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A Just Share of the National Pie:
Restoring the I.R.A. Cut
by: Agustin Martin G. Rodriguez, Ph. D.

Threat and Counter Threat

As the last decade of the millenium came to a close, the issue of local government finances came to the attention of the media. The cause of this furor was the Senate Finance Committee’s proposal to cut the source of the local governments' share of internal revenue by Php 30.445-Billion in order to reduce the public sector deficit. To demonstrate their opposition to this proposal, local government executives threatened to call for a work stoppage of all local government units in the country. The threat came from the Union of Local Authorities of the Philippines (ULAP), the umbrella organization that brings together local authorities from the provincial to the barangay levels. The threat from the ULAP was surprising since the leagues have not been known to openly challenge national government actions. Local executives have always supported the national government’s programs and directives (worth noting is their unquestioning support of the CONCORD campaign despite its unpopularity with the greater majority), and the flexing of the muscles of their newly gained autonomy to counter national government directives is a rarity.

If the cut pushes through, it is not the first such reduction of the Internal Revenue Allocation (I.R.A.). Since local autonomy was legislated, national government has actually cut the revenue allotment of local governments in many ways.  President Ramos in his last year as president held-back Php 10 billion from the I.R.A., and subsequently restored only Php 5 Billion from the cut. In most years since the Code mandated I.R.A. formula was made effective, the base for computing the I.R.A. was reduced. To date, Php 5 Billion is held back every year for the Service Equalization Fund. Local executives have complained about these cuts, but they have never reacted so passionately. Neither were there strong reactions to other acts of the national government that threatened local autonomy. Many bills are pending in Congress for the re-nationalization of many devolved services, but no strong objections from the leagues have yet been registered. Neither are there strong objections when the national government issues directives inimical to local autonomy. Examples of these are Administrative Order No. 92-267 and Department of Interior and Local Government Memorandum Circular No. 94-120 which require the approval of the DILG secretary before local officials can travel abroad. Local officials are also required to obtain approval from the DILG to purchase equipment with their 20% development fund.(DILG 1995, 1996, 1997) DILG Memo Circular No. 98-136 imposes limitations on the use of local intelligence funds with a list of allowable uses for this fund. They must also acquire the approval of the Committee on Privatization to dispose of assets (E.O. No. 12, 1998). These orders are not only a threat to autonomy but also an insult to the capacity of local executives to govern, but no protests made the newspaper headlines. Thus, the furor over the I.R.A. cut for the 2000 budget was surprising, and yet upon hearing it, many advocates of local autonomy could not help but feel that it was about time that the leagues had spoken-up to defend their autonomy. 

When ULAP flexed its muscles, the national government took notice. After all, a nation-wide work stoppage from the local governments would paralyze government operations and the delivery of basic services. The first reaction of the national government to this threat was to issue a counter-threat, i.e. they threatened to file administrative cases against local executives who participated in the work stoppage. But once they realized that the ULAP was serious about the work stoppage, the national government made quick moves to appease the powerful union of local authorities. The President himself met with the ULAP leaders to ask them to call off their strike set for the third week of December with the assurance that he would talk to the members of the Bicameral Conference Committee on the 2000 General Appropriations Bill to restore the cut that the Senate Finance Committee proposed. ULAP agreed to put on hold their strike, and they waited to see if the bicameral committee could propose a reasonable solution to the I.R.A. cut issue.

The I.R.A. and Local Autonomy

At the heart of this issue is the question of local fiscal autonomy. Actually, from the point of view of the ULAP, the opposition to the cut was as much a question of the preservation of autonomy as it was a question of survival. From the official position of the ULAP which was certified by its national president, Gov. Joey D. Lina, and approved on the 9^th of December 1999, the fact that the delivery of basic services would suffer from the I.R.A. cut was highlighted and the question of local fiscal autonomy was hardly touched, except for a note that the automatic release of the I.R.A. was guaranteed by the 1987 Constitution and  the Local Government Code of 1991. One cannot help but agree with the ULAP The I.R.A. cut will amount to a substantial reduction of funds that will finance the many basic services that were devolved to them by the Code since 1992. Today, local government units (LGUs) are mandated to deliver health, agriculture, environment and social services that the national government agencies used to deliver. A reduction of their budgets will translate to a reduction of funds for health services, local infrastructure maintenance, day care services,  disaster aid programs, and irrigation projects. The ULAP was right in emphasizing the fact that an I.R.A. cut would translate into a cut in basic services that LGUs provide for the poorest of their constituents. In a press statement issued by civil society groups in the Philippine Daily Inquirer dated 12 January 2000, they noted that the proposed cut to the I.R.A. would amount to the following: the share of provinces would be reduced by Php 103 million each, cities by Php 99 million each, municipalities by Php 8 million each, and barangays by Php 173,000 each. Specifically, they sited that the province of Cebu would lose Php 221-million, Ilo-ilo would lose Php 161 million, and Rizal Php 130 million. Cities like Manila would lose Php 364 million, Quezon City Php 445 million, and Las Piñas Php 111 million.

