3Repuhlic of tbe ~bilippines

~upreme <!Court
;fffilanila
EN BANC
METROPOLITANNAGA WATER
DISTRICT, VIRGINIA I. NERO,
JEREMIAS P. ABAN JR., and
EMMA A. CUYO,
Petitioners,

- versus -

COMMISSION ON AUDIT,
Respondent.

G.R. No. 218072

Present:
SERENO, C.J,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,*
PERALTA,
BERSAMIN,
DEL CASTILLO,
PEREZ,
MENDOZA,
REYES,
PERLAS-BERNABE,
LEONEN,
JARDELEZA, and
CAGUIOA,JJ
Promulgated:
March 8, 2016

~~~-~

:x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - :x

DECISION
MENDOZA, J.:
This petition for certiorari under Rule 64 of the Revised Rules of
Court seeks to reverse and set aside the September 10, 2014 Decision 1 and
the March 9, 2015 Resolution of the Commission on Audit (COA/ which
affirmed the October 24, 2011 Decision3 of the COA Regional Office No. V
(COA Regional Office) disallowing the payment of backpay differential of
* On Leave.
1

Concurred in by Chairperson Ma. Gracia M. Pulido-Tan, Commissioner Heidi L. Mendoza and

Commissioner Jose A. Fabia; rol/o, pp.20-27.
2
Id. at 30.
3
Penned by Regional Director Nilda B. Plaras; id. at 45-51.

DECISION

G.R. No. 218072

Cost of Living Allowance (COLA) to the officials and employees of Metro

Naga Water District (MNWD) in the amount of 3,499,681.14.
On August 20, 2002, the Board of Directors (the Board) of petitioner
MNWD passed a resolution4 granting the payment of accrued COLA
covering the period from 1992 to 1999 in favor of qualified MNWD
personnel. The Board issued the said resolution on the basis of the Courts
ruling in de Jesus v. COA5 and its subsequent rulings, and the series of
opinions of the Office of the Government Corporate Counsel (OGCC). The
MNWD employees began receiving their respective accrued COLA in
installment basis starting 2002.6
During the post-audit, the Audit Team Leader Jaime T. Posada, Jr.
(Posada) observed that the payment of COLA in the amount of
P3,499,681.14 in 2007 lacked documentation. Thus, Posada required
MNWD to submit its payroll as of June 30, 1989 for COLA and its payroll
as of July 31, 1989 for salary and other benefits including COLA. The
purpose was to determine whether the COLA was received by MNWD
employees prior to the effectivity of the Salary Standardization Law
(SSL).7MNWD failed to submit the requested documents.
On June 15, 2009 Posada issued Notice of Disallowance (ND) No.
2009-0018 disallowing the COLA paid in 2007 amounting to P3,499,681.14
and directing the named MNWD officers to immediately settle the
disallowance. On October 8, 2009, MNWD filed a notice of appeal with the
COA Regional Office.
The COA Regional Office Ruling
In its October 24, 2011 decision, the COA Regional Office upheld the
ND covering the disbursement of COLA in 2007 amounting to
P3,499,681.14. It opined that MNWD could not rely on the case of PPA
Employees hired after July 1, 1989 v. COA (PPA Employees)9 because the
circumstances were dissimilar considering that MNWD was unable to prove
that it had granted COLA to its employees since July 1, 1989. Moreover, the
COA Regional Office ruled that MWND could not assert that its employees

Id. at 31-32.
355 Phil. 584 (1998).
6
Rollo, p. 5.
7
Id. at 20.
8
Id. at 33.
9
506 Phil. 382 (2005).
5

DECISION

G.R. No. 218072

were entitled to COLA by virtue of Letter of Implementation (LOI) No. 9710

because the latter did not include water districts in its coverage.
Undaunted, MWND appealed before the COA.
The COA Ruling
On September 10, 2014, the COA rendered the assailed decision
affirming the ruling of the COA Regional Office. It agreed with the COA
Regional Office that there was substantial distinction between the case of
Philippine Ports Authority (PPA) and that of MNWD which warranted the
difference in the treatment of the back payment of COLA. The COA noted
that in PPA Employees, it was established that the PPA had been paying
COLA to its employees even prior to July 1, 1989. MNWD, on the other
hand, admitted that it had not previously paid the COLA and merely
disbursed the same after the passage of a board resolution in 2002. The COA
also negated the argument of MNWD that its personnel were entitled to
COLA as a matter of right. The COA ruled that water districts were not
within the coverage of LOI No. 97.
