Law Summary
Classification of Municipalities
- Municipalities are also divided into six income classes based on the average annual income over the last four calendar years:
- First Class: ₱15 million or more
- Second Class: ₱10 million or more but less than ₱15 million
- Third Class: ₱5 million or more but less than ₱10 million
- Fourth Class: ₱3 million or more but less than ₱5 million
- Fifth Class: ₱1 million or more but less than ₱3 million
- Sixth Class: less than ₱1 million
Periods of General Reclassification
- The Secretary of Finance shall reclassify provinces, cities, and municipalities every four years based on income over the previous four years.
- The first classification under this Order takes effect on July 1, 1987.
- Newly created local government units with less than four years of existence will be classified based on income during their existence.
- No readjustment is allowed within four years after reclassification except for diminishing revenues.
Definitions
- "Annual income" refers to revenues and receipts from regular sources excluding non-recurring income such as grants, loans, and sale of fixed assets.
- "Average annual income" means the average of annual incomes over the relevant years as certified by the Commission on Audit.
Uses of Income Classification
- Basis for fixing maximum local tax ceilings.
- Determines administrative and statutory aids, financial grants, and other assistance.
- Establishes salary scales, allowances, per diems, and emoluments for local officials and employees.
- Guides personnel policies on promotions, transfers, and related matters.
- Influences local government budget policies.
- Determines financial capacity for development programs and priority projects.
Maximum Amount Expendable for Salaries and Wages
- Salaries and wages shall not exceed 45% of income for first and second class LGUs and 55% for lower classes.
- Excludes salaries of personnel in public schools, hospitals, health and agricultural services, public utilities, markets, and economic enterprises.
- Secretary of Finance may recommend exceptions up to 25% beyond limits, excluding cases of overdraft or imminent overdraft.
Special Provisions on Salary Adjustments
- LGUs upgraded or downgraded must adjust Position Classification and Pay Plans accordingly.
- No employee suffers salary reduction due to reclassification.
- For 1988 budgets, appropriations should match new classifications but must cover existing salary rates.
- New appointees receive salaries per new classification.
- The Joint Commission on Local Government Personnel Administration shall issue guidelines within 60 days of effectivity.
Maximum Rates of Local Taxes
- LGUs may maintain or adjust existing local tax rates despite classification changes.
- New tax ordinances require Secretary of Finance approval within 60 days, reviewing for reasonableness and financial impact.
Administrative Authority of Secretary of Finance
- The Secretary reviews income ranges every four years and recommends changes to ensure classifications reflect economic and financial realities.
Implementing Rules and Regulations
- The Secretary of Finance shall issue necessary rules, regulations, and orders for implementation, including fixing new classifications.
Repealing Clause
- Presidential Decree No. 465 (May 20, 1974) and inconsistent laws or regulations are repealed or modified accordingly.
Effectivity
- This Order takes effect immediately upon signing on July 25, 1987.