Measuring the Financial Position of Municipalities: Numbers Do Not Speak for Themselves

Abstract

There are several challenges facing someone who wants to know if a city's revenue structure is fair and reasonable. There are few generally accepted standards to use as benchmarks of financial condition, and there is no generally accepted methodology to assess relative financial position. This article reviews literature on financial position and condition, and then develops a methodological approach that creates a cohort of similar cities for benchmarking financial position, and then forming a basis for assessing financial condition. Based on a study of the financial position of a medium-sized city, the article offers lessons for practitioners and scholars.

Evaluating the Validity and Reliability of the Financial Condition Index for Local Governments

“…Sohl et al () have argued that the lack of a carefully selected cohort is a major failure of many financial analyses. Financial position comparison within one state, as opposed to a cohort of the 100 or 200 largest cities nationwide, may be an appropriate technique of comparison because the cities are all within the same legal framework—and thus similar operational constraints.…”

“…Unlike these earlier studies, I use multiple years in this article rather than a one‐year cross‐section. This is because changes in financial condition may be just as important as looking at the current‐year financial condition (Petro ; Sohl et al ; Rivenbark, Roenigk, and Allison ; Jacob and Hendrick ).…”

“…While this is an incomplete assessment of the content validity of the measure, it is a positive step toward that validation. It is not prudent to simply assume that just because a scheme is “commonly used and considered valid by both researchers and financial statement users” (Sohl et al , 77) that when these measures are combined as indices and in a new setting (local government) that they need not undergo intensive analysis to determine reliability and validity. There are clearly many different ratios and calculations that can be used to assess financial condition.…”

From Big to Small Cities: A Qualitative Analysis of the Causes and Outcomes of Post–Recession Municipal Bankruptcies

“…Not all cities use the same accounting practices and each city has its own distinctive financial structure (Sohl et al. ). It is therefore hard to compare the fiscal health of cities with precision (Pierson et al.…”

“…Quantitative analysis of city budget data to examine the causes of bankruptcy is difficult across cities (Hendrick 2011). Not all cities use the same accounting practices and each city has its own distinctive financial structure (Sohl et al 2009). It is therefore hard to compare the fiscal health of cities with precision (Pierson et al 2015), particularly in the case of municipal bankruptcies, where you have a small sample size and irregular accounting practices.…”