Title
Social Security System vs. Commission on Audit
Case
G.R. No. 259862
Decision Date
May 21, 2024
The SSS sought to annul COA's decision disallowing CNA incentives due to audit rule violations for 2005-2008 disbursements. The COA upheld the disallowance based on evidence of lack of legal basis.
social security system
commission on audit
collective negotiation agreement

Case Summary (G.R. No. 259862)

Factual Background

The SSS-Luzon North Cluster received three Notices of Disallowance relating to CNA incentives paid to rank-and-file employees for calendar years 2005 to 2008. The amounts disallowed were PHP 3,626,505.53, PHP 16,612,484.21, and PHP 464,264.34, the last of which was later corrected to PHP 459,981.36, yielding a total originally asserted as PHP 20,703,254.08. COA Cordillera Administrative Region (COA CAR) concluded that the grants violated the rules and conditions in DBM Budget Circular No. 2006-01 and in PSLMC Resolution No. 02, Series of 2003, including that the incentives were not provided for in the CNAs or supplements, that savings were not demonstrably generated from identified cost-cutting measures, that excessive accruals were used as the basis for payments, and that the one-time end-of-year payment requirement was not observed.

COA CAR Proceedings

The COA CAR, by Decision No. 2016-014 dated April 5, 2016, denied the SSS appeals and affirmed the Notices of Disallowance, except for a computational reduction of PHP 4,282.98 in one disallowance. COA CAR found that the SSS failed to produce an existent supplemental CNA for 2005, failed to meet the Corporate Operating Budget performance targets for 2005 and 2007, improperly relied on nonrecurring revenues and excessive accruals as sources of savings, and failed to identify in the CNA specific cost-cutting measures whose implementation generated the savings used for the incentives. COA CAR also held that the practice of staggering payments contravened the one-time payment mandate in DBM Budget Circular No. 2006-01.

COA Commission Proper Decision

On automatic review, the COA Commission Proper issued Decision No. 2021-425 dated December 17, 2021, which approved COA CAR Decision No. 2016-014 in full and adopted its findings. The COA CP likewise affirmed the disallowances and directed the audit team to evaluate the participation of the Social Security Commission members to determine possible supplemental notices of disallowance against them.

Petition to the Court and Contested Issue

The SSS filed a petition under Rule 64 seeking annulment and setting aside of COA CP Decision No. 2021-425, and sought a declaration that the recipients and the certifying and approving officers were not liable to refund the disallowed amounts. The central issue before the Court was whether the COA committed grave abuse of discretion in affirming the Notices of Disallowance.

Standard of Review

The Court reiterated that a Rule 64 petition against COA decisions is limited to jurisdictional error or grave abuse of discretion. The Court adopted the definition of grave abuse of discretion articulated in Madera v. Commission on Audit, namely, an act not based on law and the evidence but on caprice, whim, or despotism, or an evasion or virtual refusal to perform a duty enjoined by law. Deference is accorded to constitutionally created administrative agencies such as the COA in view of separation of powers and their expertise.

Precedent and Controlling Administrative Rules

The Court relied upon its prior decisions in Social Security System v. Commission on Audit (2020) and Social Security System v. Commission on Audit (2021) which had previously addressed disallowances of CNA incentives in analogous SSS transactions and upheld COA findings that incentives lacked legal basis and violated DBM Budget Circular No. 2006-01 and PSLMC Resolution No. 02, Series of 2003. The Court reviewed the pertinent provisions of DBM Budget Circular No. 2006-01 governing CNA incentives, including the requirement that cash incentives be provided for in CNAs or supplements, that the incentive be a one-time end-of-year payment, that savings must be from cost-cutting measures identified in the CNA, and the apportionment scheme for such savings. The Court also noted PSLMC Resolution No. 02, Series of 2003, which conditions the grant of CNA incentives on meeting targeted operating income and excludes nonrecurring revenues from actual operating income.

2005 Incentive: Lack of Valid CNA or Supplemental CNA

The Court upheld COA’s finding that the 2005 incentives were unsupported by a valid CNA or supplemental CNA. The SSS relied on SSC Resolution No. 259-S.2005, which referenced a Supplemental CNA authorizing PHP 20,000 per employee, payable in two tranches, but the SSS failed to produce the alleged Supplemental CNA despite opportunities to do so. COA CAR further observed that the amounts affected by the disallowance differed from the amounts described in the SSC resolution, and therefore the documentary basis for the 2005 grant was conclusively absent.

Failure to Meet Corporate Operating Budget Targets in 2005 and 2007

The Court affirmed COA CAR’s determination that the grants for 2005 and 2007 failed the PSLMC condition requiring that actual operating income at least meet the targeted operating income in the Corporate Operating Budget. For 2005, the SSS’s actual operating income fell short of the COB target. For 2007, the SSS’s reliance on proceeds from the sale of shares in San Miguel Corporation did not convert a nonrecurring gain into recurring operating income, because the sale was extraordinary and was not included in the targeted operating income when the COB was approved.

Cost-Cutting Measures and Source of Savings for 2006–2008 Incentives

The Court agreed with COA that the CNAs used as the basis for the 2006–2008 incentives failed to identify specific cost-cutting measures, and that the SSS did not prove that savings used for the incentives derived from cost-cutting measures identified in the CNAs. The SSS’s computation relied on excessive accruals and on savings alleged to have arisen from unimplemented or partially completed projects. COA CAR reasonably concluded that these were not legitimate sources of savings under DBM Budget Circular No. 2006-01 and PSLMC Resolution No. 02, Series of 2003.

Use of Eighty Percent Allocation and Agreement in the CNA

The Court held that the SSS could not lawfully apply an eighty percent allocation of savings toward CNA incentives absent express agreement to that effect in the CNA document. The SSS’s asserted intention to apply an additional thirty percent was not proved by any CNA provision. The Court emphasized that such apportionment must be agreed upon and appear in the CNA itself to be valid.

Staggered Payments and the One-Time Payment Rule

The Court sustained COA’s disallowance on the ground that the SSS paid CNA incentives on a staggered basis in contravention of Section 5.7 of DBM Budget Circular No. 2006-01, which mandates a one-time end-of-year payment. The Court rejected SSS’s argument that staggered payments in a succeeding year were permissible because the circular’s use of “shall” renders the end-of-year payment mandatory and not optional.

Fiduciary Duty and Prudence in Managing the SSS Fund

The Court reiterated the fiduciary character of SSS funds and the heightened duty of prudence imposed on the SSS and its officers. The Court cited precedent holding that SSS funds are trust funds that must be managed so as not to diminish the property rights of contributors, and that the SSS’s charter does not confer unfettered discretion to disregard applicable budgeting and audit rules.

Liability of Approving and Certifying Officers and Recipients

Applying the return rules clarified in Madera v. Commission on Audit, the Court held that recipients of the disallowed incentives must return the amounts they received becau

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