The review was also inspired by the Local Government Code which states that the use of the SEF as loan collateral was prohibited. The Department of Interior and Local Governments (DILG) is the main implementor of the said law.
While the LBP is committed to help in the financial requirements of local government units (LGUs), it should only be done, in the context, of adhering to the existing rules and regulations.
"We have to make sure that nobody is liable later on," LBP president Margarito Teves said in a press release.
Pimentel, the author of the local government code and the recognized authority on the devolution of national government functions, stressed that education is not an evolved function and thus remains in the hands of the central government.
As such, Pimentel said the use of SEF as loan collateral could constitute technical malversation on the ground of using public funds for purposes other than originally intended.
Through its Bulacan Governor Josefina de la Cruz, the LGU obtained a loan from the government financial institution worth P216 million, consisting of two packages, an existing P151-million term loan and a new P65-million loan facility. Based on supporting documents submitted, Cruz said the money has earmarked for the construction of school buildings.
The provincial government also has an outstanding facility with the LBP amounting to over P85 million, which has been obtained using its prime real estate properties and internal revenue allotment (IRA) as collateral.
The solon said that the IRA is an acceptable form of collateral but not SEF. Tapping the SEF to back-up loan availments is "subject to legal question." The SEF is given to LGUs to supplement its needs in the delivery of basic education, which include honoraria and salaries of teachers and purchase of books and supplies.
Teves directed bank officials, who processed and recommended the approval of the facility to the province of Bulacan, to submit an executive summary of the SEF-secured loans.
"We may have to go back to them (referring to Governor De la Cruz and the other provincial officials involved in the loan applications) and raise some of the questions or concerns raised by Senator Pimentel," the press statement said.
The bank’s board of directors approved loans to LGUs "on the basis that all is legally tenable."
Based on a Bangko Sentral ng Pilipinas (BSP) ruling, loans to all types of borrowers are considered "substandard" should the documentation requirements, particularly the collateral, be deemed as not in order.
In some instances, if the release of the facility is in tranches, additional disbursements may have to be put on hold until after all the documentation requirements have been satisfied by the borrower.
In this particular case, the LGU would be required to put up a replacement collateral. If it fails to provide the necessary collateral replacement and the loan is declared substandard, the LBP as required by the BSP to set aside reserve provisions to cover th "illegally collateralized loans." This situation would constrict the GFI’s financial flexibility to extend financing to other borrowers.
Apart from the LBP, the province of Bulacan has also outstanding debts to the Development Bank of the Philippines (DBP), making it one of the most heavily indebted provinces despite a huge annual budget of P1.5 billion.