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Assessing and ranking the financial risk of municipal governments

Author

Listed:
  • John M. Trussel
  • Patricia A. Patrick

Abstract

Purpose - The purpose of this paper is to develop a model to assess and rank the financial risk of a municipal government (“municipality”). Financial risk is the likelihood that a municipality will experience financial distress. Design/methodology/approach - Logistic regression is used with financial indicators to assess the level of financial risk. Then, the municipalities are ranked according to their financial risk. As predictor variables for the regression model, indicators are used that were developed by a Pennsylvania state agency to monitor the financial condition of municipalities. Findings - Financial risk is positively associated with debt service, population, tax effort, and public service on roadways, while negatively correlated with intergovernmental revenues, operating position, user charges, capital outlays, fund balances, and tax revenue concentration. The financial risk model is able to correctly classify up to 99 percent of municipalities as either at risk or not at risk of financial distress. Research limitations/implications - The financial risk model was developed using data from one state in the USA. Further research is needed to test the model’s application to other states and countries. Practical implications - Financial risk is on the rise since the Great Recession. This study may be used by municipal managers, citizens, creditors, and regulators to assess and rank the financial risk of a municipality. Originality/value - This study provides a method of classifying municipalities as either at risk or not at risk of financial distress. Previous models of the financial condition of municipalities do not provide a method of assessing and ranking financial risk.

Suggested Citation

  • John M. Trussel & Patricia A. Patrick, 2018. "Assessing and ranking the financial risk of municipal governments," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 19(1), pages 81-101, February.
    • Handle: RePEc:eme:jaarpp:jaar-05-2016-0051
    DOI: 10.1108/JAAR-05-2016-0051
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    Citations

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    Cited by:

    1. Vicente Pina & Patricia Bachiller & Lara Ripoll, 2020. "Testing the Reliability of Financial Sustainability. The Case of Spanish Local Governments," Sustainability, MDPI, vol. 12(17), pages 1-22, August.
    2. Tamer Aksoy & Yunus Emre Asan, 2020. "Assessing financial risk management in local governments: Case of Istanbul Metropolitan Municipality (IMM)," International Journal of Business Ecosystem & Strategy (2687-2293), Bussecon International Academy, vol. 2(4), pages 10-23, October.
    3. Isnurhadi & Sulastri & Yulia Saftiana & Ferry Jie, 2022. "Banking Industry Sustainable Growth Rate under Risk: Empirical Study of the Banking Industry in ASEAN Countries," Sustainability, MDPI, vol. 15(1), pages 1-21, December.

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