8.3 Fund Accounting: General Fund, SEF, Trust Funds, and 20% Development Fund

Fund Accounting: General Fund, SEF, Trust Funds, and 20% Development Fund

Quick Answer: Republic Act No. 7160 (Sections 308–313) mandates that Philippine LGUs maintain three distinct statutory funds: the General Fund (GF) for regular governance, the Special Education Fund (SEF) funded by the extra 1% RPT levy and budgeted solely by the Local School Board (LSB), and the Trust Fund (TF) held in a fiduciary capacity. Under Section 287, at least 20% of the annual National Tax Allotment (NTA) must be earmarked for the Development Fund, which cannot be spent on personnel or administrative overhead. Special Accounts in the General Fund (SAGF) are mandatory for economic enterprises, public utilities, and loans.

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1. Foundational Architecture of LGU Fund Accounting

Unlike commercial enterprises that operate as single accounting entities, a local government unit functions as a composite of several independent fiscal entities. In public financial management, a "fund" is defined as an independent fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities.

Under Section 308 of Republic Act No. 7160, local governments are legally mandated to maintain three primary statutory funds:

Philippine Local Government Fund Structure (RA 7160, Sec. 308)
├── 1. General Fund (GF - Sec. 308(a))
│     ├── Regular Operational Resources (Taxes, Fees, NTA Share)
│     └── Special Accounts in the General Fund (SAGF - Sec. 313):
│           ├── (a) Local Economic Enterprises (LEEs - Markets, Slaughterhouses)
│           ├── (b) Public Utilities (Waterworks, Power, Transport)
│           ├── (c) Loans, Credits, and Bond Issues
│           └── (d) 20% Development Fund (Sec. 287)
├── 2. Special Education Fund (SEF - Sec. 308(b))
│     └── Exclusively funded by 1% Additional RPT Levy (Sec. 235)
│     └── Budgeted exclusively by the Local School Board (LSB - Sec. 98)
└── 3. Trust Funds (TF - Sec. 308(c))
      ├── Contractor Performance Bonds & Bidder Deposits
      ├── National Government Conditional Grants (SubayBAYAN / LGSF)
      └── Barangay Shares from Provincial/City Real Property Tax Collections

Each fund must maintain its own dedicated bank depository accounts, separate subsidiary ledgers, distinct disbursement journals, and independent cashbooks. Commingling the monies of these funds in a single bank account or borrowing cash between funds without legislative authorization is an audit violation and a breach of fiduciary duty.

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2. The General Fund (GF, Section 308(a))

The General Fund is the primary operational fund of the local government unit. All receipts and revenues of the LGU that are not restricted by law to a specific fund or earmarked for dedicated purposes must accrue to the General Fund.

Primary Revenue Streams Accruing to the General Fund

1. Local Taxes: Basic Real Property Tax (excluding the 1% SEF), Local Business Taxes (LBT), community taxes, franchise taxes, real property transfer taxes, and amusement taxes.
2. Regulatory Fees and Service Charges: Mayor's permits, building permits, health sanitary certificates, civil registry fees, and toll fees.
3. National Tax Allotment (NTA): The unearmarked 80% portion of the LGU's regular share in national taxes (expanded following the Supreme Court's Mandanas-Ochoa ruling).
4. Receipts from Commercial Operations: Operating receipts from economic enterprises before net earnings are calculated.

Uses of the General Fund

The General Fund finances the general administrative operations, delivery of devolved basic services (health, agriculture, social welfare), legislative operations of the Sanggunian, disaster risk reduction and management (LDRRMF 5% statutory set-aside), and general capital expenditures.

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3. The Special Education Fund (SEF, Section 308(b))

The Special Education Fund is a dedicated statutory fund created to support local public education. Its legal governance is strictly insulated from general political budgeting.

Exclusive Funding Source

Under Section 235 and Section 272 of RA 7160, the SEF is financed exclusively by the proceeds of the additional one percent (1%) tax on the assessed value of real property levied annually by a province, city, or municipality within Metro Manila. This 1% SEF levy is collected concurrently with the basic RPT by the Local Treasury Office.

