Automatic Income
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Classification of Local Government Units Act".
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Sec. 2. Deciaration of Poiicy. - It is the policy of the State to provide a more
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responsive approach to promote local autonomy and enable local government units to
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realize their full economic potential. In line with this, the State recognizes the need to
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determine the financial capability and fiscal position of the local government units.
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Towards this end, the State shall formulate policies and guidelines for an
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equitable and rational system of income classification to effectively distribute national
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resources based on the needs of the communities.
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Sec. 3. Definition of Terms. - As used in this Act:
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a. Annuai Reguiar 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 National Tax
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Allotment (NTA) and other shares In national wealth, but exclusive of non-


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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 Republic 
Act (R. A.) No. 7643, and the gross income tax paid by business and 
enterprises in Special Economic Zones under R. A. No. 7916, otherwise 
known as "The Special Economic Zone Act of 1995" 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 
submitted by the local government units pursuant to the guidelines issued 
by the Department of Finance (DOF);
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 (LGU) refer to the political subdivisions of the State, 
namely province, city, or municipality;
d. LGU Leagues refer to the Union of Local Authorities of the Philippines 
(ULAP), League of Provinces of the Philippines (LPP), League of 
Municipalities of the Philippines (LMP), and the League of Cities of the 
Philippines (LCP); and
e. 
Schedule of Income Classification refers to the updated income 
classification of LGUs periodically issued by the Secretary of Finance 
pursuant to Section 6 of this Act.
Sec. 4. Income Classification of Provinces, Cities, and Municipalities, -
a. Provinces shall be classified into six (6) classes, according to income ranges 
and based on the average annual regular income for three (3) fiscal years 
preceding a general Income reclassification. The classification shall be as
follows:


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1. First Class - The Provinces that have obtained an Average Annual
Regular 
Income of One 
Billion Five Flundred Million 
Pesos
(Pl/500/000/000.00) or more;
2. Second Class - The Provinces that have obtained an Average Annual
Regular 
Income of One 
Billion Two Flundred 
Million 
Pesos
(PI,200,000,000.00) or more, but less than One Billion Five Hundred 
Million Pesos (Pl,500,000,000.00);
3. Third Class - The Provinces that have obtained an Average Annual 
Regular Income of Nine Hundred Million Pesos (P900,000,000.00) or 
more, but less than One Billion Two Hundred Million Pesos 
(1,200,000,000.00);
4. Fourth Class - The Provinces that have obtained an Average Annual 
Regular Income of Six Hundred Million Pesos (P600,000,000.00) or 
more, but less than Nine Hundred Million Pesos (P900,000,000.00);
5. Fifth Class - The Provinces that have obtained an Average Annual 
Regular Income of Three Hundred Million Pesos (P300,000,000.00) 
or more, but less than Six Hundred Million Pesos (P600,000,000.00); 
and
6. Sixth Class - The Provinces that have obtained an Average Annual 
Regular Income of less than Three Hundred Million Pesos 
(P300,000,000.00).
b. Cities shall be classified into six (6) classes, according to income ranges and 
based on the average annual regular income for three (3) fiscal years 
preceding a general income reclassification. The classification shall be as 
follows:
1. First Class -The Cities that have obtained an Average Annual Regular 
Income of One Billion Three Hundred Million Pesos 
(PI,300,000,000.00) or more;
2. Second Class - The Cities that have obtained an Average Annual 
Regular Income of One Billion Pesos (P1,000,000,000.00) or more, 
but less than One Billion Three Hundred Million Pesos 
(PI,300,000,000.00);


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3. Third Class - The Cities that have obtained an Average Annual 
Regular Income of Eight Hundred Million Pesos (P800,000,000.00) or 
more, but less than One Billion Pesos (PI,000,000,000.00);
4. Fourth Class - The Cities that have obtained an Average Annual 
Regular Income of Five Hundred Million Pesos (P500,000,000.00) or 
more, but less than Eight Hundred Million Pesos (P800,000,000.00);
5. Fifth Class - The Cities that have obtained an Average Annual Regular 
Income of Three Hundred Million Pesos (P300,000,000.00) or more, 
but less than Five Hundred Million Pesos (P500,000,000.00); and
6. Sixth Class - The Cities that have obtained an Average Annual 
Regular Income of less than Three Hundred Million Pesos 
(P300,000,000.00).
c. Municipalities shall be classified into six (6) classes, according to Income 
ranges and based on the average annual regular income for three (3) fiscal 
years preceding a general income reclassification. The classification shall be 
as follows:
1. First Class - The Municipalities that have obtained an Average Annual 
Regular Income of Two Hundred Million Pesos (P200,000,000.00) or 
more;
2. Second Class - The Municipalities that have obtained an Average 
Annual Regular Income of One Hundred Sixty Million Pesos 
(P160,000,000.00) or more, but less than Two Hundred Million Pesos 
(P200,000,000.00);
3. Third Class - The Municipalities that have obtained an Average 
Annual Regular Income of One Hundred Thirty Million 
(P130,000,000.00) or more, but less than One Hundred Sixty Million 
Pesos (P160,000,000.00);
4. Fourth Class - The Municipalities that have obtained an Average 
Annual Regular Income of Ninety Million Pesos (P90,000,000.00) or 
more, but less than One Hundred Thirty Million (P130,000,000.00);


