Assessing and ranking the financial risk of municipal governments: The case of Pennsylvania
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.
Keywords
Acknowledgements
This project was made possible, in part, by a grant from the Center for Rural Pennsylvania, a legislative agency of the Pennsylvania General Assembly. The Center for Rural Pennsylvania is a bipartisan, bicameral legislative agency that serves as a resource for rural policy within the Pennsylvania General Assembly. It was created in 1987 under Act 16, the Rural Revitalization Act, to promote and sustain the vitality of Pennsylvania’s rural and small communities.
Citation
Trussel, J.M. and Patrick, P.A. (2018), "Assessing and ranking the financial risk of municipal governments: The case of Pennsylvania", Journal of Applied Accounting Research, Vol. 19 No. 1, pp. 81-101. https://doi.org/10.1108/JAAR-05-2016-0051
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited