Improving revenue generation capabilities of LGUs PAM

MA. PAMELA P. QUIZON

Chief, Local Revenue Enforcement Division

Bureau of Local Government Finance

»“Honest and effective governance—truly transparent, disciplined and serving the interest of the country and its people” is the vision of the Philippine government for the Philippine public financial management system (PFM).

(COA, DBM, and DOF, 2011)

»The public finance agencies of the Philippine government are ―collectively committed to promote fiscal responsibility and good governance through transparency and accountability in financial transactions in the Philippine government.

(COA, DBM. and DOF, 2011)

» LGU growth lagging behind population growth and inflation.

» For the past decade the growthof LGU revenues have failed to catch up with the combined growth of population as well as prices.

» LGU revenues grew annually by 5.85% compared to the combined growth of population and prices of 6.46%.

Annual Growth Rates of LGU Sources of Revenues (in %)

2001-2010 Province City Municipality Total

Local Sources 7.65% 5.97% 4.72% 5.92%

IRA and other grants and aids

5.12% 4.95% 6.49% 5.66%

All other sources

4.13% 10.19% 10.36% 8.45%

Total Revenues 5.50% 5.73% 6.23% 5.85%

Adequacy of LGU Revenues

Annual Population Growth Rate

2001-2010 1.88%

Annual Inflation rate 2001-2010 4.58%

Population Growth + Inflation

2001-2010 6.46%

»Continued high dependence on the Internal Revenue Allotment (IRA).

»Dependence on the Internal Revenue Allotment (IRA) and other grants at all levels of LGUs remained high – 75% for provinces, 79% for municipalities, and 42% for cities.

» Local revenue sources negatively affected by elections.

» LGU local revenue sources, especially local tax collections, are negatively affected by a 3-year election related cycle. For the different LGU levels, election-related cyclical behaviors in different local revenue sources have been observed (ADB, 2007):

˃ Provinces — real property tax (RPT), business tax, fees and charges andeconomic enterprises.

˃ Cities — economic enterprises, other receipts

˃ Municipalities — RPT, business tax, fees and charges and economic enterprises, other receipts.

» Delay in updating of the Schedule of Market Values (SMV).

» The inability of most LGUs to regularly enact updated schedules of market values is indicative of considerable delay problems (10 to 20 years) associated with the politicalization of the LGU SMV updating process.

Year

Gross Value Added in Real

Estate at Current Prices


Estate at Constant 2000

Prices

Implicit Price Index for Real

Estate (2000 = 100)

2001356,982 333,272 107.11

20111,097,765 634,456 173.02

Annual Growth

Rate11.89% 6.65% 4.91%

YearTaxable

Assessed ValueNo. of Property

Units (PU) Taxable

Value/PU

20011,245,954,783,602

30,398,830 40,987

20112,515,274,287,897

33,217,384 75,722

Annual Growth

Rate7.28% 0.89% 6.33%

» Institutional deficiencies. Institutional bottlenecks like the issue of titling delays for properties covered by the Comprehensive Agrarian Reform Program (CARP) and system deficiencies like lack of information sharing between LGU departments

Year

Gross Value Added

in Real Estate at Current Prices


Estate at Constant 2000

Prices

Implicit Price Index for

Real Estate (2000 = 100)

2001356,982

333,272 107.11

20111,097,765

634,456 173.02

Annual Growth Rate

11.89% 6.65% 4.91%

Year RPT CollectionNo. of

Property Units (PU)

Collection/PU

200116,842,815,948

30,398,830 554

201127,399,920,255

33,217,384 825

Annual Growth Rate

4.99% 0.89% 4.06%

» Problematic real property accounts Collection efficiencies as of 2011 are still low primarily because of problematic real property accounts.

» Net of problematic accounts, the collection efficiency in 2010 would have been 93.2%, but because of the problematic accounts, RPT collection efficiency is a low of 56.10%.

