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Financial Management

Local Government Units

Reported by: Joimee T. Ereno


♥ Financial management refers to the efficient and effective management of money (funds)
in such a manner as to accomplish the objectives of the organization. It is the
specialized function directly associated with the top management.


♥ Officially local government in the Philippines, often called local government

units or LGUs, are divided into three levels – provinces and independent cities;
component cities and municipalities; and barangays.

What You Need to Know About Your LGU?

1. What is a local government unit (LGU)?

LGUs have four classifications: the barangays (villages), municipalities, cities and provinces,
and the autonomous regions (although there is only one existing, the Autonomous Region in Muslim
Mindanao). They are considered independent from the national government: each LGU has the right
and the power to regulate its affairs—political, economic, social, and administrative—in its given
territory, consistent with the national policies.

2. Who are my elected LGU officials?

They are the barangay chairman, also known as the punong barangay; mayors and vice
mayors for both municipalities and cities; governors and vice governors. They are the ones which
head the executive department of their respective LGU.

The citizens also vote for their representatives to the Sanggunian or the council, the
legislative branch of the LGU. These are called Board Members at the provincial level, and
councilors from the city and municipality to the barangay level.
3. How long do they stay in office?

They stay for a term of three years.

4. What is the role of my Local Chief Executive?

The Local Chief Executive -- the Governor, the Mayor or the Barangay Chairperson -- leads
the daily operations of the LGU. She/he must enforce all laws and ordinances, maintain public order,
formulate development plans for the corresponding territories, and represent her/his respective LGU
in all transactions.

Section 22 of the Republic Act 7160, also known as the Local Government Code of 1991,
allows the Local Chief Executive to enter into contracts even without approval of the Sanggunian.
She/he is, however, obliged to post a copy of the contract in a conspicuous place of the LGU.

5. What is the role of the Sanggunian?

It is the legislative body of the LGU. It is responsible in enacting and reviewing ordinances,
approving resolutions, and planning the economic growth of the LGU, among other tasks.

It is composed of representatives from each legislative district, from the provincial down to
the municipal level. The number of Sanggunian representatives varies according to the LGU’s
charter or its number of districts. The Vice Governor or Vice Mayor heads the Sanggunian once it

The Sangguniang Pambarangay (Barangay Council) is elected at large and has seven

6. Who are my appointed local officials?

They are those who assume equally important roles in managing the LGU, particularly its
funds and resources. They are the local treasurer, budget officer, assessor, planning and
development officer, engineer, health officer, and civil registrar for each LGU.

The provincial or city LGU also has the administrator, legal officer, veterinarian, social
welfare and development officer, and general services officer. The provincial LGU also appoints an
7. Who conducts my LGU’s procurement activities?

The Bids and Awards Committee (BAC) does. It monitors procurement of the LGU, qualifies
contractors, manages the biddings, evaluates bids, and recommends to the Local Chief Executive
the awarding of contracts.

The Local Chief Executive appoints five to seven members to the BAC representing different
offices within the LGU such as the administrator’s office, budget, legal, general services, and
engineering offices; plus a representative of the citizens, usually coming from the civil society. They
elect among themselves the chairman and the vice-chairman of the committee. All members, except
for the citizen representative, should be occupying permanent positions in the LGU.

8. What basic services should my LGU provide me with?

It is the job of your LGU to raise funds and revenues and at the same time protect the
welfare of citizens by delivering basic services like health, education, social welfare, livelihood, and
infrastructure. Your LGU should also enforce law and order and protect the people from external
threats, whether natural or man-made.

9. What facilities should my LGU provide me with?

These include schools, health centers, hospitals, livelihood and technology centers, markets,
cemeteries, library; and infrastructures like gymnasiums, multi-purpose halls, ports, water supply and
sewerage systems.

Of course, all these will depend on the classification, capacity and financial status of your

10. When should the LGU enact a budget?

The Local Chief Executive and concerned departments start to draft the budget on July 15,
and submit it to the Sanggunian on or before October 15, which should approve it before end of the

You can ask for a copy of the approved budget at the Sanggunian office.

11. What happens when the Sanggunian fails to pass the budget?

The Sanggunian sometimes fails to enact the budget due to circumstances like a calamity or
political differences. When this happens, the budget of the preceding year is automatically reenacted
within the first 90 days of the current fiscal year.
12. I want to know more about my LGU’s income and expenditures. Where should I go?

You should easily find your LGU’s itemized monthly collections and disbursements in its
website and in visible areas of its main building, the plaza, main street, and in other conspicuous
places within the LGU’s territory. These should be posted within 10 days after the end of each month
and be visible in the said locations for at least two weeks.

