I VOI.RN_.§ J |,1, .._r.

-October1992
..... ISSN0115-9097 ]

FISCALDECENTRALIZATION Editor's Note

ANDTHELOCALGOVERNMENTCODE _temmive and promising. Looking back,

OF1991 to8rowtk
one werehow
x_membem otm_ bycontinin
numerous avenues8
"walls" that only stagnated the economy
rather than united the people. Alas, ff the
by Rosario G. Manasan "k_s _ ant_," =,=ot,_,_,e
ResearchFellow,PIDS ,._vt_=_aR,.a_,-
_m,_th,=_._ily
singing the tune of "Divided We S=nd,

he enactment of the Local Department of SocialWelfare and United WeFall."

Government Code(LGC)
T Autonomy in local affairs, how-
of 1991 is perceived by
many as a milestone towards in-
creased decentralization and 1o-
cal autonomy. The new Code
signals the transfer of the deliv-
.
ery of basic services and certain
regulatory functions from the
national government to the local
government units (LGUs). In
particular, the LGC reassigns to
LGUs some of the powers, func-
tions and responsibilities until
recently discharged by the fol-
lowing national government
agencies: Department of Agri-
culture, Department
Development, Department of ever, may not be easily fox_mming de-
Environment and Natural Re- svi= decentralization-- atleast,it will
not be served in a silver platter.
sources, Department of Public In= tt_ght-provo_,hay
Works and Highways, Depart- eni/tled_lDecentral/zaUonandthe
ment of Tourism, and Depart- l_z Z,o<at.Gov=rmentCoa=,"
eario _.Ro-
Manasan, PIDS Research Fellow,
ment of Education and Sports. ,aar_ howsomeofthe _o_i_ of
theCode,tf_ thefL,t_mz ]_,aao.
]zeal govm-mn_t traits _s). Sheslm_
of
Decentralization of au- h_a_l__o_t_coa_
thority from the national govern- ,ndcomp,
where the r _th=r_l=with=_it_tio_
Code is not affected. Where
ment to the local government is Sen_tio_=_otb_made,.he_e=
meaningless if the local units are epecittcaata.
She_thatth_t_'U.
not financially independent of have constant
that the levelof
increase tax oollection
(or decrease) and
in tax base
the central government. Thus, _t_Uth_ht_to_i_l_at.of_wa_ The
hand-in-hand with the transfer .t_dyisbrokenuptntotwo_ at,-
des, each one focusing on a pa_r
ofexpenditureresponsibilitiesto .p_o_a.=._limpaaoftheCoae
o_th_X_-_.
The research was mmpleted
of Health, To page 2 r dmmghtheassbtance°ftheUnitedSlat_
Agency for International Development
G/SAID) by the author while she was on

y /' /t /t- _ . _ member of the Local Development As-

_ sbtance ProgramMonitoring
leave from Teamop- a
PIDS and simultaneously

r _ Development, Inc.'s contract with USAID-

Manila. The views and findings con-
rained in the study ave those of the author
. and do not necessarily reflect those of
USAID or the ARD.

