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Ateneo School of Government June 2007
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.
The need to establish benchmarks in the area of local financial management (LFM) is evident and real. The project seeks to develop benchmarks in the various areas of LFM that will facilitate more effective governance of local government units, thereby keeping them in harmony with their mandates while at the same time satisfying their constituents in terms of service delivery. In addition, the project aims to identify the good practices necessary for effective LFM in the context of good governance and in light of local and international developments in the field.
TABLE OF CONTENTS
Page I. Introduction ............................................................................................................................................... 2 II. Objectives of the Project ........................................................................................................................ 2 III. Conceptual Framework Drawn from Practice........................................................................................ 3 IV. Summary of Methodology...................................................................................................................... 6 V. Phase 1 – Identify Key Measures of Financial Performance.................................................................. 9 Methodology ............................................................................................................................................. 9 Key Results ............................................................................................................................................. 11 VI. Phase 2 – Select a Shortlist of Relatively High-performing LGUs...................................................... 14 Methodology ........................................................................................................................................... 14 Data Limitations for Phase 2.................................................................................................................. 17 Key Results ............................................................................................................................................. 18 VII. Phase 3 – Identify Current Good Practices in LFM .......................................................................... 20 Methodology ........................................................................................................................................... 20 Key Results ............................................................................................................................................. 23 VIII. Phase 4 – Developing a Framework for Assessing Exemplary Practices in LFM............................ 34 Literature Review of Local Best Practices ............................................................................................. 34 Proposed Benchmarks in LFM ............................................................................................................... 40 Proposed System for Award Selection.................................................................................................... 43 IX. Limitations of Study............................................................................................................................. 49 X. Recommended Next Steps.................................................................................................................... 50 XI. References ............................................................................................................................................ 51
Appendices 1. 2. 3. 4. 5. 6. 7. 8. 9. Sample Group of LGUs Financial Data – Provinces Financial Data – Cities Financial Data – Municipalities Data Analysis – Provinces Data Analysis – Cities Data Analysis – Municipalities Field Research Questionnaire Field Research Schedule
A decade and a half of implementation of the Local Government Code of 1991 provides an opportune time to examine the progress of local government units (LGUs) in managing their finances. The Code authorizes LGUs to levy taxes, fees, and charges and to create their own sources of revenues that accrue exclusively to them. The challenge has been for LGUs to take full responsibility for the opportunities provided by the Code and to develop expertise in resource mobilization. Local financial management (LFM) is focused on generating resources and allocating these to various competing public service demands of the locality. Indeed, LFM is a significant aspect of good public governance. Manasan, et al developed a governance index where the capacity of the LGU to mobilize and utilize resources is regarded as the first of the three principal elements of good governance. However, while the existing measurement and award systems in the Philippines deal with the overall aspect of governance, there are none that specifically focus on LFM. Furthermore, while the Code governs the conduct and management of financial affairs, transactions, and operations of LGUs, and provides the fundamental principles in local fiscal administration (Sec. 304 and 305), there are minimal efforts to examine the compliance of LGUs to these legal provisions. There is also an absence of mechanisms that encourage innovations and a culture of excellence in the way local officials handle their financial responsibilities. Those who champion the cause of sound LFM are not appropriately given attention and rewarded. These represent wasted opportunities for identifying sources of norms and standards that may be adopted and replicated by other LGUs.
Objectives of the Project
The need to establish benchmarks in the area of LFM is evident and real. The project seeks to develop benchmarks in the various areas of LFM that will facilitate more effective governance of LGUs, thereby keeping them in harmony with their mandates while at the same time satisfying their constituents in terms of service delivery. In addition, the project aims to identify the good practices necessary for effective LFM in the context of good governance and in light of local and international developments in the field. Specifically, the study aims to: 1. Identify key measures of financial performance of LGUs; 2. Identify current good practices in LFM vis-à-vis good governance principles; and 3. Develop a framework for assessing exemplary practices in LFM.
Conceptual Framework Drawn from Practice
Local financial management is a complex whole, that is, a set of connected parts that, when put together, are expected to achieve specific goals. Such are that distinguishing marks of a “system,” described by Reyes and Talatala (1994). On these premises, therefore, LFM can be viewed as a system that encompasses several major areas of concern, namely: Treasury, Accounting, Budgeting, and Other allied (finance-related) areas (see Figure 1). • Treasury involves the responsibility of the local officials to ensure proper and timely sourcing of funds and receipt of revenues, as well as placing the funds in the most favorable or advantageous form of investment. This function also includes the disbursement of funds based on prescribed policies and projections. Specifically, the local government treasury function in the Philippines deals with real property and business taxation, use of credit financing, and the search of revenues from non-traditional sources. Accounting refers to the system of record-keeping and financial reporting of the local government. This requires that effectively functioning accounting processes are in place and that the LGU is in compliance with reportorial requirements. Accounting also involves expenditure management and the generation and provision of significant financial information to various interested parties. Budgeting entails the preparation of financial plans and the analysis of the variance between the plan and actual activities. It also involves the process of capital investment in long-term assets and projects. Other allied or finance-related areas include internal auditing, local development planning, local economic development, and procurement processes. All of these areas operate in systems separate from LFM but they not only have financial management components but also influence LFM performance.
The systems framework also deals with performance evaluation as one of its characteristics. These are the means by which the system as a whole is assessed periodically to view leakages and bottlenecks in the functioning of its various parts. These constitute the basis for recognizing significant accomplishments and productive activities that maintain the relevance of the system to its environment.
Figure 1 – Framework in Analyzing Local Financial Management as a System for Good Governance
E X T E R N A L E N V I R O N M E N T
AREAS OF CONCERN • TREASURY • ACCOUNTING • BUDGETING • ALLIED AREAS
(Other Finance-Related Areas) FINANCIAL PERFORMANCE • • • • • • Liquidity Activity Cost Efficiency Profitability Leverage Stability GOOD GOVERNANCE • • • • Transparency Accountability Predictability Participation
Figure 1 also shows that the effective management of the various areas of local finance is manifested in the financial performance of an LGU in terms of liquidity, activity, cost efficiency, profitability, leverage, and stability. These indicators of financial performance distinguish those that performed well and those that did not meet the expectations. These represent common financial performance indicators used in private business enterprises that are also relevant for local governments. • Liquidity refers to the ability of the LGU to generate cash for payment of maturing obligations. It represents the ability of the local government to pay currently maturing obligations when they fall due. Activity refers to the ability of the LGU to use its assets or resources to generate revenues as reflected in the turnovers of assets. Cost efficiency is the measure of the incurrence of costs and expenses in relation to the revenues and income generated. Profitability refers to the earning power of the LGU in managing its economic enterprises. It measures the return on the revenue generated or capital invested. Leverage reflects the extent of the LGU borrowing in relation to its assets and equity.
• • • •
Stability refers to the ability of the LGU to remain financially sound and capable of paying longterm obligations.
The financial performance of a LGU is, to a large extent, indicative of its observance of good governance principles. It can be said that a higher level of financial performance suggests more substantial compliance to the principles of transparency, accountability, predictability, and participation (Sound Development Management, ADB, 2005). The results of the evaluation of financial performance and relating the same with the observance of good governance principles can be used as feedback in the implementation of future activities in the different areas of LFM. It should likewise be noted that there are factors in the external environment of the LGUs that affect their financial management practices and the resulting financial performance. These factors include macroeconomic conditions, national policies and executive issuances, political conditions in the country, and local socio-cultural practices, among others.
Summary of Methodology
The project was divided into two major components: Component A was concerned with identifying good practices in the field of LFM while Component B dealt with benchmarking and the development of an award system in LFM (Figure 2). These two components address the five objectives of the project. It is important to note that this project covers only Component A (Phases 1, 2, and 3) and the first part of Component B (Phase 4), which is the development of a framework for assessing exemplary practices in LFM. The second part of Component B (Phase 5) comprises a separate project. This section presents an overall summary of the methodology utilized in the project. Detailed discussions of the specific activities undertaken during each phase of the project are covered in the succeeding sections of this report.
Figure 2 – Components and Phases of the Project
COMPONENT A IDENTIFYING PRACTICES
COMPONENT B AWARD SYSTEM
Phase 1 Identify key measures of financial performance
Select a shortlist of relatively highperforming LGUs
Phase 4 Develop a framework for assessing exemplary practices in LFM
Identify current good practices in LFM
Establish an award system in LFM
COMPONENT A – IDENTIFYING LGU PRACTICES IN LFM Phase 1 – Identify Key Measures of Financial Performance This phase answers the question: “What key indicators of financial performance are appropriate for LGUs?” Existing performance measurement systems currently utilized by various government agencies were reviewed to develop a comprehensive inventory of quantitative measures for financial performance. In addition, well-established measures of financial condition drawn from financial management literature were reviewed and included in the larger list. Finally, the six measures of financial performance identified in the Conceptual Framework (see Figure 1) were also taken into consideration in the identification of the indicators. After a comprehensive review of references, a list of key measures of financial performance of LGUs was developed with the concurrence of the EPRA Multi-Stakeholder Team (MST). These key measures of financial performance were the basis for selecting a shortlist of relatively high-performing LGUs in Phase 2 of the project.
Phase 2 – Select a Shortlist of Relatively High-performing LGUs In this phase of the project, a sampling exercise was undertaken with the objective of identifying a small group of LGUs that performed well based on the key measures of financial performance identified in Phase 1. This shortlist of LGUs would be used as subjects in the next phase of the project, which focuses on identifying current good practices in LFM. There were several sub-activities within Phase 2 of the project. 1. Sampling Design. A sampling design was developed to ensure the selection of a nationwide and cross-sectional sample of LGUs, including three types of LGUs–provinces, cities, and municipalities. 2. Population of Sample Group. The EPRA MST was tasked to randomly select the LGUs to be included in the sample group. 3. Data Gathering for Sample Group. The LGUs in the sample group were evaluated using the key measures of financial performance identified in the previous activity. Financial reports from the Commission on Audit (COA) and the Bureau of Local Government Finance of the Department of Finance (DOF-BLGF) were gathered for all the LGUs and used to calculate the key measures for the sample group. 4. Data Analysis and Selection of Shortlist of LGUs. A comparative analysis of LGUs based on the key measures of financial performance was undertaken to reduce the sample into an upper tier of LGUs of the sample group that can be considered high-performers. A total of 12 LGUs were then selected from the upper tier of sample and these shortlisted LGUs were the basis for executing the next phase in the study. Phase 3 – Identify Current Good Practices in LFM This phase answers the question “What are the patterns of financial management practices of LGUs in the context of exemplary financial performance and good governance principles?” The 12 shortlisted LGUs from Phase 2 of the project served as field research subjects to identify existing practices being utilized by LGUs that exhibit strong performance in LFM. The activities undertaken Phase 3 were the following: 1. Instrumentation. A field research questionnaire and method were developed that was used to probe the LGUs on specific practices that they utilize to achieve good results in LFM. In addition to practices, the research also explored organizational competencies consistent with these practices. These included work processes, structures, systems, and technologies that are critical for a high level of financial performance. 2. Data Gathering. Researchers were fielded out to the shortlisted LGUs to generate information on the actual practices and competencies of high-performing LGUs. 3. Data Processing and Analysis. The data gathered was analyzed to develop an inventory of current good practices and organizational competencies in LFM of relatively high-performing LGUs. Specific criteria for determining what constitutes a good practice in LFM were developed based on existing guidelines used by the Department of Interior and Local Government (DILG). Component A of the project was completed upon identification of the current good practices in LFM. In Component B of the project, the field research findings were integrated with the best practices drawn
from a literature review to generate proposed benchmarks that can be used as develop a framework for assessing exemplary practices in LFM for LGUs. COMPONENT B – DEVELOPING AN AWARD SYSTEM FOR LFM Phase 4 – Develop a Framework for Assessing Exemplary Practices in LFM In this phase of the project, the current good practices gathered from the field research in Phase 3 were integrated with local best practices identified through a comprehensive literature review. The combined inventory of practices then served as the foundation for developing a framework for assessing exemplary practices in LFM. The activities to be undertaken in Phase 4 include the following: 1. Literature review of practices in LFM that have been recognized by different organizations as exemplary or exceptional. This involved the review of existing documentation on LFM best practices reported by international funding agencies (such as the World Bank and Asian Development Bank), internationally-funded projects, and case studies developed in academic institutions. It also included a review of documentation from national government agencies and foundations (such as the Galing Pook Foundation, DOF-BLGF, and DILG). 2. Development of proposed benchmarks in LFM. The results of the literature review were integrated with the findings from the field research phase of the project to strengthen the pool of LFM practices. Possible benchmarks for evaluating LGU financial management were then established based on this pool of identified good LFM practices. 3. Development of the system for award selection. A process for recognizing exemplary practices of LGUs in the various areas of LFM was designed based on the proposed benchmarks defined in the previous activity. An exemplary practice is any practice (program, project, technique, method, tool, system, approach, procedure, process, or strategy) that works in one place, is worthy of replication, and is replicable elsewhere. Guidelines were developed to carry out a rational and systematic selection of participating LGUs. This included the following aspects of the award system: o o o o o o o o o Standards/requirements for LGUs to qualify for the award, specifying among others the mode for joining the competition; Period of selection and awarding; Criteria for rating LGUs based on established criteria; Method of gathering data; Composition, functions and responsibilities of the panel of judges; Obligations, responsibilities, and opportunities of LGUs selected for the awards; Documentation procedures; Post-award monitoring system and follow-through measures; and Identification of the name or title of the award, preferably through a consultative process involving the various leagues and organizations involved in local governance.
