Beruflich Dokumente
Kultur Dokumente
FINANCIAL MANAGEMENT
FRAMEWORKS FOR GOOD
GOVERNANCE
June 2007
DISCLAIMER
“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”.
Abstract
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
I. Introduction
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.
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.
2
III. 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.
3
Figure 1 – Framework in Analyzing Local Financial Management as a System
for Good Governance
FEEDBACKS
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.
4
• Stability refers to the ability of the LGU to remain financially sound and capable of paying long-
term 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 macro-
economic conditions, national policies and executive issuances, political conditions in the country, and
local socio-cultural practices, among others.
5
IV. 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.
COMPONENT A COMPONENT B
IDENTIFYING PRACTICES AWARD SYSTEM
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.
6
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.
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
7
from a literature review to generate proposed benchmarks that can be used as develop a framework for
assessing exemplary practices in LFM for LGUs.
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 Standards/requirements for LGUs to qualify for the award, specifying among others the mode
for joining the competition;
o Period of selection and awarding;
o Criteria for rating LGUs based on established criteria;
o Method of gathering data;
o Composition, functions and responsibilities of the panel of judges;
o Obligations, responsibilities, and opportunities of LGUs selected for the awards;
o Documentation procedures;
o Post-award monitoring system and follow-through measures; and
o Identification of the name or title of the award, preferably through a consultative process
involving the various leagues and organizations involved in local governance.
8
V. 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.
o Expenditure indicators are common-size ratios that measure the costs expended by the LGU
to finance its operations, provide services, and service its debt.
o Liquidity indicators measure the ability of the LGU to generate cash for payment of near-
term obligations.
o 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.
o Leverage indicators measure the extent that the LGU utilizes debt financing to support its
activities.
o 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.
o 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.
9
Table 1 - Inventory of Financial Management Measures
Revenue Indicators Expenditure Indicators
• Revenue target accomplishment rate = Total revenue • Expenditure rate = Total expenditures / Budget estimate
collection / Estimated total revenues or collectibles • Social expenditure ratio = Expenditures for social services /
• Real property tax accomplishment rate = Collection from Total expenditures
real property taxes / Estimated collection from real property • Economic expenditure ratio = Expenditures for economic
taxes services / Total expenditures
• Cost to collection ratio = Cost of assessment and collection / • Personal services expenditure ratio = Expenditures for
Internally-generated revenues personal services / Total expenditures
• Revenues per capita = Total revenue collection / LGU • Personal services ceiling = Expenditures for personal
population services / Total revenue collection
• Local revenues per capita= Total local revenue collection / • Internal financing ratio = Internally-generated revenues /
LGU population Total expenditures
• Internal revenues per capita = Internally-generated • Expenditures per capita = Total expenditures / LGU
revenues / LGU population population
• IRA dependency ratio = IRA revenues / Total revenue
collection
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.
10
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.).
o 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.
o 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
11
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.
o 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.
o 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.
12
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.
13
VI. 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.
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 Assets, liabilities, and government equity data were derived from the Consolidated Balance
Sheets found in the AARs of each LGU from COA.
o All revenue and expenditure data were derived from the SIEs from DOF-BLGF.
o 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:
15
Table 4 – Measures of Financial Performance Calculated
For Sample Group of LGUs
Revenue Indicators
• Local revenues per capita = Total local revenue collection / LGU population
• IRA dependency ratio = IRA revenues / Total revenue collection
Expenditure Indicators
• Expenditures per capita = Total expenditures / LGU population
Liquidity Indicators
• Current ratio = Current assets / Current liabilities
• Quick ratio = (Cash + Other short-term assets) / Current liabilities
Asset Turnover Indicators
• Total asset turnover = Total local revenue collection / Total assets
• Fixed asset turnover = Total local revenue collection / Net fixed assets
Leverage Indicators
• Debt to asset ratio = Total debt / Total assets
• Debt servicing ratio = Debt service payments / Total revenue collection
Profitability Indicators
• Return on assets = Increase in net equity / Total assets
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.
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
16
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 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.
17
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 DOF-
BLGF. 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.
