The Supreme Court affirmed that local government units (LGUs) cannot create retirement plans that supplement or duplicate the Government Service Insurance System (GSIS). This ruling reinforces the principle that national laws take precedence over local ordinances, ensuring uniform retirement benefits for government employees and preventing unauthorized use of public funds. The Court emphasized that LGUs must adhere to national policies on retirement benefits, as defined by Congress, to maintain consistency and prevent financial irregularities.

Puerto Princesa’s Incentive Program: A Clash Between Local Autonomy and National Mandates

In this case, Lucilo R. Bayron, et al. vs. Commission on Audit, the Supreme Court addressed the legality of Puerto Princesa City Government’s (PPCG) Early & Voluntary Separation Incentive Program (EVSIP), established through Ordinance No. 438. The Commission on Audit (COA) disallowed the disbursement of funds under this program, arguing it violated national laws governing retirement benefits. The central legal question was whether a local ordinance could create a supplementary retirement plan for LGU employees, despite the existence of the GSIS and prohibitions against additional retirement schemes.

The factual backdrop involved the enactment of Ordinance No. 438 by the Sangguniang Panlungsod of Puerto Princesa City, which aimed to provide incentives for early and voluntary separation of city government employees. Section 3 outlined the purposes, including granting incentives for loyalty and satisfactory public service for employees with at least ten years of service. Section 6 detailed the benefits, calculating incentives based on the employee’s basic monthly salary multiplied by a factor (1.5, 1.8, or 2.0, depending on years of service) and then by the number of years of service. These benefits were in addition to any entitlements from national agencies like GSIS, HMDF (PAG-IBIG), and PhilHealth. The ordinance allocated P50 million annually from PPCG’s budget starting in 2011.

COA’s review led to the issuance of Notices of Disallowance (NDs) totaling P89,672,400.74 for payments made under the EVSIP. The COA argued that the EVSIP was not enacted pursuant to any reorganization law, and Section 76 of the Local Government Code does not explicitly empower LGUs to create early retirement programs. Further, COA contended that the EVSIP was a prohibited supplementary retirement plan under Section 10 of R.A. No. 4968, which amended Section 28 of C.A. No. 186, known as the Government Service Insurance Act. The COA held the officials liable for the illegal disbursements, leading to the present petition questioning the COA’s decision.

The Supreme Court framed the issues as pure questions of law: whether the petitioners should have filed a motion for reconsideration and whether Ordinance No. 438 provided a valid basis for PPCG’s EVSIP. While noting the general requirement of a motion for reconsideration, the Court deemed it dispensable because the primary issue was the validity of the ordinance, a question resolvable through statutory construction. However, the Court deferred ruling on the petitioners’ alleged good faith, given ongoing investigations by the Office of the Ombudsman. This left the Court free to focus on the core legal issue: the validity of Ordinance No. 438.

The Court firmly stated that while LGUs have the power to approve budgets and appropriate funds, this power is limited by national legislation. Section 458(a)(2)(i) of the Local Government Code allows appropriation of funds for purposes “not contrary to law.” The Court reiterated the principle that municipal ordinances are subordinate to national laws, quoting Magtajas v. Pryce Properties Corp., Inc.:

The rationale of the requirement that the ordinances should not contravene a statute is obvious. Municipal governments are only agents of the national government. Local councils exercise only delegated legislative powers conferred on them by Congress as the national lawmaking body. The delegate cannot be superior to the principal or exercise powers higher than those of the latter. It is a heresy to suggest that the local government units can undo the acts of Congress, from which they have derived their power in the first place, and negate by mere ordinance the mandate of the statute.

Thus, the Court concluded that C.A. No. 186, as amended by R.A. No. 4968, cannot be circumvented by a local ordinance creating a separate retirement plan. Section 28(b) of C.A. No. 186 clearly prohibits supplementary retirement plans other than the GSIS. The petitioners argued that the EVSIP was akin to separation pay, not a prohibited retirement plan. However, the Court rejected this argument, distinguishing it from cases where reorganizations or streamlining efforts justified early retirement incentives.

