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Confidential Standard & Poor’s

Analysis of Naga
Financial Management Assessment
City of Naga, Camarines Sur, Philippines

July 31, 2009 Score

FMA (Financial Management Annual budgeting 2
Assessment) is a comprehensive assessment of Financial policy and medium-term
the local or regional government's (LRG) 1+
fiscal framework
financial management sophistication and
quality. Standard & Poor’s evaluates Financial reporting and disclosure 2+
challenges, strengths, and risks of the entity’s
financial management systems and practices in Revenue management 2
the context of global good practices and the
local environment. The evaluation reviews Expenditure management 1+
systems and policies that build general
financial management capacity, fiscal
accountability and discipline, and efficient Debt management 2-
allocation and use of public funds. Systems and
policies are assessed in terms of their
Liquidity and cash management 2-
progressiveness and performance Management of LRG-owned
considerations. Progressiveness and N/A
performance of individual elements are then
combined into an overall score, using Performance focus and measurement 1+
weighting factors based on local realities.
Key elements highlighted in bold

FMA scores OVERALL SCORE: 2 (Intermediate)

0 = Underdeveloped, Evolving or Poor
1 = Basic
2 = Intermediate
The overall FMA score of ‘Intermediate’ for Naga City reflects
3 = Sound its moderately developed level of financial reporting and fairly
4 = Sophisticated high level of disclosure, adequate performance in annual
5 = Advanced budgeting and debt management skills which are more
sophisticated than most local peers. On the other hand, the
Government brief score takes into account the basic practices of Naga in elements
• Status: City government with executive and of FMA like expenditure management and medium-term
legislative branches and autonomous planning.
• Major revenue sources: Real property tax, Notably, Naga City’s overall FMA score is the highest among
business tax and central transfers (IRA) assessed Philippines LGUs to date, reflecting the city’s more
• Core expenditure mandates: Primary health balanced developments in its FMA practices for most key
care, garbage collection, waste disposal, areas, as opposed to some local peers who may demonstrate
social welfare and local infrastructure (e.g. sound practices in certain elements such as revenue
city roads/bridges, school buildings, health management, but at the same time scoring poorly in other areas
facilities, housing, water supply,
like debt management, budgeting etc. Nevertheless, the Naga
drainage/flood control)
city government’s lack of computerization in most aspects of
Territory statistics financial management such as annual budgeting, financial
Naga Philippines reporting, tax collection and disbursement have emerged as a
Population, 2007 Mils 0.16 88.57 constraint on these respective scores. A comprehensive
Economic structure Trading centre for the region. computerization of the city’s system could potentially see
Economy mostly engaged in improvement in Naga’s overall FMA and individual element
agriculture and trade. scores.
GDP per capita, 2007 US$800* US$1,638
In addition to Naga City’s own weaknesses in financial
FMA Financial Management Assessment
*GDP per capita for Bicol Region. Data by city level not management practices, the city’s overall FMA score is
constrained by the poor public finance environment that
Philippines LGUs operate in. The complicated national set-up
Budget statistics (mil. PHP) to supervise LGUs involves multiple national agencies
2007 2006 2005
simultaneously managing the same local government space,
Operating revenues 468.6 425.4 380.4
and the general lack of co-ordination among them has
Capital revenues 0.0 17.1 0.0 contributed to ineffective oversight. An extremely politicized
Operating expenditures 309.4 310.7 272.9 environment has also brought about general institutional
Capital expenditure 98.0 85.8 29.5 weaknesses in the city government, although this is not unlike
Direct debt 90.0 102.0 122.2
many other LGUs. In the absence of institutionalized policies
and a medium-term policy framework, the key-man risk factor
Tax-supported debt 90.0 102.0 122.2
is significant for Naga City, since elected mayors have almost
Cash and liquid assets 244.7 159.0 152.7 full discretion in all key decisions, which is a similar situation
Capital expenditure (% to other LGUs.
of total expenditures) 24.1 21.6 9.8
Debt service (% of
Like many LGUs in the Philippines, Naga have no accounting
operating revenues)) 4.7 7.6 8.5 software in place and still relying on archaic manual
Direct debt (% of
procedures that are cumbersome and lengthy. Mitigating this is
operating revenues) 19.2 24.0 32.1 the existence of timely and comprehensive audits by the
PHP—Philippines Pesos national Commission On Audit. However, the majority of
LGUs received qualified opinions on their financial statements.
Notably, Naga City is the only city assessed so far to have
consistently received a clean opinion from COA on its financial
statements, which placed the quality of its financial reporting
considerably above domestic peers.

Overview of Naga City’s key strengths and weaknesses

Not withstanding the systemic constraints and institutional
weaknesses afflicting Naga City, the strongest areas of
financial management which drive the overall score for the city
government include annual budgeting at Intermediate, financial
reporting and disclosure at Intermediate Plus and debt
management at Intermediate Minus. Despite the lack of
budgeting or accounting software, the city has been accurate in
its budgeting performance on both revenue and expenditure.
And as mentioned, its audited financial statements are free of
material qualifications, a rarity among Philippines LGUs. This
is a significant driving factor behind the city’s overall score as
well. Naga city has also proven to have the capacity to
managed debt and demonstrated a relatively high level of
quality in its debt monitoring.
On the other hand, the overall score is weakened by the city’s
developing practices in expenditure management, financial
policy and medium-term framework and to a lesser extent
liquidity & cash management. Most of Naga city’s systems are
not computerized. Its disbursement process is still manual,
resulting in lengthy procedures and slow turnaround in clearing
payables. The city also suffers from a lack of explicitly stated
polices in liquidity and reserves investment, and mismatches
from month to month between revenue collected and
disbursement. The absence of medium or long-term planning is
evident in most elements of financial management of Naga
(although again this is a prevalent weakness among Philippine
local governments in general).
FMA Financial Management Assessment

The city’s financial statements had received clean audit

opinions from COA in the last few years. No notable
discrepancies appeared on Naga’s audited statements except for
the usual inconsistency in the valuation of physical assets, and
COA reported that the city is expected to resolve them by end
2008. Naga’s transparency in its reporting of financial
performance is also noteworthy, with the comprehensive
publishing of its annual budget, interim annual and quarterly
financial statements released on a timely basis on the city
website. However its financial reporting score is constrained by
the lack of accounting software that would potentially reduce
paperwork and offer easier access to financial information
within the city administration. Nonetheless, Naga has still
managed to consistently produce reliable financial statements
despite the lack of electronic solutions.
Likewise, despite the absence of any budgeting software,
Naga’s annual budgeting performances have been strong and
demonstrated relative accuracy on both revenue and
expenditure planning. It is conservative on revenue budgeting,
with final outcome more often than not exceeding initial
budgeted amount. Correspondingly, expenditure outturn has
been lower by an average of 1.6% from budgeted amounts in
the period 2005-2007 (albeit with some volatility from year to
year). Though Naga’s annual budgeting process is still largely
characterized by incremental-based, it is one of the few LGUs
to have at least adopt some form of programmatic expenditure
planning. Currently, around 15%-20% of the city’s budget is
estimated to be program-based.
The Naga city government demonstrate adequate capacity in
debt management. Unlike most LGUs who have monthly debt
repayment automatically deducted from their monthly IRA
transfers, the Naga administration keeps good track of its
amortization schedule and issue checks on timely basis to
directly repay lending banks. Furthermore, all of the city’s
loans are negotiated with clauses that allow prepayment
without penalties. The city government actively monitors
borrowing rates and would seek cheaper refinancing whenever
the opportunity arises. However, like most LGUs, Naga’s debt
management score is weakened by the lack of a coherent and
explicit debt policy. Alleviating this is that the city’s medium-
term investment plan (LDIP) has acted as a pseudo-debt policy
of the current administration.
Conversely, a key weakness of Naga’s financial management
practices stemmed from its basic to under-developed practices
in expenditure management. Since most processes are still not
computerized, the city’s disbursement and authorization
processes are lengthy and cumbersome. Revenue collection is
also on a manual basis and this lack of computerization
throughout the whole administration has translated to the city’s
high number of civil servants employed. Personnel expenses
currently stand at around 43% of Naga’s total income, close to
the regulated 45% ceiling.

