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Thursday, March 1, 2007
Ministry takes charge of bankrupt city
This month, the Internal Affairs and Communications Ministry is expected to designate Yubari, Hokkaido, as a "municipality under rehabilitation." Following are questions and answers outlining what that means for the city:
Why did Yubari's financial condition deteriorate?
Yubari, a city of 13,000 residents in central Hokkaido, prospered from its coal mines until the 1980s, when oil replaced coal as the predominant energy source.
Yubari tried to revive itself as a tourist spot by building amusement parks, ski resorts and sponsoring an international film festival, but these efforts failed.
What is the status of Yubari at the moment?
Currently, Yubari is in the final stages of officially being declared a municipality in dire financial straits.
Last June, Yubari announced it was seeking central government support in an effort to rehabilitate. Since then, Yubari has been drafting a road map for rehabilitation under the guidance of the internal affairs ministry.
According to the plan, Yubari will reduce its accumulated loss of 35.3 billion yen in 18 years starting April 1 by slashing the number of municipal officials, raising utility fees, and shutting down public facilities, which will place a heavy burden on residents.
What does it mean for a municipality to be declared bankrupt by the ministry?
It means the loss of its means of autonomy -- the power to draft a budget. The internal affairs ministry essentially controls the budget until rehabilitation is complete. For Yubari, that will be 18 years from now.
The entire procedure is similar to a bankrupt company rehabilitating itself under strict monitoring of a court-appointed receiver.
What are the conditions for declaring a municipality effectively bankrupt?
A city, town or village is considered effectively bankrupt when its annual loss tops 20 percent of its budget. In Yubari's case, the loss was 35.3 billion yen, or eight times the 4.4 billion yen budget for fiscal 2005. In the case of prefectures, the figure is 5 percent, instead of 20 percent.
Is there a way for Yubari to restore itself without getting state support?
Yubari can try to rebuild itself by drafting a reconstruction plan on its own. But with its losses exceeding 20 percent of the budget, it is banned from issuing local government bonds. With few means to secure financial resources, self-rehabilitation is not a realistic option.
If it asks for the government's support, Yubari, under strict ministry guidance, will be able to issue local government bonds. The government will also provide other financial benefits, including shouldering the interest on their loans.
Is Yubari the first municipality to become effectively bankrupt?
The first was the town of Akaike, Fukuoka Prefecture. Like Yubari, Akaike was once a coal mining town. After integrating with neighboring municipalities, it is now known as Fukuchi. The central government designated it a municipality under rehabilitation in 1992. The town at the time had a population of about 10,200.
Akaike went bankrupt with a loss of 3.2 billion yen, or 1.3 times its annual budget. It slashed the salaries of town officials, raised utility costs and cut back on public works projects. Town officials even repaired roads themselves to save costs.
As a result, the town's reconstruction process was completed by the end of fiscal 2001 -- two years earlier than originally planned.
Why did Yubari go under? It seemed very sudden.
Until last June, Yubari had been hiding the snowballing debt by window-dressing its account, making it difficult for the internal affairs ministry to learn the truth.
The town had been hiding its losses by transferring funds between the city's general and special accounts for the last decade or so. The process was not illegal but it was deemed inappropriate.
It also turned out that Yubari and five other neighboring cities and towns had been misusing long-term loans borrowed from government-sponsored funds established to help former coal mining towns boost their local businesses.
Regulations stipulate that the loans have to be used to promote the local economy. But the municipalities had been using the loans to repay debts.
Is the central government taking measures to prevent a recurrence?
Yes. The internal ministry has drafted a bill aimed at increasing the transparency of local government budgets.
The new bill, to be submitted to the current Diet session, will require municipalities to include accounts of affiliated local public corporations in their balance sheets.
Local governments will also have to disclose their annual debt repayment budget. Failure to satisfy conditions will result in a warning by the internal ministry and an order to map out a financial reconstruction plan before falling into bankruptcy.