18
Table 6 – Upper Tier of LGUs in Sample Group
Provinces Cities Municipalities
Bataan Antipolo, Rizal Agoo, La Union
Bulacan Dagupan, Pangasinan Alicia, Isabela
Cagayan Iligan, Lanao del Norte Brooke’s Point, Palawan
Cebu Iloilo, Iloilo Guiguinto, Bulacan
Laguna Mandaue, Cebu Kalibo, Aklan
La Union Marikina Limay, Bataan
North Cotabato Muntinlupa Lumban, Laguna
Pangasinan Parañaque Naval, Biliran
Rizal Olongapo, Zambales Sampaloc, Quezon
Southern Leyte Tagaytay, Cavite 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 geographically-
diverse 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.
19
VII. 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.
20
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.
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:
21
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.
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.
22
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.
• 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;
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.
23
Financial Management Areas
Practices Frequency
1. Functionality of the LFC (All functional areas)
o Compliance with Section 316 of the Local Government Code of 1991. The 12
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 9
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 3
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.
24
Oratorical contest for students sponsored by LGU to espouse to the youth
the importance of paying taxes on time and in full.
o 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 4
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 3
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 2
collect real property taxes.
o 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. 4
An increase of at least 20 percent in gross receipts reported by a business 3
automatically exempts the business from examination of gross receipts.
A decrease in gross receipts reported by a business triggers an automatic 2
examination of gross receipts.
A sampling of businesses is periodically conducted to establish baselines 2
for presumed income among common types of businesses.
Economic development initiatives are aggressively implemented to 2
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. 1
Establishment of a one-stop shop so that business permit can be obtained in 1
one day.
o Aggressive revenue goal-setting. While the majority of the LGUs in the 1
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.
25
o Utilizing debt financing. While many LGUs in the shortlist are conservative 3
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.
o Bond flotation. The issuance of LGU bonds was undertaken by only two LGUs 2
in the shortlist: one LGU issued bonds to construct and rehabilitate two
hospitals while another issued bonds to construct a commercial center.
o Utilizing public-private partnerships. There are just two examples of public- 2
private 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.
o Establishment of revenue mobilization body. One LGU created Resource 1
Mobilization Team to specifically explore alternative sources of funds for the
LGU.
26
o Maximizing liquid assets. Several LGUs in the shortlist indicated that they 4
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.
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.
28
supplies are issued to a department.
Valuable property, plant, and equipment are insured to safeguard these 3
assets.
Auxiliary Police are used to safeguard major properties and assets. 1
o Implementation of E-procurement. Several of the LGUs in the shortlist 3
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.
29
Organizational Competency Areas
Competencies Frequency
1. Organizational (Departmental) Philosophies
o Coordination of departmental mandates. Several LGUs in the shortlist 4
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 3
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 9
through regular staff meetings and informal settings.
Innovations are identified from external trainings attended by management 2
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 6
necessary.
Individual standards and targets for each staff member are reviewed semi- 3
annually during formal performance evaluations.
Departmental targets are clarified with staff at the beginning of the year 2
during annual strategic planning meetings.
Local Chief Executive conducts regular meetings with department heads to 2
review progress on projects and programs.
o Participatory management. A couple of LGUs mentioned that they espouse 2
“participatory management” where staff members are directly involved in
analysis and the decision-making process for the department.
30
4. Rewards and Incentives
o Staff incentive programs. Most LGUs in the shortlist indicated that they 9
implement Productivity Incentive Programs provided for by law that provide
employees with token annual bonuses. However, there are various non-
monetary 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 7
performers.
Service awards and plaques of appreciation are given to reward long-term 3
service to the LGU.
Awarding ceremonies are held during fiestas and parades to publicly 3
recognize exemplary employees.
One LGU implements a Performance Rewards and Incentives Service 1
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.
6. Accountability Mechanisms
o Individual accountability. Most of the LGUs in the shortlist indicated that 8
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 2
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 5
members.
There is a Grievance Committee that reviews serious issues raised by staff 3
members.
Staff are encouraged to provide feedback and suggestions in informal 2
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
Executive. The efforts mentioned by the LGUs include:
A suggestion box is located in municipal hall for the public to provide 3
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 1
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 1
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.
9. External Linkages
o Professional relationships. For several LGUs, they indicated that the 6
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 6
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 4
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 2
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 2
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.
33
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.
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.
34
o 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.
o 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).
o 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.
35
Moreover, the Mayor also conducts conferences with the businessmen regarding
business-oriented programs with investment in mind.
o 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.
o 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.
36
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 cross-
check 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.
o 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.
37
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.
o 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 multi-
storey 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 build-
lease-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.
o 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.”
