Institute of Politics and Governance

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On the Local Government Service Equalization Fund

Speech delivered by Former Asst. Executive Secretary Antonio E. Nery,
August 8, 2000 in Sulo Hotel

PRELIMINARIES

Distinguished officers and members of the Local Governance Policy Forum, my co-advocates, guests, ladies and gentlemen, good morning!

I am more than pleased for the opportunity given to me by the Local Governance Policy Forum to address you in this gathering-one that I think is very timely and providential. Your bid to fully to understand the issue at hand with regards to local fiscal autonomy is a challenge that I share with you.

Today, it is my hope that I maybe able to share with you some thoughts on the relevant issues and concerns for discussion in this forum and relay to you the thinking and current directions of the OCD with regards to the LGSEF.

I. UPDATES AND RECENT DEVELOPMENTS ON THE LOCAL SERVICE EQUALIZATION FUND (LGSEF)

Let me start by updating this forum about the Local Government Service Equalization Fund (LGSEF) and
the recent development in its implementation.

The LGSEF is a nationwide program established in 1998 pursuant to executive Order No. 48. Its operating framework emanates from the spirit of the Local Governance Code of 1991 that seeks to ensure that the dual goals of autonomy and effective governance are achieved.

The LGSEF is a response to the continuing and persistent calls for support of government units (LGUs) all over the country. It is designed to address the financial shortfalls of LGUs in the performance of devolved functions and responsibilities as well as the delivery of basic services at the local levels. It intends to respond to the needs for additional funding of the 78 provinces, 85 cities, 1,525 municipalities, and 41,940 barangays all over the country.

At the onset, the priority beneficiaries if the LGSEF were defined to unclude the followinf LGUs:

Ø Those are exceptionally burdened with devolved facilities without matching grants;

Ø Those that are affected with disparity in terns of the cost of devolved functions and services and the incremental IRA accruing to the LGUs upon the application of the across-the-board IRA formula;

Ø Those that have limited capacity to raise sufficient revenues or additional source of funds due to the nature of their environs and state of development, to cover the total actual costs of devolved functions and services;

Ø Those that are calamity-stricken; and;

Ø Those that do not have adequate capacity to match the counterpart funding requirement needed in accessing other fund sources that will support the implementation of devolved programs, projects and activities in their localities.

For two years now, a 5.0 Billion fund has been earmarked under the General Appropriations Act (GAA) of CY 1999 and CY 2000. In both instances, the pertinent provisions of the GAA stipulate that the LGSEF financial support shall be released directly to the LGUs in accordance with the implementing rules and regulations, including such mechanism and guidelines for the equitable allocation and distribution of said amount among LGUs as maybe prescribed by the Oversight Committee on Devolution (OCD).

For the information of everyone, the OCD was constituted pursuant to Book IV, Title III, Section 533 (b) of RA 7160. It is currently composed of DILG Secretary Alfredo Lim, DBM Secretary Benjamin Diokno, DOF Secretary Jose T. Prado, Chairman of the Senate Committee on Local Government Senator Aquilino Pimentel, Senator Tessie Aquino-Oreta, Senator Vicente Sotto, Chairman of the House of Representatives Committee on Local Government Cong. Romeo Candazo, Cong. Rodolfo Albano, Cong. Victor Sumulong, President of the League of Provinces Governor Joey Lina, President of the League of Cities Mayor Alipio Fernandez, President of the League of Municipalities Mayor Jinggoy Estrada, and President of the Liga ng mga Barangay Brgy., Captain James Martin Lim, withExecutive Secretary Ronaldo Zamora, as Chairman.

The OCD, as a collegial body of key stakeholders in local governanace, oversees and manages the LGSEF including the funds allocation schemes to the LGUs, with the endorsement from the major leagues of LGUs, namely: League of Provinces, League of Cities, League of Municipalities and Liga ng mga Barangay. Said guidelines are submitted to the President for confirmation and issuance of appropriate directives to concerned agencies.