The Court analyzed previous rulings, particularly GSIS v. COA, emphasizing that any retirement incentive plan must be linked to a reorganization or streamlining of the organization, not merely to reward loyal service. In Abanto v. Board of Directors of the Development Bank of the Philippines, the Court noted that the DBP’s supplementary retirement plan was expressly authorized by its charter, a crucial distinction absent in the case of Puerto Princesa City. The objectives of PPCG’s EVSIP included granting incentives for loyalty and satisfactory service, which the Court found contrary to Section 28(b) of C.A. No. 186.

The Court highlighted the supplementary nature of the EVSIP’s benefits, as they were to be paid in addition to GSIS benefits. The factors used to calculate the EVSIP benefits (1.5, 1.8, or 2.0 multiplied by years of service) indicated a reward for loyalty, rather than a separation pay based on reorganization. A true separation pay, similar to that under the Labor Code, would not include these factors. Moreover, the Court noted that even under R.A. No. 6656, separation pay due to reorganization is limited to one month’s salary per year of service, without a minimum service requirement, further distinguishing it from the EVSIP’s ten-year minimum.

Ultimately, the Court declared Ordinance No. 438 and Resolution No. 850-2010 ultra vires, affirming COA’s disallowance. The legal basis for the EVSIP was found to be an invalid attempt to circumvent national law. The Court invoked the operative fact doctrine, acknowledging the ordinance’s existence before being declared void, but emphasized that this applied only to those who acted in good faith. Citing Araullo v. Aquino, the Court clarified that the doctrine does not automatically apply to the authors and implementors of the EVSIP, absent concrete findings of good faith by the proper tribunals.

Finally, the Court suggested closer coordination between COA and the Department of Budget and Management in reviewing LGU budgets to identify appropriations contrary to national laws. This proactive approach could prevent the enactment of ultra vires ordinances and provide timely legal challenges to protect public funds. The Court emphasized the importance of LGUs adhering to national policies to ensure consistency and legality in their financial operations.

FAQs

What was the key issue in this case?	The key issue was whether a local government can create a supplementary retirement plan for its employees that goes beyond what is provided by national law, specifically the GSIS. The Supreme Court ruled that it cannot, as national laws prevail over local ordinances in this matter.
What is the GSIS?	GSIS stands for the Government Service Insurance System. It’s the social insurance institution for government employees in the Philippines, providing retirement, life insurance, and other benefits.
What is the operative fact doctrine?	The operative fact doctrine recognizes that an invalid law may have had effects before being declared void. It applies to actions taken in good faith under the presumption of the law’s validity, but it does not automatically protect those who authored or implemented the law.
What does “ultra vires” mean?	“Ultra vires” is a Latin term meaning “beyond the powers.” In this context, it means that the local ordinance exceeded the legal authority granted to the local government.
What is the role of the Commission on Audit (COA)?	The COA is the independent constitutional office responsible for auditing government funds and ensuring their proper use. It has the power to disallow illegal or unauthorized expenditures.
Why was the Puerto Princesa City ordinance deemed illegal?	The ordinance was deemed illegal because it created a supplementary retirement plan, which is prohibited by national law (specifically C.A. No. 186, as amended by R.A. No. 4968). National law mandates that GSIS is the primary retirement system for government employees.
What is the significance of Section 28(b) of C.A. No. 186?	Section 28(b) of C.A. No. 186 prohibits the creation of supplementary retirement or pension plans for government employees, other than the GSIS. This provision aims to ensure uniformity and prevent redundancy in retirement benefits.
Can local governments offer any incentives to retiring employees?	Local governments can offer incentives to retiring employees, but these incentives must be within the bounds of national law. They cannot create separate retirement plans that duplicate or supplement GSIS benefits unless expressly authorized by a national law.
What happens to the money already disbursed under the illegal ordinance?	The COA can seek to recover the funds disbursed under the illegal ordinance from those responsible for authorizing and receiving the payments, unless they can prove they acted in good faith. The Office of the Ombudsman will investigate potential misconduct by government officials.

This case underscores the importance of local governments adhering to national laws, particularly in matters of finance and employee benefits. The Supreme Court’s decision serves as a reminder that while local autonomy is valued, it cannot override the supremacy of national legislation. The ruling ensures that the financial resources of local governments are used in accordance with the law, promoting accountability and preventing unauthorized disbursements.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: LUCILO R. BAYRON, ET AL. VS. COMMISSION ON AUDIT, G.R. No. 253127, November 29, 2022