These cuts will certainly affect social services which already suffer with the spending habits of LGUs. In studies by Prof. Jocelyn Quaresma and Simeon Ilago made in 1996, they note that up to 1994 almost half of LGU spending goes to personnel services and about 30% goes to maintenance and other operating expenses, while social and economic services received less than 20% of expenses. At least this was the pattern up to 1994. Such spending patterns could be alarming because many of the personnel expenses fund casual employees: an item which Terrence R. George notes, is “a frequently used source of patronage to reward loyal followers.”[1] Quaresma and Ilago note that "…while more resources have come into the hands of local governments, expenditures on capital outlay, and economic and social services remain wanting."[2] Dr. Rosario Manasan’s paper “Local Government Financing of Social Service Sectors in a Decentralized Regime: Special Focus on Provincial Government in 1993 and 1994” notes that provincial government expenses on health was below the level needed to sustain expenses before devolution, and social welfare spending “declined in nominal terms” as well.[3] With a 25% cut on their budgets, social service spending will suffer even more.

We must note though, that the I.R.A. cut is not only a threat to social services and the social and economic welfare of the constituents of local governments, this cut is also a threat to local autonomy itself. The I.R.A. is the just share of LGUs in the nation's internal revenue collections, e.g. "revenue from income tax from revenue income, business income, and corporate income; the 10% value-added tax; taxes on foreign trade; excise taxes on alcohol, tobacco, petroleum products, and the documentary stamp tax."[4] This is part of what the Constitution calls the LGUs "just share, as determined by law, in the national taxes which shall be automatically released to them."(Art. X, Sec. 6) Republic Act 7160 or The Local Government Code of 1991 (The Code) is the law that determined that I.R.A. shares should mean this:

Sec. 284. Allotment of Internal Revenue Taxes .-- Local government units shall have a share in the national internal revenues taxes based on the collection of the third fiscal year preceding the current fiscal year as follows…

(c) On the third year and thereafter, forty percent (40%)

Further in Section 286, the Code makes this provision:

Sec. 286. Automatic Release of Shares. -- (a) The share of each local government unit shall be released, without need of any further action, directly to the provincial, city, municipal or barangay treasurer, as the case may be, on a quarterly basis within five days after the end of each quarter, and which shall not be subject to any lien or holdback that may be imposed by the National Government for whatever purpose.

Thus, the Code fulfills the Constitutional mandate by providing a clear formula for the computation of the I.R.A. share and by providing for the automatic release of the shares.

The key issues in the I.R.A. cut controversy revolve around the fact that the Constitution and the Code recognize that local autonomy demands that local governments receive a fixed and predictable income that will be automatically released to them, without their being dependent on the national government's whims regarding its release or without just cause, i.e. an unmanageable budget deficit. If the idea of local autonomy is to give local government units the power and responsibility to provide for devolved, essential services for their constituents, to plan for the development of their localities, and to freely and effectively administer their political and administrative units, the LGU administrators need a source of income that is assured to them without their having to court the favor of the national government for projects or for a share of the national budget. As the Constitution makes clear, local governments shall have autonomy and they shall have a just share of the national taxes. Autonomy demands a just share of national taxes. After all, one cannot act autonomously if one does not have a reliable source of revenue. To be given the autonomy to administer their localities without the equivalent resources for such administration is an ineffective grant of autonomy. The Constitution and the Code wisely mandate the automatic release of the I.R.A. so that local governments can budget their administrations without needing to cater to the dictates of the national government, e.g. without mayors having to agree to support the CONCORD issue or to support the administration’s candidates for elections to assure themselves of a budget. If these shares are not automatically released, national government can hold its release to make sure that LGUs tow the national government's line. Thus, the I.R.A. is to be released without lien or holdback and under a clear schedule.

