DAVAO CITY — A recent study by the National Economic and Development Authority (NEDA), now the Department of Economy, Planning, and Development (DEPDev) has shed light on the complexities of the Philippines’ devolution process, particularly regarding the fiscal implications of reassigning devolved functions, services, and facilities (FSFs) among Local Government Units (LGUs).
This study responds to issues raised by LGUs regarding their readiness to assume devolved FSFs and analyzes a list of proposed FSFs reassignments from the Department of the Interior and Local Government (DILG) and the Union of Local Authorities of the Philippines (ULAP).
In a statement, the DILG in Davao Region welcomed the “timely and insightful study, which affirms the long-standing concerns of our local government units regarding the implementation of Executive Order No. 138.”
“As the Department continues to guide LGUs in Region 11 through the devolution transition, we underscore the need for responsive national policies, adequate capacity-building, and targeted fiscal support mechanisms such as the Growth Equity Fund. We also support the call for legislative reforms to institutionalize a more equitable and effective devolution framework,” DILG Davao Regional Director Abdullah V. Matalam said.
The report, titled “Shifting Gears in Devolution,” analyzed the financial capacity of LGUs to absorb and effectively manage these reallocated responsibilities, uncovering potential challenges and significant fiscal gaps.
The study, prompted by Executive Order 138, s. 2021, which aims for the full devolution of certain executive branch functions to LGUs, examined the readiness of provinces, cities, and municipalities to assume these duties. It focused on analyzing the fiscal gaps—the difference between an LGU’s incremental revenues and the incremental costs of the reassigned FSFs—under two scenarios: “SLOW GO,” reflecting the immediate reassignment of FSFs, and “BIG BANG,” which factors in the costs of upgrading these FSFs to meet minimum service standards (MSS).
Under the “SLOW GO” scenario, the study found that most LGUs would not incur fiscal gaps, suggesting sufficient resources to absorb the reassigned FSFs. However, this approach could potentially widen inequality in service delivery without upgrades to meet MSS. In contrast, the “BIG BANG” scenario revealed significant fiscal gaps for many LGUs, particularly the provinces and municipalities. This finding indicates that simply reassigning FSFs without considering upgrade costs would strain the financial capacities of many LGUs.
NEDA conducted simulation exercises to assess the fiscal gaps (difference between incremental expenditures and available revenues) for provinces, cities, and municipalities under different scenarios. Data from the Bureau of Local Government Finance (BLGF), National Government Agencies (NGAs), and Key Informant Interviews (KIIs) with LGUs were used.
The NEDA study also projected the phased implementation of full devolution over five years, assuming annual increases in LGUs’ national tax allotments (NTAs) and spreading upgrade costs over the initial four years. By the fifth year, provinces are still expected to have fiscal gaps, although narrower, while municipalities and cities are anticipated to not incur such gaps. This highlights the need for targeted assistance to provinces during this transition.
Furthermore, the analysis indicated that reassigning and upgrading social sector FSFs first could lead to lower fiscal gaps, potentially even fiscal surpluses, compared to economic sector FSFs. Recommendations from the study include amending EO 138, s. 2021 to provide a legal framework for reassignment and upgrades, strengthening LGU capacity, enhancing the Growth Equity Fund (GEF), and establishing a fiscal equalization grant scheme.
Regional Director Matalam affirms the study’s recommendations for a phased and capacity-aligned approach to devolution, saying that “this reflects a balanced appreciation of the realities on the ground—especially for provinces and municipalities facing fiscal constraints”.
This DEPDev (NEDA) study underscores the importance of a phased and supported approach to devolution, ensuring that LGUs are financially and technically equipped to deliver quality public services. As the Philippines continues to navigate its devolution journey, these findings will be crucial in shaping effective policies and implementation strategies. PIA DAVAO