THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE

1. THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services Presentation for League of City of the Philippines 26 August 2014 Crowne Plaza,

2. Scope of the Local Government Code Review SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

3. Scope of LGC Review The LGC review will focus on fiscal provisions • Expenditure assignment • Revenue assignment & taxing powers • Intergovernmental fiscal transfers • LGU borrowing and credit finance • Creation of LGUs • Inter-LGU alliances/cooperation • Fiscal administration

4. Why is the LGC review focused on fiscal provisions? • They are critical to LGUs’ ability to deliver basic services. • It is important to conduct a review of the provisions using a holistic framework. • Many of specific topics identified are on the priority list of various stakeholders.

5. 1. Expenditure Assignment SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

6. Expenditure Assignment – who does what? • Issues: • Overlapping and at times unclear assignment of functions across various levels of government (NG and different levels of LGUs) • Results in waste of resources • Unfunded mandates • Results in relevant services not being delivered at all or not delivered in sufficient quantities In either case, the welfare of local communities is adversely affected.

7. Expenditure Assignment – who does what? • Direction of reform (1) • Clarifying expenditure responsibilities/functions by distinguishing between fully devolved functions and delegated functions (i.e., functions which are related to the attainment of national objectives but implementation of which at the local level are assigned to LGUs) • Making the distinction has implications on how functions are financed • fully devolved functions best financed through block grants and own-source revenues • delegated functions best financed through conditional transfers

8. Expenditure Assignment – who does what? • Direction of reform (2) • Revisit NG-LG and inter-LGU expenditure sharing in the following sectors: • Health • Agriculture • Environment and natural resources

9. How do LGUs finance devolved functions? • Own-source revenues • Intergovernmental fiscal transfers • LGU borrowing and credit finance

10. 2. Own-Source Revenues and Revenue Assignment SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

11. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Own-source revenues and revenue assignment • Issues (1) • Lack of productive source of local revenues ► high LGU dependence on transfers ► weak revenue autonomy ► perverse incentives and weak accountability • Promotes less than efficient and fiscally responsible spending • Allows LGUs not to impose taxes on their constituents commensurate with the services they deliver, resulting in weak local demand and accountability

12. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Own-source revenues and revenue assignment • Issues (2) • Wide flexibility in taxes and fees that LGUs are allowed to impose ► increased uncertainty on part of local investors as local revenue codes differ significantly from one location to another • May hurt inflow of investments and local economic growth • Some LGUs impose nuisance taxes that increase the cost of doing business and/or cause inefficient allocation of resources without a commensurate increase in revenue take

13. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Own-source revenues and revenue assignment • Direction of reform (1) • Identification of a closed positive list of local taxes, fees, and charges over which LGUs have full autonomy in setting tax rates • Simplification of rate structure of local business taxes • Indexation of tax rates, fees and charges that are fixed in peso terms to inflation • Revisit of situs provision (i.e., derivation basis) with respect to local business tax

14. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Own-source revenues and revenue assignment • Direction of reform (2) • Assign the conduct and approval of the general revision of the schedule of market value of real property to the national government while retaining full autonomy on setting of assessment levels and real property tax rates to LGUs • Provide mechanism for administrative recourse in case of disputes related to LGU taxing powers • Assign more revenue-productive taxes to LGUs • Piggybacking on NG taxes like personal income tax • Green taxes

15. 3. Intergovernmental Fiscal Transfers SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

16. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Intergovernmental Fiscal Transfers • Issues (1) • Intergovernmental transfers mainly take the form of the IRA • Does IRA provide sufficient resources needed for LGUs to deliver fully devolved services? (vertical balance issue) • Does the IRA assist fiscal equalization so that it provides more resources to LGUs with greater needs and less to LGUs with greater tax capacity? • Does IRA have disincentive effect on local revenue generation? • Lack of well-structured set of conditional transfers to leverage national government policy objectives

17. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Intergovernmental Fiscal Transfers • Issues (2) • Reforming the system of intergovernmental transfers … • Should be done in coordination with reform in revenue assignment and expenditure assignment • Should not threaten macroeconomic and fiscal stability • Reforms, even if substantive, can be designed and implemented in a marginal and sequential way so as not to harm any LGU in the process

18. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Intergovernmental Fiscal Transfers • Direction of reform (1) • Revisit vertical balance problem • Introduce transfer mechanism that will take into account disparities in revenue raising capacity of LGUs in line with their expenditure needs (equalization grant)

19. HOW DO LGUs PAY FOR DEVOLVED SERVICES?Intergovernmental Fiscal Transfers • Direction of reform (2) • Establish system of conditional transfers with well-defined cost-sharing provisions and performance indicators (especially with regards to delegated functions) • Review current provisions related to LGU share in national wealth and national taxes for the purpose of facilitating release, promoting more efficient utilization and, possibly, promoting greater equity

20. 4. LGU Borrowing and Credit Finance SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

21. HOW DO LGUs PAY FOR DEVOLVED SERVICES?LGU Borrowing and Credit Finance • Issues (1) • Subnational borrowing important if LGUs are to be enabled to finance lumpy investments on local infrastructure • At present, subnational borrowing is low relative to LGU financing for local infrastructure • Need to streamline procedures governing LGU access to credit market

22. HOW DO LGUs PAY FOR DEVOLVED SERVICES?LGU Borrowing and Credit Finance • Issues (2) • Important to manage fiscal risks arising from LGU borrowing • Review Section 296 of LGC which allows LGUs to borrow for the purpose of stabilizing finances • Improve measurement of LGU borrowing capacity • Preference for gov’t financial institutions as LGU depository bank (Section 311 of LGC) ► discourages entry of private institutions in LGU credit market • Greater competition has potential to reduce LGU borrowing cost

23. HOW DO LGUs PAY FOR DEVOLVED SERVICES?LGU Borrowing and Credit Finance • Direction of reform (1) • Require LGUs to repay loans not used to finance capital investments (i.e., loans incurred to stabilize finances) within the current fiscal year • Alternatively, limit use of LGU borrowing to the financing of capital investment only (Golden Rule)

24. HOW DO LGUs PAY FOR DEVOLVED SERVICES?LGU Borrowing and Credit Finance • Direction of reform (2) • Define the debt service ratio in terms of the net operating surplus before interest payments and capital expenditures instead of regular LGU income to make ratio more aligned with LGUs’ capacity to service their debt • Liberalize Section 311 of LGC to remove preferential treatment given to GFIs as LGU depository bank

25. 5. Inter-LGU Alliances and Cooperation SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

26. Inter-LGU Alliances /Cooperation • Issues • Inter-LGU cooperation deemed necessary and critical when delivery of devolved service involves: • economies of scale (e.g., solid waste management, water supply) • externalities or spillover effects (e.g., coastal resource management, environmental management) • Attempts at inter-LGU to date have been hamstrung by questions related to how they will manage funds they have contributed to the alliance, how they can access financing from both credit and capital markets, etc.

27. Inter-LGU Alliances/Cooperation • Direction of reform • Clarify pre-requisite conditions related to the formation of inter-LGU alliances • Establish regulatory framework for said alliances including legal personality of the same and treatment in terms of fiscal administration, accounting and reporting

28. 6. Creation of LGUs SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

29. Creation of LGUs • Issues • For various reasons, growing trend in favor of… • conversion of municipalities to cities • Breaking up of existing provinces/ municipalities/ barangays into two or more new provinces/ municipalities/ barangays • Such a trend tends to result in inefficiently sized jurisdictions

30. Creation of LGUs • Direction of reform • Amend existing LGC provisions that have unwittingly incentivize such behavior • Strengthen existing provisions that regulate creation of new LGUs

31. 7. Local Fiscal Administration SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

32. Local Fiscal Administration • Issues • Some of the existing provisions of the LGC on fiscal administration deemed antiquated, not consistent with other laws enacted after the LGC, etc. • Direction of reform • Review provisions related to, among others: • Cap on personal services expenditures • Procurement

33. Next Steps • Technical studies • Further consultation

34. LGC Review Team • Bureau of Local Government Development, Department of Interior and Local Government • Technical Review Team • Rosario G. Manasan • Antonio Avila Jr. • Oscar Gomez Jr. • Joy Valerie Lopez Thank you very much!