Income Classification System & LGFPMS

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System of income classification system for Phil LGUs and the the proposed Local Govt. Financial Performance Monitoring System (LGFPMS)

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LGU Financial Performance Measurement: BLGF’s Per CapitaIncome Classification System and Local Government Financial Performance Monitoring System (LGFPMS) : 

LGU Financial Performance Measurement: BLGF’s Per CapitaIncome Classification System and Local Government Financial Performance Monitoring System (LGFPMS) ADB TA 4556 15 November 2007

Outline of Presentation : 

2 Outline of Presentation Covers 2 major components of ADB TA 4556: The Use of Per Capita Measures for the Income Ranking of LGUs Proposed New Local Government Financial Performance Indicators

Outline of Presentation : 

3 Outline of Presentation Review of the use of Fiscal Performance Indicators in the Philippines Integrated Framework for LGU Performance Assessment The Proposed Per Capita Income Classification System Purpose of the Income Ranking of LGUs Definitions and Measures of Fiscal Capacity Statistical Tests Used Indicator Selection Results Provincial Level City Level Municipal Level - LGU Ranking Results Provincial Level City Level Municipal Level

Outline of Presentation : 

4 Outline of Presentation Population Projection Time Period for the Periodic LGU Income Reclassification LGU Financial Performance Measurement Proposed Enhanced LGFPMS Conclusions and Recommendations

LGU Financial Performance Assessment : 

5 LGU Financial Performance Assessment

The Use of Financial Performance Indicators in the Phil : A Short Review : 

6 The Use of Financial Performance Indicators in the Phil : A Short Review As pointed out by BLGF, there is “no existing standard system of fiscal/financial performance indicators among LGUs in the Philippines…”, and that “a real system of financial performance indicators has yet to be established for LGUs…” Efforts have, however, been made by various sectors and agencies to develop and promote ways of measuring LGU financial performance.

Slide 7: 

7 Ad-Hoc Indicators Ad-hoc indicators by BLGF and the Commission on Audit (COA) such as “revenue growth rate, collection efficiency, per capita revenues or expenditures…” used in the course of setting revenue targets in the case of BLGF or audit functions in the case of COA. Indicators used to Exact Compliance Indicators utilized to exact and monitor compliance to limitations prescribed by the 1992 Local Government Code (LGC) such as i) the prohibition against incurring deficits in the annual budget; ii) the 55% limitation on the percentage of personal services in total LGU budget for 4th to 6th class LGUs and 45% for 3rd and higher income class LGUs; and iii) the 20% of annual regular revenue debt service cap for LGUs. The Use of Financial Performance Indicators

Slide 8: 

8 Financial Performance Measures used by Financial Intermediaries Financial performance measures used by financial intermediaries providing credit to LGUs such as the Land Bank of the Philippines (LBP), the Development Bank of the Philippines (DBP), and the LGU Guarantee Corporation (LGUGC) covering i) liquidity indicators, ii) leverage indicators, iii) debt service indicators, iv) indicators of compliance to prescribed laws, rules and regulations, and v) non-financial indicators — quality of management, project implementation track record, constituency support, and political leadership. USAID Governance and Local Democracy (GOLD) Project Financial Trend Monitoring System (FTMS). A 35 indicator FTMS based on the ICMA-developed FTMS framework for assessing the financial performance of local governments in the United States was introduced by USAID GOLD. The Use of Financial Performance Indicators

Slide 9: 

9 USAID Governance and Local Democracy (GOLD) Project Financial Trend Monitoring System (FTMS)

Slide 10: 

10 DILG’s LGPMS is “…a self-assessment, management and development tool that enables provincial, city and municipal governments to determine their capabilities and limitations in the delivery of essential public services.” LGPMS view LGU performance from 5 performance areas and 17 areas using 107 indicators. The Use of Financial Performance Indicators

Slide 11: 

11 Existing BLGF LGFPMS Revenues indicators – reflect revenue generation capacity in terms of the existence of an appropriate revenues level and the extent of the predictability of local revenues. Expenditures indicators –reflect expenditures rigidity or the degree of flexibility that an LGU has to allocate resources for different purposes. Debt indicator - reflects the debt carrying capacity of an LGU when compared against the 20% of annual regular income statutory debt service for LGUs. Overall Financial (Operating result) indicators – reflect the financial management capacity in terms of the relation between revenues and expenditures and define the extent to which the LGU implements an efficient financial resources management. The Use of Financial Performance Indicators

Slide 12: 

12 The Use of Financial Performance Indicators

Slide 13: 

13 The objectives of the LGFPMS include: Assess individual LGU performance; Provide active advisory to LGUs; Support LGU credit assessment; and Support policy formulation The LGFPMS indicators are grouped into 4 categories. Revenues indicators – or those that reflect revenues generation capacity. These are indicators, which show the existence of an appropriate revenues level and the extent of the predictability of local revenues. Expenditures indicators – or those that reflect expenditures rigidity. These indicators define the degree of flexibility that an LGU has to allocate resources for different purposes. Debt indicator. It reflects the debt carrying capacity of an LGU. It is compared against the 20% of annual regular income statutory debt service cap for LGUs. Overall Financial (Operating result) indicators – or those that reflect the financial management capacity. These indicators refer to the relation between revenues and expenditures and define the extent to which the LGU implements an efficient financial resources management. The Use of Financial Performance Indicators