You might as well want to check the website of the Bureau of Local Government Finance
(BLGF), the agency under the Department of the Interior and the Local Government (DILG) that
supervises LGUs’ financial activities.

13. What happens when my LGU fails to publicly post its financial documents?

The Local Government Code is strict when it comes to your LGU’s transparency on fiscal
matters. Section 513 says the Local Treasurer or Chief Accountant can be held liable for failing to
post the LGU’s budget and expenditure. While the law imposes only PhP 500 (EURO 8) fine for
violation, the erring official can be imprisoned for a maximum of one month.

14. What are my LGU’s other sources of income?

Apart from the staple income from tax revenues and different income-generating projects
such as livelihood and lending programs, an LGU can also receive pork barrel allocation from

Also check our research on LGU incomes to know more.

15. What is pork barrel?

In Philippine politics, pork barrel refers to government funds which politicians use to fund pet
projects for their personal and political gain.

Pork barrel comes in the form of discretionary and lump sum appropriations which the
President, Senators and Congressmen allocate for their favored districts and localities – or lately,
fake NGOs. Pork barrel includes the Priority Development Assistance Fund under the legislators and
the President’s ‘unprogrammed’ funds.

16. Can my LGU receive pork barrel from a lawmaker?

Yes. Even though PDAF has already been abolished, lawmakers can still allocate pork barrel
to their preferred LGU by appropriating it during deliberation of the national budget. Sen. Jinggoy
Estrada, for example, realigned PhP 100 million (EURO 1.6 million) of his PDAF for 2014 to the City
of Manila, where his father, former President Joseph Estrada, is incumbent mayor.
Your LGU’s financial statements should reflect any pork barrel allocation.

17. Can an LGU official have his or her own pork barrel?

Yes, and he/she usually allocates this to ‘typical’ pet projects such as medical assistance,
scholarship, and infrastructure. But regulations and studies on the extent of such fund among LGUs
are still lacking.

It is important for citizens like you to check whether such fund is included in your LGU’s budget and
ensure, if there is, that it is used to benefit your community.

18.What can I do if I find out that my LGU is misusing funds?

File a complaint. But before doing so, ask yourself first: did your LGU use public funds for
their private gain? Did the LGU spend more than it should? What laws did it violate?

Answers to these questions will help you assess the extent of your LGU’s misuse of public
funds. From there, you will be able to know what to complain about.

19.What data do I need to investigate corruption in my LGU?

Monthly or quarterly financial reports, audit reports, bidding documents, or contracts which
your LGU entered into are very useful.

And so are the statement of assets, liabilities, and net worth (SALN) of LGU officials or
employees. These will tell whether their lifestyle is logical to their declared SALN. Most often,
allegation of corruption sparks when a public servant seems to live way beyond what his income
could support.

Documents such as land titles, corporate records, records of election expenditures, tax
returns are also useful in your investigation.

20. Where can I file my complaint?

You can file it before the Office of the Ombudsman or the Commission on Audit.

Complaints filed before the Office of the Ombudsman cover illegal, unjust, or inefficient acts
of a public official or employee. A complaint can be subject to criminal or administrative proceedings.

Complaints filed before the COA include acts of fraud, waste, abuse, or misuse of public

21. Do these agencies accept complaints from anonymous sources?

Yes. Both agencies recognize the potential dangers a complainant can face once he or she
goes public. But they scrutinize the complaints and look for strong evidence first to back these up.

22. Can I file my complaint on alleged public misuse of funds online?

Yes. Thanks to new technology, filing complaints against your erring LGU is right at your
fingertips. When doing so before the Office of the Ombudsman, just go to its Online Filing Page and
fill up the online complaint form. Keep in mind, though, that online submission of the complaint is just
the first step. You should go to the Office of the Ombudsman in your region to confirm your complaint
and submit evidence.

COA likewise accepts online complaints through its Citizens’ Desk.

Remember that while online submission is encouraged, nothing beats actual filing and
follow-up of your complaint through visit or phone call to the agency for quick action.


Every local government unit, as a corporation, shall have the following powers:

(1) To have continuous succession in its corporate name;

(2) To sue and be sued;

(3) To have and use a corporate seal;

(4) To acquire and convey real or personal property;

(5) To enter into contracts; and

(6) To exercise such other powers as are granted to corporations, subject to the
limitations provided in this Code and other laws.


♥ A local government unit may, through its chief executive and acting pursuant to an
ordinance, exercise the power of eminent domain for public use, or purpose, or welfare
for the benefit of the poor and the landless, upon payment of just compensation,
pursuant to the provisions of the Constitution and pertinent laws.


