Republic of the Philippines
HOUSEOF REPRESENTATWES
Quezon City
EIGHTEENTH CONGRESS
Second Regular Session
HOUSE BILL NO.
INTRODUCED BY HONORABLE CHERYL P. DELOSO.MONTALLA
AIY ACT
INSTITUTIONALIZING THE INCOME CLASSIFICATION OF PROVINCES, CITIES
AIYD MUNICIPALITIES, AND F'OR OTHER PURPOSES
EXPLANATORY NOTE
Income classification of provinces, cities and municipalities in the country serves as the
basis for the determination of financial capability of local governments to provide, in full or in
part, the funding requirements of development projects and other priority needs in their localities.l
In a Resolution of the Regional Development Council (RDC) of the Cordillera
Administrative Region (CAR) in 2018, it stated that "income classification of local governments
can also be used as a factor in the allocation of national and other financial grants and is important
in the fixing of maximum tax ceilings imposed by the local governments; the determination of
administrative and statutory aid, financial grants, and other forms of assistance to local
governments; the establishment of the salary scales and rates of allowances, per diems, and other
emoluments officials and personnel may be entitled; the implementation of personnel policies on
promotions, transfers, details or secondment and related matters at the local government levels;
the formulation and execution of local government policies and the determination of financial
capability of local govemments to undertake developmental programs and priority projects." 2
The advantages of upgrading the income classification of local governments are the
corresponding increase in the Internal Revenue Allotrnent (IRA); increase in salaries of officials
and personnel; sustained implementation of Magna Cartaof Personnel for the 4th to 6th class local
governments and provision of mandatory services. On the other hand, income reclassification will
result in the lowering of the personnel services cap from 55 percent to 45 percent and the
requirement of higher equity when the local governments apply for a loan.3
The rapidly increasing population based on the 2015 census, the selection of programs and
projects based on LGU income classification and the availment of loans by the LGU based on their
capacity to pay back are the prime considerations for the periodic upgrading of the local
government's income classification.
Section 9 of Executive Order No. 249, series of 1987 tasked the Secretary of Finance to
review the income ranges, at least once every four years, provided that the finance department
shall recommend appropriate changes or revisions to the proper authority, such that the income
classification may continue to conform with prevailing economic conditions and the overall
financial stafus of the local governments.a
I https://www.baguioheraldexpressonline.com./law-on-income-classification-of-lgus-sought-2/
2 https://baguio.gov.ph/contenUlaw-income-classifi cation-lgus-sought
3 https://www.baguioheraldexpressonline.com/law-on-income-classification-of-lgus-sought-2/
a https://www.officialgazette.gov.ph/1987/07l25lexecutive-order-no-249-s-19871
April 27, 2021
5:57 pm
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From income classification through legislation and income reclassification through
promulgation of DOF Department Orders, the income reclassifications of local govemments have
developed in such a way that these provinces, cities and municipalities income classes are not truly
reflective oftheir financial capability particularly in generating locally-sourced revenue.s
It bears emphasis that despirc the developments, the DOF is constrained to halt all request
for reclassification due to legal constrains as advised by the Department ofJustice.6
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 rcclassi
provinces, cities and municipalities.T
of
In view ofthe foregoing, the passage ofthis bill is earnestly sought
D[.I.OSO*. MONTALLA
Representativ_e
2trd DistricL Zambales
..,.-..
5 Explanalory Note ofHouse Bill No. 2058, authored by Hon. Jake Vincent S. Villa.
6 tbid.
? Ibid.


