A City with a ¥4.4 Billion Structural Gap
Uchimachi is a city of 230,000 people. General-account revenue is ¥88.0 billion: tax revenue ¥34.0 billion (down 6.0% on the previous year), local allocation tax and grants ¥30.0 billion, and the rest fees and other income. Welfare spending is ¥26.0 billion, up 9.0% on the year, and debt service is ¥16.5 billion. The reserve fund holds ¥12.0 billion. The mayor's three options are: (A) issue ¥5.0 billion of bonds to cover the shortfall; (B) use half the reserve fund and cut services by ¥2.0 billion; (C) raise the municipal tax rate and keep services unchanged. A neighbouring city of similar size has a debt service ratio of 12%. Under the Local Finance Law, bonds may in principle be issued only for capital expenditure, and a city with a certified real deficit must draw up a rehabilitation plan.
1. Estimate the shortfall and the debt service ratio under option A, and explain why the ratio is misleading.
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Tax revenue falls by 6.0% of ¥34.0bn ≈ ¥2.04bn; welfare rises by 9.0% of ¥26.0bn ≈ ¥2.34bn. Shortfall ≈ ¥4.4bn.
Debt service ratio now = 16.5 ÷ 88.0 = 18.8%, against 12% for the comparable city - already 6.8 points worse before any new borrowing.
Option A adds ¥5.0bn; repaid over 20 years that is ¥0.25bn of principal plus roughly ¥0.1bn of interest, so the ratio moves only to about (16.5 + 0.35) ÷ 88 ≈ 19.1%. The small movement is the trap: the ratio looks stable this year and deteriorates sharply when the bonds mature or when rates rise. Meanwhile the reserve fund of ¥12.0bn covers about three years of a ¥4.4bn gap, so the city is not insolvent - it is structurally short, which is a different diagnosis and calls for a different remedy.
2. Evaluate option A against the legal rules on local borrowing and the principle behind them.
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The Local Finance Law limits local bonds in principle to capital expenditure - roads, schools, waterworks - whose benefit extends to future residents who will help repay. Borrowing to fund salaries and welfare is a deficit bond, permitted only within a national framework; for a city with a certified real deficit it triggers a rehabilitation plan approved by the prefecture and the national government, with external scrutiny of spending.
Option A as described is therefore not a neutral financing choice. It shifts today's consumption onto future residents and, if the deficit is certified, places the city under supervision it did not choose.
The constitutional layer underneath is local autonomy: the city has the right to manage its own affairs, but its finances must be sound and accountable to residents. That means the choice belongs in the assembly, with the figures published, not settled inside the mayor's office.
3. Recommend a course of action and state which additional data would change your recommendation.
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A mix of B and C, with borrowing reserved for capital works. Use about ¥6.0bn of the reserve, keeping ¥6.0bn as a floor for disaster response; trim ¥2.0bn of services chosen by measured need rather than across-the-board; and raise the tax rate in a band that is progressive relative to income, since a flat per-capita rise would hit 65+ households hardest.
Reasoning: a ¥4.4bn structural gap will not close in one year. The reserve buys time; the tax rise addresses the trend; borrowing only for capital keeps the debt service ratio from climbing further.
Data that could change this: the age structure and income distribution of taxpayers; how much welfare growth comes from new long-term-care certifications rather than price; the debt maturity schedule; and the prefecture's calculation of the local allocation tax, since cutting services too far can reduce the grant and make the gap larger, not smaller.