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Tuesday, Aug. 21, 2007

LOCAL GOVERNMENTS CAUGHT IN A CRUNCH OF THEIR OWN MAKING

Baby boomers' pension demands met with new bonds issues


Staff writer

With nest eggs that hold the promise of fresh demand, the many baby boomers starting to retire this year may be a boon for manufacturers, travel agencies and banks, but it is another story for the financially troubled local governments on the hook for paying retirement allowances to their employees.

About 87,000 local public servants, including schoolteachers and police officers, are among the estimated 2.2 million people reaching age 60 this fiscal year. The huge amount of retirement allowances that local governments must pay to the retirees is weighing heavily on their already strained fiscal conditions.

To resolve the situation, the Internal Affairs and Communications Ministry revised the law in 2006 to ease legal restrictions on issuing local government bonds as a temporary measure through 2015, giving prefectures and municipalities a new source of revenue.

According to the ministry, the amount of local bonds that prefectures, cities, towns and villages nationwide plan to issue to cover retirement allowance payments in fiscal 2007 is expected to jump to ¥590 billion from ¥250.9 billion last year.

But the issuance of such bonds means an additional debt burden for already ailing local governments, and it is future taxpayers who will have to repay the debt.

"Because many baby boomers are retiring, local governments' cost of retirement allowance payment will increase considerably," said Daisuke Fujinoki, a ministry official in charge of local bonds. "We also took into account the already severe fiscal conditions of local governments."

Before the 2006 revision, local governments were only allowed to issue such bonds to cover an unexpected rise in retirement allowances caused, for example, by large numbers of workers quitting in midcareer.

The revision enabled the local governments to issue the bonds to cover the retirement pay for the workers leaving at their mandatory retirement age. In exchange, the prefectures and municipalities need to submit plans to cut the number of public workers and save personnel expenses, which they can then use to redeem the bonds.

Private-sector companies do not face the same problem because they set aside reserves for retirement allowances for their employees. But most financially strapped local governments do not have this luxury, Fujinoki said.

Experts are critical of such bonds.

Naohiko Jinno, an economics professor at the University of Tokyo, said local governments should not be allowed to issue bonds for operating expenses such as personnel costs, including retirement allowances.

"The purpose of local bonds should be limited to building infrastructure such as schools and roads that will benefit future taxpayers who will shoulder the burden" of repaying the debt, Jinno said. "Future taxpayers will not benefit in any way from the retirement allowances paid to today's retirees."

And when local governments slash their personnel, taxpayers will be the ones to suffer from downgraded services caused by the cuts in the number of workers at public hospitals, nurseries and schools, Jinno said.

"I wonder why taxpayers don't complain that they will have to pay for the retirement costs and put up with reduced public services," he said.

Out of 47 prefectural governments, 43 told The Japan Times they plan to issue local bonds to cover the costs of increased retirement allowance payments. Only Tokyo, Gifu, Tottori and Shimane said they have no such plans for the current year.

"Since fiscal 2005, Tokyo's fiscal balance has been in the black," said Yuji Ikeda, an official at the Tokyo Metropolitan Government. "We can do without local bonds for retirement allowances."

Tokyo needs to pay about ¥207.2 billion in retirement allowances this fiscal year, up from ¥185.8 billion the previous year. This year, roughly 5,000 employees of the metropolitan government are expected to retire — up from about 3,200 in fiscal 2006.

Meanwhile, Hokkaido plans to issue ¥26 billion in local bonds in fiscal 2007 to cover retirement allowances, nearly double the ¥14 billion it issued in fiscal 2006. Some 4,061 Hokkaido officials will retire this fiscal year, up 534 from the previous year.

"Tax revenue is not increasing and subsidies from the central government have been slashed," said a Hokkaido financial official who requested anonymity. "The financial state of Hokkaido is tough."

But Ichiro Shirakawa, an economics professor at Otemon Gakuin University in Osaka, said local governments should have set aside reserves to cover the ballooning cost of retirement payments; the rise after all has been anticipated for some time.

"Borrowing money because they ran out of cash is not commendable in terms of accounting," Shirakawa said. "Local governments could have predicted the amount of money they needed, including retirement allowances, from the time they hired each new worker."

What local governments need to do first, Shirakawa said, is cut expenditures.

"There is still room for the local governments to cut down unnecessary costs and make their operations cost-effective," he said. "Only then should they be allowed to issue more bonds."



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