EN BANC On December 27, 1997, the President of the Philippines issued AO 372.

Its full text,

with emphasis on the assailed provisions, is as follows:
[G.R. No. 132988. July 19, 2000
"ADMINISTRATIVE ORDER NO. 372
AQUILINO Q. PIMENTEL JR.,, Petitioner, v. Hon.ANDER AGUIRRE in his
capacity as Executive Secretary, Hon. EMILIA BONCODIN in her capacity as ADOPTION OF ECONOMY MEASURES IN GOVERNMENT FOR FY 1998
Secretary of the Department of Budget and Management, Respondents.
WHEREAS, the current economic difficulties brought about by the peso depreciation
ROBERTO PAGDANGANAN, intervenor. requires continued prudence in government fiscal management to maintain
economic stability and sustain the country's growth momentum;
DECISION
WHEREAS, it is imperative that all government agencies adopt cash management
PANGANIBAN,  J.: measures to match expenditures with available resources;

The Constitution vests the President with the power of supervision, not control, NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the Philippines,
over local government units (LGUs). Such power enables him to see to it that LGUs by virtue of the powers vested in me by the Constitution, do hereby order and
and their officials execute their tasks in accordance with law. While he may issue direct:
advisories and seek their cooperation in solving economic difficulties, he cannot
prevent them from performing their tasks and using available resources to achieve SECTION 1. All government departments and agencies, including state universities
their goals. He may not withhold or alter any authority or power given them by the and colleges, government-owned and controlled corporations and local
law. Thus, the withholding of a portion of internal revenue allotments legally due governments units will identify and implement measures in FY 1998 that will
them cannot be directed by administrative fiat. reduce total expenditures for the year by at least 25% of authorized regular
appropriations for non-personal services items, along the following suggested
The Case areas:

Before us is an original Petition for Certiorari and Prohibition seeking (1) to annul 1. Continued implementation of the streamlining policy on organization and staffing
Section 1 of Administrative Order (AO) No. 372, insofar as it requires local by deferring action on the following:
government units to reduce their expenditures by 25 percent of their authorized
regular appropriations for non-personal services; and (2) to enjoin respondents a. Operationalization of new agencies;
from implementing Section 4 of the Order, which withholds a portion of their
internal revenue allotments. b. Expansion of organizational units and/or creation of positions;

On November 17, 1998, Roberto Pagdanganan, through Counsel Alberto C. Agra, c. Filling of positions; and
filed a Motion for Intervention/Motion to Admit Petition for Intervention,
[1 attaching thereto his Petition in Intervention 2 joining petitioner in the reliefs
sought. At the time, intervenor was the provincial governor of Bulacan, national d. Hiring of additional/new consultants, contractual and casual personnel,
president of the League of Provinces of the Philippines and chairman of the League regardless of funding source.
of Leagues of Local Governments. In a Resolution dated December 15, 1998, the
Court noted said Motion and Petition. 2. Suspension of the following activities:

The Facts and the Arguments

a. Implementation of new capital/infrastructure projects, except those
which have already been contracted out;

Page 1 of 11 Pimentel v Aguirre

 b. Acquisition of new equipment and motor vehicles; SECTION 2. Agencies are given the flexibility to identify the specific sources of
cost-savings, provided the 25% minimum savings under Section 1 is complied with.
c. All foreign travels of government personnel, except those associated
with scholarships and trainings funded by grants; SECTION 3. A report on the estimated savings generated from these measures
shall be submitted to the Office of the President, through the Department of Budget
d. Attendance in conferences abroad where the cost is charged to the and Management, on a quarterly basis using the attached format.
government except those clearly essential to Philippine
commitments in the international field as may be determined by SECTION 4. Pending the assessment and evaluation by the Development Budget
the Cabinet; Coordinating Committee of the emerging fiscal situation, the amount equivalent to
10% of the internal revenue allotment to local government units shall be withheld.
e. Conduct of trainings/workshops/seminars, except those conducted by
government training institutions and agencies in the performance SECTION 5. The Development Budget Coordination Committee shall conduct a
of their regular functions and those that are funded by grants; monthly review of the fiscal position of the National Government and if necessary,
shall recommend to the President the imposition of additional reserves or the lifting
f. Conduct of cultural and social celebrations and sports activities, except of previously imposed reserves.
those associated with the Philippine Centennial celebration and
those involving regular competitions/events; SECTION 6. This Administrative Order shall take effect January 1, 1998 and shall
remain valid for the entire year unless otherwise lifted.
g. Grant of honoraria, except in cases where it constitutes the only
source of compensation from government received by the person DONE in the City of Manila, this 27 th day of December, in the year of our Lord,
concerned; nineteen hundred and ninety-seven."

h. Publications, media advertisements and related items, except those Subsequently, on December 10, 1998, President Joseph E. Estrada issued AO 43,
required by law or those already being undertaken on a regular amending Section 4 of AO 372, by reducing to five percent (5%) the amount of
basis; internal revenue allotment (IRA) to be withheld from the LGUs.