Weighted average RPT rate

2.1%

Gross Taxable Value52,433,591,950

Collection efficiency based on

gross taxable value52.3%

Taxable value net of problematic account 29,413,036,523

Net taxable values as a % of gross taxable

value56.10%

Collection efficiency based on net taxable

value93.2%

» Difficulty in capturing business income levels for taxation.

The slow growth of business taxes is saddled by problems related to the identification of new businesses for taxation purposes and the undervaluation of declared gross sales.

The full capture of business taxes is estimated to have the potential to increase LGU business tax revenue by a factor ranging from 1.5 to 2.0. (ADB TA 7451, Aug. 2012).

»Track 1 - Proper Management of LGUs Taxing and Revenue Raising Power

»Track 2 – Stimulate Progress through Investments and Other Economic Activities

»Track 3 - Exercise of Corporate Powers and Partnership Arrangements

»Track 4 – LGC Review and Amendments

1994 & succeeding

years = 40%

1993 = 35%

INTERNAL REVENUE ALLOTMENT

Gross Internal Revenue Collections based

on third preceding Calendar Year

Provinces

23%

Cities

23%

Municipalities

34%

Barangays

20%

50% Population (NSO)

25% Land Area (LMB)

25% Equal Sharing

(1) Total BRGY.SHARE – BRGYs. with 100

inhabitants = NET Brgy.Share

(2) Net Brgy.Share

1992 1993 1994 forward

40% Pop. 50% Pop. 60% Pop.

60% E.S. 50% E.S 40% E.S.

A. Base

B. Level

C. LGU Allocation

D. Intra LGU Allocation

1992 = 30%

CY 2015Php 389.86B

• Means through which the national government support

the delivery official public services.

• Used to equalize or lessen disparities in fiscal capacities

among LGUs.

o More allotments can be given to LGUs with greater

needs and less resources.

• Allotments can influence the activities of LGUs.

oMore allotments can be given to help themselves by collecting taxes efficiently.

»Central Transfers creates ”fiscalillusion” in the form of a flypapereffect” that is associated with lumpsum grant-transfers from thenational government like the IRAand other shares from the nationalwealth.

» Coverage

» Assessment

» Collection

»Updating Local Revenue Codes

»General Revision of Real Property Assessment

»Add new taxes, fees and charges using Section 186

»Revalidate/Reduce Exemptions

» Use of Presumptive Income Levels

» Updating the Unit Base Schedule of Market Values

» Developing models for determination of fee rates/ cost recovery

» Inspection of books of accounts

» Efficient delivery system (e.g. client satisfactions, simplification of procedures)

» Computerized Assisted System

» Effective Tax Information (Social Marketing)

» Issuance of Demand Letters

» Field Collections (e.g. house to house, mall based collection)

» One Stop Shops

» Participation of Barangays (billing, identification of tax subjects)

» Enforcement of Civil and Administrative Remedies

» Sale at Public Auction

1. Anchor provisions on legal basis

2. Expand Coverage (explore section 182)

3. Elimination of unproductive bases of revenues/bases which the LGU has no intentions of enforcing

4. Adjust/Update Rates (fixed rate, benchmarking, inflation, cost of delivery)

5. Simplify Provisions (minimize requirements to the most essential)

6. Increase transparency (those easily understood has greater chances for voluntary compliance)

7. Input Economic Sensitivity (amount passed on)

8. Encourage or discourage activities (rate variation)

Year Inflation Rate Consumer Price Index

2002 2.97% 103.0

2003 3.45% 106.5

2004 5.98% 112.9

2005 7.63% 121.5

2006 6.24% 129.1

2007 2.81% 132.7

2008 9.30% 145.0

2009 3.25% 149.8

2010 3.83% 155.5

2011 4.65% 162.7

2012 3.20% 167.9

2013 3.30% 173.4

2014 (est.) 4.50% 181.2

» RPT is the biggest and most potent source of revenues

» It is indexed on immovable (land, building, machineries and other structures)

