Moratorium in Seongnam

Wakeup call for unthrifty local governments

The largest city in Gyeonggi Province has declared a moratorium on its $432 million in debt. The declaration does not mean the bankruptcy of Seongnam City. It illustrates the possibility that many outspending local autonomous bodies may go bankrupt.

The city's trouble started when its former actor-turned-mayor Lee Dae-yeop borrowed $432 million to build the most luxurious and expensive city hall, parks and roads during his four-year mayorship.

The moratorium is shocking because the nation's ninth city is above the average of their peers in financial self-sufficiency. The recent downturn in the property market is also responsible for the moratorium.

The city borrowed heavily on the wrong assumption that property tax revenue will increase automatically. It had to slash this year's budget by $500 million as property tax revenue fell.

Financial woe is not limited to the city. In 1994, the Orange County in California filed for bankruptcy proceeding as the county sustained a loss of $1.6 billion in junk bonds. California laid off 30,000 teachers and raised tuition by 10 percent each year. The Yubari county in Japan's Hokkaido had to cut payrolls and treble bus fare after its failed investment in tourism facilities in 2006.

This year mark's the coming-of-age for the local autonomy system. Many mayors and governors became hostage to demonstrative administration. They started mega projects without proper cost benefit analysis. Eye-catching construction works have been the seed of corruption. Nearly half of elected heads of the local autonomous bodies faced indictment or litigations on corruption charges for the past four years.

Other counties and cities, including Yongin City, Anyang City and Yongsan County in Seoul, have either built the luxurious offices or plan to build them. The East District in Daejeon City and the West District in Busan are in difficulty in paying salary.

The provincial governments have so far issued 25 trillion won in bonds, equal to 12 percent of the central government budget. If the ratio rises to 30 percent, it becomes serious. Provincial governments generate only 52 percent of budget on their own, with the rest coming from the central government.

The central government has limits in restraining the local governments' construction projects. Under the Korean law, County, city and province are almost free from bankruptcy as the central government is fully responsible for rescuing any local body in financial trouble. This law must change as it creates moral hazard.

The city must sell its gorgeous city hall to repay the debt. Investigation must start whether the former mayor abused his power. The nation's first moratorium by a local government must be a wake-up call for other cities. Heads of the local governments must have limits in budget spending in strict compliance with the accounting rules. The local governments must have ceiling in borrowing.

Its trouble has also alerted the government against a possible repercussion of the recent downturn in the property market. Many local governments had outspent their budget on the misguided assumption of an automatic increase in property tax revenue.