Aggrieved, MNWD moved for reconsideration, but its motion was
denied by the COA in its assailed resolution, dated March 9, 2015.
Hence, this present petition raising the following
ISSUES
A. WHETHER
COA
GRAVELY
ABUSED
ITS
DISCRETION TANTAMOUNT TO LACK OR
EXCESS OF JURISDICTION IN NOT RECOGNIZING
WATER DISTRICT EMPLOYEES ENTITLEMENT
TO ACCRUED COLA FOR THE PERIOD 1992-1999
AS A MATER OF RIGHT IN ACCORDANCE WITH
LOI 97.
B. WHETHER
COA
GRAVELY
ABUSED
ITS
DISCRETION TANTAMOUNT TO LACK OR
EXCESS OF JURISDICTION WHEN IT FAILED TO
APPLY EXISTING JURISPRUDENCE IN FAVOR OF
MNWDS
EMPLOYEES
FOR
COLA
11
ENTITLEMENT.

10

Authorizing the Implementation of Standard Compensation and Position Classification Plans for the
Infrastructure/Utilities Group of Government Owned or Controlled Corporations.
11
Rollo, p. 7.

DECISION

G.R. No. 218072

Essentially, the Court is tasked to resolve whether the back payment

of the COLA was correctly disallowed; and in the event the disbursement
was improper, whether MNWD is liable to refund the same.
MNWD argues that its employees were entitled to receive COLA as
local water districts (LWD) were covered under the provisions of LOI No.
97. It asserts that requiring proof that MNWD employees received their
COLA prior to July 1, 1989 before they could be entitled to COLA under
LOI No. 97 would be unrealistic and unjust because LWDs were declared
government owned and controlled corporations (GOCCs) only on September
13, 1991 when the Court promulgated Davao City Water District, et al. v.
CSC and COA (Davao City Water District).12 Further, MNWD insists that
pursuant to PPA Employees, MNWD employees must likewise enjoy their
COLA from March 12, 1992 to March 16, 1999.
In its Comment,13 dated September 7, 2015, the COA reiterated its
reasons for upholding the disallowance of the disbursement in question. It
asserted that MNWD could not rely on PPA Employees because, unlike the
employees therein, the MNWD employees were not previously receiving
COLA. In other words, MNWD could not claim that its employees were
deprived of COLA because there was no showing that they were paid COLA
in the first place.
In its Reply,14 dated December 21, 2015, MNWD countered that it
need not comply with the requirements laid out in Aquino v. PPA (Aquino),15
where it was held that in order to be entitled to accrued fringe/amelioration
benefits under LOI No. 97, it must be shown that (1) the employee was an
incumbent; and (2) the employee was receiving those benefits as of July 1,
1989. It reasoned that what was involved in the said case was a claim for
continuous enjoyment of Representation and Travel Allowance (RATA) and
not the payment of accrued COLA.
The Courts Ruling
LWDs are included in the
coverage of LOI No. 97
Section 1(d) of LOI No. 97 states:
1. Scope of the Plan The Position and Compensation Plans for the
Infrastructure and Utilities group shall apply to the corporations in
the transport, the power, the infrastructure, and the water utilities
sector, as follows: xxx
12

278 Phil. 605 (1991).

Rollo, pp. 94-117.
14
Id. at 124-134.
15
G.R. No. 181973, April 17, 2013, 696 SCRA 666.
13

DECISION

G.R. No. 218072

d. Water Utilities
Local Water Utilities
Local Water Utilities Administration
Metropolitan Waterworks and Sewerage System16

As can be gleaned from above, LWDs are among those included in

the scope of LOI No. 97. A local water utility is defined as any district, city,
municipality, province, investor-owned public utility or cooperative
corporation which owns or operates a water system serving an urban center
in the Philippines, except that the said term shall not include the
Metropolitan Waterworks and Sewerage System (MWSS) or any system
operated by the Bureau of Public Works.17 It is, therefore, categorical that
MNWD, as a LWD, is included in the coverage of LOI No. 97.