i. Grant of new/additional benefits to employees, except those expressly Petitioner contends that the President, in issuing AO 372, was in effect exercising
and specifically authorized by law; and the power of control over LGUs. The Constitution vests in the President, however,
only the power of general supervision over LGUs, consistent with the principle of
j. Donations, contributions, grants and gifts, except those given by local autonomy. Petitioner further argues that the directive to withhold ten percent
institutions to victims of calamities. (10%) of their IRA is in contravention of Section 286 of the Local Government Code
and of Section 6, Article X of the Constitution, providing for the automatic
release to each of these units its share in the national internal revenue.
3. Suspension of all tax expenditure subsidies to all GOCCs and LGUs

The solicitor general, on behalf of the respondents, claims on the other hand that
4. Reduction in the volume of consumption of fuel, water, office supplies, electricity AO 372 was issued to alleviate the "economic difficulties brought about by the peso
and other utilities devaluation" and constituted merely an exercise of the President's power of
supervision over LGUs. It allegedly does not violate local fiscal autonomy, because
5. Deferment of projects that are encountering significant implementation problems it merely directs local governments to identify measures that will reduce their total
expenditures for non-personal services by at least 25 percent. Likewise, the
6. Suspension of all realignment of funds and the use of savings and reserves withholding of 10 percent of the LGUs IRA does not violate the statutory prohibition
on the imposition of any lien or holdback on their revenue shares, because such
withholding is "temporary in nature pending the assessment and evaluation by the
Development Coordination Committee of the emerging fiscal situation."

Page 2 of 11 Pimentel v Aguirre

The Issues
This provision has been interpreted to exclude the power of control. In Mondano v.
Silvosa,[5 the Court contrasted the President's power of supervision over local
The Petition[3 submits the following issues for the Court's resolution: government officials with that of his power of control over executive officials of the
national government. It was emphasized that the two terms -- supervision and
control -- differed in meaning and extent. The Court distinguished them as follows:
"A. Whether or not the president committed grave abuse of discretion [in] ordering
all LGUS to adopt a 25% cost reduction program in violation of the LGU[']S fiscal
autonomy "x x x In administrative law, supervision means overseeing or the power or
authority of an officer to see that subordinate officers perform their duties. If the
latter fail or neglect to fulfill them, the former may take such action or step as
"B. Whether or not the president committed grave abuse of discretion in ordering prescribed by law to make them perform their duties. Control, on the other hand,
the withholding of 10% of the LGU[']S IRA" means the power of an officer to alter or modify or nullify or set aside what a
subordinate officer ha[s] done in the performance of his duties and to substitute
In sum, the main issue is whether (a) Section 1 of AO 372, insofar as it "directs" the judgment of the former for that of the latter."[6
LGUs to reduce their expenditures by 25 percent; and (b) Section 4 of the same
issuance, which withholds 10 percent of their internal revenue allotments, are valid In Taule v. Santos,7 we further stated that the Chief Executive wielded no more
exercises of the President's power of general supervision over local governments. authority than that of checking whether local governments or their officials were
performing their duties as provided by the fundamental law and by statutes. He
Additionally, the Court deliberated on the question whether petitioner had the locus cannot interfere with local governments, so long as they act within the scope of
standi  to bring this suit, despite respondents' failure to raise the issue.[4 However, their authority. "Supervisory power, when contrasted with control, is the power of
the intervention of Roberto Pagdanganan has rendered academic any further mere oversight over an inferior body; it does not include any restraining authority
discussion on this matter. over such body,"[8 we said.

The Court's Ruling

In a more recent case, Drilon v. Lim,[9  the difference between control and
supervision was further delineated. Officers in control lay down the rules in the
performance or accomplishment of an act. If these rules are not followed, they
The Petition is partly meritorious.
may, in their discretion, order the act undone or redone by their subordinates or
even decide to do it themselves. On the other hand, supervision does not cover
Main Issue:
such authority. Supervising officials merely see to it that the rules are followed, but
Validity of AO 372
they themselves do not lay down such rules, nor do they have the discretion to
Insofar as LGUs Are Concerned
modify or replace them. If the rules are not observed, they may order the work
done or redone, but only to conform to such rules. They may not prescribe their
Before resolving the main issue, we deem it important and appropriate to define own manner of execution of the act. They have no discretion on this matter except
certain crucial concepts: (1) the scope of the President's power of general to see to it that the rules are followed.
supervision over local governments and (2) the extent of the local governments'
autonomy. Under our present system of government, executive power is vested in the
President.[10 The members of the Cabinet and other executive officials are merely
Scope of President's Power of Supervision Over LGUs alter egos. As such, they are subject to the power of control of the President, at
whose will and behest they can be removed from office; or their actions and
decisions changed, suspended or reversed.[11 In contrast, the heads of political
Section 4 of Article X of the Constitution confines the President's power over local
subdivisions are elected by the people. Their sovereign powers emanate from the
governments to one of general supervision. It reads as follows:
electorate, to whom they are directly accountable. By constitutional fiat, they are
subject to the Presidents supervision only, not control, so long as their acts are
"Sec. 4. The President of the Philippines shall exercise general supervision over exercised within the sphere of their legitimate powers. By the same token, the
local governments. x x x" President may not withhold or alter any authority or power given them by the
Constitution and the law.

