After 'Insolvency' Comes Caution or Crisis? ... Gyeonggi Province Confused About Insolvency Criteria

Governor Choo Mi-ae of Gyeonggi Province has backed away from saying Gyeonggi Province's financial situation is "effectively in default" to "it will default at this rate." Her diagnosis of an already-occurred 'default' has shifted to a future possible 'default risk.'

On the 14th, Governor Choo posted on her social media account: "Please understand and evaluate Gyeonggi Province's actual circumstances properly." She likened Gyeonggi Province's finances to a "personal household" and said, "The debt-to-budget ratio is merely an impressive-looking hollow indicator."

Governor Choo has argued that Gyeonggi Province's financial flexibility has greatly diminished based on reasons including debt in the 7 trillion won range, decreased acquisition tax revenue, increased local bonds, and burdens from fixed expenditures. She additionally presented 2024 Gyeonggi Province total assets of approximately 43.3 trillion won and liabilities of approximately 6.6 trillion won, debt increased by 36.1% from 2023 to 2025, and high dependence on acquisition tax, which accounts for about half of local tax revenue.

However, she did not present the criteria for determining at what level these figures constitute "default."

The Local Finance Act does not contain a legal term "default." Instead, there is a system that designates local governments as either financially cautious entities or financially crisis entities based on their degree of fiscal risk, or designates them as entities requiring emergency financial management in more serious cases.

In particular, Article 60-3 of the Local Finance Act allows designation as an emergency financial management entity if the local government cannot pay salaries of its employees for more than 30 days or cannot repay the principal or interest on debts due for more than 60 days. Under the current legal system, this is the provision closest to defining a local government's "default."

There are also quantitative standards for determining the earlier stages of financial caution and financial crisis. The debt-to-budget ratio is a "caution" threshold above 25 percent and a "crisis" threshold above 40 percent. The debt service ratio thresholds are 12 percent and 17 percent, respectively.

However, all six fiscal indicators for Gyeonggi Province, which the Ministry of Public Administration and Security inspects quarterly, fall below the caution threshold. The Ministry stated, "All indicators are below the caution level," and Gyeonggi Province is aware that it does not fall under the category of a financially crisis entity under the current Local Finance Act (August 10 report: "Gyeonggi Province says 'effectively in default' despite government disagreement—Is it a 'crisis' or 'exaggeration'?").

Person A, who was involved in Gyeonggi Province's finances, said, "It is important for local finance to be operated according to legal systems, and if current standards do not reflect reality, the government or National Assembly can request amendments to related laws," and pointed out: "If Gyeonggi Province currently does not even fall under 'caution' but is already called 'default,' does that mean 'caution' comes after 'default' and 'crisis' comes after that?"

Governor Choo also likened Gyeonggi Province's finances to a "personal household," arguing that statutory indicators alone cannot explain the actual financial situation. She said that although there is a loan, the borrowed money has already been spent on living expenses, the assets owned are not abundant, fixed expenditures keep increasing, and future incoming salary is also not stable. She then asked, "Is refusing to pay something immediately just because the loan maturity has not arrived the behavior of a responsible household head?"

Governor Choo presented 2024 Gyeonggi Province total assets of approximately 43.3 trillion won and liabilities of approximately 6.6 trillion won, saying, "The fundamental problem is that there is a lot of debt but not enough assets to repay it." She also said that the debt-to-asset ratio of 15.3 percent is the highest among metropolitan local governments.

However, Gyeonggi Province's total assets include social infrastructure such as roads and rivers that are difficult to liquidate to repay debt, making it difficult to make a simple comparison to cash or real estate owned by individuals.

However, when comparing liquid assets and current liabilities—which represent assets that can be converted to cash in the short term and debts that must be repaid within one year—Gyeonggi Province's 2024 fiscal year liquid assets are 4.7779 trillion won and current liabilities are 1.6342 trillion won. Liquid assets exceed current liabilities by 3.1437 trillion won, about 2.9 times the size.

Using Governor Choo's "personal household" analogy and calculating simply based on 14.2 million residents, liquid assets per resident would be approximately 330,000 won and current liabilities per resident approximately 110,000 won. A simple subtraction of these two amounts leaves approximately 220,000 won in liquid assets.

When determining an individual's "default," or insolvency, the judgment is not made simply based on the fact of debt or the debt-to-asset ratio.

The Supreme Court holds that solvency should be determined by comprehensively considering the debtor's occupation, career, qualifications or skills, labor capacity, family relationships, details and scale of property and debt, and others. It should be judged based on whether the debtor is in an objective state of being generally and continuously unable to satisfy debts that must be immediately repaid with current property, credit, and income (Supreme Court decision 2009. 3. 2., 2008ma1651).

Person A said, "If comparing to a personal household, one must not only look at the total debt, but also see the money that needs to be repaid now, assets that can be mobilized immediately, and whether this can be covered with future earnings," and added: "The only data currently available is Local Finance 365 and the 'Gyeonggi Province Debt Map' created by Gyeonggi Province Councilman Kim Han-seul, but even this makes it difficult to understand who the creditors of each debt are, what the respective interest rates are, and how much principal and interest must be repaid annually."

Another issue Governor Choo emphasized is the unstable tax revenue structure.

Governor Choo said, "This year, approximately half of Gyeonggi Province's local tax revenue is acquisition tax," and argued that the dependence is overwhelmingly higher compared to Seoul at 23.5 percent and Daejeon at 21 percent. She continued, "Even if the industrial economy improves, neither assets nor tax revenue improve," and said, "There is no tax base outside of acquisition tax."

The high dependence on acquisition tax is confirmed by figures.

In 2024, Gyeonggi Province collected a total of 15.1114 trillion won in local taxes. Of this, acquisition tax accounted for 7.7655 trillion won, or 51.4 percent. Since more than half of local taxes are acquisition tax, Governor Choo's point that the structure has high volatility of tax revenue depending on changes in real estate transactions has merit.

However, there is a difference between the assertion that "there is no tax base outside acquisition tax" and the actual tax revenue structure.

In the same year, local consumption tax collected 3.6295 trillion won (approximately 24.0%), local education tax 2.0791 trillion won (approximately 13.8%), registration and license tax 613.7 billion won (approximately 4.1%), regional resource facility tax 501.4 billion won (approximately 3.3%), and entertainment tax 445.5 billion won (approximately 2.9%).

These five tax categories alone, excluding acquisition tax, total 7.2692 trillion won, or approximately 48.1 percent of total local taxes. Compared to acquisition tax of 7.7655 trillion won, it is only about 496.3 billion won (approximately 6.4%) less.

Person A said, "Saying that high dependence on acquisition tax makes the province vulnerable to real estate market changes and saying there is no tax base outside acquisition tax are completely different things," and stated: "While mentioning the acquisition tax problem, if efforts are not made to accommodate real estate market changes, and 'default' is declared first in a situation that does not meet statutory standards, that does not follow the proper order."

Governor Choo has repeatedly raised the alarm about Gyeonggi Province's finances by successively presenting increased debt, fund borrowing, decreased acquisition tax, increased fixed expenditures, and debt-to-asset ratios. However, she has not yet publicly disclosed separate criteria for determining at what level these indicators combined constitute "default." A Gyeonggi Province official said, "The Governor judges the current financial situation to be default," and added: "We are currently confirming the specific standards for judgment by comparing various indicators."