Phase 1 – Identify Key Measures of Financial Performance
For this phase, existing performance measurement systems of national government agencies were reviewed to identify key quantitative measures of financial performance that were used in the next phase of the project. There were several activities in Phase 1. Methodology 1. Categorization of measures. The indicators were categorized into six areas of financial performance, which follow directly from what was elaborated in the Conceptual Framework. o Revenue indicators are common-size ratios that measure the ability of the LGU to mobilize revenues, whether internally or through intergovernmental transfers and grants. Expenditure indicators are common-size ratios that measure the costs expended by the LGU to finance its operations, provide services, and service its debt. Liquidity indicators measure the ability of the LGU to generate cash for payment of nearterm obligations. Asset turnover indicators are measures of overall financial activity that quantify the efficiency of by which the LGU utilizes assets or resources to generate revenues. Leverage indicators measure the extent that the LGU utilizes debt financing to support its activities. Profitability indicators measure the net returns on the revenues generated and capital invested by the LGU and its economic enterprises. Cost efficiency measures that relate LGU expenditures to revenues are also included under these indicators. Stability indicators are not measured by any single indicator. Rather, a historical trend analysis of the various measures of financial performance, in particular revenue and expenditure indicators, would be the basis of evaluating the financial stability of an LGU.
2. Inventory of Financial Management Measures. Various financial indicators from the Local Productivity and Performance Measurement System of the Department of Interior and Local Government (DILG) and the Local Government Performance Measurement System developed by Bureau of Local Government Finance of the Department of Finance (DOF-BLGF) were evaluated to identify measures that focused on evaluating LGU financial performance. In addition, established measures of financial performance drawn from financial management literature were surveyed (Finkler, 2000, and Horngren, 1999). Table 1 below shows the inventory of financial measures that was initially developed from the review of literature.
Table 1 - Inventory of Financial Management Measures
• Revenue target accomplishment rate = Total revenue collection / Estimated total revenues or collectibles • Real property tax accomplishment rate = Collection from real property taxes / Estimated collection from real property taxes • Cost to collection ratio = Cost of assessment and collection / Internally-generated revenues • Revenues per capita = Total revenue collection / LGU population • Local revenues per capita= Total local revenue collection / LGU population • Internal revenues per capita = Internally-generated revenues / LGU population • IRA dependency ratio = IRA revenues / Total revenue collection
• Expenditure rate = Total expenditures / Budget estimate • Social expenditure ratio = Expenditures for social services / Total expenditures • Economic expenditure ratio = Expenditures for economic services / Total expenditures • Personal services expenditure ratio = Expenditures for personal services / Total expenditures • Personal services ceiling = Expenditures for personal services / Total revenue collection • Internal financing ratio = Internally-generated revenues / Total expenditures • Expenditures per capita = Total expenditures / LGU population
• Current ratio = Current assets / Current liabilities • Quick ratio = (Cash + Marketable securities + Current receivables) / Current liabilities • Days of cash on hand = (Cash + Marketable securities) * 365 / (Operating expenses – Bad debts – Depreciation) • Cash target accomplishment rate = Actual cash position / Budgeted cash position
Asset Turnover Indicators
• Receivables turnover = Internally-generated revenues / Receivables • Average collection period = 365 / Receivables turnover • Inventory turnover = Cost of inventory / Inventory • Days inventory on hand = 365 / Inventory turnover • Total asset turnover = Internally-generated revenues / Total assets • Fixed asset turnover = Internally-generated revenues / Net fixed assets
• • • • Debt to asset ratio = Total debt / Total assets Debt to equity ratio = Total debt / Equity Debt per capita = Total debt / LGU population Times-interested-earned = Income before interest expense / Interest expense • Cash flow coverage = (Cash from operations + Interest + Rent) / Interest, rent, and debt payments • Debt servicing ratio = Debt service payments / Total revenue collection
• Savings rate = Net income (loss) / Total revenue collection • Enterprises profitability rate = Net income (loss) of economic enterprises / Total gross income of economic enterprises • Operating margin = Increase in equity / Total revenue collection • Return on equity = Increase in equity / Equity • Return on assets = Increase in equity / Total assets
3. Criteria for Selecting Key Measures. A set of criteria was then developed in order to distill the long list of indicators of financial performance into a shorter list of key measures that would be most relevant for LGUs. Recommended criteria that were used to select the final measures follow below: o Availability of data – The key measures should be based on data that are readily available from public sources, namely, Statements of Income and Expenditures from DOF-BLGF and Audited Financial Statements from COA. Appropriateness to LGU financial management system – The key measures should be relevant to the current system of LGU finance, in particular the LGU system of accounting and reporting financial and operational activities. As a result, the indicators should be adjusted to reflect the local context of public finance and reporting (e.g. LGU data on
receivables are generally unreliable, LGUs are restricted from investing in marketable securities, etc.) and should avoid strictly private-sector measures, such as profit-maximization indicators. Also, the key measures should, as much as possible, include indicators with targets that LGUs are required to achieve as per the Local Government Code of 1991 and/or other national government agency guidelines. o Minimization of potential data manipulation – The key measures should exclude data that are potentially prone to subjective estimation or manipulation by the LGU (e.g. estimates for revenue collection, budget estimates, etc.). Reflective of intervention by LGU management – The key measures should be indicative of the financial management efforts and initiatives exerted by the LGU. Useful for assessing LGU creditworthiness – The key measures should, as much as possible, be relevant indicators for credit analysis.
Key Results Based on the criteria developed, a total of 12 key measures of financial performance of LGUs were identified with concurrence of the EPRA MST. As listed in Table 2 below, these indicators were then used as the tool for evaluating a sample group of LGUs in the next activity. A brief description of the selected measures follows below. Table 2 – Key Measures of Financial Performance for LGUs
• • • • Local revenues per capita = Total local revenue collection / LGU population IRA dependency ratio = IRA revenues / Total revenue collection Expenditures per capita = Total expenditures / LGU population Personal services ceiling = Expenditures for personal services / Total revenue collection Current ratio = Current assets / Current liabilities Quick ratio = (Cash + Very short-term assets) / Current liabilities Total asset turnover = Total local revenue collection / Total assets Fixed asset turnover = Total local revenue collection / Net fixed assets Debt to asset ratio = Total debt / Total assets Debt servicing ratio = Debt service payments / Total revenue collection Return on assets = Increase in net equity / Total assets Enterprises profitability rate = Net income (loss) of economic enterprises / Total gross income of economic enterprises
Expenditure Indicators Liquidity Indicators
Asset Turnover Indicators
• • • • • •
Leverage Indicators Profitability Indicators
Revenue indicators – The revenue indicators selected are focused on measuring the local revenue mobilization performance of LGUs. Currently, LGUs are still highly dependent on the Internal Revenue Allotment (IRA), which is an annual revenue sharing from the national government to local governments. Based on DOF-BLGF data in 2004, IRA dependency of provinces averaged 81.9 percent while for municipalities, the average was 75.6 percent. The
dependency of cities on IRA was the lowest with an average of 43.3 percent. The Local Government Code of 1991 was designed to empower LGUs to be financially self-sufficient and less dependent on intergovernmental transfers from the national government. Hence, the two revenue indicators selected, local revenues per capita and IRA dependency ratio, specifically measure how effectively an LGU maximizes its local revenue potential o Expenditure indicators – The expenditure indicators selected focus on two different aspects of expenditure performance. The first measure, expenditures per capita, is a basic indicator of how much the LGU spends to provide services to the public on a per capita basis. Generally speaking, an LGU with a high level of expenditures per capita relative to its peers is likely to provide more services to its constituents. The second measure, the personal services ceiling, is based on a requirement of the Code for LGUs to limit expenditures for personal services (i.e. personnel salaries, benefits, etc.) to 45 percent of total expenditures. A low personal services ceiling for an LGU is indicative of a greater concentration of expenditures for providing services rather than on overhead costs for personnel. These two indicators are complimentary in the sense that an LGU should ideally have a high level of expenditures per capita coupled with a low personal services ceiling. o Liquidity indicators – The two liquidity indicators selected, current ratio and quick ratio, are fundamental measures of an LGU’s ability to meet short-term obligations. The current ratio looks at all the current assets of an LGU and relates it to its short-term obligations. The quick ratio looks at the most liquid assets of an LGU, which in the local case is basically cash, and compares it to the LGU’s short-term obligations. These are two universally-used indicators of liquidity that apply to organizations of all types. Asset Turnover Indicators – The two asset turnover indicators selected relate the local revenue collection of an LGU to two asset bases: total assets and net fixed assets. Total asset turnover and fixed asset turnover are both widely-used indicators of financial activity that measure how efficiently an organization utilizes its assets to produce revenues. Leverage Indicators – The leverage indicators selected focus on the two aspects of debt capacity: outstanding debt capacity and debt servicing capacity. The first measure, debt to asset ratio, relates the total outstanding debt of an LGU to its total assets. A very high debt to asset ratio indicates that an organization is highly leveraged and more reliant on maximizing its assets to produce revenues to meet its debt obligations. The second measure, debt servicing ratio, is based on a requirement of the Code for LGUs to limit debt service expenses to within 20 percent of total expenditures. Maintaining a manageable level for debt servicing ratio is important for LGUs given that an exceedingly high level of debt service payments relative to total expenditures means that an LGU has less resources to spend on providing services to its constituents. o Profitability indicators – The two profitability indicators selected focus on two different aspects of an LGU’s profitability. The first measure, return on assets, relates the increase in net equity of an LGU to its total assets. While having a positive return to assets is ideal, it is important to point out that the overarching goal of governments, unlike private entities, is to provide public services rather than to maximize revenues. Hence, while a negative return to assets is indicative of poor financial management, an exceedingly high return to assets is not necessarily a positive indicator because it might mean that the LGU is not fully utilizing its resources to provide services to its constituents.
The second measure, enterprises profitability rate, measures the profitability of the economic enterprises of an LGU. Economic enterprises are business-like enterprises operated by LGUs that, in theory, should be financially self-sufficient, if not profitable. Hence, measuring the enterprises profitability rate of an LGU would indicate whether these economic enterprises are being managed well and do not require subsidies by the LGU.
Phase 2 – Select a Shortlist of Relatively High-performing LGUs
The objective of Phase 2 was to select a shortlist of relatively high-performing LGUs that served as the basis of qualitative field research in Phase 3 of the project. There were four activities in this phase: 1) the development of a sampling design; 2) the population of the sample group; 3) data gathering for the sample group; and 4) comparative analysis of the data and selection of the shortlist of LGUs. Methodology 1. Development of sampling design. A sample size of 104 LGUs (out of 1,704 LGUs in total) was selected with a 15 percent margin of error. The sampling design ensured the selection of a nationwide and cross-sectional sample of LGUs, including the three types of LGUs–provinces, cities, and municipalities. This design was selected to balance the two considerations of: 1) selecting a sufficiently large and inclusive sample; and 2) the challenge of collecting the financial data for the sample group from COA and DOF-BLGF. As detailed in Table 3 below, the sample of 104 LGUs was composed of 29 provinces, 32 cities, and 43 municipalities distributed across the 13 regions of the country plus the National Capital Region, Cordillera Autonomous Region, and Autonomous Region of Muslim Mindanao. Table 3 – Sampling Design (with a 15% Margin of Error)
REGION CAR 1 2 3 4-a 4-b 5 6 7 8 9 10 11 12 13 ARMM NCR TOTAL PROVINCES Total Sample Pop’n Size 6 2 4 2 5 2 7 3 5 2 4 1 6 2 7 2 4 1 6 2 3 1 5 2 4 2 4 1 5 2 6 2 81 29 CITIES Sample Total Pop’n Size 1 0 8 2 3 1 13 4 11 3 1 0 7 2 17 5 12 3 4 1 4 1 8 2 5 1 4 1 3 1 3 1 14 4 118 32 MUNICIPALITIES Sample Total Pop’n Size 76 2 117 3 90 3 117 3 131 4 48 1 107 3 140 4 120 4 139 4 67 2 85 3 44 1 45 1 70 2 106 3 3 0 1,505 43 TOTAL Sample Total Pop’n Size 83 4 129 7 98 6 137 10 147 9 53 2 120 7 164 11 136 8 149 7 74 4 98 7 53 4 53 3 78 5 115 6 17 4 1,704 104
2. Population of sample group. Upon the selection of the sampling design, the EPRA MST randomly selected the LGUs to be included in the sample group. Specifically, the representatives of the League of Provinces of the Philippines, the League of Cities of the Philippines, and the League of Municipalities of the Philippines were tasked with randomly selecting the LGUs to be included for each category of LGU of the sample group. The sample group of LGUs selected by the EPRA MST is listed in Appendix 1. 14
3. Data gathering for sample group. Audited Annual Reports (AARs) from COA and Statements of Income and Expenditure (SIEs) from DOF-BLGF were gathered for the LGUs in the sample group in order to calculate the 12 measures of measures of financial performance identified in the first activity of Phase 1. The population data used were derived from the latest 2000 census data from the Bureau of Census. The goal was to collect financial data for three years: 2003, 2004, and 2005. However, due to issues in data gathering, there were several gaps in the data for each group of LGUs–provinces, cities, and municipalities. These are discussed in detail in the following sub-section on Limitations for Phase 2. 4. Data Analysis and Selection of Shortlist of LGUs. Using the data collected from COA and DOF-BLGF, the key measures of financial performance identified in Activity #1 (see Table 2) were calculated for the LGUs. The indicators were calculated for 2003, 2004, and 2005 for the majority of provinces and cities in the sample group while they were calculated for 2004 and 2005 for the majority of the municipalities in the sample group. The following guidelines were followed for the data analysis of the sample group of LGUs to ensure the consistency of the financial data used: o o o Assets, liabilities, and government equity data were derived from the Consolidated Balance Sheets found in the AARs of each LGU from COA. All revenue and expenditure data were derived from the SIEs from DOF-BLGF. Population data were derived from the latest 2000 census data from the Bureau of Census.