So although it is correct for MNWD to insist that LWDs were subject
to the provisions of LOI No. 97, it is erroneous for it to claim that LWDs
started to be covered by LOI No. 97 only in 1991 when the Court
promulgated Davao City Water District. In the said case, it was ruled that
LWDs, created pursuant to Presidential Decree (P.D.) No. 198, were
GOCCs with original charter. It must be remembered that the interpretation
of a law by this Court constitutes part of that law from the date it was
originally passed, as it merely establishes the contemporaneous legislative
intent that the interpreted law carried into effect.18 Thus, when P.D. No. 198
was enacted in 1973, LWDs were already GOCCs included in the coverage
of LOI No. 97.
No need to establish that
the benefits in question
were received since July
1, 1989 by incumbent
employees as of the said
date
MNWD correctly argues that the elements of incumbency and prior
receipts are inapplicable in determining the propriety of its COLA back
payments. In Ambros v. COA,19 as cited in Aquino, the Court explained that
in order for non-integrated benefits to be continued, they must have been
received as of July 1, 1989 by incumbents as of the said date. Thus, when
the benefit in question is not among the non-integrated benefits enumerated
under Section 12 of the SSL or added by a subsequent issuance of the
Department of Budget and Management (DBM), the twin requirements of
16

www.gov.ph/1979/08/31/letter-of-implementation-no.97-s-1979/ [date accessed February 29, 2016].

Section 3(h) of Presidential Decree No. 198 or the Provincial Water Utilities Act of 1973.
18
Republic v. Remman Enterprises, Inc., G.R. No. 199310, February 19, 2014, 717 SCRA 171.
19
501 Phil. 255 (2005).
17

DECISION

G.R. No. 218072

incumbency and prior receipt find no application. Hence, in resolving the

propriety of the COLA back payments, a resort to the abovementioned
requirements is unnecessary.
Integration is the rule
and not the exception
The Court, nevertheless, finds that the back payment of the COLA to
MNWD employees was rightfully disallowed. Pertinent to the issue is
Section 12 of the SSL, which 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 DBM, 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.

The consolidation of allowances in the standardized salary as stated in

the above-cited provision is a new rule in Philippine position classification
and compensation system. In Maritime Industry Authority v. COA (MIA),20
the Court explained that, in line with the clear policy of standardization set
forth in Section 12 of the SSL, all allowances, including the COLA, were
generally deemed integrated in the standardized salary received by
government employees, and an action from the DBM was only necessary if
additional non-integrated allowances would be identified. Accordingly,
MNWD was without basis in claiming COLA back payments because the
same had already been integrated into the salaries received by its employees.
Moreover, MNWDs reliance in PPA Employees is misplaced. The
circumstances in the case at bench clearly differ from those in PPA
Employees to warrant its application. In Napocor Employees Consolidated
Union v. The National Power Corporation (Napocor),21 as cited in MIA, the
Court clarified that the PPA Employees was inapplicable where there was no
issue as to the incumbency of the employees, to wit:

20
21

G.R. No. 185812, January 13, 2015.

519 Phil. 372 (2006).

DECISION

G.R. No. 218072

In setting aside COA's ruling, we held in PPA Employees that

there was no basis to use the elements of incumbency and prior
receipt as standards to discriminate against the petitioners therein.
For, DBM-CCC No. 10, upon which the incumbency and prior
receipt requirements are contextually predicated, was in legal limbo
from July 1, 1989 (effective date of the unpublished DBM-CCC No.
10) to March 16, 1999 (date of effectivity of the heretofore
unpublished DBM circular). And being in legal limbo, the benefits
otherwise covered by the circular, if properly published, were
likewise in legal limbo as they cannot be classified either as
effectively integrated or not integrated benefits.
There lies the difference.
Here, the employee welfare allowance was, as above
demonstrated, integrated by NPC into the employees' standardized
salary rates effective July 1, 1989 pursuant to Rep. Act No. 6758.
Unlike in PPA Employees, the element of discrimination between
incumbents as of July 1, 1989 and those joining the force thereafter
is not obtaining in this case. And while after July 1, 1989, PPA
employees can rightfully complain about the discontinuance of
payment of COLA and amelioration allowance effected due to the
incumbency and prior receipt requirements set forth in DBM-CCC
No. 10, NPC cannot do likewise with respect to their welfare
allowance since NPC has, for all intents and purposes, never really
discontinued the payment thereof.
