Title
Supreme Court
Automatic Income Classification of LGUs Act
Law
Republic Act No. 11964
Decision Date
Oct 26, 2023
The Automatic Income Classification of Local Government Units Act institutionalizes the automatic income classification of provinces, cities, and municipalities in the Philippines to promote local autonomy and determine their financial capability, with adjustments made by the Secretary of Finance based on economic conditions, ensuring that lower income class LGUs are not disadvantaged and implementing rules and regulations to be issued by the Department of Finance and Department of Budget and Management.

Law Summary

Declaration of Policy

  • Promotes local autonomy and economic potential of LGUs.
  • Establishes the need to determine financial capability and fiscal position.
  • Emphasizes equitable and rational income classification for accelerated economic growth and resource distribution.

Definition of Terms

  • Actual Growth Rate: Percentage increase in aggregate annual regular income since last classification.
  • Annual Regular Income: Revenues from regular sources reported yearly on cash basis; includes NTA, excise taxes, VAT shares, and business gross income in special economic zones; excludes non-recurring receipts.
  • Average Annual Regular Income: Average of annual regular incomes over three fiscal years prior to reclassification.
  • Local Government Units (LGUs): Provinces, cities, municipalities.
  • LGU Leagues: ULAP, LPP, LMP, LCP.
  • Schedule of Income Classification: Updated classification issued by Secretary of Finance.

Income Classification of Provinces, Cities, and Municipalities

  • Provinces: Classified into five classes based on average annual income over three years, from First Class (≥ P1.5 billion) to Fifth Class (< P500 million).
  • Cities: Similar five-class system; First Class (≥ P1.3 billion) to Fifth Class (< P500 million).
  • Municipalities: Classified into five classes; First Class (≥ P200 million) to Fifth Class (< P90 million).
  • Newly created LGUs classified based on estimated income shares from components or barangays.
  • Income ranges adjusted every three years by the Secretary of Finance.

Administrative Authority of the Secretary of Finance

  • Authorized to adjust income ranges based on actual income growth from last classification.
  • Conducts income reclassification every three years to align with economic conditions.
  • May consider factors like inflation, GDP, calamities for retaining classifications.
  • Upgrades LGU classification upon recommendation by NEDA with evidence of revenue growth over three years.

Period of Automatic Income Reclassification

  • First reclassification within six months after Act effectivity.
  • Scheduled reclassifications every three years thereafter.
  • DOF issues classification schedules within 60 days post-reclassification.
  • Non-issuance of orders does not suspend automatic reclassification.
  • Reclassification not to occur more than once every three years.

Uses of Income Classification

  • Basis for:
    • Administrative and statutory aids, financial grants.
    • Assessment of LGU financial capacity for projects.
    • Determination of personal services budget per RA 7160.
    • Compensation adjustments under the Salary Standardization Law of 2019.
    • Creation of new LGUs without downgrading original units.
    • Determining number of elective local council members.
    • Issuance of free patent titles for residential lands.
    • Setting minimum wages for domestic workers.
    • GSIS insurance requirements for LGU properties.
    • Limitations and utilization of agricultural land reclassification.
    • Other uses as prescribed by law.

Guidelines for LGUs with Upgraded Classification

  • Fourth or lower class LGUs upgraded to first, second, or third class are:
    • Exempt from expanding personal services immediately.
    • May maintain existing personnel until next fiscal year.
    • Restricted from filling vacancies arising from transfers, resignation, or death until succeeding fiscal year.
    • Not penalized for exceeding personnel limitations if maintaining status quo.

Effectivity of Income Reclassification

  • Takes effect January 1 following issuance of the classification schedule by Secretary of Finance.

Transitory Provisions

  • LGUs with incomes falling below thresholds during first reclassification retain their current class.
  • Downgrading applies if income remains below threshold in next reclassification.
  • No salary or benefit reduction for officials and employees at time of effectivity.

Implementing Rules and Regulations

  • DOF, with DBM and LGU Leagues, to promulgate IRR within three months of Act’s effectivity.
  • IRR takes effect 30 days after publication in a newspaper of general circulation.

Separability Clause

  • If any part is declared unconstitutional, remaining provisions stay effective.

Repealing Clause

  • Laws and issuances inconsistent with this Act are repealed or modified accordingly.

Effectivity

  • The Act takes effect 15 days after complete publication in the Official Gazette or newspaper of general circulation.

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