38
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 non-
tax revenue collection, Quezon City adopted stricter requirements for permits.
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.
39
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.
40
Table 9 – Proposed Benchmark Practices
Practices Criteria
1. Functionality of the LFC (All functional areas)
o Compliance with the duties of the LFC specified in Section 316 of the Local o Legal mandate & high
Government Code of 1991. frequency (12)
o Maintenance of regular meeting schedule for LFC to periodically review o High frequency (9)
financial issues of the LGU.
41
8. Link between Planning and Budgeting (Budgeting and Other Finance-related
functional areas)
o Budgeting that operationalizes local plans, which are developed with multi- o Legal mandate & high
sectoral participation as mandated by DILG and NEDA, such as Local frequency (9)
Development Plans, Local Development Investment Plans, and Annual
Investment Plans. This includes the implementation of a Capital Investment
Planning process.
42
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:
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 non-
governmental 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:
43
o Representatives from the business sector
o Representatives from good governance NGOs
o Representatives from the academe
o Expert in international local public finance
o 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.
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:
44
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.
o 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.
o Time frame. Approximately one to two months should be allocated for this activity.
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.
o 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).
45
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.
o Time frame. Approximately one to two months should be allocated for this activity.
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 third-
level screening, which will select the final National Awardees.
o 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.
o 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
46
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.
o Time frame. Approximately two to three months should be allocated for this activity.
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.
o 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.
o 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.
o 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
47
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 award-
giving 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.
o 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.
48
IX. 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.
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.
49
X. 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.
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.
50
XI. References
Abad, Dina, et al. 2004. “LGU Organizational Competency Assessment.” Ateneo School of Government.
Manila, Philippines.
Amatong, Juanita D. 2005. Local Government Fiscal and Financial Management Best Practices.
Department of Finance, Republic of the Philippines. Manila.
Asian Development Bank. 1995. “Governance: Sound Development Management.” Manila, Philippines.
Commission on Audit. 2003-2005. Audited Annual Reports. Republic of the Philippines. Manila.
(For the following LGUs: Laguna; La Union; North Cotabato; Rizal; Antipolo, Rizal; Iligan, Lanao del
Norte; Iloilo, Iloilo; Olongapo, Zambales; Agoo, La Union; Kalibo, Aklan; Limay, Bataan; and
Sampaloc, Quezon.)
Cuenca, Janet S. and Ma. Libertad Dometita. 2004. “Lipa City: Emerging City for All Seasons?”
Philippines.
Department of Finance. Local Government Fiscal Performance Management System. Bureau of Local
Government Finance, Department of Finance, Republic of the Philippines. Manila.
Department of Interior and Local Government. Local Productivity and Performance Management System.
Republic of the Philippines. Manila.
Department of the Interior and Local Government. The Victorias Bond Flotation for Housing. Republic of
the Philippines. Manila.
Finkler, Steven A. 2000. Financial Management for Public, Health, and Not-for-profit Organizations –
Preliminary Edition. Prentice Hall. New Jersey, USA.
Galing Pook Foundation. 2001. Kaban Galing, Striving for Good Local Governance. Instrumedia
Marketing Corporation. Philippines.
Galing Pook Foundation. 2001. Kaban Galing, Transforming the Local Economy. Instrumedia Marketing
Corporation. Philippines.
Gavino, Carlos B. 1998. “LGU Financing: Present Sources, Availability and Terms.” Coordinating
Council of the Philippine Assistance Program. Philippines.
Horngren, Charles T., Gary L. Sundem, and John A. Elliot. 1999. Introduction to Financial Accounting.
Prentice Hall. New Jersey, USA.
Manasan, Rosario G., Eduardo T. Gonzales, and Romualdo B. Gaffud. 1999. “Indicators of Good
Governance: Developing an Index of Governance Quality at the LGU Level.” UNDP and National
Economic and Development Authority. Manila, Philippines.
Orial, Lydia N. 2002. Local Government Finance and LGU Bond Market Development in the Philippines.
Asian Development Bank. Philippines.
51
Reyes, Jaine C. and Gener L. Talatala. 1994. Systems Framework and Research Organizations in
Behavior of Research Organizations. Research Management Center, University of the Philippines – Los
Baños. Philippines.
World Bank and Asian Development Bank. Decentralization in the Philippines: Strengthening Local
Government Financing and Resource Management in the Short Term. Philippines.
52