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.