The main transfer instrument from the central governments to local government units (LGUs) in the Philippines, the IRA (Internal Revenue Allotment), introduced in 2001, has been criticized for two main failings: its inability to equalize sufficiently, especially regarding the poorer municipalities and provinces, and that its funds have not been spent in an efficient manner. Recently LGU associations have petitioned the Government of the Philippines (GoP) for an expansion in the funding of the IRA from 40 percent of internal revenue collections to 50 percent, and several draft Bills have been prepared. There appears to be ample consensus that if the additional 10 percent in funding were to take place, these funds should not be distributed following the same methodology used for the IRA and that a new transfer mechanism should be put in place. Two general requirements for the new transfers are often mentioned. First, the distribution of the additional funds would need to have a much stronger equalization effect among LGUs. Second, the recipient LGUs would need to be held accountable to use the funds to improve the performance of public services. The new transfer so far has been called the “Local Government Enhancement Fund” or LGEF. We propose a more descriptive name for it -- the fund for “Fiscal Equity and Expenditure Performance” or FEEP. The design of the new transfer with 10 percent additional funding and separate from the IRA will face four major challenges: (1) How to concretely define the origin and computation of the 10 percent additional funding (2) How to apportion the additional funding among the different groups of LGUs (provinces, cities, municipalities, and barangays) (3) What formula to use for the distribution of the additional funds for qualifying LGUs in each particular group of LGUs (4) How to ensure that the additional funds will be used by LGUs to improve their service delivery performance These four challenges are addressed in this paper.