DEMAALA V. COMMISSION ON AUDIT, G.R. NO.

199752, [FEBRUARY 17, 2015]

FACTS:
The Sangguniang Panlalawigan of Palawan enacted Provincial Ordinance No. 332-A, Series of 1995, entitled
“An Ordinance Approving and Adopting the Code Governing the Revision of Assessments, Classification and Valuation
of Real Properties in the Province of Palawan” (Ordinance). Chapter 5, Section 48 of the Ordinance provides for an
additional levy on real property tax for the special education fund at the rate of one-half percent or 0.5% as follows:
Section 48. Additional Levy on Real Property Tax for Special Education Fund. — There is hereby levied an annual tax
at the rate of one-half percent (1/2%) of the assessed value property tax. The proceeds thereof shall exclusively accrue
to the Special Education Fund (SEF).
In conformity with Section 48 of the Ordinance, the Municipality of Narra, Palawan, with Demaala as mayor,
collected from owners of real properties located within its territory an annual tax as special education fund at the rate
of 0.5% of the assessed value of the property subject to tax. This collection was effected through the municipal
treasurer.
On post-audit, Audit Team Leader Juanito A. Nostratis issued Audit Observation Memorandum (AOM) No.
03-005 dated August 7, 2003 in which he noted supposed deficiencies in the special education fund collected by the
Municipality of Narra. He questioned the levy of the special education fund at the rate of only 0.5% rather than at 1%,
the rate stated in Section 235 of Republic Act No. 7160, otherwise known as the Local Government Code of
1991 (Local Government Code).
After evaluating AOM No. 03-005, Regional Cluster Director Sy issued NC No. 2004-04-101 dated August 30,
2004 in the amount of P1,125,416.56. He held Demaala, the municipal treasurer of Narra, and all special education
fund payors liable for the deficiency in special education fund collections.

ISSUES:
A. WON THE SEF RATE IS DISCRETIONARY
B. WON THE OFFICIALS MAY BE HELD PERSONALLY LIABLE.

HELD:
A. YES. Section 235’s permissive language is unqualified. Moreover, there is no limiting qualifier to the articulated rate
of 1% which unequivocally indicates that any and all special education fund collections must be at such rate.
At most, there is a seeming ambiguity in Section 235. Consistent with what has earlier been discussed
however, any such ambiguity must be read in favor of local fiscal autonomy. As in San Juan v. Civil Service
Commission, the scales must weigh in favor of the local government unit.
Fiscal autonomy entails “the power to create . . . own sources of revenue.” In turn, this power necessarily
entails enabling local government units with the capacity to create revenue sources in accordance with the realities
and contingencies present in their specific contexts. The power to create must mean the local government units’ power
to create what is most appropriate and optimal for them; otherwise, they would be mere automatons that are turned
on and off to perform prearranged operations.
Devolving power but denying its necessary incidents and accessories is tantamount to not devolving power
at all. A local government unit with a more affluent constituency may thus realize that it can levy taxes at rates greater
than those which local government units with more austere constituencies can collect. For the latter, collecting taxes
at prohibitive rates may be counterproductive. High tax rates can be a disincentive for doing business, rendering it
unattractive to commerce and thereby stunting, rather than facilitating, their development. In this sense, insisting on
uniformity would be a disservice to certain local government units and would ultimately undermine the aims of local
autonomy and decentralization.
Of course, fiscal autonomy entails “working within the constraints.” To echo the language of Article X, Section
5 of the 1987 Constitution, this is to say that the taxing power of local government units is “subject to such guidelines
and limitations as the Congress may provide.” It is the 1% as a constraint on which the respondent Commission on
Audit is insisting.
There are, in this case, three (3) considerations that illumine our task of interpretation: (1) the text of Section
235, which, to reiterate, is cast in permissive language; (2) the seminal purpose of fiscal autonomy; and (3) the
jurisprudentially established preference for weighing the scales in favor of autonomy of local government units. We
find it to be in keeping with harmonizing these considerations to conclude that Section 235’s specified rate of 1% is a
maximum rate rather than an immutable edict. Accordingly, it was well within the power of the Sangguniang
Panlalawigan of Palawan to enact an ordinance providing for additional levy on real property tax for the special
education fund at the rate of 0.5% rather than at 1%.

