The reserve funds of Japanese cities and towns increased from ¥7.8 trillion in FY2009 to ¥12.9 trillion in FY2015. The municipalities claim that they save the funds in case their revenues run short owing to serious economic recessions and natural disasters.
This paper analyzed whether their claim is reasonable by using the concept of primary balance. Primary balance is defined as (Revenues - Accounts brought forward - Local bonds - Withdrawal of funds) - (Expenditures - Redemption of bonds - Deposit in funds). This is transformed into (Revenues - Accounts brought forward - Expenditures) - (Local bonds - Redemption of bonds) - (Withdrawal of funds - Deposit in funds). The first term on the right side is the net balance. We call the second term B-balance and the third term F-balance. According to the primary balance calculation, the reserve funds consist of financial adjustment funds and sinking funds, excluding special purpose funds.
Our analysis yielded the following results. The municipalities kept negative balances in both the B-balance and F-balance between FY2009 and FY2015. They paid back more than they borrowed and they saved more than they withdrew. As a result of emphasizing the F-balance rather than the B-balance, the amount of reserved funds grew by 66.2%, while the amount of outstanding bonds rose by 1.2%. The municipalities accumulated not only financial adjustment funds and sinking funds, but also special purpose funds. When deciding how much to pay back and how much to reserve, the municipalities seem to use as reference points the prefectures to which they belong and neighboring municipalities in the same prefecture.
The increase in municipal finance and the widening gap between revenues and expenditures can be understood in light of the historical background of the situation. Although the population increased by 0.3% and local tax revenues by 1.4% from FY2009 to FY2015, municipalities’ revenues went up by 9.5% and the amount of expenditures by 8.4%, owing to many economic measures, including the recovery and reconstruction policies for the Great East Japan Earthquake.