FMA Financial Management Assessment

Constraining the city’s overall FMA score is also its lack of a

stipulated financial policy, no liquidity targets and no
comprehensive risk assessment tools. These translate to
significant constraints in Naga’s liquidity and cash
management score. No paperless payment exists and the city
government takes as long as 147 days to clear payables,
suggesting delays to suppliers and contractor and/or significant
past obligations outstanding for considerable amount of time
but still classified as current liabilities. However, offsetting the
funds ‘owed’ to the city’s Special Education Fund under ‘Intra-
Agency Payables’ would yield significantly lower numbers of
days payables to 109 days, although still high, but more
comparable to domestic peers. In mitigation, the city’s liquidity
position is healthy, with free cash sufficient to cover on
average 9X of monthly operating expenditures. Nevertheless,
despite the large amount of reserves held, the city has not
developed risk assessment tools in its investing of reserves and
merely place its cash with whichever bank offer the best
interest rates.
Other weaknesses of Naga include the lack of a comprehensive
medium-term fiscal framework, and the absence of concrete
financial policies or targets. In mitigation, the city’s LDIP
indicate some progress towards a multi-year planning
approach, which has been lacking among Philippines LGUs.
Nonetheless, the city’s spending capacity appear to be still
weak, judging from only around 50% of the LDIP being
implemented each term, and yet large excess funds year after
year still occur, leading to the rapid accumulation of reserves.

Peer comparison
In the Philippines local context, Naga City’s overall FMA
sophistication is more advanced than most peers (see Appendix
II “FMA Peer Comparison Table”), reflecting the city’s more
balanced developments in its FMA practices for most key
areas, relative to some local peers who may demonstrate sound
practices in certain areas but at the same time scoring poorly in
Although the city government does not yet have an electronic
budgeting solution in place, its performance in final budgetary
outcomes compared to initial projections is far better than local
peers and it is the only LGU assessed so far to practice some
form of program-based budgeting (albeit still insufficiently
developed by international standards). This contributes to its
annual budgeting score being the highest among local peers.
Similarly, while most LGUs had mainly received qualified
opinions from COA, Naga, who had consistently been passed
with a clean opinion on its financial statements, stands out
strongly among its peer group in terms of quality of its
financial reporting. Coupled with the comprehensive disclosure
of financial information on the city website, these translate to
Naga having the highest score for financial reporting and
disclosure among assessed LGUs to date. In addition, as
mentioned above, Naga’s high quality of debt monitoring
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reflects its superior capacity to manage debt than other
Philippines LGUs too.
In terms of financial policy and medium-term framework, with
most peers being extremely weak in medium and long-term
planning, the existence of a detailed LDIP puts Naga slightly
ahead, though it would still be considered lacking by
international standards.
Naga’s visibility in setting of tax and charges appear to be
more transparent than peers. External stakeholders are
consulted and tacit agreement is sought before revisions of
rates are proposed. Its revenue projections is also significantly
more accurate, however the distinct lack of computerization in
its collection system put its revenue management score on the
same level as Marikina and Taguig, but below that of Quezon.
Conversely, the city’s slow turnover in spending transactions
and the implication of high overdue payables has affected its
liquidity and cash management score in relation to peers. The
city’s number of days payables ratio is worse off than the
averages of most local peers. Naga’s score, is however, not
worse off than Taguig or Iligan in this aspect due to its
minimizing of currents accounts (two) to handle day-to-day
transactions, and the city has maintained a healthy liquidity
position providing ample coverage of operating expenses in
recent years.

Key trends and challenges for the development of Naga’s

FMA score
A comprehensive computerization of the city’s revenue and
expenditure management systems, adopting an accounting
software (such as e-NGAS) and implementing an e-budgeting
software, could help address some of the weaknesses in the
elements of expenditure and revenue management, financial
reporting and annual budgeting. Naga is currently in the
process of developing new computerized systems for both the
RPT and business tax collection, and these are expected to
come on board by 2010. If successful, the computerized
revenue collection would help streamline processes and reduce
paperwork. Consequently, the benefits from a more efficient
revenue collection system could lead to a leaner civil service.
Nonetheless, reducing headcount has often proved to be
challenging in the politicized public finance environment of
Philippines local governments.
In the area of expenditure management, a full computerization
of the payment process and adoption of an e-commerce facility
would make disbursement more efficient and faster clearing of
payables. This in turn would help reduce the currently high
ratio for number of days payables.
To raise Naga City’s overall FMA assessment to a Sound level,
would depend on the city administration taking a longer-term
view on all aspects of its financial planning. A key area is the
establishment of a forward-looking revenue and expenditure

FMA Financial Management Assessment
framework, with linkages to a comprehensive long-term
investment plan and the annual budgeting process. While the
city’s LDIP is a good starting point for development of a
longer-term approach to financial management, its usefulness
would increase with more details on programs, accountability
for achievement of key targets and comprehensive exploration
of potential funding sources. Naga’s overall FMA score could
also benefit from directly linking the LDIP to the annual
budgeting process. With the introduction of more program-
based expenditure planning, this could improve the overall
level of financial management sophistication for the city. In
addition, stipulation of policies in liquidity, debt and
investment management would help improve continuity
beyond the political cycle.
At the more systemic level, an introduction of medium-term
budgeting framework requirement would have a positive effect
in terms of general impact on financial management
sophistication of Philippines LGUs. More effective and
efficient co-ordination between central agencies and LGUs
would also require efforts on the central government’s part.
Nonetheless, the establishment of the Joint Memorandum
Circular should help in some way to further the endeavors to
co-ordinate and synchronize local governments planning,
execution and reporting cycles and formats with those of
national agencies. Central efforts to transit all LGUs to a full
accrual accounting system, ensuring consistency of its
application and imposing penalties for non-compliance would
also help improve financial reporting and disclosure standards.

FMA Financial Management Assessment

Public Finance Environment of Philippines LGUs

Local Government Units (LGUs) in the Philippines operate in a public finance
environment that is generally unfavourable towards the implementation of sophisticated
fiscal management systems. The environment is extremely politicized and marked with
legislative constraints. LGUs are being managed simultaneously by multiple national
agencies, and a general lack of co-ordination between them has brought about ineffective

Complicated national set-up

As many as four National Government Agencies (NGAs) have oversight responsibilities
over the LGUs. They include;
1. Department of Interior and Local Government (DILG)
2. National Economic and Development Authority (NEDA)
3. Bureau of Local Government Finance (BLGF) from the Department of Finance
4. Department of Budget Management (DBM)
In addition, there is also the Commission of Audit (COA), the independent national body
which set accounting standards and procedures, and audits all LGUs. For Metro Manila
cities, the Metropolitan Manila Development Authority (MMDA) is responsible for the
delivery of basic urban services requiring coordination in the capital region. These
include land use planning and zoning, traffic management, public safety and sanitation
and waste management.