Slide 14: 

14 Overall Rating Standard LGUs are considered “financially weak if at least one third of the benchmarks fail and its regular operation incur cash deficit.” Otherwise, they are financially strong. Status: As of July 2006, 8 of the 14 indicators have been incorporated in the 2005 data capture of the LGPMS (Indicators 1, 2, 3, 8, 9, 11, 13, and 14). 6 of the 14 (Indicators 4, 5, 6, 7, 10, and 12) was not included because of “the inherent difficulty for establishing performance criteria and for determining actual expenditures (i.e., social and economic expenditure)…” Caveats and Limitations noted by BLGF BLGF has strongly advised that “LGUs be sorted out by income class, political level (i.e., municipalities, cities, and provinces) or by level of internal revenue allotment before application of the fiscal/financial performance indicators to make the assessment fair and meaningful.” The need for BLGF (DOF) to “review the proposed benchmarks…” for the already integrated indicators and establish “… a clear standard among LGU classes for the indicators.” The need to define an “analytical framework for analyzing fiscal performance reports vis-à-vis LGPMS capacity, productivity and development indicators.” The analytical framework should also cover linkages between the LGFPMS to credit rating. BLGF expressed the reservation that “… 14 indicators may not be comprehensive to reflect on LGU performance.” The Use of Financial Performance Indicators

Summary of Necessary Enhancements : 

15 Summary of Necessary Enhancements LGUs be sorted out by income class, political level (i.e., municipalities, cities, and provinces) before application of the fiscal/financial performance indicators to make the assessment fair and meaningful. Need to define an analytical framework for analyzing fiscal performance reports vis-à-vis LGPMS capacity, productivity and development indicators. Need to review the indicators and establish benchmarks to set a clear standard among LGU classes for the indicators.” Analytical framework should also cover linkages between the LGFPMS to credit rating.

Integrated Framework for LGU Comparative Performance Assessment : 

16 Integrated Framework for LGU Comparative Performance Assessment Overall LGU Performance – LGPMS of DILG Governance/ Administration Constituency Welfare Financial Performance LGU Financial Performance LGFPMS of BLGF Revenue Mobilization Expenditure Management Debt & Investment Capacity Overall Financial Management Major Components of Framework LGU Income Classification LGU Financial Performance Assessment Overall LGU Performance Assessment

Integrated Framework for LGU Comparative Performance Assessment : 

17 Integrated Framework for LGU Comparative Performance Assessment The LGU income classification component “pre-sorts” LGUs by political level and by income class to make the application of the performance measures “fair and meaningful”. The LGFPMS “statically” assesses the fiscal performance of LGUs vis-à-vis benchmarks for each of the fiscal performance indicators appropriate for each political level and corresponding income classes within each political level. Parallel to the fiscal performance indicator assessment is the fiscal capacity assessment using the fiscal capacity model that develops a prognosis across time into the future of the potential fiscal performance of the LGU.

Integrated Framework for LGU Comparative Performance Assessment : 

18 Integrated Framework for LGU Comparative Performance Assessment The results of both static fiscal indicator analysis and fiscal capacity projections are combined and serve as the bases of the LGU debt capacity certification and the LGU creditworthiness rating: The fiscal capacity projections provide an estimate of what the LGU can borrow, and this is what is traditionally certified by BLGF as the debt capacity; The creditworthiness rating system will assess the appropriate LGU creditworthiness rating - best, high, good, medium, below medium and speculative. This will then be translated into a set of recommended proportions of the maximum borrowing capacity as determined by the debt capacity projections; and Applying the appropriate proportion on the LGU maximum borrowing capacity will yield what the LGU should borrow. It will be stressed that this is just a guide figure and not a BLGF recommendation.

Integrated Framework for LGU Comparative Performance Assessment : 

19 Basic Premise in integrating LGFPMS with LGPMS DILG’s LGPMS puts BLGF’s LGFPMS as part of the administration module. The basic premise in combining the financial performance indicators with the service delivery indicators is that improved LGU financial performance is not the goal per se but should be translated to improved constituency welfare via improved service delivery. Integration of LGFPMS with LGPMS Integration of the proposed LGFPMS “in toto” (broken arrow from LGFPMS to Administration component of LGPMS) using the proposed benchmarks. Integration of the creditworthiness ratings as computed by the LGU creditworthiness rating system. (Broken arrow from creditworthiness rating scheme to Administration component of LGPMS). Integrated Framework for LGU Comparative Performance Assessment

The Proposed Per Capita Income Classification System for LGUs : 

20 The Proposed Per Capita Income Classification System for LGUs

Purpose of the Income Ranking of LGUs : 

