Topic : Financial Management in Local Government Unit (LGU)

Reporter : Catherine N. Anito

What is Financial Management?

… refers to the efficient and effective management of money (funds) in such a manner as to accomplish the
objectives of the organization. It is the specialized function directly associated with the top management.

Local Fiscal Administration Fundamental Principles:

1. No money shall be paid out of local treasury except in pursuance of an appropriations ordinance of law;
2. Local government funds and monies shall be spent solely for public purposes;
3. Local revenue is generated only from sources expressly authorized by law or ordinance, and collection
thereof shall at all times be acknowledged properly;
4. All monies officially received by a local government officer in any capacity or an any occasion shall be
accounted for as local funds, unless otherwise provided by law;
5. Trust funds in the local treasury shall not be paid out except in fulfillment of the purpose for which the
trust was created on the funds received;
6. Every officer of the local government unit whose duties permit or require the possession or custody of
local funds shall be properly bonded, and such officer shall be accountable and responsible for said funds
and for said funds and for the safekeeping thereof in conformity with the provisions of law.;
7. Local governments shall formulate sound financial plans and the local budgets shall be based on
functions activities and projects in terms of expected results;
8. Local budget plans and goals shall, as far as practicable, be harmonized with national development plans,
goals and strategies in order to optimize the utilization of resources and to avoid duplication in the use of
fiscal and physical resources;
9. Local budgets shall operationalize approved local development plans;
10. Local government units shall ensure that their respective budgets incorporate the
requirements of their component units and provide for equitable allocation of resources among these
component units;
11. National planning shall be based on local planning to ensure that the needs and aspirations of the people
as articulated by the local government units in their respective local development plans are considered in
the formulation of budgets of national line agencies of funds
12. Fiscal responsibility shall be shared by all those exercising authority over the financial affairs,
transactions, and operations of the local government units; and
13. Every officer of the local government unit whose duties permit or require the possession or custody of
local funds shall be properly bonded, and such officer shall be accountable and responsible for said funds
and for said funds and for the safekeeping thereof in conformity with the provisions of law.;

Sources of Revenue
A. Internal Revenue Allotment (IRA) – these are revenue transfer from the National Government to
the Local Government Unit.

B. LGU Shares in National Wealth & Other Taxes – LGUs were to have an equitable share in the
proceeds derived by the National Government and any of its agencies and corporations from the
utilization and development of the national wealth within their locality including those from mining
taxes, royalties, forestry and fishery charges.
 C. Local Tax and Non-Tax Revenues – locally generated revenue is a range of taxes, fees and
charges that LGC provide authority for local governments to assess and collect
D. Loans & Grants – LGUs were allowed to accept donations directly from donors, without prior
approval of the National Government.

A. Internal Revenue Allotment (IRA)

Allocated according to type of local government;
 Province - 23 %
 Cities - 23 %
 Municipalities - 34 % and
 Barangays - 20 %

Share of Provinces, Cities, and Municipalities based on:

 Population - 50 %
 Land Area - 25 % and
 Equal Sharing - 25 %
 Barangays: 60% Population + 40% Equal Sharing

B. LGU Shares in National Wealth and Other Taxes

 Share in the proceeds from the Development and Utilization of the National Wealth
 Share of the Local Governments from any Government Agency or Owned & Controlled Corporation
 Remittance of the Share of Local Government Units
 Development & Livelihood projects
C. Local Tax and Non-Tax Revenues
 Taxes on transfer of real property ownership, the business of printing & publication ; sand, gravel &
other quarry resources; delivery trucks of manufacturers & dealers ; the franchise tax, professional
tax; & amusement tax
 Taxes on small business; application fees for barangay clearance; user fees for barangay-owned
properties or service facilities; fees & charges on cockfighting-related activities, recreation facilities
which charge admission fees & billboards, signboards and other outdoor advertisements
D. Loans & Grants - local governments may obtain other resources from grants and donations from private s
ector, NGOs or donor assistance.

