G.R. No. 229780 EN BANC January 22, 2019
BALAYAN WATER DISTRICT (BWD), CONRADO S. LOPEZ and ROMEO D. PANTOJA, Petitioners vs. COMMISSION ON AUDIT, Respondent

FACTS

Balayan Water District (BWD), a government entity under P.D. No. 198, granted its employees accrued Cost of Living Allowance (COLA) for 1992-1999 via a 2006 Board Resolution. The Commission on Audit (COA) subsequently issued Notices of Disallowance (NDs) for these payments made in 2010 and 2011. The COA held that local water districts were not covered by Letter of Instruction (LOI) No. 97, which authorized COLA for certain GOCCs, and that to be entitled, employees must have been receiving the allowance prior to July 1, 1989, per Republic Act No. 6758 (the Salary Standardization Law).
Petitioners appealed, arguing that under the precedent set in Metropolitan Naga Water District v. COA (MNWD), water districts are covered by LOI No. 97 and the requirements of incumbency and prior receipt are inapplicable. They further contended that the approving officers and recipient employees acted in good faith and should not be liable to refund the disallowed amounts.

ISSUE

Whether the COA committed grave abuse of discretion in affirming the disallowance of the accrued COLA payments and in not appreciating good faith to exempt the petitioners from refund liability.

RULING

The Court upheld the COA’s disallowance but modified the liability for refund. The legal logic proceeds from the integration rule under Section 12 of R.A. No. 6758 . This law mandates that all allowances are deemed integrated into the standardized salary, except for those specifically enumerated. COLA is not among the listed exceptions. Therefore, COLA was integrated into the basic salary effective July 1, 1989. The Court clarified that while MNWD correctly stated water districts are covered by LOI No. 97, this did not alter the fundamental principle that COLA was already subsumed into the standardized pay by operation of law. Thus, any separate grant of COLA for periods after June 30, 1989, such as the 1992-1999 accruals here, lacked legal basis.
On the refund, the Court applied the doctrine of good faith. The approving officers (BWD’s General Manager and Board) are liable to refund because they are presumed to know the law, especially after the DBM issued Circular No. 2005-502 expressly prohibiting such grants and warning of personal liability. Their approval despite this circular negates good faith. Conversely, the rank-and-file employee-recipients, as passive recipients who had no hand in authorizing the disbursement, are absolved from refunding. They received the benefits in good faith, under the honest belief they were entitled pursuant to a board resolution, and should not be penalized for relying on their employer’s directive.