During the encoding of the data, there were several gaps in the SIE data that were identified that prevented the calculation of “Expenditures for personal services” and “Net income (loss) of economic enterprises.” These issues are discussed in greater detail in the following sub-section on Limitations for Phase 2. As a result, the financial measures that were actually calculated for the LGUs in the sample group were reduced to 10 from the original list of 12 financial indicators. Table 4 below enumerates the final measures that were calculated:
Table 4 – Measures of Financial Performance Calculated For Sample Group of LGUs
• • • Local revenues per capita = Total local revenue collection / LGU population IRA dependency ratio = IRA revenues / Total revenue collection Expenditures per capita = Total expenditures / LGU population Current ratio = Current assets / Current liabilities Quick ratio = (Cash + Other short-term assets) / Current liabilities Total asset turnover = Total local revenue collection / Total assets Fixed asset turnover = Total local revenue collection / Net fixed assets Debt to asset ratio = Total debt / Total assets Debt servicing ratio = Debt service payments / Total revenue collection Return on assets = Increase in net equity / Total assets
Expenditure Indicators Liquidity Indicators
Asset Turnover Indicators
• • • • •
Leverage Indicators Profitability Indicators
Data Tables. The data collected and analyzed for the LGU sample group can be found in the tables contained in Appendices 2, 3, and 4 for provinces, cities, and municipalities, respectively. The top half of each table in the Appendices contains the actual financial data extracted from the AARs from COA and SIEs from DOF-BLGF that were used to calculate the measures of financial performance. The bottom half of each table in the Appendices contains the key measures of financial performance calculated for each LGU in the sample group. The specific data points that were collected for each LGU for the sample period are summarized in Table 5 below. Table 5 – Summary of Financial Data Collected
Balance Sheet data from Annual Audited Reports Current Assets Cash and Other Short-term Assets Net Fixed Assets Total Assets Current Liabilities Total Debt Increase in Net Equity Data from Statements of Income and Expenditures Total revenue collection Internal Revenue Allotment (IRA) Revenues Total local revenue collection Debt Service Payments Total Expenditures Total Gross Income of Economic Enterprises
Data Analysis. After the measures of financial performance were calculated for the sample group, these were then averaged over the period that the data was collected for each LGU. The data analysis is summarized in the tables contained in Appendices 5, 6, and 7 for provinces, cities, and municipalities, respectively. The top half of each table in the Appendices contains the average data for each financial indicator for each LGU. For provinces, this resulted in three-year averages for 25 out of 29 provinces in the sample group and two-year averages for the remaining four provinces. For cities, this resulted in three-year averages for 29 out of 32 cities in the sample group and two-year averages for the remaining three cities. Finally, for municipalities, this resulted in two-year averages for 34 out of
41 municipalities in the sample group and one year’s worth of data for the remaining seven municipalities. The bottom half of each table in the Appendices contains the rankings for each LGU for each financial indicator. Each LGU was sequentially ranked within its peer group for each measure of financial performance. For example, for the 29 provinces in the sample group, each province was ranked 1-29 for each of the 10 financial performance measures based on the average that was calculated for each indicator. Based on this ranking, the lower rank indicates a better performance for a given financial indicator. This exercise was conducted for the three categories of LGUs in the sample group. Data Limitations for Phase 2 Data Gathering Issues. There were several gaps in the available data that prevented the complete collection of financial data for all the LGUs in the sample group for the three years: 2003, 2004, and 2005. Except for a few exceptions, the SIEs from DOF-BLGF were available for LGUs in the sample group for all three years. However, the AARs available on the COA website were incomplete for 2004 and 2003 for cities and provinces and were completely unavailable for municipalities. AARs were subsequently requested from COA but due to time and resource constraints, there were gaps in the final data collected for the sample group. The issues encountered with the data gathering are discussed below: 1. Provinces – AARs were unavailable for 2005 for three of the 29 provinces (Laguna, La Union, and Lanao del Sur). In addition, the SIE was unavailable for 2003 for one province (Camarines Sur). To summarize: o Due to issues in data gathering, the financial performance measures were calculated for three years for 25 out of 29 provinces in the sample group while the measures were calculated for two years for the remaining four provinces. 2. Cities – AARs were unavailable for 2005 for two of the 32 cities (Butuan, Agusan del Norte, and Masbate, Masbate). In addition, the AAR was unavailable for 2004 for one city (Marawi, Lanao del Sur). To summarize: o Due to issues in data gathering, the financial performance measures were calculated for three years for 29 out of 32 cities in the sample group while the measures were calculated for two years for the remaining three cities. 3. Municipalities – The AARs for municipalities were collected only for 2005, which provided for data for 2004 and 2005. However, due to unavailability of AARs from COA, seven municipalities in the original sample group were randomly replaced by other municipalities within the same region. Hence, the distribution of municipalities across the regions specified in the sampling design was maintained. The seven replacements are detailed in Appendix 1. However, SIEs were unavailable for 2004 for the replacement municipalities. Finally, due to problems with the data files downloaded from COA, two of the municipalities in the sample group had to be excluded from the sample group (Santa, Ilocos Sur, and Banta, Leyte). Due to time constraints, the two excluded municipalities could not be replaced anymore. To summarize: o Due to issues in data gathering, the size of the sample group of municipalities was reduced to 41 from the original 43. The financial performance measures were calculated for two years for 34 out of 41 municipalities in the reduced sample group while the measures were calculated for one year for the remaining seven municipalities.
In addition, the three-year period of analysis of the research prevented an analysis of the financial stability of the LGUs in the sample group. Typically, at least 5 years of historical trending is needed to fully analyze the financial stability of organizations. Data Gaps. During the encoding of the data, several issues emerged that prevented the calculation of two of the measures of financial performance. 1. Data for “Expenditures for personal services” was not included as an expenditure category in the SIEs from DOF-BLGF. Although there is a line for this expenditure category in the Consolidated Statements of Income and Expenses found in the AARs, the decision was made to not use this data in order to maintain the consistency for the sources of expenditure data to the SIEs of DOFBLGF. As a result, the Personal Services Ceiling could not be calculated for the data analysis of the LGU sample group. 2. Data for “Net income (loss) of economic enterprises” was not included as an expenditure category in the SIEs from DOF-BLGF. This data also cannot be found in the Consolidated Statements of Income and Expenses found in the AARs. As a result, the Enterprises profitability rate could not be calculated for the data analysis of the LGU sample group. Key Results 1. Identification of upper tier of LGUs in the sample group. The rankings for each financial indicator were accumulated for each LGU to select the upper tier of each category of LGUs in the sample group. The basic principle followed was that LGUs with lower accumulated scores generally indicated better relative financial performance compared LGUs with higher accumulated scores. However, a decision was made to exclude three measures of financial performance from the final accumulation of rankings to select the upper tier LGUs in the sample group. Firstly, given that the presence or absence of outstanding debt does not necessarily indicate good or bad financial performance, the two leverage measures, debt to asset ratio and debt servicing ratio, were excluded from the final ranking process. However, these leverage measures were used as a secondary screening tool after the rankings were completed to ensure that the leverage ratios for the LGUs in the upper tier were not exceedingly high (particularly for the debt servicing ratio, which should not exceed the 20 percent limit specified in the Local Government Code of 1991). Secondly, the profitability measure of return on assets was excluded from the final ranking of LGUs because, as discussed in the previous section, maximizing financial return is not necessarily a financial goal for local governments. Hence, this measure was used as a secondary screening tool to ensure that those ranking in the upper tier of each category of LGU did not generate negative returns on assets. Consequently, the upper tier of each category of LGU was determined by accumulating the rankings for the seven remaining measures of financial performance. Based on the accumulated scores for these remaining measures, the following LGUs in Table 6 (arranged alphabetically) emerged as having the lowest scores in their respective categories of LGU. These LGUs can be considered to be the relatively high-performing LGUs within the sample group selected for this study.
Table 6 – Upper Tier of LGUs in Sample Group
Provinces Bataan Bulacan Cagayan Cebu Laguna La Union North Cotabato Pangasinan Rizal Southern Leyte Cities Antipolo, Rizal Dagupan, Pangasinan Iligan, Lanao del Norte Iloilo, Iloilo Mandaue, Cebu Marikina Muntinlupa Parañaque Olongapo, Zambales Tagaytay, Cavite Municipalities Agoo, La Union Alicia, Isabela Brooke’s Point, Palawan Guiguinto, Bulacan Kalibo, Aklan Limay, Bataan Lumban, Laguna Naval, Biliran Sampaloc, Quezon Tupi, South Cotabato
2. Selection of shortlist of LGUs. The LGUs in the upper tier of the sample group served as the basis for selecting a shortlist of LGUs that served as the basis for identifying current good practices in LFM in Phase 2 of the project. Given the limitations of time and resources, it was determined that a total of 12 LGUs would be visited during the field research phase. As a result, four LGUs were selected for each category of LGUs–provinces, cities, and municipalities. The main consideration in selecting the final shortlist of LGUs was to have a geographicallydiverse group of LGUs in the group. Consequently, the 12 LGUs in the shortlist encompassed six different regions and included at least two representatives from Luzon, Visayas, and Mindanao. Table 7 – Shortlist of LGUs for Field Research
Provinces Laguna La Union North Cotabato Rizal Cities Antipolo, Rizal Iligan, Lanao del Norte Iloilo, Iloilo Olongapo, Zambales Municipalities Agoo, La Union Kalibo, Aklan Limay, Bataan Sampaloc, Quezon
Phase 3 – Identify Current Good Practices in LFM
The objective of Phase 3 of the project was to generate a broad list of good practices in LFM drawn from LGUs that have exhibited good financial performance. In Phase 4, these practices were used in the establishment of benchmarks that were the basis for developing a framework for assessing exemplary practices in LFM for LGUs. In addition, the LGUs were also probed on their organizational competencies that are necessary to achieve good financial results. There were three main activities: 1) the development of the field research questionnaire and method that were used to probe LGUs on specific practices they utilize; 2) the conduction of field research among the 12 LGUs identified in the shortlist from Phase 1; and 3) the development of an inventory of current good practices and competencies in LFM. Methodology 1. Development of a field research questionnaire and method. Given the focus on financial management practices of LGUs, it was determined that the specific subjects for the field research would be the four members of the Local Finance Committee (LFC). The creation of an LFC for each LGU is mandated by Section 316 of the Local Government Code of 1991. By law, the LFC is composed of the local Planning and Development Officer, local Budget Officer, and local Treasurer. In practice, the local Accountant is typically included as part of the functioning LFC. The four functions of the four members of the LFC are consistent with the Areas of Concern in LFM elaborated in the Conceptual Framework of this research. The Code identifies eight key functions for the LFC, namely: a) Determine the income reasonably projected as collectible for the ensuing fiscal year; b) Recommend the appropriate tax and other revenue measures or borrowings, which may be appropriate to support the budget; c) Recommend to the Local Chief Executive concerned the level of the annual expenditures and the ceilings of spending for economic, social, and general services based on the approved local development plans; d) Recommend to the Local Chief Executive concerned the proper allocation of expenditures for each development activity between current operating expenditures and capital outlays; e) Recommend to the Local Chief Executive concerned the amount to be allocated for capital under each development activity or infrastructure project; f) Assist the Sangguniang Panlalawigan in the review and evaluation of budget of component cities and municipalities in the case of the provincial finance committee, the Barangay budgets in the case of city or municipality finance committee, and recommend the appropriate action thereon; g) Assist the Sanggunian concerned in the analysis and review of annual regular and budgets of respective local government unit to determine compliance with statutory and administrative requirements; and h) Conduct semi-annual review and general examination of cost and accomplishments against performance standards applied in undertaking development projects. Given their mandate as the body primarily responsible for overseeing financial issues at the LGU level, the field research questionnaire was developed with the LFC and its primary functions in mind.
