Law on automatic income classification to unleash LGUs’ economic potential — Diokno

The new law institutionalizing the automatic income classification of local government units (LGUs) is seen to boost their revenues and ensure fiscal sustainability, the Department of Finance (DOF) said.

In a statement on Saturday, Finance Secretary Benjamin Diokno said, “This law is a significant milestone that resolves the long-standing issue of outdated LGU income classification for over a decade.”

“It paves the way for a more responsive approach to foster local autonomy and empower LGUs to unleash their full economic potential,” Diokno said.

Signed on Thursday, Republic Act 11964, or the Automatic Income Classification of Local Government Units Act, seeks to provide a more responsive approach to the promotion of local autonomy and enable LGUs to realize their full economic potential.

Under RA 11964, municipalities shall be classified into five classes according to their income ranges as well as the average annual regular income for the three fiscal years preceding a general income reclassification.

The LGUs will be classified as First Class, or municipalities earning an annual average income of P200,000,000; Second Class, municipalities earning an average annual income of P160,000,000, or more but less than P200,000,000; Third Class, those earning P130,000,000 or more, but less than P160,000,000; Fourth Class, those with an annual average regular income of P90,000,000 or more, but less than P130,000,000; and Fifth Class, those with an average annual income of less than P90,000,000.

Diokno said the law updates the income classification of LGUs according to their current financial capabilities. 

The measure also empowers the Department of Finance to efficiently and systematically determine LGUs’ financial capabilities and fiscal positions in line with the economy and local development.

The Secretary of the Department of Finance, in consultation with the National Economic and Development Authority (NEDA) and the concerned LGUs league, shall have the authority to adjust the income ranges based on the actual growth rate of the annual regular income from the last income reclassification and undertake regular income reclassification once every three years so that LGU income reclassification conforms with the prevailing economic conditions.

The first general income reclassification shall be made within six months after the effectivity of the law and every three years thereafter.

The law states that the first income reclassification of provinces, cities, and municipalities will take effect on January 1st of the immediately succeeding year following the issuance of the table of income classification by the DOF chief.

The LGU income classification will serve as the basis for the identification of administrative and statutory aids, financial grants, and other forms of assistance to LGUs; the determination of LGU capability to undertake development programs and projects; the total annual supplemental appropriation for personal services of an LGU; and the compensation adjustment for LGU personnel, pursuant to Republic Act 11466, or the Salary Standardization Law of 2019.

The DOF was tasked with crafting the law’s implementing rules and regulations (IRR) within three months of its effectivity, in coordination with the Department of Budget and Management (DBM) and in consultation with LGU Leagues.

For its part, the Bureau of Local Government Finance (BLGF) said that RA 11964 paves the way for fiscal decentralization for LGUs, “enabling the bureau to enhance its oversight functions for provinces, cities, and municipalities by promoting data-driven and performance-informed policy and decision-making at both national and local levels.”

The BLGF exercises administrative and technical supervision over the treasury and assessment operations of LGUs, assisting in the formulation and implementation of policies related to LGU revenue administration and fund management.

In its latest report, the BLGF said that LGUs saw a significant improvement in their fiscal performance in 2022. 

The total current operating income of LGUs, comprising both local and external sources, rose from P871.30 billion in 2021 to P1.10 trillion in 2022, representing a growth of P230.78 billion or 26%. 

The increase was mostly attributed to the National Tax Allotment (NTA) due to the higher allocation from the national government.

LGUs’ operating income from local sources, such as the collection of local taxes and fees, also increased from P256.21 billion in 2021 to P278.64 billion in 2022, representing a growth of P22.43 billion or 9%. —VBL, GMA Integrated News