Evaluating financial performance in local government: maximizing the benchmarking value

Abstract

One of the main problems in evaluating financial performance arises in carrying out comparisons between municipalities, as no account is taken of the impact of certain factors of the social and economic environment on the indicators in question. In this study, the concept of financial condition is applied, revealing the influence of such factors, and a methodology is proposed to minimize their effects on the results of the evaluation. The results of applying these to a sample of municipalities in Spain reveal that the model is useful for reinforcing the value of benchmarking between municipalities with similar characteristics. Points for practitioners The use of indicators for evaluating financial performance has advanced considerably in recent years. However, many criticisms have been made by public sector managers concerning the application of such indicators. One of these is that, in many cases, the values measured by different authorities are not comparable, as the services they provide differ significantly. If local authorities were grouped according to the social and economic factors influencing their provision of public services, the evaluations made would be much more effective, facilitating decision-making by supervisory bodies and by municipal managers.

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

“…In this case, the unemployment rate has a negative influence on the financial of local governments, as the findings of previous literature and international organizations had shown [3,47,48]. However, our findings represent an advance because they support that the unemployment rate could affect specifically on the financial capacity of local governments to contribute to sustainable development.…”

“…According to the Fiscal Sustainability Report [3], a higher rate of unemployment has a negative influence on the country's production and income received by the different levels of government (central, regional and local). In parallel, the preliminary investigation revealed that the increase in unemployment has adverse effects on social spending [47], indebtedness [6] and government revenues [48]. In addition, due to the economic crisis, in Spain, the unemployment rate has had an uneven behavior between the different economic sectors (agriculture, industry, building and services) (Public State Employment Service-SEPE).…”

“…However, an increase in the immigrant population leads to new demands for public services and this could turn into a tendency to raise the level of accumulated debt [6,65] and public expenditures [57,66]. Moreover, prior research has identified that immigrants have a negative influence on the financial performance of public administrations [48], and it positively associated with the tax burden [47]. Therefore, immigration cause an additional load on social welfare, education and health systems, which could be non-covered by their taxes, increasing the pressure on public services and influencing negatively on the financial performance.…”

“…Third, according to numerous previous studies on finances of local governments [2,6,19,25,47,48] municipalities with a large population have been chosen for two reasons. These municipalities cover more than 50% of the Spanish population, so the effects of local government policies on sustainable growth include a large number and variety of stakeholders [3,69].…”

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

“…In the public sector, only some countries (USA and Spain), use some systems or models to predict and identify the financial crisis (Kloha, 2005a(Kloha, , 2005bCoe, 2008;Zafra-Gómez, López-Hernández, & Hernández-Bastida 2009). 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).…”