A Technical Work Group (TWG), composed of OCD members and /or technical representatives, assists the OCD in coordinating the technical and policy development thrusts of the LGSEF. It is also tasked to undertake the initial screening and selection of eligible LGUs' projects and make the necessary recommendations to the OCD for the approval of said projects to be funded under the LGSEF.

A Secretariat technical and administrative support services to the OCD and its Technical Work Group (TWG). It serves as the information and coordination center of the OCD.

At this juncture, let me present to you the status report of the implementation of the LGSEF.

In 1999, the P 5.0 Billion LGSEF was allocated using the following schemes, namely:

a) For the lst tranche, P2.0 Billion was directly released to the LGUs. The distribution of the fund was done using the codal formula of the Internal Revenue Allotment (IRA) for LGUs.

Under this scheme, all 78 provinces got an aggregate amount of P 460 Million or 23% of total allocation and the individual share received by a province averages to about 5.8 Million. For the 84 cities, the aggregate amount was P460 Million or 23% of the total allocation and on the average, a total received about P 5.47 Million. For the 1,524 municipalities, the aggregate amount was P680 Million or 34% of total allocation, which means that on the average a municipality received about P447,000. For the 41,940 barangays received P10,000.

b) For the 2nd tranche amounting to an aggregate of P 1.725 Billion, distribution to LGUs was done using the modified Cost-of-Devolved-Functions (CODEF) formula based on the CODEF distribution at the level ending CY 1992.

Under this component, 40% of total was shared among 78 provinces, 20% of total shared among 84 cities and 40% of total shared among 1,524 municipalities. The average individual share received by a province was about P 8.8 Million; a city, P 4.1 Million; a municipalities, P 452,000.

c) Together with the 2nd tranche, financial amounting to a total of P 275 Million was distributed to affected LFGs as a local affirmative actio to cover the decrease in their IRA due to the reduction in their respective land area conponentr for computing the LGUs' IRA. Twenty-five (25) provinces, four (4) cities, and 85 municipalities were adversely affected by the implementation of the OCD Resolution No.99-001. This policy measure, which the OCD adopted, addresses the issues related to the cadastral surveys on the land areas of LGUs concerned which to date are still not final and not approved by the Land Management Bureau (LBM).

d) For the balance amounting to P 1.0 Billion, the distribution was done a project-based
mechanism to enable disadvantaged LGUs to accessfunds assistance to support their
local affirmative action projects (LAAP).

This LAAP mechanism is governed by a set of guidelines and procedures prescribed
by the OCD pursuant to Resolution No. 99-003. The LAAPs by proponent LGUs
were assessed and approved by the TWG and OCD en banc.

This LGSEF component supported 27 provinces, with an average share of about P 5.5
Million each; 33 cities, with an average share of about P 4.1 Million each; 352
municipalities, with an average share of about P 1.5 Million each; and 251 barangays,
with an average share of about P 390,000 each.

For CY 2000, the amount of Two and a Half Billion Pesos (P 2.5 Billion) chargeable against the P 5.0 Billion LGSEF for CY 2000 has already been released directly to all the LGUs using the IRA codal formula. Under this distribution scheme,the individual share received by a province averages to about P 7.37 Million; a city, P 6.84 Million; a municipality, P 557,000; and a barangay, P11,900.

Given these statistics, it is obvious that the aggregate amount of P 5.0 Billion earmarked for access by LGUs each year under LGSEF is quite limited considering the number of LGUs that need assistance.

In fact, the OCD is flooded with the pending requests from LGUs all over the country for financial assistance to cover their local affirmative action projects. Based on the records of the Secretariat, 67 provinces have submitted project proposals worth P 2.3 Billion; 36 cities with submitted projects totaling to P 743 Million; 858 municipalities with requests amounting to P218 Million. We have with us more than P 18.9 Billion worth of proposals.You could imagine how full are the hands of the OCD given that only P 2.5 Billion remains unallocated under the LGSEF for CY 2000.

