By:
GERIEBETH G. DELA TORRE
Acting Director, Local Government Units Operations Service
Bureau of Local Government Finance
Department of Finance
Reference
(https://www.unescap.org/sites/default/files/PHILIPPINES_presentation.pdf)
OUTLINE
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Fiscal Decentralization
Legal Framework
Certificate of Net Debt Service Ceiling and Borrowing Capacity
Memorandum Circular on Updated Guidelines
Statistics of LGU Indebtedness
Projects through Credit Financing
FISCAL DECENTRALIZATION
Fiscal Decentralization refers to the public finance
dimension of intergovernmental relations. It specifically
addresses the reform of the system of revenue source and
expenditure functions transfers rom the central to subnationalgovernments.
Four
Pillars
Fiscal
Decentralization
=
Allocating
Revenue
Sources
Assignment
of Expenditure
Responsibilities
+
+
Designing
Intergovernmental
Transfers
+
Structuring
Sub-National
Borrowing/
Debt
Source: An Overview of Fiscal Decentralization, World Bank, Feruglio and Anderson, 2008
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Allocating Revenue Sources
Definition
Distribution of financial resources among the different levels of government
Importance
It ensures sub-national autonomy, promotes accountability and ownership,
realizes decentralization efficiency gains and facilitates cash flow management
Basic Principles
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Revenue Potential
Economic Efficiency
Equity
Administrative Feasibility
Politically Acceptability
Responsible LGUFinancing Seminar
08-10 Dec2018
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Assignment of Expenditure Responsibilities
Definition
Distribution of functions among the different government levels
Importance
Financing should follow functions. It is important to clearly define the assignment
of expenditure responsibilities in order to enhance accountability, avoid
unproductive overlap, duplication of authority and legal challenges
Basic Principles
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Efficiency Criteria/Subsidiary Principle
Service of BenefitArea
Economies of Scale
Cultural Values
Size and diversity
Responsible LGUFinancing Seminar
08-10 Dec2018
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Designing Intergovernmental Transfers
Definition
Transfer of finances from the central government to lower government levels
Importance
Revenue assignment never matches the expenditure needs, so intergovernmental fiscal
transfers are often necessary to assure revenue adequacy
Objectives
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Bridging the vertical fiscalgap
Improve horizontal fiscalbalance
Fund national priorities
Compensate for spillovers orexternalities
Responsible LGUFinancing Seminar
08-10 Dec2018
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Structuring Sub-National Borrowing/Debt
Definition
Capacity for sub-national governments to borrow money to cover their expenditure
responsibilities
Importance
Financing capital infrastructure expenditure and tax flows and to foster political
accountability
Sources
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Direct borrowing by central government and on-lending to sub-national tiers
Through a public intermediary a state-owned financial institution
Direct borrowing from capital markets sub-national or foreign markets
Through market decentralization of publicservices
To overcome negative effects of subnational borrowing, the key element is
the design of the regulatory framework under which borrowing powers are
decentralized
Responsible LGUFinancing Seminar
08-10 Dec2018
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Local Government Code
Book II
(Title I & II):
Local
Government
Taxation
Book I
(Section 17):
Basic Services
and Facilities
Book II
(Title III):
Share of LGU
in the Proceedsof
National Taxes
Book II
(Title IV):
Credit
Financing
Allocating Revenue
Sources
Assignment of
Expenditure
Responsibilities
Designing
Intergovernmental
Transfers
Structuring
Sub-National
Borrowing/Debt
.
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.
Responsible LGUFinancing Seminar
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Credit Financing/LGU Debt Management
LGU DEBT MANAGEMENT
The aims of the National Government in controlling the LGU
debts are:
a) Prevent a systemic LGU debt crisis that could force the National
Government to bail out heavily indebted LGUs;
b) Strengthen the implementation of the statutory limit on LGU debts
that was built into theLGC; and
c) Promote responsible and credible debt management among LGUs.
