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The Philippine LGU
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According to historians, even before the first local elections under the American occupation government were held, Filipino politicians demonstrated their proclivity towards "undemocratic" activities. Among others, local officials mishandled public funds, preventing them from carrying out many important functions. As early as 1903, the American occupation government found itself instituting more supervision over local governments, and by 1907, local governments were stripped of most of their authority over their own communities.

Almost a century after, the Local Government Code of 1991 decentralized government functions. The Code devolves the delivery of basic services (agriculture, environment, health, public works, education, social services, etc.) to local governments. In the past decade, however, evidence of improved performance in the delivery of basic services is largely anecdotal (in the absence of established standard measures of performance).
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The Philippines is an archipelago consisting of more than 7,000 islands. It has 3 main island groups: Luzon, Visayas and Mindanao. The country is divided into 79 provinces, 114 cities, 1,496 municipalities and around 42,000 barangays (municpal districts).

The enactment of the Philippine Local Government Code of 1991 effected a major paradigm shift in governance. The Code mandates the devolution to LGUs of many national government functions and provides for a higher LGU share in internal revenue taxes. It also allows LGUs greater autonomy in mobilizing resources and allocating these resources to their needs.

The Code introduced far-reaching changes in the Philippine political process. It transferred substantial powers, functions and responsibilities from the national government to the LGUs, thereby allowing the impetus for change and development to originate from the local level (bottom-up vs. top-down approach). It redirected the country's development thrusts and encouraged a shift in development strategies from being national-driven to local-driven.

The devolution of basic services and activities to LGUs is expected to lead to a more effective means of addressing the basic needs of the people and advancing government agenda. To realize the objectives, the Code has empowered the LGUs to create their own sources of revenue, to levy taxes, fees and charges and to access non-traditional LGU financing sources (e.g., loans, bonds, etc.). With these financing alternatives and revenue creation powers, the LGUs are expected to depend less on transfers from the national government (Internal revenue Allotment or IRA).

More than a decade after, however, LGUs have continued to use the traditional sources of funding (IRA) in financing local government expenditures which are mostly salaries and wages and maintenance and other operating expenses. Capital outlays or capital expenditures have been minimal.

The primary twin objectives of the Code are: to enable LGUs to attain their fullest development potential as self-reliant communities, and to transform them into active partners in pursuing national goals.

The Code granted LGUs with more powers, responsibilities and resources, thereby transforming them from mere administrators of local affairs to managers of communities.

Responsibilities of LGUs

Decentralization is the transfer of service delivery functions to LGUs. The Code identified and assigned those functions that properly fall within the scope of responsibility of LGUs. Such assignment necessitates the devolution of responsibility to LGUs by the national agencies currently providing such services and facilities. The devolved service delivery functions are as follows:

The Municipality -

Agricultural Extension and On-Site Research - Extension and on-site research services and facilities related to agriculture and fishery activities which include: palay, corn and vegetable seed farms; medicinal plant gardens; and fruit tree, coconut and other kind of seedling nurseries; demonstration farms; inter-barangay irrigation system; dispersal of livestock and poultry, fingerlings and other seedling materials for aquaculture; water and soil resource utilization and conservation; enforcement of fishery laws in municipal waters including the conservation of mangroves.

Conservation and Protection of the Environment - Implementation of community-based forestry projects which include: establishment of tree parks, greenbelts and similar forest development projects; management and control of communal forests; integrated social forestry programs.

Field Health Services and Hospital Services - Implementation of programs and projects on primary health care, maternal and child care, and communicable and non-communicable disease control services; access to secondary and tertiary health services; purchase of medicines, medical supplies and equipment needed to carry out the services.

Public Works and Infrastructure Projects Funded Out of Local Funds - Construction and maintenance of infrastructure facilities which are funded out of local funds including, but not limited, to the following: local roads and bridges; clinics, health centers, and other health facilities necessary to carry out the health services; communal irrigation, small water impounding projects; fish ports; artesian wells, spring development, rain water collectors and water supply systems; seawalls, dikes, drainage and sewerage, and flood control; traffic signals and road signs; other similar facilities.

School Building Program - School buildings and other facilities for public elementary and secondary schools; construction, rehabilitation, repair and maintenance of public school buildings. The national government may, however, continue to construct, replace, rehabilitate, complete, repair and maintain school buildings for elementary and secondary schools. Like other infrastructure projects, the school building program is thus not fully devolved to LGUs. The DECS may continue to implement its own school building program.

Social Welfare and Development - Social welfare services which include: programs and projects on child and youth welfare, family and community welfare, women's welfare, welfare of the elderly and disabled persons; community-based rehabilitation programs for vagrants, street children, juvenile delinquents and victims of drug-abuse; livelihood and other pro-poor projects; nutrition services; and family planning services.

