Can Local Governments Pay Penalties? Legal Insights in the Philippines

Local government units (LGUs) in the Philippines—provinces, cities, municipalities, and barangays—are created by law and vested with both governmental (public) and proprietary (corporate) functions. In the exercise of these functions, questions sometimes arise regarding whether LGUs can or should pay fines and penalties imposed either by courts, quasi-judicial bodies, or regulatory agencies. Below is a comprehensive discussion on the legal and practical considerations relevant to this question.

1. Legal Personality of Local Government Units

Separate Juridical Personality
Under Section 15 of the Local Government Code of 1991 (Republic Act No. 7160), every local government unit is a body corporate with the power to sue and be sued. This corporate personality allows LGUs to incur obligations, enter into contracts, and own or dispose of properties separate from the national government. As such, they can be held liable—and consequently compelled—to pay damages, fines, or penalties if found at fault or if ordered by a competent authority.
Governmental vs. Proprietary Functions
LGUs exercise two kinds of functions:
- Governmental functions: These are public or sovereign in nature (e.g., maintaining peace and order, regulating local affairs), and generally enjoy certain immunities from suit.
- Proprietary functions: These are not strictly governmental and are often undertaken for the community’s benefit in a manner akin to a private entity (e.g., operation of public utilities, local enterprise activities).
The distinction sometimes matters in determining liability. When performing proprietary functions, LGUs are treated more like private entities, meaning they can be subjected to liabilities (including payment of penalties) without necessarily invoking state immunity.

2. Sources of LGU Liability

LGUs in the Philippines can be held liable for penalties and fines in multiple ways:

Judicial Decisions
- Civil liability: Courts may order an LGU to pay damages or civil penalties for acts such as breach of contract, torts, or regulatory violations (e.g., environmental infractions).
- Criminal proceedings against officials: Although criminal liability is generally personal to the official, it is not unusual for the LGU to face related civil liabilities (such as restitution or fines for the corporate entity) if the court finds the LGU itself contributed to or benefited from the wrongdoing.
Administrative and Regulatory Fines
- National government regulatory bodies (e.g., the Environmental Management Bureau, Department of Environment and Natural Resources) or quasi-judicial agencies (e.g., National Labor Relations Commission in labor-related cases) may impose fines or penalties for non-compliance with national laws or regulations.
- Local legislation also imposes fines for violations of local ordinances, but these typically apply to private citizens or entities. LGUs themselves can face administrative sanctions or fines if they fail to comply with higher-level regulations (e.g., improper waste disposal, building code violations, labor standards for municipal employees).
Contractual Penalties
- If an LGU enters into a contract (e.g., joint venture agreements, supply contracts, lease of public facilities) containing penalty clauses, it may be obliged to pay stipulated damages for breach of contractual obligations.

3. Legal Basis for Payment of Penalties by LGUs

Local Government Code (RA 7160)
- Power to Incur Obligations (Section 22): LGUs may enter into transactions and contracts to secure the necessary supplies, materials, and services, and in doing so, they can be subject to lawful obligations and liabilities.
- Power to Sue and Be Sued (Section 15): Because they can be sued, it follows that valid judgments against them—whether for damages or penalties—must be satisfied from LGU funds, subject to budgetary rules.
Budgetary and Appropriation Rules
- Appropriation of Public Funds (Section 305, et seq.): Public funds can only be used for a public purpose and must be covered by appropriate ordinances. If an LGU is legally mandated to pay a penalty, the sanggunian (local legislative council) can enact an ordinance appropriating the necessary amount.
- Commission on Audit (COA) Oversight: COA examines whether expenditures are valid, lawful, and for a public purpose. Hence, an LGU’s payment of fines or penalties must be supported by a valid legal obligation (e.g., a court judgment, an administrative order). Unauthorized or personal penalties—especially those imposed specifically on an individual official—cannot be validly charged to public funds.
Jurisprudence
While there is no single Supreme Court decision solely dedicated to “LGUs paying penalties,” numerous rulings affirm that:
- LGUs, as juridical entities, can be held liable in the same manner as private corporations when performing proprietary functions.
- Any payment from the local treasury must pass COA scrutiny.
- Public funds cannot be used to settle personal liabilities of officials; such personal fines remain the responsibility of the individuals concerned.

4. Distinguishing Between Corporate and Personal Liability

4.1. Liability of the LGU as a Corporate Entity

When the local government unit itself violates a law or regulation in the discharge of its official functions—particularly proprietary ones—any resulting fines may be charged against the funds of the LGU. For instance:

Environmental Violations: If a city government mismanages its landfill, leading to pollution and a regulatory agency imposes fines, the city treasury may lawfully shoulder the penalty.
Contractual Stipulated Damages: If the municipal government defaults on a public works contract, the penalty clause in the contract may require the municipal treasury to pay the stipulated damages.

4.2. Personal Liability of Local Officials

Local chief executives (mayors, governors, barangay captains), members of the sanggunian, or employees who commit administrative or criminal offenses often face personal fines and penalties. Key points:

Personal vs. Public Purpose: Public funds may not be used to settle personal liabilities. For example, if a mayor is found criminally liable under the Anti-Graft and Corrupt Practices Act, any fine imposed on the mayor personally is not chargeable to the LGU.
COA Disallowance: Should an LGU attempt to settle such personal fines using public funds, the Commission on Audit could issue a Notice of Disallowance, requiring the responsible officials to reimburse any amounts improperly disbursed.