Responsible LGUFinancing Seminar
08-10 Dec2018
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Four Pillars of LGU Debt Management
01
Strengthening of the CertificationProcess
by the DOF-BLGF as to LGU Debt Capacity
(Certification of Net Debt Service Ceiling and Net Borrowing Capacity )
02
03
Code of Good Debt Policy, Management and
Practice for Adoption byLGUs
Credit Rating or Classification System that will
Distinguish LGU’s Degree of CreditWorthiness
(Creditworthiness Rating Index)
04
Credible MonitoringSystem for LGU Debts
(Statement of Indebtedness, Payment andBalances)
Responsible LGUFinancing Seminar
08-10 Dec2018
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Four Pillars of LGU Debt Management
Strengthened Certification by
the DOF-BLGF as to the Debt
Capacity and Due Diligence
Process Followed by LGUS
The certification of debt limits is an important control
point for ensuring that LGUs have undergone a process
and have stated their debt policy, determined the most
suitable financing, matched their debt financing to their
capital investment program, etc.
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08-10 Dec2018
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Four Pillars of LGU Debt Management
Code of Good Debt Policy, Management and Practice for LGUs
The financial market needs assurance thatLGUs understand
and follow established norms and processes for meeting debt
service commitments and have an internalorganization for
managing debts including ethical considerations thatare
required of LGU leaders
because they are using other people’smoney.
Adoption by LGUs of a Code of Good Debt is
voluntary andwill require demonstrating the LGU’s
commitment through internal controls, processes and selfimposed standards of performance.
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08-10 Dec2018
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Four Pillars of LGU Debt Management
LGU Credit Rating or ClassificationSystem
The financial markets and banks want to
know the creditworthiness of LGUs that go
out to borrow or issue bonds. It is costly for
financial institutions to gather information
on each LGU. A credit classification system
will enable bond investors and bank lenders
to compare credit standing of LGUs prior to making
their financial commitments to them.
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08-10 Dec2018
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Four Pillars of LGU Debt Management
Monitoring of LGUDebts
A core responsibility of DOF is to determine the
systemic risks of LGUdebt levels.
There is no bankruptcy law for LGUs that would
provide legal protection for the people of an LGU
whoseInternal Revenue Allotment (I will be
collected by banks or bondholders in the event of
default by the LGU. By monitoringthe systemic
risks of LGU debt levels, DOF can give early
warning signals to investors and lenders including
regulators like the BSP.
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08-10 Dec2018
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LEGAL FRAMEWORK
BUREAU OF LOCAL GOVERNMENT FINANCE
Mandated to develop and promote plans and programs for the
improvement of resource management systems, collection
enforcement mechanisms and credit utilization schemes at the local
levels.
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LEGAL FRAMEWORK
Sec. 296 of LGC, Art. 395 LGC IRR
Sec. 324 of LGC
LGUs may create indebtedness and avail of credit
facilities for local infra and socio-economicdevelopment
projects with government or private banks and lending
institutions
Appropriations of 20% of the LGU’s regular income for
debt servicing
Art. 403 LGC IRR
EO 127
DOF mandated to render technical assistance to any LGU
in the availment of credit facilities, flotation of bonds,
contracting of loans and issue guidelines for the purpose
BLGF to develop and promote plans and programs for the
improvement of resource management systems,
collection enforcement mechanisms and credit utilization
schemes at the locallevels
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08-10 Dec2018
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EX-ANTE CONTROL AND REGULATIONS
LGU debt service ceiling and net
borrowing capacity determinedand
certified by BLGF
DOF/BLGF Regulations
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enhance the access of all LGUs to credits and other forms of
indebtedness
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Favorable Monetary Board opinionon
the monetary and balance of
payments implications
Local legislative authorization and
inclusion in the annual investment
plans and priorities arerequired
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Local Finance Circular (LFC) No. 1-2000: issued to
LFC No. 01-2012: Amended the previous LFC to ensure a
more accurate and appropriate evaluation of the maximum
borrowing and debt servicing capacities of all LGUs
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LFC No. 01-2014: Reduced requirements for 171 LGUs
affected by Typhoon Yolanda, from 12 to 4 requirements, and
extending the validity by 1year
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DOF Department Order No. 054.2016: Streamlined
requirements and process: 4 documents; Well-defined
computational parameters; Improved certificationprocess;
Verification/ validation delegated to BLGF RegionalOffices
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LEGAL BASIS FOR CERTIFICATION OF NET DEBT
SERVICE CEILING AND BORROWING CAPACITY
BSP CIRCULAR LETTEROF
2002
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“… all banks andNBQBs
shall require each
borrowing LGU to
present a certificate of
its debt service and
borrowing capacity,
duly certified by BLGFDOF.”