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Extent of Local Autonomy
directly responsive and effective at the local levels. In turn, economic, political and
social development at the smaller political units are expected to propel social and
Hand in hand with the constitutional restraint on the President's power over local economic growth and development. But to enable the country to develop as a
governments is the state policy of ensuring local autonomy.[12 whole, the programs and policies effected locally must be integrated and
coordinated towards a common national goal. Thus, policy-setting for the entire
country still lies in the President and Congress. As we stated in Magtajas v. Pryce
In Ganzon v. Court of Appeals,[13  we said that local autonomy signified "a more Properties Corp., Inc., municipal governments are still agents of the national
responsive and accountable local government structure instituted through a system government.[23
of decentralization." The grant of autonomy is intended to "break up the monopoly
of the national government over the affairs of local governments, x x x not x x x to The Nature of AO 372
end the relation of partnership and interdependence between the central
administration and local government units x x x." Paradoxically, local governments
are still subject to regulation, however limited, for the purpose of enhancing self- Consistent with the foregoing jurisprudential precepts, let us now look into the
government.[14 nature of AO 372. As its preambular clauses declare, the Order was a "cash
management measure" adopted by the government "to match expenditures with
Decentralization simply means the devolution of national administration, not power, available resources," which were presumably depleted at the time due to
to local governments. Local officials remain accountable to the central government "economic difficulties brought about by the peso depreciation." Because of a
as the law may provide.[15 The difference between decentralization of looming financial crisis, the President deemed it necessary to "direct all
administration and that of power was explained in detail in Limbona v. government agencies, state universities and colleges, government-owned and
Mangelin[16  as follows: controlled corporations as well as local governments to reduce their total
expenditures by at least 25 percent along suggested areas mentioned in AO 372.

"Now, autonomy is either decentralization of administration or decentralization of

power. There is decentralization of administration when the central government Under existing law, local government units, in addition to having administrative
delegates administrative powers to political subdivisions in order to broaden the autonomy in the exercise of their functions, enjoy fiscal autonomy as well. Fiscal
base of government power and in the process to make local governments 'more autonomy means that local governments have the power to create their own
responsive and accountable,'[17 and 'ensure their fullest development as self- sources of revenue in addition to their equitable share in the national taxes
reliant communities and make them more effective partners in the pursuit of released by the national government, as well as the power to allocate their
national development and social progress.'[18 At the same time, it relieves the resources in accordance with their own priorities. It extends to the preparation of
central government of the burden of managing local affairs and enables it to their budgets, and local officials in turn have to work within the constraints thereof.
concentrate on national concerns. The President exercises 'general They are not formulated at the national level and imposed on local governments,
supervision'[19 over them, but only to 'ensure that local affairs are administered whether they are relevant to local needs and resources or not. Hence, the necessity
according to law.'[20 He has no control over their acts in the sense that he can of a balancing of viewpoints and the harmonization of proposals from both local
substitute their judgments with his own.[21 and national officials,[24 who in any case are partners in the attainment of national
goals.

Decentralization of power, on the other hand, involves an abdication of political

power in the favor of local government units declared to be autonomous. In that Local fiscal autonomy does not however rule out any manner of national
case, the autonomous government is free to chart its own destiny and shape its government intervention by way of supervision, in order to ensure that local
future with minimum intervention from central authorities. According to a programs, fiscal and otherwise, are consistent with national goals. Significantly, the
constitutional author, decentralization of power amounts to 'self-immolation,' since President, by constitutional fiat, is the head of the economic and planning agency
in that event, the autonomous government becomes accountable not to the central of the government,[25 primarily responsible for formulating and implementing
authorities but to its constituency."[22 continuing, coordinated and integrated social and economic policies, plans and
programs[26 for the entire country. However, under the Constitution, the
formulation and the implementation of such policies and programs are subject to
Under the Philippine concept of local autonomy, the national government has not "consultations with the appropriate public agencies, various private sectors, and
completely relinquished all its powers over local governments, including local government units." The President cannot do so unilaterally.
autonomous regions. Only administrative powers over local affairs are delegated to
political subdivisions. The purpose of the delegation is to make governance more

Page 4 of 11 Pimentel v Aguirre

Consequently, the Local Government Code provides:[27 appropriation" is merely advisory in character, and does not constitute a
mandatory or binding order that interferes with local autonomy. The language
"x x x [I]n the event the national government incurs an unmanaged public sector used, while authoritative, does not amount to a command that emanates from a
deficit, the President of the Philippines is hereby authorized, upon the boss to a subaltern.
recommendation of [the] Secretary of Finance, Secretary of the Interior and Local
Government and Secretary of Budget and Management, and subject to consultation Rather, the provision is merely an advisory to prevail upon local executives to
with the presiding officers of both Houses of Congress and the presidents of the recognize the need for fisestraint in a period of economic difficulty. Indeed, all
liga, to make the necessary adjustments in the internal revenue allotment of local concerned would do well to heed the President's call to unity, solidarity and
government units but in no case shall the allotment be less than thirty percent teamwork to help alleviate the crisis. It is understood, however, that no legal
(30%) of the collection of national internal revenue taxes of the third fiscal year sanction may be imposed upon LGUs and their officials who do not follow such
preceding the current fiscal year x x x." advice. It is in this light that we sustain the solicitor general's contention in regard
to Section 1.
There are therefore several requisites before the President may interfere in local
fiscal matters: (1) an unmanaged public sector deficit of the national government; Withholding a Part of LGUs' IRA

