Province of Negros Occidental vs. Commissioners, Commission on Audit

A local government unit need not secure prior approval from the President to grant additional compensation such as hospitalization and health care insurance benefits to its employees, because Administrative Order No. 103's prior-approval requirement applies only to departments, bureaus, offices, and government-owned and controlled corporations under the President's power of control pursuant to Section 17, Article VII of the Constitution, whereas LGUs are subject only to the President's power of general supervision under Section 4, Article X.

The Province of Negros Occidental, a local government unit, sought to provide hospitalization and health care insurance benefits to its 1,949 officials and employees through a contract with Philam Care Health System Incorporated, a private insurer. Administrative Order No. 103, issued by President Fidel V. Ramos on 14 January 1994, authorized productivity incentive benefits to government personnel and prohibited the grant of similar allowances or benefits without prior approval from the Office of the President. Republic Act No. 6758, the Salary Standardization Law, prescribed a revised compensation and position classification system for government workers and consolidated most allowances into standardized salary rates. The interplay between local fiscal autonomy under the Local Government Code of 1991 and these national-level compensation policies framed the dispute.

On 21 December 1994, the Sangguniang Panlalawigan of Negros Occidental passed Resolution No. 720-A allocating ₱4,000,000 of its retained earnings for the hospitalization and health care insurance benefits of 1,949 officials and employees of the province. After a public bidding, the Committee on Awards granted the insurance coverage to Philam Care Health System Incorporated. The Province, represented by then Governor Rafael L. Coscolluela, and Philam Care entered into a Group Health Care Agreement involving a total payment of ₱3,760,000 representing the insurance premiums. The total premium amount was paid on 25 January 1996.

On 23 January 1997, after a post-audit investigation, the Provincial Auditor issued Notice of Suspension No. 97-001-101 suspending the premium payment for lack of approval from the Office of the President as required under Administrative Order No. 103, dated 14 January 1994. The Provincial Auditor explained that the premium payment violated Republic Act No. 6758, the Salary Standardization Law. The Province complied post-facto and sent a letter-request dated 12 January 1999 to the Office of the President. In a Memorandum dated 26 January 1999, President Joseph E. Estrada directed the COA to lift the suspension but only in the amount of ₱100,000. The Provincial Auditor disregarded the President's directive and instead issued Notice of Disallowance No. 99-005-101(96) dated 10 September 1999 on grounds similar to those in the Notice of Suspension.

The Province appealed the disallowance to the COA, which affirmed the Provincial Auditor's Notice of Disallowance in a Decision dated 14 July 2006. The COA ruled that under AO 103, no government entity, including an LGU, is exempt from securing prior presidential approval for additional benefits to personnel, consistent with the salary standardization policy under RA 6758. The COA further held that Section 468(a)(1)(viii) of the Local Government Code relied upon by the Province must be harmonized with Section 12 of RA 6758, and that the Philam Care insurance duplicated benefits already provided under the Medicare program. The COA held liable the 1,949 beneficiary officials and employees for their proportionate shares, former Governor Coscolluela for signing the contract and approving the disbursement voucher, and the Sangguniang Panlalawigan members who passed Resolution No. 720-A. Philam Care was not held liable because insurance law prohibits refund of premiums after risks have attached, and the Provincial Accountant was excused as to the voucher but remained liable for her proportionate share as a beneficiary. The Province's Motion for Reconsideration was denied by the COA on 30 January 2008, prompting the instant petition.

• Validity of Disbursement: Petitioner argued that the payment of insurance premiums for health benefits was lawful and proper because it was paid from an allocation of retained earnings pursuant to a valid appropriation ordinance, constituting a clear exercise of express powers under the principle of local fiscal autonomy.
• Local Fiscal Autonomy: Petitioner maintained that local fiscal autonomy includes the power of LGUs to allocate their resources in accordance with their own priorities, and that while LGUs are agents of the national government, an LGU has fiscal control over revenues derived solely from its own tax base.

• Subjection to RA 6758: Respondents maintained that although LGUs enjoy local fiscal autonomy, they remain bound by RA 6758, and their actions are subject to scrutiny by the Department of Budget and Management and applicable COA auditing rules.
• Prior Presidential Approval Required: Respondents argued that the grant of additional compensation, such as hospitalization and health care insurance benefits, must have prior presidential approval to conform with the state policy on salary standardization for government workers.