The seemingly endless flow of requests for funding assistance is indicative of a lot of things which, I believe, stand for what we share as common concerns.What more do the local governments need to uplift the lives of their people, many of whom are underserved and disadvantaged? How much extra support is needed to fulfill their mandates of service and plug the gap in resources to fully fulfill them? How fast and timely would these extra help come?

I daresay these are questions that the LGSEF continues to grapplke with for nearly two years now. The continuing calls of LGUs for additional resources resonate loud and clear. Until such time these calls are addressed, the LGSEF stands to serve as a stop gap measure for them to at least partially meet their mandates in the service of the people that we mutually serve.

It is significant to note that given a wide array of funds sources that LGUs can access, the LGSEF is deluged with all types of project proposals that otherwise can be supportedby other funding windows in government. Perhaps, the come-on lies on the transparent and fast processes undertaken by the OCD in the approval of projects as the immediate and direct releases of funds under the LGSEF.

Let me stress that these processes the active participation of the four major leagues of LGUs. Definitely, they stand strong and committed as the strong voices of all provinces, cities, municipalities and barangays. In most cases, their positions and policy initiatives define character of the LGSEF and how implementation proceeds.
PUTTING LGSEF IN THE CONTEXT OF THE FORUM'S THEME

Having said these, allow me to put the LGSEF in the context of forum's theme entitled, "WHO CONTROLS LOCAL GOVERNMENT FUNDS? GOVERNMENT INCURSIONS ON LOCAL FISCAL AUTONOMY." Sounds like a simple question, yet with a whip of critical perspective.

Ladies and gentlemen, with your indulgence, let me tackle this simply. After all, my preceding presentation has already drawn for you a clear picture of what the LGSEF is and did so far. As it is, you can affirm that the LGSEF is a nationwide funding program for local governments at all levels and across the country. Its P 5.0 Billion allocation was earmarked under the General Appropriations Act since 1999.

It is common knowledge that, at the level of the GAA processes, the control button is the responsibility of the Congress. But this is not completely true. While the GAA is considered as the national government instrument appropriate budgets to both national government agencies and local government units for its operations, the provision of this law are based on consultations and budget hearings involving all concerned agencies and units of government.

In the case of LGSEF, this fund found its way into the GAA as a result of the persistence of the LGUs with Gov. Joey Lina at their helm. At the time when President Estrada was also serving as t e Secretary of Interior and Local Government with Sec. Puno then as his undersecretary, a series of consultations between the DILG and ULAP was undertaken to define possible solutions to address the financial shortfall facing LGUs in the delivery of basic services, particularly those that were devolved to them pursuant to the Local Government Code of 1991. These initiatives led to the issuance of EO 48 establishing the LGSEF and reactivating the OCD in late 1998.

At that point the OCD Secretariat, in coordination with DILG undertook rapid survey of the actual costs incurred by LGUs in implementing devolved programs, projects and facilities for CY 1997 to derive an indicative costs of devolved perograms and facilities at the level of CY 1999. It also covered the estimation of how much additional funds the LGUs would need to fully and efficiently implement the functions, facilities and services devolved to them by the national government agencies concerned.

Significant findings of the survey shows that the indicative costs of devolved functions (CODEF), including the additional required amount to efficiently and fully deliver said services in the provinces, cities and municipalities at the 1999 level would total to about P 22.8 Billion, while the guaranteed CODEF which LGUs receive annually is fixed at P 6.5 Billion based at the level ending in December 1992.

The study revealed that the LGUs had assumed the average difference of what DBM would release to them. But, while these funding gaps maybe cover up by the incremental increase in IRA of LGUs, which was about P 12 Billion for CY 1999, as pointed out by the DBM, the LGUs, particularly the 5th and 6th class municipalities, would not be able to match these amounts with their already meager IRA.

The survey outputs indeed confirmed the clamor of LGUs for an augmentation fund to cover the inadequacy and the disparity in terms of the CODEF provisions as well as the inequity in relation to the fiscal capacity of LGUs as a result of an across-the-board IRA formula.

