financial management assessment (fma) report on naga city

Confidential Standard & Poor’s

Analysis of Naga

Financial Management Assessment

City of Naga, Camarines Sur, Philippines

July 31, 2009

FMA (Financial Management Assessment) is a comprehensive assessment of the local or regional government's (LRG) financial management sophistication and quality. Standard & Poor’s evaluates challenges, strengths, and risks of the entity’s financial management systems and practices in the context of global good practices and the local environment. The evaluation reviews systems and policies that build general financial management capacity, fiscal accountability and discipline, and efficient allocation and use of public funds. Systems and policies are assessed in terms of their progressiveness and performance considerations. Progressiveness and performance of individual elements are then combined into an overall score, using weighting factors based on local realities.

FMA scores0 = Underdeveloped, Evolving or Poor

1 = Basic

2 = Intermediate

3 = Sound

4 = Sophisticated

5 = Advanced

Government brief Status: City government with executive and

legislative branches and autonomous budget.

Major revenue sources: Real property tax, business tax and central transfers (IRA)

Core expenditure mandates : Primary health care, garbage collection, waste disposal, social welfare and local infrastructure (e.g. city roads/bridges, school buildings, health facilities, housing, water supply, drainage/flood control)

Territory statisticsNaga Philippines

Population, 2007 Mils 0.16 88.57

Economic structure Trading centre for the region. Economy mostly engaged in agriculture and trade.

GDP per capita, 2007 US$800* US$1,638

*GDP per capita for Bicol Region. Data by city level not available.

Key elements highlighted in bold

OVERALL SCORE: 2 (Intermediate)

SummaryThe overall FMA score of ‘Intermediate’ for Naga City reflects its moderately developed level of financial reporting and fairly high level of disclosure, adequate performance in annual budgeting and debt management skills which are more sophisticated than most local peers. On the other hand, the score takes into account the basic practices of Naga in elements of FMA like expenditure management and medium-term planning.

Notably, Naga City’s overall FMA score is the highest among assessed Philippines LGUs to date, reflecting the city’s more balanced developments in its FMA practices for most key areas, as opposed to some local peers who may demonstrate sound practices in certain elements such as revenue management, but at the same time scoring poorly in other areas like debt management, budgeting etc. Nevertheless, the Naga city government’s lack of computerization in most aspects of financial management such as annual budgeting, financial reporting, tax collection and disbursement have emerged as a constraint on these respective scores. A comprehensive computerization of the city’s system could potentially see improvement in Naga’s overall FMA and individual element scores.

In addition to Naga City’s own weaknesses in financial management practices, the city’s overall FMA score is

Score

Annual budgeting 2

Financial policy and medium-term fiscal framework

1+

Financial reporting and disclosure 2+

Revenue management 2

Expenditure management 1+

Debt management 2-

Liquidity and cash management 2-

Management of LRG-owned companies

N/A

Performance focus and measurement 1+

FMA Financial Management Assessment

Budget statistics (mil. PHP)2007 2006 2005

Operating revenues 468.6 425.4 380.4

Capital revenues 0.0 17.1 0.0

Operating expenditures 309.4 310.7 272.9

Capital expenditure 98.0 85.8 29.5

Direct debt 90.0 102.0 122.2

Tax-supported debt 90.0 102.0 122.2

Cash and liquid assets 244.7 159.0 152.7

Capital expenditure (% of total expenditures) 24.1 21.6 9.8

Debt service (% of operating revenues)) 4.7 7.6 8.5

Direct debt (% of operating revenues) 19.2 24.0 32.1

PHP—Philippines Pesos

constrained by the poor public finance environment that Philippines LGUs operate in. The complicated national set-up to supervise LGUs involves multiple national agencies simultaneously managing the same local government space, and the general lack of co-ordination among them has contributed to ineffective oversight. An extremely politicized environment has also brought about general institutional weaknesses in the city government, although this is not unlike many other LGUs. In the absence of institutionalized policies and a medium-term policy framework, the key-man risk factor is significant for Naga City, since elected mayors have almost full discretion in all key decisions, which is a similar situation to other LGUs.

Like many LGUs in the Philippines, Naga have no accounting software in place and still relying on archaic manual procedures that are cumbersome and lengthy. Mitigating this is the existence of timely and comprehensive audits by the national Commission On Audit. However, the majority of LGUs received qualified opinions on their financial statements. Notably, Naga City is the only city assessed so far to have consistently received a clean opinion from COA on its financial statements, which placed the quality of its financial reporting considerably above domestic peers.

Overview of Naga City’s key strengths and weaknessesNot withstanding the systemic constraints and institutional weaknesses afflicting Naga City, the strongest areas of financial management which drive the overall score for the city government include annual budgeting at Intermediate, financial reporting and disclosure at Intermediate Plus and debt management at Intermediate Minus. Despite the lack of budgeting or accounting software, the city has been accurate in its budgeting performance on both revenue and expenditure. And as mentioned, its audited financial statements are free of material qualifications, a rarity among Philippines LGUs. This is a significant driving factor behind the city’s overall score as well. Naga city has also proven to have the capacity to managed debt and demonstrated a relatively high level of quality in its debt monitoring.

On the other hand, the overall score is weakened by the city’s developing practices in expenditure management, financial policy and medium-term framework and to a lesser extent liquidity & cash management. Most of Naga city’s systems are not computerized. Its disbursement process is still manual, resulting in lengthy procedures and slow turnaround in clearing payables. The city also suffers from a lack of explicitly stated polices in liquidity and reserves investment, and mismatches from month to month between revenue collected and disbursement. The absence of medium or long-term planning is evident in most elements of financial management of Naga (although again this is a prevalent weakness among Philippine local governments in general).

The city’s financial statements had received clean audit 2


opinions from COA in the last few years. No notable discrepancies appeared on Naga’s audited statements except for the usual inconsistency in the valuation of physical assets, and COA reported that the city is expected to resolve them by end 2008. Naga’s transparency in its reporting of financial performance is also noteworthy, with the comprehensive publishing of its annual budget, interim annual and quarterly financial statements released on a timely basis on the city website. However its financial reporting score is constrained by the lack of accounting software that would potentially reduce paperwork and offer easier access to financial information within the city administration. Nonetheless, Naga has still managed to consistently produce reliable financial statements despite the lack of electronic solutions.

Likewise, despite the absence of any budgeting software, Naga’s annual budgeting performances have been strong and demonstrated relative accuracy on both revenue and expenditure planning. It is conservative on revenue budgeting, with final outcome more often than not exceeding initial budgeted amount. Correspondingly, expenditure outturn has been lower by an average of 1.6% from budgeted amounts in the period 2005-2007 (albeit with some volatility from year to year). Though Naga’s annual budgeting process is still largely characterized by incremental-based, it is one of the few LGUs to have at least adopt some form of programmatic expenditure planning. Currently, around 15%-20% of the city’s budget is estimated to be program-based.