(2) consultations with the presiding officers of the Senate and the House of
Representatives and the presidents of the various local leagues; and (3) the Section 4 of AO 372 cannot, however, be upheld. A basic feature of local fiscal
corresponding recommendation of the secretaries of the Department of Finance, autonomy is the automatic release of the shares of LGUs in the national internal
Interior and Local Government, and Budget and Management. Furthermore, any revenue. This is mandated by no less than the Constitution.[28 The Local
adjustment in the allotment shall in no case be less than thirty percent (30%) of Government Code[29 specifies further that the release shall be made directly to the
the collection of national internal revenue taxes of the third fiscal year preceding LGU concerned within five (5) days after every quarter of the year and "shall not
the current one. be subject to any lien or holdback that may be imposed by the national
government for whatever purpose."[30 As a rule, the term "shall" is a word of
Petitioner points out that respondents failed to comply with these requisites before command that must be given a compulsory meaning.[31 The provision is,
the issuance and the implementation of AO 372. At the very least, they did not therefore, imperative.
even try to show that the national government was suffering from an
unmanageable public sector deficit. Neither did they claim having conducted Section 4 of AO 372, however, orders the withholding, effective January 1, 1998, of
consultations with the different leagues of local governments. Without these 10 percent of the LGUs' IRA "pending the assessment and evaluation by the
requisites, the President has no authority to adjust, much less to reduce, Development Budget Coordinating Committee of the emerging fiscal situation" in
unilaterally the LGU's internal revenue allotment. the country. Such withholding clearly contravenes the Constitution and the law.
Although temporary, it is equivalent to a holdback, which means "something held
The solicitor general insists, however, that AO 372 is merely directory and has been back or withheld, often temporarily."[32 Hence, the "temporary" nature of the
issued by the President consistent with his power of supervision over local retention by the national government does not matter. Any retention is prohibited.
governments. It is intended only to advise all government agencies and
instrumentalities to undertake cost-reduction measures that will help maintain In sum, while Section 1 of AO 372 may be upheld as an advisory effected in times
economic stability in the country, which is facing economic difficulties. Besides, it of national crisis, Section 4 thereof has no color of validity at all. The latter
does not contain any sanction in case of noncompliance. Being merely an advisory, provision effectively encroaches on the fiscal autonomy of local governments.
therefore, Section 1 of AO 372 is well within the powers of the President. Since it is Concededly, the President was well-intentioned in issuing his Order to withhold the
not a mandatory imposition, the directive cannot be characterized as an exercise of LGUs IRA, but the rule of law requires that even the best intentions must be carried
the power of control. out within the parameters of the Constitution and the law. Verily, laudable
purposes must be carried out by legal methods.
While the wordings of Section 1 of AO 372 have a rather commanding tone, and
while we agree with petitioner that the requirements of Section 284 of the Local Refutation of Justice Kapunan's Dissent

Government Code have not been satisfied, we are prepared to accept the solicitor
general's assurance that the directive to "identify and implement measures x x x
that will reduce total expenditures x x x by at least 25% of authorized regular Mr. Justice Santiago M. Kapunan dissents from our Decision on the grounds that,
allegedly, (1) the Petition is premature; (2) AO 372 falls within the powers of the