Given a solid justification, the OCD, with the strong endorsement of the leagues of LGUs, requested the Senate and the House of the Representatives to consider the resolution of the OCD for al allocation in the 1999 GAA. Said OCD resolution clearly stated that this allocation be separate and apart from the IRA share of the LGUs. Let me emphasize that this position remained in the succeeding requests made for CY 2000 and CY 2001.

At any rate, believing in the intent of the LGSEF and the good that it will bring to the majority of LGUs that remain disadvantaged as far as their fiscal standing is concerned,
Senator Aquilino Pimentel, an old OCD member and Chairman of the Senate Committee on Local Government, sponsored and shepherded the inclusion of the LGSEF in the GAA in 1999 and 2000.

For CY 2001, Senator Pimentel has informed OCD, through his official representativein the OCD, Dir. Terry Dumogho, of his continuing support for the inclusion of the LGSEF in the GAA for CY 2001.His representation indicated that the LGSEF should be over and above the IRA share of LGUs and should be sourced from the operating budgetsof national government agencies,GOCCs, and other instrumentalities that have devolved functions and facilities as well as those which use local government facilities and resources to Resolution No. OCD-2000-026 dated 22 June 2000.

I share the belief that the inclusion of the LGSEF in the GAA in the succeeding years is a milestone for local government to push until such time that the IRA formula has been amended. In the 8 years of implementation of the code, the clamor to revise the formula and scheme for the determination of LGUs' IRA shares has never stopped.It woult seem that we are still in transition period for the devolution programas prescribed under the Code. Day-to-day attendant issues are raised by LGUs and continue to reach OCD.

While the conditions by which LGUs find themselves in have vastly changed since then, their needs have also changed. And, the nagging questions related to the fiscal autonomy fluctuate in accordance with who has more and who has less, between the national and local sectors in government and among the various levels of local governments. Can the playing fields be leveled?

Clearly, the intent of the OCD including its partners in Congress is not of control but mote of facilitation--- to bring resources where these are most needed. The OCD recognizes that a carefully designed intergovernmental transfer can be a tool to encourage sound fiscal management, efficient delivery of services and consequently good governance at the LGUs level.

Let me informs you that the OCD in partnership with the DILG is undertaking several studies to surface various aspects that have a bearing on our concern. These studies will be significant in providing a firm basis for short-term and long-term executive and legislative actions to address the limitations and shortcomings in the present revenue-raising and sharing schemes involving the LGUs.

We hope to draw out a basis for a rational and more efficient allocation of revenue between the national government and the LGUs. There are specific questions that need to have real and concrete answers: One is the IRA formula arbitrary and inequitable? Which LGUs have disproportionately large increases in IRA shares and which lost out? Two is the IRA codal formula reflective of the actual needs of the LGUs? Are there other measures to consider aside from the LGUs' population, land area and the equal sharing coomponents of the IRA formula? Three reports show that relative to the national budget, the IRA is miniscule. In 1997, the total IRA was only 14% of the national budget, while 86% was controlled and used by the national government agencies and offices. The question: Is the national revenue sharing scheme just and equitable?

When we have the answers to these questions, perhaps the path towards local fiscal autonomy will be rid of cobwebs, misconceptions, and all the myths that perpetuated the long-drawn transition towards real decentralization.

The OCD laid its stake to ensure that the goals of effective local governance and decentralization are achieved. It stands not to compromise the intent of the Code and the struggle of LGUs to attain their vision for local autonomy. Individually and collectively, the OCD asserts that local autonomy should and must be achieved.