The Naga city government demonstrate adequate capacity in debt management. Unlike most LGUs who have monthly debt repayment automatically deducted from their monthly IRA transfers, the Naga administration keeps good track of its amortization schedule and issue checks on timely basis to directly repay lending banks. Furthermore, all of the city’s loans are negotiated with clauses that allow prepayment without penalties. The city government actively monitors borrowing rates and would seek cheaper refinancing whenever the opportunity arises. However, like most LGUs, Naga’s debt management score is weakened by the lack of a coherent and explicit debt policy. Alleviating this is that the city’s medium-term investment plan (LDIP) has acted as a pseudo-debt policy of the current administration.

Conversely, a key weakness of Naga’s financial management practices stemmed from its basic to under-developed practices in expenditure management. Since most processes are still not computerized, the city’s disbursement and authorization processes are lengthy and cumbersome. Revenue collection is also on a manual basis and this lack of computerization throughout the whole administration has translated to the city’s high number of civil servants employed. Personnel expenses currently stand at around 43% of Naga’s total income, close to the regulated 45% ceiling.

Constraining the city’s overall FMA score is also its lack of a

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stipulated financial policy, no liquidity targets and no comprehensive risk assessment tools. These translate to significant constraints in Naga’s liquidity and cash management score. No paperless payment exists and the city government takes as long as 147 days to clear payables, suggesting delays to suppliers and contractor and/or significant past obligations outstanding for considerable amount of time but still classified as current liabilities. However, offsetting the funds ‘owed’ to the city’s Special Education Fund under ‘Intra-Agency Payables’ would yield significantly lower numbers of days payables to 109 days, although still high, but more comparable to domestic peers. In mitigation, the city’s liquidity position is healthy, with free cash sufficient to cover on average 9X of monthly operating expenditures. Nevertheless, despite the large amount of reserves held, the city has not developed risk assessment tools in its investing of reserves and merely place its cash with whichever bank offer the best interest rates.

Other weaknesses of Naga include the lack of a comprehensive medium-term fiscal framework, and the absence of concrete financial policies or targets. In mitigation, the city’s LDIP indicate some progress towards a multi-year planning approach, which has been lacking among Philippines LGUs. Nonetheless, the city’s spending capacity appear to be still weak, judging from only around 50% of the LDIP being implemented each term, and yet large excess funds year after year still occur, leading to the rapid accumulation of reserves.

Peer comparisonIn the Philippines local context, Naga City’s overall FMA sophistication is more advanced than most peers (see Appendix II “FMA Peer Comparison Table”), reflecting the city’s more balanced developments in its FMA practices for most key areas, relative to some local peers who may demonstrate sound practices in certain areas but at the same time scoring poorly in others.

Although the city government does not yet have an electronic budgeting solution in place, its performance in final budgetary outcomes compared to initial projections is far better than local peers and it is the only LGU assessed so far to practice some form of program-based budgeting (albeit still insufficiently developed by international standards). This contributes to its annual budgeting score being the highest among local peers. Similarly, while most LGUs had mainly received qualified opinions from COA, Naga, who had consistently been passed with a clean opinion on its financial statements, stands out strongly among its peer group in terms of quality of its financial reporting. Coupled with the comprehensive disclosure of financial information on the city website, these translate to Naga having the highest score for financial reporting and disclosure among assessed LGUs to date. In addition, as mentioned above, Naga’s high quality of debt monitoring reflects its superior capacity to manage debt than other

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Philippines LGUs too.

In terms of financial policy and medium-term framework, with most peers being extremely weak in medium and long-term planning, the existence of a detailed LDIP puts Naga slightly ahead, though it would still be considered lacking by international standards.

Naga’s visibility in setting of tax and charges appear to be more transparent than peers. External stakeholders are consulted and tacit agreement is sought before revisions of rates are proposed. Its revenue projections is also significantly more accurate, however the distinct lack of computerization in its collection system put its revenue management score on the same level as Marikina and Taguig, but below that of Quezon.

Conversely, the city’s slow turnover in spending transactions and the implication of high overdue payables has affected its liquidity and cash management score in relation to peers. The city’s number of days payables ratio is worse off than the averages of most local peers. Naga’s score, is however, not worse off than Taguig or Iligan in this aspect due to its minimizing of currents accounts (two) to handle day-to-day transactions, and the city has maintained a healthy liquidity position providing ample coverage of operating expenses in recent years.

Key trends and challenges for the development of Naga’s FMA scoreA comprehensive computerization of the city’s revenue and expenditure management systems, adopting an accounting software (such as e-NGAS) and implementing an e-budgeting software, could help address some of the weaknesses in the elements of expenditure and revenue management, financial reporting and annual budgeting. Naga is currently in the process of developing new computerized systems for both the RPT and business tax collection, and these are expected to come on board by 2010. If successful, the computerized revenue collection would help streamline processes and reduce paperwork. Consequently, the benefits from a more efficient revenue collection system could lead to a leaner civil service. Nonetheless, reducing headcount has often proved to be challenging in the politicized public finance environment of Philippines local governments.

In the area of expenditure management, a full computerization of the payment process and adoption of an e-commerce facility would make disbursement more efficient and faster clearing of payables. This in turn would help reduce the currently high ratio for number of days payables.

To raise Naga City’s overall FMA assessment to a Sound level, would depend on the city administration taking a longer-term view on all aspects of its financial planning. A key area is the establishment of a forward-looking revenue and expenditure framework, with linkages to a comprehensive long-term

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investment plan and the annual budgeting process. While the city’s LDIP is a good starting point for development of a longer-term approach to financial management, its usefulness would increase with more details on programs, accountability for achievement of key targets and comprehensive exploration of potential funding sources. Naga’s overall FMA score could also benefit from directly linking the LDIP to the annual budgeting process. With the introduction of more program-based expenditure planning, this could improve the overall level of financial management sophistication for the city. In addition, stipulation of policies in liquidity, debt and investment management would help improve continuity beyond the political cycle.

At the more systemic level, an introduction of medium-term budgeting framework requirement would have a positive effect in terms of general impact on financial management sophistication of Philippines LGUs. More effective and efficient co-ordination between central agencies and LGUs would also require efforts on the central government’s part. Nonetheless, the establishment of the Joint Memorandum Circular should help in some way to further the endeavors to co-ordinate and synchronize local governments planning, execution and reporting cycles and formats with those of national agencies. Central efforts to transit all LGUs to a full accrual accounting system, ensuring consistency of its application and imposing penalties for non-compliance would also help improve financial reporting and disclosure standards.

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Public Finance Environment of Philippines LGUs

Local Government Units (LGUs) in the Philippines operate in a public finance environment that is generally unfavourable towards the implementation of sophisticated fiscal management systems. The environment is extremely politicized and marked with legislative constraints. LGUs are being managed simultaneously by multiple national agencies, and a general lack of co-ordination between them has brought about ineffective oversight.