Field Research Questionnaire. The field research questionnaire was divided into two sections corresponding to queries on financial management practices and organizational competencies. Furthermore, each section was subdivided into 10 subsections that represent the critical areas in financial management and organizational competency for LGUs. In particular, the 10 financial management areas are elaborations of the four Areas of Concern in LFM identified in the Conceptual Framework (i.e. Treasury, Accounting, Budgeting, and Other Finance-related Areas). The specific Area of Concern associated with each of the 10 financial management areas is indicated in parenthesis in Table 8 below. On the other hand, the 10 organizational competency areas were developed to probe on various organizational characteristics, such as structures, processes, leadership styles, and evaluation and feedback mechanisms that serve as the foundation for an LGU to produce strong financial outcomes. These represent organizational characteristics that, while not specifically exclusive to financial management, are critical for any organization to function effectively and efficiently. Table 8 provides details on the general structure of the field research questionnaire. Table 8 – Structure of Field Research Questionnaire
Financial Management Areas 1. Functionality of LFC (All functional areas) 2. Generation of Revenue from Traditional Sources (Treasury functional area) 3. Nontraditional Sources of Funds (Treasury functional area) 4. Control Mechanisms on Fund Management (Accounting and Treasury functional areas) 5. Local Budgeting (Budgeting functional areas) 6. Expenditure Management (Budgeting, Accounting, and Other Finance-related functional areas) 7. Compliance with Accounting System and Financial Reporting Standards (Accounting functional area) 8. Link between Planning and Budgeting (Budgeting and Other Finance-related functional areas) 9. Practices on Procurement (Other Finance-related functional areas) 10. Financial Performance Management (All functional areas) Organizational Competency Areas 1. Organizational (Departmental) Philosophies 2. Leadership Styles 3. Structure and Staffing Practices 4. Rewards and Incentives 5. Internal Process Improvement in Fiscal Offices 6. Accountability Mechanisms 7. Feedback Mechanisms 8. Internal Linkages (within the LGU) 9. External Linkages 10. Ethical Standards
Between two to four questions were included under each subsection to try to elicit specific responses from the subjects of the field research on the actual practices and competencies of the LGU in the area of LFM. The field research questionnaire can be found in Appendix 8. Before the actual conduction of the field research, the questionnaire was first pre-tested with members of the LFC of the City of Muntinlupa to test and validate the questions and to fine-tune the field research method. Field Research Method. The objective of the field research was to gather the four members of the LFC and to conduct a focused group discussion with them, ideally collectively as a group, using the field research questionnaire as the interview guide. The basic process implemented during the field research was as follows:
a) The background and purpose of the research was explained to the subjects. The reason why the LGU was selected was also discussed with them. b) The field research questionnaire was then distributed to each one so that they could complete the self-assessment ratings that solicited responses of either “No”, “To a Certain Extent”, “To a Great Extent”, and “Yes” to questions on the specific practices and processes of the LGU. c) After the members of the LFC completed the field research questionnaires, the researchers conducted a focused group discussion where the subjects were probed on each of the questions of the questionnaire to extract specific responses pertaining to actual practices and competencies in the LGU. d) When available, documents supporting the responses of the subjects during the interviews were collected. These included detailed historical revenue data, local development plans and annual investment plans, vision and mission statements, various memoranda, etc. While the responses to the self-assessment ratings were collected, these were not collectively analyzed after the completion of the field research activity of the project. The focus of the field research was on the gathering qualitative data from the interviews rather on quantitatively analyzing the self-assessment of the subjects. Hence, the self-assessment ratings of the field research questionnaire were used to stimulate self-reflection among the members of the LFC to facilitate the focused group discussion with them. 2. Field Research among the LGUs in the Shortlist Scheduling. Once the shortlist of LGUs was finalized in conjunction with the EPRA MST on March 12, 2007, letters were immediately drafted and faxed to the Local Chief Executives of each of the 12 LGUs in the shortlist. The letters were followed up by phone calls to the offices of the Local Chief Executives to arrange for an interview schedule with the members of the LFC. The members of the EPRA MST, in particular the various leagues and the representative from DOF-BLGF, assisted the research team in scheduling the field research with the LGUs. The field research was eventually conducted over a one month period, from March 21 to April 19, 2007. The final research schedule can be found in Appendix 9. Pre-Research Preparation. There were seven researchers that conducted the field work. Between one to three researchers traveled to each LGU to conduct the research among the members of the LFC. Before visiting the LGUs, the researchers reviewed the financial performance measures calculated for each LGU in order to identify their financial strengths and to plan for specific areas in LFM that would be focused on during the field research. For example, LGUs with very strong Local Revenues per Capita and relatively IRA Dependency Ratios would be probed more closely on their practices for mobilizing local revenues. In addition, the AARs and SIEs of each LGU were also reviewed by the researchers to gain a clearer understanding of the financial standing of the LGU. Post Research. After each field research with an LGU, the researchers completed a summary sheet that summarized all the qualitative data generated from the members of the LFC. The summary sheet followed the structure of the field questionnaire and was divided into two sections (financial management and organizational competencies) with 10 subsections each. After the field researches were completed with all 12 LGUs in the shortlist, the summary sheets were collected and summarized. The researchers were also debriefed on the field research experiences and probed on the specific responses that were generated from their specific LGUs.
Key Results After completing the field research activities, an inventory of good practices and competencies exhibited by relatively high-performing LGUs in the sample group was developed. These practices and competencies represent very specific and practical approaches in LFM currently being used by LGUs to achieve strong financial results. Based on existing guidelines used by DILG, the following criteria were developed to identify the good practices and organizational competencies of LGUs in the shortlist: • Concern for overall LGU goals and objectives. The practice helped the LGU achieve its financial performance objectives and/or facilitated the effective implementation of the various stages or phases of a program or project. Focus on local financial management. The practice resulted in a change or improvement in the LGU’s financial situation or condition after its implementation. Responsiveness to real/felt needs. The practice identifies the problems and needs in the area of local financial management and creatively responds to such important departmental or local problems and concerns. Optimum use of resources. The practice is cost-effective, maximizes on existing or potential resources, simple, and sustainable. Potential for Replication. The practice has potential for replication, that is, it can be adopted by the LGUs for implementation for similar or other projects with favorable results; Promotion of inter-department or inter-LGU cooperation. The practice promotes partnership relationships between the LFC departments and the client-beneficiaries and also between the LGU and external stakeholders, resulting in better involvement in various aspects of financial management. The practice has strong emphasis on participatory approach to local development.
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The good practices and competencies were organized according to the structure of the field research questionnaire (see Table 8). There are two main sections: financial management practices and organizational competencies. Under each section, there are 10 subsections representing the main areas of concern for financial management and organizational competencies. The specific Area of Concern associated with each of the 10 financial management subsections is indicated in parenthesis. The number of LGUs that responded with each identified practice was tallied and the frequency of each practice is noted under the specified column. There were 12 LGUs in the shortlist so the maximum frequency is 12. It is important to note that, given the open-ended format of the questionnaire, the practices documented reflect only the responses from the focused group discussions. Hence, it is possible that an LGU in the shortlist actually utilizes a practice cited below but it was not mentioned by the subjects during the focused group discussion.
Financial Management Areas Practices 1. Functionality of the LFC (All functional areas) o Compliance with Section 316 of the Local Government Code of 1991. The members of the LFC of the LGUs in the shortlist indicated that full compliance with their legal mandate was the main objective of that body. Generally, they believe that the law limits the LFC from functioning beyond its provisions, thus compliance with the eight key functions specified by the Code was the primary concern. o Regular meetings. The majority of the LFCs in the shortlist of LGUs indicated that they maintain regular meeting schedules to periodically review financial issues of the LGU. This allows them to constantly monitor the financial condition of the LGU and anticipate issues and problems rather than to schedule meetings only on an ad hoc basis depending on whether there are financial issues that need to be addressed. o Expanded membership. For a few of the LFCs, the membership of the body was expanded to include other LGU officials who are stakeholders in the financial management of the LGU, e.g. Administrator, Legal Officer, Human Resource Officer, representatives from the Office of the Mayor and from the Sangguniang Bayan. The expanded membership of the LFC provides the body with better information to make decisions and improves coordination and cooperation with these other important stakeholders in LFM. 2. Generation of Revenue from Traditional Sources (Treasury functional area) o Utilizing all traditional revenue sources. The LGUs in the shortlist exhibited relatively strong performance in revenue mobilization as evidenced by high rates of Local Revenues per Capita and low IRA Dependency Ratios compared to their peers in the sample group. All of the LGUs in the shortlist indicated that they utilize all the traditional sources of revenue provided for their type of LGU under the Code, with a focus on the two major sources of revenues: real property taxes and business taxes. o Computerized tax-mapping. Several LGUs in the shortlist have implemented Geographical Information Systems or other systems to facilitate tax mapping for real property and business taxes. This tool been hugely beneficial to the revenue generation of the LGUs in terms of maintaining an up-to-date and accurate database of taxpayers, assessing tax levies, and identifying delinquent taxpayers. o Information and education campaigns. Several LGUs in the shortlist indicated that they utilize a variety of tax information campaigns to inform and educate their constituents on their responsibilities to remit taxes and to explain the purpose and use of the revenues collected by the LGU. Innovative examples include: Regular meetings with owners of local businesses before business tax deadlines to remind them of their responsibilities to pay taxes on time. “Tax caravans” that go around the different Barangays of the LGU to disseminate information and collect taxes on the spot. Recognition and awards for top local tax payers, e.g. annual dinner sponsored by LGU. Dissemination of information to teachers through the Department of Education. 24 Frequency 12
Oratorical contest for students sponsored by LGU to espouse to the youth the importance of paying taxes on time and in full. Real property tax practices. The LGUs in the shortlist indicated that they utilize various initiatives to improve their collection of real property taxes. These include: High-value delinquency cases are targeted and judicial remedies are aggressive implemented to resolve delinquencies. One of the effective remedies utilized is the public auction of delinquent real properties so that revenues are generated from tax-foreclosed properties. A few LGUs in the shortlist reassess the value of real property every three years. Even though this is specified in the Code, very few LGUs actually do this. The periodic reassessment ensures that real property values are accurate and up-to-date, allowing the LGU to grow its property tax base. Barangays are deputized by the two LGUs to disseminate information and collect real property taxes. Business tax practices. The LGUs in the shortlist indicated that they utilize various initiatives to improve their collection of business taxes. These include: Judicial remedies are aggressive implemented to resolve delinquencies. An increase of at least 20 percent in gross receipts reported by a business automatically exempts the business from examination of gross receipts. A decrease in gross receipts reported by a business triggers an automatic examination of gross receipts. A sampling of businesses is periodically conducted to establish baselines for presumed income among common types of businesses. Economic development initiatives are aggressively implemented to improve the business climate, e.g. improving roads and telecommunications networks, improving peace and order situation, improving traffic management in busy commercial districts. The database of business establishments is updated weekly. Establishment of a one-stop shop so that business permit can be obtained in one day. Aggressive revenue goal-setting. While the majority of the LGUs in the shortlist rely on historical trending to set revenue goals for the year, one LGU sets goals based on the national growth rate of taxes in order to make sure that the LGU keeps in step with the revenue growth of the national government.
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3. Nontraditional Sources of Funds (Treasury functional area) o Generating grant funds. Many LGUs in the shortlist indicated that they solicit grant funds from a broad base of sources to augment their revenues. These include international grants, Community Development Funds, grants from national government agencies, and grants/sponsorships from private firms. The Local Chief Executive plays a prominent role in these efforts. o Maximizing revenues from economic enterprises. Several LGUs in the shortlist indicated that they actively utilize economic enterprises as an important source of supplemental revenues for the LGU. New economic enterprise projects are pursued and LGU assets are maximized to generate additional revenues for the LGU (e.g. the development of malls/commercial centers on LGU properties, the assessment of parking fees on LGU property, the implementation of the Small Town Lottery, bidding out of parking spaces of new bus terminal for bus companies, renting out communications towers to mobile phone providers, renting out agricultural equipment, renting out LGU property, etc.). 25
Utilizing debt financing. While many LGUs in the shortlist are conservative when it comes to borrowing funds, there were LGUs that actively made use of debt financing to fund long-term capital projects that would have otherwise not been undertaken due to the insufficiency of current revenues. There are several practices implemented by the more aggressive LGUs in this area: Loan funds from Government Financial Institutions are utilized only for self-sustaining economic enterprise projects. Comprehensive feasibility studies are required before pursuing a loan for a project. Very high value is placed on maintenance of very good relationships with banks and paying debt service on time and in full. Bond flotation. The issuance of LGU bonds was undertaken by only two LGUs in the shortlist: one LGU issued bonds to construct and rehabilitate two hospitals while another issued bonds to construct a commercial center. Utilizing public-private partnerships. There are just two examples of publicprivate partnership arrangements among the LGUs in the shortlist. One LGU implemented a Build-Lease-Transfer scheme to rebuild a public market. In exchange for receiving discounts on leases and tax abatements for a fixed term, market tenants financed the construction of their own stalls according to a building plan of the LGU. The implementation of this form of public-private partnership allowed the LGU to quickly rebuild its public facility utilizing private funds rather than scarce public funds out of its revenue collections. Another LGU used a public-private partnership to build a commercial center. Establishment of revenue mobilization body. One LGU created Resource Mobilization Team to specifically explore alternative sources of funds for the LGU.
