Disallowed Expenses Local Officials Must Refund Illegally Received Funds

The Supreme Court has ruled that local government officials who received disallowed extraordinary and miscellaneous expenses (EME) must refund the amounts, even if they acted in good faith. In Abella v. Commission on Audit (G.R. No. 238940, April 19, 2022), the Court En Banc affirmed the COA's disallowance of over P8 million in EME paid to Butuan City officials from 2004 to 2009, clarifying important rules on local fiscal autonomy, the liability of fund recipients, and the right to speedy disposition of cases.

The Facts

The Department of Budget and Management (DBM) had disapproved a separate EME appropriation in Butuan City's annual budget, ruling that EME falls under the discretionary funds of the local chief executive and cannot be a separate item of appropriation under Section 325(h) of the Local Government Code (RA 7160). Despite this, the Sangguniang Panlungsod enacted an ordinance granting EME allowances to certain officials.

The COA issued multiple Notices of Disallowance (NDs) covering EME payments from 2004 to 2009. The affected officials appealed, raising three main arguments: violation of their right to speedy disposition of cases, improper issuance of the NDs, and good faith as passive recipients.

No Violation of Speedy Disposition Rights

The Court rejected the claim that the COA's delay in resolving the appeals violated the constitutional right to speedy disposition of cases. Citing Cagang v. Sandiganbayan, the Court explained that determining inordinate delay requires examining the facts and circumstances, not mere mathematical reckoning.

The consolidated appeals covered 94 disallowances involving numerous transactions, disbursement vouchers, and individuals. Notably, some records had been destroyed when the COA office caught fire in 2011, complicating the audit. The Court also observed that the petitioners never raised the speedy disposition issue during the proceedings before the COA, raising it only as a "last-ditch attempt" in their petition. Without proof of actual prejudice, the passage of time alone does not constitute a violation.

EME Appropriations Properly Disallowed

The Court affirmed that EME and discretionary funds serve the same purpose: providing a source of funds for expenses connected to official functions not covered by regular budget allocations. Section 325(h) of the Local Government Code expressly prohibits appropriating separate amounts for discretionary purposes beyond the 2% limit for the local chief executive's discretionary fund.

The Court noted that COA Circulars consistently characterized EME as similar to discretionary expenses. Since the city ordinance already appropriated funds for the Mayor's discretionary expenses, the separate EME appropriations were "patent circumventions" of the law. The Sangguniang Panlungsod also designated local officials as equivalent in rank to national officials entitled to EME under the General Appropriations Acts, but this was done without DBM authorization.

On fiscal autonomy, the Court clarified that local autonomy "does not signify the absolute freedom of the LGUs to create their own sources of revenue and to spend their revenues unrestrictedly." LGUs remain subject to national supervision and COA's auditing power.

Good Faith Does Not Excuse Refund Liability

Applying Madera v. Commission on Audit, the Court held that a recipient's good faith is inconsequential in determining liability for disallowed transactions, based on the principles of solutio indebiti and unjust enrichment. However, the Court recognized exceptions: refund may be excused when the benefits were genuinely given for services rendered, or when the Court finds equitable grounds based on undue prejudice or social justice considerations.

These exceptions, however, apply only to disbursements with adequate factual and legal bases that were disallowed due to procedural infirmities. In this case, the EME grants were based solely on the local ordinance without supporting vouchers or documents. The Court also applied the three-year rule from Cagayan De Oro City Water District v. Commission on Audit, but found it inapplicable because the officials already had notice of the illegality from earlier disallowances in 2006 and 2009.

Practical Takeaways

• Good faith is not a defense. Recipients of disallowed government funds must refund them, regardless of whether they acted in good faith.
• EME and discretionary funds are the same. Local governments cannot create separate EME appropriations beyond the 2% discretionary fund limit under Section 325(h) of the Local Government Code.
• Local autonomy has limits. LGUs remain subject to DBM supervision and COA auditing authority to ensure compliance with national laws.
• Raise procedural rights promptly. Claims of inordinate delay must be raised during proceedings, not for the first time on appeal, and must show actual prejudice.
• Document everything. Disbursements must be supported by proper vouchers and documentation; exceptions to refund liability require proof that funds were genuinely used for official purposes.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.