- The IRA distribution formula and tax assignments that lead to vertical and horizontal imbalances in LGUs’ resource bases – absence of equalization, mismatch with expenditure assignments;

- The tax assignments that favor one type of LGUs – cities – while depriving other levels (especially provinces) of adequate tax bases.

The combination of the current IRA distribution formula and the tax assignments exacerbates the vertical imbalance in revenue assignments across levels of LGUs as well as mismatch between devolved service delivery responsibilities and LGUs’ fiscal capacities.

On the expenditure side, the incomplete implementation of the legally mandated devolution, thanks to “loopholes” in the LGC and some national government agencies’ reluctance to fully devolve certain functions, has created confused situations of expenditure assignments and murky accountability. The unclear de facto assignments of expenditure responsibilities and the distorted revenue assignments weaken the LGUs’ incentives to cooperate with each other, and this tendency is accentuated by the hyper fragmentation of the LGU jurisdictions.

A recently completed Bank report on local service delivery in the Philippines provides rare empirical data on the skewed resource allocations among different levels of LGUs and clear mismatch between expenditure assignments and resource bases even after taking the IRA into account. An in-depth review of spending data from several case study LGUs revealed the troubling patterns of expenditure allocation such as one province spending more than 2.5 times as much on health on a per capita basis than another province in the sample, or one city receiving 1.5 times as much in total revenues (including the IRA transfer) than another city in the sample, resulting in the former being able to spend 1.5 times more on roads and 1.7 times more on health, again on a per capita basis, than the latter (World Bank 2011). Relative levels of spending are only proxies of the quality and adequacy of service delivery, and it is conceivable that some LGUs may make use of limited resources more effectively than others. Nonetheless the wide disparities in revenue assignments across LGUs are likely to be correlated with the adequacy of service delivery and these clearly reflect weaknesses in both the tax assignments and the transfer distribution formula, as currently specified in the Local Government Code. The national government has no explicit policy to compensate for this disparity in LGU revenue assignments.

# **What Sorts of Reforms Are Desirable from Technical Points of View?**

An ideal solution to the problems enumerated above would be an overhaul of the LGC, probably through omnibus amendments or even its repeal and replacement with whole new legislation. Key content of the reforms would include, inter alia:

- A revised IRA distribution formula which approximates the principle of “finance follows functions” in the vertical assignment of transfers and includes a stronger element of horizontal equalization – the direction of the change should be to increase the provinces’ share of the IRA, reduce the cities’ and possibly eliminate the barangays’ as the latter could be absorbed into the administrative structure of the cities/municipalities;

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