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The first day in the financial reconstruction of Yubari, Hokkaido, has passed. On April 1, the start of the new fiscal year, the city began its 18-year-long program to repay accumulated debts of 35.3 billion yen. The central government will carefully monitor budgets drawn up by the city, which was once a thriving coal-mining center but is now designated a “municipality under rehabilitation.”

Yubari is not an isolated case. Many local governments are suffering from deteriorating financial conditions. To try to prevent more bankruptcies, the government has submitted to the Diet a bill aimed at ensuring financially healthy local governments.

If the bill passes, the government hopes to start implementing it in a phased manner in fiscal 2008, with full implementation from April 2009. It is hoped that the legislation will help re-instill fiscal discipline in prefectural and municipal governments. The central government also needs to work out measures to encourage and help local governments.

The bill reflects the central government’s sense of crisis. Various factors have led to the deterioration of local governments’ financial conditions. One is a sheer lack of fiscal discipline on the part of local governments. Some local governments launched costly construction projects without carrying out efforts to cut spending. Another factor is a general weakening of local economies that has led to lower tax revenues.

Some local governments made efforts to economize in the past, but their feet were cut out from under them by the central government’s policy of pushing “cheap government,” begun under the Koizumi administration. For the past three years, tax-based grants in aid from the central government have dropped by about 5 trillion yen, causing financial problems for many local governments.

Large-scale mergers of municipalities pushed by the central government appear to have brought financial difficulties to some local governments, although the central government said the mergers would reduce personnel costs for municipal workers while maintaining or improving administrative services for residents. One merger that has not necessarily brightened financial prospects for municipalities involves the city of Goto, formed when the city of Fukue and five towns merged in August 2004.

The new city comprises 63 islands in the East China Sea about 100 km west of the city of Nagasaki. Goto’s fiscal 2007 budget is about 27 billion yen — about 5 billion yen less than the combined budgets of Fukue and the five towns before the merger. The city has tightened its budget because city officials found that if the city were managed as the area was before the merger, it would suffer an annual deficit of more than 2 billion yen and, like Yubari, fall into the status of a “municipality under rehabilitation” in fiscal 2008.

The city of Goto has outstanding debts amounting to about 47 billion yen in the form of bonds issued by the former Fukue and five towns. For fiscal 2007, the city must repay 5.3 billion yen while its tax revenues are expected to reach only 3.4 billion yen. The city plans to make up the difference by issuing new bonds or using tax-based grants in aid from the central government.

To prevent local governments like Goto from going the way of Yubari, the bill submitted by the government to the Diet would require the heads of local governments to report every year (1) the ratio of deficit amounts to standard revenues; (2) the deficit amounts on a consolidated basis, taking into account the financial conditions of publicly run corporations and third-sector entities; (3) the debt amounts that need to be repaid during the year; and (4) the total amounts of outstanding debts on a consolidated basis.

If any of these four indicators slips below a certain standard set by the internal affairs ministry, the local government concerned will be required to work out a plan to put its finances on a healthy footing. If the situation deteriorates further, the local government will enter a “rehabilitation” stage and be required to work out a financial rehabilitation plan. An external audit will be carried out for a local government that fails to meet even one of the ministry-set standards. The internal affairs minister can issue advice if a local government’s plan for restoring financial health is not going well.

The central government will need to be cautious in deciding on standards because a rigidity that fails to take into account the particular situation of a local government may not work. Utmost care will be needed because the standards will greatly affect the operation of local governments.

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