and upg3"ade the publication date of the

Deve_m_ent Research News,the Editorial
Staff has decided m defer the update
stories Io Meantime, in aneffort
the following to adjust
issue, beginning
I I ==
 DEVELOPMENT
RESEARCH
NEWS
FiscalDecentralization...
(Frompage 1)
the L_;Us, the LGC, in principle,
provides LGUs with a higher
share in the national taxes with
greater certainty so that they can
effectively perform their new
tasks. It also broadens the taxing
and revenue-raising powers of
the LGUs relative to earlier per-
LGU'sSliceofInternalRevenue
Allotment
fromtheNationalPie
Through the 1991 LGC,
LGUs are entitled to a share in the
gross national internal revenue taxes
based oncollectionsin the third year
preceding the current one, at a rate
of 30 percent in the first year of
LGC's implementation, 35 percent
in the second year, and 40 percent in
every year thereafter. However, in
the ev_mt that the national govern-
ment it_urs an unmanageable pub-
lic sector deficit, the internal reve-
nue allotment (IRA) may be re-
duced, but in no case shall it be less
than 30 percent of net Bureau
of Internal Revenue (BIR) tax re-
ceipts,
In the old set-up, Presiden-
tial Decree (PD) 1741 prescribed that
the IRA should not exceed 20 per-
cent of net
and that the internal revenue
IRA share of anytaxes
par-
ticularLGU should not increase by
year.
more than 20 percent in any
Understandably, the given
1991
LGChasgeneratedveryhighexpec-
rations among local government
officials and the general public Since
the amount allocated for IRA in 1987-
conventional wisdom is that with
the IRAofpegged
percent net BIRattax30receipts,
percent the
of
gross BIRcollections in the first year
September- October1992
tinent legislations like PD 231 one hand, and the cost of de-
(Local Tax Code). volved functions, on the other,
and the distribution of the IRA
In the following pages are across different levels of LGUs.
two related articles analyzing The second talks about thevari-
some of the provisions of the 1991 ous revenue-generating and tax-
LGC as theyimpact on the finan- ing powers of the LGUs. It is
cial position of LGUs. The first hoped that the analyses would
one deals with the balance be- be useful in identifying the
tween the increment in the Inter- strengths and weaknesses of the
nal Revenue Allotment (IRA),on LGC. O
oftheLGC'simplementation, theIRA
shares of LGUs will almost triple
relative to the previous year's level.
However, under the LGC, the vari-
ous allotments and aids from the
national government to LGUs that
comprised what used to be known as
National Assistance to Local Govern-
ment Unit (NALGU) funds are now
integrated with the IRA. Thus, it is
more appropriate to compare the 1992
IRA with the 1991 NALGU level.
The full implementation of
the 1991 LGC implies that IRA to
LGUs in 1992 should equal P24.4 bil-
lion. While this represents a hefty
111.8 percent increase over the P8.5
billion IRA in 1991, in effect, it is a
mere 51 percentincrease over the P16.2
(_) billion NALGU in the same year.
Oo Moreover,
ment in the the
totalP8.2 billion
national aidsincre-
and
/i--. allotments .toLGUs under this sce-
P16.2 billion in 1991 NALGU) is just
about half of the initial expected
__, nario billion
P15.9 (P24.4 billion
(P24.4inbillion
1992 IRA less
in 1992
IRA less P8.5 billion in 1991 IRA).
If one assumes that 40 per-
......... cent (the maximum share prescribed
were appropriated for IRA in 1992,
,_ the 101.1
year percentofincrease
thereafter) BIR taxstill falls
receipts
_j short of what is anticipated.
 DEVELOPMENT
REI;EARCHNEWS Se3tember-October1992

