Title
Automatic LGU Income Classification Act
Law
Republic Act No. 11964
Decision Date
Oct 26, 2023
Republic Act No. 11964 establishes an automatic income classification system for provinces, cities, and municipalities to enhance local autonomy and ensure equitable distribution of national resources based on financial capability, with reclassifications occurring every three years.
automatic income
classification
local government

Policy and purpose

  • The State adopts a policy to promote local autonomy and enable Local Government Units (LGUs) to realize their full economic potential (Section 2).
  • The State recognizes the need to determine the financial capability and fiscal position of LGUs.
  • The State formulates policies and guidelines for an equitable and rational system of income classification to accelerate and improve economic growth and distribute national resources based on community needs (Section 2).

Core definitions established

  • “Actual Growth Rate” is the percentage increase in the aggregate annual regular income for provinces, cities, and municipalities from the last income reclassification (Section 3).
  • “Annual Regular Income” means revenues, including fees and receipts actually realized and reported yearly on a cash basis from regular sources, including National Tax Allotment (NTA) and other shares in national wealth, but excluding non-recurring receipts such as national aids, grants, financial assistance, loan proceeds, sales of assets, miscellaneous income/receipts and similar others (Section 3).
  • Annual Regular Income includes, for purposes of this Act:
    • shares from national wealth,
    • excise tax on tobacco,
    • incremental collection from value-added tax (VAT) under Republic Act No. 7643, and
    • the gross income tax paid by business and enterprises in Special Economic Zones under Republic Act No. 7916 (“The Special Economic Zone Act of 1995,” as amended), and any other shares granted by law to the LGU (Section 3).
  • “Average Annual Regular Income” is the sum of annual regular income actually obtained during the required number of fiscal years preceding the year of general information reclassification, divided by the required number of fiscal years as provided in Section 4 (Section 3).
  • “LGUs” refer to political subdivisions of the State: province, city, or municipality (Section 3).
  • “LGU Leagues” refer to ULAP, LPP, LMP, and LCP (Section 3).
  • “Schedule of Income Classification” is the updated income classification of LGUs periodically issued by the Secretary of Finance pursuant to Section 6 (Section 3).

Classification system and income thresholds

  • Provinces are classified into five (5) income classes based on average annual regular income for three (3) fiscal years preceding a general income reclassification (Section 4(a)).
    • First Class provinces: P1,500,000,000.00 or more.
    • Second Class provinces: P900,000,000.00 or more but less than P1,500,000,000.00.
    • Third Class provinces: P700,000,000.00 or more but less than P900,000,000.00.
    • Fourth Class provinces: P500,000,000.00 or more but not less than P700,000,000.00.
    • Fifth Class provinces: less than P500,000,000.00 (Section 4(a)).
  • Cities are classified into five (5) income classes based on average annual regular income for three (3) fiscal years preceding a general income reclassification (Section 4(b)).
    • First Class cities: P1,300,000,000.00 or more.
    • Second Class cities: P1,000,000,000.00 or more but less than P1,300,000,000.00.
    • Third Class cities: P800,000,000.00 or more but less than P1,000,000,000.00.
    • Fourth Class cities: P500,000,000.00 or more but less than P800,000,000.00.
    • Fifth Class cities: less than P500,000,000.00 (Section 4(b)).
  • Municipalities are classified into five (5) income classes based on average annual regular income for three (3) fiscal years preceding a general income reclassification (Section 4(c)).
    • First Class municipalities: P200,000,000.00 or more.
    • Second Class municipalities: P160,000,000.00 or more but less than P200,000,000.00.
    • Third Class municipalities: P130,000,000.00 or more but less than P160,000,000.00.
    • Fourth Class municipalities: P90,000,000.00 or more but less than P130,000,000.00.
    • Fifth Class municipalities: less than P90,000,000.00 (Section 4(c)).
  • For newly created provinces or municipalities before the regular reclassification, the Secretary of Finance classifies using the estimated aggregate net share of income from regular sources from component LGUs (including the corresponding estimated NTA under Section 285 of Republic Act No. 7160, as amended), for the fiscal year immediately preceding creation (Section 4(d)).
  • The same rule applies to municipalities converted into cities and cities created from existing municipalities and/or barangays (Section 4(d)).
  • The income ranges are adjusted and updated by the Secretary of Finance every three (30) years based on standards provided in the succeeding section (Section 4(d)).

Automatic reclassification schedule and update

  • The first general income reclassification must be made within six (6) months after the Act’s effectivity, and then every three (3) years thereafter (Section 6(a)).
  • The Department of Finance (DOF) issues the appropriate department order within sixty (60) days from regular income reclassification, containing the schedule of income classification as certification of the income classification of LGUs (Section 6(b)).
  • The Bureau of Local Government Finance (BLGF) of the DOF automatically updates the schedule every three (3) years (Section 6(b)).
  • Failure of the DOF to issue the succeeding department orders within the period does not suspend the effects of the automatic income reclassification (Section 6(b)).
  • After the first general reclassification, no readjustment of classification may be made more than once in three (3) consecutive calendar years (Section 6(c)).