There appears to be an absence of co-ordination among the NGAs and to complicate the
already onerous national set-up, each agency issues its own set of guidelines and manuals
to the LGUs. Their oversight responsibilities often overlapped with one another and
inconsistent policies existed from time to time. Take for example the extremely unwieldy
financial reporting process for LGUs. The BLGF is responsible for revenue and debt
management, DBM focuses on expenditure management, while COA audits the LGU.
Each agency has its own reporting format and therefore every LGU has to maintain three
different sets of accounts just to comply with the different standards--the treasurer
submits her statements to BLGF, the budget officer to DBM and the chief accountant to
COA. On a positive note, the three NGAs are in the process of agreeing on one format.

Often local governments find it so difficult to navigate through the heavy bureaucracy
and paperwork that they simply isolate themselves from central bodies. They would do
the bare minimum to fulfil national requirements (which is not stringent to begin with),
and for regulations that have no penalties for non-compliance or are weakly-enforced,
LGUs would not bother to uphold them. Overall, these factors contribute to not only a
lack of co-ordination between NGAs, but also a lack of co-ordination between NGAs and

The central government is aware of this problem, and in 2007, the NGAs with the help of
GTZ (a German government owned technical agency) commissioned a Joint
Memorandum Circular (JMC) to synchronize and harmonize local planning, revenue
administration, budgeting and expenditure management among LGUs. The JMC also
defined the roles and functions of the NGAs and reconciled their policies. However, with
city mayors and provincial governors mostly operating in silos and holding great
influence over their electorate, it will in all likelihood be years before the JMC can fulfill
its intended purpose.

FMA Financial Management Assessment

Politicized environment with short-term framework

Perhaps the single greatest obstacle to developing a favorable public finance environment
in the Philippines is the highly-politicized nature of the whole LGU system. LGU
elections are held once every three years, and Local Chief Executives (LCEs) may be
elected up to three consecutive terms. With each term of office being so brief, many
mayors/governors concentrate solely on how to win the next election and thus operate
from a populist platform. LCEs rarely engage in medium-term planning beyond the term
of their office, therefore investment projects tend to be small-sized and short-term. Even
among the more developed LGUs in the Metro Manila region, long-term investment
strategizing (if any) is done vaguely, with no financial backing or cost estimates. The
political reality consequently results in a local governance system with a very short
forward-looking framework.

Key-man risk and the lack of continuity

Elected LCEs hold great power in their jurisdiction. All key decisions rest in the hands of
the mayor/governor and they have the final say on all issues—the local finance
committee can propose a budget or the local planning committee can recommend a
project, but ultimately it is the LCE who has the sole discretion to decide. Therefore how
a local government is run is driven essentially by the personality of the mayor/governor.
This poses a very significant key-man risk factor for every LGU in the Philippines.

More often than not, a newly-elected LCE who comes into power will replace the key
heads of departments of the previous administration. However it is at times difficult to
dismiss officials due to potential political backlash and the risk of losing electoral
support. Subsequently officials who cannot be dismissed are rotated to positions that are
unimportant and irrelevant to their skill-sets, so the headcount in the city government
bureaucracy keeps increasing every time a new mayor is elected (see “Expenditure
Management” section). Newly-elected LCEs have also been known on occasions to not
honour the obligations incurred by the previous administration. Since institutionalized
frameworks are also lacking (LCEs do not bother to put long-term systems in place), the
Philippine LGU system is characterized by a distinct lack of continuity. This further
contributes to the short-term approach in practically all aspects of local public finance—
financial policy, budgeting, investment priorities etc.

Weak credit culture

A credit culture is lacking among local governments in the Philippines. There are LGUs
who run healthy surpluses and are lowly leveraged, yet in spite of that have generally
very low credit standing with banks. This is partially explained by previous instances of
local governments defaulting on bank loans because the newly-elected LCE refuse to
honour the borrowings of the previous administration. The absence of debt monitoring
systems and poor debt management sophistication among local governments further
contributes to the reluctance of banks to make unsecured lending to LGUs.

The current prevailing mentality among Philippines commercial banks is that they would
only lend to the LGU if they can trust the current mayor/governor--a manifestation of the
key-man risk factor again--and even then the tenor of the loan would not exceed the
political cycle. This links back to the problem of lack of continuity and the politicized
nature of public finance operations. So in such an environment, the Government
Financial Institutions (GFIs) have emerged as the major source of lending to LGUs. As
LGUs must receive central government transfers (IRA; Internal Revenue Allotment)
through GFIs, the GFIs would then lend to LGUs with the IRA pledged against the
borrowings. Repayment is then automatically deducted from the IRA account monthly.
And since many LGUs have no loans on an unsecured basis, a vicious cycle emerged

FMA Financial Management Assessment
whereby local governments in the Philippines have not been able to build up savvy debt
management expertise. This weak credit culture is a key impediment to the funding of
long-term infrastructure development in the country.

Highlighting the state of the credit culture among local governments is their attitude
towards the settlement of their current obligations and payables. There is no legislated
time period for an LGU to make payments to contractors and suppliers for projects or
services delivered before the payables is deem as overdue. Some LGUs have internal
guidelines to settle payables within 30 days, but the majority take an apathetic approach
towards it, frequently dragging on payments for months and even years.

Corruption and graft

Widespread corruption and graft is also a significant problem for the Philippines public
finance environment. In the 2008 Corruption Perception Index of Transparency
International, the country came in at a lowly 141 out of 180 countries, faring worst than
Asian peers like Indonesia (126) and Vietnam (121). Mayors and governors have been
known to waive tax arrears in return for political or monetary favors. Most LGUs are still
not fully computerized and using archaic manual procedures that require layers of human
interaction, leaving gaping holes in the system for graft.

Accounting standards and accountability

One of the few positives in the Philippines public finance environment is the existence of
comprehensive audit on LGUs’ accounts. The Commission On Audit has facilitated the
standardization of accounting procedures and guidelines, audits the LGUs on a timely
basis and publishes their financial statements regularly. However, COA’s transition from
cash basis accounting to a full accrual system is poor. LGUs currently reports on a
confusing mixed-accrual standard—expenditures are reported on accrual basis, while
three methods are adopted for revenue reporting (accrual for IRA, modified accrual on
property tax and cash basis for all other revenues). This cumbersome reporting format
makes comparison between budget outcome with final statement on income and
expenditures almost impossible. On a positive note, LGUs consolidate the accounts of all
their economic enterprises on their own balance-sheets. The Code does not allow LGUs
to set-up commercial corporations therefore off-budget activities are kept to a minimum,
mitigating the risk of large contingent liabilities on local governments.

