Legal bases and cited authorities
- Sections 7, 8, and 9 of Republic Act No. 7160 (Local Government Code of 1991) require income-based viability standards for creating, converting, dividing/merging, and abolishing LGUs.
- RA No. 9009 amends Section 450 of Republic Act No. 7160, including the income requirement relevant to conversion of a municipality or cluster of barangays into a component city.
- Section 450(a), as amended by RA No. 9009 provides the DOF certification role and the income threshold for conversion into a component city.
- Section 461(a) provides the DOF certification role and income threshold for the creation of a province.
- Sections 442(a) and 452(a) of Republic Act No. 7160 require certification of income requirements for creation of a municipality and classification of a city into a highly urbanized city, respectively.
- Sections 442(c), 450(c), as amended, and Section 461(c) define the composition of “average annual income.”
- Department Special Order No. 6-92 (August 21, 1992) designates the Bureau of Local Government Finance (BLGF) of the DOF to certify LGU income.
- Department Order No. 08-2011 (February 11, 2011) establishes the electronic Statement of Receipts and Expenditures (eSRE) as the official DOF reporting system for local fiscal and financial matters.
- Resolution No. 2, series of 2009 approves rebasing of price indices to base year 2006 under the National Statistical Coordination Board (NSCB), now the Philippine Statistics Authority (PSA), and PSA letters dated 04 November 2014 and 10 May 2016 provide that the old CPI series will no longer be generated once the rebased series becomes available.
Purpose and uniform computation
- The order requires the BLGF and provincial and city treasurers to use uniform rules for attesting and certifying the income requirement that the Local Government Code requires for the creation, conversion, merger, or abolition of LGUs.
- The order provides a methodology for certification of average annual income to support the statutory viability and capacity-to-serve standards under the Local Government Code.
Coverage: transactions and responsible offices
- The order applies to the income attestation/certification required for the creation, conversion, merger, or abolition of LGUs.
- The order directs the BLGF to implement the certification framework and to carry out policy and technical supervision of revenue operations affecting local governments.
- The order directs provincial treasurers and city treasurers to compute and certify income requirements that the Local Government Code assigns to them.
- The order requires different income computations depending on the LGU action (creation of province/municipality, conversion to component city, conversion of barangays to municipality, and classification into a highly urbanized city).
Basic data and certification elements
- The BLGF and the concerned provincial and city treasurers must use the approved Statement of Receipts and Expenditures (SRE) submitted by LGUs through the eSRE system.
- The basic data must cover the last two (2) consecutive years, and four (4) years prior to the issuance of the latest income reclassification, for computing and attesting income requirements.
- The certification of average annual income must include:
- Average Annual Income of the Proposed LGU; and
- Resulting Average Annual Income of the Original LGU or LGUs (to determine whether the income of the original unit or units will be reduced to less than the minimum requirements); and
- Resulting Average Annual Regular Income of the Original LGU or LGUs (as the basis of the income classification of the original LGU or LGUs at the time of creation or conversion).
Determination and computation rules
- Annual income must follow the Local Government Code and RA No. 9009 definition: it consists of income accruing to the general fund, exclusive of special funds, trust funds, transfers, and non-recurring income.
- For creation of province, creation of municipality, conversion of barangay into municipality, and classification of component city into highly urbanized city, annual income is computed as:
- Annual Income = Real Property Tax (General Fund) + Tax on Business + Other Taxes + Regulatory Fees (Permits and Licenses) + Service/User Charges (Service Income) + Receipts from Economic Enterprises (Business Income) + Interest Income + Shares from Philippine Economic Zone Authority (PEZA) + Internal Revenue Allotment (IRA).
- For conversion of municipality/ies or cluster of barangays into component city, locally generated annual income is computed as:
- Locally Generated Annual Income = Real Property Tax (General Fund) + Tax on Business + Other Taxes + Regulatory Fees (Permits and Licenses) + Service/User Charges (Service Income) + Receipts from Economic Enterprises (Business Income) + Interest Income + Shares from PEZA.
- The income requirements thresholds that the certification must support include the following statutory minimums (as stated in the Local Government Code provisions referenced by the order):
- Conversion into a component city: required locally generated average annual income for the last two (2) consecutive years must be at least Php100,000,000.00 based on 2000 constant prices, and creation/conversion must not reduce the original unit(s)’ income below minimum requirements.
- Creation of a province: required average annual income must be not less than Php20,000,000.00 based on 1991 constant prices, and creation must not reduce original unit(s)’ income below minimum requirements.
- Creation of a municipality or conversion of a barangay into a municipality: required average annual income for the last two (2) consecutive years must be at least Php2,500,000.00 based on 1991 constant prices, and creation/conversion must not reduce original municipality/municipalities’ income below minimum requirements.
- Classification into a highly urbanized city: required latest annual income must be at least Php50,000,000.00 based on 1991 constant prices.
Indexing method and minimum-reduction test
- In the absence of PSA-issued CPI based on the required base year, the BLGF must compute the CPI factor using CPI indexing and apply it to convert annual income from current prices to constant prices.
- The method requires computing CPI growth rate for fiscal year (t) by dividing the difference of current year CPI based on available constant prices and prior year CPI based on available constant prices, with CPI available constant prices defined as CPI based on available constant price.
- The method requires estimating the required CPI for the creation/conversion fiscal year (t) using:
- Required CPlt = (1 + Growth Rate of CPI based on available constant pricet) x Required CPt-1,
- with CPI based on required constant prices set such that the CPI based on required constant prices is 100, so:
- Required CPI factor = CPI based on Required Constant Pricet / 100.
- The method requires converting annual income at current prices to constant prices using:
- Annual income at constant prices (AICP)t = Annual income at current prices / Required CPI factor.
- The conversion to constant prices must be computed as follows, depending on the LGU action:
- Creation of Province: compute annual income at constant prices received by the province from all subject municipalities.
- Conversion into Component City: compute locally generated annual income at constant prices of component municipality or cluster of barangays.
- Creation of Municipality: compute annual income at constant prices received by all subject barangays.
- Classification of Component City as Highly Urbanized City: compute the latest annual income at constant prices of the subject component city.
- The method requires totaling annual constant-price incomes for each year and dividing by the number of fiscal years to obtain the average annual income at constant prices, using:
- Average Annual Income at constant prices (AICP)t1, t2 = AICPt1 + AICP / 2.
- To test statutory non-reduction of minimum requirements, the reduced average annual income of the original unit(s) must be computed by deducting the shares of income of the proposed LGU from the original unit(s)’ annual income.
Resulting classification and income basis
- The order requires determining the resulting income classification of the original LGU/LGUs using the average annual regular income equal to the average annual regular income of the original LGU/LGUs less than its shares from the proposed LGU at current prices.
- The resulting income classification must follow the existing policy of the DOF on income classification.
BLGF responsibilities and certification outputs
- The BLGF must:
- Update annually the CPI Factor based on available CPI data released by the PSA.
- Provide annually the matrix of CPI table for provincial and city treasurers to compute and certify the latest annual income.
- Issue a Certificate of Average Annual Income to requesting LGUs and legislators, indicating results of the income requirements needed under the statutory scheme.
- Capacitate provincial and city treasurers on computation and certification methodology for the latest annual income.
- Issue clarificatory guidelines/updates/advisories for implementing the order, subject to direct supervision and approval of the Undersecretary of Revenue Operations Group.
- Provide an annual report to the DOF on the certifications issued.
Repeal and modification
- All department orders, circulars, and issuances inconsistent with Department Order No. 031-2018 are repealed or modified accordingly.