• Grave Abuse of Discretion: Whether the COA committed grave abuse of discretion in affirming the disallowance of ₱3,760,000 in premium payments for the hospitalization and health care insurance benefits granted by the Province of Negros Occidental to its 1,949 officials and employees.
• Applicability of AO 103 to LGUs: Whether Administrative Order No. 103's requirement of prior approval from the President applies to local government units.

• Grave Abuse of Discretion: Yes. The COA gravely abused its discretion in applying AO 103 to disallow the premium payment, because AO 103's prior-approval requirement does not apply to LGUs.
• Applicability of AO 103 to LGUs: No. Section 2 of AO 103 prohibits only government offices, agencies, GOCCs, and their governing boards from granting benefits without prior presidential approval; LGUs, being subject only to the President's general supervision, are not covered.

• Grave Abuse of Discretion: The COA erred in applying AO 103 to LGUs. A close reading of Section 2 of AO 103 reveals that the prohibition applies only to "government offices/agencies, including government-owned and/or controlled corporations, as well as their respective governing boards." Nowhere does Section 2 indicate that the prohibition extends to LGUs. The requirement of prior presidential approval under AO 103 is applicable only to departments, bureaus, offices, and GOCCs under the Executive branch, consistent with Section 17, Article VII of the Constitution, which grants the President control over executive departments, bureaus, and offices. Since LGUs are subject only to the President's general supervision under Section 4, Article X of the Constitution, the President's authority over them is limited to ensuring that laws are faithfully executed — the President cannot lay down rules for LGUs or modify their rules. The grant of additional compensation such as hospitalization and health care insurance benefits therefore does not need presidential approval to be valid. Additionally, the CSC, through Memorandum Circular No. 33 (1997), and the President, through Administrative Order No. 402 (1998), recognized the inadequacy of health care services for government personnel and directed all government offices including LGUs to provide health programs, with LGUs authorized to utilize local funds for the purpose. RA 7875, instituting the National Health Insurance Program, was approved only on 14 February 1995 — about two months after Resolution No. 720-A was passed — and even thereafter AO 402 acknowledged that basic health services under the NHIP were either inadequate or had not reached certain geographic areas. The COA also failed to establish that medical care benefits under Presidential Decree No. 1519 were sufficient to cover the needs of government employees, especially those in LGUs.

• Applicability of AO 103 to LGUs: The constitutional distinction between the President's power of control and power of general supervision is decisive. The power of control gives the President authority to alter, modify, set aside, or substitute his judgment for that of a subordinate officer. General supervision, by contrast, means only the power to see to it that subordinates perform their functions according to law. Section 17, Article VII of the Constitution vests the President with control over executive departments, bureaus, and offices. Section 4, Article X provides that the President shall exercise general supervision over local governments. Because LGUs fall under general supervision and not control, the President cannot require LGUs to seek prior approval for the grant of benefits duly authorized by their own legislative bodies. The Province validly relied on Section 468(a)(1)(viii) of the Local Government Code, which empowers the Sangguniang Panlalawigan to determine the allowances and benefits of officials and employees paid from provincial funds, and on CSC MC No. 33 and AO 402, which expressly encouraged LGUs to establish health programs using local funds.

• President's Power of Control vs. Power of General Supervision — The President's power of control is the power to alter, modify, or set aside what a subordinate officer has done in the performance of his duties and to substitute the judgment of the President over that of the subordinate. The power of general supervision is the power of a superior officer to see to it that subordinates perform their functions according to law. Under Section 17, Article VII of the Constitution, the President has control over executive departments, bureaus, and offices. Under Section 4, Article X, the President exercises only general supervision over local governments. Because LGUs are subject only to general supervision, the President cannot require them to obtain prior approval for acts within their statutory authority, nor can the President modify or reverse their discretionary decisions.

• Local Fiscal Autonomy — The State shall ensure the autonomy of local governments (Section 25, Article II, Constitution), and territorial and political subdivisions shall enjoy local autonomy (Section 2, Article X, Constitution). The Local Government Code empowers the Sangguniang Panlalawigan to determine the positions, salaries, wages, allowances, and other emoluments and benefits of officials and employees paid wholly or mainly from provincial funds (Section 468(a)(1)(viii), RA 7160). LGUs have fiscal control over revenues derived from their own tax base and may allocate resources according to their own priorities.

• "Nowhere is it indicated in Section 2 that the prohibition also applies to LGUs. The requirement then of prior approval from the President under AO 103 is applicable only to departments, bureaus, offices and government-owned and controlled corporations under the Executive branch." — This passage constitutes the ratio decidendi, establishing that AO 103's prior-approval requirement does not extend to LGUs because the provision's text is limited to national government offices and GOCCs.