Statutory Division of Proceeds (Section 272)

• In the case of provinces, the SEF proceeds are divided equally:
  • 50% accrues to the Provincial School Board;
  • 50% is remitted to the Municipal School Board of the municipality where the property is situated.
• In cities, 100% of the SEF proceeds accrue entirely to the City School Board.
• In Metro Manila municipalities, 100% accrues to the Municipal School Board.

Exclusive Budgeting Authority: The Local School Board (LSB)

Under Sections 98 to 101 of RA 7160, the SEF is budgeted and administered exclusively by the Local School Board, not by the Sangguniang Bayan or Sangguniang Panlungsod:

• Composition: The LSB is co-chaired by the Local Chief Executive (Governor or Mayor) and the Division Superintendent of Schools (or District Supervisor). Members include the Chairperson of the Education Committee of the Sanggunian, the Local Treasurer, the Federation President of the Sangguniang Kabataan (SK), the President of the Parents-Teachers Association (PTA) federation, and a representative from the teachers' organizations.
• Budget Adoption: The LSB prepares, deliberates, and adopts the annual SEF budget through a formal School Board Resolution. The Sanggunian has no legal authority to alter, amend, or reduce items in the SEF budget adopted by the School Board.

Allowable vs. Prohibited SEF Expenditures

Under Joint Circular No. 1 (Series of 2017 and 2020) of the DepEd, DBM, and DILG, allowable SEF expenditures are restricted to:

• Construction, repair, and maintenance of school buildings and public school facilities;
• Establishment and improvement of science and computer laboratories, libraries, and workshops;
• Procurement of instructional materials, textbooks, computers, and digital learning modules;
• Payment of compensation for locally funded teachers (subject to DepEd service standards);
• Educational research, literacy programs, and sports development activities directly benefiting public school students (e.g., participation in Palarong Pambansa).

Strict Prohibition: SEF cannot be used for administrative expenses of the DepEd Division Office, purchase of executive vehicles, or personal allowances of regular national DepEd personnel already covered by national appropriations.

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4. Trust Funds (TF, Section 308(c))

A Trust Fund consists of private or public monies received by the local government unit as trustee, agent, or custodian for a specific, designated purpose. Trust monies do not belong to the LGU; the LGU merely holds them in a fiduciary capacity.

Primary Examples of Trust Funds in LGUs

1. Contractor Performance Bonds and Bidder Deposits: Cash security deposits submitted by private contractors under the procurement law governing the transaction to guarantee faithful completion of infrastructure projects. These funds are held in escrow and refunded upon final project turnover and issuance of the Certificate of Acceptance.
2. National Government Subsidies and Grants: Conditional fund transfers from national government agencies (e.g., DILG, DSWD, DPWH, DA) for specific infrastructure programs, conditional cash transfers, or the Local Government Support Fund (LGSF). These monies must be accounted for strictly under the guidelines of the granting agency.
3. Barangay Real Property Tax Shares: The statutory shares of barangays in basic real property taxes and community taxes collected by the provincial or city treasury, held in trust until transferred or remitted to the respective barangay accounts within five (5) days after the end of each quarter (Section 271).

The Fiduciary Rule on Trust Funds (Section 309(b))

Section 309(b) of RA 7160 states that trust funds shall be disbursed only for the specific purpose for which the trust was created or the funds received. Commingling trust monies with the General Fund or utilizing trust cash to temporarily cover regular payroll or debt service is an illegal diversion of funds and constitutes a criminal offense under Philippine anti-graft statutes.

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5. The 20% Component of the NTA for Development (Section 287)

Under Section 287 of Republic Act No. 7160, every local government unit is legally mandated to appropriate in its annual budget no less than twenty percent (20%) of its annual National Tax Allotment (NTA) for development projects.

