## 3 Promotion of Soundness of Local Public Finance

## (1) Law Relating to the Financial Soundness of Local Governments, etc

Amid severe financial conditions caused by such factors as the redemption of local bonds and the advance of aging, local governments are required to conduct autonomous financial management that takes into account the needs of local residents. Furthermore, it is extremely important to establish the financial discipline of local governments in order to promote decentralization from now on. In response to this situation, the present system of local government financial reconstruction only uses flow indexes for the real deficit, such as the general account, and various problems have been pointed out, such as the fact that it is a mechanism for reconstruction through application.

Therefore, the present system of local government financial reconstruction was drastically revised for the first time in about 50 years, and in June 2007 the Law Relating to the Financial Soundness of Local Governments (2007, Law No. 94) has been enacted as a new system to thoroughly establish and disclose financial indexes and to strive for the early soundness and rebuilding of financial affairs. Financial indexes will be enforced from April 2008, and regulations concerning duties of formulating financial soundness plans, etc. will be enforced from April 2009.

## Comparison of New Law and Present System

## New 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 real liabilities, including public enterprises, third-sector enterprises, etc.

→Reported to assembly and publicly announced with auditor inspection attached

## Early financial soundness

## Financial soundness through independent improvement efforts

Formulation of financial soundness plan (approval by assembly), obligatory request for external auditing

Report of progress of implementation to assembly and public announcement every fiscal year

If the early achievement of financial soundness is deemed to be strikingly difficult, the minister of internal affairs and communications or the prefectural governor makes necessary recommendations.

Soundness of public enterprise management

Sound finance

## Financial rebuilding

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

Formulation of financial rebuilding plan (approval by assembly), obligatory request forexternal auditing

The financial rebuilding plan can seek consultations and agreement from the minister of internal affairs and communications.

(No agreement) Restrictions on the issue of local bonds, excluding disaster rehabilitation projects, etc.

(Agreement) Possible to issue local bonds (rebuilding transfer special bonds) whose redemption deadline comes within the plan period in order to transfer the balance shortfall.

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

Financial deterioration

## Present system

## Problems of present system

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

There are only standards for reconstruction organizations and no early corrective functions.

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 early corrective functions for public enterprises. Etc.

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

Formulation of financial reconstruction plan through application by the deficit organization (Agreement of the minister of internal affairs and communications is 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)