» It benefits all levels of LGU

» It supports elementary and high school education through SEF

» Real property values floats with inflation and development

Valuation» Updating the schedule of values closer to market level» Identification of new structures (taxmapping , barangay –based support) » Capture the changes in the land use classification » Conduct of general revision of real property assessments» Computer assisted mass appraisal and assessment records system» Improving capacity of Assessment Offices

Collection» Information and education campaign (barangay/school based support)» Efficient distribution of notices of delinquencies» Policies to improve tax effort (incentives like discounts and relief, payment in kind etc)» Enforcement of civil and administrative remedies » Conduct of sale at public auction» Bundling of taxes

The LGU’s Role in Stimulating Progress:

• Provider of economic infrastructure

• Enabler – the creator of a business friendly

environment for sustainable development

• Planner and promoter of in-bound

investments - bringing in investments

creates more jobs, increase productivity,

generates resources for the government

and leads to improving the quality of life inthe communities.

»Steps in pursuing

economic activities:

˃ Plan

˃ Organize

˃ Implement

Economic Dynamism

Size of economy, Growth of Economy and Investments, Employment, Prices,

Productivity, Business Groups, Financial Deepening

Government Efficiency

Transparency and Accountability, Public Finance, Recognition of Performance / Governance Responsiveness to Business and Basic Government Services

Infrastructure

Basic Infrastructure, Technology Infrastructure and Social Infrastructure.

Overall

Rank

Overall

Score

City/ Region

Rank

Economic

Dynamism

Government

Efficiency

Infrastructure

1 53.242 Makati, NCR 2 4 4

2 49.363 Cagayan de Oro, Region X 9 5 2

3 49.075 Naga City, Region V 4 1 18

4 47.717 Davao City, Region XI 11 13 1

5 45.465 Marikina City, NCR 19 16 3

6 45.003 Iloilo City, Region VI 23 2 7

7 43.686 Cebu City, Region VII 10 55 5

8 43.148 Manila, NCR 3 56 10

9 43.021 Valenzuela City, NCR 7 23 11

10 42.703 Paranaque City 1 93 13

1. Updated and approved LGU Plans

2. Structure leading local economic investment and incentive promotion

3. Local policies and ordinances consistent with national investment policies

4. Streamlined transactional services

5. LGU Roadmap to attract investments and generate employment

6. Active partnership with business sector

7. Infrastructure to basic local businesses

2/12/2015 For Discussion

»The significant borrowings of LGUs triggered the development of local economic infrastructure like public markets, slaughterhouses, transport terminals & post-harvest facilities

»The operation of most of these local economic enterprises is usually subsidized by the LGUs

»The challenge is to make local economic enterprises “revenue positive” or viable

˃ Public-Private Partnership

+ Power & Water Utilities Joint Venture Project of Bohol Province

+ Bulacan Toll & Packaging Center undertaken with the private sector to promote micro-small-medium enterprises

+ Mandaluyong Public Market

˃ Bond Flotation

+ Boracay-Aklan Provincial Bonds for

Tourism Development

˃ Inter-local Cooperation (LGU Initiative)

+ Inter-LGU cooperation of Metro Naga

Development Council

+ Gingoog Bay Development Council

(LGUs share a common resource

base)

+ Partido Development Authority in

Camarines Sur created by an act of

Congress providing legal

framework for inter-LGU

cooperation

˃ Corporatization of Basic Services

(Congressional Initiative)

+ La Union Medical Center - an act of

Congress corporatizing La Union

Provincial Hospital

˃ Corporatization of Public Utility (LGU

Initiative)

+ Corporatization of Misamis Oriental

Telephone System (MISORTEL) as

initiated by the Misamis Oriental

Province to ensure efficiency &

viability of MISORTEL. The

corporation has been registered

with SEC.