In late 2003, COA attempted to introduce computerization of accounting procedures

across the country by rolling out e-NGAS (Electronic New Government Accounting
System). However, there were flaws with e-NGAS and it was designed primarily for
LGUs with simple operations. Therefore the take-up rate among the more developed
Metro Manila LGUs has been slow, with those adopting it heavily customizing the
software to suit their individual operations. Ironically, it appears that even though COA is
encouraging LGUs to adopt e-NGAS, but when it comes to audit requirements, COA also
wants to audit the manual entries. This adds on unnecessary double-work for LGUs who
has adopted e-NGAS and discourages computerization of accounting procedures across
the country.

The LGUs generally take a lackadaisical approach towards COA. Out of the 217 LGUs
audited by COA in 2007, only 18% received no qualifications on their financial
statements. The majority (76%) of LGUs was rendered with qualified opinions, and 6%
were deemed so deficient that they were given an adverse opinion i.e. the financial
statements do not represent fairly the financial position of the LGU. There are no
penalties for non-compliance with audit standards and LGUs generally ignore audit
recommendations year after year. COA would only report an LGU to the Office of
Ombudsman if the discrepancies are deemed to be extremely serious and graft-related.

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Therefore financial statements of local governments can be unreliable at times, especially
in regards to the balance-sheet with un-reconciled balances on cash position and large
discrepancies in inventories due to past-year failure to recognize depreciation on assets.

Central government requirement and monitoring

The BLGF and DBM have responsibilities for regulating the local governments. Two
broad principles guide their monitoring; BLGF makes sure that a LGU’s total borrowings
is limited at 20% debt servicing of its regular income, and DBM checks that LGUs do not
budget more than 45-55% (depending on class of LGU) of total regular income on
salaries. These two guidelines are strictly monitored by the two agencies and non-
compliance can result in harsh penalties against the LCE and his/her administration like
being removed from office or brought to the Ombudsman for criminal charges.

At the moment, there is no existing standard system of fiscal performance indicators among
LGUs in the Philippines. The Department of Finance (DOF) is proposing a new Local
Government Financial Performance Management System (LGFPMS) that will benchmark the
LGUs in terms of service delivery and financial performance. The new LGPMS is based on
defined quantitative indicators and LGUs who score well, could potentially be allowed to
exceed the current borrowing cap of 20% of income on debt servicing. However, it appears
that even when the LGPMS is passed, LGUs are not obligated to adopt it and there are no
penalties for missing benchmarks.

FMA Financial Management Assessment

Key Factors by Analytical Elements

1. Annual Budgeting: Score 2

Annual budgeting is a principal tool of government financial planning. The analysis takes into
consideration accounting basis and methods of budgeting, the scope of operating activities and
entities covered, the structure of appropriations, budget consultations, and approval processes.

Main strengths:
• Naga City display intermediate practices in key aspects of annual budgeting. The city
has been consistent with the centrally stipulated sub-national government budgeting
process, which is thoroughly described in the Local Government Code (LGC).
• Naga’s budgeting performance is fairly strong and has demonstrated relative accuracy
on both revenue and expenditure planning over the last five years (see table 1). It is
conservative on revenue budgeting, with final outcome more often than not exceeding
initial budgeted amount. Correspondingly, expenditure outturn has been lower by an
average of 1.6% from budgeted amounts in the period 2005-2007 (albeit with some
volatility from year to year). The city’s budgeting results are significantly better than
many of its rated domestic peers who had reported persistent under-collection in
revenues and double-digit deviations in spending from initial targets (see appendix II).
• The city administration practises a so-called ‘result-based’ budgeting process. Each
department head is first asked to submit what are the results they wished to achieve and
these results must be consistent with planning documents, mayor’s and stakeholder’s
priorities, and commitment to national legislations. To minimise overly-optimistic
projections of projects/programs that can be accomplished, advance estimates of
income is let known to city departments to moderate their expectations. Department
heads also have to adhere to an internal ‘80-20’ budgeting rule i.e. department heads
must try to generate targeted results with 80% of funds requested and 20% to be set
aside as savings. Any requests to exceed 80% use of allocated appropriations must be
justified, for example, unexpected surge in energy prices resulting in cost over-runs etc.
Weekly management meetings are also held between department heads and the mayor
to discuss accomplishment of set targets. In all, these practises have resulted in a
relatively high-degree of accuracy in fiscal outcome versus budgeted targets for the
• There are usually few in-year revisions to Naga City’s budget. These are in the form of
supplementary budgets which require approval of the Sanggunian (the local legislative
council). For the last few years, around an average of three supplementary budgets
were passed annually and were typically small in size.
• The city government’s economic enterprises’ are included in the annual budget
therefore minimizing off-budget activities, adding to better transparency in the
budgeting process.

Main weaknesses:
• Naga City’s budget planning is manual and is not supported by any budgeting software.
Many Philippines LGUs are lagging significantly behind in terms of computerization of
the budgeting process. However, LGUs like City of Marikina are currently pilot-testing
an ebudget system, which if successful and adopted throughout the Philippines, could
enable the budget process to be more efficient and transparent.
• The city’s budgeting process is cash-based with expenditure planning characterised by
indexations and incremental norms. Though its program-based budgeting process is
still insufficiently developed, Naga is nevertheless one of the few LGUs in the

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Philippines to practise some form of programmatic expenditure planning (the city’s
share of expenditure based on programs is currently around 15%-20%).
• Annual budgeting is done for only one year forward. Though the city reportedly
performs multi-year revenue and expenditure forecasts, Standard & Poor’s have yet to
receive those reports despite requests made to review them (pending information).
• The annual budget’s linkage to a comprehensive medium-term fiscal framework is
weak. Though the city’s Annual Investment Plan is incorporated in the annual budget,
and the AIP is in turn based on a medium-term development plan, actual realization
rate of the medium-term plan is low and dependent upon revenue collection (for more
details, see section on ‘Financial policy and medium-term fiscal framework’).

Table 1 Naga City General Fund: Actual outturn VS budget

General Fund (PHP.
Mil) 2007 2006 2005 2004 2003
Deviation of final total
revenues from initial
budget 4.4% 13.5% 0.0% -7.6% 7.9%
Deviation of final total
expenditures from
initial budget -4.7% 5.0% -5.2% 3.0% 13.1%

Key international good practice

Some of the factors that Standard & Poor’s considers as international good practice are:
• Program-based budgeting and accrual-based information are used extensively.
• The budget encompasses all fiscal operations and financial liabilities of the
• Expenditures and revenues should be specified separately in the budget (“gross
recording”). Off-budget funds are avoided or only allowed under strict conditions.
• Policy-making decisions with financial implications are accurately reflected in the
budget before the start of the fiscal year.
• Budgets are based on unbiased projections of both revenues and expenditures, and
reflect realistic intentions of the government.
• Budgeting practices and procedures mandate preparation of an annual budget, so
that government units are assigned budget appropriations before the start of the fiscal
• Budgets are consistently executed during the fiscal year, with only minor
adjustments if necessary.
• Reliable information systems support planning and execution of the government's
• Practices comply with national budget process legislation.
• Annual budgeting process is linked to medium-term fiscal framework, policy or

2. Financial policy and medium-term fiscal framework: Score 1+

Financial policy and medium-term fiscal framework are elements of fiscal management that
determine government accountability for a stable financial position in the long run and the
government's ability to consistently implement long-term policies.