Complicated national set-upAs many as four National Government Agencies (NGAs) have oversight responsibilities over the LGUs. They include;

1. Department of Interior and Local Government (DILG)2. National Economic and Development Authority (NEDA)3. Bureau of Local Government Finance (BLGF) from the Department of Finance

(DOF)4. Department of Budget Management (DBM)

In addition, there is also the Commission of Audit (COA), the independent national body which set accounting standards and procedures, and audits all LGUs. For Metro Manila cities, the Metropolitan Manila Development Authority (MMDA) is responsible for the delivery of basic urban services requiring coordination in the capital region. These include land use planning and zoning, traffic management, public safety and sanitation and waste management.

There appears to be an absence of co-ordination among the NGAs and to complicate the already onerous national set-up, each agency issues its own set of guidelines and manuals to the LGUs. Their oversight responsibilities often overlapped with one another and inconsistent policies existed from time to time. Take for example the extremely unwieldy financial reporting process for LGUs. The BLGF is responsible for revenue and debt management, DBM focuses on expenditure management, while COA audits the LGU. Each agency has its own reporting format and therefore every LGU has to maintain three different sets of accounts just to comply with the different standards--the treasurer submits her statements to BLGF, the budget officer to DBM and the chief accountant to COA. On a positive note, the three NGAs are in the process of agreeing on one format.

Often local governments find it so difficult to navigate through the heavy bureaucracy and paperwork that they simply isolate themselves from central bodies. They would do the bare minimum to fulfil national requirements (which is not stringent to begin with), and for regulations that have no penalties for non-compliance or are weakly-enforced, LGUs would not bother to uphold them. Overall, these factors contribute to not only a lack of co-ordination between NGAs, but also a lack of co-ordination between NGAs and LGUs.

The central government is aware of this problem, and in 2007, the NGAs with the help of GTZ (a German government owned technical agency) commissioned a Joint Memorandum Circular (JMC) to synchronize and harmonize local planning, revenue administration, budgeting and expenditure management among LGUs. The JMC also defined the roles and functions of the NGAs and reconciled their policies. However, with city mayors and provincial governors mostly operating in silos and holding great influence over their electorate, it will in all likelihood be years before the JMC can fulfill its intended purpose.

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Politicized environment with short-term frameworkPerhaps the single greatest obstacle to developing a favorable public finance environment in the Philippines is the highly-politicized nature of the whole LGU system. LGU elections are held once every three years, and Local Chief Executives (LCEs) may be elected up to three consecutive terms. With each term of office being so brief, many mayors/governors concentrate solely on how to win the next election and thus operate from a populist platform. LCEs rarely engage in medium-term planning beyond the term of their office, therefore investment projects tend to be small-sized and short-term. Even among the more developed LGUs in the Metro Manila region, long-term investment strategizing (if any) is done vaguely, with no financial backing or cost estimates. The political reality consequently results in a local governance system with a very short forward-looking framework.

Key-man risk and the lack of continuityElected LCEs hold great power in their jurisdiction. All key decisions rest in the hands of the mayor/governor and they have the final say on all issues—the local finance committee can propose a budget or the local planning committee can recommend a project, but ultimately it is the LCE who has the sole discretion to decide. Therefore how a local government is run is driven essentially by the personality of the mayor/governor. This poses a very significant key-man risk factor for every LGU in the Philippines.

More often than not, a newly-elected LCE who comes into power will replace the key heads of departments of the previous administration. However it is at times difficult to dismiss officials due to potential political backlash and the risk of losing electoral support. Subsequently officials who cannot be dismissed are rotated to positions that are unimportant and irrelevant to their skill-sets, so the headcount in the city government bureaucracy keeps increasing every time a new mayor is elected (see “Expenditure Management” section). Newly-elected LCEs have also been known on occasions to not honour the obligations incurred by the previous administration. Since institutionalized frameworks are also lacking (LCEs do not bother to put long-term systems in place), the Philippine LGU system is characterized by a distinct lack of continuity. This further contributes to the short-term approach in practically all aspects of local public finance—financial policy, budgeting, investment priorities etc.

Weak credit cultureA credit culture is lacking among local governments in the Philippines. There are LGUs who run healthy surpluses and are lowly leveraged, yet in spite of that have generally very low credit standing with banks. This is partially explained by previous instances of local governments defaulting on bank loans because the newly-elected LCE refuse to honour the borrowings of the previous administration. The absence of debt monitoring systems and poor debt management sophistication among local governments further contributes to the reluctance of banks to make unsecured lending to LGUs.

The current prevailing mentality among Philippines commercial banks is that they would only lend to the LGU if they can trust the current mayor/governor--a manifestation of the key-man risk factor again--and even then the tenor of the loan would not exceed the political cycle. This links back to the problem of lack of continuity and the politicized nature of public finance operations. So in such an environment, the Government Financial Institutions (GFIs) have emerged as the major source of lending to LGUs. As LGUs must receive central government transfers (IRA; Internal Revenue Allotment) through GFIs, the GFIs would then lend to LGUs with the IRA pledged against the borrowings. Repayment is then automatically deducted from the IRA account monthly. And since many LGUs have no loans on an unsecured basis, a vicious cycle emerged

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whereby local governments in the Philippines have not been able to build up savvy debt management expertise. This weak credit culture is a key impediment to the funding of long-term infrastructure development in the country.

Highlighting the state of the credit culture among local governments is their attitude towards the settlement of their current obligations and payables. There is no legislated time period for an LGU to make payments to contractors and suppliers for projects or services delivered before the payables is deem as overdue. Some LGUs have internal guidelines to settle payables within 30 days, but the majority take an apathetic approach towards it, frequently dragging on payments for months and even years.

Corruption and graftWidespread corruption and graft is also a significant problem for the Philippines public finance environment. In the 2008 Corruption Perception Index of Transparency International, the country came in at a lowly 141 out of 180 countries, faring worst than Asian peers like Indonesia (126) and Vietnam (121). Mayors and governors have been known to waive tax arrears in return for political or monetary favors. Most LGUs are still not fully computerized and using archaic manual procedures that require layers of human interaction, leaving gaping holes in the system for graft.

Accounting standards and accountabilityOne of the few positives in the Philippines public finance environment is the existence of comprehensive audit on LGUs’ accounts. The Commission On Audit has facilitated the standardization of accounting procedures and guidelines, audits the LGUs on a timely basis and publishes their financial statements regularly. However, COA’s transition from cash basis accounting to a full accrual system is poor. LGUs currently reports on a confusing mixed-accrual standard—expenditures are reported on accrual basis, while three methods are adopted for revenue reporting (accrual for IRA, modified accrual on property tax and cash basis for all other revenues). This cumbersome reporting format makes comparison between budget outcome with final statement on income and expenditures almost impossible. On a positive note, LGUs consolidate the accounts of all their economic enterprises on their own balance-sheets. The Code does not allow LGUs to set-up commercial corporations therefore off-budget activities are kept to a minimum, mitigating the risk of large contingent liabilities on local governments.