♥ Local government units (LGUs) were given responsibility for the provision of basic

♥ tasked to provide or maintain infrastructure facilities.


♥ general hygiene

♥ sanitation

♥ solid waste collection

♥ multi-purpose halls and pavements

♥ day care centers, and

♥ maintenance of barangay roads, bridges and water supply systems


♥ solid waste disposal systems,

♥ municipal roads and bridges,

♥ school buildings,

♥ health centers,

♥ public markets,

♥ slaughterhouses and other municipal enterprises and infrastructure.

♥ communal irrigation systems,

♥ water and soil resources

♥ utilization and conservation projects;

♥ enforcement of fishery laws in municipal waters including the

conservation of mangroves; seawalls, dikes, drainage and sewerage,

♥ flood control;
♥ tourism facilities and other tourist attractions

♥ implementation of community-based

Local government income generation: How and where?

Income covers “all revenues and receipts collected or received, forming the gross
accretion of funds of the local government;” 2 Local government income comes from different
sources and revenue measures. Some are generated internally –in the form of local taxations
while others are sourced elsewhere –from the likes of national government, from other local
government units (LGUs) and from creditors. This background paper will focus on local revenue
sources and the share of national wealth since they are the main income sources of most LGUs.
It is however important to understand that loans/borrowings, aid and grants and inter-local
authority transfers can also play a significant role.

Local sources of income

The local governments’ power to generate its own financial resources is guaranteed by
Article 10 Section 5 of the Constitution:

“Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local governments.”

Two important points can be deduced from the said provision: one, that local sources of
income can be through tax and non-tax revenue measures; and, two, that collections from these
sources shall go to the local government concerned.

Local governments are given the power to adopt and implement tax and non-tax
measures to generate funds. Section 130 of the LGC, however, requires that these measures
are consistent with the following principles:

1. Taxation shall be uniform in each local government unit;

2. Taxes, fees, charges and other impositions shall:
1. be equitable and based as far as practicable on the
taxpayer’s ability to pay;
2. be levied and collected only for public purposes;
3. not be unjust, excessive, oppressive, or
4. not be contrary to law, public policy, national
economic policy, or in restraint of trade;
b. The collection of local taxes, fees, charges and other impositions shall in no case be let to any
private person;
c. The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of,
and be subject to disposition by, the local government unit levying the tax, fee, charge or other
imposition unless otherwise specifically provided herein; and,
d. Each local government unit shall, as far as practicable, evolve a progressive system of

National to local transfers

Aside from the power to generate local resources, local governments are also entitled to
a share in national government revenue sources. Two significant Constitutional provisions
guarantee this entitlement. The first is Article X, Section 6 which provides that:

“Local government units shall have a just share, as determined by law, in the national
taxes which shall be automatically released to them.”

This provision forms the basis for the institution of the Internal Revenue Allotment (IRA),
the share of local government units in the national internal revenue taxes. The national internal
revenue taxes, refers to sales tax, specific tax, contractor’s tax, on banks and finance
companies, fixed taxes on business and occupation, tax on common carriers, charges tax,
miller’s tax (except that on sugar), percentage tax on cinematographic film owners, lessors and
distributors, certain mining taxes, occupation fees and rentals, and water rentals.3

The LGC entitles local governments to 40 percent share of national internal revenue
collections of the third preceding year. The LGC also specifies how the 40 percent share will be
divided among local government units. It is allocated first among the LGUs as follows:
 23 percent is allocated for provinces;
 23 percent is allocated for cities;
 34 percent is allocated for municipalities; and
 20 percent is allocated for barangays

The amounts allocated for each class of LGU is further distributed to determine the share of
each province, city and municipality using the following criteria:

 Population – 50 percent
 Land area – 25 percent
 Equal sharing -- 25 percent

This is why many local governments are wary of attempts to redraw municipal boundaries since
it will directly affect their revenues.

From the above formula, one can infer that the following factors can affect the amount of IRA
each LGU gets:

 Tax revenue performance of the national government. Effectiveness and efficiency of

tax administration, tax leakages/evasion, certain tax exemptions, all impact on the actual level
of internal revenue collections. Since the IRA is based on revenue collections, poor tax
revenue effort will stunt the amount of the IRA for LGUs.
 LGUs with larger population size and/or land area will tend to have a greater share of
the IRA.
 The greater the number of LGUs among each class will impact on the share of each
LGU. If Congress converted several municipalities into cities, there would be more LGUs that
will share the 23 percent allocation for cities.