4. Control Mechanisms on Fund Management (Accounting and Treasury functional areas) o Compliance with COA guidelines on fund management. The LGUs in the shortlist indicated that they rely on strict compliance with guidelines issued by COA to ensure proper management control over all cash transactions. These include: Collectors follow a daily market collection schedule and either a same-day or next-day bank deposit schedule. There is a regular schedule for remitting and auditing cash collections (monthly, quarterly, or semi-annually). LGU bank accounts are reconciled on a regular basis (either weekly or monthly). There is a limit on the amount for cash disbursements by the LGU (e.g. PhP50,000) and no direct disbursements are allowed from cash collections. There is a regular review of variances between actual collections and target collections and this is utilized to review the performance of collectors. Daily cash flow reports are generated to inform the Local Chief Executive and other department heads of any issues in cash management. Disbursements are contingent on availability of cash flows as monitored by the LGU Treasurer. Memoranda of Accounting are issued to non-complying liquidating officers. As a management control measure, there is a regular job rotation in the Office of the Treasurer to prevent staff members from being in one position for too long. 26
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Maximizing liquid assets. Several LGUs in the shortlist indicated that they employ a regular process to review monthly cash flow forecasts and identify funds that will not be utilized in the near-term. The idle funds are placed in time deposits and high-earning savings accounts that are scheduled to mature only when the funds are scheduled for disbursement.
5. Local Budgeting (Budgeting functional area) o Compliance with DBM guidelines on budget preparation. The LGUs in the shortlist indicated that they strictly follow the budget schedule and processes mandated by DBM with regard to budget preparation, budget authorization, budget review, budget execution, and budget accountability. LGU budgets are consistently prepared and authorized in time for the beginning of the next fiscal year. o Budget variance. Most LGUs in the shortlist indicated that they generate regular revenue and expenditure reports (weekly or monthly) to analyze budget variances. Variances between actuals and targets are investigated and addressed by the department head concerned. o Budget forecasting. Several LGUs in the shortlist indicated that they rely primarily on historical trends (e.g. patterns of expenditures over the past three or five years) as the basis for developing departmental budgets. Furthermore, expenditure ceilings are set based on past performance of the various departments. o Consultative process. Several LGUs in the shortlist indicated that they utilize a consultative approach to budget preparation that involved multiple stakeholders throughout the entire process. These include: Legislative and Executive budget hearings that are open to the public and are one basis for prioritizing programs. Annual strategic planning meetings between the LFC and the various department heads of the LGU are scheduled at the onset of the budget cycle. The collective review of the proposed budget of the Local Chief Executive by the LFC and department heads before submitting the proposed budget to Sangguniang Bayan for budget authorization. 6. Expenditure Management (Budgeting, Accounting, and Other Finance-related functional areas) o Compliance with COA and DBM processes. The LGUs in the shortlist indicated that they rely on compliance with guidelines of DBM and COA to ensure proper management control over expenditure management. These include: Cash disbursements are contingent on budget appropriations and allotments. Project statements and supporting documents are prepared and reviewed before appropriations are approved by the LGU Budget Officer. Special funds, specifically the Special Education Fund and Trust Funds, are strictly maintained and the funds are spent on specific purposes mandated. Special accounts for economic enterprises, debts, and development projects are strictly maintained and the funds are spent on the specific purposes for which the accounts were created. Separate statements of income and expenditure are maintained for economic enterprises. o Special appropriations. Most of the LGUs in the shortlist indicated that they maintain special appropriations for debt service and remittances to national 27
government agencies in order to prioritize those expenditures. Great importance is placed on maintaining strong relationships with government financial institutions and national government agencies and these appropriations are never compromised for any reason. Debt amortization schedules are maintained and updated by the LGU. 7. Compliance with Accounting System and Financial Reporting Standards (Accounting functional area) o Compliance with COA guidelines for accounting and financial reporting. For the LGUs in the shortlist, compliance with the accounting and reporting standards of COA’s New Government Accounting System (NGAS) is the primary concern. o Availability of financial information. Most LGUs in the shortlist indicated that financial information, such as reports on revenue generation, IRA receipts, and expenditures, are displayed in publicly accessible places such as bulletin boards in the LGU administration building, police station, markets, churches, internet, etc. o Implementation of Electronic-NGAS. Several LGUs indicated that they have adopted or are in the process of adopting E-NGAS, which is the computerized accounting system of COA that is recommended but not required by COA. This system has simplified and streamlined the accounting processes of the early adopters among the LGUs. o Inventory of fixed assets. A very common but important accounting issue faced by LGUs (including all the LGUs in the shortlist) is the determination of an accurate and up-to-date inventory for the Property, Plant, and Equipment of the LGU. However, a few LGUs in the shortlist are addressing this issue by creating Inventory Committees or Task Forces to conduct a complete inventory of Property, Plant, and Equipment and align the accounts of the Accounting and General Services Departments. Once completed, these LGUs will finally have accurate accounting and technical information regarding their fixed assets. 8. Link between Planning and Budgeting (Budgeting and Other Finance-related functional areas) o Budgets operationalize local plans. The LGUs in the shortlist indicated that they strive to operationalize the local development plans of the LGU through the annual budgets. Various planning documents are regularly developed and updated with multi-sector participation. These include: Local Development Plans are developed by a multi-sector Local Development Council and are utilized to develop annual budgets. These plans set out Local Chief Executive’s vision for the LGU and are developed into multi-point agenda, which is the key basis for prioritizing expenditures. Multi-year Local Development Investment Programs are developed with multi-sector participation and are utilized to develop Annual Investment Plans. The strategic planning for capital investments is led by the Planning and Development Department of the LGU or a special body such as a Provincial Development Investment Group. 9. Practices on Procurement (Other Finance-related functional areas) o Safeguarding valuable assets. The LGUs in the shortlist indicated that they implement various practices to secure valuable assets. These include: Memoranda of Receipt are issued to department heads when equipment and 28
supplies are issued to a department. Valuable property, plant, and equipment are insured to safeguard these assets. Auxiliary Police are used to safeguard major properties and assets. Implementation of E-procurement. Several of the LGUs in the shortlist indicated that they have implemented of E-Procurement system, which has allowed them to procure many types of supplies through DBM at a generally lower cost.
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10. Financial Performance Management (All functional areas) o Internal financial reporting. The LGUs in the shortlist indicated that they rely mainly on internal financial reports to monitor the financial performance of the LGU. Regular revenue and expenditure variance reports (weekly or monthly) are generated to analyze budget variances. Variances between actuals and targets are investigated and addressed by the department head concerned. The Local Chief Executive is kept abreast of financial issues that emerge. As per COA guidelines, the LGU Accounting prepares quarterly trial balance sheets and statements of income and expenditures. These are analyzed to identify potential financial management issues within the LGU. o Other mechanisms to monitor performance. One LGU in the shortlist utilizes a separate body to monitor development projects. A multi-sector Project Monitoring Committee monitors the progress of all development projects funded by the Local Development Fund and by national government agencies.
Organizational Competency Areas Competencies 1. Organizational (Departmental) Philosophies o Coordination of departmental mandates. Several LGUs in the shortlist indicated that departmental mandates of the LFC departments are closely coordinated among staff members and divisions through regular staff meetings (weekly or monthly) and periodic values orientation seminars. o Mission and vision. Some of the LGUs in the shortlist indicated that they have specific mission and vision statements for each LFC department that are focused on the specific functions of each department. 2. Leadership Styles o Promoting innovations. Most LGUs in the shortlist indicated openness towards innovative practices that can improve internal processes and service delivery. These are generated through two sources: Staff members are encouraged to provide suggestions for innovative ideas through regular staff meetings and informal settings. Innovations are identified from external trainings attended by management and staff. Staff members that underwent external training are encouraged to implement and disseminate innovative practices that they may have learned during the external training. o Clarifying standards and targets. The LFCs of the LGUs in the shortlist indicated that they utilize various processes to clarify standards and targets for their departments. These include: Individual staff targets are brought up during regular staff meetings when necessary. Individual standards and targets for each staff member are reviewed semiannually during formal performance evaluations. Departmental targets are clarified with staff at the beginning of the year during annual strategic planning meetings. Local Chief Executive conducts regular meetings with department heads to review progress on projects and programs. o Participatory management. A couple of LGUs mentioned that they espouse “participatory management” where staff members are directly involved in analysis and the decision-making process for the department. 3. Structure and Staffing Practices o Staffing practices. The LFCs of the LGUs in the shortlist indicated that they focus on strengthening the skills of their staff members and placing them in positions where they can excel. Specific practices include: All new hires are required to undergo training and orientation conducted by the department and by the Civil Service Commission. Efforts are made to hire new staff members that have an educational background or experience in the functional areas of the positions that need to be filled. There is strict compliance with Civil Service Code guidelines and qualifications for positions. Job rotation is implemented as a management control measure and also to find best fit for each staff member. Frequency 4
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4. Rewards and Incentives o Staff incentive programs. Most LGUs in the shortlist indicated that they implement Productivity Incentive Programs provided for by law that provide employees with token annual bonuses. However, there are various nonmonetary programs to reward good performance by staff members and provide added motivation to improve performance. Model Employee or Employee of the Year awards are awarded to top performers. Service awards and plaques of appreciation are given to reward long-term service to the LGU. Awarding ceremonies are held during fiestas and parades to publicly recognize exemplary employees. One LGU implements a Performance Rewards and Incentives Service Excellence (PRAISE) program to recognize top employees for regardless of function (including administrative and maintenance staff). This program is used to motivate all employees and stress that everyone’s contributions are important. 5. Internal Process Improvements in Fiscal Offices o Regular meetings. Several LFCs in the shortlist of LGUs indicated that they utilize regular staff meetings to identify bottlenecks and issues in work processes. The Local Chief Executive also plays a critical part in initiating and endorsing process improvements within the LGU. o Process flow charts. A few LGUs indicated that flow charts are used as a tool to reference all major work processes and are reviewed periodically to identify lags and problems and seek constant improvement. 6. Accountability Mechanisms o Individual accountability. Most of the LGUs in the shortlist indicated that accountability for each staff member is based on job description and is reviewed semi-annually during departmental performance evaluations and performance reviews conducted by the Human Resource Department. Staff members are held accountable for their actions and are reprimanded as needed. o Group accountability. A couple of LGUs in the shortlist indicated that departmental goals and strategies are discussed with staff members during regular meetings to create a group effort and a collective pursuit of departmental goals. Also, organizational charts are maintained to show how the work within each department is delineated and how the role of each staff member is important. 7. Feedback Mechanisms o Internal feedback. The LGUs in the shortlist indicated that they rely on several mechanisms to generate internal feedback. These include: Regular staff meetings where formal feedback is solicited from staff members. There is a Grievance Committee that reviews serious issues raised by staff members. Staff are encouraged to provide feedback and suggestions in informal settings as well. o External feedback. For a few LGUs in the shortlist, the solicitation of external feedback from the general public is usually initiated by the Local Chief 31
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Executive. The efforts mentioned by the LGUs include: A suggestion box is located in municipal hall for the public to provide feedback. This is opened only by the Office of the Local Chief Executive who then contacts the pertinent department head to address any issues that need to be addressed. In one LGU, Local Chief Executive actually provides mobile phone number to the general public so they can contact him about specific issues. In another LGU, there is an initiative organized by local non-government organizations (NGOs) and supported by the LGU called the Performance Service Evaluation Program, which evaluates the performance of LGU, gathers feedback from the public, and directs the feedback to department heads. This is supported by grant funds from an international donor. 8. Internal Linkages (within the LGU) o LFC internal coordination. Several LGUs in the shortlist indicated that internal coordination within the LFC is achieved through the regular meetings of the LFC. Department heads also communicate through formal (e.g. memos) and informal means (e.g. text messaging). o LGU-wide coordination. For a couple of LGUs in the shortlist, the Local Chief Executive conducts periodic meetings with department heads to review progress on projects and programs and ensure close coordination between departments. 9. External Linkages o Professional relationships. For several LGUs, they indicated that the department heads of the LFC departments are active members of their respective associations (e.g. Philippine League of Local Treasurers), which are a source of continuing education and innovative ideas. Department heads of LFC departments also usually maintain close ties with their fellow department heads in other LGUs in the region to share best practices. o External training. Several LGUs in the shortlist indicated that they actively pursue training opportunities for officers and staff to facilitate capacity-building and skills development. These include trainings conducted by oversight national government agencies such as DOF, COA, and DBM as well scholarships for deserving employees. o Relationships within the local community. Several LGUs in the shortlist indicated that they place great value in maintaining close relationships local NGOs, business groups, and community organizations. These various stakeholders are included in multi-sector meetings, particularly during development planning and budget preparation. o Developing external relationships. A couple of the LGUs in the shortlist indicated that they value their external relationships very greatly. For LFC departments, it is important to maintain good relationships with oversight national government agencies such as DOF, COA, DBM, and DILG to make sure that the LGUs are in harmony with national government mandates. The LGUs also seek out national government agencies and donor organizations to generate potential grant revenues for the LGU. o Adopting external innovations. A couple of LGUs in the shortlist indicated that they actively seek to find innovative practices by organizing education tours to visit other LGUs with innovative practices that can be replicated (e.g. “Lakbay Aral”). Official visits are sometimes organized to bring in officers of the other 32
LGUs to share their positive experiences about innovative programs that the LGU is proposing to implement. This helps create buy-in with the Sangguniang Bayan and the general public. 10. Ethical Standards o The LGUs in the shortlist indicated that they make use of various practices to create an ethical work environment. These include: The ethical standards of the Civil Service Code are complied with and enforced. Employees have vows and codes of conduct and new hires are oriented on ethical standards. Staff orientations and seminars on ethics and public accountability are conducted by individual departments and the Human Resource Department. A formal values formation program is implemented, including regular bible readings and visitations by clergy to provide moral guidance. The Local Chief Executive supports the enforcement of ethical standards and sets an example for the LGU.
