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 ▷ ▷ ▷ ▷ ▷ ▷ 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 Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 • • • • • Revenue Potential Economic Efficiency Equity Administrative Feasibility Politically Acceptability Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 • • • • • Efficiency Criteria/Subsidiary Principle Service of BenefitArea Economies of Scale Cultural Values Size and diversity Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 • • • • Bridging the vertical fiscalgap Improve horizontal fiscalbalance Fund national priorities Compensate for spillovers orexternalities Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 • • • • 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 DOF| PTA 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 . . . Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 DOF| PTA 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 DOF| PTA 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. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA EX-ANTE CONTROL AND REGULATIONS LGU debt service ceiling and net borrowing capacity determinedand certified by BLGF DOF/BLGF Regulations enhance the access of all LGUs to credits and other forms of indebtedness Favorable Monetary Board opinionon the monetary and balance of payments implications Local legislative authorization and inclusion in the annual investment plans and priorities arerequired Responsible LGUFinancing Seminar 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 LFC No. 01-2014: Reduced requirements for 171 LGUs affected by Typhoon Yolanda, from 12 to 4 requirements, and extending the validity by 1year DOF Department Order No. 054.2016: Streamlined requirements and process: 4 documents; Well-defined computational parameters; Improved certificationprocess; Verification/ validation delegated to BLGF RegionalOffices 08-10 Dec2018 DOF| PTA LEGAL BASIS FOR CERTIFICATION OF NET DEBT SERVICE CEILING AND BORROWING CAPACITY BSP CIRCULAR LETTEROF 2002 ▷ “… all banks andNBQBs shall require each borrowing LGU to present a certificate of its debt service and borrowing capacity, duly certified by BLGFDOF.” Responsible LGUFinancing Seminar BSP CIRCULAR NO.926, SERIES OF 2016 ▷ Required document for the request for Monetary Board Opinion 08-10 Dec2018 DOF DEPARTMENTORDER NO. 054.2016 ▷ Streamlining the Certification of Net Debt Service Ceiling and Borrowing Capacity of Local Government Units DOF| PTA 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 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 Responsible LGUFinancing Seminar 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 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 Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 Responsible LGUFinancing Seminar 08-10 Dec2018 Local Fiscal Policy Service Local Debt Monitoring and Evaluation Division DOF| PTA Calculating Annual Regular Income ▷ ▷ ▷ ▷ ▷ ▷ ▷ Real Property Tax Business Tax Fees and Charges Receipts from Economic Enterprises IRA Other Share from Nat’l Tax Collection Other Income (Interest Income) Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA STATISTICS ON LGU INDEBTEDNESS AND ISSUED CERTIFICATES OF NDSC/BC Varying degrees of dependency on national transfers • LGUs receive 40% share from internal revenue taxes • Better tax effort means more IRA, adds pressure on local collectioncapacity • LGUs’ own-source revenue capacity depends on assigned taxing mandates Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA Issued Certificates of NDSC/BC On average, the Bureau issues 319 certificates annually. Election year means less requests for the certificate. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA Certificates Issued in 2017 The Bureau has issued a total of 340 certificates of NDSC/BC in 2017. Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA 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 Responsible LGUFinancing Seminar 08-10 Dec2018 DOF| PTA Potential Projects through Credit Financing Infrastructure • • • • • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Lot acquisition Roads Bridges Ports Terminals Sports complex Reclamation projects DOF| PTA Potential Projects through Credit Financing Heavy Equipment • • • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Dump truck Tractor Backhoe Grader Bulldozer DOF| PTA Potential Projects through Credit Financing Economic Enterprise • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Public market Slaughterhouse Telecommunication facilities DOF| PTA Potential Projects through Credit Financing Health Care • • • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Hospitals Health centers Rehabilitation centers Medical equipment Medical programs DOF| PTA Potential Projects through Credit Financing Education • • • Responsible LGUFinancing Seminar 08-10 Dec2018 School building Rehabilitation of building Computerization program DOF| PTA Potential Projects through Credit Financing Water System • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Water system Rehabilitation of water system Irrigation system DOF| PTA Potential Projects through Credit Financing Power Generation • • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Rehabilitation of electrical system Renewable energy projects Solar panel Solar-powered lamps DOF| PTA Potential Projects through Credit Financing Disaster M anagement • • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Disaster preparedness program Rescue equipment Rescue vehicle Construction of evacuation site DOF| PTA Potential Projects through Credit Financing Livelihood Projects • • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Purchase/ lease of post-harvest facilities Entrepreneurship projects Agricultural programs Fishery programs DOF| PTA Potential Projects through Credit Financing Housing and Community Development • • • • Responsible LGUFinancing Seminar 08-10 Dec2018 Housing facility Relocation Low-cost housing Street lights DOF| PTA 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!