1996 LGU Financing Framework

Basic Objective: to wean away the LGUs from dependence on the national government and promote effective
partnership with the private sector
Two premises of Vision:
First, LGUs have varying level and records of creditworthiness and bankability.
Second, their financing needs are huge.
A seven-point program of action was recommended to implement the Framework, namely:
1) Increase LGU use of BOT arrangements;
2) Develop the LGU bond market;
3) Promote LGU access to private banks;
4) Optimize the involvement of GFIs in LGU financing;
5) Restructure and reorient the Municipal Development Fund;
6) Improve the capacity of LGUs to raise own revenues; and
7) Tap ODA technical assistance and financing.

State of LGU Financing

1) BOT Projects of LGUs
2) Bond Issuances of LGUs
3) Private Bank Loans to LGUs
4) GFI Loans to LGUs
5) Restructuring the Municipal Development Fund
6) Improving the Revenue Generation Capacity of LGUs
7) Tapping ODA Technical Assistance and Financing

LGU Budgeting Process

LGU Budgeting Process

1. Budget Preparation
 Done between July 15 and October 15 of the current year transmitted to the Local Sanggunian
not later than October 16
Two Parts of Executive Budget
1. Estimates of Income
2. Total appropriations covering current operating expenditures and capital
a. Personal Services

 Salaries and Wages

 Per Diems

 Compensation and Non-Commutable Allowances

 Life and Retirement Insurances

 Premiums

 Overtime Pay
b. Maintenance and Other Operating Expenses
 Payments for Travelling Expenses

 Communication Services

 Supplies and Materials

C. Capital Outlays
 Expenses for Land

 Land Improvements

 Structure and Equipment

2. Budget Authorization
 Legislative discussion of the proposed budget is done by the Sanggunian between October
16 and November 17.
 Enact annual budget by issuing an appropriation ordinances on or before the current fiscal
year.
3. Budget Review
 The review action by the reviewing authority may lead to either the declaration of the
budget.
4. Budget Execution
 This phase involves the release and actual disbursement of funds for the identified
functions, wok and financial plan and request for allotment.
5. Budget Accountability
  Final phase of the budget process.
 Recording and reporting actual income and expenditures.
 Evaluation of the performance of the local government unit.

Cooperative Undertaking among LGU’s Form of inter-local government cooperation

An Inter-Local Cooperation (ILC) is a group of local government units that are geographically
adjacent or contiguous to each other coming together on a long-term basis to jointly provide services
and/or implement projects. ILC may also be interchangeably referred to as alliance(s) or cluster(s).
Originally, the term was Inter-LGU cooperation

Four Essential Elements of ILC

1. A common purpose;
2. A coordinating structure;
3. Commonly agreed upon systems; and
4. Pooled resources

“This allows for Inter-LGU cooperation to occur through Memoranda of Agreement for mutually beneficial
purposes, with agreed contributions of staff, financial and capital resources in whatever manner that suits the
LGU concerned.” 

Philippine laws that promote inter-local cooperation

• The Philippine Fisheries Code for coastal and fisheries management;
• The National Integrated Protected Areas System Act;
• The Ecological Solid Waste Management Act;
• Executive Order No. 205 series of 2000 for the establishment of Inter-Local Health Zones;
• The Urban Development and Housing Act

Alliance Configurations
Four Alliance Configurations
1. All-LGU or Natural Alliance – this alliance between and among LGUs of the same level, like an
alliance of municipalities or it can be between LGUs of different levels, such as provinces and
municipalities .
 Southeast Cebu Coastal Resource Management Council (SCCRMC)
 Laguna Bay Development Alliance ( LBDA)
 Northern Negros Aquatic Resources Management Advisory Council (NNARMAC)
 PALMA Alliance
2. All-LGU Alliance with a new juridical entity – this alliance configuration is created through
congressional acts, presidential executive order or provincial executive order.
 Metro Manila Development Authority
 Partido Development Authority
3. All-Government Alliance – this alliance is made up of LGUs and national line agencies.
 Lake Mainit Development Alliance
4. Public-Private Sector Alliance – this alliance configuration is becoming increasingly popular because
of the recognition that development should involve all stakeholders as much as possible.
 Alliance of Northern Iloilo for Health Development
 Alliance of Seven, Samar