Page 5 of 11 Pimentel v Aguirre

President as chief fiscal officer; and (3) the withholding of the LGUs IRA is implied "x x x Judicial power includes not only the duty of the courts to settle actual
in the President's authority to adjust it in case of an unmanageable public sector controversies involving rights which are legally demandable and enforceable, but
deficit. also the duty to determine whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or
First,  on prematurity. According to the Dissent, when "the conduct has not yet instrumentality of government. The courts, as guardians of the Constitution, have
occurred and the challenged construction has not yet been adopted by the agency the inherent authority to determine whether a statute enacted by the legislature
charged with administering the administrative order, the determination of the transcends the limit imposed by the fundamental law. Where the statute violates
scope and constitutionality of the executive action in advance of its immediate the Constitution, it is not only the right but the duty of the judiciary to declare such
adverse effect involves too remote and abstract an inquiry for the proper exercise act unconstitutional and void."
of judicial function."
By the same token, when an act of the President, who in our constitutional scheme
This is a rather novel theory -- that people should await the implementing evil to is a coequal of Congress, is seriously alleged to have infringed the Constitution and
befall on them before they can question acts that are illegal or unconstitutional. Be the laws, as in the present case, settling the dispute becomes the duty and the
it remembered that the real issue here is whether the Constitution and the law are responsibility of the courts.
contravened by Section 4 of AO 372, not whether they are violated by the acts
implementing it. In the unanimous en banc case Taada v. Angara, 33 this Court held Besides, the issue that the Petition is premature has not been raised by the parties;
that when an act of the legislative department is seriously alleged to have infringed hence it is deemed waived. Considerations of due process really prevents its use
the Constitution, settling the controversy becomes the duty of this Court. By the against a party that has not been given sufficient notice of its presentation, and
mere enactment of the questioned law or the approval of the challenged action, the thus has not been given the opportunity to refute it.[38
dispute is said to have ripened into a judicial controversy even without any other
overt act. Indeed, even a singular violation of the Constitution and/or the law is Second, on the President's power as chief fiscal officer of the country. Justice
enough to awaken judicial duty. Said the Court: Kapunan posits that Section 4 of AO 372 conforms with the President's role as chief
fiscal officer, who allegedly "is clothed by law with certain powers to ensure the
"In seeking to nullify an act of the Philippine Senate on the ground that it observance of safeguards and auditing requirements, as well as the legal
contravenes the Constitution, the petition no doubt raises a justiciable controversy. prerequisites in the release and use of IRAs, taking into account the constitutional
Where an action of the legislative branch is seriously alleged to have infringed the and statutory mandates."[39 He cites instances when the President may lawfully
Constitution, it becomes not only the right but in fact the duty of the judiciary to intervene in the fiscal affairs of LGUs.
settle the dispute. 'The question thus posed is judicial rather than political. The
duty (to adjudicate) remains to assure that the supremacy of the Constitution is Precisely, such powers referred to in the Dissent have specifically been authorized
upheld.'34 Once a 'controversy as to the application or interpretation of a constitutional by law and have not been challenged as violative of the Constitution.  On the other
provision is raised before this Court x x x , it becomes a legal issue which the Court is bound by hand, Section 4 of AO 372, as explained earlier, contravenes explicit provisions of
constitutional mandate to decide.'[35
the Local Government Code (LGC) and the Constitution. In other words, the acts
alluded to in the Dissent are indeed authorized by law; but, quite the opposite,
xxx Section 4 of AO 372 is bereft of any legal or constitutional basis.

"As this Court has repeatedly and firmly emphasized in many cases,[36 it will not Third, on the President's authority to adjust the IRA of LGUs in case of an
shirk, digress from or abandon its sacred duty and authority to uphold the unmanageable public sector deficit. It must be emphasized that in striking down
Constitution in matters that involve grave abuse of discretion brought before it in Section 4 of AO 372, this Court is not ruling out any form of reduction in the IRAs
appropriate cases, committed by any officer, agency, instrumentality or of LGUs. Indeed, as the President may make necessary adjustments in case of an
department of the government." unmanageable public sector deficit, as stated in the main part of this Decision, and
in line with Section 284 of the LGC, which Justice Kapunan cites. He, however,
In the same vein, the Court also held in Tatad v. Secretary of the Department of merely glances over a specific requirement in the same provision -- that such
Energy:[37 reduction is subject to consultation with the presiding officers of both Houses of
Congress and, more importantly, with  the presidents of the leagues of local
governments.

Page 6 of 11 Pimentel v Aguirre

Notably, Justice Kapunan recognizes the need for "interaction between the national and Section 286(a) of the Local Government Code, which provides:
government and the LGUs at the planning level," in order to ensure that "local
development plans x x x hew to national policies and standards." The problem is SEC. 286. Automatic Release of Shares. - (a) The share of each local government
that no such interaction or consultation was ever held prior to the issuance of AO unit shall be released, without need of any further action, directly to the provincial,
372. This is why the petitioner and the intervenor (who was a provincial governor city, municipal or barangay treasurer, as the case may be, on a quarterly basis
and at the same time president of the League of Provinces of the Philippines and within five (5) days after the end of each quarter, and which shall not be subject to
chairman of the League of Leagues of Local Governments) have protested and any lien or holdback that may be imposed by the national government for whatever
instituted this action. Significantly, respondents do not deny the lack of purpose.
consultation.

The share of the LGUs in the national internal revenue taxes is defined in Section
In addition, Justice Kapunan cites Section 287[40 of the LGC as impliedly 284 of the same Local Government Code, to wit:
authorizing the President to withhold the IRA of an LGU, pending its compliance
with certain requirements. Even a cursory reading of the provision reveals that it is
totally inapplicable to the issue at bar. It directs LGUs to appropriate in their annual SEC. 284. Allotment of Internal Revenue Taxes. - Local government units shall
budgets 20 percent of their respective IRAs for development projects. It speaks of have a share in the national internal revenue taxes based on the collection of the
no positive power granted the President to priorly withhold any amount. Not at all. third fiscal year preceding the current fiscal year as follows:

