🚨 Local Government Bonds: Local Government Financing and Debt Management

Today Korean Social News | 2025.07.08

📌 Local Financial Crisis Deepens…Local Bond Burden Increases, Forcing Budget Cuts

💬 Local government finances are getting worse due to economic slowdown and falling tax revenues. With the central government cutting local subsidies, local governments are struggling with money problems and issuing more bonds. The average financial independence rate of local governments nationwide is only 43%, with most staying in the 20-30% range. Total local government debt has exceeded trillions of won, and the debt-to-budget ratio has reached double digits. In this situation, local governments are responding with budget cuts, but this is raising concerns about reduced public services and delayed regional development projects.

Summary

• Local government bonds are bonds issued by local governments for regional development and are important financing tools.
• Too much local bond issuance can hurt local government financial health and increase burden on residents.
• They are issued under government approval and management, and proper debt management is key to regional development.

1️⃣ Definition

Local government bonds are bonds issued by local governments to raise money needed for improving residents' welfare and regional development. Simply put, they are 'IOUs' that cities, provinces, counties, and districts issue when they need money.

Local governments use this money to build regional infrastructure like roads, schools, hospitals, and water systems, and to provide public services that residents need.

💡 Why is this important?

• They raise money needed to build regional infrastructure and provide public services.
• They help local governments become more financially independent and carry out policies on their own.
• They contribute to regional economic growth and improving residents' quality of life.
• When managed properly, they can fairly share costs between current and future generations.

2️⃣ Types of Local Government Bonds and Issuance Process

📕 Main Types of Local Government Bonds

• Local government bonds are divided into several types based on how they are issued. The main types are:

  • General account bonds are the most common type, repaid from the local government's general finances.
  • Special account bonds are repaid from revenues of specific projects, mainly used for water supply or transportation projects.
  • Public bonds are issued openly to general investors.
  • Private bonds are issued only to specific institutions or investors.
  • Foreign currency bonds are issued in foreign currencies, mainly used for large infrastructure projects.

• Classification by business purpose is also important. Main classifications include:

  • Construction bonds are for raising money to build infrastructure like roads, bridges, and schools.
  • Refunding bonds are issued to repay existing bonds when they mature.
  • Deficit bonds are issued to cover budget deficits and are basically prohibited.
  • Temporary borrowings are short-term loans to solve temporary cash shortages.

📕 Local Government Bond Issuance Process and Management

• Issuing local government bonds requires strict procedures. Main procedures include:

  • Local governments must create bond issuance plans linked to medium and long-term financial plans.
  • They must get approval through budget review and voting by local councils.
  • They need approval or consultation from the Minister of Public Administration and Security, with smaller amounts requiring only notification.
  • They must receive credit ratings from rating agencies to provide reliability to investors.
  • Actual issuance and sales are done through financial institutions or securities companies.

• Systematic management after issuance is essential. Main management measures include:

  • Managing debt limits to prevent excessive issuance and maintain financial health.
  • Creating and implementing regular repayment plans to manage creditworthiness.
  • Disclosing debt status to residents to ensure transparency.
  • Evaluating project performance to check the effectiveness of bond issuance.
  • Monitoring interest rate changes and market conditions to refinance at appropriate times.

Key Issues in Local Government Bond Management

1. Exceeding debt limits: Risk of deteriorating financial health by exceeding legal debt limits
2. Excessive dependence: Problem of relying only on bond issuance without trying to secure own resources
3. Project feasibility: Risk of increasing future burden by issuing bonds for economically unfeasible projects
4. Repayment ability: Possibility of difficulty in repayment due to worsening future financial conditions
5. Intergenerational equity: Structural problem where future generations bear the burden of current generation's benefits

3️⃣ Local Government Bond Status and Financial Health

✅ Current Status of Local Government Bond Issuance

• Local government bond issuance has been continuously increasing recently. Main status includes:

  • As of 2024, total local government bond balance nationwide is about 62 trillion won, reaching 30% of local budgets.
  • Seoul accounts for about 25% of total local government bonds, showing the largest portion.
  • The capital region and metropolitan cities like Gyeonggi Province, Incheon, and Busan have high issuance rates.
  • It has increased by more than 10% annually on average over the past 5 years, showing rapid growth.
  • Issuance for regional economic recovery surged after COVID-19.

• Financial situations differ by local government. Main characteristics include:

  • Local governments with higher financial independence tend to use local government bonds more.
  • Rural areas have relatively smaller issuance amounts but may have greater repayment burdens.
  • Local governments pursuing large development projects show rapid increases.
  • Some local governments are under financial pressure as they approach legal debt limits.
  • Local governments with low credit ratings face additional burden from high interest rates.

