# Promotion of the Soundness of Local Public Finance

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

Amid extremely severe financial conditions and the hardening of the financial structure caused by such factors as the redemption of municipal bonds issued in the past and the aging of society, the soundness of local public finance is an important issue.

A number of issues were pointed out in the conventional system for the financial reconstruction of local governments, such as the lack of disclosure of easily understood financial information and a function for prompt correction.

Accordingly, the present system of local government financial reconstruction was drastically 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 thoroughly establish and disclose financial indexes and to strive for the early stage achievement of soundness and rebuilding of financial affairs. 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 New and Previous Reconstruction Laws

## Soundness 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.

## New Law

Reported to the council and publicity announced, attached to auditor inspection

## 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.

Soundness of public enterprise management

Sound finance

## 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.

## (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

deterioration

## I ssues faced with the previous Reconstruction Law

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

## Previous Reconstruction Law

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 (Previous Reconstruction Law)

Formulation of financial reconstruction plan through application by the deficit organization

$ ^{*} $ 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)