WHEREFORE, the Petition is GRANTED. Respondents and their successors are (a) On the first year of the effectivity of this Code, thirty percent (30%);
hereby permanently PROHIBITEDfrom implementing Administrative Order Nos. 372
and 43, respectively dated December 27, 1997 and December 10, 1998, insofar as (b) On the second year, thirty-five (35%) percent; and
local government units are concerned.
(c) On the third year and thereafter, forty percent (40%).
SO ORDERED.
Provided, That in the event that the national government incurs an unmanageable
Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Mendoza, Quisumbing, Pardo, Buena, public sector deficit, the President of the Philippines is hereby authorized, upon the
Gonzaga-Reyes, and De Leon, Jr., JJ., concur. recommendation of Secretary of Finance, Secretary of Interior and Local
Government and Secretary of Budget and Management, and subject to consultation
Kapunan, J., see dissenting opinion. with the presiding officers of both Houses of Congress and the presidents of the
liga, to make the necessary adjustments in the internal revenue allotment of local
government units but in no case shall the allotment be less than thirty percent
Purisima, and Ynares-Santiago, JJ., join J. Kapunan in his dissenting opinion. (30%) of the collection of national internal revenue taxes of the third fiscal year
preceding the current fiscal year: Provided, further, That in the first year of the
DISSENTING OPINION
effectivity of this Code, the local government units shall, in addition to the thirty
percent (30%) internal revenue allotment which shall include the cost of devolved
KAPUNAN, J.: functions for essential public services, be entitled to receive the amount equivalent
to the cost of devolved personal services.

In striking down as unconstitutional and illegal Section 4 of Administrative Order

No. 372 ("AO No. 372"), the majority opinion posits that the President exercised xxx
power of control over the local government units ("LGU), which he does not have,
and violated the provisions of Section 6, Article X of the Constitution, which states: The majority opinion takes the view that the withholding of ten percent (10%) of
the internal revenue allotment ("IRA") to the LGUs pending the assessment and
SEC. 6. Local government units shall have a just share, as determined by law, in evaluation by the Development Budget Coordinating Committee of the emerging
the national taxes which shall be automatically released to them. fiscal situation as called for in Section 4 of AO No. 372 transgresses against the
above-quoted provisions which mandate the "automatic" release of the shares of

Page 7 of 11 Pimentel v Aguirre

the LGUs in the national internal revenue in consonance with local fiscal autonomy. WHEREAS, Section 4 of Administrative Order No. 372 provided that the amount
The pertinent portions of AO No. 372 are reproduced hereunder: equivalent to 10% of the internal revenue allotment to local government units shall
be withheld; and,
ADMINISTRATIVE ORDER NO. 372

WHEREAS, there is a need to release additional funds to local government units for
ADOPTION OF ECONOMY MEASURES IN GOVERNMENT FOR FY 1998 vital projects and expenditures.

WHEREAS, the current economic difficulties brought about by the peso depreciation NOW, THEREFORE, I, JOSEPH EJERCITO ESTRADA, President of the Republic of the
requires continued prudence in government fiscal management to maintain Philippines, by virtue of the powers vested in me by law, do hereby order the
economic stability and sustain the countrys growth momentum; reduction of the withheld Internal Revenue Allotment (IRA) of local government
units from ten percent to five percent.

WHEREAS, it is imperative that all government agencies adopt cash management

measures to match expenditures with available resources; NOW THEREFORE, I, The five percent reduction in the IRA withheld for 1998 shall be released before 25
FIDEL V. RAMOS, President of the Republic of the Philippines, by virtue of the December 1998.
powers vested in me by the Constitution, do hereby order and direct:
DONE in the City of Manila, this 10th day of December, in the year of our Lord,
SECTION 1. All government departments and agencies, including x x x local nineteen hundred and ninety eight.
government units will identify and implement measures in FY 1998 that will reduce
total appropriations for non-personal services items, along the following suggested With all due respect, I beg to disagree with the majority opinion.
areas:
Section 4 of AO No. 372 does not present a case ripe for adjudication. The
xxx language of Section 4 does not conclusively show that, on its face, the
constitutional provision on the automatic release of the IRA shares of the LGUs has
SECTION 4. Pending the assessment and evaluation by the Development Budget been violated. Section 4, as worded, expresses the idea that the withholding is
Coordinating Committee of the emerging fiscal situation the amount equivalent to merely temporary which fact alone would not merit an outright conclusion of its
10% of the internal revenue allotment to local government units shall be withheld. unconstitutionality, especially in light of the reasonable presumption that
administrative agencies act in conformity with the law and the Constitution. Where
the conduct has not yet occurred and the challenged construction has not yet been
xxx adopted by the agency charged with administering the administrative order, the
determination of the scope and constitutionality of the executive action in advance
Subsequently, on December 10, 1998, President Joseph E. Estrada issued of its immediate adverse effect involves too remote and abstract an inquiry for the
Administrative Order No. 43 (AO No. 43), amending Section 4 of AO No. 372, by proper exercise of judicial function. Petitioners have not shown that the alleged 5%
reducing to five percent (5%) the IRA to be withheld from the LGUs, thus: IRA share of LGUs that was temporarily withheld has not yet been released, or that
the Department of Budget and Management (DBM) has refused and continues to
ADMINISTRATIVE ORDER NO. 43 refuse its release. In view thereof, the Court should not decide as this case
suggests an abstract proposition on constitutional issues.