˃Strong political will with entrepreneurial

mind set

˃Stakeholders participation

+Transparency

+Accountability

+Empowerment

˃Capacity building/ technical assistance

˃Selection of appropriate financing option

˃Peace and order

˃Political harmony

» Vague policy/legal framework

˃Lack of roadmap for LGUs to establish and

disengage in the operation of LEEs

˃Vague legal basis of LGUs to establish LGU

corporations

˃Absence of clear-cut guidelines for LGUs to

enter into joint venture with private sector

THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE

Improving Lives Through Local Governance Reform: Transparency, Accountability and Better Services

SYMPOSIUM ON THE REVIEW OF THE 1991 LOCAL GOVERNMENT CODE


The LGC review will focus on fiscal provisions

1. Expenditure assignment

2. Revenue assignment & taxing powers

3. Intergovernmental fiscal transfers

4. LGU borrowing and credit finance

5. Creation of LGUs

6. Inter-LGU alliances/cooperation

7. Fiscal administration

They are critical to LGUs’ ability to deliver basic

services.

It is important to conduct a review of the

provisions using a holistic framework.



1. Expenditure

Assignment

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.

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 o fully devolved functions best financed through block grants

and own-source revenues

o delegated functions best financed through conditional transfers if this happens there will be no need for Section 17 (f) except when said Section is interpreted in the context of conditional transfers

Consultation result – agreement in LVM

Other amendments suggested during the

consultations (1)

Reassign responsibility for solid waste

management, specifically operation of sanitary

landfill to province (LVM)

Delete Sections 147 (1) (xi), 458 (1) (xi) and 468 (1)

(xi) of the LGC authorizing the LGUs to provide

for additional allowances and other benefits to

judges, prosecutors, and other national

government agency officials operating in LGUs

(LVM)

Other amendments suggested during the

consultations (2)

Full disclosure of allocation for field offices of

NGAs operating in LGUs per budgets of said

NGAs (like DepEd, PNP, etc.) in GAA (VM)

Own-source revenues

Intergovernmental fiscal transfers

LGU borrowing and credit finance



2. 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

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 and fees that

increase the cost of doing business and/or cause

inefficient allocation of resources without a

commensurate increase in revenue take

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 (LVM)

Indexation of tax rates, fees and charges that are fixed in peso terms to inflation (LVM)

Revisit of situs provision (i.e., derivation basis) with respect to local business tax (agreement in principle with LVM but M support for Escudero bill)

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 (LVM)

Provide mechanism for administrative recourse in case of disputes related to LGU taxing powers – Amend Section 195 (M)

Assign more revenue-productive taxes to LGUs Piggybacking on NG taxes like personal income tax

Green taxes

Other amendments suggested during the consultation

Repeal provisions of other legislation effectively amending Section 193 re tax exemptions of GOCCs, etc. (LVM)

Provide that LGUs may require establishments to submit/ open their book of accounts (VM)



3. 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

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 notto harm any LGU in the process

HOW DO LGUs PAY FOR DEVOLVED SERVICES?

Intergovernmental Fiscal Transfers


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) (LVM)

Provided it is funded from additional transfers from the current 40% share of IRA in national internal revenue taxes




Establish system of conditional transfers with well-defined cost-sharing provisions and performance indicators (especially with regards to delegated functions) [LVM – conditional transfers to be performance based]




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

In VM, suggestion to provide for direct remittance/ payments to LGUs by GOCC/ private companies of their share in national wealth



Other amendments suggested in consultations Increase fixed share of LGUs in national taxes

Amend Section 284 by replacing “national internal revenue taxes” with “national taxes” (LVM)

Increase share of IRA in national internal revenue taxes from 40% to 50% (LVM)

Clarify that the term “national internal revenue taxes” in Section 284 include VAT/ excise tax collections of the BOC as in the case filed by Cong Mandanas in the SC (VM)

Provide conditional transfers to LGUs for the protection of municipal waters (VM)

Liberalize provision regarding utilization of share in NW (VM)





4. 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

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


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) [L]




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 (LVM)



Other suggestions made during consultations

Monetary Board approval should be removed/ facilitated (LVM)

Streamline regulatory processes related to approval of LGU borrowing (LVM)





5. Inter-LGU Alliances and 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 cooperation 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.

