G.R. No. 213472 - Zamboanga City Water District vs. Commission on Audit

Case Summary (G.R. No. 213472)

Key Dates

Audit Notices of Disallowance issued January 9, 2007; LAO decision dated October 14, 2008; COA Decision dated October 28, 2010; COA Resolution denying reconsideration dated June 6, 2014; Supreme Court decision rendered January 26, 2016. Applicable constitutional framework: 1987 Philippine Constitution.

Applicable Law and Authorities

Primary statutory and administrative sources invoked: P.D. No. 198 (Local Water Utilities Act) as amended by R.A. No. 9286; R.A. No. 6758 (Salary Standardization Law, SSL); various DBM issuances (LOI No. 97, CCC No. 10, Budget Circulars); A.O. No. 103 (austerity limits on per diems); PSLMC Resolution No. 2, series of 2003 (guidelines for CNA incentives); Civil Service Commission (CSC) and GSIS-related provisions; Supreme Court jurisprudence including Mendoza v. COA, Ambros v. COA, Philippine Ports Authority (PPA) cases, Maritime Industry Authority (MIA) v. COA, and others.

Notices of Disallowance — Scope and Amounts

COA issued multiple Notices of Disallowance (ND Nos. 2006-001 to 2006-014) totaling P27,293,621.40. Disallowed items included salary increase of GM Bucoy, representation and transportation allowances (RATA) and representation allowances (RA), monetization of leave credits, back payments of COLA and Amelioration Allowance (AA), midyear and 14th-month pay, Collective Negotiation Agreement (CNA) incentives, per diems of the Board of Directors (BOD), excess RA payments, and payments for a separate life insurance scheme.

Procedural History

ZCWD appealed to the Legal and Adjudication Office (LAO). LAO upheld all NDs. ZCWD then appealed to COA, which affirmed the LAO decision. Reconsideration before COA was denied. Petition for certiorari was filed in the Supreme Court challenging COA’s rulings and asserting legal bases for the disbursements under P.D. No. 198 as amended and relevant LWUA resolutions.

Central Issues Presented to the Court

(1) Whether the disbursements covered by the NDs were improper under applicable law; and (2) if improper, whether ZCWD officials and/or recipients are liable to refund the disallowed amounts. Subsidiary issues included the scope of the BOD’s power to fix GM compensation under Section 23 of P.D. No. 198 as amended, the applicability of SSL integration rules to various allowances, compliance with PSLMC guidelines for CNA incentives, entitlement to 14th-month pay and retroactive COLA/AA, and the effect of A.O. No. 103 and LWUA resolutions on BOD per diems.

Board of Directors’ Authority to Fix GM Compensation

The Court held that while Section 23 of P.D. No. 198 authorizes the BOD to fix compensation, that authority is limited by the Salary Standardization Law unless the GOCC is expressly exempted by charter. Applying Mendoza v. COA, the Court affirmed that Local Water Districts are not exempt from the SSL absent explicit charter exemption; thus salary adjustments must conform to SSL position classification and limits. Accordingly, the salary increase for GM Bucoy and related monetized leave credits that exceeded SSL-authorized amounts were properly disallowed.

Representation and Transportation Allowances (RATA) and Representation Allowances (RA)

The Court accepted that Local Water Districts fall within LOI No. 97’s coverage but clarified that continued receipt of non-integrated benefits (like RATA) is limited to incumbents as of July 1, 1989 who were actually receiving those benefits at that date. Relying on Ambros and PPA jurisprudence, the Court found ZCWD’s GM and assistant GMs, though incumbents, were not receiving RATA at the LOI No. 97 rates on July 1, 1989; thus they lacked entitlement to RATA at those higher rates and the related payments were appropriately disallowed.

Cost of Living Allowance (COLA) and Amelioration Allowance (AA) Back Payments

The Court reaffirmed the general rule under Section 12 of the SSL that most allowances are deemed integrated into standardized salary rates unless specifically excepted. Applying MIA v. COA, the Court held COLA and AA were already integrated into standardized salary, and ZCWD’s back payments lacked proper legal basis. The Court rejected ZCWD’s reliance on PPA Employees (which had special factual predicates regarding DBM CCC No. 10 being in legal limbo), finding that PPA’s rationale did not apply to ZCWD’s factual circumstances.

CNA Incentives and PSLMC Resolution No. 2 Compliance

PSLMC Resolution No. 2 requires CNAs to identify specific cost-cutting measures by management and union and to demonstrate that funds for incentives derive from savings generated by those measures. The Court found ZCWD failed to identify specific cost-cutting measures and its certifications of savings did not cover the relevant periods; therefore, payment of CNA incentives was properly disallowed.