Main strength:
• Continuity in the city planning office and the initiative of the mayor has enabled the
development of a medium-term investment program (Local Development Investment
FMA Financial Management Assessment
Program). The LDIP--planned according to a series of discussion with stakeholders--is
a 3-year investment program that corresponds to the local political cycle. It lists the
programs/projects that the administration aims to achieve during its term of office. Cost
estimates are provided, with timetable of completion and borrowing requirements
projected for key programs/projects. The city’s AIP is formulated with the LDIP in
mind. However with limited revenue and funding sources, only about 50% or less of
the LDIP are implemented each term, and unfinished projects are deferred to the next
term of office. Though Naga’s LDIP is not a comprehensive medium-term fiscal
framework, it is a noteworthy attempt at multi-year planning, which to date has been
lacking among assessed LGUs in the Philippines.

Main weaknesses:
• Despite the existence of more fully developed medium-term investment projections
than exist in many LGUs, the Naga city government does not have any stated financial
policies and guidelines that link medium-term development goals with fiscal
parameters and no clear policy on borrowing. Moreover, the LDIP does not go beyond
the current political cycle. Internally, the city administration agrees on the lone
simplistic guideline that spending should not exceed income collected.
• LGUs are required by the central government to prepare Comprehensive Land Use Plan
(CLUP) and Comprehensive Development Plan (CDP) as a guide to long-term planning
up till 30 years. However, most LGUs have a lackadaisical approach towards it. Naga
City last prepared the reports in 2000 and has not updated it since. Although the city’s
CLUP has some project cost estimates, the linkage between the long-term plan and the
city’s LDIP and AIP is ineffectual, and the CLUP merely serves as a very broad guide
to city planning.
• Though the city informed during our meetings that multi-year revenue and expenditure
forecasts are done each time a new term of government begins, we have yet to receive
reports of these despite repeated requests (pending information).

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:
• A clearly stipulated financial policy incorporates long-term perspective, which explains
the government's vision of its future financial position, key aggregate fiscal parameters,
and the way financial management is executed.
• Government financial policy is designed to support financial stability and disciplined
financial management. There should be observable consistency in the implementation
of financial policy and limited sensitivity to political cycles.
• The government maintains a proactive approach to identification, analysis, evaluation,
and treatment of potential risks. The risk management process is clearly defined,
documented, and integrated with fiscal management processes.
• Allocation of government financial resources by functions is in accordance with
medium-term framework, with strategic and fiscal targets guiding allocation decisions.
• There is an explicit investment policy. The focus of government investments is on
public sector development. Investments in the public sector are allocated on principles
of competitiveness and transparency. An effective priority-setting mechanism is an
important part of selecting government wide investment projects.
• There is an explicit link between the government’s long-term strategic development
plan, medium-term development plan and medium-term fiscal or financial framework.

3. Financial reporting and disclosure: Score 2+

FMA Financial Management Assessment
Disclosure and effective communication of financial, performance, and governance
information to government stakeholders is a critical aspect of government accountability.

Main strengths:
• Naga’s financial reporting and disclosure are on an intermediate to sound level.
The city’s financial statements are prepared according to national accounting standards
(NGAS; New Government Accounting System) in a timely manner and are externally
audited by COA. The annual audit report on Naga had been published regularly on
COA’s website since 2002 and is comprehensive. These audit reports served as a
dependable source of financial information on the city.
• The city’s financial statements received the closest to a clean opinion from COA among
LGUs assessed by S&P to date. COA stated in Naga’s 2007 audit certificate that the
city’s financial statements are free of material misstatements, and was prepared in
conformity with generally accepted state accounting principles. The only notable
qualification made by COA was on the discrepancies in validity of Property, Plant &
Equipment and Inventories. Naga has responded to the audit recommendation by
starting a conduct of the physical count of the properties of the City government and
has set up an Inventory Committee for this purpose. The city is scheduled to submit
reports of the physical count to COA by September 2008. In mitigation, discrepancies
with regards to inventory value are very common among Philippines LGUs as COA
had only introduced the concept of depreciation of assets in 2004. With difficulties in
retrieving historical records, many LGUs are not able to depreciate their assets
accordingly. Yet the Commission continues to make the same recommendation on
inventory values even though it is often beyond the city government to resolve these
• The level of Naga’s public disclosure of financial performance is relatively high, with
both annual budgets and final out-turns of revenue and expenditure regularly published
on the city government’s website. The city also publishes its quarterly financial
statements (Statement Of Operations) on a timely basis on its website.

Main weaknesses:
• The city government does not use any accounting software. Journal and ledger entries
are recorded manually on paper before being transferred to excel. Naga currently does
not have plans to adopt e-NGAS, the computerized form of the NGAS standards. In
mitigation, Naga City has consistently produced reliable and clear financial statements
despite the lack of accounting software.
• Despite certain drawbacks in the centrally required NGAS standards, Naga does not
have any managerial accounting to offset these drawbacks. The city administration also
does not seem to calculate an aging profile of their receivables and payables (pending
• Naga city government does not publish an annual report. The mayor delivers an annual
State Of The City Report (available on the city website), which highlights the city’s
achievements for the year, and goals and vision ahead. However the SOCR does not
contain meaningful financial indicators or relative performance measures. And like
many LGUs in the Philippines, there is no updated meaningful socio-economic data
available on the city level.

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:
• Financial statements are accurately and timely prepared. Internal audit ensures accuracy
of accounting and financial statements.

FMA Financial Management Assessment
• The government implements integral accounting policy across all its units. Accounting
staff has sound qualifications.
• Accounting software allows easy access to accounting information and reduces paper
• Managerial accounting offsets drawbacks of statutory accounting and reporting.
• Accounting information allows segment analysis of government activities.
• Interim and annual financial statements are published within a reasonable timeframe
after the end of the reporting period.
• Government financial statements are subject to annual independent audit.
• Government accounting is compliant with national accounting standards.

4. Revenue management: Score 2

Revenue management is mainly concerned with medium-term and in-year forecasting of
revenues, timely collection, limitation of non-transparent revenue practices, and prudent
policies for one-off and unexpected shifts in revenues.

Main strengths:
• Naga demonstrates intermediate in key aspects of revenue management, with revenue
collection fairly efficient and timely. The city’s seasonality of revenue from month-to-
month is predictable. Discounts are given to taxpayers for early payment which allowed
Naga to build up cash buffer at beginning of the financial year against months of low
• The city’s revenue budgeting appears to be the most accurate so far among assessed
LGUs. Naga’s revenue planning tend to err on the conservative side, with final revenue
out-turns usually more than initial targeted amount. Although exhibiting some
volatility, its deviation of final total revenue from budget is still relatively lesser than
that of it domestic peers, some of which have high double-digit deviations.
• Philippines LGUs are protected to some degree against tax arrears by stringent local tax
laws. LGUs have the right to auction sale properties and shut down businesses for tax
arrears. However difficulties abound in actual legal enforcement. The Naga city
administration estimates its RPT collection efficiency to be around 80% and expressed
that the processes involved in a property auction sale can be lengthy and onerous. Other
methods have been taken to improve RPT collection such as stepping up efforts in
sending out delinquency letters and dispatching tax officials to call on tax delinquents
in person. Comparatively, business tax collection efficiency is higher at around 90%.
The city government conducted tax mapping of barangays and has an active task force
in place to shut down businesses that are recalcitrant in tax payments.
• Naga’s tax revision processes are fairly transparent; the city government conducts
public hearing and external stakeholders are consulted before amended fees/tax rates
are proposed to the Sanggunian. For example, in the 2008 increase in fair market
valuation for the assessment of RPT, the local chamber of commerce was consulted and
gave tacit approval to the city government on the revision. The mayor had pledged that
RPT should henceforth be used only to fund capital expenditure and therefore increases
in RPT would ultimately benefit taxpayers (albeit whether this is fiscally feasible
remains to be seen). However, Naga City’s revenue management is still weakened by
the absence of clear and stipulated long-term revenue policies. Tax revisions though
requiring approval of the Sanggunian, is still largely driven by the mayor.
• Comprehensive information on tax rates and business permits is available on the city
website. Application forms, documents and local ordinances can be downloaded too.
The City Treasurer’s Office had also set up an online business information inquiry
system, whereby business owners can find details on tax assessments, payments, arrears
FMA Financial Management Assessment
outstanding etc by entering their business identification number. Nonetheless, though
the city website is highly-informative, electronic transactions are not implemented yet.
Taxpayers and business owners are still required to visit city hall to pay their taxes and
submit applications/documentations for permits.

