Policy and purpose
- The Act declares that it is the policy of the State to promote local autonomy and enable LGUs to realize their full economic potential (Section 2).
- The Act requires determining the financial capability and fiscal position of LGUs (Section 2).
- The Act mandates formulating policies and guidelines for an equitable and rational system of income classification to accelerate and improve quality of economic growth and distribute national resources based on community needs (Section 2).
Key definitions the Act establishes
- “Actual Growth Rate” is defined as the percentage increase in the aggregate annual regular income for provinces, cities, and municipalities from the last income reclassification (Section 3(a)).
- “Annual Regular Income” means revenues, including fees and receipts actually realized and reported yearly on a cash basis by provinces, cities, and municipalities from regular sources, including the 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 items (Section 3(b)).
- Annual Regular Income includes shares from national wealth; excise tax on tobacco; incremental collection from value-added tax (VAT) under Republic Act No. 7643; and gross income tax paid by business and enterprises in Special Economic Zones under Republic Act No. 7916, otherwise known as “The Special Economic Zone Act of 1995,” as amended, as well as other shares granted by law to the LGU (Section 3(b)).
- The Act provides that annual regular income is computed from the Statement of Receipts pursuant to guidelines issued by the Department of Finance (DOF) (Section 3(b)).
- “Average Annual Regular Income” means 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 number of fiscal years provided in Section 4 (Section 3(c)).
- “Local Government Units (LGUs)” refers to political subdivisions of the State: province, city, or municipality (Section 3(d)).
- “LGU Leagues” refers to ULAP, LPP, LMP, and LCP (Section 3(e)).
- “Schedule of Income Classification” means the updated income classification of LGUs periodically issued by the Secretary of Finance pursuant to Section 6 (Section 3(f)).
Coverage and what classifications cover
- The income classification system applies to provinces, cities, and municipalities (Section 4).
- Provinces are classified into five (5) classes based on average annual regular income for the three (3) fiscal years preceding a general income reclassification (Section 4(a)).
- Cities are classified into five (5) classes based on average annual regular income for the three (3) fiscal years preceding a general income reclassification (Section 4(b)).
- Municipalities are classified into five (5) classes based on average annual regular income for the three (3) fiscal years preceding a general income reclassification (Section 4(c)).
- The Act provides classification rules for certain newly created or converted LGUs and applies this rule to provinces and municipalities, including conversions and creations from existing units and/or barangays (Section 4(d)).
Income class thresholds and adjustments
- Section 4(a) classifies provinces as follows:
- First Class: average annual regular income of P1,500,000,000.00 or more.
- Second Class: P900,000,000.00 or more, but less than P1,500,000,000.00.
- Third Class: P700,000,000.00 or more, but less than P900,000,000.00.
- Fourth Class: P500,000,000.00 or more, but not less than P700,000,000.00.
- Fifth Class: less than P500,000,000.00.
- Section 4(b) classifies cities as follows:
- First Class: P1,300,000,000.00 or more.
- Second Class: P1,000,000,000.00 or more, but less than P1,300,000,000.00.
- Third Class: P800,000,000.00 or more, but less than P1,000,000,000.00.
- Fourth Class: P500,000,000.00 or more, but less than P800,000,000.00.
- Fifth Class: less than P500,000,000.00.
- Section 4(c) classifies municipalities as follows:
- First Class: P200,000,000.00 or more.
- Second Class: P160,000,000.00 or more, but less than P200,000,000.00.
- Third Class: P130,000,000.00 or more, but less than P160,000,000.00.
- Fourth Class: P90,000,000.00 or more, but less than P130,000,000.00.
- Fifth Class: less than P90,000,000.00.
- Section 4(d) authorizes the Secretary of Finance to classify a province or municipality that is created before regular reclassification, based on the estimated aggregate net share from regular sources from component LGUs plus the corresponding estimated NTA under Section 285 of Republic Act No. 7160 (Local Government Code of 1991), during the fiscal year immediately preceding its creation; the rule also applies to:
- a municipality converted into a city; and
- a city created out of existing municipalities and/or barangays.
