Developing a Method to Assessing the Municipal Financial Health

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.

[1]  Steve Page,et al.  Developing a Model , 2010 .

[2]  Craig L. Johnson,et al.  Fiscal Institutions, Credit Ratings, and Borrowing Costs , 2005 .

[3]  Bernardino Benito,et al.  An Empirical Assessment of the Municipal Financial Situation in Spain , 2009 .

[4]  Gudmundur F. Ulfarsson,et al.  Urban Sprawl and the Cost of Public Services , 2003 .

[5]  Allen Michel,et al.  Municipal Bond Ratings: A Discriminant Analysis Approach , 1977 .

[6]  B. Honadle.  The States' Role in U.S. Local Government Fiscal Crises: A Theoretical Model and Results of a National Survey , 2003 .

[7]  Constantin Zopounidis,et al.  Assessing financial distress where bankruptcy is not an option: An alternative approach for local municipalities , 2012, Eur. J. Oper. Res..

[8]  R. Berne.  The Relationships between Financial Reporting and the Measurement of Financial Condition , 1992 .

[9]  B. López,et al.  Utilidad de la Información Contable en los Rating de Deuda Pública , 2003 .

[10]  G. Wolff.  Fiscal Crises in the US Cities: Structural and Non-Structural Causes , 2004 .

[11]  A. Carmeli.  The Effect of Fiscal Conditions of Local Government Authorities on Their Economic Development , 2007 .

[12]  Sanford M. Groves,et al.  Evaluating Financial Condition: A Handbook for Local Government , 2003 .

[13]  Robert W. Ingram,et al.  The Association Between Municipal Accounting Information and Bond Rating Changes , 1982 .

[14]  Helen F. Ladd.  America's Ailing Cities: Fiscal Health and the Design of Urban Policy , 1989 .

[15]  Bernardino Benito,et al.  Urban Sprawl and the Cost of Public Services: An Evaluation of Spanish Local Governments , 2010 .

[16]  R. Hendrick.  Assessing and Measuring the Fiscal Heath of Local Governments , 2004 .

[17]  Mark D. Robbins,et al.  The Influence of Jurisdiction Size and Sale Type on Municipal Bond Interest Rates: An Empirical Analysis , 2001 .

[18]  Salwa Ammar,et al.  Evaluating City Financial Management Using Fuzzy Rule—Based Systems , 2001 .

[19]  T. Clark.  Fiscal Management Of American Cities - Funds Flow Indicators , 1977 .

[20]  Eric A. Scorsone,et al.  Causes and consequences of fiscal stress in Michigan cities , 2011 .

[21]  J. Zafra-Gómez,et al.  Developing an alert system for local governments in financial crisis , 2009 .

[22]  Gudmundur F. Ulfarsson,et al.  Does `Smart Growth' Matter to Public Finance? , 2008 .

[23]  J. Yinger,et al.  The Fiscal Condition of School Districts in Nebraska: Is Small Beautiful?. , 1990 .

[24]  Sanford M. Groves,et al.  Financial Indicators for Local Government , 1981 .

[25]  B. Honadle,et al.  Analyzing Rural Local Governments' Financial Condition: An Exploratory Application of Three Tools , 1998 .

[26]  K. K. Raman,et al.  Financial Reporting and Municipal Bond Rating Changes , 1981 .

[27]  D. M. Mead.  An analyst's guide to government financial statements , 2001 .

[28]  R. Walker,et al.  Explanators of Local Government Distress , 2007 .

[29]  Xiaohu Wang,et al.  Measuring Financial Condition: A Study of U.S. States , 2007 .

[30]  S. Tarantola,et al.  State-of-the-art Report on Current Methodologies and Practices for Composite Indicator Development , 2002 .

[31]  R. Inman.  How to Have a Fiscal Crisis: Lessons from Philadelphia , 1995 .

[32]  C. Weissert,et al.  Developing and Testing a Composite Model to Predict Local Fiscal Distress , 2005 .

[33]  A. L. Hernández,et al.  Evaluación de la condición financiera en las administraciones locales a través del análisis de componentes principales , 2006 .

[34]  A. Carmeli.  Introduction: Fiscal and Financial Crises of Local Governments , 2003 .

[35]  Helen F. Ladd,et al.  Fiscal impacts of local population growth: A conceptual and empirical analysis , 1994 .

[36]  H. Chernick,et al.  Lost in the Balance: How State Policies Affect the Fiscal Health of Cities , 2001 .

[37]  Bernardino Benito,et al.  The determinants of the municipal debt policy in Spain , 2004 .

[38]  R. England,et al.  Explaining Fiscal Stress Among Large U.S. Cities: Toward An Integrative Model , 1983 .

[39]  J. Zafra-Gómez,et al.  Developing a Model to Measure Financial Condition in Local Government , 2009 .

[40]  Frances S. Berry.  Innovation in Public Management: The Adoption of Strategic Planning , 1994 .

[41]  M. Wolkoff.  An Evaluation of Municipal Rainy Day Funds , 1987 .

[42]  C. Weissert,et al.  Someone to Watch Over me , 2005 .

[43]  William H. Frey,et al.  Center on Urban and Metropolitan Policy , 2004 .

[44]  James P. Smith,et al.  The new Americans: economic demographic and fiscal effects of immigration. , 1997 .

[45]  Stefano Tarantola,et al.  Handbook on Constructing Composite Indicators: Methodology and User Guide , 2005 .