A Framework To Measure The Financial Performance of Local Governments

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A Framework to Measure the Financial Performance of Local Governments
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Local Government Studies, 2014
http://dx.doi.org/10.1080/03003930.2014.991865
A Framework to Measure the Financial

Performance of Local Governments
GERARD TURLEY, GERALDINE ROBBINS & STEPHEN MCNENA
J.E. Cairnes School of Business and Economics, National University of Ireland, Galway, Galway
City, Republic of Ireland
ABSTRACT A framework to assess the financial performance of local governments is

presented in this paper. The framework adapts and extends an earlier methodology and
includes new financial performance measures reflecting considerations in the literature of
appropriate financial performance measures for local government units. Using 14 indi-
cators, five broad financial performance measures are employed, assessing liquidity,
autonomy, operating performance, collection efficiency and solvency. We apply this
numerical and narrative analysis of key financial performance indicators to Ireland’s
primary local authorities during the recent boom and bust period. Through application of
this financial performance measurement framework using a benchmarking methodology,
we identify relatively strong and weak local authority financial performance. We recom-
mend the adoption of this framework as an extension to the annual financial statements of
local authorities to help users more easily assess financial performance and to distinguish
between relatively well-performing councils and those showing signs of financial trouble,
with a view to early identification of councils in financial difficulty.
KEY WORDS: Performance measurement, financial indicators, local government,
Ireland, benchmarking
1. Introduction
This paper examines the financial performance of local government during the
recent financial boom and bust periods and brings knowledge garnered from
earlier studies conducted in Europe, North America, Asia and Australia to bear
on developing a comprehensive understanding of the meaning of financial
performance in this public sector domain. We develop a financial performance
measurement framework. Application of our framework by local authorities
makes the contents of the financial statements more interpretable to citizen
users interested in local government finances, transparency and financial
performance.
Correspondence Address: Gerard Turley, J.E. Cairnes School of Business and Economics, National
University of Ireland, Galway, North Campus, Newcastle Road, Galway City, Republic of Ireland.
E-mail: gerard.turley@nuigalway.ie
© 2014 Taylor & Francis

