DOF welcomes Senate approval of LGU automatic income classification bill

The Department of Finance (DOF) welcomed the approval of Senate Bill (SB) No. 2165 or the Automatic Income Classification of Local Government Units (LGUs) Act on third and final reading on August 7, 2023.

“I thank the Senate of the Philippines, through the leadership of Senate President Migz Zubiri and the sponsorship of Deputy Majority Floor Leader JV Ejercito, for swiftly acting on this priority measure. This will improve LGUs’ fiscal performance and allow our frontline government units to recruit skilled professionals for quality public service delivery,” Finance Secretary Benjamin E. Diokno said.

SB No. 2165 aims to classify provinces, cities, and municipalities into six classes according to their income ranges and average annual regular income by providing a comprehensive policy framework and parameters to be implemented by the Secretary of Finance.

Upon consultation with LGU Leagues, the Finance Secretary shall have the authority to update income brackets every three (3) years according to the actual growth rate of the annual regular income from the last income reclassification.

The Finance Secretary shall also consider inflation and gross regional domestic product in evaluating if an LGU has experienced prolonged economic shocks that may warrant retaining its current income classification.

To incentivize performing LGUs, the Finance Secretary may upgrade the income classification of a province, city, or municipality by one class higher, provided that the LGU’s real per capita locally sourced revenue is growing annually for three (3) consecutive years.

Anchoring on equity and fairness, the Senate version also lifted the percentage restrictions on salary under Section 10 (a) of Republic Act (RA) No. 11466 or the Salary Standardization Law of 2019, as long as the Personal Services limitations under the Local Government Code of 1991 are met.

The Bureau of Local Government Finance (BLGF), which supervises the revenue operations of LGUs, was directed to prepare for the task of automatically updating the schedule of LGU income classification every three years.

The BLGF lauded the legislative milestone that will address the long-standing issue of non-updating of LGUs’ income classification for the last 14 years.

“When the LGU Income Classification Bill becomes a law, it will be vital in shaping the fiscal decentralization policy for our local governments. The updated fiscal indicators will equip the BLGF to improve its oversight functions for provinces, cities and municipalities towards data-driven and performance-informed policy and decision making at the national and local levels,” said BLGF Executive Director Niño Raymond B. Alvina.

The LGU Income Classification Bill was finally approved with 22 affirmative votes, two negative votes, and zero abstentions two weeks after the President identified the bill as a priority measure in his second State of the Nation Address (SONA).