I. THE LOCAL GOVERNMENT SYSTEM
      According to the definition by the United Nations, local government is a political unit of a nation or state constituted by law with power of control over local affairs including the power to impose taxes. Its functions and scope of activities in relation to the central government are characterized by centralism hierarchical structure, chain of command, executive dominance and legislative legislation. The central government however has full power of control and supervision are composed of 76 provinces, 1,587 municipalities, 63 cities and around 41,299 barangays while in the National Capital Region it is composed of 7 cities and 10 municipalities.

Local Governments have two purposes:
      1. To serve as the instrumentalities of the Central Government in carrying out functions as in the collection of taxes, assessment of properties and as administrative vehicles for national development, and
      2. To act as agent in the regulation, promotion and management of their affairs.
      Aside from the governmental and ministerial functions, the local governments also perform other duties as in the operation of public utilities and other activities relevant to the local existence.
      The provincial government (Sangguniang Panlalawigan) is the largest political unit. These are further subdivided into cities (Sangguniang Panglunsod) and municipalities (Sangguniang Bayan). The smallest units under the jurisdiction of the cities or municipal governments are the barangays which are also endowed with the powers of government as provided for in the Barangay Code.

II. INTERGOVERNMENTAL RELATIONSHIP
      As mentioned earlier, local governments are under the supervision and control of the national government, specifically by the Office of the President. As such, major policy decisions affecting the local governments are done at the national government level by the President through the Department of Interior and Local Government. The supervision of basic local units are exercised over local units in many ways, like the appointment of local chief executives, the supervision over local financial management, and the allocation of powers and functions among levels of local authority.
      There is a so-called local-central government partnership in undertaking national development programs. This concept of partnership is based on the assumption that is as the nationwide development undertaking is concern; neither the central nor the local governments can do it alone. In the process of nation buildings, central and local institutions should work in a concrete and unified effort on integrated programs of local and national concerns. The partnership scheme, in essence is a sharing of responsibilities which may be operationalized by using the four (4) dimensions in the administration of any development program which are planning, financing, implementation, and evaluation. These are the criteria for determining the specific nature of involvement that may be assigned to each of them.
      The planning phase of the program is the primary responsibility of the central government. This include the determination of priorities, the analysis and integration of data resources, setting guidelines and policy standards and the actual formulation of the plan, the local governments participation in the planning phase includes formulation of the plan, the collection of data on particular projects, and the monitoring of local needs.
      The financing phase of most programs is shared responsibility of both local and national governments. The principal and regular funding of projects may come from the national government, but fixed contributions may be exacted from the local units. In certain areas, the greater funding requirements may be borne by the local units but some grants and subsidies may require and equal sharing between the national and local governments.
      Implementing a development program is a responsibility of the local level. This consists of translating the plan in accordance with the standards set from the top, the provisions of operating and supporting personnel and stimulation of citizen participation in the program.
      The implementation of local fiscal programs undergoes a series of tedious reviews. The Department of Finance oversees the local fiscal manager which is the treasurer and reviews the annual as well as the supplemental budgets approved at the local level. But this function was reverted to the Department of Budget and Management by virtue of P.D. 1375. For instance, after a municipal budget is approved it is sent to the provincial budget officer who then sends it-with recommendations-to the regional DBM representative for approval. The office of the Budget and Management, while it considers such budgetary aspects as the reasonableness of the revenue estimates, its relationships to the capital improvement program, can out rightly veto such budget if it conflicts with several statutory limitations placed on localities.
      The budget is also reviewed by the DILG. Under P.D. 144, twenty percent (2%) of the IR allotment to each local government must be spent on development projects which in turn, must be reviewed by the DILG. Finally, all the financial affairs of local government are audited by the Commission of Audit of the central government.
      Both levels of government may have to do the evaluation of a program for their own purposes. The national government has to device a control system to get assurance that in the implementation, minimum standards are met, legal requirements and policy guidelines are observed and the technical support is adequate. The local government part of the evaluation task is designed to ascertain the responsiveness of the program and assess its concrete impact on the people of the community.

III. LOCAL GOVERNMENT FISCAL STRUCTURE
      Presidential Decree 477 promulgated on June 3, 1974 establishes the local government fund structure. It provides that each local government has two funds: the General Fund and the Infrastructure Fund.