Tourism Promotion and Development - Tourism facilities and other tourist attractions, which include: acquisition of equipment; regulation and supervision of business concessions; and security services for such facilities.

Other Services and Facilities - Maintenance of a public library; and information services which include investments and job placement information systems, tax and marketing information systems.

The Province -

Agricultural Extension and On-Site Research - Extension and on-site research services and facilities include: dairy farms, livestock markets, animal breeding stations and artificial insemination centers; prevention and control of plant and animal pests and diseases; and assistance in the organization of farmers' and fishermens' cooperatives and other collective organizations, as well as the transfer of appropriate technology.

Conservation and Protection of the Environment - Enforcement of forestry laws in community-based forestry projects, pollution control law, small-scale mining law and other laws in the protection of the environment; and mini hydro-electric projects for local purposes.

Field Health Services and Hospital Services - Health services which include hospitals and other tertiary health services.

Public Works and Infrastructure Projects Funded Out of Local Funds - Construction and maintenance of infrastructure facilities financed out of local funds including, but not limited, to the following: provincial roads and bridges; inter-municipal waterworks, drainage and sewerage, flood control and irrigation systems; reclamation projects; and other similar facilities.

Social Welfare and Development - Social welfare services which include: programs and projects on rebel returnees and evacuees; relief operations; and population development services.

Tourism Promotion and Development -Tourism development and promotion programs.

Telecommunications - Inter-municipal telecommunication services, subject to national policy.

Low-Cost Housing Programs and Projects - Programs and projects for low-cost housing and other mass dwellings, except those funded by the SSS, GSIS and the HDMF or Pagibig Fund.

Other Services and Facilities - Industrial research and development services, as well as the transfer of appropriate technology; and investment support services, including access to credit financing.

Devolution on LGU Finance -

The devolution of functions to LGUs has several repercussions, among them the consequent downsizing of affected national agencies, the massive capability-building program necessary for LGUs in view of their increased functions and the huge funding requirements of the devolved responsibilities.

Cognizant of the huge financial burden that the devolution has placed on the LGUs, the lawmakers made sure the Code amply provides the LGUs with the means to cope with the expected rise in expenditures. The LGUs were thus given the powers to create their own sources of revenues and levy taxes, fees and charges that will accrue exclusively to the LGUs. They were likewise allowed to borrow and avail of credit facilities from government and/or private lending institutions to finance their local projects as well as to issue bonds, securities, debentures, collaterals, notes and other obligations to finance self-liquidating and income-producing development and livelihood projects.

Finally, the LGUs' share in the national taxes was increased and fixed, release of which should be automatic unless the national government incurs an unmanageable public sector deficit. From its 20% share in the pre-Code era, the LGU share in the internal revenue taxes (Internal Revenue Allotment or IRA) was increased to 40% since 1994.

With the LGUs expanded fiscal powers and increase IRA share under the Code, did the LGUs manage to cover the devolved functions efficiently? The answer to this, unfortunately, is no, specially in the small-sized LGUs.

One study undertaken on the effects of decentralization and economic efficiency in service delivery revealed some interesting observations:

Production efficiency has probably been improved as a result of fiscal decentralization. Allocation has also improved (changes in expenditure patterns) as well as fiscal efficiency.

However, the study further concluded that very few LGUs have fully exploited their own sources of revenue and that many LGUs are not able to meet devolved expenditure responsibilities and create new expenditures out of the shared revenue.

LGU Fiscal Management -

The ever-increasing expenditures on service functions demand that LGUs must use new methods in fiscal management. LGUs must establish an accountable, efficient and dynamic organizational and management structure. LGUs must embark on comprehensive and extensive development planning and efficient revenue and resource mobilization activities with strong community participation.

To respond to this challenging demand for infrastructure and service provision, innovative revenue generation and resource mobilization schemes must be explored inasmuch as the traditional central government budget allocations and donor financing are fast becoming insufficient.

The issue of fiscal sustainability is key to the success of the decentralization program. The fact that the national government continues to fund some devolved responsibilities suggests the need to review the present expenditure assignments between the national and local governments to address existing overlaps and duplications which result to economic inefficiency. To rationalize the IRA formula, minimum standards of service delivery by sector that would be financed by the IRA must be established. In addition, there is also the need to inject incentive feature in the IRA formula to reward efficiency and encourage greater tax effort and efficiency in service delivery.

The absence of straightforward performance indicators in Central Government Grant allocation could undermine LGUs' tax effort and operational efficiency and accountability. Likewise, such unconditional grant cannot stimulate LGUs to engage in long-term capital investments and other development projects beyond the required basic services.

As LGUs confront the challenges of devolution and as they become increasingly aware of the extent of their responsibilities, there is now a compelling drive to revisit the present IRA formula. Various Sources