21 Purpose of the Income Ranking of LGUs Per EO 249 dated 25 July 1987: The fixing of the maximum tax ceilings imposable by local governments; The determination of administrative and statutory aids, financial grants, and other forms of assistance to local governments; The establishment of the salary scales and rates of allowances, per diems, and other emoluments that local government officials and personnel may be entitled; The implementation of personnel policies on promotions, transfers, details or secondment, and related matters at the local government levels; The formulation and execution of local government policies; and The determination of the financial capacity of LGUs to undertake developmental programs and priority projects. the financial capacity of LGUs to pay its way (operating and capital expenditures) on a continuing basis while: 1) maintaining existing (or needed) service levels; 2) withstanding local and regional economic disruptions; and 3) meeting the demands of natural growth, decline, and change. Intention is to establish over time and in comparison with similar LGUs

Definition and Measures of Fiscal Capacity : 

22 Definition and Measures of Fiscal Capacity Fiscal capacity is the ability of a jurisdiction to raise own source revenues for public services. Need for a single index or number to measure the financial health of LGUs Primary candidates as LGU income classification index Per Capita Locally Sourced Revenue at 1985 Prices (PCLR) Per Capita Total Revenues at 1985 Prices (PCTR) Various factors representing primary forces: environmental, organizational and financial) affect LGU fiscal capacity but there is a Per capita LGU revenue usually measured in real terms LGU Revenue figures reflect the combined effect of the size of the tax base and the ability of the LGU to capture the appropriate taxes due. Per capita LGU revenues reflect changes in revenues vis-à-vis population and inflation LGU revenues should be growing at a rate equal to or greater than the combined effects of population and inflation so that it can maintain if not increase service levels to its constituents.

Statistical Tests Used : 

23 Statistical Tests Used Incidence of Poverty Human Development Index LGU Economic Base Underlying Principle: Fiscal capacity is not the overall LGU development goal per se, but just a tool to be used to alleviate the pervasive poverty among their constituencies and improve the lives of their constituents Degree of Association: Coefficient of Correlation (r) measures the degree of association (or relationship) between two variables. It can take a range of -1 ≤ 0 ≤ 1 with 1 or -1 indicating perfect positive or negative correlation and 0 indicating no correlation at all. Potential Impact: estimated using the concept of elasticity or the % change in a variable in response to a % change in another variable, e.g. % change in the incidence of poverty in response to a % change in either measure of LGU fiscal capacity Indicator effectiveness will be judged against the strength of its statistical relationship with 3 development measures available at the provincial and city level

Indicator Selection Results: Correlation Analysis : 

24 Indicator Selection Results: Correlation Analysis Degree of Statistical Relationship with the Incidence of Poverty (Province) Degree of Statistical Relationship with the HDI (Province) Degree of Statistical Relationship with the Economic Base (City)

Indicator Selection Results:Elasticity Analysis : 

25 Indicator Selection Results:Elasticity Analysis Per Capita Total Revenues Per Capita Locally Sourced Revenues Impact on Incidence of Poverty (Province)

Indicator Selection Results:Elasticity Analysis : 

26 Per Capita Total Revenues Per Capita Locally Sourced Revenues Impact on the HDI (Province) Indicator Selection Results:Elasticity Analysis

Indicator Selection Results:Elasticity Analysis : 

27 Per Capita Total Revenues Per Capita Locally Sourced Revenues (PCLR) Impact of the Economic Base (City) More buoyant Less buoyant because of effect of IRA PCLR is more indicative of the ability of LGUs to capture their growing economic bases Indicator Selection Results:Elasticity Analysis

The Issue of Convergence : 

28 The Issue of Convergence Are LGUs converging in terms of their revenue effort or are they becoming further apart? β-convergence which answers the question of “Is the per capita revenue of a typical LGU moving towards (or converging) towards the mean (or average) value for all the LGUs during a particular time period.” σ-convergence which answers the question of “Is the standard deviation (how far is a typical LGU from the mean value for all LGUs) of the per capita revenue of a particular LGU getting bigger or smaller during a particular time period. While β-convergence is a necessary condition, it is not sufficient to guarantee convergence. There must also be σ-convergence, that is the % growth in the per capita revenue of the low revenue LGUs during the particular period (in this case, 2001 to 2004) must be high enough relative to the higher revenue LGUs to result in absolute increases that narrows down relative spread around the overall average LGU revenue

β Convergence in Philippine Provinces: 2001-2004 : 

29 β Convergence in Philippine Provinces: 2001-2004 Per Capita Local Revenues Per Capita Total Revenues There is β-convergence occurring at the provincial level. The per capita revenue of lower per capita revenue provinces in 2001 grew faster than higher per capita revenue provinces from 2001 to 2004.

β Convergence in Philippine Cities: 2001-2004 : 

30 β Convergence in Philippine Cities: 2001-2004 Per Capita Local Revenues Per Capita Total Revenues There is β-convergence occurring at the city level. The per capita revenue of lower per capita revenue cities in 2001 grew faster than higher per capita revenue cities from 2001 to 2004.