It is also worth bearing in mind that the Constitution provides the mandatory and automatic
release of the IRA to the LGUs.

The second significant Constitutional provision on LGU share in national resources is Section 7
of Article IX which states that:
“Local governments shall be entitled to an equitable share in the proceeds of the utilization and
development of the national wealth within their respective areas, in the manner provided by law,
including sharing the same with the inhabitants by way of direct benefits.”

Section 290 of the LGC operationalized this provision stating that:

“Local government units shall, in addition to the internal revenue allotment, have a share of forty
percent (40%) of the gross collection derived by the national government from the preceding
fiscal year from mining taxes, royalties, forestry and fishery charges, and such other taxes, fees,
or charges, including related surcharges, interests, or fines, and from its share in any co-
production, joint venture or production sharing agreement in the utilization and development of
the national wealth within their territorial jurisdiction.”

In addition, LGUs are also entitled a share on the proceeds derived by a government agency or
government-owned or controlled corporation engaged in the utilization and development of the
national wealth. The LGU’s share shall be 1 percent of the gross sales or receipts of the
preceding calendar year or 40 percent of the mining taxes, royalties, forestry and fishery
charges and such other taxes, fees or charges, including related surcharges, interests, or fines
the government agency or GOCC would have paid if it were not otherwise exempt, whichever is
higher. The allocation for such shares of the LGUs is determined as such: 20 percent for
province, 45 percent for component city/municipality, and 35 percent for barangays.

Whereas the IRA is shared across all LGUs, the recipient of the shares on the earnings from
utilization of the national wealth is directed to LGUs where such national wealth are located.

Local government expenditures

The income generated by LGUs through different sources as discussed above are
allocated across various expenditure items which should ideally support the provision of
essential services that would promote development and raise the quality of life of the LGU’s
constituents. Resource allocation is done through the local budgeting process which consists of
the following phases: budget preparation, budget authorization, budget execution and budget
Budget preparation
Budget preparation involves the formulation of the a) estimates of income; and, b) a budget
proposal to be submitted by the local chief executive to the sanggunian for deliberation and
approval. The preparation phase consists of three major activities by the heads of local
departments and offices.

1. On or before July 15th of each year, the local treasurer is required to submit to the local
chief executive a certified statement containing the following:
1. actual income and expenditures during the immediately preceding year;
2. actual income and expenditures of the first two quarters of the current fiscal year;
3. estimated income and expenditures for the last two quarters of the current fiscal
b. A Local Finance Committee is convened which is composed of the local planning and
development officer, the local budget officer and the local treasurer. The committee is tasked to
deliberate and submit to the local chief executive the following:
1. Estimation of a reasonable income projection for the ensuing year;
2. recommendations on the appropriate tax and revenue measures or borrowing
appropriate to support the budget;
3. recommendations on the level of annual expenditures and the ceilings of
spending for economic, social and general services based on the LGU’s
approved local development plan; and,
4. recommendations on the amount to be allocated for capital outlay under each
development activity or infrastructure project.
b. Heads of the LGU’s departments and offices prepare and submit budget proposals for the
ensuing year to the local chief executive.

Based on these submissions, the local chief executive prepares the executive budget for the
ensuing year to the local legislative council/sanggunian not late than October 16th of the current
year. According to the LGC, “failure to submit such budget on the date prescribed… shall
subject the local chief executive to such criminal and administrative penalties as provided for
under this Code and other applicable laws.”

Budget authorization
Upon receipt of the budget documents from the local chief executive, the sanggunian is then
tasked to enact, through an ordinance, the annual budget of the LGU for the ensuing fiscal year
before the end of the current year. Ideally, the sanggunian should study, scrutinize and
deliberate the estimated income and proposed budget. Legislative approval is important
because it is the sanggunian which has the power to appropriate the budget. Appropriation
refers to “an authorization made by ordinance, directing the payment of goods and services
from local government funds under specified conditions or for specific purposes.”4

Once a budget is passed by the legislature, the appropriations ordinance is subject to review by
authorities depending on the nature of the LGU. The Department of Budget and Management
(DBM) reviews the appropriation ordinance of provinces, highly-urbanized cities, independent
component cities, and municipalities within Metro Manila. The sangguniang
panlalawigan (provincial council) is tasked to review the ordinance of component cities and
municipalities. The review process ensures that the budgets prepared and approved by these
LGUs are within the budgetary requirements and general limitations as prescribed in the Code.5

Budget execution
The LGC states that the responsibility for the execution of the annual budget and the
accountability therefore shall be vested primarily in the local chief executive.