In late 2003, COA attempted to introduce computerization of accounting procedures across the country by rolling out e-NGAS (Electronic New Government Accounting System). However, there were flaws with e-NGAS and it was designed primarily for LGUs with simple operations. Therefore the take-up rate among the more developed Metro Manila LGUs has been slow, with those adopting it heavily customizing the software to suit their individual operations. Ironically, it appears that even though COA is encouraging LGUs to adopt e-NGAS, but when it comes to audit requirements, COA also wants to audit the manual entries. This adds on unnecessary double-work for LGUs who has adopted e-NGAS and discourages computerization of accounting procedures across the country.

The LGUs generally take a lackadaisical approach towards COA. Out of the 217 LGUs audited by COA in 2007, only 18% received no qualifications on their financial statements. The majority (76%) of LGUs was rendered with qualified opinions, and 6% were deemed so deficient that they were given an adverse opinion i.e. the financial statements do not represent fairly the financial position of the LGU. There are no penalties for non-compliance with audit standards and LGUs generally ignore audit recommendations year after year. COA would only report an LGU to the Office of Ombudsman if the discrepancies are deemed to be extremely serious and graft-related.

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Therefore financial statements of local governments can be unreliable at times, especially in regards to the balance-sheet with un-reconciled balances on cash position and large discrepancies in inventories due to past-year failure to recognize depreciation on assets.

Central government requirement and monitoringThe BLGF and DBM have responsibilities for regulating the local governments. Two broad principles guide their monitoring; BLGF makes sure that a LGU’s total borrowings is limited at 20% debt servicing of its regular income, and DBM checks that LGUs do not budget more than 45-55% (depending on class of LGU) of total regular income on salaries. These two guidelines are strictly monitored by the two agencies and non-compliance can result in harsh penalties against the LCE and his/her administration like being removed from office or brought to the Ombudsman for criminal charges.

At the moment, there is no existing standard system of fiscal performance indicators among LGUs in the Philippines. The Department of Finance (DOF) is proposing a new Local Government Financial Performance Management System (LGFPMS) that will benchmark the LGUs in terms of service delivery and financial performance. The new LGPMS is based on defined quantitative indicators and LGUs who score well, could potentially be allowed to exceed the current borrowing cap of 20% of income on debt servicing. However, it appears that even when the LGPMS is passed, LGUs are not obligated to adopt it and there are no penalties for missing benchmarks.

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Key Factors by Analytical Elements

1. Annual Budgeting: Score 2

Annual budgeting is a principal tool of government financial planning. The analysis takes into consideration accounting basis and methods of budgeting, the scope of operating activities and entities covered, the structure of appropriations, budget consultations, and approval processes.

Main strengths:

Naga City display intermediate practices in key aspects of annual budgeting. The city has been consistent with the centrally stipulated sub-national government budgeting process, which is thoroughly described in the Local Government Code (LGC).

Naga’s budgeting performance is fairly strong and has demonstrated relative accuracy on both revenue and expenditure planning over the last five years (see table 1). It is conservative on revenue budgeting, with final outcome more often than not exceeding initial budgeted amount. Correspondingly, expenditure outturn has been lower by an average of 1.6% from budgeted amounts in the period 2005-2007 (albeit with some volatility from year to year). The city’s budgeting results are significantly better than many of its rated domestic peers who had reported persistent under-collection in revenues and double-digit deviations in spending from initial targets (see appendix II).

The city administration practises a so-called ‘result-based’ budgeting process. Each department head is first asked to submit what are the results they wished to achieve and these results must be consistent with planning documents, mayor’s and stakeholder’s priorities, and commitment to national legislations. To minimise overly-optimistic projections of projects/programs that can be accomplished, advance estimates of income is let known to city departments to moderate their expectations. Department heads also have to adhere to an internal ‘80-20’ budgeting rule i.e. department heads must try to generate targeted results with 80% of funds requested and 20% to be set aside as savings. Any requests to exceed 80% use of allocated appropriations must be justified, for example, unexpected surge in energy prices resulting in cost over-runs etc. Weekly management meetings are also held between department heads and the mayor to discuss accomplishment of set targets. In all, these practises have resulted in a relatively high-degree of accuracy in fiscal outcome versus budgeted targets for the city.

There are usually few in-year revisions to Naga City’s budget. These are in the form of supplementary budgets which require approval of the Sanggunian (the local legislative council). For the last few years, around an average of three supplementary budgets were passed annually and were typically small in size.

The city government’s economic enterprises’ are included in the annual budget therefore minimizing off-budget activities, adding to better transparency in the budgeting process.

Main weaknesses:

Naga City’s budget planning is manual and is not supported by any budgeting software. Many Philippines LGUs are lagging significantly behind in terms of computerization of the budgeting process. However, LGUs like City of Marikina are currently pilot-testing an ebudget system, which if successful and adopted throughout the Philippines, could enable the budget process to be more efficient and transparent.

The city’s budgeting process is cash-based with expenditure planning characterised by indexations and incremental norms. Though its program-based budgeting process is still insufficiently developed, Naga is nevertheless one of the few LGUs in the

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Philippines to practise some form of programmatic expenditure planning (the city’s share of expenditure based on programs is currently around 15%-20%).

Annual budgeting is done for only one year forward. Though the city reportedly performs multi-year revenue and expenditure forecasts, Standard & Poor’s have yet to receive those reports despite requests made to review them (pending information).

The annual budget’s linkage to a comprehensive medium-term fiscal framework is weak. Though the city’s Annual Investment Plan is incorporated in the annual budget, and the AIP is in turn based on a medium-term development plan, actual realization rate of the medium-term plan is low and dependent upon revenue collection (for more details, see section on ‘Financial policy and medium-term fiscal framework’).

Table 1 Naga City General Fund: Actual outturn VS budgetGeneral Fund (PHP. Mil) 2007 2006 2005 2004 2003

Deviation of final total revenues from initial budget 4.4% 13.5% 0.0% -7.6% 7.9%

Deviation of final total expenditures from initial budget -4.7% 5.0% -5.2% 3.0% 13.1%

Key international good practiceSome of the factors that Standard & Poor’s considers as international good practice are:

Program-based budgeting and accrual-based information are used extensively.

The budget encompasses all fiscal operations and financial liabilities of the government.

Expenditures and revenues should be specified separately in the budget (“gross recording”). Off-budget funds are avoided or only allowed under strict conditions.

Policy-making decisions with financial implications are accurately reflected in the budget before the start of the fiscal year.

Budgets are based on unbiased projections of both revenues and expenditures, and reflect realistic intentions of the government.

Budgeting practices and procedures mandate preparation of an annual budget, so that government units are assigned budget appropriations before the start of the fiscal year.

Budgets are consistently executed during the fiscal year, with only minor adjustments if necessary.

Reliable information systems support planning and execution of the government's budget.

Practices comply with national budget process legislation.

Annual budgeting process is linked to medium-term fiscal framework, policy or plan.