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VIII. Phase 4 – Developing a Framework for Assessing Exemplary Practices in LFM
The objective of this phase of the project is to develop a framework for assessing exemplary practices of LGUs in financial management. In the first stage of this phase, a literature review was undertaken to summarize best practices in LFM that have already been documented in past research. In the second stage, the best practices from the literature review were integrated with the good practices documented by this study from the field research in Phase 3. This then served as the basis for identifying potential benchmark practices in LFM. Finally, these proposed benchmarks served as the foundation for developing a framework for assessing exemplary practices in LFM. Literature Review of Local Best Practices In this stage, a review of existing documentation on LFM practices that have been recognized by different organization as exemplary or exceptional was conducted. Previous research by international development agencies (such as the World Bank and Asian Development Bank), internationally-funded projects, and academic institutions were reviewed along with documentation from national government agencies and foundations (such as the Galing Pook Foundation, DOF-BLGF, and DILG). The local best practices were organized under the same financial management areas that were used in the Phase 3 of the project. However, the documented practices were concentrated in several financial management areas and were not identified for all 10 areas that were utilized in the field research. This is an indication that past research has mainly focused on a few specific areas of LFM, particularly on the area of Treasury. The references for each documented case study are indicated in parenthesis. 1. Generation of Revenue from Traditional Sources o Computerized tax-mapping Cabanatuan City (World Bank and Asian Development Bank). Cabanatuan City developed a geographic information system via aerial photography maps that doubled the city’s number of registered properties and increased their revenues. Cabanatuan City assigned each building a unique number, and also started a door-to-door campaign. Naga City (World Bank and Asian Development Bank). Naga City started a geographic information system with the aid of USAID. Its pilot system, called the Building Information Database System, was developed such that each building was given a unique property index number so that all building information could be recorded and accessed. Quezon City (Amatong, 2005). Quezon City adopted a geographic information system costing PhP 10 million in order to tax map real estate properties. This enabled the proper valuation of properties and guided the Assessor’s Office in updating real estate assessment. This initiative helped to increase real property tax collections by 12 percent and 14 percent in consecutive years. Santa Rosa, Laguna (Amatong, 2005). Santa Rosa implemented tax-mapping and computerization as part of a Real Property Tax Administration Program that targeted an increase in local revenues. Later on, Santa Rosa also adopted a geographic information system. They completed manual tax mapping in 1994, computerization of 59,496 real property units in 1996, and the geographic information system in 1998. As a result, Santa Rosa recorded an increase of real property units from 35,137 in 1995 to 77,959 in 2000, and then to 95,201 in 2004. Collections almost doubled after the tax-mapping and then almost tripled after computerization. Santa Rosa was also able to sustain an average collection efficiency of about 72 percent. Santa Rosa also improved its management of tax records through the conversion of manual records into a digital database
Computerization of records Bulacan City (Kaban Galing, Striving for Good Local Governance, 2001). Bulacan computerized its real property tax administration to eliminate the long process of preparing documents for property assessment. What once took 30 minutes to process for the real property tax unit, now took only 2 minutes afterwards the computerization. Moreover, assessment became more accurate. In addition, due to the geographic information system, Bulacan was able to map out various properties and to reclassify them. Quezon City (Amatong, 2005). An independent private firm was used by Quezon City to encode tax declaration and payment records from 440,000 real property owners. Index card entries were converted to a computerized information system. A key aspect of this project was that it was kept confidential in order to prevent employees from changing any entries. This resulted in reducing processing transactions of from three to five hours to just 30 minutes. This initiative helped uncover tax delinquencies to an estimated PhP 10.7 billion. San Fernando, Pampanga (World Bank and Asian Development Bank). San Fernando implemented an Operation “Suyod” wherein the Treasurer’s Office, with the aid of village officials, identified businesses and established whether or not they paid their taxes. This information was kept in a database and was regularly updated. Villasis, Pangasinan (Kaban Galing, Striving for Good Local Governance, 2001). Villasis computerized all of its operations. They trained units, used off-the-shelf, standard programs, developed their own software, acquired licensed software, and upgraded equipment. As a result of the computerization, they have eliminated typing, the payroll system is now prepared by one person per day, there is no need for draftsmen, civil certificates are issued quickly, and many of the personnel are computer literate. Management information systems Cebu City (Kaban Galing, Transforming the Local Economy, 2001). In order to reduce opportunities for graft and tax evasion, Cebu implemented a computerized taxation system established by the Management Information and Computer Services Department. This system computed assessed and market values of physical properties, printed real property tax clearances, printed notices of delinquency and real property ledgers, issued real property tax clearance, traced the history of a real property tax, computed business taxes and regulatory fees, dispatched appropriations, allotments, and expenditures, prepared the payroll, and monitored traffic violations. This system has become an important tool to highlight sources of graft and to identify corrupt tax officials. Quezon City (Amatong, 2005). Quezon City implemented a Central Management Information System which provides real-time taxpayers data. A computerized monitoring and reporting system was also developed. Daily tax receipts and cash reports are created and then submitted to the Mayor and Treasurer. Employees that may be involved with tax anomalies were imposed sanctions (e.g. transfer, filing of charges, dismissal). Information and education campaigns Lipa City (Cuenca and Dometita, 2004). To sustain increasing revenues, Lipa City’s tax information and collection campaign was intensified. This required them to send regular notices of tax, post information in public spaces, and conduct house-to-house campaigns. Moreover, field audits were accomplished in order to verify the authenticity of declared gross receipts of establishments. This was useful in assessing real properties, which lead to the discovery of new buildings and such. Quezon City (Amatong, 2005). Quezon City maintains an interactive relationship between with the Quezon City Chamber of Commerce and Industry. Due to their dialogue, they were able to co-found the Quezon City Registry Databank. The Chamber is also a partner in Quezon City’s recognition of Quezon City’s top Business Taxpayers.
Moreover, the Mayor also conducts conferences with the businessmen regarding business-oriented programs with investment in mind. Real property tax practices Quezon City – Improved customer service for taxpayers (Amatong, 2005). To make it easier for taxpayers to assess and pay their taxes to the city, Quezon City improved customer service with air-conditioned lounges, coffee and tea, telephones, and electronic numbering. Moreover, Quezon City conducted a recognition program for its 100 top Real Property Taxpayers. Quezon City – Incentives for taxpayers (Amatong, 2005). To increase its revenues, Quezon City had tax incentives for its prompt taxpayers: a 20 percent discount for annual taxpayers and a 10 percent discount for quarterly taxpayers. This triggered an increase of 30 percent of taxpayers availing of the annual discount and an increase of 10 percent of taxpayers availing of the quarterly discount. Before the deadline, 60 percent of real property taxpayers already paid in full. Quezon City – Public auction of delinquent properties (Amatong, 2005). To remove the accrued receivables from delinquent Real Property Tax accounts, Quezon City conducted a public auction. A noticeable offshoot of this public auction is that before auction, delinquent real property taxpayers went to the City Hall and proposed settlement of at least 30 percent downpayment with the balance payable within six months. This auction encouraged an estimated 52 percent of delinquent property owners to settle their accounts. It also increased the asset base since properties unsold to bidders were opted to be purchased by Quezon City. This also increased taxpayer awareness on responsible property ownership. Santa Rosa, Laguna – Judicial remedies, taxpayer incentives, and customer service (Amatong, 2005). Santa Rosa improved tax collections by sending out delinquency notices every week, issuing Warrants of Levy for delinquent taxpayers, and implementing raffles. These also improved the quality of services to taxpayers due to the quicker transaction time and regular updates through bills. Business tax practices Lipa City – One Stop Shop (Cuenca and Dometita, 2004). In conjunction with a computerization project of the Treasurer’s Office and the Permits and Licenses Division, Lipa City implemented a One Stop Shop project wherein representatives from all offices needed to issue Mayor’s permits and taxes were gathered at the City Hall lobby during the first month of the year until the middle of February. Due to this, permit processing took only about a day or two and generated increased revenues from business permits. San Fernando, Pampanga – One Stop Shop (Kaban Galing, Transforming the Local Economy, 2001). San Fernando implemented a one stop tax and business permit payment center presided by the Treasurer’s Office. These one stop shops have representatives from different offices. San Fernando distributed brochures that contained a checklist of things to do. Flowcharts were also displayed in conspicuous areas. Quezon City – Adoption of Presumptive Income Level Approach (Amatong, 2005). Quezon City implemented a Presumptive Income Level Approach that resulted in more realistic and current minimum levels of annual gross sales of specific businesses. Surveys were conducted to determine the minimum levels of gross sales. Based on the studies, the Treasurer then issued a memorandum that established the schedule of minimum gross sales receipts for several businesses. This has become the basis for computation of the presumptive tax for different types of businesses. Since its implementation, people have been paying taxes based on their minimum gross receipts schedules. Quezon City – Alignment of business tax rates with neighboring LGUs (Amatong, 2005). Quezon City adjusted its business tax by aligning its rate with Metro Manila’s. This doubled Quezon City’s income from business taxes.
Quezon City – Coordination of tax processing (Amatong, 2005). To improve the imposition and collection of business taxes, Quezon City issued various requirements for taxpayers that coordinated various tax and revenue processes. These included: 1) directing the Accountant to deduct from collection vouchers of the city’s contractors 75 percent of one percent of gross receipts for business taxes, implying advanced payment of business taxes by contractors; 2) requiring businesses to submit two years worth of financial statements and payments of value-added tax and non-VAT records; 3) requiring business to provide proof of payment for Mayor’s permits and business taxes before the processing of transfer taxes of sellers of land, building, and condominium units; and 4) reconciling the Treasurer’s records with the Land Registration Authority through a crosscheck of official receipts of transfer tax payments. Quezon City – Inspections of businesses (Amatong, 2005). Quezon City conducted door-to-door and street-by-street inspection and verification of business establishments. This aided them in identifying businesses without licenses. Revenue officers also went to business establishments at random. Holistic fiscal management system Gingoog City (Amatong, 2005). The Gingoog Bay Development Council, with the support of various international and local development agencies, developed a strategic plan that outlined strategies to finance its projects and programs. The Council proposed a resource mobilization and generation project that was adopted by the city in a Manual. The Manual set specific goals to improve revenue mobilization and improve customer service to taxpayers. Gingoog City accomplished its goals through numerous strategies, including: i. computerization of records; ii. prompt distribution of notices of delinquency; iii. tax information and community outreach campaigns that utilized Barangay assemblies, house-to-house campaigns, and print and broadcast media; iv. tax-mapping; v. business inspections and the deputization of Barangay treasurers to make collections; vi. training of personnel; vii. collection schemes systemizing the entire tax collection process and the preparation of tax collection procedures in November and December; viii. discounts for taxpayers for prompt or advanced payment; ix. recognition of outstanding taxpayers and Barangays through plaques and certificates; and x. adoption of an Investment Incentive Code which encouraged private investors to invest in Gingoog through tax and fee exemptions. Due to its holistic Fiscal Management System, Gingoog managed to increase its income from local sources. Business tax collections rose from PhP 10.6 million in 2000 to PhP 14.3 million in 2004. Real property tax collections increased from PhP 9.9 million in 2000 to PhP 13.3 million in 2004. Moreover, Gingoog has generated budget surpluses since 2000.
2. Nontraditional Sources of Funds o Bond flotation Boracay, Aklan – Bond Flotation for tourism infrastructure (Amatong, 2005). Aklan issued PhP 40 million in bonds to finance the construction of a jetty port used by tourists traveling to Boracay Island. This amount was calculated as the most that the province could borrow without having the debt service on the bonds interfere with the provision of basic services. The project helped to increase provincial income by over 70 percent over the two year period after completion of the jetty port.
