The economic downturn experienced by major global economies in 2008 had challenged the path of the Philippine economic trajectory and initially put the country at risk of a negative growth after an impressive figure in the preceding year. The bleak economic outlook was expected to have a major and direct impact on the local government, a major beneficiary of the government’s programs and projects.

The resiliency of the country’s economy, however, had helped solidly weather the threat of an economic meltdown. The efforts of the government in the past few years to control fiscal deficit, manage the debt ratios, solidify the banking sector’s capital adequacy standards and institute effective regulatory policies have helped shield the country from the external shock and its impact to economic growth, poverty alleviation, employment generation, financial remittances, credit availability and the general investment climate.

Against the backdrop of imminent fiscal traps brought about by the crisis during the year under review, the government managed to restore and sustain macroeconomic stability amidst these challenges and slippages compounded by concerns on trade and investment barriers and the nagging social and cultural differences. The regulatory agencies had pooled their efforts to ably support the local government units (LGUs) in sustaining their economies and effectively manage their financial resources to deliver basic services to the people. The central government’s direct intervention to shore up local government fiscal resiliency was best represented by the release of P12.5 billion internal revenue allotment differential authorized under EO 273 that paved the way for the IRA monetization program implemented by the Department of Budget and Management (DBM), Department of Finance (DOF) and the Department of Interior and Local Government.

The DOF-Bureau of Local Government Finance (BLGF) continuously monitored the fiscal health of the local government units and mobilized its resources to improve the revenue-generation capacities of the LGUs contributing to overall positive results. Complementary to the initiatives of the DOF, the DILG pursued a number of projects for the LGUs foremost of which is the promotion of good local governance thru the assessment of LGUs capabilities and limitations in the delivery of basic services covering the areas of administration, social and economic development and environmental management.

The Annual Financial Report for Local Government for CY 2008 consolidates and combines the results of financial performance and cumulative results of operations of all local government units that reflect the events that transpired during the period. The report hopes to convey financial information wrapped as decision base for stakeholders, decision-makers and the public at large.

A.      FINANCIAL CONDITION

For the year under review, the Local Governments (excluding barangays) posted total combined assets of P507.86 billion while liabilities registered P109.57 billion with deferred credits pegged at P30.54 billion and the equity account at P367.73 billion. Comparing with the balances of the previous year, the total assets increased by P28.74 billion while a P7.46 billion increase in total liabilities was noted and Deferred Credits decreased by P3.43 billion.

The year-on-year variances of each of the account grouping per unit are presented below (in billions):

The comparative balance sheet data per unit for 2008 and 2007 is indicated in Figure 1.

As reflected in the combined Balance Sheet of the LGUs, the total assets account for the year for all units amounting P507.86 billion is made up of Current Assets recorded at P152.85 billion; Investments, P4.01 billion; Property, Plant and Equipment, P347.21 billion and Other Assets at P3.78 billion.

Sixty-eight per cent of the total assets is made up of the account Property, Plant and Equipment and another notable amount in the Assets Account is the Current Assets which makes up 30 percent of the total.

For the year under review, the total assets registered an increase of P28.74 billion (6 percent) from last year’s balance. The increase is attributed to a substantial increase in the LGUs’ Cash which is mostly composed of Cash In Bank Account positively impacting on their liquidity owing further to the conversion of Receivables into Cash. The Cities have registered the largest Cash Deposits amounts among the three political subdivisions as well as Cash on Hand accounts. As a further reflection of their liquidity, the LGUs’ total Investment Accounts have decreased considerably during the year by P3.18 billion owing primarily to the conversion of investments into cash with the Cities getting another big share of the activity.

The LGUs have further strengthened their operational capacities as indicated by an increase in their fixed assets. The total Property, Plant and Equipment Account records a total acquisition of P20.74 billion. The asset acquisitions attributed the highest again to the Cities followed by the Provinces with Buildings and Construction-in-Progress Accounts recording substantial increases.

Although the liability side of the balance sheet equation did increase during the year, a P7.4 billion increase still is lower than the increases in Asset and a positive difference between the two accounts points towards a better financial condition of the LGUs. During the year, the LGUs have recorded a P6.5 billion (12%) increase in current liabilities. It is noteworthy that the Cities accounted an increase in their current liabilities compared to CY 2007 in the amount of P1.7 billion with the Provinces topping the list with an increase of P2.86 billion. However, the figures impart an impression that on the whole, the LGUs are not highly leveraged.

For CY 2008, the LGUs have generally fared well in terms of managing their financial conditions and the figures presented above support that assertion. However, these figures also present opportunities to the LGUs to further enhance their fiscal and policies and operational management. Further shoring up of cash positions, a more efficient collection of receivables and further pruning of current liabilities will guarantee a liquid and efficient LGU.