2 G. Turley et al.
The fiscal position of local government units in OECD countries remained

broadly balanced up to 2007 in contrast to that of national governments. Given
the nature of revenue and expenditure assignments and the subnational fiscal
rules that limited borrowing during the boom years, local governments were less
affected by the economic and financial crisis that struck in 2007/2008 (Blöchliger
et al. 2010; Vammalle and Hulbert 2013). Despite the sovereign debt crisis and
the sluggish economic growth since the 2008/2009 Great Recession, overall ‘…
sub-central governments’ finances are in fairly good shape in most OECD
countries…’ (OECD 2013a).
While local government in Ireland benefitted from the boom years, it was not
as profligate as central government (Turley and Flannery 2013). Although
spending increased, as local councils in Ireland are not responsible for education
or health and have limited social welfare competencies (primarily in social
housing), the increased demands for public services were less evident than in
other EU or OECD countries where expenditure assignments are much greater.
In 2012, Ireland’s local government debt as a percentage of GDP was 3.8%, as
against an EU27 average of 7.8%. This compares to a general government debt/
GDP ratio of 126%, as against a EU27 average of 98% (OECD 2013b). This
represents a fourfold increase in the general government’s debt/GDP position.
Overall, falling local revenues combined with significant reductions in central
government transfers resulted in expenditure adjustments as local councils
sought pay and non-pay savings (Turley and Flannery 2013). For example, in
terms of day-to-day spending, local government employment numbers were
reduced by one quarter between 2008 and 2012 in contrast to a 10% reduction
across the overall public sector (Murphy 2014). Many of the reforms that have
taken place in the public sector since 2007/2008 have been at local government
level.
However, just as there are cross-country differences in subnational govern-
ment performance, there are, within countries, cross-council differences in per-
formance that are not captured by national aggregates. In this paper we set out to
review the financial performance of Irish local authorities during the boom and
bust period by developing a framework to assess the financial performance of
local authorities not just in Ireland but elsewhere where there is similar publicly
available financial information on local governments. Our framework consists of
financial ratios as such ratios have an established history as key elements in
models used to identify deteriorating financial position and bankruptcy in the
private sector (Beaver, McNichols, and Rhie 2005). Although bankruptcy pre-
diction is not the focus of our study, we rely on this predictive power of financial
ratios to show trends, which might require corrective action on the part of local
government.
Our paper begins with a brief review of public sector reforms and an extensive
literature review on measuring the financial performance of local governments.
Following that, the literature review is used to help construct our financial
performance measurement framework. Information on the Irish local government
reform context is provided in the next section. This is followed by application of
Measuring the Financial Performance of Local Governments 3
the framework to Irish local authorities, during both the 2007 boom and 2011
bust years. In the next section, an analysis of the findings is presented and used
to facilitate benchmarking of financial performance across councils and this is
followed by our conclusions outlining the contribution of the paper.
2. Literature review
Public administration in many parts of the world is undergoing change, reflecting
the mounting expectations of citizens, the increasing complexity of governing,
the growth of new technologies and the influence of debate internationally on
best practice in public sector management (Hood 1995; Pollitt and Bouckaert
2004; Hood and Dixon 2013). The label ‘New Public Management’ (NPM) has
been used to encapsulate this wave of reform in public management policy and
practice. The financial account of the organisation allows comparison with past
performance and with performance of other organisations (Potter 2005; Miley
and Read 2013), and facilitates efficiency benchmarking. Continuing reform of
local government systems worldwide is necessitating accurate, timely and rele-
vant information with which to assess local authority performance (Kloot and
Martin 2000).
Analysis of financial reports is considered to be an important managerial tool
for the evaluation of corporate strengths and weaknesses (Carmeli 2002). The
continued importance of traditional financial ratios in assessing corporate finan-
cial health is well established. Accounting information relating to profitability,
liquidity and long-term indebtedness is critical to assessing financial performance
and condition (Beaver, McNichols, and Rhie 2005; Wu, Gaunt, and Gray 2010).
These studies show that firms with relatively lower earnings, larger declines in
operating income, relatively low working capital and high debt-to-asset ratios are
more likely to experience bankruptcy. In the private sector, models predicting
deteriorating financial condition typically include accounting data. In the public
sector, there is little or no market data and all local government units are required
to provide key services with little opportunity for diversification. Therefore our
framework relies on key accounting data incorporated into financial ratios avail-
able from published financial reports. We also consider socio-economic variables
such as population, surface area and degree of urbanisation as these type of
environmental variables are regarded as factors that impact on financial health
(Wang, Dennis, and Tu 2007; Cabaleiro, Buch, and Vaamonde 2013).
In the US, formal financial trend monitoring of local governments was recom-
mended 30 years ago (Stevens and McGowan 1983). It is increasingly recog-
nised that the importance of accounting as a technology which is embedded
within the public management of cities is profound (Lapsley, Miller, and
Panozzo 2010). With the spread of NPM ideas globally, both accrual accounting
and a desire to enhance transparency emerged as a growing ambition of govern-
ments (Pilcher 2011).
Financial condition is a broad concept describing a local government’s
financial health (Groves, Godsey, and Shulman 2003). The term financial
4 G. Turley et al.
condition has been used in discussions of US state and local government’s

financial health for many years (Kamnikar, Kamnikar, and Deal 2006). More
specifically financial condition can be broadly defined as a local government’s:
1) ability to finance its services on a continuing basis; 2) ability to meet its
obligations as they fall due; and 3) ability to finance the services its constitu-
ents require (Mead 2001).
Authors over the past two decades concur on the need to examine similar
aspects of performance. In his study of local government financial statements in
the US, Gauthier (2007) recommends that an assessment of a local government’s
financial health be made from three perspectives: near-term financing – is the
local government able to meet its short-term financial obligations in a timely
manner?; financial position – the difference between total assets and total
liabilities, i.e. net assets; and economic condition – focusing on the likelihood
that the current financial position will improve or deteriorate in the future. In
Canada, the 2010 Auditor General Report illustrates how a comparison of current
year information with previous year(s) shows the annual surplus, while still
positive, lower than at any time in the previous decade. Such trend information
reveals potentially hard choices for provincial governments in maintaining cur-
rent programmes and service levels (Auditor General Nova Scotia 2010), and
provides users of financial statements with additional insights into financial
condition. In Malaysia, Atan et al. (2010) examined the performance of local
authorities across three categories: fiscal-year balance, short-term liquidity and
long-run solvency, the same three categories of financial performance identified
by Ryan, Robinson, and Trevor (2000) as necessary for assessing the perfor-
mance of Australian local government units 10 years earlier. In their recent study
in Spain, Guillamón, Bastida, and Benito (2011) found that local governments
are informing citizens about financial issues beyond that required by legal
requirements unlike in Italy where voluntary disclosures in the annual reports
of local government are negligible (Steccolini 2004). In Western Australia,
financial ratios are required to be included in the annual report of local govern-
ments since 1996 (Government of Western Australia: Department of Local
Government 2013).
In 2002, Carmeli proposed and tested a framework to assess the financial
performance of local authorities in Israel. Carmeli (2002) relied on Groves’
(1980) four categories of financial variables for evaluating the financial perfor-
mance and financial strength of US cities – namely short-term liquidity, budget-
ary solvency, long-run solvency and service development. Groves (1980) work
has been expanded upon over the last three decades to include a new focus on
building fiscal sustainability (Groves 1980; Groves, Godsey, and Shulman 2003).
The concept of fiscal sustainability is often called financial soundness or fiscal
solvency (Hildreth 1996). Fiscal sustainability concerns the capacity to meet
present and future levels of debt and other financial obligations within the
organisation’s revenue constraints (Chapman 2008; Ward and Dadayan 2009;
Rose 2010) and encompasses four dimensions: liquidity, own-source revenue
reliance, revenue flexibility and indebtedness.
We take Carmeli’s (2002) framework and adapt it for elements of finan-