Budget execution involves the activities related to the disbursement of funds to be used for pre-
identified programs, projects, activities contained in the approved budget. It involves the
exercise of local executive of mechanisms to program and control cash disbursements. An
important mechanism for control is the power to issue allotments by the local chief executive.
Allotments are essentially authorizations to departments/offices to incur obligations of specific
amounts to be paid out of local government funds.

Budget accountability
The Commission on Audit and DBM have promulgated rules and regulations that seek to
strengthen accountability mechanisms in local finance. The New Government Accounting
System (NGAS) issued by the COA contains detailed guidelines for local government units in
accounting for all incomes, disbursements and budgetary accounts. It also specifies in great
detail a financial reporting system which requires, among others, the preparation of year-end
financial statements such as balance sheet, statement of income and expenses, and statement
of cash flows. More importantly, the COA conducts audits of local government finances and
publishes these audit reports on their website.

Citizens’ participation in local public finance

A significant feature of decentralization in the country is the recognition by law of the importance
of people’s participation in local governance processes. The LGC mandates local sectoral
representation in the sanggunian and representation of people’s organizations and NGOs in
local special bodies such as the local development council, local school board and local health
board. Citizens can and should engage with these to study what programs are being prioritized
and assess whether due importance is given to programs and services that are most needed for
the development of communities. Statutory requirements for preparation and submission of
budgetary and financial reports, while necessary, are not enough to strengthen mechanisms for

Citizen’s involvement in local fiscal administration is essential in ensuring that those holding
public office consistently perform their duties and responsibilities in line with the best interest of
the people. Members of the public therefore need to monitor and ultimately play a role in
influencing the funding priorities of local officials since the funds ultimately belong and aim to
serve and support the people.

Local Government Code of 1991

♥ local government units shall be given more powers, authority, responsibilities, and
resources. The process of decentralization shall proceed from the national government
to the local government units.

♥ policy of the State to ensure the accountability of local government units through the
institution of effective mechanisms of recall, initiative and referendum.

1996 LGU Financing Framework

♥ LGUs would have to improve their ability to generate their own revenues and to gain
access to private capital.
♥ The basic objective of the Framework is to wean away the LGUs from dependence on
the national government and promote effective partnership with the private sector.

 LGUs have varying level and records of creditworthiness and bankability.

 Their financing needs are huge.

♥ Therefore, the private sector (BOT investors, bondholders, commercial banks), the GFIs
and MDF all have a role to play in meeting LGU financing needs.

What is Public Financial Management?

♥ is a system of rules, procedures and practices for government to manage public


♥ is an integral part of such organizational structure and operating mechanism as it

provides the general framework for:

 (1) generating revenues;

 (2) allocating resources; and

 (3) managing expenditures, all of which are necessarily entailed in the fulfillment
of the LGU’s mandates.

Public Financial Management

♥ PFM seeks to address the key challenges of controlling government spending and
making agencies operate efficiently and effectively.

Is government spending within limits?

Does it obtain best value for money?

Why Assess PFM?

♥ PFM largely and directly affects the delivery of public goods and services to the LGU’s

 generate its own sources of revenues.

 spending will be limited to programs, projects and activities.

 It ensures that public funds will always be spent in a cost-effective manner and
will always be advantageous to government.

Public Financial Management Assessment Tool (PFMAT)

♥ a self-assessment instrument designed to assist LGUs in evaluating their PFM


♥ The tool describes the characteristics of a good PFM system, identifies performance
indicators to gauge how the LGU is actually doing in a particular area of PFM, and
identifies the sources of information which will help the LGUs establish their compliance
with graduated levels of performance.

Provisions in Article X on Local Government in the 1987 Philippine


Section 5. Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local governments;

Section 6. Local government units shall have a just share, as determined by law, in the national
taxes which shall be automatically released to them; and

Section 7. Local governments shall be entitled to an equitable share in the proceeds of the
utilization and development of the national wealth within their respective areas, in the manner
provided by law, including sharing the same with the inhabitants by way of direct benefits.

Republic Act No. 7160

Section 33.
Inter-Local Government Relations
Cooperative Undertakings Among Local Government Units

“Local government units may, through appropriate ordinances, group themselves,

consolidate, or coordinate their efforts, services, and resources for purposes commonly
beneficial to them. In support of such undertakings, the local government units involved may,
upon approval by the sanggunian concerned after a public hearing conducted for the
purpose, contribute funds, real estate, equipment, and other kinds of property and appoint or
assign personnel under such terms and conditions as may be agreed upon by the participating
local units through Memoranda of Agreement.”