H. No.

7006
S, No. 2165

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Begun and held in Metro Manila, on Monday, the twenty-fourth

day of July, two thousand twenty-three.

[Republic act no. 11964]

AN ACT INSTITUTIONALIZING THE AUTOMATIC

INCOME CLASSIFICATION OF PROVINCES, CITIES,
AND MUNICIPALITIES, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the

Philippines in Congress assembled:

ti Section l. Short Title. — This Act shall be known as the

Automatic Income Classification of Local Government Units Act”.

Sec. 2. Declaration of Policy. — It is the policy of the

State to provide a more responsive approach to promote local
autonomy and enable local government units to realize their full
economic potential. In line with this, the State recognizes the
need to determine the financial capability and fiscal position of
local government units.
 Towards this end, the State shall formulate pohcies and
guidelines for an equitable and rational system of income
classification to effectively accelerate and improve the quality of
economic growth and distribute national resources based on the
needs of the communities.

Sec. 3. Definition of Terms. - As used in this Act:

(a) Actual Growth Rate refers to the percentage increase

in the aggregate annual regular income for provinces, cities, and
municipalities from the last income reclassification;

(b) Annual Regular Income refers to revenues, including

fees and receipts actually realized which are reported yearly on
cash basis by provinces, cities, and municipalities from regular
sources, including the National Tax Allotment (NTA) and other
shares in national wealth, but exclusive of non-recurring receipts,
such as national aids, grants, financial assistance, loan proceeds,
sales of assets, miscellaneous income/receipts and similar others.
For the purpose of this Act, shares from national wealth, excise
tax on tobacco, incremental collection from value-added tax (VAT)
under Republic Act No. 7643, and the gross income tax paid by
business and enterprises in Special Economic Zones under
Republic Act No. 7916, otherwise known as “The Special Economic
Zone Act of 1995”, as amended, and such other shares as may be
granted by law to the province, city, or municipality, shall be
considered as part of the annual regular income. The annual
regular income shall be computed from the Statement of Receipts
and Expenditures submitted by the local government units
pursuant to the guidelines issued by the Department of
Finance (DOF);

(c) Average Annual Regular Income refers to the sum of

the annual regular income, as herein defined, actually obtained
by a province, city, or municipality during the required number
of fiscal years preceding the year of general income reclassification
of local government units, divided by such number of fiscal years
as provided in Section 4 hereof;
 (d) Local Government Units (LGUs) refer to the political
subdivisions of the State, namely province, city, or municipality;

(e) LGU Leagues refer to the Union of Local Authorities of

the Philippines (ULAP), League of Provinces of the Philippines
(LPP), League of Municipalities of the Philippines (LMP), and
the League of Cities of the Philippines (LCP); and

(0 Schedule ofIncome Classification refers to the updated

income classification of LGUs periodically issued by the Secretary
of Finance pursuant to Section 6 of this Act.

Sec. 4. Income Classification of Provinces, Cities, and

Municipalities. —

(a) Classification of Provinces. - Provinces shall be

classified into five (5) classes, according to their income ranges
and based on the average annual regular income for three (3)
fiscal years preceding a general income reclassification. The
classification shall be as follows:

(1) First Class - Provinces that have obtained an

average annual regular income of One billion five himdred million
pesos (Pi,600,000,000.00) or more;

(2) Second Class - Provinces that have obtained an

average annual regular income of Nine hundred million pesos
(P900,000,000.00) or more, but less than One billion five hundred
million pesos (Pl,600,000,000.00);

(3) Third Class - Provinces that have obtained an

average annual regular income of Seven himdred million pesos
(P700,000,000.00) or more, but less than Nine hundred million
pesos (P900,000,000.00);

(4) Fourth Class - Provinces that have obtained an

average annual regular income of Five hundred million pesos
(P500,000,000.00) or more, but less than Seven hundred milLion
pesos (P700,000,000.00); and
 (6) Fifth Class - Provinces that have obtained an
avera^amual regular income of less than Five hundred million
pesos (P600,000,000.00).