- The income ranges in the classification tables 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 authority
- The Secretary of Finance, in consultation with NEDA and the concerned LGU leagues, has authority to adjust income ranges based on actual growth rate and to undertake regular income reclassification every three (3) years (Section 5).
- The Act allows the Secretary of Finance to consider inflation and gross regional domestic product when evaluating prolonged economic shocks such as public calamity and national emergency that may warrant retaining an LGU’s current income classification (Section 5).
- The Secretary of Finance, upon recommendation of NEDA, must upgrade an LGU’s income classification if the LGU shows growth in real per capita locally sourced revenue every year for the past three (3) years (Section 5).
- The first general income reclassification must be made within six (6) months after the effectivity of the Act, and then every three (3) years (Section 6(a)).
- The DOF must issue the appropriate department order containing the schedule of income classification within sixty (60) days from regular income reclassification; the schedule serves as certification of income classification (Section 6(b)).
- The Act directs that the schedule of income classification is automatically updated by the Bureau of Local Government Finance (BLGF) of the DOF every three (3) years (Section 6(b)).
- The Act provides that non-issuance of the department orders in succeeding regular classification periods does not suspend the effects of the automatic income reclassification (Section 6(b)).
- The Act prohibits any readjustment of classification more than once in three (3) consecutive calendar years after the first general reclassification (Section 6(c)).
Uses of income classification and legal effects
- The income classification serves as basis for identifying administrative and statutory aids, financial grants, and other assistance to local governments (Section 7(a)).
- The income classification serves as basis for determining the financial capability of LGUs to undertake developmental programs and priority projects (Section 7(b)).
- The income classification is basis for the 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)).
- The income classification is basis for compensation adjustment for LGU personnel under Republic Act No. 11466 (Salary Standardization Law of 2019), with the rule that LGUs may fully adopt salary schedules notwithstanding ceilings under Sections 10(a) and 10(b) of the cited law, subject to compliance with personal services (PS) limitation and budget authorization requirements of Republic Act No. 7160 (Section 7(d)).
- The income classification is basis for the creation of a new LGU, while preventing downgrade of the income classification of the original unit when division and merger occur pursuant to Section 8 of Republic Act No. 7160 (Section 7(e)).
- The income classification is basis for the number of elective members in the Sangguniang Panlalawigan and the Sangguniang Bayan under Section 2 of Republic Act No. 6687 (Section 7(f)).
- The income classification is basis for issuance of a free patent title to residential lands under Republic Act No. 10023 (Section 7(g)).
- The income classification is basis for determining the minimum wage of domestic workers under Section 24 of Republic Act No. 10361 (Domestic Workers Act / Batas Kasambahaya) (Section 7(h)).
- The income classification is basis for allowing LGUs to insure their properties with the Government Service Insurance System (GSIS) in compliance with Section 5 of Republic Act No. 656 (Property Insurance Law) (Section 7(i)).
- The income classification is basis for limiting the percentage of agricultural land area that can be reclassified and the manner of utilization or disposition as stipulated in Section 20 of Republic Act No. 7160 (Section 7(j)).
- The income classification is basis for such other purposes provided in existing laws and regulations (Section 7(k)).
Special rules after reclassification
- A fourth or lower income class LGU that is reclassified as first, second, or third income class following the first general income reclassification is exempted from providing additional personal services (Section 8).
- Such LGUs may maintain existing personal services prior to reclassification until the next fiscal year pursuant to civil service rules and regulations (Section 8).
- For the case of personnel transfers, resignation, or deaths, the local government must not cause the filling of vacant positions nor provide funding for those vacancies until the succeeding fiscal year (Section 8).
- An LGU that exceeds the limitations in 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 reclassificatio