2. Financial policy and medium-term fiscal framework: Score 1+ Financial policy and medium-term fiscal framework are elements of fiscal management that determine government accountability for a stable financial position in the long run and the government's ability to consistently implement long-term policies.

Main strength: Continuity in the city planning office and the initiative of the mayor has enabled the

development of a medium-term investment program (Local Development Investment Program). The LDIP--planned according to a series of discussion with stakeholders--is a 3-year investment program that corresponds to the local political cycle. It lists the

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programs/projects that the administration aims to achieve during its term of office. Cost estimates are provided, with timetable of completion and borrowing requirements projected for key programs/projects. The city’s AIP is formulated with the LDIP in mind. However with limited revenue and funding sources, only about 50% or less of the LDIP are implemented each term, and unfinished projects are deferred to the next term of office. Though Naga’s LDIP is not a comprehensive medium-term fiscal framework, it is a noteworthy attempt at multi-year planning, which to date has been lacking among assessed LGUs in the Philippines.

Main weaknesses: Despite the existence of more fully developed medium-term investment projections

than exist in many LGUs, the Naga city government does not have any stated financial policies and guidelines that link medium-term development goals with fiscal parameters and no clear policy on borrowing. Moreover, the LDIP does not go beyond the current political cycle. Internally, the city administration agrees on the lone simplistic guideline that spending should not exceed income collected.

LGUs are required by the central government to prepare Comprehensive Land Use Plan (CLUP) and Comprehensive Development Plan (CDP) as a guide to long-term planning up till 30 years. However, most LGUs have a lackadaisical approach towards it. Naga City last prepared the reports in 2000 and has not updated it since. Although the city’s CLUP has some project cost estimates, the linkage between the long-term plan and the city’s LDIP and AIP is ineffectual, and the CLUP merely serves as a very broad guide to city planning.

Though the city informed during our meetings that multi-year revenue and expenditure forecasts are done each time a new term of government begins, we have yet to receive reports of these despite repeated requests (pending information).

Key international good practice: Some of the factors that Standard & Poor’s considers as international good practice are:

A clearly stipulated financial policy incorporates long-term perspective, which explains the government's vision of its future financial position, key aggregate fiscal parameters, and the way financial management is executed.

Government financial policy is designed to support financial stability and disciplined financial management. There should be observable consistency in the implementation of financial policy and limited sensitivity to political cycles.

The government maintains a proactive approach to identification, analysis, evaluation, and treatment of potential risks. The risk management process is clearly defined, documented, and integrated with fiscal management processes.

Allocation of government financial resources by functions is in accordance with medium-term framework, with strategic and fiscal targets guiding allocation decisions.

There is an explicit investment policy. The focus of government investments is on public sector development. Investments in the public sector are allocated on principles of competitiveness and transparency. An effective priority-setting mechanism is an important part of selecting government wide investment projects.

There is an explicit link between the government’s long-term strategic development plan, medium-term development plan and medium-term fiscal or financial framework.

3. Financial reporting and disclosure: Score 2+Disclosure and effective communication of financial, performance, and governance information to government stakeholders is a critical aspect of government accountability.

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Main strengths: Naga’s financial reporting and disclosure are on an intermediate to sound level. The

city’s financial statements are prepared according to national accounting standards (NGAS; New Government Accounting System) in a timely manner and are externally audited by COA. The annual audit report on Naga had been published regularly on COA’s website since 2002 and is comprehensive. These audit reports served as a dependable source of financial information on the city.

The city’s financial statements received the closest to a clean opinion from COA among LGUs assessed by S&P to date. COA stated in Naga’s 2007 audit certificate that the city’s financial statements are free of material misstatements, and was prepared in conformity with generally accepted state accounting principles. The only notable qualification made by COA was on the discrepancies in validity of Property, Plant & Equipment and Inventories. Naga has responded to the audit recommendation by starting a conduct of the physical count of the properties of the City government and has set up an Inventory Committee for this purpose. The city is scheduled to submit reports of the physical count to COA by September 2008. In mitigation, discrepancies with regards to inventory value are very common among Philippines LGUs as COA had only introduced the concept of depreciation of assets in 2004. With difficulties in retrieving historical records, many LGUs are not able to depreciate their assets accordingly. Yet the Commission continues to make the same recommendation on inventory values even though it is often beyond the city government to resolve these discrepancies.

The level of Naga’s public disclosure of financial performance is relatively high, with both annual budgets and final out-turns of revenue and expenditure regularly published on the city government’s website. The city also publishes its quarterly financial statements (Statement Of Operations) on a timely basis on its website.

Main weaknesses:

The city government does not use any accounting software. Journal and ledger entries are recorded manually on paper before being transferred to excel. Naga currently does not have plans to adopt e-NGAS, the computerized form of the NGAS standards. In mitigation, Naga City has consistently produced reliable and clear financial statements despite the lack of accounting software.

Despite certain drawbacks in the centrally required NGAS standards, Naga does not have any managerial accounting to offset these drawbacks. The city administration also does not seem to calculate an aging profile of their receivables and payables (pending submission).

Naga city government does not publish an annual report. The mayor delivers an annual State Of The City Report (available on the city website), which highlights the city’s achievements for the year, and goals and vision ahead. However the SOCR does not contain meaningful financial indicators or relative performance measures. And like many LGUs in the Philippines, there is no updated meaningful socio-economic data available on the city level.


Financial statements are accurately and timely prepared. Internal audit ensures accuracy of accounting and financial statements.

The government implements integral accounting policy across all its units. Accounting staff has sound qualifications.

Accounting software allows easy access to accounting information and reduces paper work.

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Managerial accounting offsets drawbacks of statutory accounting and reporting.

Accounting information allows segment analysis of government activities.

Interim and annual financial statements are published within a reasonable timeframe after the end of the reporting period.

Government financial statements are subject to annual independent audit.

Government accounting is compliant with national accounting standards.

4. Revenue management: Score 2Revenue management is mainly concerned with medium-term and in-year forecasting of revenues, timely collection, limitation of non-transparent revenue practices, and prudent policies for one-off and unexpected shifts in revenues.

Main strengths:

Naga demonstrates intermediate in key aspects of revenue management, with revenue collection fairly efficient and timely. The city’s seasonality of revenue from month-to-month is predictable. Discounts are given to taxpayers for early payment which allowed Naga to build up cash buffer at beginning of the financial year against months of low collection.

The city’s revenue budgeting appears to be the most accurate so far among assessed LGUs. Naga’s revenue planning tend to err on the conservative side, with final revenue out-turns usually more than initial targeted amount. Although exhibiting some volatility, its deviation of final total revenue from budget is still relatively lesser than that of it domestic peers, some of which have high double-digit deviations.