(b) Classification of Cities. - Cities shall be classified into

l^e (6) classes, according to their income ranges and based on
the average annual regular income for three (3) fiscal years
preceding a general income reclassification. The classification
shall be as follows:

(1) First Class - Cities that have obtained an average

^ual regular income of One bilHon three hundred milHon pesos
(Pl,300,000,000.00) or more;

(2) Second Class - Cities that have obtained an average

annual regular income of One billion pesos (Pl,000,000,000 00)
0ne bm,n three hundred mm>’1 pe80B

(3) Third Class - Cities that have obtained an average

?pfinonann^eFlar inCOme 0f Eight hundred million pesos

So XoSrmore'but 1688 than on<, bfflion pesos

(4) Fourth Class - Cities that have obtained an average
^nual regular income of Five hundred million pesos
(P500ifln’n o0'00) 0r m0re’but less than Eight hundred million
pesos (P800,000,000.00); and

(6) Fifth Class - Cities that have obtained an average

0,1688 thanFivehundredmiUionpe80B

(c) Classification of Municipahties. - Municipahties shall

be classified into five (5) classes, according to their income ranges
and based on the average annual regular income for three (3)
tiscal years preceding a general income reclassification The
classification shall be as follows:
 (1) First Class — Municipalities that have obtained an
average annual regular income of Two hundred million pesos
(P200,000,000.00) or more;

(2) Second Class - Municipalities that have obtained an

average annual regular income of One hundred sixty million pesos
(PieO.OOO.OOO.OO) or more, but less than Two hundred million
pesos (P200,000,000.00);

(3) Third Class - Municipalities that have obtained an

average annual regular income of One hundred thirty million
pesos (P130,000,000.00) or more, but less than One hundred sixty
miUion pesos (P160,000,000.00);

(4) Fourth Class - Municipalities that have obtained an

average annual regular income of Ninety million pesos
(P90,000,000.00) or more, but less than One hundred thirty million
pesos (P130,000,000.00); and

(5) Fifth Class - Municipalities that have obtained an

average annual regular income of less than Ninety million pesos
(P90,000,000.00).

(d) If a province or municipality is created before the

regular reclassification of LGUs, the Secretary of Finance ahall
have the authority to classify the concerned LGU on the basis of
the estimated aggregate net share of income from regular sources
from its component cities and municipalities in the case of a
province, or its component barangays in the case of a municipality,
including the corresponding estimated NTA of the newly created
province or municipality pursuant to Section 286 of Republic Act
No. 7160, as amended or the Local Government Code of 1991,
during the fiscal year immediately preceding its creation. This
rule shall likewise apply to a municipality that is converted into
a city, or a city that is created out of existing municipalities
and/or barangays: Provided, That the income ranges herein shall
be adjusted and updated by the Secretary of Finance every
three (3) years based on the standards provided in the
succeeding section.
 Sec. 5. Administrative Authority of the Secretary of
Finance. - The Secretary of Finance, in consultation with the
National Economic and Development Authority (NEDA) and the
concerned LGU Leagues, shall have the authority to adjust the
income ranges herein provided based on the actual growth rate of
the annual regular income from the last income reclassification,
and undertake the regular income reclassification once every three
(3) years, in order that the income classification of LGUs may
continue to conform with the prevailing economic conditions and
the overall financial status of local governments: Provided, That
the Secretary of Finance may consider inflation and gross regional
domestic product in evaluating if an LGU has experienced
prolonged economic shocks such as, but not limited to, public
calamity and national emergency that may warrant retaining
its current income classification; Provided, further. That the
Secretary of Finance, upon recommendation of NEDA,
upgrade the income classification of an LGU ifthe LGU has shown
growth in real per capita locally sourced revenue every year for
the past three (3) years.

Sec. 6. Period of Automatic Income Reclassification. —

(a) The first general income reclassification shall be

within six (6) months after the effectivity of this Act, and eveiy
three (3) years thereafter.

(b) The DOF shall, within sixty (60) days from the regular
income reclassification, issue the appropriate department order
containing the schedule of income classification which shall serve
as certification of the income classification of LGUs. The schedule
of income classification shall be automatically updated by the
Bureau of Local Government Finance (BLGF) of the DOF every
three (3) years: Provided, however. That the non-issuance of
said department orders in the succeeding regular reclassification
within the said period shall not suspend the effects of the automatic
income reclassification.