To stress, herein petitioners failed to establish that they
suffered a diminution in pay as a consequence of the consolidation
of the employee welfare allowance into their standardized salary.
There is thus nothing in this case which can be the subject of a back
pay since the amount corresponding to the employee welfare
allowance was never in the first place withheld from the
petitioners.22

In PPA Employees, the crux of the issue was whether it was

appropriate to distinguish between employees hired before and after July 1,
1989 in allowing the back payment of the COLA. In the said case, the Court
ruled that there was no substantial difference between employees hired
before July 1, 1989 and those hired thereafter to warrant the exclusion of the
latter from COLA back payment. It is important to highlight that, in PPA
Employees, the COLA was paid on top of the salaries received by the
employees therein before it was discontinued.
The COA noted that the MNWD employees never received the COLA
prior to 2002. Thus, following the ruling in Napocor, there is nothing in this
case which could be the subject of back payment considering that the COLA
was never withheld from MNWD employees in the first place. In PPA
Employees, the Court allowed the back payment of the COLA because the
employees hired after July 1, 1989 would suffer a diminution in pay if the
back payment would be limited to employees hired before the said date.
22

Id. at 388-389.

DECISION

G.R. No. 218072

Here, no diminution would take place as the MNWD employees only

received the COLA in 2002.

Refund not necessary

when there is a showing
ofgood faith
MNWD, nonetheless, is not required to return the disallowed amount
on the basis of good faith. Good faith, in relation to the requirement of
refund of disallowed benefits or allowances, is a "state of mind denoting
honesty of intention, and freedom from knowledge of circumstances which
ought to put the holder upon inquiry; an honest intention to abstain from
taking any unconscientious advantage of another, even through technicalities
of law, together with absence of all information, notice, or benefit or belief
of facts which render transaction unconscientious."23
MNWD employees need not refund the amounts corresponding to the
COLA they received. They had no participation in the approval thereof and
were mere passive recipients without knowledge of any irregularity. Hence,
good faith should be appreciated in their favor for receiving benefits to
which they thought they were entitled. 24
Further, good faith may also be appreciated in favor of the MNWD
officers who approved the same. They merely acted in accordance with the
resolution passed by the Board authorizing the back payment of COLA to
the employees. Moreover, at the time the disbursements were made, no
ruling similar to MIA was yet made declaring that the COLA was deemed
automatically integrated into the salary notwithstanding the absence of a
DBM issuance. In Mendoza v. COA, 25 the Court considered the same
circumstances as badges of good faith.
WHEREFORE, the December 10, 2014 Decision and the March 9,
2015 Resolution of the Commission on Audit are AFFIRMED with
MODIFICATION, in that, petitioner Metro Naga Water District is
absolved from refunding the total amount of P3,499,681.14 as reflected in
the Notice of Disallowance.
SO ORDERED.

JOSE CA

~1\1rENDOZA

Asso\ri~~bTs~ice

23
24
25

PEZA v. COA, 690 Phil. 104, 115 (2012), as cited in MIA, supra note 20.
Silang et. al. v. COA, G.R. No. 213189, September 8, 2015.
G.R. No. 195395, September 10, 2013, 705 SCRA 306.

G.R. No. 218072

DECISION

WE CONCUR:

MARIA LOURDES P. A. SERENO

Chief Justice

J. VELASCO, JR.
Asi'ociate Justice

ANTONIO T. CARPIO
Associate Justice

lfnJ A~1-~ ~~
I

/. ~

(On Leave)
ARTURO D. BRION
Associate Justice

~.LEONARDO-DE CASTRO
Associate Justice

'/~~

RIANO C. DEL CASTILLO

Associate Justice

JOS

/JJl.W

Associate Justice

/MARVICM.V.F. LEONEN
Associate Justice

ESTELA M. fERLAS-BERNABE
Associate Justice

Associate Justice

\\

DECISION

10

G.R. No. 218072

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I hereby

certify that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Court.

MARIA LOURDES P. A. SERENO

Chief Justice