(Pimentel vs. Aguirre, G.R. No. 132988, July 19, 2000)

Facts:

In 1997, President Ramos issued AO 372 which: (1) required all government departments and agencies, including
SUCs, GOCCs and LGUs to identify and implement measures in FY 1998 that will reduce total expenditures for the year
by at least 25% of authorized regular appropriations for non-personal services items (Section 1) and (2) ordered the
withholding of 10% of the IRA to LGUs (Section 4) . On 10 December 1998, President Estrada issued AO 43, reducing
to 5% the amount of IRA to be withheld from LGU.

Issues:

1. Whether or not the president committed grave abuse of discretion in ordering all LGUS to adopt a 25% cost
reduction program in violation of the LGU'S fiscal autonomy

2. Whether Section 4 of the same issuance, which withholds 10 percent of their internal revenue allotments, are valid
exercises of the President's power of general supervision over local governments

Held:

1. Section 1 of AO 372 does not violate local fiscal autonomy. Local fiscal autonomy does not rule out any manner of
national government intervention by way of supervision, in order to ensure that local programs, fiscal and otherwise,
are consistent with national goals. Significantly, the President, by constitutional fiat, is the head of the economic and
planning agency of the government, primarily responsible for formulating and implementing continuing, coordinated
and integrated social and economic policies, plans and programs for the entire country. However, under the
Constitution, the formulation and the implementation of such policies and programs are subject to "consultations
with the appropriate public agencies, various private sectors, and local government units." The President cannot do
so unilaterally.

Consequently, the Local Government Code provides:

"x x x [I]n the event the national government incurs an unmanaged public sector deficit, the President of the Philippines
is hereby authorized, upon the recommendation of [the] Secretary of Finance, Secretary of the Interior and Local
Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both
Houses of Congress and the presidents of the liga, to make the necessary adjustments in the internal revenue allotment
of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national
internal revenue taxes of the third fiscal year preceding the current fiscal year x x x."
There are therefore several requisites before the President may interfere in local fiscal matters: (1) an unmanaged
public sector deficit of the national government; (2) consultations with the presiding officers of the Senate and the
House of Representatives and the presidents of the various local leagues; and (3) the corresponding recommendation
of the secretaries of the Department of Finance, Interior and Local Government, and Budget and Management.
Furthermore, any adjustment in the allotment shall in no case be less than thirty percent (30%) of the collection of
national internal revenue taxes of the third fiscal year preceding the current one.

Petitioner points out that respondents failed to comply with these requisites before the issuance and the
implementation of AO 372. At the very least, they did not even try to show that the national government was suffering
from an unmanageable public sector deficit. Neither did they claim having conducted consultations with the different
leagues of local governments. Without these requisites, the President has no authority to adjust, much less to reduce,
unilaterally the LGU's internal revenue allotment.
AO 372, however, is merely directory and has been issued by the President consistent with his power of
supervision over local governments. It is intended only to advise all government agencies and instrumentalities to
undertake cost-reduction measures that will help maintain economic stability in the country, which is facing economic
difficulties. Besides, it does not contain any sanction in case of noncompliance. Being merely an advisory, therefore,
Section 1 of AO 372 is well within the powers of the President. Since it is not a mandatory imposition, the directive
cannot be characterized as an exercise of the power of control.

2. Section 4 of AO 372 cannot be upheld. A basic feature of local fiscal autonomy is the automatic release of the shares
of LGUs in the national internal revenue. This is mandated by no less than the Constitution. The Local Government
Code specifies further that the release shall be made directly to the LGU concerned within five (5) days after every
quarter of the year and "shall not be subject to any lien or holdback that may be imposed by the national government
for whatever purpose." As a rule, the term "shall" is a word of command that must be given a compulsory meaning.
The provision is, therefore, imperative. (Pimentel vs. Aguirre, G.R. No. 132988, July 19, 2000)

Mandanas v Romulo GR 152774 May 27, 2004

FACTS:
In 1998, then President Estrada issued EO No. 48 establishing the “Program for Devolution Adjustment and
Equalization” to enhance the capabilities of LGUs in the discharge of the functions and services devolved to them
through the LGC. The Oversight Committee under Executive Secretary Ronaldo Zamora passed Resolutions No. OCD-
99-005, OCD-99- 006 and OCD-99-003 which were approved by Pres. Estrada on October 6, 1999. The guidelines
formulated by the Oversight Committee required the LGUs to identify the projects eligible for funding under the
portion of LGSEF and submit the project proposals and other requirements to the DILG for appraisal before the
Committee serves notice to the DBM for the subsequent release of the corresponding funds. Hon. Herminaldo
Mandanas, Governor of Batangas, petitioned to declare unconstitutional and void certain provisos contained in the
General Appropriations Acts (GAAs) of 1999, 2000, and 2001, insofar as they uniformly earmarked for each
corresponding year the amount of P5billion for the Internal Revenue Allotment (IRA) for the Local Government Service
Equalization Fund (LGSEF) & imposed conditions for the release thereof.