14th-Month Pay Entitlement

The Court treated 14th-month pay as a non-integrated benefit which may be continued only if received by incumbents as of July 1, 1989. ZCWD’s documentary proof was insufficient to demonstrate unequivocally that the payments labeled as “Year-end Christmas Bonus” were in fact the 14th-month pay prior to July 1, 1989. Even assuming historical payment, the benefit could not be extended to employees hired after July 1, 1989. The differential treatment between pre- and post-July 1, 1989 employees was found to be a reasonable classification under the equal protection clause of the 1987 Constitution, consistent with the SSL’s objective of standardization and non-diminution of pay for incumbents.

Per Diems of the Board of Directors and Austerity Limits

Although LWUA has authority to fix per diems under R.A. No. 9286, A.O. No. 103 imposed a cap and austerity constraints applicable to GOCCs to meet fiscal targets. The President’s supervisory powers over attached agencies permitted limits on LWUA’s discretion. LWUA Board Resolution No. 120 authorizing per diems beyond A.O. No. 103’s cap did not justify exceeding the statutory austerity limits; thus excess per diem payments were disallowed.

Good Faith and Liability to Refund Disallowed Amounts

The Court applied established precedent excusing refund liability where disbursements were made in good faith — defined as honest intention without knowledge of facts that ought to have put the payor on inquiry. The Court absolved (1) GM Bucoy and the BOD members who approved her salary increase (and related monetized leave credits) from refund because, at the time, there was no binding jurisprudence clearly declaring that Local Water Districts were covered by the SSL; (2) officers and employees involved in back COLA/AA payments, given absence at the time of a clear ruling like MIA; and (3) recipients of midyear incentives under the PRAISE program because the payments had CSC authorization and the disbursements were made under a reasonable belief in entitlement.

Instances Where Good Faith Was Rejected and Refund Ordered

Good faith was not found for certain disbursements: (a) RATA payments at LOI No. 97 rates because the Court’s prior

Case Syllabus (G.R. No. 213472)

Procedural Posture

Petition for certiorari under Rule 64 of the Revised Rules of Court seeking to reverse and set aside: (a) the October 28, 2010 Decision of the Commission on Audit (COA) and (b) the June 6, 2014 Resolution of the COA denying reconsideration, which had affirmed the October 14, 2008 Decision of the Legal and Adjudication Sector, Legal and Adjudication Office-Corporate (LAO).
Petitioners: Zamboanga City Water District (ZCWD) and numerous named employees/unions, represented by counsel; Respondent: Commission on Audit.
Relief sought: annulment of COA decisions/NDs and/or absolution from refunding disallowed amounts.

Facts and Background

ZCWD is a government-owned and controlled corporation (GOCC) created under P.D. No. 198 (Local Water Utilities Act of 1973), as amended by R.A. No. 9286.
On January 9, 2007, Catalino S. Genel, Audit Team Leader for ZCWD, issued Notices of Disallowance (NDs) covering disbursements for various payments during the tenure of then-General Manager Juanita L. Bucoy.
Aggregate amount disallowed by LAO/COA: P27,293,621.40, pursuant to ND Nos. 2006-001 (2005) to 2006-014 (2005).
ZCWD filed an omnibus appeal to the LAO on April 12, 2007; LAO issued decision on October 14, 2008 upholding all NDs; COA affirmed on October 28, 2010; motion for reconsideration denied June 6, 2014.

Notices of Disallowance — Items and Amounts

ND No. 2006-001 (2005): Claim for salary increase of GM Juanita L. Bucoy — lacked DBM guideline; exceeded DBM-approved rate per audited plantilla — P523,760.00.
ND No. 2006-002 (2005): Representation Allowance and Transportation Allowance (RATA) — not in accordance with DBM-approved rates and relevant laws/circulars — P88,911.60.
ND No. 2006-003 (2005): Monetization of leave credits — computed on new rate instead of standardized rate under DBM audited plantilla — P21,910.28.
ND No. 2006-004 (2005): Back payment of Cost of Living Allowance (COLA) and Amelioration Allowance (AA) — violation of Section 12, R.A. No. 6758 and DBM Budget Circulars — P15,435,121.92.
ND No. 2006-005 (2005): One-month midyear incentive — no legal basis under R.A. No. 6886 as amended by R.A. No. 8441; CSC lacks jurisdiction to set rates — P3,915,068.00.
ND No. 2006-006 (2005): 14th month pay — no legal basis pursuant to R.A. No. 6886 as amended — P3,964,770.00.
ND No. 2006-007 (2005): Collective Negotiation Agreement (CNA) incentive — nonconformity with PSLMC Resolution No. 2 (no proof of cost-cutting measures/savings; pre-determined amount) — P1,680,000.00.
ND Nos. 2006-008 to 2006-012 (2005): Per diems of Board of Directors in excess of Administrative Order (A.O.) No. 103 allowances — total P301,440.00 (part of total P1,507,200.00 referenced).
ND No. 2006-013 (2005): Excess Representation Allowance (RA) — violation of DBM Budget Circulars; RATA based on 40% basic under LOI No. 97 no longer valid under Section 40, R.A. No. 9206 — P22,014.60.
ND No. 2006-014 (2005): Separate life insurance program other than GSIS — contrary to principle of prudent spending of government funds — P134,865.00.