(c) No readjustment of classification shall be made more

than once in three (3) consecutive calendar years after the first
general reclassification provided herein.
 Sec. 7. Uses of Income Classification. - The income
classification of provinces, cities, and municipalities shall, among
other purposes, serve as basis for the following:

(a) Identification of administrative and statutory aids,

financial grants, and other forms of assistance to local
governments;

(b) Determination of the financial capability of LGUs to

undertake developmental programs and priority projects;

(c) Total annual or supplemental appropriation for personal

services of an LGU for one (1) fiscal year as provided in Section
325(a) of Republic Act No. 7160;

(d) Compensation adjustment for personnel of the LGUs

pursuant to Republic Act No. 11466 or the “Salary Standardization
Law of 2019”: Provided, That LGUs may fully adopt the salary
schedules notwithstanding the ceilings under Sections 10(a) and
10(b) of the said law, subject to compliance with the personal
services (PS) limitation and budget authorization requirements
ofRepubhcActNo. 7160;

(e) Creation of a new LGU provided that the division anH

merger of an existing LGU shall not downgrade the income
classification of the original unit pursuant to Section 8 of Republic
Act No. 7160;

(f) Number of elective members in the Sangguniang

Panlalawigan and the Sangguniang Bayan as provided under
Section 2 of Republic Act No. 6637;

(g) Issuance of a free patent title to residential lands

as provided under Republic Act No. 10023, otherwise known
as “An Act Authorizing the Issuance of Free Patents to
Residential Lands”;

(b) Minimum wage of domestic workers as provided under

Section 24 of Republic Act No. 10361, otherwise known as the
“Domestic Workers Act” or “Batas Kasambahay”;
 (i) LGUs to insure its properties with the Governraent
Service Insurance System (GSIS) in comphance with Section 6 of
Republic Act No. 656 or the “Property Insurance Law”;

© Limitation on the percentage of agricultural land area

that can be reclassified and the manner of their utilization
or disposition as stipulated in Section 20 of Republic Act
No. 7160; and

(k) Such other purposes as provided under existing laws

and regulations.

Sec. 8. Ouidelines in Cases Where a Fourth or Lower

Income Class LGU Receives a Third or Higher Income Class
Designation as a Result of the First General Income
Reclassification. - A fourth or lower income class LGU which is
reclassified as first, second, or third income class following the
first general income reclassification provided herein shall be
exempted from providing for additional personal services gpH may
maintain existing personal services prior to the reclassification,
pursuant to civil service rules and regulations, until the next
fiscal year. In case of personnel transfers, resignation or deaths,
the local government may not cause the filli ng up of vacant position
nor provide for its funding until the succeeding fiscal year.

LGUs exceeding the Limitations provided in Section 325(a)

of Republic Act No. 7160 despite maintaining the status quo after
it received a first, second, or third income class designation
following the first general income reclassification shall not be
considered in violation of Section 325 of Repubhc Act No. 7160.

Sec. 9. Effectivity of the Income Reclassification. — The

first income reclassification of provinces, cities, and municipahties
pursuant to this Act and its uses as provided under Section 7
herein shall take effect on January 1st of the immediately
succeeding year following the issuance of the table of
income classification by the Secretary of Finance as mandated by
this Act.

Sec. 10. Transitory Provision. — An LGU whose average

annual regular income falls below the income range based on the
 first general income reclassification as provided in this Act shall
retain its current income class: Provided, however, That if its
income continues to faU below the income range in the next
reclassification, the concerned LGU shall be downgraded to its
corresponding income class: Provided, further. That during the
first income reclassification, no official or employee in the

_ ImPlementing Rules and Regulations (IRR). -

The DOF, in coordination with the Department of Budget and
Management (DBM) and in consultation with the LGU Leagues,
shall promulgate the necessary implementing rules and
regulations within three (3) months from the effectivity of
t“s Ac1t-, The IRR issued pursuant to this section shaU take
effect thirty (30) days after its pubHcation in a newspaper of
general circulation.

Sec. 12. Separability Clause. - If any portion or

provismn of this Act is declared unconstitutional, the remainder
oi this Act or any provision not affected thereby shall remain in
force and effect.

Sec. 13. Repealing Clause. - Any law, presidential decree

or issuance, executive order, letter of instruction, rule or
regulation inconsistent with the provisions of this Act is hereby
repealed or modified accordingly.

/■■ j SEC,i4, Effectivity- ~ This Act shall take effect fifteen

(15) days after its complete publication in the Official Gazette or
in a newspaper of general circulation.

Approved,

r MIGUEL F.ZUBIRI E IINAND MARTIN G. ROf ,DEZ

President of the Senate Speaker of the House*
ofRepresentatives
 10

This Act, which is a consohdation of House Bill No. 7006

and Senate Bill No. 2165, was passed by the House of
Representatives and the Senate of the Philippines on
August 30,2023 and August 29,2023, respectively.

REOn^^S. VELASCO
ecretaty of Secretary General
House ofRepresentatives

Approved: 2 6 OGT 2123

FERDINAND ROMUaLdEZ MARCOS JR.

President of the Philippines

REPUBLIC OF THE PHILIPPINES

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