Infrastructure Funds are exclusively used for the following:
      1. Repair, maintenance, improvement and construction of roads, bridges and highways. However, in applying this fund to use, adequate provisions shall be made for the maintenance of existing, un-abandoned roads and bridges before new construction are undertaken.
      2. The providing and maintaining wharves, piers and docks in accordance with plans and specifications furnished by the proper national office, and for removal of obstruction to navigation.
      3. For subsidizing or for acquiring, operating and maintaining means of water transportation within the province or city or between the province or city and neighboring provinces and cities or islands or to dredge rivers and provide facilities for communication and transportation by rivers, as well as for establishing telephone system.
      4. The construction, improvement, maintenance and repair of plazas, park monuments and playgrounds, street lighting, artesian wells, irrigation system, flood control system, sewerage and drainage system, and other permanent public improvements.
      5. The acquisition of lands and buildings for public use. While the general fund is the source of all other expenditures and obligation with local jurisdiction other than education, this fund consists of monies and resources not otherwise accruing to other fund and is available for the payment of expenditures, obligation or purposes not specifically declared by law as chargeable to, or payable from any other fund. The general fund may cover capital construction expenditures while the infrastructure fund covers current spending for maintenance activities on roads, bridges, etc. so, infrastructure fund are generally development type of expenditures.
      There is a third type of fund administered by the local treasurers, the Special Education Fund (SEF). It is exclusively devoted to the provision of elementary level education. While the national government directly provides salary and payment to personnel, non-personnel expenditures are paid out of the SEF. The primary local revenue source supporting this funds is the real property tax, although in some localities, periodic transfer from general fund to the SEF are also made.
      Major Source of Revenue
      Local revenues are derived mainly on two sources: (1) allotments and aids from the national government; (2) local taxes, fees and charges.
      1. National Allotments and Aids – These are shares from national internal revenue taxes authorized under P.D. 144 & 436. The latter was enacted to authorized additional allotments for local governments from the increase in national specific taxes on certain petroleum products for purposes of financing the maintenance and repair of existing roads and bridges, as well as new construction and improvements projects.

a. Regular Allotment
      Under the Decentralization Act, it is provided that seventeen percent (17%) of the National Revenue Collection from taxes subject to regular allotment under Section 362 of the National Internal Revenue Code such as sales tax, specific tax, contractor’s tax, tax on banks and finance companies, fixed taxes on business and occupation, tax on common carriers, charges tax, miller’s tax (except that on sugar), percentage on cinematographic film owners, lessor and distributors, certain mining taxes, occupation fees and rentals, and water rentals, was to be distributed to local governments as follows: thirteen percent (13%) to provinces and cities and four percent (4%) to municipal governments.
      Under Presidential Decree No. 1741, it is provided that to strengthen the fiscal operation of local government units, and consistent with the decentralization program of the government in the amount of twenty percent (20%) of national internal revenue taxes shall be made available to local government units.
      The amount of assistance is determined by taking into account local requirements and available national funds, as determined by the cost implementing the national development plan.
      It also provides that the amount of assistance should be computed on the basis of collections received by the national government during the third fiscal year preceding the time during which assistance is distributed. The reckoning assistance takes into consideration the budgetary assistance specifically intended for local schools, reforestations reports, or other priority local activities supported by the national government.
The total amount available is allocated among local government units as follows:
      1. Provinces – 30%
      2. Municipalities – 45%
      3. Cities - 25% The share of local government units is determined on the basis of population: 70%; land area: 20% and equal sharing: 10%.
      b. Revenue from National Aid Fund
      Aside from regular allotment granted under P.D. 1744, the local government units receive the following aid from the national government funds:
      Regular Improvement and Community Development Fund
      Contingent Fund
      Calamity Fund
      Highway Special Fund
      Philippine Charity Sweepstakes, Horse Race and Lotteries
     
      1. Local Levies – This is granted through the imposition of the real property tax under P.D. 464 (Real Property Code) and other imposition under P.D. 231 (Local Tax Code).
      a. Real Property Tax –Province, municipalities and cities levy an annual Ad Valorem Tax on the assessed value of property like lands, buildings and other improvements. Both the province and the municipality may impose the tax rate of not less than ¼ of 1% but not more than ½ of 1%., while the city may levy tax at a rate of not less than ½ of 1% but not more than 2%. Ten percent (10%) of the province and the municipality, or the city accrue to the barrages where the property subject to tax is situated.
      b. Taxes, fees and charges authorized under P.D. 231 – The continuation provides for the power of local government to create their own sources of revenue and levy taxes subject only to limitations provided by law.

2. Other Sources of Revenue
      a. To augment local revenues, local governments have been given the power to contract borrowing loans.
Presidential Decree 752 governs the conduct and management of the credit transactions and borrowing schemes of provinces, cities and municipalities. Such power have been broadened to include loans from funds secured by the National Government from foreign sources and a deferred-payment financing scheme. Furthermore, credit financing schemes are now available to local government through inter-local government loans, loans/credit from national lending institutions and bond financing.
      b. Bilateral Funding schemes with foreign countries are also available for development projects. Foreign countries donate or lend funds to local governments for development projects.