An assessment of the criteria used in the determination of Philippine LGU fiscal viability

This study examines the fiscal implications of the current criteria of establishing the fiscal viability of local governments in the Philippines. Since the passing of the Local Government Code (LGC) of 1991 thirty years ago, the criteria used to create/convert a local government unit (LGU), i.e., regular local income, population, and land area, has remained the same with the exception of the income requirement of cities. As a result of the current distribution of intergovernmental fiscal transfers, both across different levels of and within a level of local government (a portion of the intergovernmental fiscal transfer of an LGU is dependent on the number of same-level LGUs), there exists the incentive for lower-level LGUs to want to level up to get a larger share of transfers. From 2001 to present, there were 68 new cities (46.9%), 25 new municipalities (1.7%), and 107 new barangays (0.3%) created. A possible effect is the creation of LGUs that are unable to fulfill mandates and deliver devolved functions and services. The evidence supports this with fiscal trends showing that provinces and municipalities effectively finance only almost a third of current expenditures while the stipulated requirements for provinces and municipalities cover only about 11% and 1% of total current operating expenditures, respectively. [...]