$\text{Mandatory Minimum Development Appropriation} = \text{Annual NTA Allocation} \times 0.20$

Eligible vs. Ineligible Expenditures (DILG-DBM Joint Circulars)

To prevent LGUs from using development funds for recurring operational overhead, DILG-DBM Joint Memorandum Circular (JMC) No. 1 (Series of 2020) and related circulars establish clear boundaries:

| Classification | Eligible Development Expenditures | Strictly Ineligible (Prohibited) Expenditures | |:---|:---|:---|| | Social Development | • Construction/rehabilitation of health clinics, day care centers, and evacuation centers.<br/>• Water supply facilities, rural electrification, and communal sanitation systems.<br/>• Core housing programs for informal settlers. | • Payment of regular salaries, wages, overtime, or representation allowances (RATA).<br/>• Purchase of executive passenger sedans or luxury vehicles.<br/>• Funding of cultural beauty pageants, sports uniforms, or annual town fiestas. | | Economic Development | • Construction/rehabilitation of farm-to-market roads, bridges, and solar drying pavements.<br/>• Communal irrigation systems, post-harvest facilities, and agricultural processing hubs.<br/>• Local eco-tourism infrastructure and green spaces. | • Regular administrative office maintenance, electricity bills, and telephone expenses.<br/>• Financial assistance or unguided cash donations (ayuda) to private individuals.<br/>• Purchase of consumable office supplies (paper, toner, pens). | | Environmental Management | • Construction of sanitary landfills and Materials Recovery Facilities (MRF).<br/>• Reforestation, watershed management, and coastal mangrove restoration.<br/>• Flood control dikes, drainage systems, and disaster mitigation engineering. | • Fuel, oil, and routine repairs for general administrative government vehicles.<br/>• Payment of local debts or loans contracted for non-developmental purposes.<br/>• General administrative travel, foreign travel, or convention registration fees. |

Failure to budget the mandatory 20% NTA share for eligible development projects is grounds for the Sangguniang Panlalawigan or the DBM to declare the LGU's annual budget inoperative under Section 327 of RA 7160.

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6. Special Accounts in the General Fund (SAGF, Section 313)

Under Section 313 of Republic Act No. 7160, local governments are legally obligated to maintain Special Accounts in the General Fund (SAGF) for specific high-priority or commercial undertakings. These accounts are not separate statutory funds; they are distinct sub-funds maintained within the General Fund ledger to provide discrete financial accountability.

The Four Mandatory SAGF Categories

1. Local Economic Enterprises (LEEs): Dedicated accounting for public markets, slaughterhouses, municipal cemeteries, transport terminals, recreation centers, and public parking facilities.
2. Public Utilities Operated by LGUs: Dedicated accounting for local waterworks systems, municipal electric power grids, telecommunications, and ferry services.
3. Loans, Credits, and Bond Issues: Special accounts tracking borrowed capital proceeds, bond floats, and the accumulated debt service sinking funds established to retire local public debt.
4. Development Projects Financed from the NTA: The accounting vehicle utilized to record, monitor, and disburse the 20% Development Fund mandated under Section 287.

Primary Operational Objective of the SAGF

The SAGF enforces financial transparency. For local economic enterprises and public utilities, maintaining an SAGF enables the LGU and COA to determine whether the enterprise is operating at a true financial profit or loss:

• All revenues generated by the enterprise (e.g., market stall rental fees, slaughter fees) are credited to its specific SAGF.
• All direct operational costs (personnel, utility bills, maintenance) are debited against that SAGF.
• At the end of the fiscal year, net profits may be transferred to the general unappropriated surplus of the General Fund by legislative action of the Sanggunian, while net losses require fiscal restructuring.

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7. Rules on Inter-Fund Transfers and Cash Restrictions

To ensure the integrity of the statutory fund accounting architecture, Philippine law strictly limits the movement of cash between funds:

• Prohibition on Trust Fund Commingling: Monies in the Trust Fund can never be transferred or loaned to the General Fund or SEF, even on a temporary emergency basis. Doing so violates Section 309(b) and constitutes illegal diversion of public funds.
• General Fund Advances to SAGF: The General Fund may grant temporary cash advances to an economic enterprise (SAGF) to finance startup working capital or seasonal cash shortfalls, but only if authorized by an ordinance enacted by the Sanggunian and provided that the advance is treated as a receivable and scheduled for prompt repayment.
• Reversion of Unexpended Balances: Unexpended balances of regular appropriations in the General Fund revert to the unappropriated surplus at the close of the fiscal year (December 31). However, continuing capital appropriations for infrastructure projects under the 20% Development Fund remain valid until the project is completed, and unexpended SEF balances remain within the SEF for reappropriation by the Local School Board.