5. Requirements and Procedures for Payment

5.1. Sangguniang Authorization

Legislative Action: Before an LGU pays any judgment or penalty, its local legislative council (Sangguniang Panlalawigan, Panlungsod, Bayan, or Barangay) typically must pass an appropriation ordinance or resolution.
Justification: The resolution or ordinance must cite the legal basis for the liability (e.g., a final court decision or a regulatory order). The use of public funds for the payment of a penalty must be lawful and in pursuit of a public purpose—namely, settling the legitimate debt of the LGU itself.

5.2. COA Rules and Regulations

Documentary Requirements: Before the LGU disburses payment, it must comply with COA rules on documentation (e.g., the final order or decision imposing the penalty, appropriate vouchers, and proof of sanggunian approval).
Audit: COA audits LGUs to ensure that disbursements are lawful, regular, and necessary. Any improper or unauthorized payment may be disallowed.

5.3. Budget Allocation

Budget Realignment: If the imposed penalty arises after the annual budget has been set, the LGU may need to realign funds or pass a supplemental budget ordinance to cover the liability.
Debt Service Limits: Large monetary liabilities must be considered in light of the LGU’s debt service ceiling and other fiscal constraints prescribed by the Local Government Code and Department of Budget and Management (DBM) rules.

6. Examples and Practical Scenarios

Administrative Fine for Environmental Non-Compliance
- The DENR’s Environmental Management Bureau fines a city for illegal dumping of solid waste. Once the fine is final and executory, the city council can appropriate funds to pay.
- If the violation was due to individual wrongdoing by city officials in their private capacity (e.g., personal negligence), the city treasury cannot shoulder their personal liability.
Court-Imposed Damages for Tortious Acts
- A municipality negligently maintains a public market, causing injury to private individuals, who sue and secure a judgment for damages. The court may hold the municipality liable in its corporate capacity, allowing the municipality to pay out of local funds.
Civil Fine in Labor Case
- The National Labor Relations Commission imposes a fine for labor law violations committed by the LGU as an employer. The LGU is authorized to pay from its funds, as this arises from its proprietary function (being an employer) and is a direct corporate obligation.
Criminal Fine Imposed on a Local Official
- A mayor convicted of graft must pay fines and restitution. This liability is personal to the mayor, and the LGU’s funds cannot be used to pay any part of it. Any attempt to do so would be disallowed by COA, and responsible officials could be held liable for malversation or misuse of public funds.

7. Consequences of Non-Payment

If an LGU fails or refuses to pay a final and executory judgment or regulatory penalty:

Writ of Execution / Garnishment
A successful litigant or government agency may secure a writ of execution, potentially garnishing the LGU’s funds in a bank account or seizing certain assets (though with caution, as some public assets are exempt from execution when essential to governmental functions).
Administrative or Legal Sanctions
Continued refusal to settle a legally established obligation may lead to administrative sanctions against the officials concerned, as non-payment undermines the rule of law. In extreme cases, it could also lead to contempt citations if a court order is defied.
Damage to Public Service
Enforcement measures like garnishment can disrupt the delivery of essential services to local constituents if significant portions of the LGU budget are withheld or seized to satisfy the obligation.

8. Key Takeaways

LGUs, as Corporate Entities, Can Pay Penalties
If a fine or penalty is imposed on an LGU (as opposed to its officials personally) through a valid judgment or lawful order, the LGU may use public funds to settle it. This is part of the LGU’s corporate liability.
Personal Liabilities Cannot be Charged to Public Funds
Any fine or penalty specifically levied on an individual official for personal wrongdoing (whether criminal, civil, or administrative in nature) cannot be shouldered by the LGU treasury.
Legal and Budgetary Requirements Must Be Observed
The LGU’s payment of penalties must be supported by:
- A final judgment or valid administrative order;
- An appropriation ordinance enacted by the sanggunian; and
- Compliance with COA auditing rules.
COA Oversight is Critical
Even if an LGU has a lawful obligation, the Commission on Audit ensures that the payment process adheres to rules on public funds. Any irregularity, such as using local funds to pay an individual official’s penalty, will be disallowed and may subject responsible parties to liability.
Timely Payment Prevents Further Complications
Settling obligations promptly avoids garnishments, interest accrual, and the possibility of administrative or contempt sanctions.

9. Conclusion

In the Philippine setting, local government units do have the legal capacity to pay penalties—but only in their corporate or proprietary capacity and strictly when such penalties are imposed against the LGU itself, rather than an individual public official. The principle of public purpose under the Constitution and the Local Government Code bars the use of public funds for private liabilities, ensuring that only legitimate governmental or corporate obligations are charged to the local treasury. Ultimately, LGUs must navigate legal, budgetary, and audit procedures to lawfully disburse funds for fines and penalties, balancing their accountability to the public with their duty to comply with lawful orders and judgments.