# Promotion of the Soundness of Local Public Finance

## Overview of the Act on Assurance of Sound Financial Status of Local Governments

Amid extremely severe financial conditions with financial inflexibility caused by such factors as the high standard of debt service expenses concerning bonds issued in the past and the aging of society, the soundness of local public finance is an important issue to tackle. A number of drawbacks were pointed out with the conventional system of financial reconstruction of local governments, including the lack of a legal obligation to disclose comprehensible financial information and of rules for early warning.

Accordingly, the system of local government financial reconstruction was thoroughly revised for the first time in about 50 years, and in June 2007, the Act on Assurance of Sound Financial Status of Local Governments (2007, Law No. 94) was enacted as a new system to officially establish and disclose financial indexes and to strive for the early achievement of financial soundness and rebuilding. Financial indexes have been in force since April 2008 and regulations concerning the duty to formulate financial soundness plans, etc. have been in force since April 2009.

## Comparison of the Soundness Law and Previous Reconstruction Law

## Sound stage

## Establishment of indexes and thorough information disclosure

Flow indexes: Real deficit ratio, consolidated real deficit ratio, real debt service ratio

Stock indexes: Future burden ratio=indexes by realliabilities, including public enterprises, third-sector enterprises, etc.

## Soundness Law

→ Subject to auditor inspection,

reported to the council and publicly

announced

## Early financial soundness

## Financial soundness through independent improvement efforts

Formulation of financial plans (approval by the council), mandatory requests for external auditing

☑ Report on progress of implementation to the council and public announcement every fiscal year

If the early achievement of financial soundness is deemed to be significantly difficult, the Minister for Internal Affairs and Communications or the prefectural governor makes necessary recommendations.

Financial soundness of public enterprise

## Financial rebuilding

## Solid rebuilding through involvement of the central government, etc

Formulation of financial rebuilding plans (approval by the council), mandatory requests for external auditing

Agreement on the financial rebuilding plan can be sought through consultation with the Minister for Internal Affairs and Communications.

## (W/o agreement)

☑ Restrictions on the issue of local bonds, excluding disaster rehabilitation projects, etc.

## (W/agreement)

☑ Permission to issue bonds whose redemption period comes within the plan period in order to transfer the deficit (special bond for financial rebuilding)

If financial management is deemed not to conform with the plan, etc., budget changes, etc., are recommended.

## I ssues faced with the previous Reconstruction Law

Disclosure of easy-to-understand financial information, etc. is inadequate.

## Previous Reconstruction Law

There are only balance indexes centered on the ordinary account, and even if problems relating to the financial condition of stock (liabilities, etc.) are cited, they are not taken up.

● There are no rules for early warning for public enterprises, etc.

## Law on Special Measures for the Promotion of Local Financial Reconstruction (Previous Reconstruction Law)

Formulation of financial reconstruction plan through application by the local government w/deficit (Agreement of the minister for internal affairs and communications if necessary.)

*Prefectures with a deficit ratio of 5% or more and municipalities with a deficit ratio of 20% or more cannot issue local construction bonds unless they undertake financial reconstruction in accordance with the law.

Corresponding reconstruction system for public enterprises as well (Local Public Enterprise Law)