Philippines LGUs are protected to some degree against tax arrears by stringent local tax laws. LGUs have the right to auction sale properties and shut down businesses for tax arrears. However difficulties abound in actual legal enforcement. The Naga city administration estimates its RPT collection efficiency to be around 80% and expressed that the processes involved in a property auction sale can be lengthy and onerous. Other methods have been taken to improve RPT collection such as stepping up efforts in sending out delinquency letters and dispatching tax officials to call on tax delinquents in person. Comparatively, business tax collection efficiency is higher at around 90%. The city government conducted tax mapping of barangays and has an active task force in place to shut down businesses that are recalcitrant in tax payments.

Naga’s tax revision processes are fairly transparent; the city government conducts public hearing and external stakeholders are consulted before amended fees/tax rates are proposed to the Sanggunian. For example, in the 2008 increase in fair market valuation for the assessment of RPT, the local chamber of commerce was consulted and gave tacit approval to the city government on the revision. The mayor had pledged that RPT should henceforth be used only to fund capital expenditure and therefore increases in RPT would ultimately benefit taxpayers (albeit whether this is fiscally feasible remains to be seen). However, Naga City’s revenue management is still weakened by the absence of clear and stipulated long-term revenue policies. Tax revisions though requiring approval of the Sanggunian, is still largely driven by the mayor.

Comprehensive information on tax rates and business permits is available on the city website. Application forms, documents and local ordinances can be downloaded too. The City Treasurer’s Office had also set up an online business information inquiry system, whereby business owners can find details on tax assessments, payments, arrears outstanding etc by entering their business identification number. Nonetheless, though the city website is highly-informative, electronic transactions are not implemented yet. Taxpayers and business owners are still required to visit city hall to pay their taxes and submit applications/documentations for permits.

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Main weaknesses:

Revenue budgeting is restricted to just one year forward, and though the management indicated that multi-year forecasts (three years) are prepared each time a new term of office is elected, S&P have yet to receive the information (pending submission).

Most of the city’s revenue collection have not been computerized and largely rely on manual processes. The management reported that Naga’s RPT collection was partially computerized in the early 90s but had reverted to manual processes in 2008. The reason for abandoning the computerized system was that as the city’s EDPU (Electronic Data Processing Unit) suffered from high staff turnover, the unit had consequently not been able to find the personnel to reprogram the new valuations and rates for RPT in the software. Likewise, the business tax collection is also on a manual basis. The city administration has however expressed that there are plans to implement new computerized systems for both the RPT and business tax collection this year.

S&P has requested to review the aging profile of Naga’s receivables, however the city have not reverted (pending submission). Knowing the aging profile of its receivables can help provide more accuracy to the Naga city government in the preparation of its annual revenue budget.


Clear and stipulated long-term revenue policies, including taxes and user charges; Timely collection of government revenues; Reliable medium-term and in-year revenue forecasting; Reliable billing systems for taxes and user charges; and Restriction of non-transparent (non-cash) revenue arrangements.

Chart1

In-year Revenue & Expenditure Volatility

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5. Expenditure management: Score 1+

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Evaluation of expenditure management takes into consideration the LRG’s expenditure control mechanisms, with a specific view to remuneration policy, management of transfer and capital expenditures, and procurement practices.

Main strengths:

The city government in Naga follows strict procedures for tendering and for government procurement. Its procurement process is characterized by adoption of tenders for most of its expenses and an Annual Procurement Program is prepared along with the budget as mandated by the LGC. There is a dedicated unit, the General Services Department which handles all procurement and a Bids and Awards Committee (BAC) handling the tendering/bidding procedures. The city’s bidding process is linked to the national Philippine Government Electronic Procurement System (PhilGEPS) Notifications to bid for large projects are published in local and national newspapers. Naga city also started an e-procurement service on its website which post notices on bidding and results of various public bidding.

The city’s BAC checks on the documentation and assesses the qualification of bidders. The qualification of the lowest (successful) bidder is posted on the city website for added accountability. In addition, the city assessor monitors the quality of the project construction/installation and the city government would stop or delay payments to contractors if they are found to be short on promised deliverables.

Main weaknesses:

Naga displays basic practices in some aspects of expenditure management. The disbursement processing and authorization system is on a manual basis with no computerization. The process of submission of claims from suppliers to final disbursement is lengthy and cumbersome, with payments still made through paper cheques that require physical signatures of the Mayor and Treasurer, and manual recording of disbursement vouchers. On average, 600-700 checks are signed every month. Other than salaries of city government employees paid via bank-to-bank, no other paperless payment exists yet.

Currently, Naga city spends about 43% of its income on wages. National regulations broadly define the salary policies of local governments; payment on personnel services cannot exceed 45% of total regular income and individual wage levels are subject to national net tariff. Not only does Naga have little flexibility in personnel expenses, its high level of spending on wages constraints its ability to provide better public service and more capital outlays. In mitigation, central wage guidelines applies only to regular employees and since only about 50% of Naga’s civil service is regular hires with the rest on casual/contractual basis, it gives the city government to some extent, moderate flexibility on manpower.

The city’s number of personnel is considered above-average in the local context and high by international standards. This is partly a function of the still largely manual revenue and expenditure management processes in the city administration. The management is trying to keep headcount at present levels, and believe that same level of government services can be delivered with a leaner civil service. However, the political will to reduce headcount does not appear to be strong.

The city’s expenditure commitment is dependent on revenue collected i.e. even if an expense has been appropriated for, the city would only obligate it if enough cash has been collected (see section on ‘liquidity and cash management’ and ‘debt management’). Though it can be argued that this is conservative financial management, the city’s expenditure management suffers from a lack of sophistication in long-term fiscal strategizing.

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Naga city has no stated policy on the time period for payables to be outstanding before being considered as over-dues. It also does not seem to compile aging profile of payables (pending submission).


Pay policies allow proper recruitment, retention, and motivation of appropriate staff.

Procurement of property and services is comprehensively documented and structured, including the processes of risk assessment, seeking and evaluating alternative solutions, awarding the contract, delivery of and payment for the property and/or services and, where relevant, the ongoing management of a contract.

Transfer payments are managed in a manner sensitive to risks, complexity, accountability for results, and economical use of resources. Effective financial and program controls are designed and implemented within transfer payment programs.

A stipulated long-term policy of transfers to other budgets ensures stability and transparency of fund allocations. Recipients of such funds should have certainty regarding the size of the transfers during the current fiscal year and reliable guidance for the next several years.

Budgets are split into operating and capital expenditures, with medium-term implications of capital projects, such as operating expenditures after completion of capital expenditures, taken into consideration.

Commitment and authorization management insures that expenditure does not exceed the appropriated amount. Contractual liabilities of government units are properly managed consistent with budget appropriations and performance plans.

6. Debt management: Score 2-Use of debt financing should go side by side with investment policy, strategic planning, and other advanced fiscal management tools. Active debt policy improves government flexibility to develop public infrastructure and support strategic policies.

Main strengths:

Naga’s debt management skills are close to an intermediate level, but can be considered more advanced compared to many Philippines LGUs who are at the evolving or under-developed stage. Unlike other LGUs who borrow on an ad-hoc basis, the Naga city government draws up basic borrowing plans in advance for key projects in its medium-term investment plan (LDIP).