σ Convergence in Philippine Provinces: 2001-2004 : 

31 σ Convergence in Philippine Provinces: 2001-2004 Per Capita Local Revenues Per Capita Total Revenues There is no evidence of σ-convergence occurring at the provincial level. Both the average and standard deviations of the two per capita revenue measures have increased from 2001 to 2004. The % increase during the period for the low revenue LGUs did not result in a high enough absolute increase to narrow down the relative spread of individual LGU revenues around the overall LGU average.

σ Convergence in Philippine Cities: 2001-2004 : 

32 σ Convergence in Philippine Cities: 2001-2004 Per Capita Local Revenues Per Capita Total Revenues There is no evidence of σ-convergence occurring at the city level. Both the average and standard deviations of the two per capita revenue measures have increased from 2001 to 2004. The % increase during the period for the low revenue LGUs did not result in a high enough absolute increase to narrow down the relative spread of individual LGU revenues around the overall LGU average.

Development of Income Brackets : 

33 Development of Income Brackets The proposed LGU income categorization indicators were computed for each individual LGU using 2004 BLGF SIE data. The individual LGU within each LGU grouping (province, cities, municipalities) were ranked from highest to lowest for each of the alternative proposed income classification category. The ranked provinces and cities were then bracketed into 5 equally sized brackets: 1st, 2nd, 3rd, 4th, and 5th class. The ranked municipalities were bracketed into 6 equally-sized brackets following the existing 6 categories: 1st, 2nd, 3rd, 4th, 5th, and 6th class. (Based on the initial recommendations per DOF Department Order No.20-05 dated 29 July 2005). The median value for each of the 6 brackets for each LGU type were computed and used as the “cut-off” points for each category. By basing the ranking categories on actual differences across LGU type and within each LGU type, the categories can be considered more realistic rather than if it is based on some notional relationship across LGU type, i.e., category values for provinces and cities being twice that of municipalities in E.O. 249. The individual LGUs were then classified into each of the 6 categories using the “cut-off” points appropriate for each LGU type and income classification indicator.

Proposed Alternative Income Categorization Brackets: Provinces : 

34 Proposed Alternative Income Categorization Brackets: Provinces Per Capita Locally Sourced Revenues at 1985 Prices 1st Class: > 74 2nd Class: 27-74 3rd Class: 26-73 4th Class: 6-25 5th Class: < 25 Per Capita Total Revenues at 1985 Prices 1st Class: > 646 2nd Class: 250-646 3rd Class: 167-249 4th Class: 103-166 5th Class: < 103

Potential Reclassification Impact for Provinces : 

35 Potential Reclassification Impact for Provinces

Slide 36: 

36 Proposed Alternative Income Categorization Brackets: Municipalities Per Capita Locally Sourced Revenues at 1985 Prices 1st Class: > 88 2nd Class: 49-87 3rd Class: 33-48 4th Class: 24-32 5th Class: 16-23 6th Class: < 16 Per Capita Total Revenues at 1985 Prices 1st Class: > 585 2nd Class: 386-585 3rd Class: 318-384 4th Class: 278-317 5th Class: 244-277 6th Class: < 244

Slide 37: 

37 Potential Reclassification Impact for Municipalities

The Case of Philippine Cities : 

38 The Case of Philippine Cities Given that Philippine cities have shown themselves to be “engines of growth”, and have generated local revenues of magnitudes and rates of growth that far outstrips provinces and municipalities, it is proposed that a separate income classification scheme be applied to Philippine cities. Two options are proposed for consideration: A single set of income classification categories applicable for all Philippine cities; or A two-tiered income classification system where the 1st level will apply to an expanded list of “Special Cities” and a 2nd level applicable to all other Philippine cities not included in the first tier. (Under the existing scheme, only Manila and Quezon City are considered as special cities. Under existing conditions, Metro Manila and similar highly urbanized cities have closely rivaled these two cities in terms of local revenues. Furthermore, all of them face similar urban problems of equivalent magnitude). The 2nd option is based on the findings, which indicates a high degree of disparity between Metro Manila and other highly urbanized cities as a group and the other cities in the country in terms of local revenue elasticities.

Slide 39: 

39 Proposed Alternative Income Categorization Brackets: Option 1 for Cities Per Capita Locally Sourced Revenues at 1985 Prices 1st Class: > 794 2nd Class: 376-794 3rd Class: 220-375 4th Class: 75-219 5th Class: <75 Per Capita Total Revenues at 1985 Prices 1st Class: > 1,904 2nd Class: 1,086-1,903 3rd Class: 721-1,085 4th Class: 447- 720 5th Class: < 447

Slide 40: 

40 Proposed Alternative Income Categorization Brackets: Option 2 for Special Cities Per Capita Locally Sourced Revenues at 1985 Prices 1st Class: > 1,592 2nd Class: 608-1,591 3rd Class: < 608 Per Capita Total Revenues at 1985 Prices 1st Class: > 2,614 2nd Class: 895-2,614 3rd Class: < 546

Slide 41: 