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BSP CIRCULAR NO.926,
SERIES OF 2016
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Required document for
the request for
Monetary Board
Opinion
08-10 Dec2018
DOF DEPARTMENTORDER
NO. 054.2016
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Streamlining the
Certification of Net Debt
Service Ceiling and
Borrowing Capacity of
Local Government Units
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CERTIFICATE OF NET DEBT
SERVICE CEILING AND
BORROWING CAPACITY
Local Government Unit
(LGU)
LGU LOAN APPLICATION PROCESS
Local Council, through a
Resolution/Ordinance, authorizes
the Local Chief Executive to
negotiate and contract loans and
other forms of indebtedness
Bureau of Local Government Finance
(BLGF)
Lending Institution
BLGF-RO
Pre-Evaluation/Setting
of Terms and
Conditions
BLGF-CO
Evaluate LGU request and
supporting documentary
requirements
No
Submit Letter of Intent and negotiate
with the lending institution
Submit to BLGF a written request for certification of LGU Net Debt
Service Ceiling and Borrowing Capacity, with complete supporting
documents pursuant to DOF Department Order 054.2016
Documents
Complete/
Compliant?
Yes
Evaluate financial
reports of the LGU
Submit the required
additional documents
Re-negotiate with the lending
institution for lower interest rate, longer
tenor, or consider other lending
institutions, then re-submit to BLGF
Compute preliminarily LGU Net Debt Service
Ceiling and Borrowing Capacity (NDSCBC)
Final
computation and
issuance of
certificate of
NDSCBC
Bangko Sentral ng
Pilipinas
Evaluate LGU
request and
supporting
documentary
requirements
Monetary Board renders
Opinion on the Monetary
Balance and Payments
implications of the
proposed LGU
borrowing, per BSP
Circular No.926 s. 2016
Submit to BLGF-CO all documentary
requirements and the preliminary
computation for the issuance of
certificate of NDSCBC
Yes
Proposed Loan Higher than
BLGF Certification?
No
Submit to BSP a written request for Monetary Board
Opinion
Submit to the Lending Institutions the BLGF Certification,
MB Opinion and Other Requirements
Record receipt of Loan Proceeds and
prepare borrowing reports for
submission to BLGF-RO and BSP
Approval and Signing of Loan
Agreement with the LGU
Release of Loan
Receive LGU Post
Borrowing Report
Receive LGU Post
Borrowing Report
LGU LOAN APPLICATION PROCESS
Bureau of Local Government
Finance (BLGF)
BLGF-RO
Evaluate LGU request and supporting
documentary requirements
Documents
Complete/
Compliant?
Evaluate financial reports of the LGU
Compute preliminarily LGU Net Debt
Service Ceiling and Borrowing Capacity
(NDSCBC)
Submit to BLGF-CO all documentary requirements and
the preliminary computation for the issuance of certificate
of NDSCBC
BLGF-CO
Final computation and
issuance of certificate of
NDSCBC
DOCUMENTARY REQUIREMENTS
Letter Request from
the Local Chief
Executive indicating
the specific
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Lending institution(LI);
Terms and conditionof
proposed loan; and
The purpose/s ofthe
loan.
Certification of existing
loan/s duly certifiedby
the Local Treasurer
indicating
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Types and purpose of loans &
other obligations contracted;
Name of theLI;
Date of approval &maturity;
Terms & conditions
Remaining balances of loans
and other obligations;and
Annual amortization schedules
from the LI
08-10 Dec2018
Commission onAudit
(COA) Annual Audit
Certificate for the
most recent year
shall be supported by the
year-end financial reports
for the past 3years
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Pre-closing trial balance;
Detailed Statement of
Financial Performance
Certification
issued by the LI
stating that it
shall not
require LGU
deposits as
compensating
balance for the
loan (for nonauthorized
government
depository banks)
DOF| PTA
BLGF CERTIFICATE OF NDSC/BC
Features of
BLGF
Certification
• 3 Parts: Letter to the LocalChief
Executive, Certificate, and
Directives to the Local Treasurer
• Controlled; original issued eachfor
LGU, Lending Institution, andBSP
• Compliant with BSPCircular No.
926
• Free of charge
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LGU Net Debt Service Ceiling
Debt Service Ceiling (DSC)
• The maximum amount that an LGU can
appropriate in the annual budgetfor the
payment of its loan statutory and
contractual obligations.