ISSUE:
Whether the assailed provisos in the GAAs of 1999, 2000, and 2001, and the OCD resolutions infringe the Constitution
and the LGC of 1991.

HELD:
Yes. The assailed provisos in the GAAs of 1999, 2000, and 2001, and the OCD resolutions constitute a “withholding”
of a portion of the IRA – they effectively encroach on the fiscal autonomy enjoyed by LGUs and must be struck down.
According to Art. II, Sec.25 of the Constitution, “the State shall ensure the local autonomy of local governments“.
Consistent with the principle of local autonomy, the Constitution confines the President’s power over the LGUs to one
of general supervision , which has been interpreted to exclude the power of control . Drilon v. Lim distinguishes
supervision from control: control lays down the rules in the doing of an act – the officer has the discretion to order
his subordinate to do or redo the act, or decide to do it himself ; supervision merely sees to it that the rules are
followed but has no authority to set down the rules or the discretion to modify/replace them . The entire process
involving the distribution & release of the LGSEF is constitutionally impermissible. The LGSEF is part of the IRA or “just
share” of the LGUs in the national taxes. Sec.6, Art.X of the Constitution mandates that the “ just share” shall be
automatically released to the LGUs. Since the release is automatic, the LGUs aren’t required to perform any act to
receive the “just share” – it shall be released to them “without need of further action“. To subject its distribution &
release to the vagaries of the implementing rules & regulations as sanctioned by the assailed provisos in the GAAs of
1999-2001 and the OCD Resolutions would violate this constitutional mandate. The only possible exception to the
mandatory automatic release of the LGUs IRA is if the national internal revenue collections for the current fiscal year
is less than 40% of the collections of the 3rd preceding fiscal year. The exception does not apply in this case. The
Oversight Committee’s authority is limited to the implementation of the LGC of 1991 not to supplant or subvert the
same, and neither can it exercise control over the IRA of the LGUs. Congress may amend any of the provisions of the
LGC but only through a separate law and not through appropriations laws or GAAs. Congress cannot include in a
general appropriations bill matters that should be more properly enacted in a separate legislation. A general
appropriations bill is a special type of legislation, whose content is limited to specified sums of money dedicated to
a specific purpose or a separate fiscal unit – any provision therein which is intended to amend another law is
considered an “inappropriate provision “. Increasing/decreasing the IRA of LGUs fixed in the LGC of 1991 are matters
of general & substantive law. To permit the Congress to undertake these amendments through the GAAs would unduly
infringe the fiscal autonomy of the LGUs. The value of LGUs as institutions of democracy is measured by the degree
of autonomy they enjoy. Our national officials should not only comply with the constitutional provisions in local
autonomy but should also appreciate the spirit and liberty upon which these provisions are based.

GANZON V CA G.R. NO. 93252 AUGUST 5, 1991

"In administration law supervision means overseeing or the power or authority of an officer to see that subordinate
officers perform their duties. If the latter fail or neglect to fulfill them the former may take such action or step as
prescribed by law to make them perform their duties. Control, on the other hand, means the power of an officer to
alter or modify or nullify of set aside what a subordinate officer had done in the performance of his duties and to
substitute the judgment of the former for that of the latter."

SAN JUAN v. CIVIL SERVICE COMMISSION GR NO. 92299 APRIL 19, 1991

Facts: The Provincial Budget Officer of Rizal (PBO) was left vacant; thereafter Rizal Governor San Juan, peititioner,
nominated Dalisay Santos for the position and the latter quickly assumed position. However, Director Abella of Region
IV Department of Budget and Management (DBM) did not endorse the nominee, and recommended private
respondent Cecilia Almajose as PBO on the ground that she was the most qualified. This appointment was
subsequently approved by the DBM. Petitioner protested the appointment of Almajose before the DBM and the Civil
Service Commission who both dismissed his complaints. His arguments rest on his contention that he has the sole
right and privilege to recommend the nominees to the position of PBO and that the appointee should come only from
his nominees. In support thereof, he invokes Section 1 of Executive Order No. 112.