✅ Financial Health and Management Measures

• The government operates various systems to manage local government bonds. Main systems include:

  • Debt limit system sets maximum limits that each local government can issue.
  • Financial diagnosis system identifies and manages financially troubled local governments in advance.
  • Local financial investment review system examines the feasibility of large projects beforehand.
  • Local bond integrated management fund supports local governments having difficulty with repayment.
  • Regular financial disclosure improves transparency.

• Improvement measures are needed for sustainable local finances. Main measures include:

  • Local bond dependence should be gradually reduced by expanding own revenue sources.
  • Economic feasibility and effectiveness of projects should be strictly evaluated to prevent unnecessary issuance.
  • Systematic debt management linked to medium and long-term financial plans is needed.
  • Expanded government support is required to reduce financial gaps between regions.
  • Financial democracy should be strengthened through resident participation to prevent reckless issuance.

4️⃣ Related Terms

🔎 Financial Independence Rate

• Financial independence rate shows a local government's ability to operate finances on its own.
• Financial independence rate means the percentage of revenue that local governments can secure on their own, such as local taxes and non-tax income, out of their total budget. The higher this rate, the less dependent they are on the central government and the more independently they can operate their finances.
• Key characteristics of financial independence rate include: First, local tax income (resident tax, property tax, local income tax, etc.) is the core component. Second, non-tax income (fees, charges, property rental income, etc.) is also included. Third, local subsidies and national grants are excluded. Fourth, it is directly linked to regional economic power, creating large gaps between urban and rural areas.
• In Korea, Seoul has the highest rate at over 80%, while rural areas stay in the 10-20% range. Local governments with higher financial independence rates have greater capacity to issue local government bonds and stronger financial foundations to pursue various policies.

🔎 Local Subsidies

• Local subsidies are a financial adjustment system where the central government provides funds to local governments.
• Local subsidies are a system where the central government provides a certain percentage of domestic taxes (currently 19.24%) to local governments to reduce financial gaps between regions and guarantee minimum administrative services. They are distributed primarily to local governments with insufficient finances.
• Main types of local subsidies include: First, ordinary subsidies account for 97% of the total and are provided to offer basic administrative services. Second, special subsidies are provided to respond to disasters or special financial needs. Third, real estate subsidies use a certain percentage of comprehensive real estate tax as their source.
• Local subsidies play an important role in reducing financial imbalances between regions, but they are also criticized for potentially weakening local governments' efforts toward self-reliance. Recently, they are sometimes cut depending on government financial situations, causing local governments to depend more on local government bond issuance.

🔎 Debt Ratio

• Debt ratio is a key indicator measuring local governments' financial health.
• Debt ratio means the ratio comparing local governments' debt size to their financial scale or financial income, and is an important indicator evaluating local governments' financial health and debt repayment ability. It is generally divided into debt-to-budget ratio and debt-to-own-revenue ratio.
• Main types of debt ratios include: First, debt-to-budget ratio shows the portion that debt occupies in the total budget. Second, debt-to-own-revenue ratio shows debt size compared to revenue that can be secured independently. Third, per capita debt amount can help understand the burden level on residents.
• Korea manages local governments by setting debt limits for each, generally limiting debt-to-budget ratio to within 25%. The higher this ratio, the more restricted financial operation autonomy becomes, and the greater the burden on future generations, so managing it at an appropriate level is important.

5️⃣ Frequently Asked Questions (FAQ)

Q: What impact does increasing local government bonds have on residents?

A: Increasing local government bonds affects residents directly and indirectly in various ways. In the short term, positive effects may appear. Infrastructure like roads, schools, and hospitals improved with funds raised through local government bonds can enhance residents' convenience, and regional economic activation can create jobs. Also, current generations can use necessary public facilities without bearing all costs. However, long-term negative impacts should also be considered. Local taxes and various fees may increase in the future to repay debts, and other resident services may be reduced when repayment amounts increase in the budget. Particularly, intergenerational equity issues arise when the next generation must bear costs for benefits enjoyed by the current generation. Therefore, when issuing local government bonds, careful consideration should be given to whether projects are truly necessary and whether future repayment ability is sufficient. It's also important for residents to take interest in and monitor their local governments' financial situations.

Q: Is investing in local government bonds safe?

A: Local government bonds are generally considered very safe investments. The biggest reason is that they are issued by public institutions called local governments. The possibility of local governments going bankrupt or disappearing is extremely low compared to general companies, and if repayment difficulties arise, the central government is likely to provide support. Also, most domestic local government bonds guarantee principal and ensure regular interest payments. Credit ratings are mostly investment grade, proving their stability. However, they are not completely risk-free. If local governments' financial situations worsen, there may be risks of repayment delays or interest rate increases, and if inflation rises, real returns may decrease. Also, while they generally offer slightly higher returns than government bonds, they tend to have lower returns compared to stocks or corporate bonds. If considering investment, it's good to check the relevant local government's financial independence rate, debt ratio, and credit rating, and review whether it matches your investment style and purpose. Experts evaluate them as suitable investments for conservative investors or those wanting stable returns.