            The law does make provision for a cut in the I.R.A. share. Sec. 284 of the Code states:

That in the event that the National Government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of the Secretary of Finance, Secretary of Interior and Local Government, and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the liga, to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal year…

Clearly then, any cut to the I.R.A. should be recommended by the President after it is determined that an unmanageable public deficit sector deficit exists and after due consultation is made with, among others, the presidents of the leagues of local administrators. Unfortunately, the meaning of an unmanageable public sector deficit is not made clear, but at least the consultative process of reducing the I.R.A. share is a little clearer. Also, an indisputable ten percent (10%) ceiling on I.R.A. reductions has been legislated.

LGU Dependence on the I.R.A.

Given this constitutional and legal framework, one can say that the proposed Php 30 billion cut was both illegal and unconstitutional. The Senate proposed the cut without due consultation with the representatives of the leagues, and the proposed reduction amounted to twenty-five percent (25%). Even if an unmanageable public sector deficit existed, and this is really a very gray area in the law,  the Code only allows a maximum reduction of ten percent. And such a cut can only be made after due consultation. Given the reaction of the leagues, there was clearly no such consultation. On top of these issues, a more fundamental issue remains. Is it not clear in the Code and the Constitution that the I.R.A. share is to be automatically released according to the sharing scheme and schedule set by the Code? If it is clear that the I.R.A. is part of the just share of LGUs in the nation’s revenue that is automatically released to them, Congress is only authorized to discuss any cut if an unmanageable public sector deficit is foreseen and  this cut should be confined to 10%. Why then did the Senate feel authorized to even deliberate on the I.R.A. to be released to the LGUs?

In fairness to the Senate Finance Committee, the 2000 budget did reflect a daunting deficit of more than a Php 100 Billion--especially when the International Monetary Fund threatened to hold back its loans unless the deficit was somehow reduced. Therefore, the Senate decided to cut the budget by reducing the I.R.A. share by Php 30 Billion. Of course, other cuts were made to the budget but, along with education, the I.R.A. was the most controversial: both for the potential unconstitutionality and illegality of the act and the potential damage it could do.

The I.R.A. cut is truly potentially damaging for the operations of LGUs. To date, LGUs are more than 50% dependent on their I.R.A. allocation. Despite their expanded taxing powers, many LGUs simply do not have a tax base beyond that which the national government already collects. This is due to a lack of natural endowments and administrative neglect on the part of past and more centralized administrations. After all, despite the expanded taxing powers of the LGUs, the most substantial sources of tax funds from their constituents are already collected by the National Government. Thus, clearly the I.R.A. is not fiscal assistance from the national government but is actually the just share of local governments from the taxes collected from their constituents.

For many LGUs, especially those which are classified as 4^th to 6^th class municipalities, a reduction of I.R.A. shares means a reduction of their capability to provide for basic services. As it stands, the I.R.A. distribution scheme discriminates against smaller municipalities that are poorer, smaller and have a small population.  Because the I.R.A. distribution favors highly populated areas, like cities, the reduction doubly discriminates against poorer and less populated localities. Also, the I.R.A. distribution favors provinces which get a bigger share of the I.R.A. pie while most of the front line services are provided by cities and municipalities. The first step of distribution follows this formula: provinces = 23%, cities = 23%, municipalities = 34%, and barangays = 20%. If we consider that the provincial share will be distributed among 78 provinces, the cities' share among 83, and the municipal share among 1,452 municipalities, we can clearly see how municipalities which often bear the brunt of line services and often have little income, are discriminated against with this sharing scheme. The second step of distribution determines the share of each LGU based on these weighted criteria: population is weighted 50%, land area,  25% and the remaining 25% to be distributed equally. Again we see the discrimination against poorer and less populated municipalities.

For LGUs, especially municipalities, that have almost no way of raising revenue and are discriminated against by the I.R.A. sharing scheme, the millions that will be cut from their actual budget will mean that social and economic services cannot be funded. Existing services will suffer and as well as projects that will lead to any form of economic development leading to fiscal independence.  And surely, the first things that suffer from budget cuts would be social services since these are the lowest priority in local government spending.

