Benchmarking Study:
Local Financial Management Framework
for Good Governance*
RUFO R. MENDOZA, Ph.D.
Ateneo School of Government
Ateneo de Manila University
45th Annual Conference and Meeting
PHILIPPINE ECONOMIC SOCIETY
Nov. 14-16, 2007
*draws largely from the research of the Economic Policy Reform and Advocacy project
of the USAID and the Ateneo de Manila University
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Introduction
• Over a decade of Local Government Code of
1991: an opportune time to examine the
progress of LGUs in managing their finances
– LGC governs the conduct and management of
financial affairs, transactions, and operations
– LGC outlines the fundamental principles in local
fiscal administration
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• Minimal efforts to examine LGUs’ compliance to legal provisions
• Mechanisms for innovations and excellence in handling financial responsibilities not adequately in place
• Champions of sound LFM not given appropriate attention and rewards
wasted opportunities for coming out with norms and standards that may be adopted and replicated by
other LGUs.
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Local Financial Management as a System
FUNCTIONAL AREAS
• TREASURY
• ACCOUNTING
• BUDGETING
• Other Finance-Related
Areas
FINANCIAL PERFORMANCE
• Liquidity
• Activity
• Cost Efficiency
• Profitability • Leverage
• Stability
GOOD GOVERNANCE
• Transparency
• Accountability
• Predictability
• Participation
F E E D B A C K S
SYSTEM COMPONENTS PERFORMANCE
MEASUREMENT OVERARCHING GOALS E
X
T
E
R
N
A
L
E
N
V
I
R
O
N
M
E
N
T
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Methodology
COMPONENT A
IDENTIFYING PRACTICES COMPONENT B
AWARD SYSTEM
Phase 1
Identify key
measures of
financial
performance
Phase 3
Identify current
good practices
in LFM
(utilizing shortlist
of LGUs from
Phase 2)
Phase 4
Develop a
framework for
assessing LFM
in LGUs
Phase 5
Establish an
award system
in LFM
Phase 2
Select a shortlist
of relatively
high-performing
LGUs
(utilizing key
measures from
Phase 1)
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Key Measures of Financial Performance
Revenue Indicators
1 Local Revenues per capita = Total local revenue collection / LGU population
2 IRA dependency ratio = IRA revenues / Total revenue collection
Expenditure Indicators
3 Expenditures per capita = Total expenditures / LGU population
4 Personal services ceiling = Expenditures for personal services / Total
revenue collection
Liquidity Indicators
5 Current ratio = Current assets / Current liabilities
6 Quick ratio = (Cash + Very short-term assets) / Current liabilities
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Asset Turnover Indicators
7 Total asset turnover = Internally-generated revenues / Total assets
8 Fixed asset turnover = Internally-generated revenues / Net fixed assets
Leverage Indicators
9 Debt to asset ratio = Total debt / Total assets
10 Debt servicing ratio = Debt service payments / Total revenue collection
Profitability Indicators
11 Return on assets = Increase in equity / Total assets
12 Enterprises profitability rate = Net income (loss) of economic enterprises /
Total gross income of economic enterprises
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Shortlist of LGUs for Field Research
Provinces Cities Municipalities
Laguna Antipolo, Rizal Agoo, La Union
La Union Iligan, Lanao del
Norte Kalibo, Aklan
North Cotabato Iloilo, Iloilo Limay, Bataan
Rizal Olongapo,
Zambales Sampaloc, Quezon
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FINANCIAL MANAGEMENT
PRACTICES
ORGANIZATIONAL COMPETENCIES
BENCHMARKS
• identified with high frequency of responses during the field research
• identified both in the literature review and the field research
• mandated by oversight agencies
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1. Functionality of the LFC (All functional areas)
Compliance with the duties of the LFC specified in Section 316
of the Local Government Code of 1991
Maintenance of regular meeting schedule for LFC to periodically
review financial issues of the LGU.
Legal mandate &
high frequency (12)
High frequency (9)
PROPOSED BENCHMARKS
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2. Generation of Revenue from Traditional Sources
(Treasury functional area)
Utilization of all applicable revenue sources provided
for by the Code
Information and education campaigns to reach out to
the taxpayer community, inform and educate them of
their obligation to pay taxes, and provide them with
information on tax information
Computerized tax-mapping utilizing geographical
information systems or other systems to facilitate
accurate mapping of real property and business
taxpayers. This also involves the computerization of
records
High frequency (12)
Indicated by literature
review & field research
Indicated by literature
review & field research
PROPOSED BENCHMARKS
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Real property tax practices
Aggressive implementation of judicial remedies
Public auction of delinquent properties
Deputization of Barangays to disseminate information
and collect real property taxes
Business tax practices
Aggressive implementation of judicial remedies
Adoption of presumptive income level approach to
estimating minimum levels of gross income for
different types of businesses
Establishment of a one-stop shop so that business
permits and taxes can be processed in one day
Indicated by literature
review & field research
Indicated by literature
review & field research
PROPOSED BENCHMARKS
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3. Nontraditional Sources of Funds
(Treasury functional area)
Maximization of revenues from LGU assets (such as
income from various user fees, special parking areas,
renting out equipment, leasing property, etc.)