Issue: Whether or not DBM is empowered to appoint a PBO who was not expressly nominated by the provincial
governor.

Held:
Under the cited Sec 1 of EO 112, the petitioner's power to recommend is subject to the qualifications
prescribed by existing laws for the position of PBO. Consequently, in the event that the recommendations made by
the petitioner fall short of the required standards, the appointing authority, public respondent DBM is expected to
reject the same. In the event that the Governor recommends an unqualified person, is the Department Head free to
appoint anyone he fancies?
Petitioner states that the phrase of said law: "upon recommendation of the local chief executive concerned"
must be given mandatory application in consonance with the state policy of local autonomy as guaranteed by the
1987 Constitution under Art. II, Sec. 25 and Art. X, Sec. 2 thereof. He further argues that his power to recommend
cannot validly be defeated by a mere administrative issuance of public respondent DBM reserving to itself the right
to fill-up any existing vacancy in case the petitioner's nominees do not meet the qualification requirements as
embodied in public respondent DBM's Local Budget Circular No. 31 dated February 9, 1988.
This case involves the application of a most important constitutional policy and principle, that of local
autonomy. We have to obey the clear mandate on local autonomy. Where a law is capable of two interpretations,
one in favor of centralized power in Malacañang and the other beneficial to local autonomy, the scales must be
weighed in favor of autonomy.
The 1935 Constitution clearly limited the executive power over local governments to "general supervision . .
. as may be provided by law." The President controls the executive departments. He has no such power over local
governments. He has only supervision and that supervision is both general and circumscribed by statute. The exercise
of greater local autonomy is even more marked in the present Constitution. Article II, Section 25 provides: "The State
shall ensure the autonomy of local governments"
Thereby, DBM Circular is ultra vires and is, accordingly, set aside. The DBM may appoint only from the list of
qualified recommendees nominated by the Governor. If none is qualified, he must return the list of nominees to the
Governor explaining why no one meets the legal requirements and ask for new recommendees who have the
necessary eligibilities and qualifications.

DEFINITIONS

(k) Government Agency refers to any of the various units of the Government of the Republic of the Philippines,
including a department, bureau, office, instrumentality or GOCC, or a local government or a distinct unit therein.

(l) Government Corporate Governance Standards refer to a set of principles derived from law and practices, rules and
standards prescribed by the Governance Commission for Government-Owned or -Controlled Corporations (GCG) that
generate long-term arid desirable economic value for the State. It shall also refer to a system whereby shareholders,
creditors, and other stakeholders of a corporation ensure that management enhances the value of the corporation as
it competes in an increasingly global market place.

(m) Government Financial Institutions (GFIs) refer to financial institutions or corporations in which the government
directly or indirectly owns majority of the capital stock and. which are either: (1) registered with or directly supervised
by the Bangko Sentral ng Pilipinas; or (2) collecting or transacting funds or contributions from the public and places
them in financial instruments or assets such as deposits, loans, bonds and equity including, but not limited to, the
Government Service Insurance System and the Social Security System.

(n) Government Instrumentalities with Corporate Powers (GICP)/Government Corporate Entities (GCE) refer to
instrumentahties or agencies of the government, which are neither corporations nor agencies integrated within the
departmental framework, but vested by law with special functions or jurisdiction, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy usually through a charter
including, but not limited to, the following: the Manila International Airport Authority (MIAA), the Philippine Ports
Authority (PPA), the Philippine Deposit Insurance Corporation (PDIC), the Metropolitan Waterworks and Sewerage
System (MWSS), the Laguna Lake Development Authority (LLDA), the Philippine Fisheries Development Authority
(PFDA), the Bases Conversion and Development Authority (BCDA), the Cebu Port Authority (CPA), the Cagayan de Orb
Port Authority, the San Fernando Port Authority, the Local Water Utilities Administration (LWUA) and the Asian
Productivity Organization (APO).

(o) Government-Owned or -Controlled Corporation (GOCC) refers to any agency organized as a stock or nonstock
corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and
owned by the Government of the Republic of the Philippines directly or through its instrumentahties either wholly or,
where applicable as in the case of stock corporations, to the extent of at least a majority of its outstanding capital
stock: Provided, however, That for purposes of this Act, the term “GOCC”- shall include GICP/GCE and GFI as defined
herein.

(p) Nonchartered GOCC refers to a GOCC organized and operating under Batas Pambansa Bilang 68, or “The
Corporation Code of the Philippines”.