But mere rhetorics and traditional ways can not go beyond the barriers that impinge upon our mutual goals towards local autonomy. And so, when we espouse this principle in the context of our respective perspectives, are we ready to assume new roles and pursue them as our strong incentives to play the part in this whole scheme or governance. The key stakeholders, including you and me, need to build and enhance our added value to the whole process. But to gauge our readiness requires a shift in perspectives --- from mere numbers and statistics to real human faces. Are these faces with leadership or less of it, with integrity or less or it, with fiscal management ability or less or it? Are these numbers for those who have less or for those with more to have more? In this arena, I think, the control button is the responsibility or each or us.
Who controls local government funds? As I am about to end my presentation, let me share you this one. This question is not a simple one at all. It is as complicated as synchronizing the diversified perspectives and interests involved in governance. Perhaps, our bid to get a clearer grasp of the issue at hand may only be as good as far as the limits of our own respective perspective and interest. Beyond that we find that we have only scratched the surface.

For now, the Supreme Court decision has made clear that the Executive Secretary and the Secretary of Budget and Management "are permanently prohibited from implementing Administrative Order Nos. 372 and 43, respectively dated December 27, 1997 and December 10, 1998, in so far as local government units are concerned."

Is Executive Order No. 58 and the special provisions of the GAA for CY 1999 and CY 2000 providing for the LGSEF appropriations another issue to be raised for clarification and decision by the Supreme Court? This was the question I asked myself after reading the SC ruling. Do you share the same one? Listen, let me confide a clue to a possible answer.

Allow me to share with you excerpts from the letter of the Union of Local Authorities of the Philippines (ULAP) to the OCD Chairman on their position regarding the LGSEF in the light of the Supreme Court Decision, as signed by the President of the major leagues of LGUs. It reads as follows:

Inasmuch as the Supreme Court had already ruled that any retention of the IRA is prohibited", we would like to reiterate the OCD resolution that the LGSEF for CY 2001 should be over and above the IRA, as initially intended under EO No. 48. And that henceforth, with the jurisprudence already established by the Supreme Court under G.R. 132988, dated July 19, 2000, the LGSEF should no longer be sourced from the IRA as this would be unconstitutional.

However, since the OCD already authorized the release of the LGSEF for CY 1999 and CY 2000 based on the agreed upon guidelines, and considering that President Estrada had already approved OCD Resolution No. 2000-023 last July 5, 2000 (before the Supreme Court ruling was officially released), we will abide by whatever decision has been reached by the OCD, as provided for under Special Provision No. ³ of the GAA. Therefore, there should be no reason for DBM not to release the remaining balance of P 2.5 Billion from the LGSEF for CY 2000 as scheduled."

Right now, I have no indication of what position the OCD has on this matter. A meeting has been scheduled this Friday, 11 August to specifically discuss the ruling and detemine the position as well as make the necessary resolution to address issues raised regarding the provisions of the ruling.
So you see how providential the LGPF invitation was. It gave me the time and space to share all these with you.

May I close by saying that the LGUs are mandated to exercise their powers, functions and responsibilities in accordance with the provisions of the Local Government Code of 1991. In this light, the local Government executives (governor/city/mayor/municipal mayor/barangay captain) concerned have the authority to plan, identify, manage and implement projects/activities that would benefit the majority if not all of their constituents within their jurisdiction, including those with funding support from the LGSEF.

The recent articles in the newspapers maligning the LGSEF and myself with all the trimmings of malicious allegations were definitely concocted to destroy rather that build whatever gains we have achieved.

You will agree with me that time and again, some scrupulous interest groups, influence peddlers and the like, have continued to ply their trade using various modus operandi as well as devious approaches that lure vulnerable LGEs to agree to dubious schemes and unethical arrangements.

We therefore call upon all local government executives to be wary of uncscrupulous suppliers, middle men and the like. Let us put a stop to devious and dubious designs perpetuated by unscrupulous groups that tarnish the true intent of government programs such as the Local Government Service Equalization Fund.

Let us join hands in sustaining the LGSEF. Let us forge a partnership in creating solutions to the problems that hinder us from achieving the goal of local fiscal autonomy. As advocates for policy reforms, let us create a synergy in orchestrating a transparent and unified action towards effective decentralization and local autonomy. For, ours is a process that ultimately has an impact on the sustainability and empowerment of every LGU.

Thank you very much.