LAO Decision (October 14, 2008) — Key Holdings

LAO upheld all NDs in aggregate amount of P27,293,621.40.
On GM salary: LAO disagreed that ZCWD BOD had unfettered right to fix GM compensation under R.A. No. 9286; compensation still subject to Salary Standardization Law (R.A. No. 6758).
Representation and transportation allowances, and back COLA/AA: disallowed because LWDs were not covered by LOI No. 97; even if covered, ZCWD was receiving RATA at 20% not the LOI No. 97 rate.
Midyear incentive & CNA incentives: improper; CSC approval insufficient authority; failure to comply with PSLMC Resolution No. 2.
Life insurance: contrary to Section 28(b) of Commonwealth Act No. 186 as amended by R.A. No. 4968 (GSIS); per diems and 14th month pay were excessive or unauthorized under A.O. No. 103 and R.A. No. 8441.

COA Decision (October 28, 2010) and Reconsideration Denial (June 6, 2014)

COA denied ZCWD’s appeal and affirmed ND Nos. 2006-001 to 2006-014 (total P27,293,621.40).
Emphasized ZCWD’s failure to prove compliance with PSLMC Resolution No. 2 for CNA incentives: lacked identification of specific cost-cutting measures and proof that incentive funds came from savings generated by such measures.
Motion for reconsideration by ZCWD denied by COA (June 6, 2014), prompting petition to the Supreme Court.

Issues Presented to the Supreme Court

Whether the disbursements under the NDs were improper.
If improper, whether petitioner is liable to refund the disallowed amounts.
Subsidiary issues: scope of BOD’s power under Section 23 of P.D. No. 198 as amended by R.A. No. 9286; applicability of Salary Standardization Law (R.A. No. 6758) to LWDs/GOCCs; entitlement to back COLA/AA and 14th month pay; compliance with PSLMC Resolution No. 2; lawfulness of per diems vis-à-vis A.O. No. 103 and LWUA resolutions; and applicability of good faith defense to refund.

Petitioners’ Contentions (ZCWD)

BOD has power to determine and fix GM’s salary under Section 23 of P.D. No. 198, as amended by R.A. No. 9286.
Employees entitled to COLA and AA based on PPA Employees (506 Phil. 382, 2005): integration of benefits took place March 16, 1999 with DBM CCC No. 10, so back payments warranted.
CNA incentives complied with PSLMC Resolution No. 2.
Employees had always been paid 14th month pay since July 1, 1989; denying it now violates equal protection.
Per diems lawful because LWUA authorized higher rates under LWUA Board Resolution No. 120; A.O. No. 103 did not repeal R.A. No. 9286.
If disallowances are upheld, ZCWD acted in good faith and should not be required to reimburse.

Respondent’s Position (COA)

Reiterated reasons for upholding the disallowances: noncompliance with DBM, SSL, PSLMC Resolution No. 2, A.O. No. 103, and statutory limitations.
Emphasized petitioners failed to identify specific cost-cutting measures and savings as required for CNA incentives.
Maintained that certain benefits were not authorized under law or existing DBM issuances.

Supreme Court’s Ruling — Overview

The Supreme Court affirmed the COA October 28, 2010 Decision and June 6, 2014 Resolution, with modification as to liability for refund by certain recipients and officers.
Court resolved the principal issues listed: affirmed impropriety of several disbursements, but applied good faith doctrine to absolve certain recipients and officers from refund for specific items; held others (officers who authorized certain releases) bound to refund.

Detailed Legal Findings — Limited Power of BOD to Fix GM Salary

Court held ZCWD’s contention that BOD could fix GM compensation under Section 23 of P.D. No. 198 (as amended) was misplaced insofar as it sought exemption from Salary Standardization Law (SSL, R.A. No. 6758)