The city has a good record in managing debt and has no default history. Given the low scale of borrowings (direct debt outstanding of PHP 63 million which amount to 13% of 2008 operating revenues), it is understandable that there is no dedicated unit set up for debt management. The City Treasurer is responsible for debt management. The treasurer’s office keeps good track of all existing and past loans, and readily provided S&P with an amortization schedule, and summary details of loans upon request. Details of the city’s loans outstanding are also made public in its COA audited financial statements.

Unlike most LGUs who have monthly debt repayments automatically deducted from IRA transfers, Naga’s city treasurer keeps track of loan payment dates and issue checks monthly or quarterly to repay directly to the lending banks. This has so far been done on a timely basis. Furthermore, the management expressed that all its recent loans have been negotiated with clauses that allow prepayment without penalties incurred. The Local Finance Committee monitors current market interest rates and will seek refinancing whenever the opportunity arises. In all, Naga’s level of debt management

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sophistication, though considered basic in the international context, is the most advanced seen among assessed LGUs to date.

Main weaknesses:

Naga’s debt management practices are weakened by the lack of a coherent and stated debt policy. Other than funding for key projects outlined in the LDIP, borrowings can be driven by the mayor instead of being strategized around long-term investment plans and funding sources. In mitigation, Naga has thus far only borrowed to fund infrastructure projects.

The public finance environment has resulted in Naga’s funding source being restricted to just bank loans from GFIs, albeit this is similar to many LGUs. Thus the management has not been able to establish comprehensive procedures to evaluate possible funding options that take into account market, liquidity, operation and concentration risks.

In August 2007, the city government had secured a loan from the Land Bank of Philippines for the purpose of buying out a more costly loan from the Department of Finance. COA in its value-for-money audit however noted that Naga city could have saved interest expense of around PHP6 million had it self-financed the DOF loan with its own unrestricted free cash. The management indicated that self-financing was difficult during that available window of refinancing as there was no appropriations budgeted earlier to fund long-term obligations. It appears that though the city administration had implemented measures to more effectively manage debt, inflexible national budgetary laws can at times impede local government efforts.

The city government pledges cash balances as collateral for its bank borrowing, despite the fact that this borrowing is also secured by an IRA pledge in the event of default. Although this double provision is dictated by the state-owned banks that they are able to borrow from, this practice has the effect of reducing Naga’s overall borrowing capacity and financial flexibility.


Debt policy takes account of market, credit, liquidity, funding, operational, and concentration risks.

Debt management is arranged to minimize risks and costs of borrowing and to meet external financing needs of the government, without jeopardizing financial stability, but while improving financial flexibility.

Debt policy is explicitly formulated and communicated to the legislative authority and the wider community.

7. Liquidity and cash management: Score 2-The evaluation of a government’s practices in liquidity and cash management is mainly based on a review of cash flow planning, practices in financing spending units, and maintenance of liquidity levels.

Main strengths:

Naga demonstrates intermediate practices in some aspects of liquidity and cash management. Though there are no stipulated targets, the Naga city government has performed well in managing their liquidity. Throughout the 12-month period of January 2008 to December 2008, Naga had managed to maintain average cash liquidity high enough to cover almost 9X of monthly operating expenditures. In addition, free cash

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and liquid assets have been increasing since 2004, and are estimated to have reached 83% of annual operating expenditures at of end 2008.

The city maintains two main current accounts for its day-to-day transactions, with the DBP and Land Bank, which is not in line with best practice of having single treasury account but nonetheless better than many local peers. Moreover, the City Treasury reports on a daily basis, the total collection for the day, checks made out and expenses incurred, and also total funds available.

The city has an arrangement with Land Bank for an uncommitted credit-line of PHP330 million. However there is no commitment fee involved and the credit line can only be drawn upon to fund capital expenditures.

Main weaknesses:

The city has no stipulated liquidity policy that explains the government’s liquidity targets and liquidity risks, no comprehensive guide to in-year cash flow planning and no stated policy on investment of cash reserves. Internally, the management agrees to the lone guideline that daily disbursement should be less than cash collected. The existence of the LDIP suggests that steps are being undertaken by the current management to institutionalized medium-term spending priorities in Naga. However, the city’s spending capacity seems weak, judging from the large excess funds despite only about half or less of the LDIP being implemented each term.

For the city government, more revenue comes in the first quarter of the year as discounts are given to taxpayers for early payment and/or prompt payment (see chart 1). This is mismatched by bulky expenditure items (mostly for capital projects) occurring in second half of the year. This seasonality could cause potential cash-flow management issues. In mitigation the seasonality has been predictable, and the administration manages it by building up cash buffer in the high-collection months in preparation for covering expenses in lean months. Naga has also not been late on salaries or debt payments before.

Despite the large reserves it holds, Naga’s does not have a stated policy on investment of cash reserves. The city invests its cash based solely on which bank offers the best time deposit rates. This lack of risk assessment could potentially be damaging to the city’s financial health. In mitigation, currently in the Philippines, LGUs can only place funds with Government Financial Institutions (GFIs) and LGUs have access to special savings deposit accounts that offer higher interest rates.

The calculation of number of days payables ratio from the financial statements shows about 147 days in 2007, one of the highest among peers, and suggesting frequent delays in payment to suppliers and contractors, and/or that there are significant past obligations outstanding for long period of time yet still classified under current liabilities. Notably, these high payables are in part driven by the city’s placing of Special Education Funds in General Fund. In the Philippines, the Local Government Code mandates that RPT rates to be set at a maximum total of 3%, of which 2% collected goes to the General Fund while 1% would go to the Special Education Fund. LGUs would typically then have two accounts to collect RPT. In the case of Naga City, the management had placed all RPT collections under one General Fund account in order to gain better interest rates. This resulted in inflated current liabilities due to the inclusion of funds ‘owed’ to the SEF under ‘Intra-Agency Payables’. Excluding these would yield significantly lower numbers of days payables to 109 days, although still high, but more comparable to domestic peers. To add, the city has clear priorities of payment; on the top of the agenda list are salaries, and the current administration has never been late on these payments.

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Chart 2

In-Year Liquidity Volatility

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Table 2PHP. Mil 2008E 2007 2006 2005 2004

Cash and liquid assets at year-end 299.3 244.7 159.0 152.7 59.01

% of annual opex 82.9% 79.1% 51.2% 56.0% 22.3%E- estimated


Cash management combines secure banking and treasury arrangements with fast and convenient cash disbursements. Internal (treasury) control over proper cash spending is reliable, but not burdensome for spending units.

Electronic transaction processing systems are in place.

The financial body ensures timely availability of funds to spending units. The government spends according to expenditure plans and policy priorities, not when cash becomes available.

Cash and debt management are integrated. The government manages its consolidated risk position.

The government minimizes the costs of maintaining its liquidity through adequate size, structure, and income from its liquidity reserve.