• 20% x Annual Regular Income (ARI)
ARI is the average previous 3-year locally sourced
income + other shares from national taxes based on COA
data + actual annual IRA based on DBM data
Net DSC (NDSC)
• DSC less All amortizationspayable
during the year
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08-10 Dec2018
Local Fiscal
Policy Service
Local Debt
Monitoring and
Evaluation Division
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Calculating Annual Regular Income
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Real Property Tax
Business Tax
Fees and Charges
Receipts from Economic Enterprises
IRA
Other Share from Nat’l Tax Collection
Other Income (Interest Income)
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08-10 Dec2018
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LGU Net Borrowing Capacity
Borrowing Capacity (BC)
• The maximum loanable amount for a
given period of time at a specified rate
of interest.
• NDSC x Annuity Factor
Annuity factor is the financial value that, when
multiplied by a periodic amount, shows the present or
future value of thatamount.
Local Fiscal
Policy Service
Local Debt
Monitoring and
Evaluation Division
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08-10 Dec2018
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STATISTICS ON LGU
INDEBTEDNESS AND ISSUED
CERTIFICATES OF NDSC/BC
Varying degrees
of dependency on
national transfers
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LGUs receive 40% share
from internal revenue
taxes
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Better tax effort means
more IRA, adds pressure
on local collectioncapacity
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LGUs’ own-source revenue
capacity depends on
assigned taxing mandates
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08-10 Dec2018
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LGU
Outstanding
Loans
The outstanding loans
of LGUs shows a
generally increasing
pattern. Even though
it is increasing, its
ratio to the country’s
GDP has a downward
trend.
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Issued
Certificates of
NDSC/BC
On average, the
Bureau issues 319
certificates annually.
Election year means
less requests for the
certificate.
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08-10 Dec2018
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Certificates Issued in 2017
The Bureau
has issued a
total of 340
certificates of
NDSC/BC in
2017.
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08-10 Dec2018
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PROJECTS THROUGH
CREDIT FINANCING
FORMS OF LOCAL
INDEBTEDNESS
o Loans, Credits and Other Formsof
Indebtedness
o Bonds and OtherLong-Term
Securities
o Inter-Local Government Loans,
Grants, and Other Subsidies
o Loans from funds secured by
National Government fromforeign
sources
LIMITED PURPOSES
 Construction, installation, improvement,
expansion, operation, or maintenance of
public facilities, infrastructure facilities,
housing projects, acquisition of real property,
and the implementation of other capital
investment projects
 Establishment, development, or expansionof
agricultural, industrial, commercial, house
financing projects, livelihood projects, and
other economic enterprises
 Acquire property, plant, machinery,
equipment, and such necessaryaccessories
 Finance self-liquidating, income-producing
development or livelihoodprojects
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Potential Projects through Credit
Financing
Infrastructure
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Lot acquisition
Roads
Bridges
Ports
Terminals
Sports complex
Reclamation
projects
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Potential Projects through Credit
Financing
Heavy
Equipment
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08-10 Dec2018
Dump truck
Tractor
Backhoe
Grader
Bulldozer
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Potential Projects through Credit
Financing
Economic
Enterprise
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08-10 Dec2018
Public market
Slaughterhouse
Telecommunication
facilities
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Potential Projects through Credit
Financing
Health Care
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08-10 Dec2018
Hospitals
Health centers
Rehabilitation
centers
Medical
equipment
Medical programs
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Potential Projects through Credit
Financing
Education
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08-10 Dec2018
School building
Rehabilitation of
building
Computerization
program
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Potential Projects through Credit
Financing
Water System
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08-10 Dec2018
Water system
Rehabilitation of
water system
Irrigation system
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Potential Projects through Credit
Financing
Power
Generation
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Responsible LGUFinancing Seminar
08-10 Dec2018
Rehabilitation of
electrical system
Renewable energy
projects
Solar panel
Solar-powered
lamps
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Potential Projects through Credit
Financing
Disaster
M anagement
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Disaster
preparedness
program
Rescue equipment
Rescue vehicle
Construction of
evacuation site
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Potential Projects through Credit
Financing
Livelihood
Projects
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Purchase/ lease of
post-harvest
facilities
Entrepreneurship
projects
Agricultural
programs
Fishery programs
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Potential Projects through Credit
Financing
Housing and
Community
Development
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Responsible LGUFinancing Seminar
08-10 Dec2018
Housing facility
Relocation
Low-cost housing
Street lights
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Credit financing has a vital role in local development.
It has risks, so it should always be used responsibly, and strategically, to achieve the
vision of an LGU for progress and better public service delivery.
Thank You for listening!