Evaluation of Financial Stability and Health of Municipalities

Abstract

Financial stability of municipalities is an important aspect for long-term sustainable development and disproportionate debt can generate risks for their standard functioning. Although there are many methodologies for assessing the financial stability and health of municipalities, they are usually based on central government needs and are not used for financial management and planning. The aim of the article is to develop a set of indicators for assessing financial stability and health for needs of municipalities by using publicly available information. The selected indicators highlight two basic assumptions important for short and long-term budget balance and sustainability of funding. Concretely, the balance of the current budget should always be positive and the maximum debt service should not exceed the surplus of the current budget. The set of indicators includes three groups of indicators: budgetary management, indebtedness and liquidity. There is a clearly defined and interpretable assessment for each indicator in terms of financial stability and potential risk.