New Seongnam City Hall building
By Kim Tong-hyung
Although the insolvency of Seongnam is disputed, the real problem is that there are local governments in a sorrier state than the key satellite city on the southern outskirts of Seoul.
According to government figures, local governments combined for an account surplus of 20.2 trillion won in 2008, but reported a deficit of 7.1 trillion won in 2009, due in large part to the excessive spending on property projects and reduced income from tax cuts implemented by the central government. The new Seongnam mayor recently declared a moratorium on its debts, much from the construction of its lavish new city hall, but the central government stepped in to say that this was not the case.
The recent economic downturn, which had municipalities spending more to boost local economies and create more jobs, also had a role in deteriorating their financial health, experts say.
"Some cities, like Incheon, are now pressed with an interest burden that is nearly as large as its budget," said Park Jeong-eon, a representative from the civic group, Good Budget Center.
"The biggest problem is that municipal councils have lost their role of monitoring spending by local governments and forcing them to be prudent. It doesn't help that the councils are dominated by members of the same political party as the governors and mayors."
Municipalities that stick out for faltering financial health include large cities such as Busan, Daegu and Gwangju, while the coffers are bare in mid-sized cities Sokcho and Siheung as well, according to a report by the Hyundai Research Institute (HRI).
A devotion to overzealous construction and housing projects is a fault that is commonly found among the local governments now in financial turmoil. Although Seongnam's decision to spend more than 322 billion won on its lavish City Hall will always be lamented, the city is perhaps more concerned about tumbling housing prices in its ambitious Pangyo new town district.
Incheon is struggling to find home buyers and tenants for its massive Well County complex in Songdo International City, while the neighboring city of Gimpo is also worried about its increasing inventory of unsold new apartments.
The Donggu district of Daejeon and the Namgu district of Busan are other municipalities that have found themselves crippled by massive spending on new administrative buildings, which won't be finished in time after construction was halted due to soaring costs.
The sleepy ski resort of PyeongChang, which recently declared its third bid to host the Winter Olympic Games, is also failing to repay its 600 billion won debt, a result of its massive spending on the Alpensia Sports Complex and Resort.
In a measurement of debt coverage ratios, or the proportion of debt payments in the general fund, Seongnam was one of six Korean cities with a ratio of over 10 percent, including Busan (11.85 percent), Daegu (13.4 percent) and Gwangju (11.36 percent), according to an HRI study. The higher ratios indicate a higher budgetary burden.
"There are a total of 40 municipal governments failing to pay their employees with their own money, which includes tax income and revenue from housing projects, water management services, interest rates, service fees, rental fees and others," said Kim Dong-yeol, a HRI researcher.
"Despite the inability of many local governments to pay their own employees, 59 municipalities have been spending a combined 2.48 trillion won on building new city halls or administrative centers, and this led to the issuance of municipal bonds worth more than 358.3 billion won. Apparently, there is an alarming need for prudence."
It is critical for municipal governments to find ways to tighten their purse strings, as a failure to do so may result in a debt-driven game of dominos. They won't be getting much help from the central government, which is currently pushing a tax-cut policy that has led to a significant reduction of the subsidies channeled to local governments.
Slumping house prices, which may be preceding a dramatic crash of the country's housing market, is also a concern for the local governments that had spend massively in past years to exploit the property bubble.
Many local governments appear to be relying on issuing municipal bonds to escape their financial troubles. According to government figures, bonds issued by municipal governments were worth a combined 4.73 trillion won last year, adding up to 11.47 trillion won since 2007. About 1.65 trillion won worth in municipal bonds were issued just through March this year.
Bonds can only be stop-gaps and their overuse could lead to bigger financial troubles down the road. They do enable a way for mayors and governors, however, to toss their headaches to their successors.