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New law updating the income classification of LGUs to help DOF boost LGU revenues, fiscal sustainability

Republic Act (RA) No. 11964, otherwise known as the Automatic Income Classification of Local Government Units Act, which was signed into law by President Ferdinand R. Marcos, Jr. on October 26, 2023 will help the Department of Finance (DOF) boost LGU revenues, ensuring fiscal sustainability of local governments.

The law updates the income classification of LGUs according to their current financial capabilities. It empowers the DOF to efficiently and systematically determine LGUs’ financial capabilities and fiscal positions in line with the economy and local development.

“This law is a significant milestone that resolves the long-standing issue of outdated LGU income classification for over a decade. It paves the way for a more responsive approach to foster local autonomy and empower LGUs to unleash their full economic potential,” Finance Secretary Benjamin E. Diokno said.

R.A. 11964 classifies provinces, cities, and municipalities into five classes according to their income ranges, based on the average annual regular income for three fiscal years preceding a general income reclassification.

The Secretary of Finance, in consultation with the National Economic and Development Authority (NEDA) and the concerned LGUs League, will have the authority to adjust the income brackets according to the actual growth rate of the annual regular income from the last income reclassification.

Further, the Secretary of Finance is designated to carry out LGU income reclassification once every three years so that such conforms with the current economic conditions.

The classification will serve as basis for determining LGU capability to undertake development programs and projects, as well as adjustment of compensation for LGU personnel pursuant to the Salary Standardization Law of 2019.

According to the law, the first general income reclassification will be made within six months after its effectivity and every three years thereafter.

The first income reclassification of provinces, cities, and municipalities will take effect on January 1st of the immediate succeeding year following the release of the table of income classification by the Secretary of Finance.

The DOF shall craft the law’s