AMENDING ADMINISTRATIVEORDER NO. 372 DATED 27 DECEMBER 1997

ENTITLED "ADOPTION OF ECONOMY MEASURES IN GOVERNMENT FOR FY 1998" The President is the chief fiscal officer of the country. He is ultimately responsible
for the collection and distribution of public money:

WHEREAS, Administrative Order No. 372 dated 27 December 1997 entitled

"Adoption of Economy Measures in Government for FY 1998" was issued to address SECTION 3. Powers and Functions. - The Department of Budget and Management
shall assist the President in the preparation of a national resources and
the economic difficulties brought about by the peso devaluation in 1997;
expenditures budget, preparation, execution and control of the National Budget,
preparation and maintenance of accounting systems essential to the budgetary

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process, achievement of more economy and efficiency in the management of must first be determined, and the money for their payment collected.18 In this
government operations, administration of compensation and position classification regard, administrative documentations are also undertaken to ascertain their
systems, assessment of organizational effectiveness and review and evaluation of availability, limits and extent. The phrase, thus, should be used in the context of
legislative proposals having budgetary or organizational implications.1 the whole budgetary process and in relation to pertinent laws relating to audit and
accounting requirements. In the workings of the budget for the fiscal year,
In a larger context, his role as chief fiscal officer is directed towards "the nation's appropriations for expenditures are supported by existing funds in the national
efforts at economic and social upliftment"2 for which more specific economic coffers and by proposals for revenue raising. The money, therefore, available for
powers are delegated. Within statutory limits, the President can, thus, fix "tariff IRA release may not be existing but merely inchoate, or a mere expectation. It is
rates, import and export quotas, tonnage and wharfage dues, and other duties or not infrequent that the Executive Department's proposals for raising revenue in the
imposts within the framework of the national development program of the form of proposed legislation may not be passed by the legislature. As such, the
government,3 as he is also responsible for enlisting the country in international release of IRA should not mean release of absolute amounts based merely on
economic agreements.4 More than this, to achieve "economy and efficiency in the mathematical computations. There must be a prior determination of what exact
management of government operations," the President is empowered to create amount the local government units are actually entitled in light of the economic
appropriation reserves,5 suspend expenditure appropriations,6 and institute cost factors which affect the fiscal situation in the country. Foremost of these is where,
reduction schemes.7 due to an unmanageable public sector deficit, the President may make the
necessary adjustments in the IRA of LGUs. Thus, as expressly provided in Article
284 of the Local Government Code:
As chief fiscal officer of the country, the President supervises fiscal development in
the local government units and ensures that laws are faithfully executed.8 For this
reason, he can set aside tax ordinances if he finds them contrary to the Local x x x (I)n the event that the national government incurs an
Government Code.9 Ordinances cannot contravene statutes and public policy as unmanageable public sector deficit, the President of the Philippines is
declared by the national govemment.10 The goal of local economy is not to "end hereby authorized, upon the recommendation of Secretary of Finance,
the relation of partnership and inter-dependence between the central Secretary of Interior and Local Government and Secretary of Budget
administration and local government units,"11 but to make local governments and Management and subject to consultation with the presiding officers
"more responsive and accountable" [to] "ensure their fullest development as self- of both Houses of Congress and the presidents of the "liga," to make
reliant communities and make them more effective partners in the pursuit of the necessary adjustments in the internal revenue allotment of local
national development and social progress."12 government units but in no case shall the allotment be less than thirty
percent (30%) of the collection of national internal revenue taxes of the
third fiscal year preceding the current fiscal year. x x x.
The interaction between the national government and the local government units is
mandatory at the planning level. Local development plans must thus hew to
"national policies and standards13 as these are integrated into the regional Under the aforecited provision, if facts reveal that the economy has sustained or
development plans for submission to the National Economic Development will likely sustain such "unmanageable public sector deficit," then the LGUs cannot
Authority. "14 Local budget plans and goals must also be harmonized, as far as assert absolute right of entitlement to the full amount of forty percent (40%) share
practicable, with "national development goals and strategies in order to optimize in the IRA, because the President is authorized to make an adjustment and to
the utilization of resources and to avoid duplication in the use of fiscal and reduce the amount to not less than thirty percent (30%). It is, therefore,
physiesources."15 impractical to immediately release the full amount of the IRAs and subsequently
require the local government units to return at most ten percent (10%) once the
President has ascertained that there exists an unmanageable public sector deficit.
Section 4 of AO No. 372 was issued in the exercise by the President not only of his
power of general supervision, but also in conformity with his role as chief fiscal
officer of the country in the discharge of which he is clothed by law with certain By necessary implication, the power to make necessary adjustments (including
powers to ensure the observance of safeguards and auditing requirements, as well reduction) in the IRA in case of an unmanageable public sector deficit, includes the
as the legal prerequisites in the release and use of IRAs, taking into account the discretion to withhold the IRAs temporarily until such time that the determination
constitutional16 and statutory17 mandates. of the actual fiscal situation is made. The test in determining whether one power is
necessarily included in a stated authority is: "The exercise of a more absolute
power necessarily includes the lesser power especially where it is needed to make
However, the phrase "automatic release" of the LGUs' shares does not mean that the first power effective."19 If the discretion to suspend temporarily the release of
the release of the funds is mechanical, spontaneous, self-operating or reflex. IRAs the IRA pending such examination is withheld from the President, his authority to