• "Since LGUs are subject only to the power of general supervision of the President, the President's authority is limited to seeing to it that rules are followed and laws are faithfully executed. The President may only point out that rules have not been followed but the President cannot lay down the rules, neither does he have the discretion to modify or replace the rules." — This defines the constitutional boundary of the President's authority over LGUs and explains why prior approval cannot be required of them.

• "Thus, consistent with the state policy of local autonomy as guaranteed by the 1987 Constitution, under Section 25, Article II and Section 2, Article X, and the Local Government Code of 1991, we declare that the grant and release of the hospitalization and health care insurance benefits given to petitioner's officials and employees were validly enacted through an ordinance passed by petitioner's Sangguniang Panlalawigan." — This is the dispositive legal declaration affirming the validity of the Province's grant of health insurance benefits under the constitutional and statutory framework of local autonomy.

• De Villa vs. City of Bacolod, G.R. No. 80744, 20 September 1990, 189 SCRA 736 — Cited to define the President's power of general supervision as the power of a superior officer to see to it that subordinates perform their functions according to law.
• Bito-Onon vs. Judge Yap Fernandez, 403 Phil. 693 (2001) — Cited to distinguish the President's power of control from the power of general supervision.
• Rufino vs. Endriga, G.R. No. 139554, 21 July 2006, 496 SCRA 13 — Cited for the proposition that the power of control gives the President the power to revise or reverse the acts or decisions of a subordinate officer involving the exercise of discretion, which in turn cited Mondano vs. Silvosa, 97 Phil. 143 (1955).

• Section 17, Article VII, 1987 Constitution — Vests the President with control over all executive departments, bureaus, and offices, and the duty to ensure faithful execution of laws. Applied to show that AO 103's prior-approval requirement is anchored on this power of control and thus extends only to entities under the President's control.
• Section 4, Article X, 1987 Constitution — Provides that the President shall exercise general supervision over local governments. Applied to establish that LGUs are not subject to the President's power of control and therefore need not secure prior presidential approval for benefits duly enacted by their legislative bodies.
• Section 25, Article II, 1987 Constitution — Declares that the State shall ensure the autonomy of local governments. Applied as constitutional basis for upholding the Province's grant of health insurance benefits.
• Section 2, Article X, 1987 Constitution — Provides that territorial and political subdivisions shall enjoy local autonomy. Applied alongside Section 25, Article II to affirm the validity of the Province's enactment.
• Section 468(a)(1)(viii), Republic Act No. 7160 (Local Government Code of 1991) — Empowers the Sangguniang Panlalawigan to determine the positions, salaries, wages, allowances, and other emoluments and benefits of officials and employees paid wholly or mainly from provincial funds. Applied as the statutory basis for the Province's authority to grant the insurance benefits.
• Section 12, Republic Act No. 6758 (Salary Standardization Law) — Consolidates allowances into standardized salary rates, with exceptions. The COA relied on this provision, but the Court found that the COA did not clearly establish that existing medical care benefits were sufficient to cover government employees' needs, especially those in LGUs.
• Sections 1 and 2, Administrative Order No. 103 (1994) — Authorizes productivity incentive benefits and prohibits granting similar benefits without prior presidential approval. Applied to determine that the prohibition in Section 2 does not extend to LGUs.
• CSC Memorandum Circular No. 33, series of 1997 — Directed all government offices including LGUs to provide a health program for employees including hospitalization services. Relied upon by the Province and cited by the Court as recognizing the inadequacy of health care policy for government personnel.
• Administrative Order No. 402 (1998) — Established an annual medical check-up program for government personnel and encouraged LGUs to establish similar programs using local funds. Cited to show that both the CSC and the President acknowledged the deficiency of health services under the NHIP.
• Republic Act No. 7875 (National Health Insurance Act of 1995) — Instituted the National Health Insurance Program for all Filipinos. Noted as having been approved only after the Province passed its resolution, and as still inadequate as evidenced by the subsequent issuance of AO 402.

Chief Justice Renato C. Corona; Associate Justices Conchita Carpio Morales, Presbitero J. Velasco, Jr., Antonio Eduardo B. Nachura, Teresita J. Leonardo-De Castro, Arturo D. Brion, Diosdado M. Peralta, Lucas P. Bersamin, Mariano C. Del Castillo, Roberto A. Abad, Martin S. Villarama, Jr., Jose Portugal Perez, Jose C. Mendoza, and Maria Lourdes P. A. Sereno. All concurred in full; no separate concurring opinions were filed.