Adjustments and authority of Secretary of Finance

  • The Secretary of Finance, in consultation with NEDA and the concerned LGU leagues, adjusts income ranges and undertakes regular income reclassification so that LGU classifications conform with prevailing economic conditions and overall financial status (Section 5).
  • The adjustment is based on the actual growth rate of annual regular income from the last income reclassification (Section 5).
  • The Secretary of Finance may consider inflation and gross regional domestic product to evaluate whether an LGU experienced prolonged economic shocks such as public calamity and national emergency that warrant retaining its current income classification (Section 5).
  • Upon NEDA recommendation, the Secretary of Finance upgrades the income classification of an LGU if the LGU shows growth in real per capita locally sourced revenue every year for the past three (3) years (Section 5).

When classification takes effect

  • The first income reclassification under the Act takes effect on January 1 of the immediately succeeding year following issuance of the table of income classification by the Secretary of Finance (Section 9).
  • LGU classification under this Act is used for the purposes in Section 7 beginning with the effectivity described in Section 9 (Section 9).

Uses of income classification by law

  • Income classification of provinces, cities, and municipalities serves as basis for:
    • identifying administrative and statutory aids, financial grants, and other forms of assistance to local governments (Section 7(a));
    • determining the financial capability of LGUs to undertake developmental programs and priority projects (Section 7(b));
    • determining total annual or supplemental appropriation for personal services of an LGU for one (1) fiscal year under Section 325(a) of Republic Act No. 7160 (Section 7(c));
    • compensation adjustment for LGU personnel under Republic Act No. 11466 (Salary Standardization Law of 2019), with LGUs allowed to fully adopt salary schedules notwithstanding ceilings under Sections 10(a) and 10(b) of Republic Act No. 11466, subject to compliance with personal services (PS) limitation and budget authorization requirements under Republic Act No. 7160 (Section 7(d));
    • the creation of a new LGU, provided that division and merger of an existing LGU shall not downgrade the income classification of the original unit pursuant to Section 8 of Republic Act No. 7160 (Section 7(e));
    • the number of elective members in the Sangguniang Panlalawigan and Sangguniang Bayan under Section 2 of Republic Act No. 6687 (Section 7(f));
    • the issuance of a free patent title to residential lands under Republic Act No. 10023 (Section 7(g));
    • the minimum wage of domestic workers under Section 24 of Republic Act No. 10361 (Domestic Workers Act / Batas Kasambahay) (Section 7(h));
    • LGUs insuring their properties with GSIS in compliance with Section 5 of Republic Act No. 656 (Property Insurance Law) (Section 7(i));
    • limiting the percentage of agricultural land area that can be reclassified and prescribing manner of utilization or disposition under Section 20 of Republic Act No. 7160 (Section 7(j));
    • and other purposes under existing laws and regulations (Section 7(k)).

Guidelines for fourth-or-lower reclassification

  • A fourth or lower income class LGU that is reclassified as first, second, or third after the first general income reclassification is exempt from providing for additional personal services and may maintain existing personal services prior to reclassification until the next fiscal year, pursuant to civil service rules and regulations (Section 8).
  • For personnel transfers, resignation, or deaths, the local government must not cause filling of vacant positions nor provide funding for such vacancies until the succeeding fiscal year (Section 8).
  • An LGU that exceeds limits under Section 325(a) of Republic Act No. 7160 despite maintaining status quo after receiving a first, second, or third income class designation following the first general income reclassification is not considered in violation of Section 325 of Republic Act No. 7160 (Section 8).

Transitional income-class retention rules

  • An LGU whose average annual regular income falls below the income range used in the first general income reclassification retains its current income class (Section 10).
  • If the LGU continues to have average annual regular income below the income range in the next reclassification, it must be downgraded to its corresponding income class (Section 10).
  • During the first income reclassification, no official or employee in the concerned LGU suffers diminution of salary and benefits actually received at the time of effectivity of the Act (Section 10).

Implementing rules and regulations

  • The DOF, coordinating with the Department of Budget and Management (DBM) and consulting the LGU Leagues, must promulgate implementing rules and regulations within three (3) months from effectivity of the Act (Section 11).
  • The IRR takes effect thirty (30) days after publication in a newspaper of general circulation (Section 11).

Separability and repeal

  • If any portion or provision of the Act is declared unconstitutional, the remainder remains in force (Section 12).
  • Any law, presidential decree or issuance, executive order, letter of instruction, rule, or regulation inconsistent with the Act is repealed or modified accordingly (Section 13).

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