cial performance considered important by other scholars and governments in
the intervening years. We develop an extended framework to assess the
financial performance of Irish local authorities based on a review of current
practice, recommendations and consideration of the Irish context and the
information available in local authority financial statements. The framework
would also be useful in other global contexts where similar financial infor-
mation is available. Table 1 shows the support in the literature reviewed for
developing aspects of the framework taking Carmeli’s (2002) paper as the
starting point.
Operating performance, liquidity, autonomy, collection efficiency and sol-
vency emerge as themes repeated across these global studies. Consideration of
sustainability has emerged as a global concern. This will depend on liquidity,
own-source revenue reliance, revenue flexibility and levels of indebtedness. Our

extended framework gives consideration to all of these elements.
Table 1. Framework for assessment of financial performance of local authorities
Financial performance measures/indicators considered

Measure Financial indicator important in other studies
Liquidity Current ratio Carmeli (2002, 2008); PricewaterhouseCoopers (2006);

Kamnikar, Kamnikar, and Deal (2006); Zafra-Gómez,
López-Hernández, and Hernández-Bastida (2009); Atan
et al. (2010); Government of Western Australia:
Department of Local Government (2013).
Average collection Atan et al. (2010).
period
Autonomy Self-income ratio Carmeli (2002); Atan et al. (2010); Auditor General Nova
Scotia (2010); Government of Western Australia:
Department of Local Government (2013).
Operating Operating surplus/ Carmeli (2002, 2008); PricewaterhouseCoopers (2006);
performance (deficit) Zafra-Gómez, López-Hernández, and Hernández-Bastida
(2009); Atan et al. (2010); Auditor General Nova Scotia
(2010); Local Government Association of South
Australia (2012); Queensland Government (2013);
Government of Western Australia: Department of Local
Government (2013).
Operating surplus/ Carmeli (2002); Government of Western Australia:
(deficit) per resident Department of Local Government (2013).
Operating surplus/ Carmeli (2002); Local Government Association of South
(deficit) ratio Australia (2012).
Collection Collection efficiency Carmeli (2002); Atan et al. (2010).
efficiency ratios
Solvency Net financial liabilities PricewaterhouseCoopers (2006); Auditor General Nova
Scotia (2010); Local Government Association of South
Australia (2012); Queensland Government (2013).
Net financial liabilities PricewaterhouseCoopers (2006); Local Government
ratio Association of South Australia (2012); Queensland
Government (2013).
(Gross) Debt-to- Atan et al. (2010).
income ratio
Debt-to-assets ratio PricewaterhouseCoopers (2006).
6 G. Turley et al.
3. Financial performance measurement framework

We adapt and extend Carmeli’s (2002) framework where four broad per-
formance measures are employed, namely liquidity, fiscal-year balance,
solvency and service and municipal development. We use a five measure
framework, consisting of liquidity, autonomy, operating performance,
collection efficiency and solvency given the importance of these aspects
of financial health of both private- and public sector entities. We omit
some of the original indicators used in the Carmeli’s study, and include
new ones, based on a review of the literature, data availability and our
own judgement of the most relevant indicators for our purpose, namely to
assess the financial performance of Irish city and county councils, with a
view to identifying possible liquidity and solvency problems and, more
specifically, early identification of those local councils in, or on a trajectory

to, financial difficulty. A description of each measure and the indicators used
follows.
3.1. Liquidity
Liquidity is a measure of the ability to meet short-term debt obligations
without having to liquidate assets or close down. In general, the greater the
coverage of liquid assets to short-term liabilities, the better as it is an
indication that the organisation can pay its debts while at the same time
fund its ongoing operations. We use two financial indicators to measure
liquidity. The current ratio is equal to the ratio of current assets to current
liabilities. Conventional wisdom is that a current ratio less than one is not
ideal, particularly if it persists. The average collection period measures the
average time in days that rates collection is outstanding. For the major source
of self-revenue, namely the commercial rates, it is calculated as rates arrears
divided by rates income, multiplied by 365. A longer collection period may
reflect poor collection management and/or a difficult external economic envir-
onment and inability to pay.
3.2. Autonomy
This is a measure of the degree of autonomy that local authorities have, vis-à-vis
the central government. How reliant or dependent are city and county councils on
central government for income, as opposed to own-source revenue? This can be
measured by the self-income ratio which is the ratio of own-source income
divided by total income, i.e. the inverse of the dependency ratio. For many
local governments worldwide own-source income includes user fees and charges,
and some form of local taxation, often on property or income. Total income
includes own-source income and income from central government, in the form of
grants/transfers.
3.3. Operating performance

