Law Summary
Classification of Municipalities
- Municipalities are divided into six classes based on their average annual income over the last four years:
- First Class: ₱15 million or more
- Second Class: ₱10 million to less than ₱15 million
- Third Class: ₱5 million to less than ₱10 million
- Fourth Class: ₱3 million to less than ₱5 million
- Fifth Class: ₱1 million to less than ₱3 million
- Sixth Class: Less than ₱1 million
Periods of General Reclassification
- The Secretary of Finance must reclassify all provinces, cities (except Manila and Quezon City) and municipalities every four years based on average income for the four preceding years.
- First classification under this EO takes effect July 1, 1987.
- Newly created local governments with less than four years’ existence are classified based on income during the years they have been established.
- No readjustment within four years after the first classification except in cases of declining revenues, where classification can be readjusted at any time.
Definitions of Terms
- "Annual income" includes revenues from regular sources such as local General and Infrastructure funds, internal revenue allotments, and specific tax allotments per PDs 144 and 436.
- Excludes non-recurring receipts like national aids, grants, loans, and sales of fixed assets.
- "Average annual income" is the mean of annual incomes over the required number of years, certified by the Commission on Audit.
Uses of Income Classification
- Basis for:
- Setting maximum local tax ceilings.
- Determining administrative and statutory aids and financial grants.
- Establishing salaries, allowances, per diems, and other emoluments for local officials and personnel.
- Implementing personnel policies (promotions, transfers, etc.) at local government levels.
- Formulating and executing local budgets.
- Assessing financial capacity to undertake developmental and priority projects.
Maximum Amount Expendable for Salaries and Wages
- Annual salaries and wages for local officials and employees shall not exceed:
- 45% of total annual income (regular sources) for first and second class LGUs.
- 55% for those lower than second class.
- Public school and health workers' salaries, and certain other enterprises' salaries are excluded from this computation.
- Secretary of Finance may recommend appropriations exceeding these limits by up to 25%, but not allowed if the LGU is in overdraft or nearing overdraft.
Special Provisions on Position Classification and Pay Plans
- LGUs whose classifications change must revise position classifications and pay plans accordingly, following Joint Commission on Local Government Personnel Administration circulars.
- No diminution of current basic salary rates for officials and employees as of the EO's effectivity.
- For CY 1988 budgets, appropriations shall reflect new classification salaries but also provide for additional funds to maintain existing salaries where higher.
- New appointees or promoted personnel shall receive salaries aligned with the new classification rates.
- The Joint Commission shall issue implementing guidelines within 60 days from the EO’s effectivity.
Maximum Rates of Local Taxes
- LGUs may maintain or adjust existing local tax rates regardless of changes in income classification.
- New tax ordinances must be reviewed and approved by the Secretary of Finance within 60 days for reasonableness and financial impact.
Administrative Authority of Secretary of Finance
- Authorized to review and recommend adjustments to income classification ranges at least every four years to align with economic conditions and LGU financial status.
Implementing Rules and Regulations
- Secretary of Finance shall issue necessary rules and Department Orders for implementing the new classifications.
Repealing Clause
- Presidential Decree No. 465 (May 20, 1974) is repealed.
- All inconsistent laws, orders, issuances, rules, or regulations are repealed or modified accordingly.
Effectivity
- The Executive Order takes effect immediately upon issuance on July 25, 1987.