Debt crunch looms over many local governments

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Debt crunch looms over many local governments

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Civil servants in Incheon have their work cut out for them these days: The city’s finances are in a parlous state, and the urge of the day is to drum up more revenue.

One method is to crack down on illegally-parked cars. The city’s paper-pushers have been instructed to hunt down improperly-parked cars and remove their license plates to force the owners to pay a fine and pay it fast.

In two weeks, the city collected around 6,200 license plates and 1 billion won ($884,000) in fines.

Last week it was revealed that Incheon Metropolitan City wasn’t able to provide 2 billion won worth of civil servant benefits due to a budget crunch. The city explained that its cash on hand was close to zero because 50.2 billion won had been spent to pay back debt on railway projects.

According to the Ministry of Public Administration and Security, the total debt held by Incheon is expected to reach 3.18 trillion won by the end of this year, which is 40 percent of its total annual budget. A warning is given by the central government if a local government’s debt-to-budget ratio is in between 25 percent and 40 percent.

Incheon has spent extravagantly on big projects such as a new stadium for the 2014 Asian Games and the 2009 Global Fair & Festival, which cost 140 billion won. It is also spending 86.3 billion won to build the Wolmi Galaxy Rail that connects Incheon and Wolmi Stations.

Because of the crunch, Incheon decided last week to give up on its plan to bring in international organizations such as the United Nations Educational, Scientific and Cultural Organization and UN Habitat to its business district in Songdo. Under previous plans, the city would sponsor the international organizations’ moves to the tune of 500 to 600 million won per year.

“We are currently out of money and our foremost concern is paying wages to our employees,” said Jeong Tae-ok, head of the city’s planning and management department.

Incheon isn’t alone in its fiscal plight. Other municipal and regional governments are also in financial trouble because revenues are down due to the sluggish real estate market, and spending was never cut. The central government’s financial support has also decreased.

According to the Ministry of Strategy and Finance, total regional government debt was 47 trillion won in 1995, which tripled to 141 trillion won last year. Their fiscal self-reliance ratio has dropped from 57.6 percent in 2001 to 52.2 percent in 2010. The total volume of local bond issuances have also increased, reaching 29 trillion won in 2010, 50.7 percent more than in 2008.

According to a recent report by the public administration and security ministry, Siheung, Gyeonggi, had the most serious debt problem among 244 local self-governing bodies as of last year. The debt-to-budget ratio for Siheung was over 40 percent last year, while Busan and Incheon’s ratios were between 25 and 40 percent. The ministry report showed that 57 other governments will soon enter that range, which will mean that one out of four local governments will suffer large deficits.

For example, the debt ratio of Taebaek City in Gangwon Province is 19.9 percent as of late March, which is considered “normal,” but if fiscal conditions worsen it will be placed under a debt warning like Busan and Incheon are. Taebaek City’s total budget for this year is 254 billion won, but it has guaranteed debts of 146 billion won of O2 Resort, which is run by the Taebaek Tourism Organization. If the resort goes bankrupt, Taebaek City’s debt ratio is expected to exceed 80 percent.

According to sources, there are 38 local governments that are not able to pay their employees’ monthly salaries, with 11 in the South Jeolla region. For example, the annual income of Gangjin County in South Jeolla is around 20 billion won, but its expenditure on wages is 28 billion won. In July 2010, Seongnam City declared a moratorium on repayments of 520 billion won in city debt as it failed to find ways to pay back its luxurious new city hall complex and several other big projects. It was the first time that a local government declared bankruptcy.

Who’s to blame for such budget trouble? Experts point to too much spending on welfare, and they say things will get worse with the general and presidential elections coming up. Politicians have been promising a wave of new welfare benefits to win votes.

But some governments are having trouble paying for current welfare programs. Last year, Bupyeong District in Incheon wasn’t able to pay its employees’ salaries for three consecutive months because it spent more than 60 percent of its budget on welfare benefits.

“Politically-motivated heads of local districts are pouring forth policies that make them seem caring about the public,” said Jung Chang-hoon, an administrative professor at Inha University.

Some also blame local councils for not being able to monitor and audit regional budgets carefully enough.

Yongin City in Gyeonggi, which has 500 billion won in debt for its light rail construction project, submitted documents to the central government to receive permission to issue 420 billion won worth of bonds. Though the amount is more than 30 percent of its total annual budget, Yongin City is expecting the government to give it the green light because if it doesn’t, the city’s assets will be attached for not being able to pay the railroad construction budget.

“If we can’t issue local bonds, then we might call a moratorium,” said an official from Yongin City.

Hwaseong City in Gyeonggi is on the verge of going bankrupt because of its Hwaseong Sports Complex, which was completed last October. The large stadium was built with a 287 billion won budget and has been in serious financial trouble ever since.

“The real estate market has been sluggish and there has been an increase in welfare spending, which has made making ends meet more difficult,” said Lee Jin-soo, head of policy planning in Gyeonggi Province.

By Lee Eun-joo [angie@joongang.co.kr]

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