Developing a Method to Assessing the Municipal Financial Health

Abstract

Following the conceptual framework developed by the Canadian Institute of Chartered Accountants, which is based on three broad dimensions of sustainability, flexibility and vulnerability, this paper proposes a method for evaluating the financial health of municipalities. This methodology could be useful for performance assessment in any country and framework. An aggregate indicator has been obtained for each municipality that covers all the aspects analyzed. For this, multivariate statistical techniques of principal component analysis and discriminant analysis are combined. The proposed method overcomes the problem that we detected in the literature related to the weighting of variables, optimizing the measurement of the variability of all indicators that are included in the financial condition. The indicator evaluates and ranks the degree of financial health of each municipality and serves as a tool to study how different factors might have an impact on its financial health. The performance of the indicator has been contrasted with the socioeconomic variables of population size and geographic location. The proposed method has been applied to 5,165 Spanish municipalities.

Analyzing Forces to the Financial Contribution of Local Governments to Sustainable Development

“…Therefore, as the Table 2 shows, the dependent variable of our study is calculated using the income statement adjusted, i.e., elimination the effect of the extraordinary revenues and expenditures, following the recommendations of international organizations [3,12,17] and previous research [8,32,35,73]. Therefore, we understand the adjusted income as the most comprehensive standpoint to measure the financial sustainability of the public services, in the same line that previously mentioned international organizations and academic studies.…”

“…Indeed, since 2008 in this countries a strong imbalance in development and economic growth has led to a greater imbalance between regions [4] (see Table 1), jeopardizing the ability of governments to continue to provide services in the future [5][6][7]. This worrying financial situation has attracted policymakers' attention, specifically regarding local governments, whose high debt levels and budget deficits, together with its harmful effects on the economic development, have caused a process of policy reforms aimed at promoting efficiency, balanced budgets and, mainly, the financial sustainability of public services [6,8,9].…”

How to Improve the Financial Conditions of Local Governments in a Period of Crisis: An Explanatory Case Study

“…However, in most of the cases, distress is calculated with the financial performance primarily assessed through the concept of financial condition (Carmeli 2003;Carmeli 2008;Honadle 2003;Dollery, Crase & Byrnes, 2006;Audit Commission, 2007;Zafra-Gómez et al, 2009). Therefore, the measurement of financial condition is an indispensable way of evaluating the health status of local governments, considering that good financial health represents a prerequisite for convergence towards the objectives of any institution (Cabaleiro et al, 2013).…”

“…In this context, international authorities have highlighted the need for sustainable strategies to be developed to create the necessary conditions to achieve financial health as well as ensure intergenerational equity (Cabaleiro, et al, 2013).…”

Why Traditional Financial Analysis Tools and Approaches are Not Suitable for Municipalities and should be Re-Designed? (The Case of Municipalities in Czech Republic)

“…Canada and the Canadian Institute of Chartered Accountants (CICA) developed a common framework for concepts such as financial condition and the financial health of public entities [13]. Other solutions in practice include measuring the financial condition of the government of U.S. States through four financial dimensions and 11 specific financial indicators -cash solvency (cash ratio, quick ratio, current ratio), budgetary solvency (operating surplus/deficit ratio, per capita), long-run solvency (net asset ratio, long-term liability ratio, long-term liability per capita) and service level (solvency tax per capita, revenue per capita, expenses per capita) [14], or efforts to construct model capable of prediction of local fiscal distress and the development of analytical methods for municipal financial health [1], [14]- [16].…”