41 Proposed List of Special Cities: 28 Metro Manila & Highly Urbanized Cities under 2004 SIE Cebu City Olongapo City Makati City Davao City Iloilo City Pasig City Lapu-Lapu City Mandaluyong City Bacolod City Pasay City Iligan City Zamboanga City Parañaque City Manila City Muntinlupa City Butuan City Quezon City Angeles City Marikina City Mandaue City Valenzuela City Las Piñas City Cagayan de Oro City Baguio City Lucena City Kalookan City Malabon City General Santos City

Slide 42: 

42 Proposed Alternative Income Categorization Brackets: Option 2 for All Other Cities Per Capita Locally Sourced Revenues at 1985 Prices 1st Class: > 473 2nd Class: 254-472 3rd Class: 127-471 4th Class: 126-53 5th Class: < 53 Per Capita Total Revenues at 1985 Prices 1st Class: > 1,478 2nd Class: 966-1,477 3rd Class: 650-965 4th Class: 408-649 5th Class: < 408

Slide 43: 

43 Potential Reclassification Impact for Cities

Slide 44: 

44 Price Deflators The per capita LGU revenue estimates at current prices were deflated to 1985 Prices using the relevant regional price indices (1985 = 100) as estimated by the National Statistical Coordination Board (NSCB). The computational procedure is as follows: The % annual change in the GRDP Implicit Price Index (IPIN) measures the annual inflation rate for the region.

Slide 45: 

45 Proposed Time Period Interval for the Periodic Review of the Income Classification of LGUs Rationale Section 9 of EO 249, Providing for a New Income Classification of Provinces, Cities and Municipalities, and for other Purposes, dated 25 July 1987 provides the Secretary of Finance with the “authority to review the income ranges at least once every 4 years” after the implementation of the EO, and to “recommend such appropriate changes or revisions to the proper authority in order that the income classification of local government units may continue to conform with the prevailing economic conditions and the overall financial status of the local governments.”

Slide 46: 

46 Rationale Revisions in the income brackets were effected via DOF Department Order 32-01 dated 20 Nov. 2001 and Department Order 20-05 dated 29 July 2005. In both cases, it was explicitly stated that the scheme will “anchor income reclassification on the own-sourced revenue efforts of LGUs, thus, promoting greater local fiscal sustainability”. The proposed real per capita local revenue classification scheme effectively captures the intent of the income classification of LGUs --- measuring the ability of LGUs to raise sufficient local revenues to meet the demands of a growing population in an economic environment characterized by rising prices and budgetary deficits of the national government. Proposed Time Period Interval for the Periodic Review of the Income Classification of LGUs

Slide 47: 

47 Analytical Framework The basic analytical tool used is time series analysis wherein the changes in per capita local revenue at constant 1985 Prices (PCLR85) from 1992 to 2004 are decomposed into its trend and cyclical/irregular components. A given time series (TSt) is made up of four (4) components. Trend (Tt) — whether the data is continuously increasing or decreasing during the time period under study. Seasonality (St) — whether the data regularly exhibits ups and downs during particular periods of the year such as quarters, semester, etc. Cyclicity (Ct) — whether the data regularly exhibits ups and downs during certain multi-year intervals such as every 3 years, every 4 years, or every decade, etc. Irregular (It) or random component. Proposed Time Period Interval for the Periodic Review of the Income Classification of LGUs

Slide 48: 

48 Analytical Framework The functional relationship TSt between the components of a time series are usually expressed either in Additive form — TSt = Tt + St + C/It Multiplicative form — TSt = Tt * St * C/It Since the components of the per capita LGU local revenues may be affected by factors — economic, political, cultural, social, environmental, and even force majeure — that are relatively independent of each other especially at the LGU level, the additive form is adopted for analytical purposes. Proposed Time Period Interval for the Periodic Review of the Income Classification of LGUs

Slide 49: 

49 Analytical Framework 3 aspects of PCLR85 time series are statistically decomposed and the trends analyzed: The annual movement or changes in the absolute value of PCLR85 from 1992 to 2004; The annual movement or changes in the absolute rate of change of PCLR85 (PCLR85t – PCLR85t-1) from 1993 to 2004; and The annual movement or changes in the % rate of change of PCLR85 [(PCLR85t – PCLR85t-1)/PCLR85t-1] * 100 from 1993 to 2004. Proposed Time Period Interval for the Periodic Review of the Income Classification of LGUs

Slide 50: 

50 Analytical Framework Trend and Cycle Analyses The fitted time trend and cyclical values were superimposed on the scatter plot of the actual values and the resulting graphs “eyeballed” to infer regularity in the data. The inferred regularities were then subjected to spectrum analysis for a more exact statistical confirmation. Spectrum analysis is concerned with the exploration of cyclical patterns of data. The purpose of the analysis is to decompose a complex time series into a few underlying sinusoidal (sine and cosine) functions of particular wavelengths. In essence performing spectrum analysis on a time series is like putting the series in a prism in order to identify the wave lengths and importance of underlying cyclical components to uncover recurring cycles of different lengths in the time series of interest, which at first more or less looked like random noises. Spectrum analysis may be single spectrum (Fourier) — to uncover periodicity in a single series — or cross-spectrum to uncover correlations between 2 time series at different frequencies. Proposed Time Period Interval for the Periodic Review of the Income Classification of LGUs

Results of Analyses: PCLR85 : 

51 Results of Analyses: PCLR85 The results indicate there is definitely an upward time trend in per capita local revenues at 1985 Prices, but that over time the rate of increase is declining — note the pronounced flattening of the trend line starting 1998. The graph of the cyclical component (broken line) indicate the presence of a 3-year cycle during the period 1992 to 2004. The 3-year cycle corresponds to the election years of 1992, 1995, 1998, 2001 and 2004.