B.    RESULTS OF OPERATION

For the year under review, the Local Government Units posted a net income of P47.07 billion. The amount resulted from Total Operating Income of P243.03 billion less expenses of P195.96 billion. The total consolidated net income posted during the year represented a total of P7.05 billion (17.63%) increase from CY 2007. The by-unit breakdown of the financial performance of the LGUs is presented in the table below:

A comparative outlook of LGUs operational results in terms of income and expenditures is presented in Figure 2.

The total Net Income earned by the LGUs increased by P7.05 billion from last year with the General Income Accounts (184.30billion) as the biggest contributors. Worth noting as well are the local taxes levied by the LGUs which reached a total of P58.73 billion, increasing by P2.83 billion year-on-year.

The increase in Net Income of LGUs from the previous year is mainly attributed to increases in Internal Revenue Allotments and Other Incomes which registered at 12.8 billion and 4.38 billion, respectively. The same increase is also due to marked increases in the account of both the Provinces and Municipalities which posted substantial incomes for the year.

On the expenditure side, the total operating expenses incurred by the LGUs for CY 2008 amounting to P181.00 billion was recorded and is composed of Personal Services (P89.12 billion) and Maintenance and Other Operating Expenses (P91.88 billion). The total amount is equivalent to roughly 98% of the total expenses of the LGUs for the period. During the year, the LGUs received subsidies amounting to P6.11 billion and a total of P17.48 were given as to other government agencies including P6.6 billion in the form of donations.

The fiscal discipline instituted in the LGUs reflects the varying degrees of operational results amongst the three political subdivisions. The Cities have posted the highest income level followed by the Municipalities with the Provinces occupying the rear. Looking at another financial metric and based on the data in figure 1, it is apparent that the Cities reflected the biggest gap between income and expenses which presents a better financial perspective and a more solid fiscal discipline while the Provinces and Municipalities project almost the same results.

Figure 3 below presents the comparative net income levels of the LGUs (in billions).

Compared with the previous performances of the LGUs, this year’s financial trend points towards better gains particularly in the Municipalities where the biggest increase is attained. Generally, there has been an increase in net incomes of all LGUs.

The increase in liquidity of the LGUs during the year is also a result of incomes that improved from last year’s levels. This financial indicator all the more suggests that in the presence of non-cash expenses and with limited economic base, still the LGUs were able to perform at levels where net incomes are posted. The institution of fiscal discipline within the LGUs, with the guidance of the Central Government, apparently resulted to better financial outlook though operational complacency cannot still be an option.

C.    CASH FLOWS

The Local Government cash inflows and outflows of all funds from Operating, Investing and Financing Activities for the year ended December 31, 2008 are reflected in the Statement of Cash Flows.

The total cash inflows reached P314.27 billion while cash outflows amounted to P297.01 billion resulting to a net increase in cash of P17.26 billion for the year 2008.

The table hereunder shows that cash inflows and outflows increased by P33.88 billion and by P12.64 billion, respectively, while the net cash provided was higher by P21.23 billion from that of prior year.

Operating Activities –

The net increase of P 29.9 billion or 11.19% in cash inflows came from IRA which posted an increase of P19.2 billion or 14.47% over that of prior year’s P132.76 billion IRA share; followed by the P6.8 billion or 10.74% higher than the P63.6 billion collection from taxpayers, and P4.2 billion or 7.20% more than the P59.2 billion from Other Receipts of last year. The provinces and cities with the highest receipts/collections from (a) Internal Revenue Allotment, (b) from Taxpayers , and (c) from Other Receipts are the following:

On the other hand, the bulk of the cash outflows of P248.1 billion went to payments of suppliers/contractors and other creditors which showed a P16.5 billion or 20.80% increment from last year’s P79.8 billion, and payments to employees which increased by P7.5 billion or 9.72% from last year’s P77.8 billion. However, other disbursements which include remittances to other LGUs, totaling P63.1 billion decreased by P7.9 billion or 11.17% from last year’s amount of P71.0 billion.

The net cash increase of P12.9 billion or 35.51% from operations can be attributed to the increase in collections from IRA share and Other Receipts, and reduction of other disbursements.

Investing activities -

The Local Government units posted an increase of P4.5 billion from sale of debt securities coming from the following provinces and cities:

Cash totaling P40.7 billion was used to purchase property, plant and equipment (PPE); debt securities of other entities; and loans granted to other entities. Of the total amount, P36.3 billion was spent for the purchase of PPE, and the following LGUs represent the ten (10) top payers:

Financing Activities -

Loans availed by the LGUs constituted the biggest inflows for the year in the aggregate amount of P9.6 billion, which is lower by 6.88% than last year’s total loan acquisition of P10.3 billion. Below are the ten provinces and cities with highest loan availments during the year.

Loan amortization amounting to P7.9 billion, also reduced by 5.72% from last year’s P8.3 billion payments. The succeeding Table shows the ten provinces and cities with highest loan payments.

Cash in the net amount of P1.8 billion was derived from the excess inflows from loans over amortizations.