New law updating the income classification of LGUs to help DOF boost LGU revenues, fiscal sustainability

Republic Act (RA) No. 11964, otherwise known as the Automatic Income Classification of Local Government Units Act, which was signed into law by President Ferdinand R. Marcos, Jr. on October 26, 2023 will help the Department of Finance (DOF) boost LGU revenues, ensuring fiscal sustainability of local governments.

The law updates the income classification of LGUs according to their current financial capabilities. It empowers the DOF to efficiently and systematically determine LGUs’ financial capabilities and fiscal positions in line with the economy and local development.

“This law is a significant milestone that resolves the long-standing issue of outdated LGU income classification for over a decade.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

R.A. 11964 classifies provinces, cities, and municipalities into five classes according to their income ranges, based on the average annual regular income for three fiscal years preceding a general income reclassification.

The Secretary of Finance, in consultation with the National Economic and Development Authority (NEDA) and the concerned LGUs League, will have the authority to adjust the income brackets according to the actual growth rate of the annual regular income from the last income reclassification.

Further, the Secretary of Finance is designated to carry out LGU income reclassification once every three years so that such conforms with the current economic conditions.

The classification will serve as basis for determining LGU capability to undertake development programs and projects, as well as adjustment of compensation for LGU personnel pursuant to the Salary Standardization Law of 2019.

According to the law, the first general income reclassification will be made within six months after its effectivity and every three years thereafter.

The first income reclassification of provinces, cities, and municipalities will take effect on January 1st of the immediate succeeding year following the release of the table of income classification by the Secretary of Finance.

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

The Bureau of Local Government Finance (BLGF) under the DOF highlights that RA No. 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 noted 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 PHP 871.30 billion in 2021 to P1.10 trillion in 2022, representing a growth of PHP 230.78 billion or 26 percent. The increase is mostly attributed to the National Tax Allotment (NTA) due to the higher allocation from the National Government.

Notably, LGUs’ operating income from local sources, such as the collection of local taxes and fees, increased from PHP 256.21 billion in 2021 to PHP 278.64 billion in 2022, representing a growth of PHP 22.43 billion or 9 percent.

BLGF, under the leadership of Secretary Diokno, introduced several DOF issuances to improve local finance and treasury operations.

These include guidelines on the imposition of local business tax, fees and charges to service contractors; and the imposition of local taxes, fees and charges on registered business enterprises (RBEs) availing of tax incentives under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

To instill and promote the highest quality of local treasury services, Secretary Diokno established a Competency Framework for Local Treasurers and Assistant Local Treasurers.

“I commend the BLGF for their exemplary performance in ensuring that local governments are adequately financed and equipped with the necessary policy tools to achieve fiscal sustainability,” Secretary Diokno said.