Victorias City, Negros Occidental – Bond Flotation for housing (DILG; Kaban Galing, Transforming the Local Economy, 2001). The municipality of Victorias had a high number of squatters. Bond flotation for finance the construction of housing became an option given a market survey and feasibility study. The demand for the bonds was very strong and there was also much demand for the housing units. The new homeowners took an active part in the project, which helped enhance the local economy of Victorias. Utilizing public-private partnerships Bohol – Privatization of power and water utilities (Amatong, 2005). Bohol was experiencing chronic operational and technical problems running the provincial power and water utilities. Both enterprises needed large investments (estimated at PhP 1 billion) to rehabilitate and strengthen its operations. Given the need for special expertise and additional financing, Bohol decided to privatize its power and water utilities. The privatization has resulted in many improvements: systems loss has been reduced and reliability has improved, quality service has been brought to a bigger area, and access to new water and power utilities technology has been made possible. Mandaluyong City – Public-Private Partnership schemes for public market and commercial complex (Gavino, 1998; Kaban Galing, Transforming the Local Economy, 2001; and Orial, 2002). Mandaluyong City needed to build a public market and a multistorey commercial complex after a fire destroyed its original market in 1990. It was determined that the public market could be financed via a build-transfer scheme, while the commercial complex could be financed through a build-operate-transfer scheme. A contractor developed, financed, and constructed the market and commercial complex. Once construction was completed, the ownership of the building was transferred to the city, which was then responsible for operating, controlling, and supervising the market. For the commercial center though, the contractor would have a lease to operate the complex for 40 years, after which the operation would be transferred to Mandaluyong City. With no initial investment, the city now enjoys additional revenues from taxes, licenses, and fees from the market and commercial complex. San Jose de Buenavista, Antique – Build-Lease-Transfer scheme for new market (Amatong, 2005). San Jose de Buenavista needed funds to construct a new market that had burned down. A build-lease-transfer scheme was utilized to reconstruct the public market. In this case, San Jose de Buenavista developed a master plan from the new market and vendors were invited to provide funds to construct their own stalls following specifications of the master plan. Vendors were required to pay for space rentals (at a steep discount of 60 percent below market rate) for a period of 20 years after which the stalls would be ceded back to the municipality. However, over this period, the vendors would be deemed owners of the stalls and would thus be responsible for paying property taxes. The adoption of this scheme resulted in the fast construction and full occupation of the new market with minimal investment by San Jose de Buenavista. The success of this project encouraged local officials to build a Development Center using the same buildlease-transfer scheme two years later. After both projects become operational in 1994, local income continually grew for the next 10 years, resulting in an aggregate increase in income from locally-generated sources of 317 percent. Maximizing user fees Lipa City (Cuenca and Dometita, 2004). Lipa City aimed to increase its revenues by collecting a garbage fee. The amount of PhP 120 was assessed annually for each household, coinciding with the households’ payment of the water or electric bill. As a result, the city collected new garbage fee revenues of PhP 200,000 every year. Soon after, Lipa City bundled the collection of garbage fees with water and electrical fees and they renamed the new fee as an “environmental management fee.”
Malalag, Davao del Sur (Amatong, 2005; and Kaban Galing, Striving for Good Local Governance, 2001). The Malalag municipal government promulgated a new revenue code in 1993, which authorized the municipality to collect fees and charges for transactions that provided public services. This code specifically included the charging of user fees for medical, dental, and laboratory services. This project allowed partnerships between Malalag and private organizations and other government agencies. A goal of this project was to create a Malalag constituency that was socially responsible, contributive, and self-sufficient. In order to convince the public to pay for these health services, massive information campaigns were conducted by Barangay health workers. The results of this project can be seen in the transformation of social values which were positively indicated by the statistics on the number of patients who have availed of health services for a fee. Moreover, the amount of money raised from user fees also increased. Quezon City (Amatong, 2005). Besides the usual fees, Quezon City received income from the special parking areas, the numbering of residential and commercial buildings, and the issuance of license with sign plates and advertisements. In order to increase nontax revenue collection, Quezon City adopted stricter requirements for permits. 3. Control Mechanisms on Fund Management o Raffle of assignments Quezon City (Amatong, 2005). In order to avoid familiarization of collectors and business owners, Quezon City raffles the assignments of Letters of Authority. Moreover, City Hall offices that dealt with business taxpayers have photo galleries of permanent and casual employees for quick identification of possible complainants. 4. Practices on Procurement o Program for improving procurement process Bacolod City (Kaban Galing, Striving for Good Local Governance, 2001). Bacolod City started the Human Resource Development Program for its employees with aid from the Canadian International Development Agency-Local Government Support Program. This program included a specific module on Supply and Property Management. Through training and a redesign of the module, the city’s procurement process was improved. Signatories were reduced, a resolution was created wherein there would be a General Services Office tasked handle procurement requests, and the overall processing period was shortened. o Maximizing idle assets Munoz, Nueva Ecija (Kaban Galing, Transforming the Local Economy, 2001). Munoz wanted to develop a complete equipment pool through using idle equipment. They achieved this by identifying all their equipment assets and rehabilitating them. As a result, Munoz was able to rehabilitate machines with a value of PhP 36.5 million at a cost of only a PHP 1.7 million. Moreover, for the same year, rental of the equipment earned Munoz PhP 1.7 million. Munoz also received savings that they were able to use to help finance the construction of a market, the purchase of solar dryers, and other public assets. Direct and indirect benefits from this initiative were estimated at PhP 107.5 million over two years.
Proposed Benchmarks in LFM The survey of literature produced a wealth of documented local best practices for LGU financial management that was concentrated mainly in two areas: Generation of revenue from traditional sources and Non-traditional sources of funds. There were also additional practices identified under the areas of Control mechanisms for fund management and Practices on procurement. However, based on the literature review undertaken by this study, the vast bulk of past research on LFM practices in the Philippines has been in the general financial management area of Treasury. In a sense, this is not a surprising finding because while the Local Government Code of 1991 provides LGUs with a vast array of options in local revenue mobilization, LGUs themselves are responsible for determining what specific sources it will leverage to generate local resources. In contrast, the functions of Budgeting, Accounting, and Other finance-related areas (such as planning and procurement) are clearly specified in the Code, NGAS, and other regulations established by oversight agencies such as DBM, COA, and DILG. Benchmarking is a versatile tool that can be used to improve organizations by examining strategies and general approaches that have enabled high-performing organizations to succeed. In developing benchmarks in LFM, it is important to look at documented practices that well-functioning LGUs have used to achieve success in various aspects of financial management. In addition, it is also critical to consider practices and processes that have been mandated by law and/or by regulations of oversight national government agencies given that all LGUs are supposed to abide by these provisions. Given the process undertaken by this research, three criteria are proposed for identifying potential benchmark practices in LFM. • Practices identified both in the literature review and the field research. The results of the literature review, specifically in the areas of Generation of revenue from traditional sources and Non-traditional sources of funds, can be used to screen the findings from the field research from Phase 3 to identify possible benchmark practices in these areas. One approach is to compare the findings from the literature and the field research and identify practices emerged from both activities. These practices can be proposed as benchmark practices in LFM. Mandated practices and processes by oversight agencies. In the functional areas of Budgeting, Accounting, and Other finance-related areas, LGUs are responsible for strictly following the processes dictated by oversight national government agencies, specifically DBM for the budgeting function, COA for the accounting and other finance-related functions, and DILG and the National Economic Development Authority (NEDA) for other finance-related functions. These mandated practices could be considered benchmark practices in these areas. Practices identified with high frequency of responses during the field research. A final method to identify potential benchmarks is to look at practices that were identified with a high frequency by the shortlisted LGUs in the field research. Given the open-ended format of the research method utilized, practices that were identified by a majority of the high-performing LGUs (at least 8) can be considered as potential benchmark practices in LFM.
Using these criteria, this study identified the following practices as potential benchmarks in LFM. The recommended practices are summarized in Table 9 below and are organized using the same financial management areas utilized in the previous activities of the study. The criterion used as the basis for selecting each practice is indicated in the column on the right.
Table 9 – Proposed Benchmark Practices
1. Practices Functionality of the LFC (All functional areas) o Compliance with the duties of the LFC specified in Section 316 of the Local Government Code of 1991. o Maintenance of regular meeting schedule for LFC to periodically review financial issues of the LGU. Generation of Revenue from Traditional Sources (Treasury functional area) o Utilization of all traditional revenue sources provided for by the Code. o Information and education campaigns to reach out to the taxpayer community, inform and educate them of their obligation to pay taxes, and provide them with information on tax information. o Computerized tax-mapping utilizing geographical information systems or other systems to facilitate accurate mapping of real property and business taxpayers. This also involves the computerization of records. o Real property tax practices Aggressive implementation of judicial remedies. Public auction of delinquent properties. Deputization of Barangays to disseminate information and collect real property taxes. o Business tax practices Aggressive implementation of judicial remedies. Adoption of presumptive income level approach to estimating minimum levels of gross income for different types of businesses. Establishment of a one-stop shop so that business permits and taxes can be processed in one day. Nontraditional Sources of Funds (Treasury functional area) o Maximization of revenues from LGU assets (such as income from various user fees, special parking areas, renting out equipment, leasing property, etc.). o Utilization of public-private partnerships (such as build-lease-transfer and buildoperate-transfer) to finance public capital assets. o Utilization of bond flotation to finance large, revenue-generating public capital assets. Control Mechanisms on Fund Management (Accounting and Treasury functional areas) o Compliance with COA guidelines on fund management to ensure proper management control over all transactions. Local Budgeting (Budgeting functional area) o Compliance with DBM guidelines on budget preparation, budget authorization, budget review, budget execution, and budget accountability. Expenditure Management (Budgeting, Accounting, and Other Finance-related functional areas) o Compliance with COA and DBM guidelines to ensure proper management control over expenditure management. o Maintenance of special appropriations in the budget for debt service and remittances to national government agencies in order to prioritize those expenditures. Compliance with Accounting System and Financial Reporting Standards (Accounting functional area) o Compliance with the New Government Accounting System of COA for accounting and financial reporting. This includes the implementation of the electronic NGAS system. o Wide availability of financial information in publicly accessible locations. Criteria o Legal mandate & high frequency (12) o High frequency (9)
o High frequency (12) o Indicated by literature review & field research o Indicated by literature review & field research o Indicated by literature review & field research
o Indicated by literature review & field research
o Indicated by literature review & field research o Indicated by literature review & field research o Indicated by literature review & field research
o Legal mandate & high frequency (12)
o Legal mandate & high frequency (12)
o Legal mandate & high frequency (12) o Legal mandate & high frequency (8)
o Legal mandate & high frequency (12) o Legal mandate & high frequency (9)
Link between Planning and Budgeting (Budgeting and Other Finance-related functional areas) o Budgeting that operationalizes local plans, which are developed with multisectoral participation as mandated by DILG and NEDA, such as Local Development Plans, Local Development Investment Plans, and Annual Investment Plans. This includes the implementation of a Capital Investment Planning process. Practices on Procurement (Other Finance-related functional areas) o Compliance with RA 9184 (Government Procurement Reform Act) as mandated by DBM. This includes the implementation of the electronic procurement system.
o Legal mandate & high frequency (9)
o Legal mandate
10. Financial Performance Management (All functional areas) o Generation and analysis of regular revenue and expenditure variance reports (weekly or monthly) to monitor the financial performance of the LGU.
o High frequency (8)
Proposed System for Award Selection In this final stage of the project, a framework for evaluating LFM practices was developed based on the financial performance measures and proposed benchmarks developed from the research. This proposed framework is intended as the basis for an award-giving process to recognize LGUs that exhibit exemplary practices in LFM. The evaluation and awarding processes utilized by existing award-giving and LGU rating bodies, specifically the Galing Pook Foundation, the Local Government Unit Guarantee Corporation, and the City Competitiveness Ranking Project of the Asian Institute of Management, were reviewed and taken into consideration in developing this framework. TITLE OF AWARD: Recognizing LGUs with Exemplary Practices in Local Financial Management OBJECTIVE: To recognize LGUs nationwide (Luzon, Visayas, and Mindanao) and of all categories (provinces, cities, and municipalities) that exhibit exemplary practices in local financial management. ORGANIZATION: There will be a Board of Directors for the award-giving body that will be responsible for overall governance of the award-giving process and appointment of the panels of judges. There will also be a Secretariat office that will be responsible for the administrative functions of the award-giving process, including collecting application forms and conducting the first-level screening. In the absence of a fully-functioning organization with a Board of Directors and a Secretariat, the responsibilities and functions of these two bodies may first be housed in an academic, research, or nongovernmental institution while the process of establishing an independent award-giving body is being undertaken. PANELS OF JUDGES: 1. Composition. Panels of judges will be organized at two levels: one panel at the national level to oversee the screening process for selecting the national awardees; and three panels at the regional level, representing Luzon, Visayas, and Mindanao, to oversee the screening process in each region and select the LGUs to be submitted for final screening by the National Panel. Each panel must include experts in the various areas of LFM (if possible, including former practitioners) and must have multi-sectoral representation from various stakeholders in the financial management of LGUs (including the business sector, NGO sector, and the academe). The proposed composition of the National Panel of judges will be as follows: o Experts in each of the following areas of local financial management Treasury Budgeting Accounting Procurement Internal Control Expert on the Local Government Code Expert in information systems
o o o o o
Representatives from the business sector Representatives from good governance NGOs Representatives from the academe Expert in international local public finance Former Local Chief Executives
The proposed composition of the Regional Panel of judges should be consistent with that of the national panel but should be composed of regional representatives for each category of membership. 2. Qualifications. The judges to be appointed must have extensive backgrounds and expertise in their respective fields. Furthermore, each judge must have unquestioned integrity and must not have a direct or indirect relationship with any of the LGUs that have submitted applications for the awards. 3. Responsibilities of panels of judges o Regional Panels. The three Regional Panels of judges will be responsible for implementing the screening process at the regional level for the participating LGUs. This will involve: 1) reviewing application forms and supporting documents; 2) conducting field visits and interviews at the LGUs to validate information submitted in the applications; and 3) attending meetings to evaluate the LGUs and select the those that will be selected from each region for consideration in the national awarding. o National Panel. The National Panel of judges will be responsible for implementing the screening process at the national level for the LGUs that were selected by the Regional Panel of Experts. Similar to the other panels, this will involve: 1) reviewing application forms and supporting documents; 2) conducting field visits and interviews at the LGUs; and 3) attending meetings to evaluate and select the national awardees. 4. Tenure of judges. o The judges will be appointed by the Board of Directors of the award-giving body and have tenure of one year. SELECTION PROCESS: Figure 3 – Phases of Selection Process (Total Time Frame – 8 to 10 months)
Phase 1 Call for Applications (Secretariat – 1 to 2 months)
Phase 2 First-level Screening – Review of Applications & Financial Data (Secretariat – 1 to 2 months)
Phase 3 Second-level Screening – Review of Applications & Site Validation (Regional Panels of Judges – 2 to 3 months)
Phase 4 Third-level Screening – Review of Regional Selections & Site Validation (National Panel of Judges – 2 to 3 months)
1. Call for applications o Solicitation. Applications will be solicited from LGUs nationwide through the assistance of the various leagues of LGUs (provinces, cities, municipalities, and Barangays). The applications will be submitted to the national Secretariat for the award-giving body, which will be responsible for conducting the first-level screening. Requirements for submission. Participating LGUs will be asked to submit the following: Application forms that requests background information on the LGU (name of Local Chief Executive and members of the LFC, location, socio-economic data, demographic data); Detailed Statements of Income and Expenditures for the past three years; Audited Annual Reports for the past three years; and Annual budget documents for the past three years, including Local Development Plans and Annual Investment Plans. Time frame. Approximately one to two months should be allocated for this activity.