IRAand the Cost funded, pre-LGC/_-

of Devolved
Functions
Executive
Ordcs (B3) _ states
that in 1992, national
government agen-
cies(NGAs) should
shoulder all costs of
devolved functions,
whetherornotsaid
functlonsare shifted
to LGUs within the
year.From 1993on-
wards, ti_)ugllb _
costswill be the sole
responsibility of Comparisonof
National InternalLGUs' IRA Share(GNIRT)
LGUsa_d wiUhave and After the Looal GovernmentCode (LGC)
tobe funded from
their
augmentedIRA
sharesand locally
generated
revenues.
Giventhisperspective, will
theamount allocated forIRA less
thecostsofdevolvedfunctions of
LGUs beginning 1993 match the.
amount Ofadditional resources trans-
ferred to LGUs?
To find this out, the follow-
ing approach was taken: First, the
1991 level of NALGU funds was
viewed as representing the centrally
funded portion of LGUs' budgets
that is necessary to maintain their
services at pre-LGC levels. Second,
the buc_gets of NGAs correspond-
ing to functions and responsibilities
tobe transferred to LGUs were used
as a benchmark figure for the actual
cost of devolved functions. Third,
the baseline expenditure levels de-
rived were adjusted for inflation (as-
suming an annual inflation rate of
10%)so as to maintain their values
in real termsin 1993. Fourth, the in-
flation-adjusted, projected expendi-
ture of LGUs on both new and old
functioms was compared with the
projected IRA levels in 1993. Fi-
nail},, since no functions will be de-
volved from NGAs to the barangays,
the analysis segregated barangays
from other LGUs.
80_.NO so_.,o rangay expenditures
(comprising salariesof
barangay officials and
outlays for concreting
of barangay roads) by
P4L]billion. Howevcs,
if only 30 percent of
gross BIRtax revenues
or P30.8 billion is
20_ m^ 4o_ m^ appropriated for IRA
for
LGU8 forLOU8 in 1993,provinces,
municipalities and
Pre-LQC Post-LGC cities combined will
(P.D.1741) on maxImum
(based suffer arevenue short-
share allowed) fall equal to P3.6 bil-
lion while barangays
RevenueTaxes of the Gross
Before will posta surplus of
P2.9billion.
Independent
estimates, meanwhile,
EO 507 estimates thecostof placethecostofdevolvedfunctions
devolvedfunctions, excluding thecost atP13billion. Usingthisestimate,
of construction and maintenanceof non-barangay LGUs will sufferashort-
publicschoolbuildings, atP10 billionfallofPl.lbillion orPS.2billion ifthe
in1992.IftheP1.5billion budgetallo- 1993IRA is equalto35 percentor
cated for school buildings in the 1992 30 percent, respectively, of national
General Appropriations Act (GAA) is internal revenue taxes.
added, the total cost of devolved func-
tions amounts to Pll.5 billion. Assum- Assm_g that40 percent (the
ing 35 percent of gross BIRtax receipts maximum share allowed by the LGC
or P36 billion will be appropriated for for 1994 and everyyear thereafter) of
IRA in 1993, 80 percent of this amount BIR tax receipts is appropriated
or P28.8 billion will represent the com- for IRA in 1993, provinces, munici-
bined share of all provinces, cities and palities and cities combined will have
municipalities of the IRA while the re- a surplus equal to P4.7 billion based
maining 20 percent or P7.2 billion will on an Pll.5 billion official estimate of
go to the barangays, devolved functions or P3.1 billion
based on P13 billion independent
Table I shows the estimates of estimates of the true cost of devolved
the expenditure responsibilities of LGUs functions. Barangays,meanwhile, will
vis-fi-vis the new IRA shares in 1993 have a surplus of P5 billion.
under three percentage share scenarios
(i.e., 30%, 35%and 40%) and based on Moreover, while the 1993IRA
both official and independent estimates share of provinces, municipalities and
of the costs of devolved functions in cities appear to be sufficient to fund
1992. Using official estim.ates of the their new and existing expenditure
benchmark cost of devolved functions, responsibilities at the aggregate based
the combined IRA share of provinces, on official estimates of the cost of de-
municipalities and cities will exceed volved functions, actual data at the
thesumoftheinflation-adjustedcostof field level from a number of LGUs
devolved functions and pre-LGC ex- show that lower-income class LGUs
penditure levels of LGUs by P0.6 bil- will tend to have financial difficulties
lionCoasedon35%share)whiletheIRA as a result of the LGC's devolution
share ofbarangays will exceed centrally To page 4 _r
........... ........ 40% I_: :3o% IRA
 33.68

: ........... 4,71:

::::::::::::::::::: :::!: :: :o:26:::

,.change in total
_tiba Ofmaximum allowable tax tares 1993. it is fl-_edifference::
iOn:and the inflation:adjusted i992 level: SEFrevenucs are
iy be:used exdusiVelyfor cxluatiOn pr6:gramsi : i:
 value

..... : accrue tOprovlnce (25%);