BALAYAN WATER DISTRICT (BWD), CONRADO S. LOPEZ AND ROMEO D. PANTOJA, PETITIONERS, VS. COMMISSION ON AUDIT, RESPONDENT.

Balayan Water District versus Commission on Audit

The Case

This is a petition for certiorari under Rule 64 of the Revised Rules of Court, brought by the Balayan Water District, its General Manager Conrado S. Lopez, and Romeo D. Pantoja as representative of the employee-recipients, against the Commission on Audit. The petitioners ask the Supreme Court to reverse the Commission on Audit's decision affirming several notices of disallowance that struck down the payment of accrued Cost of Living Allowance, or COLA, to water district employees for calendar years 2010 and 2011. The case matters because it settles two questions every reviewer must know: first, whether COLA is already part of the standardized salary of government employees under the Salary Standardization Law, and second, who must refund a disallowed benefit — the responsible officers, or the passive recipients who merely received it in good faith.

Procedural History

On November 14, 2012, several notices of disallowance were issued disallowing the payment of accrued COLA for calendar years 2010 and 2011. The petitioners appealed to the Commission on Audit Regional Director for Region Four-A. In its decision of November 12, 2013, the Regional Director denied the appeal and affirmed the notices of disallowance, holding that water districts were never covered by Letter of Instruction Number 97, and that entitlement to COLA required employment on or before July 1, 1989 and actual receipt of the allowance on or before that date. Unsatisfied, the petitioners filed a petition for review before the Commission on Audit en banc. In its decision of December 27, 2016, the Commission affirmed the Regional Director, agreeing that local water districts were excluded from Letter of Instruction Number 97 and that COLA had been integrated into the standardized salary under Section 12 of Republic Act Number 6758. Hence, the petitioners elevated the matter to the Supreme Court by petition for certiorari under Rule 64.

Facts

The Balayan Water District is a government entity organized under Presidential Decree Number 198, as amended. On February 10, 2006, its Board of Directors passed Resolution Number 16-06, granting the payment of COLA to its employees on an installment basis beginning 2006. The amount to be paid was the COLA accrued from 1992 to 1999.

On November 14, 2012, the Commission on Audit issued notices of disallowance covering the COLA payments made during calendar years 2010 and 2011, in the total amount of 1,427,621 pesos and 88 centavos. The petitioners appealed, but the Regional Director and later the Commission on Audit en banc both upheld the disallowance.

Before the Supreme Court, the petitioners relied heavily on the Court's earlier ruling in Metropolitan Naga Water District versus Commission on Audit, arguing that local water districts are covered by Letter of Instruction Number 97 and that the requirements of incumbency and prior receipt do not apply. They also invoked good faith, claiming they believed they were acting in accordance with law and jurisprudence. The Commission countered that the earlier case ultimately upheld the disallowance, and that good faith could not be appreciated because Department of Budget and Management National Budget Circular Number 2005-502 already warned agency heads that they would be personally liable for authorizing COLA payments.

Issues

• Whether or not the Commission on Audit gravely abused its discretion in denying the water district employees' entitlement to accrued COLA for the period 1992 to 1999 based on Letter of Instruction Number 97.
• Whether or not the Commission on Audit gravely abused its discretion in failing to appreciate good faith in favor of the petitioners as recipients of the COLA.

Applicable Provisions

Section 12 of Republic Act Number 6758, the Salary Standardization Law, provides:

Section 12. Consolidation of Allowances and Compensation. All allowances, except for representation and transportation allowances; clothing and laundry allowances; subsistence allowance of marine officers and crew on board government vessels and hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad; and such other additional compensation not otherwise specified herein as may be determined by the Department of Budget and Management, shall be deemed included in the standardized salary rates herein prescribed. Such other additional compensation, whether in cash or in kind, being received by incumbents only as of July 1, 1989 not integrated into the standardized salary rates shall continue to be authorized.

This is the pivotal provision: because COLA is not among the enumerated non-integrated allowances, it is deemed included in the standardized salary by operation of law.

Department of Budget and Management National Budget Circular Number 2005-502 provides:

5.0 In view of the foregoing, payment of allowances and other benefits, such as COLA, which are already integrated in the basic salary, remains prohibited unless otherwise provided by law or ruled by the Supreme Court.

6.0 All agency heads and other responsible officials and employees found to have authorized the grant of COLA and other allowances and benefits already integrated in the basic salary shall be personally held liable for such payment, and shall be severely dealt with in accordance with applicable administrative and penal laws.

This circular is decisive on the question of good faith, because it was already in force when the water district board authorized the disallowed payments.

Ruling

On the first issue, the Court held that the Commission did not gravely abuse its discretion. The petitioners misread the earlier water district case. While that case clarified that Letter of Instruction Number 97 covered local water districts, it still upheld the disallowance because COLA had already been integrated into compensation. Under Section 12 of Republic Act Number 6758, the general rule is that all allowances are deemed included in the standardized salary, save only those expressly enumerated or subsequently identified by the Department of Budget and Management. The Court stressed that this provision is self-executing. As the Court put it, integration of allowances took effect upon the passage of the law and does not need further action from the Department of Budget and Management. Thus, COLA, not being an enumerated exclusion, was already part of the employees' basic salary. There was no accrued COLA to speak of, and the back payments were a redundant double compensation. The ineffectivity of the compensation circular did not matter, because that circular was needed only to identify additional non-integrated benefits.

On the second issue, the Court split the petitioners. As to the responsible officers, good faith cannot be appreciated, because when the board passed its resolution in February 2006, National Budget Circular Number 2005-502 was already valid and existing, and it unequivocally prohibited the payment of COLA unless authorized by law or by a Supreme Court ruling. That circular should have put them on guard. The Court distinguished the earlier water district case, where the board resolution was passed in 2002, before the circular was issued. As to the employees who were mere passive recipients, however, the Court ruled that good faith should be appreciated. Citing its ruling in the Silang case, the Court held that passive recipients who acted in good faith are exempt from refunding the disallowed amount, since they had no participation in the disbursement and honestly believed they were entitled to the benefit.

Doctrine

First, Section 12 of Republic Act Number 6758 is self-executing. All allowances are deemed integrated into the standardized salary upon the effectivity of the law, except only those expressly enumerated in Section 12 or subsequently identified by the Department of Budget and Management. COLA is not among the exclusions, so it is integrated by operation of law, and any separate payment of it is unauthorized double compensation subject to disallowance.

Second, on refund, the rules on good faith are differentiated. Responsible officers who authorized a disallowed disbursement cannot claim good faith where a clear and unequivocal administrative issuance, such as National Budget Circular Number 2005-502, already prohibited the payment at the time of authorization. Passive recipients, however, who merely received the benefit without participation in its approval and in the honest belief that they were entitled to it, are absolved from refunding the disallowed amount.

Disposition

The petition was partly granted. The Commission on Audit decision was affirmed with modification, absolving the employees of the Balayan Water District who were mere passive recipients of the disallowed disbursement from refunding the amounts they had received.

Remember This

Memorize this line: COLA is integrated into the standardized salary by operation of law, so its separate payment is disallowed, but passive recipients in good faith need not refund. Examiners use this case to test the self-executing character of Section 12 of the Salary Standardization Law and the good-faith exception distinguishing liable authorizing officers from absolved passive recipients.