The new law on the automatic income classification of local government units (LGUs) will help ensure the fiscal sustainability and revenues of local governments, the Department of Finance (DOF) said.

Republic Act No. 11964 or the Automatic Income Classification of Local Government Units Act updates the income classification of LGUs according to their current financial capabilities.

“This law is a significant milestone that resolves the long-standing issue of outdated LGU income classification for over a decade,” Finance Secretary Benjamin E. Diokno said.

“It paves the way for a more responsive approach to foster local autonomy and empower LGUs to unleash their full economic potential,” he added.

The law puts provinces, cities, and municipalities into five classes according to their income ranges, based on the average annual regular income for three fiscal years prior to a general income reclassification.

The Finance secretary, with input from the National Economic and Development Authority and the concerned LGUs League, will be mandated to adjust the income brackets according to the actual growth rate of the annual regular income from the last income reclassification.

The secretary is also tasked to carry out the LGU income reclassification once every three years so that it aligns with the current economic conditions.

The classification will serve as the basis for determining LGU's capability to undertake development programs and projects, as well as adjustment of compensation for LGU personnel pursuant.

The law states that the first general income reclassification will be made within six months after its effectivity and every three years afterward.

The first income reclassification of provinces, cities, and municipalities will take effect on the first day of January of the succeeding year following the release of the table of income classification by the finance secretary.

The DOF shall craft the law’s implementing rules and regulations  within three months from its effectivity, along with the Department of Budget and Management (DBM) and LGU Leagues.

The finance department’s Bureau of Local Government Finance (BLGF) emphasized that the law paves the way for fiscal decentralization for LGUs, which will enhance its oversight functions for provinces, cities, and municipalities.

The BLGF is mandated to assist in the formulation and implementation of policies related to LGU revenue administration and fund management as it supervises the treasury and assessment operations of LGUs.

In its latest report, the BLGF noted that LGUs saw a significant improvement in their fiscal performance in 2022.

In 2021, the total operating income of LGUs rose to P1.10 trillion last year, which translates to an increase of P230.78 or 26 percent from P871.30 billion in 2021. This is mostly attributed to the National Tax Allotment due to the higher allocation from the government.

LGUs’ operating income from local sources, such as the collection of local taxes and fees, also increased to P278.64 billion a year ago, up by 9 percent or P22.43 billion from P256.21 in 2021.

The BLGF introduced several issuances to improve local finance and treasury operations such as guidelines on the imposition of local business tax, fees, and charges to service contractors and registered business enterprises availing of tax incentives.

“I commend the BLGF for their exemplary performance in ensuring that local governments are adequately financed and equipped with the necessary policy tools to achieve fiscal sustainability,” Diokno said