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



6. 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

Direction of reform Amend existing LGC provisions that have unwittingly incentivize such

behavior

Strengthen existing provisions that regulate creation of new LGUs

Adjust income requirements for the creation/ conversion of highly urbanized cities, provinces and municipalities to make consistent with RA 9009 which provided new income criteria for the creation of component cities (V)

Make stricter requirements for creation of LGUs (L)

Other suggestions raised during consultations Include other criteria (e.g., level of urbanization, competitiveness, potential

for growth, poverty incidence, etc.) in addition to income, land area and population (LVM)

Re “IRA-less” barangays,

Provide IRA even to barangays that are created by Sanggunian (V)

Only barangays created by Congress should be given IRA (M)



7. 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

Full disclosure/ transparency (LVM)

Creation and operation of local economic enterprise

Authorize DOF to undertake income classification of LGUs and update income classification of LGUs (LVM)

1. LGUs’ exercise of corporate powers must be inspired by some guiding principles

˃ LGUs’ role in economic development is to be an enabler and creator of a conducive environment for sustainable development

˃ LGUs are more effective if they play the catalytic and regulatory roles and do not compete with the private sector

˃ LGUs should act primarily as planner, broker and promoter of inward investments. LGUs can play the role of investor in basic enterprises where private sector is absent.

2. LGUs operation of local economic enterprises could be viewed as two-pronged

─ As stand-alone investment by improving returns realized directly from the use/operation of such enterprise

─ As a catalyst for economic growth by utilizing the enterprise as a strategic & deliberate tool for local economic development

3. LGUs operating public economic enterprises must have a well-defined exit strategy

» The LGU FSS shall be used to set the criteria and system on the regular performance fiscal and financial performance assessment of local government units.

» LGUs were evaluated in the areas of revenue generation capacity, local collection growth, expenditure management, and reportorial compliance.

Summary per Region of LGUs Score in Fiscal Sustainability Scorecard

Region 2012Region XI 55.57Region III 55.51

CAR 53.58Region VII 51.58Region X 51.46CARAGA 50.98Region VI 49.64Region I 48.88

Region IX 45.90NCR 44.95

Region IV-A 43.07Region XII 39.56Region VIII 36.46Region V 31.00Region II 28.86

Region IV-B 25.53

Summary per Region of LGUs Score in Fiscal Sustainability Scorecard

Region2012

Excellent Very Good Good Average

CAR 3 (4%) 8 (10%) 12 (14%) 28 (34%)

NCR 1 (6%) 3 (18%) 2 (12%) 4 (24%)

Region I 3 (2%) 19 (15%) 25 (20%) 31 (25%)

Region II 1 (1%) 4 (4%) 8 (9%) 22 (24%)

Region III 7 (5%) 23 (17%) 23 (17%) 38 (28%)

Region IV-A 14 (10%) 12 (9%) 21 (15%) 27 (19%)

Region IV-B 1 (1%) 1 (1%) 6 (9%) 10 (14%)

Region V 0 (0%) 7 (6%) 9 (8%) 17 (14%)

Region VI 1 (1%) 12 (9%) 25 (18%) 28 (20%)

Region VII 7 (5%) 24 (18%) 29 (21%) 28 (21%)

Region VIII 1 (1%) 1 (1%) 15 (10%) 33 (22%)

Region IX 0 (0%) 6 (5%) 19 (16%) 30 (25%)

Region X 3 (3%) 10 (10%) 16 (16%) 27 (28%)

Region XI 2 (2%) 11 (21%) 9 (17%) 11 (21%)

Region XII 0 (0%) 2 (2%) 15 (12%) 27 (22%)

CARAGA 2 (3%) 5 (6%) 14 (18%) 23 (29%)

Thank you

Government & Nonprofit

Improving revenue generation capabilities of LGUs PAM