Utilization of public-private partnerships (such as build-
lease-transfer and build-operate-transfer) to finance
public capital assets.
Utilization of bond flotation to finance large, revenue-
generating public capital assets.
Indicated by
literature review &
field research
Indicated by
literature review &
field research
Indicated by
literature review &
field research
PROPOSED BENCHMARKS
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4. Control Mechanisms on Fund Management
(Accounting and Treasury functional areas)
Compliance with COA guidelines on fund
management to ensure proper management
control over all transactions.
Legal mandate &
high frequency (12)
PROPOSED BENCHMARKS
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5. Local Budgeting
Compliance with DBM guidelines on budget
preparation, budget authorization, budget
review, budget execution, and budget
accountability
Legal mandate
& high frequency
(12)
PROPOSED BENCHMARKS
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6. Expenditure Management
Compliance with COA and DBM guidelines to
ensure proper management control over
expenditure management.
Maintenance of special appropriations in the
budget for debt service and remittances to national government agencies in order to
prioritize those expenditures.
Legal mandate &
high frequency (12)
Legal mandate &
high frequency (8)
PROPOSED BENCHMARKS
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7. Compliance with Accounting System and
Financial Reporting Standards
Compliance with the New Government
Accounting System of COA for accounting
and financial reporting. This includes the
implementation of the electronic NGAS system.
Wide availability of financial information in
publicly accessible locations.
Legal mandate &
high frequency (12)
Legal mandate &
high frequency (9)
PROPOSED BENCHMARKS
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8. Link between Planning and Budgeting
Preparation of budgets that operationalize local
plans, which are developed with multi-sectoral
participation as mandated by DILG and NEDA,
such as Local Development Plans, Local
Development Investment Plans, and Annual Investment Plans. This includes the
implementation of a Capital Investment Planning
process.
Legal mandate &
high frequency (9)
PROPOSED BENCHMARKS
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9. Practices on Procurement
Compliance with RA 9184 (Government Procurement Reform
Act) as mandated by DBM. This includes the
implementation of the electronic procurement system.
Legal mandate
PROPOSED BENCHMARKS
10. Financial Performance Management
Generation and analysis of regular revenue and expenditure
variance reports (weekly or monthly) to monitor the
financial performance of the LGU.
High frequency (8)
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1.Leadership Styles Innovative practices are encouraged among staff members during
regular meetings and in informal settings.
Individual staff targets are clarified during regular staff meetings.
High frequency (9)
High frequency (6)
2. Structure and Staffing Practices All new hires are required to undergo training and orientation
conducted by the department and by the Civil Service
Commission.
High frequency (6)
3. Rewards and Incentives
Productivity Incentive Programs are implemented, which provide
employees with token annual bonuses.
Model Employee or Employee of the Year awards are awarded to top performers.
High frequency (9)
High frequency (7)
PROPOSED BENCHMARKS
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4. Internal Process Improvements Regular staff meetings are utilized to identify bottlenecks and issues in work
processes. The Local Chief Executive also plays a critical role in initiating and endorsing process improvements in the LGU.
oHigh frequency (6)
5. Accountability Mechanisms Accountability for each staff member is based on job description and is
reviewed semi-annually during performance evaluations. Staff members are held accountable for their actions and are reprimanded as needed.
oHigh
frequency (8)
6. External Linkages Department heads of LFC are active members of their respective associations
(e.g. Philippine League of Local Treasurers), which serve as sources of continuing education and innovative ideas. Department heads of LFC
departments also maintain close ties with their fellow department heads in other LGUs in the region to share best practices.
Training opportunities are actively pursued for officers and staff to facilitate
capacity-building and skills development. These include trainings conducted by oversight national government agencies such as DOF, COA, and DBM.
oHigh
frequency (6) oHigh
frequency (6)
PROPOSED BENCHMARKS
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Recommendations
1. Establishing an award-giving body and system for recognizing LGUs with exemplary practices in local financial management.
3. Establishing quantitative benchmarks for LGU financial performance.
5. Further research on best practices for budgeting, accounting, and other finance-related areas.
7. Identifying good practices in LFM of Barangays
9. Focusing on LFM organizational competencies