One cannot but agree that the budget needs cutting. After all, the deficit seems staggering. However, the ULAP is right in questioning the cut against the budgets of local governments, and they are right in demanding that the cuts be focused more on national government agencies whose functions have been devolved. Since the Code was passed, over 70,000 government personnel from the departments of health, agriculture, social welfare, environment, and natural resources have been taken on by the local government units. Over 900 hospitals and health facilities are now the responsibility of LGUs. Despite the devolution of these services, the budgets of the departments of agriculture and health seem to have risen disproportionately. The Department of Health's budget rose to about Php 12.3 B from Php 7.5 B in 1991 before devolution and the Department of Agriculture Php 22.3 B from Php 4.3 B. Thus, while the local governments are taking on more of the burden of governance, their budgets are being reduced and the devolved agencies are getting more money. Surely the national government should look into the absurdity of this situation. The logic behind this rise in their budgets, some local officials claim, is because they are the sources of the pork barrels of Congress. For instance, some items under their budgets, such as farm to market roads, can only be released with the concurrence of a district’s congressperson—these can be extremely useful funds for courting political favor.  Of course, the rise in budget could be attributed to the rise in inflation. Nonetheless, before Congress touched the I.R.A., they should have examined the budgets of devolved national agencies.

Resolutions and Victories

The Bicameral Budget Committee seemed to have come up with a compromise solution to the I.R.A. problem. In their February 2000 solution, they restored Php 20 billion to the I.R.A. and placed another Php 10 billion of it under the category of unprogrammed expenses. This means that the Php 10 billion would be released only when the national government reaches a desired amount in its tax collection. In short, there was no cut in principle. But in fact, the ULAP noted that the Php 10 Billion has been practically cut since the Php 10 billion could never be released if the national government deems that they have not collected enough revenue. With this solution, the ULAP would still have taken the matter of the I.R.A. cut to the Supreme Court so that the court could finally decide on the constitutionality of such hold-backs and cuts. This was probably the best move that the ULAP could have made since it would have given the issue of the automatic release of the I.R.A. a resolution with finality. This move would have been especially significant since the ULAP uncovered many items in the budgets of national line agencies that they claimed were hidden pork barrel items for Congress.

In a study made by the ULAP of the 2000 budget, many items under national agencies such as the Department of Health, Department of Agriculture, Department of Public Works and Highways, and the Department of Education among others needed either prior concurrence or prior consultation before they were implemented. Things like the use and release of funds for various infrastructure projects including local projects, rural electrification projects, and the use of lump sum appropriations of the Department of Agriculture needed either prior concurrence or consultation with legislators. Before local shares of the I.R.A. were cut, these items, which could be nothing more than sources of pork for lawmakers, should have been examined. Through these projects, lawmakers could use national government money to improve their political images in the localities while depriving essential funds for autonomous local government that provide essential services to the localities. With these continued threats against local autonomy, the ULAP pressured national government to restore all cuts. Finally, the President conceded by restoring all cuts to the I.R.A. and by promising to veto any hidden pork in the budget. Although there is no clear word on the President’s veto on the “hidden pork” since he declared that there was no pork in the General Appropriations Act submitted to him, the Php 10 B cut to the I.R.A. was restored and the ULAP declared itself victorious. But how victorious was it? National government still feels that it can cut the I.R.A. at will and its full release this year was based on the favor of the President. ULAP president, Gov. Jose Lina, admits this much.[5] Therefore, the I.R.A. issue illustrates that local governments do not have genuine fiscal autonomy given that they must court the favor of Congress and the national executive to have their full share of the constitutionally mandated and legislated I.R.A.. Therefore, the ULAP and local government have not really won anything in the annual battle for the I.R.A.. At the most they have only won a brief respite, and perhaps they have even lost something because this round has only reiterated their dependence on the Office of the President. Thus, despite ULAP’s withdrawal of its resolution to bring the matter of the I.R.A. to the Supreme Court, the battle will still continue until the court has resolved this issue with finality.

Challenges

The annual battle for the full release of the I.R.A. is one that should be followed closely by all advocates of local autonomy for it will be a test of how serious the Republic is in its establishment of genuine local autonomy. Perhaps, if the interests of ULAP will not allow it to pursue its rightful demands to the Supreme Court, it is up to the taxpayers who suffer the I.R.A. cuts to press suit. Clearly the issue of the I.R.A. release is far from over and if the local government executives will not act on it, then someone must.