Results of Analyses: PCLR85 : 

52 Results of Analyses: PCLR85 This apparent correlation between PCLR85 and election years is statistically confirmed by the results of the cross-spectrum analysis between PCLR85 and the dummy variable for election years. There is only one peak indicating that there is a statistically significant periodic relationship between PCLR85 and the election year dummy only at a wave frequency of 0.33 or once every 3 years. The squared coherency at the same frequency is 0.7307 meaning that the election dummy can account for 73% of the periodicity of PCLR85. During election years, local revenue collection efforts wanes and the rate of increase declines in real terms as LGU elected officials avoid politically costly local revenue collection efforts (after all, there is substantial IRA) followed by upsurges during the next 2 years after the election as officials scramble to fund and deliver local projects, and thus, feel the need to intensify local revenue efforts.

Results of Analyses: dPCLR85 : 

53 Results of Analyses: dPCLR85 There is a declining trend in the annual absolute rate of increase in per capita local revenues at 1985 Prices (dPCLR85) confirming the observed flattening of the PCLR85 trend line. The graph of the cyclical component (broken line) further confirms the presence of a 3-year cycle for PCLR85 during the period 1992 to 2004, which corresponds to the election years of 1992, 1995, 1998, 2001 and 2004.

Results of Analyses: dPCLR85 : 

54 Results of Analyses: dPCLR85 The data indicate that LGUs try to make up for local revenue underperformance in election years during the next 2 years following the election. After the dPCLR85 went down to Php 7.94 in the election year of 1995 from Php 19.27 and Php 17.26 in 1993 and 1994, respectively, dPCLR85 increased to Php18.31 and 18.19 in 1996 and 1997. After dPCLR85 reached (Php 6.13) in the election year of 2001 from Php 2.51 in 2000, dPCLR85 to Php 11.35 and Php 13.69 in 2002 and 2003, respectively. The negative 1999 dPCLR85 that was worse than the election year 1998 decline is probably due to the lingering effects of the downward trend in the property market that began in 1998. Note, however, dPCLR85 recovered in 2001 to reach a value of Php 2.51 in 2000 before declining again in the election year of 2001.

Results of Analyses: %dPCLR85 : 

55 Results of Analyses: %dPCLR85 The results indicate that there is a declining trend in the annual % rate of increase in per capita local revenues at 1985 Prices (dPCLR85) additionally confirming the observed flattening of the PCLR85 trend line. The graph of the cyclical component (broken line) further confirms the presence of a 3-year cycle for PCLR85 during the period 1992 to 2004, which corresponds to the election years of 1992, 1995, 1998, 2001 and 2004.

Population Projections : 

56 Population Projections

Slide 57: 

57 The population projections constitute a consistent set of population projections at the national, regional, provincial and city/municipal levels. Latest available Census of Population and Housing (CPH) is for 2000, and the latest set of projections up to 2040 (July 12, 2006) prepared by the NSO is only up to the regional level. Population levels and trends at the city/municipal, provincial, sub-regional and regional level were analyzed within the overall context of the nation as a whole and vis-à-vis the higher level units to which they belong.

Slide 58: 

58 During the Spanish period, the country’s population only grew at a relatively low rate. Between 1799 and 1896 (last year when the Spaniards conducted a nationwide census), Philippine population only grew at an annual growth rate of 1.48% for an average annual increase of 51,715 persons. Improvements in education, health and nutrition during the American era lowered mortality rates and caused the country’s annual population growth rate to accelerate to 2.07% between 1903 and 1948. During the same period, the annual increase in population averaged 251,243 people. Further increases in fertility rates accompanied by a further lowering of mortality rates caused the annual population growth rate to remain at relatively high levels from 1948 to 2000. During the period, Philippine population grew annually by 2.69% or by 1,186,430 people every year.

Slide 59: 

59 The annual percentage growth rate in Philippine population has been largely erratic (see line graph), but the annual absolute increases between 1903 and 2000 can be modeled by a third-degree polynomial (see dotted curve). The parameters of the third degree polynomial were estimated by applying general regression modeling techniques on 11 data points from available census data from 1903 to 2000.

National Population Projections : 

60 National Population Projections The projected trend is in line with World Bank projections that the Philippine population will begin stabilizing at around 2042 at a population level of about 150 million. This trend equation indicates a population of about 152 million by that year. Furthermore, the model estimated the Philippine population in 2003 at 81.29 million. The most recent available estimate of the World Bank as (2004 World Development Report) placed the population of the Philippines in 2003 at 81,503,00 or just a difference of 0.3%. Between 2000 and 2030, the population of the Philippines is projected to grow annually by 1.79% or an average increase of 1,787,528 persons per year.