2. First-level Screening of Application Forms o Objective The purpose of the first-level screening is to vet the applicant LGUs and identify those that have exhibited good financial performance in over the past three years. Only those applicants that achieve a minimum level of financial performance will be eligible to proceed to the next phase of the selection process. While the objective of the award process is to recognize LGUs that exhibit exemplary practices in LFM, it is critical that the LGU candidates have a history of good financial performance. Ultimately, good financial performance, as measured using actual financial data, is the main indication that the LFM practices of the LGU actually produce the good results. o Screening by category of LGU. The first-level screening will be done at the Secretariat level of the award-giving body. All application forms will first be divided into three categories: provinces, cities, and municipalities. The application forms and supporting documents of all the applicant LGUs will then be screened to select the pool for each category of LGUs that will move on to the second-level screening at the regional level. Criteria for screening. The following criteria will be used to screen the applications for each category of LGU: Application forms and supporting documents must be complete. Revenue criteria: i. Locally-generated revenues must be increasing over the past three years. ii. The IRA dependency ratio must be decreasing over the past three years. Expenditure criteria: i. Total expenditures must be increasing over the past three years. ii. The personal services ceiling must be below 45 percent. Liquidity criteria: i. The current ratio must be at or above the median of all applicant LGUs under that category (i.e. the median for applicant provinces, cities, or municipalities).
ii. The quick ratio must be at or above the median of all applicant LGUs under that category. Leverage criteria: i. The debt servicing ratio must be below 20 percent. Profitability criteria: i. Return on assets must be at or above the median of all applicant LGUs under that category. Budgeting criteria: i. Budgets have to be balanced and enacted on-time over the past three years. Accounting criteria: i. AARs must have at least a qualified opinion from COA. o Output of first-level screening. The output of the first-level screening will be three pools of LGUs assigned to each region of the country: Luzon, Visayas, and Mindanao. The LGUs that move on to the second-level screening will be organized by category of LGU: province, city, and municipality. Time frame. Approximately one to two months should be allocated for this activity.
3. Second-level Screening at the Regional Level o Objective. The objective of the second-level screening is to select the top LGUs for each region of the country. The LGUs that pass this stage of the process will move on the thirdlevel screening, which will select the final National Awardees. Review of application forms. The second-level screening will be conducted by the respective Regional Panels of judges for each region of the country. The Regional Panels will review the application forms and supporting documents of the LGUs that passed the first-level screening by the Secretariat and verify that the LGUs are proper candidates for screening at the regional level. Site validation Field visits and interviews will then be organized to each LGU in the region. Members of the Regional Panel will meet with LGU officials to evaluate their LFM practices according to the proposed benchmark practices identified in this study (see Table 9). The interviews will also be used to identify innovative practices adopted by the LGU. Additional documentation to support the various LFM practices identified by the LGUs will be collected. The site validation may also include interviews with local stakeholders, such as businesses, NGOs, and community organizations, to validate the claims of the LGUs. A site validation report will be prepared for each LGU to be visited. o Scoring and Criteria for Evaluation. After the field visits, the Regional Panel will convene as a body and score the LGUs on each of the 10 financial management areas utilized by the study (see Table 9). Scores ranging from 1-10 will be assigned for each of the financial management areas and will be based on the following criteria: 50 % – Achievement of the proposed benchmark practices for each financial management area; 25 % – Adoption of innovative practices that exceed and/or improve upon the proposed benchmark practices; and
25 % – Overall effectiveness and efficiency of LFM practices and their contribution to a high-level of financial performance. o Output of second-level screening. The scores for each LGU will be accumulated (with a top score of 100) and rankings will be made by each Regional Panel for each category of LGU. The top ranked provinces, cities, and municipalities (from five to ten LGUs for each category) will be identified for each region and will move on to the third-level screening at the national level. All the evaluation and scoring forms will be filed for documentation and passed on to the National Panel for the next screening stage. Time frame. Approximately two to three months should be allocated for this activity.
4. Third-level Screening at the National Level. o Objective. The purpose of the third-level screening is to identify the final group of National Awardees from the pool of LGUs that have passed the second-level screening conducted by the Regional Panels of judges. Review of regional selections. The third-level screening will be conducted by the National Panel of judges. The National Panel will review the application forms and supporting documents of the LGUs that passed the second-level screening of the Regional Panel along with the scoring sheets, evaluation forms, and other documentation produced by the Regional Panels. Site validation. The National Panel will then organize field visits and interviews to the LGUs that they determine to be candidates for national awards. Members of the National Panel will meet with LGU officials to evaluate their LFM practices according to the proposed benchmark practices and to clarify concerns raised from reviewing the outputs from the second-level screening. The interviews will also be used to validate the innovative practices adopted by the LGU that were identified in the second-level screening. Additional documentation to support the various LFM practices identified by the LGUs will be collected. This activity may also include interviews with local stakeholders, such as businesses, NGOs, and community organizations, to validate the claims of the LGUs. A site validation report will be prepared for each LGU to be visited. o Final scoring. After the field visits, the National Panel will convene as a body and score the LGUs on each of the 10 financial management areas utilized by the study. Similar to the process for the second-level screening, scores will be given from 1-10 for each of the financial management areas and will be based on the same criteria: 50 % – Achievement of the proposed benchmark practices for each financial management area; 25 % – Adoption of innovative practices that exceed and/or improve upon the proposed benchmark practices; and 25 % – Overall effectiveness and efficiency of LFM practices and their contribution to a high-level of financial performance. Selection of National Awardees. The scores for the each LGU will be accumulated (with a top score of 100) and rankings will be made by the National Panel for each category of LGU and for each region. The top ranked provinces, cities, and municipalities (from five to ten
LGUs for each category) will be identified for each region and these will be the basis for selecting the final National Awardees. All the evaluation and scoring forms will be filed for documentation for future reference. o Time frame. Approximately two to three months should be allocated for this activity.
AWARDING: An awarding ceremony will be held to recognize the National Awardees for the “Recognizing LGUs with Exemplary Practices in Local Financial Management” award. Depending on the resources of the awardgiving body, the National Awardees may receive cash prizes, plaques, trophies, and/or other forms of recognition. POST-AWARD PROGRAMS: o The LGUs who were selected as National Awardees may participate in a “Lakbay Aral”-type of a program wherein they can serve as centers for learning in LFM for their respective regions. With the cooperation with the various leagues of LGUs, LGUs seeking to improve their LFM practices and their financial performance can visit the National Awardees and talk to the local officials of the LGUs to understand the practices that they implement to achieve good financial results. If the awarding process becomes an annual program, National Awardees that consistently exhibit exemplary LFM practices every year can be awarded with another designation, such as “Awardee for Continuing Excellence in Local Financial Management.” This will ensure that there won’t be the same National Awardees every year and will also create motivation for other LGUs to aspire to achieve this higher objective.
Limitations of Study
In addition to the data limitation enumerated in the Phase 2 section of the report, there were several other limitations to this study. 1. Small sample size for quantitative analysis. The small size of the sample resulted in a high margin of error for the sample group of LGUs that were part of the data analysis of Phase 2. As a result, quantitative benchmarks for the key measures of financial performance cannot be established based on the sample group used in this study. 2. Small shortlist of LGUs for field research. It is possible that a larger inventory of good practices and competencies in LFM would have been developed from Phase 3 if more LGUs had been included in the shortlist of LGUs for the field research. Limiting the shortlist to 12 LGUs meant that only four LGUs of each type could be visited, which prevented a more thorough review of practices by type of LGU and possibly even by class of LGU within each type. 3. Limitations of field research methodology. Questionnaire. Given the open-ended format of the questionnaire for the focused group discussions and the fact that there seven different researchers that conducted the field work among the 12 shortlisted LGUs, there are likely to have been differences in the follow-up questions and the interviewing techniques used by the researchers. This likely affected the final responses generated from the subjects. Also, the practices documented from the field research reflect only the actual responses from the subjects. It is possible that an LGU actually utilizes a good practice that was documented from the field research but did not indicate this during the field interviews with them. This likely affected the frequency of responses indicated in Phase 4. Scheduling of interviews. Due to scheduling problems, there were also LFC department heads in several LGUs who were not able to participate in the research. In most cases, representatives from the LFC department participated in the focused group discussion in lieu of the department head. For three LGUs (Laguna, North Cotabato, and Limay, Bataan), the interviews only included three LFC representatives. Also, in some cases, interviews were done separately for LFC department heads that were not available for the focused group discussions. Focus on LFC. The subjects of the field research were limited to the members of the LFCs of the LGU. Other important stakeholders in the financial management of LGUs were not included in the research. This includes both internal stakeholders, such as the Local Chief Executive, other department heads, staff members of the LFC departments, and external stakeholders, such as major taxpayers, NGOs, and local community groups. Feedback from these other stakeholders could augment and validate the practices and competencies identified in the field research. 4. Focus on LFM practices. The methodology of the research was primarily concentrated on identifying good financial management practices of LGUs. There was also data gathered on organizational competencies but these were not the main focus area of the research. Organizational competencies are necessary elements for effective financial management and require more specialized instrumentation than was used by this research. There is clearly an opportunity for exploring this specific area of LFM in future research.
Recommended Next Steps
1. Establishing an award-giving body and system for recognizing LGUs with exemplary practices in local financial management. Preliminary steps should be taken to determine the feasibility of establishing an independent organization that can implement the award system proposed by this study. If establishing an independent organization is determined to be infeasible, the possibility of housing the process within an existing academic, research, or non-governmental institution should be explored. Finally, consideration should also be given to the frequency of awarding, whether it will be on an annual or a less-frequent basis. 2. Establishing quantitative benchmarks for LGU financial performance. At present, a widescale quantitative analysis of LGU financial data does not exist that can be used to establish benchmarks in the various areas of financial performance. Generating large-sample statistical data on revenue, expenditure, liquidity, asset turnover, leverage, and profitability indicators of LGUs would facilitate the establishment of medians for different indicators for each type of LGU (provinces, cities, and municipalities). These could then be used to establish quantitative benchmarks that can be the basis for evaluating LGU financial performance. This kind of analysis would greatly complement the system for evaluating LFM practices proposed by this study. 3. Further research on best practices for budgeting, accounting, and other finance-related areas. The review of literature conducted by this study on documented best practices of LGUs in the field of LFM revealed a high concentration of previous research on the Treasury function. While there is a wealth of research on revenue mobilization practices of LGUs, there is relatively less documentation on best practices in the other areas of LFM. This indicates that research on budgeting, accounting, and other finance-related best practices represents fertile ground for future study in the Philippines. 4. Identifying good practices in LFM of Barangays. While this study focused only on the three large categories of LGUs (provinces, cities, and municipalities), it recognizes the important role that Barangays play in governance and delivery of public services at the local level. Future research in the field of LFM in the Philippines would benefit from expanding the analysis to the Barangays, which maintain an independent organizational and financial structure from the other types of LGUs. 5. Focusing on LFM organizational competencies. Organizational competencies are necessary elements for effective financial management and require more specialized instrumentation than was used by this research. There is clearly an opportunity for exploring this specific area of LFM in future research.
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