Assessing financial distress where bankruptcy is not an option: An alternative approach for local municipalities

The goal of this paper is to identify the key financial distress performance indicators of local governments by using published financial data. Thus, using proper financial ratios the financial performance of municipalities is assessed through a multicriteria methodology that combines simulation analysis approach (stochastic multicriteria acceptability analysis) with a disaggregation technique. In particular, an evaluation model is developed on the basis of accrual financial data from 360 Greek municipalities for 2007. A set of customised to the local government context financial ratios is defined that rate municipalities and distinguish those with good financial condition from those experiencing financial problems. The model is validated by testing its outputs on a subsample of 100 local governments assessed in two time periods, 2007 and 2009. The model succeeded in correctly classifying distressed municipalities according to a benchmark set by the central government in 2010. Such a model and methodology could be particularly useful for performance assessment in the context of several European Union countries that have a similar local government framework to the Greek one and apply accrual accounting techniques.