But even if the issue is resolved in the courts and they deem that the I.R.A. should be released as legislated, civil society advocates for local autonomy still have a great task cut out for them in regard to fiscal autonomy. Firstly, they must push local governments to work harder to explore local sources of revenue because national government will always look for ways to cut the I.R.A.. If they cannot reduce actual percentages of the allocation then they will continue to reduce the base from which they compute the I.R.A. share. Civil society should help local governments explore non-I.R.A. sources of revenue and funding in order to build the economic base of their localities. Secondly, they should push for greater social services spending since the local governments are at the front line of social welfare provision. This means that they must push for the proper use of whatever little funds the LGUs have. In the third volume of the Commission on Audit’s Annual Financial Report on Local Governments cited by the December 23, 1999 issue of Businessworld, the commission notes that the 20% development fund from the I.R.A. that the Code sets aside for development purposes is used like “an almost unsupervised mini-pork barrel.” Instead of using the fund for basic human needs and development projects, it is diverted to infrastructure projects, ghost and non-viable projects, “hardware splurges,” “highly irregular and grossly unnecessary tourism projects,” loan payments, and even vehicles. Local executives must remember that direct spending on social and economic development is necessary because the trickle down effect of development does not address the problem of the lack of basic human needs. Therefore, the more visible and politically attractive infrastructure projects that may bring some economic growth will not address the fact that more and more infants are dying and  poor people have no homes. Advocates of local autonomy should at least push for clear annual development plans to ensure that the development funds will be used properly. But most importantly, civil society should constantly remind local government authorities that for local autonomy to work, for them to win a more meaningful autonomy from the national government, they should show that they are responsible managers of the autonomous units they were elected to govern.

Civil society must also push the national government to appreciate the need for the strengthening of local autonomy for genuine democracy which will lead to genuine development. To date, national government at every branch shows little appreciation for local autonomy. The executive works to curtail this autonomy by trying to curtail the powers of local government executives and it continues to cut the base of the I.R.A. computation. The legislature continues to cut LGU funding. Rather than hamper local autonomy, the national government should work to strengthen autonomy, and one concrete step toward this is the strengthening of local fiscal autonomy. Clearly, local governments should be helped past their I.R.A. dependence. This means the Department of  Budget and Management should study alternative sources of funding for LGUs, especially those which are not deemed credit worthy by commercial financial institutions. More information on available official development assistance should be made available to less developed LGUs without solid tax bases. Assistance should be given to these LGUs to make them more credit worthy, i.e. they must be taught better fiscal practices. Assistance should also be given for these LGUs to exploit their tax bases as well as the maximization of their taxing powers, this means better tax mapping and efficient tax collection as well as the exploration of non-tradition taxation.

The I.R.A. issue is a tremendous opportunity for civil society governance advocates and local government executives to come together in agreement and collaboration. The ULAP has already began to network with civil society advocates to help them at least bring the importance of this issue to the attention of the general population. Civil society must seize this opportunity to work with the ULAP because the I.R.A. is a cause worth fighting for. It is, after all the life-blood of local autonomy. But in such an alliance, civil society must not forget the issue they are fighting for, i.e. the democratization which is at the heart of local autonomy. Civil society must collaborate with the local executives in this issue with the understanding that their role is to push for greater democratization and people’s participation in governance in order to deliver the disenfranchised masses from their political, social and  economic marginalization. Civil society should fight for the automatic release of the I.R.A. and for genuine fiscal autonomy in order to ensure that the best ideals of local autonomy are achieved, not in order to further the worst features of local, patronage politics.               

This is the greater problem that the I.R.A. issue has brought to fore: i. e. the issue of the deepening of local autonomy through local fiscal autonomy in order to achieve greater democratization. Today, local government executives are still not aware of the value of democratization for the deepening of governance in the autonomous local governments. The strengthening of fiscal position of local governments should lead to the greater financing of local democratization. However, many local executives are still not appreciative of networking and partnership efforts of local civil society groups. Local executives also thwart the institution of people’s participation in governance, such as local representation in the local legislature, because of the lack of funds of local government. Civil society groups are fighting to strengthen fiscal autonomy in order to make available funds for local democratization. These moves for greater civil society participation are essential for the development of the localities. These groups do not only serve to fiscalize governance at the local level but can also serve as partners in development because they bring to government the voice and talents of the people at the locality. But if local executives continue to block efforts at civil society participation in governance, such as the local sectoral representation system and the participation of NGOs and POs  in local development boards and other local special bodies, then they will lose their support for the strengthening of local fiscal autonomy and for genuine development.

For the I.R.A. issue, the ULAP sought the support of civil society groups for their cause. Civil society groups involved in the struggle to institute local autonomy threw their support for the campaign to restore the cuts to the I.R.A.. Groups like the Local Governance Policy Forum is even willing to take the battle further than ULAP It is still pressing for the I.R.A. issue to be taken to the Supreme Court. However, this support is being given with the understanding that greater resources given to local government should translate to greater efforts at instituting democratic participation in governance on the part of the local government units for greater autonomy and greater people’s participation in governance is the only path to follow in truly serving the people in the localities and the nation they are citizens of.