8. Governance of government-owned and controlled companies (LRG companies):Score; Not Applicable. Government-owned enterprises often constitute a significant share of government activities. The evaluation here is focused around strategic management and corporate governance practices in relation to government-owned entities.

The city government does not own or control any commercial entities. The city is, however, responsible for economic enterprises that include the city convention center, public markets, the slaughterhouse, the bus terminal, city hospital and several others.

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These enterprises are generally self-liquidating, though the associated operating costs and required budgetary support is fully consolidated in the city’s financial statements.


Adherence to the principles of good corporate governance;

Proper representation of the government interests through effective coordinating of shareholding responsibilities;

Transparent nomination process for board of director and CEO positions, based on competence and skills;

Effective segregation of regulatory, shareholder, and consumer roles with respect to LRG companies;

Comprehensive corporate business planning at LRG companies;

Systematic performance monitoring of LRG companies and their top managers. Performance reporting by LRG companies; and

Independent external audit of large LRG companies.

9. Performance focus and measurement: Score 1+

Strong focus on public expenditure results is an established trend in contemporary public management. This is a relatively sophisticated capability to improve effectiveness of government spending that is not necessary for daily operations.

Main strength:

The Naga city government issues an annual “State of Local Governance Report” at the end of year that benchmark departmental performance to the national LGPMS program. The document highlights the city’s performance in terms of its internal capacity (inputs), service delivery performance (outputs) and development level performance (outcome). (The Department of Finance (DOF) Local Government Financial Performance Management System (LGFPMS) in theory benchmarks LGUs in terms of service delivery and financial performance. The LGPMS is based on defined quantitative indicators and LGUs who score well, could potentially be allowed to exceed the current borrowing cap of 20% of income on debt servicing. However, compliance with the LGPMS is not mandatory, there are no penalties for missing benchmarks and there is no mechanism behind it to audit results. No LGU that we have come across has failed to perform well, and this appears to remain a potentially useful but ineffectual program.)

Main weaknesses:

Naga demonstrates mostly basic practices in performance focus and measurement. The city collates an Annual Accomplishment Report, citing the accomplishments of key line units for the year and whether certain performance targets were achieved (pending submission of document). Bonuses of staff are also base on performance subject to availability of funds. However, performance focus and measurement has no linkage to the annual budget, nor the LDIP or the city’s vision, and there is no systemic approach in place to deal with performance challenges.

Similarly, the mayor’s annual ‘State of City Report’ highlights the major accomplishment of the city government for the year. However again, there are no linkages here to address Naga’s performance in relation to its AIP or LDIP, nor are there relative measurements of effectiveness.

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Effective performance management system with consistently planned and executed performance targets;

Performance management that covers all levels--from the government as a whole, to a particular government employee--and has a close link to budgeting;

Constant review and evaluations of existing expenditure programs and policies;

Reviews of opportunities to increase efficiency of operations through public private partnerships and outsourcing; and

Track record of successful restructuring of particular areas of operations, activities, and financial arrangement signaling the government's proactive approach to internal improvements.

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APPENDIX I

Financial Statistics

--Year ended Dec. 31-- (Mil. PHP) 2009F 2008E 2007 2006 2005

Budget indicators Operating revenues 505.0 488.0 468.6 425.4 380.4 Operating expenditures 393.0 361.1 309.4 310.7 272.9 Operating balance 112.1 126.9 159.1 114.7 107.5 Operating balance (% of operating revenues) 22.2 26.0 34.0 27.0 28.3 Capital revenues 0 0 0 17.1 0Capital expenditures (capex) 110.0 69.0 98.0 85.8 29.5 Balance after capex 2.1 57.9 61.1 46.0 78.0 Balance after capex (% of total revenues) 0.4 11.9 13.1 10.4 20.5 Debt repaid 14.0 27.0 12.0 20.2 22.7 Net budget loans NA NA NA NA NABalance after debt repayment and onlending (12.0) 30.9 49.2 25.8 55.3 Balance after debt repayment and onlending (% of total revenues) (2.4) 6.3 10.5 5.8 14.5 Gross borrowings 12.0 0 0 0 47.6 Balance after borrowings 0.1 30.9 49.2 25.8 102.9 Balance after borrowings (% of total revenues) 0.0 6.3 10.5 5.8 27.1 Total revenues (% of GRP or GDP) NA NA NA NA NAModifiable revenues (% of operating revenues) 34.3 34.2 30.9 32.0 29.2 Capex (% of total expenditures) 21.9 16.0 24.1 21.6 9.8 Operating-revenue growth (%) 3.5 4.2 10.2 11.8 8.7 Operating-expenditure growth (%) 8.8 16.7 (0.4) 13.9 3.1

Debt and liquidity Direct debt (debt outstanding at year-end) 61.0 63.0 90.0 102.0 122.2 Direct debt (% of operating revenues) 12.1 12.9 19.2 24.0 32.1 Direct debt (% of GRP) NA NA NA NA NATax-supported debt (% of Operating revenues) 12.1 12.9 19.2 24.0 32.1 Interest (% of operating revenues) 1.6 1.6 2.2 2.8 2.5 Debt service (% of operating revenues) 4.4 7.1 4.7 7.6 8.5 Cash & liquid assets (% of operating expenditures) 76.4 82.9 79.1 51.2 56.0 Cash & liquid assets (% of debt service) 1,363.6 859.0 1,103.9 495.1 474.8 Payables (% of total expenditure) 31.8 36.6 40.2 41.6 46.3 F--Forecast. E--Estimate. PHP-Philippines Peso. GRP--Gross regional product. N.A.--Not available.

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Disclaimer:A Financial Management Assessment (“FMA”) is an evaluation of the financial management systems of a LRG/GRE and aimed at determination of its strength, weaknesses, risks and opportunities in the context of global good practices and local environment. An FMA is prepared utilizing Standard & Poor’s methodology for a fiscal accountability and capability evaluation. The FMA is based on the information submitted by or on behalf of the subject LRG/GRE and on other information Standard & Poor’s may have available. Standard & Poor’s relies on the subject LRG/GRE for the accuracy, completeness, timeliness and reliability of the information submitted in connection with an FMA. Standard & Poor’s (i) does not and cannot guarantee the accuracy, completeness or timeliness of the information relied on in connection with an FMA and any report or the results obtained from the use of such information, and (ii) does not and cannot warrant suitability of an FMA or any report for any particular purpose or use. An FMA and its results are (i) an opinion and are not a verifiable statement of fact, (ii) provided without any express or implied warranties; (iii) do not represent an audit by Standard & Poor’s; and (iv) do not constitute investment, financial or other advice. In providing an FMA Standard & Poor’s is not providing an issuer credit rating, a financial strength rating or a corporate governance score of the subject entity. Any use or distribution of an FMA must be in compliance with all applicable laws. An FMA is conducted by Standard & Poor’s Ratings Services as an independent analytical service designed to preserve the independence and objectivity of the evaluation service.

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financial management assessment (fma) report on naga city

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