Main weaknesses:
• Revenue budgeting is restricted to just one year forward, and though the management
indicated that multi-year forecasts (three years) are prepared each time a new term of
office is elected, S&P have yet to receive the information (pending submission).
• Most of the city’s revenue collection have not been computerized and largely rely on
manual processes. The management reported that Naga’s RPT collection was partially
computerized in the early 90s but had reverted to manual processes in 2008. The reason
for abandoning the computerized system was that as the city’s EDPU (Electronic Data
Processing Unit) suffered from high staff turnover, the unit had consequently not been
able to find the personnel to reprogram the new valuations and rates for RPT in the
software. Likewise, the business tax collection is also on a manual basis. The city
administration has however expressed that there are plans to implement new
computerized systems for both the RPT and business tax collection this year.
• S&P has requested to review the aging profile of Naga’s receivables, however the city
have not reverted (pending submission). Knowing the aging profile of its receivables
can help provide more accuracy to the Naga city government in the preparation of its
annual revenue budget.

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:
• Clear and stipulated long-term revenue policies, including taxes and user charges;
• Timely collection of government revenues;
• Reliable medium-term and in-year revenue forecasting;
• Reliable billing systems for taxes and user charges; and
• Restriction of non-transparent (non-cash) revenue arrangements.

FMA Financial Management Assessment

In-year Revenue & Expenditure Volatility

Total collection Total disbursement Balance (% of qtrly revenue)
PHP Mil.
200 40%
180 30%
160 20%
40 -30%

20 -40%

0 -50%
1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008

5. Expenditure management: Score 1+

Evaluation of expenditure management takes into consideration the LRG’s expenditure control
mechanisms, with a specific view to remuneration policy, management of transfer and capital
expenditures, and procurement practices.

Main strengths:
• The city government in Naga follows strict procedures for tendering and for
government procurement. Its procurement process is characterized by adoption of
tenders for most of its expenses and an Annual Procurement Program is prepared along
with the budget as mandated by the LGC. There is a dedicated unit, the General
Services Department which handles all procurement and a Bids and Awards Committee
(BAC) handling the tendering/bidding procedures. The city’s bidding process is linked
to the national Philippine Government Electronic Procurement System (PhilGEPS)
Notifications to bid for large projects are published in local and national newspapers.
Naga city also started an e-procurement service on its website which post notices on
bidding and results of various public bidding.
• The city’s BAC checks on the documentation and assesses the qualification of bidders.
The qualification of the lowest (successful) bidder is posted on the city website for
added accountability. In addition, the city assessor monitors the quality of the project
construction/installation and the city government would stop or delay payments to
contractors if they are found to be short on promised deliverables.

Main weaknesses:
• Naga displays basic practices in some aspects of expenditure management. The
disbursement processing and authorization system is on a manual basis with no
computerization. The process of submission of claims from suppliers to final
disbursement is lengthy and cumbersome, with payments still made through paper
cheques that require physical signatures of the Mayor and Treasurer, and manual
recording of disbursement vouchers. On average, 600-700 checks are signed every

FMA Financial Management Assessment
month. Other than salaries of city government employees paid via bank-to-bank, no
other paperless payment exists yet.
• Currently, Naga city spends about 43% of its income on wages. National regulations
broadly define the salary policies of local governments; payment on personnel services
cannot exceed 45% of total regular income and individual wage levels are subject to
national net tariff. Not only does Naga have little flexibility in personnel expenses, its
high level of spending on wages constraints its ability to provide better public service
and more capital outlays. In mitigation, central wage guidelines applies only to regular
employees and since only about 50% of Naga’s civil service is regular hires with the
rest on casual/contractual basis, it gives the city government to some extent, moderate
flexibility on manpower.
• The city’s number of personnel is considered above-average in the local context and
high by international standards. This is partly a function of the still largely manual
revenue and expenditure management processes in the city administration. The
management is trying to keep headcount at present levels, and believe that same level
of government services can be delivered with a leaner civil service. However, the
political will to reduce headcount does not appear to be strong.
• The city’s expenditure commitment is dependent on revenue collected i.e. even if an
expense has been appropriated for, the city would only obligate it if enough cash has
been collected (see section on ‘liquidity and cash management’ and ‘debt
management’). Though it can be argued that this is conservative financial management,
the city’s expenditure management suffers from a lack of sophistication in long-term
fiscal strategizing.
• Naga city has no stated policy on the time period for payables to be outstanding before
being considered as over-dues. It also does not seem to compile aging profile of
payables (pending submission).

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:
• Pay policies allow proper recruitment, retention, and motivation of appropriate
• Procurement of property and services is comprehensively documented and
structured, including the processes of risk assessment, seeking and evaluating
alternative solutions, awarding the contract, delivery of and payment for the property
and/or services and, where relevant, the ongoing management of a contract.
• Transfer payments are managed in a manner sensitive to risks, complexity,
accountability for results, and economical use of resources. Effective financial and
program controls are designed and implemented within transfer payment programs.
• A stipulated long-term policy of transfers to other budgets ensures stability and
transparency of fund allocations. Recipients of such funds should have certainty
regarding the size of the transfers during the current fiscal year and reliable guidance
for the next several years.
• Budgets are split into operating and capital expenditures, with medium-term
implications of capital projects, such as operating expenditures after completion of
capital expenditures, taken into consideration.
• Commitment and authorization management insures that expenditure does not
exceed the appropriated amount. Contractual liabilities of government units are
properly managed consistent with budget appropriations and performance plans.

6. Debt management: Score 2-

FMA Financial Management Assessment
Use of debt financing should go side by side with investment policy, strategic planning, and
other advanced fiscal management tools. Active debt policy improves government flexibility to
develop public infrastructure and support strategic policies.

