The application of a synthetic measure in the assessment of the financial condition of LGUs in Poland using the TOPSIS method approach

Abstract

An assessment of the financial condition of local government units (LGUs) is usually carried out in a manner referring to traditional tools and methods based on financial analysis. However, it turns out that this approach is unreliable. There are known examples of LGUs, which, despite current reporting concerning their financial situation to the authorities controlling their financial economy, not only did not avoid financial problems (see Rewal, Dziwnów, Byczyna communes), but as a result of the improper management of public funds they were liquidated (e.g., Ostrowice commune). The finding presented above raises pertinent questions about the effectiveness of the current way of assessing the financial condition of local government units and on this basis arriving at conclusions and estimations relating to the possible consequences of the situation in local finance for the future of LGUs. Given the above, attempts to develop new solutions to assess the financial situation of LGUs are becoming more frequent. The aim of this article is to build a synthetic measure for the assessment of the financial condition of communes with regard to all basic statistics describing local government finances and making use of the TOPSIS methodology. The constructed measure does not focus on the estimation of individual financial measures but rather takes into account their interrelationships and interactions. It eliminates the problem of the lack of relationships between the analyzed result values, which may be responsible for the incorrect interpretation of the financial conditions of local government units. The value of the obtained measure allows for an objective assessment of the condition of LGUs finances, providing synthetic information concerning the multi-sectional assessment of the condition of local government finances.

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