Develop; don’t rely on IRA, LGUs told

Hitting the goal of a yearly economic growth of from 7 to 8 percent would need “efficient fiscal management” in the local government level, while local government units (LGU) should stop their heavy reliance on the Internal Revenue Allotment (IRA), according to Budget Secretary Benjamin Diokno. 

Diokno, speaking before the Philippine Association of Local Treasurers and Assessors (Phaltra) convention, said that for all the reforms that have been undertaken, the government still “has a long way to go” in fostering effective and efficient public financial management at the local level.

“If we are to achieve our lofty goals of ramping up growth to 7 to 8 percent annually in the medium-term, and lowering poverty to 14 percent from 22 percent, then we must improve the state of public financial management among local government units (LGUs),” he said.

Diokno said that for a country of more than 100 million, the national government would be hard-pressed to respond to the needs of each citizen.

“The direction we’re headed is to empower local governments in the way they manage their finances. After all, they are more attuned and more capable of responding to their local constituents,” Diokno said.

Diokno said local treasurers and assessors are “indispensable partners for change, given their crucial role in managing and utilizing local resources for effective public service.”

He added that the Duterte administration has pledged to engage LGUs as able partners in development.

Diokno recounted that during the time of President Corazon Aquino, when he was an undersecretary at the Department of Budget and Management (DBM), she promised a wide-ranging package of public-sector reforms that would devolve functions and empower local governments.

The policy of promoting local autonomy was enshrined in no less than the 1987 Constitution, he said.

Diokno said that the Aquino policy led to the passage of the Local Government Code (LGC) of 1991, which he described as “a game-changing law that altered the government structure and fiscal rules of the country.”

“Numerous functions and expenditure responsibilities were delegated to LGUs: health services, social-welfare services, agriculture extension and research, protection of the environment, among other things,” he added.

To finance these expenditures, the financial resources to LGUs were provided under the code through a higher Internal Revenue Allotment (IRA) and the delegation of the power to tax and levy fees and charges.

“These had powerful effects. Prior to the LGC, local governments received a maximum of 20 percent of the national internal revenue. With the LGC, this doubled to 40 percent,” Diokno said.

The LGC also led to the power of LGUs to generate local revenue being widened. “LGUs were given the capacity to levy real property and local business taxes, among other collections,” he said.

“In an ideal world, this would have resulted in better public service delivery and increased local government administrative capacities that, in effect, would have brought government closer to the people,” he said.

Diokno said local authorities know best the needs of their communities, and are most knowledgeable of how to respond to these needs. “They should be in the frontlines of service delivery,” he said.

However, he said the higher, predictable, formula-based, and mandatory grant system for the IRA has resulted in heavy reliance of LGUs on the IRA.

“A pattern of dependency can be drawn from the figures. For many LGUs, the IRA has accounted for more than 90 percent of their financial resources,” Diokno said.

He said from 2009 to 2014, 66 percent of the income of LGUs was sourced externally, which includes transfers from the national government such as the IRA.

Data in recent years indicate that, on average, 80 percent of the operating income of municipalities and provinces comes from the IRA and shares in other national taxes.

On the other hand, there are only slight increases in the local sources of income from 2009 to 2014.

During this period, income from local sources increased by an average of only 9 percent.

“In fact, if we compare the local sources of income to gross domestic product (GDP), it has remained flat or slightly lower — from 1.21 percent in 2009 to 1.19 percent in 2014,” it said.

The IRA is an unconditional block grant that allows LGUs full discretion in its use, except for the local government code requirement that 20 percent is allocated for local development projects.

The intention of the law is to direct expenses toward productive uses that increase the growth potential of provinces, cities, municipalities, and barangays.

“Unfortunately, the review of the pattern of LGU expenditures from 2009 to 2014 reveals that bulk of the LGU expenses has been on general public services,” Diokno said.

Government records also showed that expenses for general public services at 55 percent dwarfed those of social services at 25 percent.

“In effect, the bulk of funds is spent on local administration functions instead of education, health and nutrition, population control, labor and employment, housing and community development, social welfare, and so forth,” Diokno said.

He noted that this is an unfavorable balance, “given that spending on social services are expected to grow with a growing population, which is true for the Philippines.”

Diokno said this is bolstered by the need to set aside funds for impending natural calamities and disasters.

“Simply put: local governments are not spending enough on things that matter the most to the people they serve,” he said.

If we are to reverse this state of affairs and promote the full development of local autonomy, Diokno said two steps must be taken that are “revenue-generating powers of local governments, as provided in the LGC, must be tapped into and fully utilized, and strong performance evaluation mechanisms must be developed to extract accountability from local executives.”

Diokno said with support from the European Union, the DBM has undertaken the LGU PFM 2 project that provided for the Public Financial Management Assessment Tool (PFMAT).

“In essence, it is a self-assessment instrument that gauges the fiscal performance of LGUs. This is achieved by providing guidance on what comprises a sound and credible LGU PFM (public financial management) system by identifying performance indicators to measure the performance/compliance of LGUs,” Diokno said.

The PFMAT identifies seven key elements in securing an open and orderly PFM system:

* Policy-based budgeting – the LGUs must prepare their respective budgets with due regard to government policy.

* Comprehensiveness and transparency – fiscal and budget information (i.e., revenue forecasts, prior, current and budget years’ expenditures, and the expected outputs) must be available and accessible to the public.

* Credibility to the budget – the PFM system must contain indicators that measure whether or not the budget is realistic and is implemented as intended.

* Predictability and control in budget execution – the local budget must be implemented smoothly and effectively.

* Accounting, recording and reporting – adequate records and information must be produced for purposes of decision-making, control, management and reporting on operations.

* Internal and external audit – public finances must be subject to scrutiny by the Local Chief Executive and/or the Local Sanggunian.

* Citizens’ participation – LGUs must encourage concerned citizens to become partners in the formulation, monitoring, evaluation and improvement \ of the local budget.

Diokno said the bureaucracy is also slowly introducing performance-evaluation mechanisms that make local fiscal statistics more available to the public.

“These efforts are ultimately geared to make local executives accountable for their performance, and ultimately, to enhance the delivery of public services,” he said.