Main strengths:
• Naga’s debt management skills are close to an intermediate level, but can be considered
more advanced compared to many Philippines LGUs who are at the evolving or under-
developed stage. Unlike other LGUs who borrow on an ad-hoc basis, the Naga city
government draws up basic borrowing plans in advance for key projects in its medium-
term investment plan (LDIP).
• The city has a good record in managing debt and has no default history. Given the low
scale of borrowings (direct debt outstanding of PHP 63 million which amount to 13%
of 2008 operating revenues), it is understandable that there is no dedicated unit set up
for debt management. The City Treasurer is responsible for debt management. The
treasurer’s office keeps good track of all existing and past loans, and readily provided
S&P with an amortization schedule, and summary details of loans upon request. Details
of the city’s loans outstanding are also made public in its COA audited financial
• Unlike most LGUs who have monthly debt repayments automatically deducted from
IRA transfers, Naga’s city treasurer keeps track of loan payment dates and issue checks
monthly or quarterly to repay directly to the lending banks. This has so far been done
on a timely basis. Furthermore, the management expressed that all its recent loans have
been negotiated with clauses that allow prepayment without penalties incurred. The
Local Finance Committee monitors current market interest rates and will seek
refinancing whenever the opportunity arises. In all, Naga’s level of debt management
sophistication, though considered basic in the international context, is the most
advanced seen among assessed LGUs to date.

Main weaknesses:
• Naga’s debt management practices are weakened by the lack of a coherent and
stated debt policy. Other than funding for key projects outlined in the LDIP,
borrowings can be driven by the mayor instead of being strategized around long-term
investment plans and funding sources. In mitigation, Naga has thus far only borrowed
to fund infrastructure projects.
• The public finance environment has resulted in Naga’s funding source being
restricted to just bank loans from GFIs, albeit this is similar to many LGUs. Thus the
management has not been able to establish comprehensive procedures to evaluate
possible funding options that take into account market, liquidity, operation and
concentration risks.
• In August 2007, the city government had secured a loan from the Land Bank of
Philippines for the purpose of buying out a more costly loan from the Department of
Finance. COA in its value-for-money audit however noted that Naga city could have
saved interest expense of around PHP6 million had it self-financed the DOF loan with
its own unrestricted free cash. The management indicated that self-financing was
difficult during that available window of refinancing as there was no appropriations
budgeted earlier to fund long-term obligations. It appears that though the city
administration had implemented measures to more effectively manage debt, inflexible
national budgetary laws can at times impede local government efforts.
• The city government pledges cash balances as collateral for its bank borrowing,
despite the fact that this borrowing is also secured by an IRA pledge in the event of
default. Although this double provision is dictated by the state-owned banks that they
are able to borrow from, this practice has the effect of reducing Naga’s overall
borrowing capacity and financial flexibility.
FMA Financial Management Assessment

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:
• Debt policy takes account of market, credit, liquidity, funding, operational, and
concentration risks.
• Debt management is arranged to minimize risks and costs of borrowing and to
meet external financing needs of the government, without jeopardizing financial
stability, but while improving financial flexibility.
• Debt policy is explicitly formulated and communicated to the legislative
authority and the wider community.

7. Liquidity and cash management: Score 2-

The evaluation of a government’s practices in liquidity and cash management is mainly based
on a review of cash flow planning, practices in financing spending units, and maintenance of
liquidity levels.

Main strengths:
• Naga demonstrates intermediate practices in some aspects of liquidity and cash
management. Though there are no stipulated targets, the Naga city government has
performed well in managing their liquidity. Throughout the 12-month period of January
2008 to December 2008, Naga had managed to maintain average cash liquidity high
enough to cover almost 9X of monthly operating expenditures. In addition, free cash
and liquid assets have been increasing since 2004, and are estimated to have reached
83% of annual operating expenditures at of end 2008.
• The city maintains two main current accounts for its day-to-day transactions,
with the DBP and Land Bank, which is not in line with best practice of having single
treasury account but nonetheless better than many local peers. Moreover, the City
Treasury reports on a daily basis, the total collection for the day, checks made out and
expenses incurred, and also total funds available.
• The city has an arrangement with Land Bank for an uncommitted credit-line of
PHP330 million. However there is no commitment fee involved and the credit line can
only be drawn upon to fund capital expenditures.

Main weaknesses:
• The city has no stipulated liquidity policy that explains the government’s
liquidity targets and liquidity risks, no comprehensive guide to in-year cash flow
planning and no stated policy on investment of cash reserves. Internally, the
management agrees to the lone guideline that daily disbursement should be less than
cash collected. The existence of the LDIP suggests that steps are being undertaken by
the current management to institutionalized medium-term spending priorities in Naga.
However, the city’s spending capacity seems weak, judging from the large excess funds
despite only about half or less of the LDIP being implemented each term.
• For the city government, more revenue comes in the first quarter of the year as
discounts are given to taxpayers for early payment and/or prompt payment (see chart
1). This is mismatched by bulky expenditure items (mostly for capital projects)
occurring in second half of the year. This seasonality could cause potential cash-flow
management issues. In mitigation the seasonality has been predictable, and the
administration manages it by building up cash buffer in the high-collection months in
preparation for covering expenses in lean months. Naga has also not been late on
salaries or debt payments before.

FMA Financial Management Assessment
• Despite the large reserves it holds, Naga’s does not have a stated policy on
investment of cash reserves. The city invests its cash based solely on which bank offers
the best time deposit rates. This lack of risk assessment could potentially be damaging
to the city’s financial health. In mitigation, currently in the Philippines, LGUs can only
place funds with Government Financial Institutions (GFIs) and LGUs have access to
special savings deposit accounts that offer higher interest rates.
• The calculation of number of days payables ratio from the financial statements shows
about 147 days in 2007, one of the highest among peers, and suggesting frequent delays
in payment to suppliers and contractors, and/or that there are significant past
obligations outstanding for long period of time yet still classified under current
liabilities. Notably, these high payables are in part driven by the city’s placing of
Special Education Funds in General Fund. In the Philippines, the Local Government
Code mandates that RPT rates to be set at a maximum total of 3%, of which 2%
collected goes to the General Fund while 1% would go to the Special Education Fund.
LGUs would typically then have two accounts to collect RPT. In the case of Naga City,
the management had placed all RPT collections under one General Fund account in
order to gain better interest rates. This resulted in inflated current liabilities due to the
inclusion of funds ‘owed’ to the SEF under ‘Intra-Agency Payables’. Excluding these
would yield significantly lower numbers of days payables to 109 days, although still
high, but more comparable to domestic peers. To add, the city has clear priorities of
payment; on the top of the agenda list are salaries, and the current administration has
never been late on these payments.
Chart 2

In-Year Liquidity Volatility

Cash at beginning of the month: General Fund (LHS)

PHP Mil. Coverage of monthly opex (RHS)

300 10.0
260 7.0

240 6.0
220 4.0

200 3.0
160 0.0
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Table 2
PHP. Mil 2008E 2007 2006 2005 2004
Cash and liquid assets at year-end 299.3 244.7 159.0 152.7 59.01
% of annual opex 82.9% 79.1% 51.2% 56.0% 22.3%
E- estimated

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:

FMA Financial Management Assessment
• Cash management combines secure banking and treasury arrangements with
fast and convenient cash disbursements. Internal (treasury) control over proper cash
spending is reliable, but not burdensome for spending units.
• Electronic transaction processing systems are in place.
• The financial body ensures timely availability of funds to spending units. The
government spends according to expenditure plans and policy priorities, not when cash
becomes available.
• Cash and debt management are integrated. The government manages its
consolidated risk position.
• The government minimizes the costs of maintaining its liquidity through
adequate size, structure, and income from its liquidity reserve.