Republic of the Philippines
HOUSEOF REPRESENTATIVES
Quezon City
EIGHTEENTH CONGRESS
Second Regular Session
HOUSE BILL NO.
INTRODUCED BY HONORABLE CHERYL P. DELOSO-MONTALLA
AN ACT
INSTITUTIONALIZING THE INCOME CLASSITICATION OF PROYINCES, CITIES
AND MUNICIPALITIES, AND FOR OTHER PURPOSES
Be it enacted by the Senate and House of Representatives of the Philippines in Congress
assembled:
SECTION l. Short Title. - This Act shall be known as the "Local Goverffnent Units'
Income Classification Act of 2021".
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. Definilion 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 Intemal Revenue
Allotment (RA) 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 Jones (ECOZONES)
mder R.A. No. 7916. as amended, and such other shares as may be granted by
law to the province, city, or municipal its, shall be considered as part of the
amr,al lsgular income. The annual regular income shall be computed from the
Statement of Receipts and Expenditures (SRE) mainlained by the Bureau of
Local Govemment Finance of the Department ofFinance.
O) 
Average Annual Regular Income refers to the sum ofthe "annual regular
income", as herein defined, actually obtained by a province, city or
municipality during the required number offiscal years preceding the year of
general income reclassification of local government units, divided by such
number offiscal 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 Classiftcation 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:
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(a)
First Class provinces and cities - the provinces and cities that have obtained an
average annual income ofEight 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 (P650,040,000.00) 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
(i)
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 Closs{icrtion ol Manicipalities. - 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 (P60,000,000.00) or more, but less than
Ninety Million Pesos @90,000,000.00);
(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);
(e) Fifth Class muricipalities - the municipalities that have obtained an average annual
income of Thirty Million Pesos (P30,000,000.00) or more but less than Fort>
Million Pesos (P40.000.000.00): and
(0
Sixth Class municipalities - the municipalities that have obtained all average annual
income of less than Thirty Million Pesos (P30,000,000.00).
SECTION 6. ,4 dministalive Authority oJ the Secretary of Finance. - The Secretary of
Finance shall have the authority to set the income ranges and undertake the regular income
reclassification ofall provinces, cities and municipalities once every three (3) fiscal years, in order
that the income classification of local govemment units conforms with the prevailing economic
conditions and the overall financial status ofthe local governments.


SECTION 7. Period of Income Reclassiftcafion. -
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 oflocal govemment units, as herein provided, shall be classified on
the basis of its average annual regular income during such lesser number offiscal
years.
c)
If a province or municipality is created before the year of the general
reclassification oflocal government units, it shall be classified on the basis of the
aggegate net share of income from regular souces actually realizcd from its
component cities and municipalities in the case of a province, or its component
barangays in the case ofa municipality, plus the conesponding 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.
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 muricipalities and/or barangays.
SECTION 8. Uses of Income Classilication. - 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 gi ants, and other
tonus of assistance to local govemments;
b)
the determination ofthe financial capability oflocal govemment units to undertake
developmental programs and priority projects; and
c) 
such other purposes as provided under existing laws and regulations
SECTION 9. Guidelines In Cases Where A Fourth Or Lower Incomc Class Province,
City Or Municipality Receives A Third Or Higher fncome Closs Designation As A Resuk Of
The General Income Reclassifrcatian - 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, pusuant to civil service
rules and regulations; Provided,that in case ofpersonnel transfers, resignations or deaths, the local
govemment shall not cause the filling up of the vacant position nor provide for its frrnding 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 Local Govemment Code of 1991,
as amended, 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 ofthe Local Govemment Code of 1991, as amended.
SECTION 10. Effectivity of the Income Reclassiftcaliar. - All income reclassification of
provinces, cities, and municipalities pursuant to this Act shall be effective on January l't of the
immediate succeeding year.
SECTION ll. Implementing Rules and Regulations (IRR). - The Secretary of Finance


shall promulgate rules and regulations within three (3) months after the effectivity ofthis Act and
may continue to issue guidelines to carry out the provisions of this Act.
SECTION 12. Savings Clazse. - 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 ofFinance pursuant to this Act.
SECTION 13. Suppletory Application of Existing La$,s - The provisions of Republic
Act No. 7160, otherwise known as the Local Govemment Code of 1991, as amended, 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. A11 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,