(Part 2)

What is the basis for taking P107 billion from the Philippine Deposit Insurance Corp. (PDIC)?

As in the PhilHealth (Philippine Health Insurance Corp.) matter, the justification for getting the funds from PDIC is reportedly the legal opinion issued by Office of Government Corporate Counsel (OGCC). This column calls for PDIC to release to the public the content of the OGCC legal opinion. It should clarify whether the amount is taken as “dividends,” or as a temporary borrowing (in which case the National Government should issue the equivalent promissory note to the PDIC).

With all due respect to whatever the OGCC legal opinion contains, this writer takes the position that — based on a reading of the PDIC charter provision on dividends — the basis for taking the PDIC funds is weak. Should the matter be taken to the Supreme Court similar to the PhilHealth case, it would be interesting to see the same arguments play out. This writer expects the Government Corporate Counsel (GCC) and the Solicitor General to be placed in the same very uncomfortable spot of defending the government position from the incisive and probing questions of Supreme Court Justices Amy Lazaro-Javier and Antonio Kho, Jr.

Under RA 7656, the PDIC, as a government-owned and -controlled corporation (GOCC), is required to declare at least 50% of its net income as dividends. However, the PDIC charter RA 10846 (May 23, 2015, amending RA 3591) specifically excludes premiums or “assessment collections” received from banks from the definition of income that can be declared as dividends. RA 10846 Sec 31 inserts a new Section 18 into RA 3591 which reads:

“DIVIDEND DECLARATION. Consistent with the policy of the state …. The Corporation shall build up and maintain the DIF (Deposit Insurance Fund) at the target level set by the PDIC Board of Directors. Such target level shall be subject to periodic review and may be adjusted as necessary.

“The Corporation (PDIC) is exempt from RA 7656; instead [PDIC] shall remit dividends to the National Government only if the target DIF level for the applicable year has been reached. For purposes of computing the amount of dividends to be declared and remitted to the National Government, all assessment collections shall not be considered as income. The dividend rate shall be at least fifty percent (50%) of the income from other sources only.”

Key Point: If the premiums or assessment collections that built up the DIF were exempt from the computation of dividends to the National Government, how much more the cumulative DIF itself? Common sense dictates that the DIF itself — the accumulated total of all these premiums over the years — will be equally, if not even more, protected/exempt from any dividend computation.

While the DIF cannot be touched, no such restriction applies on the National Government taking steps to reduce, or even zero out, the retained earnings (see Column D of the table). This reduction has actually happened in the past, with the retained earnings reduced from a high of P32.1 billion in 2016 to P15.4 billion in 2020 but recovered to P27.8 billion in 2023.

WHOSE MONEY?Granting that there was a surplus, whose money is it anyway?

A former PDIC senior officer aptly put it, “PDIC is penalized for being efficient while PhilHealth was penalized for being inefficient.”

The two key arguments that the government has the right to take the PDIC’s “excess funds” are:

1. For private insurance companies, the premiums paid by the insuring public (such as for fire insurance for houses or for damage or theft of vehicles) form part of the income of the insurance company. The moment the insured party makes the payment, it is no longer his money. The company’s stockholders are entitled to get part of it as dividends from the company, since such income become part of retained earnings.

2. The government is the ultimate guarantor of the PDIC and in the event of a real major crisis, it has to “bail out” the PDIC by way of direct assistance or by recapitalizing it. Case in point is the substantial amount infused to cover the United Coconut Planters Bank (UCPB) rescue. Note that the Land Bank of the Philippines’ absorption of UCPB involved it buying the UCPB shares “owned” by PDIC. Therefore, “National Government giveth, National Government taketh away.”

However, the same International Association of Deposit Insurers (IADI) report* showed that giving back money to the government is a very low priority item, with the top “policy responses to address a surplus” (IADI 2018, Fig 11, page 28) are:

1. Reduction of premium rates 45% (20)

2. Suspension of premium collections 36% (16)

3. Refund/rebates to member banks 5% (2)

4. Pay back government seed funding 2% (1)

The top responses are consistent with the view that the money in the DIF belongs to the banks and the depositors. In the insurance industry, clients with a good payment history and good record of no-claims are given rebates or granted premium holidays.

On Feb. 28 the PDIC announced an increase in the insurance coverage for deposits from P500,000 to P1 million effective March 15. The indication that this increase in deposit coverage is a belated rear-guard action:

1. This P1 million maximum coverage amount is actually less than the P500,000 limit in 2009 when adjusted for average inflation of 4.5%, which should be P1,150,000. RA 9302, signed by President Gloria Macapagal Arroyo, increased the coverage from P100,000 to P250,000 in 2004. It was increased further to P500,000 in 2009.

2. It took 16 years for the PDIC to increase the deposit coverage and only AFTER it received criticism about the drastic reduction in the Deposit Insurance Fund, despite its mandate to review the adequacy of the DIF every three years, and there had been no indication in its prior annual reports that PDIC DIF was already in excess.

The past several annual reports had cited the need to support the national government’s need to fund important national priority projects as the reason for rising dividends — using the same phraseology used in justifying taking P89 billion from PhilHealth. The wholesale withdrawal of P107 billion was done with the same justification.

THE REAL REASON FOR THE TRANSFER OF FUNDSPublic finance specialist Zy-za Nadine Suzara, who has been monitoring the budget process for years, summed it up best during her appearance as amicus curia in the Supreme Court oral arguments session (Day 1, February 2025).

“In conclusion, the controversial transfer of PhilHealth to the Treasury operationalized through DoF (Department of Finance) Circular 003-2024 is a consequence of a larger and more serious problem. The new scheme of funding pork barrel, despite the Supreme Court declaring PDAF (Priority Development Assistance Fund) as unconstitutional. Circumventing this earlier ruling, legislators have been deliberately defunding development programs and projects in the programmed appropriations and transferring them to the unprogrammed appropriations resulting in an excessive level of stand-by appropriations. This way of massively funding patronage-driven projects distorts the integrity of the budget and the budget process itself. My analysis of the 2022 to 2024 budget reveals that pork barrel now constitutes nearly 20% of the total national budget.”

In short, Congress defunded the development projects (as indicated in the National Expenditures Program or NEP) so much to fund what can only be considered “pork barrel.” The DoF had to scrounge for resources to fill the gap — hence, P89 billion from PhilHealth, P107 billion from PDIC.

In the oral arguments before the Supreme Court, Solicitor General Menardo Guevara could only reply to the SC Justices on why the reallocation happened thus, “We can only defer to the wisdom of Congress.” This writer would really love to hear a representative of Congress, especially members of the bicameral committee, defend the wisdom of their moves.

(Read Part 1 here: https://tinyurl.com/26a5s9bq )

*“Deposit Insurance Fund Target Ratio,” a research paper by the International Association of Deposit Insurers, published in July 2018.

Alexander C. Escucha is the president of the Institute for Development and Econometric Analysis, Inc., and chairman of the UP Visayas Foundation, Inc. He is a fellow of the Foundation for Economic Freedom and a past president of the Philippine Economic Society. He is an international resource director of The Asian Banker (Singapore).

alex.escucha@gmail.com