Lower-Level Population Projections : 

61 Lower-Level Population Projections 1sT; relevant population growth elasticities are estimated for each region, province, and city/municipality. 2nd: projected annual population growth rates for the higher level area are then multiplied by the appropriate estimated population growth elasticities to come up with the projected population growth rates for the lower level areas. 3rd: projected population growth rates for the lower level areas are then applied on the base year population (Year 2000) of the lower-level areas to generate an unadjusted set of population projections for the lower level areas. 4th: with the higher level area population serving as control total, the difference between this control total and the unadjusted population total for all the lower level areas comprising the higher level area are computed. 5th: the difference computed in Step 4 are then proportionately distributed to each of the unadjusted lower level area population projections to come up with the adjusted population projections for the lower level areas. The annual growth rate is based on the exponential growth formula Pop t+n = (1+r)n * Pop t where Pop t+n is the population n years from time t and Pop t is the population at time t. Elasticity =

Re-Calibration of Population Projection Model : 

62 Re-Calibration of Population Projection Model The projection model may be re-calibrated and the projections updated in 2 stages: When the inter-agency Committee has finalized and declared official the regional population projections up to 2040, the official regional figures may be inputted into the projection model and the provincial, municipal, and city level projections re-calculated based on the “official” set of regional population projections. When the results of the either the pronounced mid-decade and delayed 2005 Census of Population or the 2010 Census of Population and Housing becomes available.

Re-Calibration of Population Projection Model : 

63 Re-Calibration of Population Projection Model A comparison of the preliminary regional medium series projection results shows negligible difference at the national level (about 0.1%) and average differences at the regional level of 0.4% in 2005 and 1.1% in 2010. Note that that the NSO estimates are consistently lower in the major growth centers of the country (Central Luzon, CALABARZON, Central Visayas, and the Davao region). The NSO probably underestimated the migration attraction potential of these centers, and correspondingly, overestimated the population holding potential of the source regions.

The Enhanced BLGF LGFPMS : 

64 The Enhanced BLGF LGFPMS

Revenue Indicators : 

65 Revenue Indicators [1] Calculated as the average annual increase in the GRDP Implicit Price Index (1985=100) for the region to which the LGU belongs as published by the NSCB. . [2] Annual compound growth rate of the LGU population calculated from the formula Pn = Po (1+r)t where Pt = population at year n, Po = base year population, t = number of years elapsed between the base year and year n, and r is the annual growth rate. The appropriate population levels may be taken from the NSO.

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66 Revenue Indicators

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67 Revenue Indicators [3] Locally Sourced Revenues include income from business and other local taxes, real property taxes, economic enterprises, fees and charges. This does not include IRA, LGU share in national wealth, loans, credits, bond proceeds, tobacco excise taxes, etc. [4] Regular Revenues = Locally Sourced Revenues + IRA

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68 Revenue Indicators [5] The RPT is the major source of local revenues for most Philippine LGUs and also mirrors the local economy as the real property tax base (the value of existing properties) reflects the status of the local economy, especially in urban areas. As such, the collection efficiency for the RPT largely mirrors the overall collection efficiency of the LGU. Many LGUs require a certificate of full payment of RPT before the issuance of a new or renewed business permit.

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69 Expenditure Indicators [6] These are legal ceilings imposed under Section 325 (a) of the LGC.

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70 Expenditure Indicators [7] Debt Service = Interest + Loan Amortization

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71 Debt & Investment Capacity Indicators [8] Regular Income = Locally Sourced Income + IRA

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72 Debt & Investment Capacity Indicators [9] Operating Surplus = Operating Revenues - Operating Expenditures

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73 Financial Management Capacity Indicators [11] Uncommitted Cash Balance = Total Ending Cash Balance – Financial Commitments. [10] Net Operating Surplus = Gross Operating Revenues – Debt Service.

Link Between LGFPMS, Financial Model, Creditworthiness : 

74 Link Between LGFPMS, Financial Model, Creditworthiness Creditworthiness indicators are part of the LGFPMS Financial model projection results serve as the basis for the determination of the 20% debt service capacity certification. Creditworthiness ratings serve as a further funnel to regulate LGU borrowing Suggestive Guide-point for LGU lenders These modules are all computer-based and are part of BLGF’S Financial, Creditworthiness and Advisory Information System (FCAIS)

Conclusions and Recommendations : 

75 Conclusions and Recommendations

Per Capita LGU Income Classification : 

76 Per Capita LGU Income Classification The results of the statistical analyses strongly support the use of real (at 1985 Prices) per capita locally-sourced revenues as a basis for classifying the fiscal capacity of Philippine cities. It is simple and yet answers the rationale for the revenue classification of Philippine LGUs. It shows higher statistical relationships with a key national and local development concerns — poverty incidence reduction and the Human Development Index (HDI). It effectively captures the ability of LGUs to tap their growing economic bases via taxes, fees and charges. It can be analyzed to examine the issue of disparity in revenue performance at the provincial, city and municipal level via convergence analysis.

