The Use of Financial Indicators to Determine Financial Health of Italian Municipalities

Abstract

Context: Governments are being pressured by citizens and other stakeholders to improve their efficiency and effectiveness while, at the same time, they are seeing reductions in available resources. This is the result of several waves of New Public Management-style reforms which have developed into the New Public Governance view (Osborne, 2009). At the same time, recent global financial stress challenges the financial sustainability of governments, both at national and local levels.

Problem: Financial health is a necessary condition under which governments must operate. Nevertheless, while the literature concentrates on different models of governance within the public sector, there is a lack of research on financial health measurement system.

Purpose: In light of this problem, we juxtapose the analysis of financial health measurement systems with Considine’s four governance models applied to the Italian local governments context.

Theoretical frameworks: The paper grounds its theoretical frameworks from the literature concerning various governance model types, [Procedural, Corporate, Market, and Network Governance] (Considine, 1999, 2001, 2003) and financial health (Boyett and Giroux, 1978; Downing, 1991; Alijarde and Lopez, 2001).

Methodology: Through a multiple case study approach of three Italian local governments we combine documental analysis of compulsory financial statement indicators and interviews with internal key users aimed to understand the effective use of financial indicators to determine financial health in practice.

Findings: A local government needs to have a specific set of financial performance indicators attuned to the prevalent governance model used for its services delivery.

Originality, value and practical implications: On a theoretical perspective, this study highlights to what extent each governance model requires specific financial health measures, in order to stress that measuring financial health is a contingent issue, which cannot be assessed regardless the prevailing governance setting implemented. Under a practical point of view, this study identifies the features of different types of financial health measurement systems in various governance models.

Keywords: Governance Models, Financial Sustainability, Performance Measurement, Italian Local Governments

JEL Classification: H83, M48