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make the necessary IRA adjustments brought about by the unmanageable public other words, all that Section 286 requires is the automatic release of the amount
sector deficit would be emasculated in the midst of serious economic crisis. In the that the LGUs are rightfully and legally entitled to, which, as the same section
situation conjured by the majority opinion, the money would already have been provides, should not be less than thirty percent (30%) of the collection of the
gone even before it is determined that fiscal crisis is indeed happening. national revenue taxes. So that even if five percent (5%) or ten percent (10%) is
either temporarily or permanently withheld, but the minimum of thirty percent
The majority opinion overstates the requirement in Section 286 of the Local (30%) allotment for the LGUs is released pursuant to the President's authority to
Government Code that the IRAs "shall not be subject to any lien or holdback that make the necessary adjustment in the LGUS' share, there is still full compliance
may be imposed by the national government for whatever purpose" as proof that with the requirements of the automatic release of the LGUs' share.
no withholding of the release of the IRAs is allowed albeit temporary in nature.
Finally, the majority insists that the withholding of ten percent (10%) or five
It is worthy to note that this provision does not appear in the Constitution. Section percent (5%) of the IRAs could not have been done pursuant to the power of the
6, Art X of the Constitution merely directs that LGUs "shall have a just share" in the President to adjust or reduce such shares under Section 284 of the Local
national taxes "as determined by law" and which share shall be automatically Government Code because there was no showing of an unmanageable public sector
released to them. This means that before the LGUs share is released, there should deficit by the national government, nor was there evidence that consultations with
be first a determination, which requires a process, of what is the correct amount as the presiding officers of both Houses of Congress and the presidents of the various
dictated by existing laws. For one, the Implementing Rules of the Local leagues had taken place and the corresponding recommendations of the Secretary
Government Code allows deductions from the IRAs, to wit: of Finance, Secretary of Interior and Local Government and the Budget Secretary
were made.

Article 384. Automatic Release of IRA Shares of LGUs:

I beg to differ. The power to determine whether there is an unmanageable public
sector deficit is lodged in the President. The President's determination, as fiscal
xxx manager of the country, of the existence of economic difficulties which could
amount to "unmanageable public sector deficit" should be accorded respect. In
(c) The IRA share of LGUs shall not be subject to any lien or hold back that fact, the withholding of the ten percent (10%) of the LGUs' share was further
may be imposed by the National Government for whatever purpose unless justified by the current economic difficulties brought about by the peso depreciation
otherwise provided in the Code or other applicable laws and loan contract on as shown by one of the "WHEREASES" of AO No. 372.23 In the absence of any
project agreements arising from foreign loans and international commitments, showing to the contrary, it is presumed that the President had made prior
such as premium contributions of LGUs to the Government Service Insurance consultations with the officials thus mentioned and had acted upon the
System and loans contracted by LGUs under foreign-assisted projects. recommendations of the Secretaries of Finance, Interior and Local Government and
Budget.24
Apart from the above, other mandatory deductions are made from the IRAs prior to
their release, such as: (1) total actual cost of devolution and the cost of city-funded Therefore, even assuming hypothetically that there was effectively a deduction of
hospitals;20 and (2) compulsory contributions21 and other remittances.22 It five percent (5%) of the LGUs' share, which was in accordance with the President's
follows, therefore, that the President can withhold portions of IRAs in order to set- prerogative in view of the pronouncement of the existence of an unmanageable
off or compensate legitimately incurred obligations and remittances of LGUs. public sector deficit, the deduction would still be valid in the absence of any proof
that the LGUs' allotment was less than the thirty percent (30%) limit provided for
in Section 284 of the Local Government Code.
Significantly, Section 286 of the Local Government Code does not make mention of
the exact amount that should be automatically released to the LGUs. The provision
does not mandate that the entire 40% share mentioned in Section 284 shall be In resume, the withholding of the amount equivalent to five percent (5%) of the
released. It merely provides that the "share" of each LGU shall be released and IRA to the LGUs was temporary pending determination by the Executive of the
which "shall not be subject to any lien or holdback that may be imposed by the actual share which the LGUs are rightfully entitled to on the basis of the applicable
national government for whatever purpose." The provision on automatic release of laws, particularly Section 284 of the Local Government Code, authorizing the
IRA share should, thus, be read together with Section 284, including the proviso on President to make the necessary adjustments in the IRA of LGUs in the event of an
adjustment or reduction of IRAs, as well as other relevant laws. It may happen that unmanageable public sector deficit. And assuming that the said five percent (5%)
the share of the LGUs may amount to the full forty percent (40%) or the reduced of the IRA pertaining to the 1998 Fiscal Year has been permanently withheld, there
amount of thirty percent (30%) as adjusted without any law being violated. In is no showing that the amount actually released to the LGUs that same year was

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less than thirty percent (30%) of the national internal revenue taxes collected,
without even considering the proper deductions allowed by law.

WHEREFORE, I vote to DISMISS the petition.

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