Per Capita LGU Income Classification : 

77 Per Capita LGU Income Classification There is definitely an upward trend in local revenue mobilization efforts in real per capita terms from 1992 to 2004. The rate of increase whether in absolute or percentage terms is however declining. Local revenue mobilization effort has a 3-year cycle tied up to the 3-year local election exercise. During election years, local revenue collection efforts wanes and the rate of increase declines in real terms as LGU elected officials avoid politically costly local revenue collection efforts (after all, there is substantial IRA). LGUs try to make up for local revenue underperformance in election years during the next two years following the election.

Per Capita LGU Income Classification : 

78 Given these findings, it is recommended that time interval for the review of the income classification of Local Government Units (LGU) be once every 3 years to coincide with the new terms of elected public officials. The implementation of the income classification system based on per capita local revenues at 1985 Prices be targeted to start July following the applicable election year, e.g. July 2008. The income classification ranges be based on the average per capita local revenues at 1985 Prices for the past 2 years prior to the applicable election year, e.g., 2005 and 2006 for the income ranges applicable beginning July 2008. Thereafter, the applicable income ranges will be recomputed every 3 years. Per Capita LGU Income Classification

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79 It is recommended that a system classifying Philippine LGUs based on real per capita locally-sourced revenues be further and fully developed for endorsement by and use of BLGF. The following need to be done: Presentation to and discussion with BLGF and DOF top management for subsequent endorsement. Presentation and discussion with selected representatives of the three (3) LGU leagues - Provinces, Cities, and Municipalities - for LGU comments and idea solicitation regarding implementation rules. Formulation of final system with 2005 categories and ranking based on audited Commission on Audit (COA) data, and the drawing up of the appropriate implementation rules and institutional framework covering review period, data sources and updating, transitory provisions, etc. Application of system using 2005 and 2006 COA data for implementation beginning July 2008. Per Capita LGU Income Classification

BLGF’s LGFPMS : 

80 BLGF’s LGFPMS BLGF’s Per Capita LGU Income Classification System, its LGFPMS and its financial and economic model is part of a comprehensive system of assessing various aspects of LGU financial performance. Enhanced LGFPMS Takes off from existing LGFPMS LGUs are pre-sorted by income class, political level (i.e., municipalities, cities, and provinces) before application of the fiscal/financial performance indicators to make the assessment fair and meaningful. An analytical framework for analyzing fiscal performance reports vis-à-vis LGPMS capacity, productivity and development indicators. Indicators are linked to key LGU financial performance concerns and benchmarks are established to set a clear standard among LGU classes for the indicators.” The LGFPMS is also linked to the creditworthiness rating system.

BLGF’s LGFPMS : 

81 BLGF’s LGFPMS As spelled out by BLGF itself, a “system of fiscal performance indicators for LGUs can be an effective tool in the performance of the following functions:” “As an aid in strategic planning and forecasting” — it “can provide LGUs with a good assessment of its fiscal situation…” to serve as “… a basis for setting future plans and forecasts. “Performance accounting and benchmarking” — “… performance versus targets” and “how LGUs compare relative” to other similarly-situated LGUs “Early warning system” — it can give “danger ahead signals… to ensure that remedial actions are made soon enough before things get out of hand.” “Quality management” — it ensures that “correct information is available at the right time…” to help LGU managers “… establish trends as well as scientifically developed gut feel.” “Incentive system” — “a well-planned incentive scheme can be anchored on a good system of financial indicators.”

Urgency in Effecting Reforms and Monitoring LGU Financial Performance : 

82 Urgency in Effecting Reforms and Monitoring LGU Financial Performance Danger signals regarding overall LGU financial performance have been noted as early as the late 1990’s but rapid increases in the IRA during the nineties served as palliatives to the malaise. Model simulation results indicate that even with the economy growing at government targeted growth rates, the annual growth performance in % terms of LGU revenues and expenditures could oscillate around a declining trend line due to the negative effects of the following: Structural problems as indicated by key revenue sources being relatively inelastic with respect to the economic base; and Push effect on expenditures and accompanying pull-down effects on revenues of the 3-year election cycle. Seriously affected are major LGU revenue sources – RPT, business taxes, and economic enterprises.

Urgency in Effecting Reforms and Monitoring LGU Financial Performance : 

83 Urgency in Effecting Reforms and Monitoring LGU Financial Performance The solution to the structural problems may not be immediately forthcoming because: Durable revenue reforms such as expanding the base of existing sources and introducing new taxes and fees/charges require “politically costly” legislations; and Sound commitment to a stable multi-year spending program requires seemingly absent strong political will and public backing.

LGU Financial Performance Measurement: BLGF’s Per CapitaIncome Classification System and Local Government Financial Performance Monitoring System (LGFPMS) : 

LGU Financial Performance Measurement: BLGF’s Per CapitaIncome Classification System and Local Government Financial Performance Monitoring System (LGFPMS) ADB TA 4556 15 November 2007