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5. Fifth Class - The Municipalities that have obtained an Average Annual
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Regular Income of Sixty Million Pesos (P60,000,000.00) or more but
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less than Ninety Million Pesos (P90,000,000.00); and
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6. Sixth Class - The Municipalities that have obtained an Average Annual
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Regular Income of less than Sixty Million Pesos (P60,000,000.00).
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d. If a province or municipality is created before the regular reclassification of
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LCDs, the Secretary of Finance shall have the authority to classify the
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concerned LGU on the basis of the estimated aggregate net share of income
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from regular sources from its component cities and municipalities in the
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case of a province, or its component barangays in the case of a municipality,
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including the corresponding estimated NTA of the newly created province
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or municipality pursuant to Section 285 of R. A. No. 7160 or the Local
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Government Code of 1991, during the fiscal year immediately preceding its
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creation. This rule shall likewise apply to a municipality that is converted
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into a city, or a city that is created out of existing municipalities and/or
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barangays.
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Sec. 5. Administrative Authority of the Secretary of Finance. -The Secretary of
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Finance, in consultation with LGU Leagues, shall have the authority to review the
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income ranges herein provided and make appropriate changes or revisions, and
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undertake the regular income reclassification once every three (3) years, in order that
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the income classification of local government units may continue to conform with
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prevailing economic conditions and the overall financial status of local governments:
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Provided, That in cases of unmanageable public sector deficit, the Secretary of Finance
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is authorized to recompute and revise the income classification of LGUs to reflect their
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actual financial situation.
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Sec. 6. Period of Automatic Income Reciassification. -
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a. The first general income reclassification shall be made within six (6) months
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after the effectivity of this Act, and every three (3) years thereafter.
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b. The DOF, shall within sixty (60) days from the regular income
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reclassification, issue the appropriate Department Order containing the
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schedule of income classification which shall serve as certification of the
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income classification of LGUs. The schedule of income classification shall be


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automatically updated by the Bureau of Local Government Finance (BLGF) 
of the DOF every three (3) years: Provided however, That the non-issuance 
of said Department Orders in the succeeding regular reclassification within 
the said period shall not suspend the effects of the automatic income 
reclassification.
c. No readjustment of classification shall be made more than once in three (3) 
consecutive calendar years after the first general reclassification provided 
herein.
Sec. 7. Uses of Income Classification. -The income classification of provinces, 
cities, and municipalities shall, among other purposes, serve as basis for the following:
a. Determination of administrative and statutory aids, financial grants, and 
other forms of assistance to local governments;
b. Determination of the financial capability of local government units to 
undertake developmental programs and priority projects;
c. Total annual or supplemental appropriation for personal services of a local 
government unit for one (1) fiscal year as provided in Section 325 (a) of R. 
A. No. 7160;
Compensation Adjustment for LGU Personnel as provided under Section 10 
of R. A. No. 11466 or the Salary Standardization Law of 2019;
Creation of a new local government unit wherein Section 8 of R. A. No. 7160 
provides that the division and merger of existing local government unit shall 
not downgrade the income classification of the original unit;
f. Number of elective members in the Sangguniang Paniaiawigan and the 
Sangguniang Bayan as provided under Section 2 of R. A. No. 6637;
g. Issuance of a free patent title to residential lands as provided under R. A. 
No. 10023;
h. Minimum wage of domestic workers as provided under Section 24 of R. A. 
No. 10361;
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Local government units to insure its properties with the Government Service 
Insurance System (GSIS) in compliance with Section 5 of R. A. No. 656 or 
the Property Insurance Law;
d.
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j. Limitation on the percentage of agricultural land area that can be
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reclassified and the manner of their utilization or disposition as stipulated in
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Section 20 of R. A. No. 7160; and
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k. 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 LGU
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Receives a Third or Higher Income Class Designation as a Result of the First General
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Income Reclassification. - A fourth or lower income class LGU which Is reclassified as
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first, second, or third income class following the first general income reclassification
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provided herein shall be exempted from providing for additional personal services and
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may maintain existing personal services prior to the reclassification, pursuant to civil
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service rules and regulations, until the next general Income reclassification. In case of
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personnel transfers, resignation or deaths, the local government may not cause the
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filling up of vacant position nor provide for its funding until the succeeding general
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income reclassification.
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LGUs exceeding the limitations provided in Section 325 (a) of R. A. No. 7160
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despite maintaining the status quo after it received a first, second, or third Income
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class designation following the first general income reclassification shall not be
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considered In violation of Section 325 of R. A. No. 7160.
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Sec. 9. Effectivity of the Income Reclassification. - The first income
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reclassification of provinces, cities, and municipalities pursuant to this Act and Its uses
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as provided under Section 7 herein shall take effect on January 1st of the immediately
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succeeding year following the issuance of the table of income classification by the
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Secretary of Finance as mandated by this Act.
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Sec. 10. Transitory Provision. - An LGU whose average annual regular income
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fall below the income range based on the first general income reclassification as
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provided in this Act shall retain its current Income class: Provided, however, That if its
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income continues to fall below the income range In the next reclassification, the
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concerned LGU shall be downgraded to its corresponding income class: Provided,
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further, That during the first income reclassification, no official or employee in the
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concerned LGU shall suffer any diminution of salary and benefits that he or she is
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actually receiving at the time of the effectivity of this Act.


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Sec. 11. Implementing Rules and Regulations (IRR). - Implementing Rules and
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Regulations. —The DOF, in coordination with the DBM, and in consultation with LCD
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Leagues, shall promulgate the necessary implementing rules and regulations within
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three (3) months from the effectivity of this Act.
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Sec. 12. Separability Clause. - If any portion or provision of this Act is declared
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unconstitutional, the remainder of this Act or any provisions not affected thereby shall
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remain in force and effect.
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Sec. 13. Repealing Clause. - Any law, presidential decree or issuance, executive
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order, letter of instruction, rule or regulation inconsistent with the provisions of this
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Act is hereby repealed or modified accordingly.
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Sec. 14. Effectivity. - This Act shall take effect fifteen (15) days following its
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complete publication In a newspaper of general circulation.
Approved,