8. Governance of government-owned and controlled companies (LRG companies):

Score; Not Applicable.
Government-owned enterprises often constitute a significant share of government activities.
The evaluation here is focused around strategic management and corporate governance
practices in relation to government-owned entities.
• The city government does not own or control any commercial entities. The city is,
however, responsible for economic enterprises that include the city convention center,
public markets, the slaughterhouse, the bus terminal, city hospital and several others.
These enterprises are generally self-liquidating, though the associated operating costs
and required budgetary support is fully consolidated in the city’s financial statements.

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:
• Adherence to the principles of good corporate governance;
• Proper representation of the government interests through effective coordinating
of shareholding responsibilities;
• Transparent nomination process for board of director and CEO positions, based
on competence and skills;
• Effective segregation of regulatory, shareholder, and consumer roles with
respect to LRG companies;
• Comprehensive corporate business planning at LRG companies;
• Systematic performance monitoring of LRG companies and their top managers.
Performance reporting by LRG companies; and
• Independent external audit of large LRG companies.

9. Performance focus and measurement: Score 1+

Strong focus on public expenditure results is an established trend in contemporary public
management. This is a relatively sophisticated capability to improve effectiveness of
government spending that is not necessary for daily operations.

Main strength:
• The Naga city government issues an annual “State of Local Governance
Report” at the end of year that benchmark departmental performance to the national
LGPMS program. The document highlights the city’s performance in terms of its
internal capacity (inputs), service delivery performance (outputs) and development
level performance (outcome). (The Department of Finance (DOF) Local Government

FMA Financial Management Assessment
Financial Performance Management System (LGFPMS) in theory benchmarks LGUs
in terms of service delivery and financial performance. The LGPMS is based on
defined quantitative indicators and LGUs who score well, could potentially be allowed
to exceed the current borrowing cap of 20% of income on debt servicing. However,
compliance with the LGPMS is not mandatory, there are no penalties for missing
benchmarks and there is no mechanism behind it to audit results. No LGU that we have
come across has failed to perform well, and this appears to remain a potentially useful
but ineffectual program.)

Main weaknesses:
• Naga demonstrates mostly basic practices in performance focus and
measurement. The city collates an Annual Accomplishment Report, citing the
accomplishments of key line units for the year and whether certain performance targets
were achieved (pending submission of document). Bonuses of staff are also base on
performance subject to availability of funds. However, performance focus and
measurement has no linkage to the annual budget, nor the LDIP or the city’s vision, and
there is no systemic approach in place to deal with performance challenges.
• Similarly, the mayor’s annual ‘State of City Report’ highlights the major
accomplishment of the city government for the year. However again, there are no
linkages here to address Naga’s performance in relation to its AIP or LDIP, nor are
there relative measurements of effectiveness.

Key international good practice:

Some of the factors that Standard & Poor’s considers as international good practice are:
• Effective performance management system with consistently planned and
executed performance targets;
• Performance management that covers all levels--from the government as a
whole, to a particular government employee--and has a close link to budgeting;
• Constant review and evaluations of existing expenditure programs and policies;
• Reviews of opportunities to increase efficiency of operations through public
private partnerships and outsourcing; and
• Track record of successful restructuring of particular areas of operations,
activities, and financial arrangement signaling the government's proactive approach to
internal improvements.

FMA Financial Management Assessment
Financial Statistics
--Year ended Dec. 31--
(Mil. PHP) 2009F 2008E 2007 2006 2005
Budget indicators
Operating revenues 505.0 488.0 468.6 425.4 380.4
Operating expenditures 393.0 361.1 309.4 310.7 272.9
Operating balance 112.1 126.9 159.1 114.7 107.5
Operating balance (% of operating revenues) 22.2 26.0 34.0 27.0 28.3
Capital revenues 0 0 0 17.1 0
Capital expenditures (capex) 110.0 69.0 98.0 85.8 29.5
Balance after capex 2.1 57.9 61.1 46.0 78.0
Balance after capex (% of total revenues) 0.4 11.9 13.1 10.4 20.5
Debt repaid 14.0 27.0 12.0 20.2 22.7
Net budget loans NA NA NA NA NA
Balance after debt repayment and onlending (12.0) 30.9 49.2 25.8 55.3
Balance after debt repayment and onlending (% of
total revenues) (2.4) 6.3 10.5 5.8 14.5
Gross borrowings 12.0 0 0 0 47.6
Balance after borrowings 0.1 30.9 49.2 25.8 102.9
Balance after borrowings (% of total revenues) 0.0 6.3 10.5 5.8 27.1
Total revenues (% of GRP or GDP) NA NA NA NA NA
Modifiable revenues (% of operating revenues) 34.3 34.2 30.9 32.0 29.2
Capex (% of total expenditures) 21.9 16.0 24.1 21.6 9.8
Operating-revenue growth (%) 3.5 4.2 10.2 11.8 8.7
Operating-expenditure growth (%) 8.8 16.7 (0.4) 13.9 3.1
Debt and liquidity
Direct debt (debt outstanding at year-end) 61.0 63.0 90.0 102.0 122.2
Direct debt (% of operating revenues) 12.1 12.9 19.2 24.0 32.1
Direct debt (% of GRP) NA NA NA NA NA
Tax-supported debt (% of Operating revenues) 12.1 12.9 19.2 24.0 32.1
Interest (% of operating revenues) 1.6 1.6 2.2 2.8 2.5
Debt service (% of operating revenues) 4.4 7.1 4.7 7.6 8.5
Cash & liquid assets (% of operating expenditures) 76.4 82.9 79.1 51.2 56.0
Cash & liquid assets (% of debt service) 1,363.6 859.0 9 495.1 474.8
Payables (% of total expenditure) 31.8 36.6 40.2 41.6 46.3
F--Forecast. E--Estimate. PHP-Philippines Peso.
GRP--Gross regional product. N.A.--Not available.

FMA Financial Management Assessment

A Financial Management Assessment (“FMA”) is an evaluation of the financial management
systems of a LRG/GRE and aimed at determination of its strength, weaknesses, risks and
opportunities in the context of global good practices and local environment. An FMA is
prepared utilizing Standard & Poor’s methodology for a fiscal accountability and capability
evaluation. The FMA is based on the information submitted by or on behalf of the subject
LRG/GRE and on other information Standard & Poor’s may have available. Standard &
Poor’s relies on the subject LRG/GRE for the accuracy, completeness, timeliness and
reliability of the information submitted in connection with an FMA. Standard & Poor’s (i)
does not and cannot guarantee the accuracy, completeness or timeliness of the information
relied on in connection with an FMA and any report or the results obtained from the use of
such information, and (ii) does not and cannot warrant suitability of an FMA or any report for
any particular purpose or use. An FMA and its results are (i) an opinion and are not a
verifiable statement of fact, (ii) provided without any express or implied warranties; (iii) do
not represent an audit by Standard & Poor’s; and (iv) do not constitute investment, financial
or other advice. In providing an FMA Standard & Poor’s is not providing an issuer credit
rating, a financial strength rating or a corporate governance score of the subject entity. Any
use or distribution of an FMA must be in compliance with all applicable laws. An FMA is
conducted by Standard & Poor’s Ratings Services as an independent analytical service
designed to preserve the independence and objectivity of the evaluation service.


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