Post-Mandanas devolution under review for compliance with Local Government Code

By Diego Gabriel C. Robles

THE National Government is reviewing plans to devolve some of its functions to local government units (LGUs) amid questions about the exact mandate of LGUs under the Local Government Code, Finance Secretary Benjamin E. Diokno said, while warning that local governments can expect a smaller share of national taxes next year because of the pandemic.

“(The review will prevent the assignment) to LGUs responsibilities that were not originally assigned as a result of the Local Government Code of 1991. For example, research and development (R&D); that should not be assigned to LGUs, right? Maybe some cities can afford it, but a great majority of LGUs cannot afford R&D. Also, education. Education is not assigned to LGUs under the Local Government Code. So why assign them some responsibilities on that?” Mr. Diokno told the Senate committee on local government on Tuesday.

The devolution plan was outlined in Executive Order (EO) 138, issued in June 2021 in response to the Supreme Court’s Mandanas ruling. The Court had ruled that LGUs are entitled to a 40% share of all “national taxes,” over-turning the National Government’s previous interpretation of the Code, which was that LGUs were entitled to a 40% cut of “internal revenue” — effectively, the Bureau of Internal Revenue’s collections only.

The previous administration, facing the prospect of losing access to a significant amount of funds as a result of the ruling, decided to offload P234.4 billion worth of functions to local governments, with EO 138 setting a 2024 terminal date for the devolution exercise.

The 40% share of national taxes, a subsidy to local governments now known as the National Tax Allotment (NTA), is based on the collections of the National Government from three years prior, according to the Local Govern-ment Code. That means the 2023 NTA will be 40% of collections in 2020, the first year of the pandemic, when government revenue took a hit from the lockdowns.

“LGUs… got a bonus or a windfall as a result of the (Mandanas) ruling; they will get a lot of money this year. I think if my recollections (are) correct, an additional hundred billion for this year. However, they will face some prob-lems next year because the formula is based on the collection three years prior, which means, because of the pandemic, collections were down,” Mr. Diokno said at the hearing.

Also at the hearing, Local Government Undersecretary Marlo L. Iringan estimated the impact of the ruling in 2022 as a 37.89% increase in LGU allocations to P959 billion.

“However, given the decrease in revenue collections of the National Government in fiscal year 2020, in view of the impact of the COVID-19 pandemic, the projected total share of LGUs from the national taxes for 2023 will significantly decrease (by) an estimated P138 billion, or equivalent to (a) 14.47% (decline),” Mr. Iringan said in projecting a P820-billion NTA for LGUs next year.

In 2020, the government collected P2.86 trillion in revenue, down 8.97%, as the economy contracted by a record 9.6% due to the lockdowns associated with the pandemic.

Mr. Diokno added that the Madanas ruling “poses a lot of challenges both to the National Government and the local governments. On the part of the National Government, we must recognize that, as a result of the pandemic, public debt has actually increased,” Mr. Diokno said.

The ratio of debt-to-gross domestic product was 62.1% as of the second quarter, above the 60% threshold considered manageable by developing economies. The ratio eased from 63.5% at the end of the first quarter.

“Realistically, because you are giving LGUs more money, the problem pointed out by the World Bank, and I agree, is that many LGUs won’t be able to spend the money. It’s because of the lack of capacity. In fact, even before the crisis, local governments already had a surplus position. They usually have large surplus because they are not able to spend their money,” Mr. Diokno said.

Aside from advocating for LGU digitalization and capacity building, Mr. Diokno said some of the administration’s priority legislation items will “help local government units attain fiscal sustainability.”

These include measures calling for real property valuation and assessment reform, LGU property insurance, and amendments to the Local Government Code of 1991 on local finance.

The amendments for the latter “include simplifying the rate structure of local business tax, revisiting the situs provision, and assigning more revenue productive taxes to LGUs, and providing a mechanism for administrative re-course in case of dispute related to LGU taxing power, among others,” Mr. Diokno said.