We use a number of indicators to measure the operating performance of the local
authorities. Operating surplus/(deficit) is the difference between revenue income
and expenditure for the period. A recurring and persistent operating deficit is an
indication that the local government is having difficulties sustaining expendi-
tures with its revenue income. It may be that expenditures are running too high,
or that revenue income is not sufficient. To make cross-council comparisons
more meaningful, we calculate the operating surplus/(deficit) per resident by
dividing the operating surplus/(deficit) by the number of residents in each local
authority area. Another variant of this measure useful for performance compar-
ison purposes is the operating surplus/(deficit) ratio, equal to the operating
surplus/(deficit) divided by total income.
3.4. Collection efficiency

We calculate collection efficiency ratios for different income sources, namely
commercial rates, commercial water charges, housing rents and, with respect to
capital income, housing loans. The collection efficiency ratio is the amount
collected divided by the total amount for collection. For any income source the
total amount for collection is calculated by taking the amount accruing in the
given year and adding the arrears at the start of the year but deducting any
waivers and write-offs.
3.5. Solvency
Solvency is the ability to repay long-term debts and the interest on those debts.
Essentially it is concerned with the long-term financial health and survival of the
organisation. Generally, the higher the solvency ratios, the more likely the organi-
sation will not be able to meet its long-term debts. We have four indicators of
solvency. Net financial liabilities are the amount owed net of the amount held or
owing to the local authority (PricewaterhouseCoopers 2006). Net financial liabil-
ities are equal to total liabilities less financial assets where financial assets are
defined in accordance with international accounting standards IAS 39. The net
financial liabilities ratio is the net financial liabilities divided by total income and
measures the extent to which net financial liabilities can be met by revenue income.
The other two solvency ratios are the gross (as opposed to the net) debt/income
ratio and the debt/assets ratio. The debt-to-income ratio measures the ability to
service the total debt, as this will come from revenue income. It is equal to total
liabilities divided by total income. The debt-to-assets ratio is the percentage of
assets financed by debt, and is measured by total liabilities divided by total assets.
Table 2 outlines the framework adapted from Carmeli (2002), the financial
indicators employed and the respective formulae.
In the next section we provide a brief background on local government
reforms and the structure of Irish local government in preparation for application
8 G. Turley et al.
Table 2. Financial performance measurement framework
Measure Financial indicator Formula
Liquidity Current ratio Current assets

Current liabilities
Average collection period2 Rates arrears
x365
Rates income
Autonomy Self-income ratio Own-source income
Total income
Operating Operating surplus/(deficit) Operating income−operating expenditure
performance
Operating surplus/(deficit) per Operating income operating expenditure
resident Number of residents
Operating surplus/(deficit) ratio Operating income operating expenditure
Total income
Collection Commercial rates collection Commercial rates collected
efficiency efficiency ratio Total commercial rates for collection
Housing rents collection efficiency Housing rents collected
ratio Total housing rents for collection
Commercial water charges Commercial water charges collected
collection efficiency ratio Total commercial water charges for collection
Housing loans collection efficiency Housing loans collected
ratio Total housing loans for collection
Solvency1 Net financial liabilities Total liabilities−financial assets
Net financial liabilities ratio Total liabilities financial assets
Total income
(Gross) Debt-to-income ratio Total liabilities
Total income
Debt-to-assets ratio Total liabilities
Total assets
Notes: 1A related financial indicator is the debt service ratio, defined as debt service payments as a
percentage of income. As interest costs are not listed separately in the financial accounts of Irish local
authorities we do not use this indicator in our framework. 2For commercial rates.
of our framework to assess the financial performance of local authorities in the

subsequent section.
4. Irish local government context

Compared to the international reform movement, continental Europe is often
regarded as a ‘maintainer’ or ‘latecomer’ in terms of NPM (Kuhlmann 2010).
There was reluctance over many years to reform the Irish public sector (Robbins
and Lapsley 2005) and to allow local authorities greater fiscal autonomy. In the
wider reform context, the Irish Government is currently undergoing its most
intensive period of reorganisation since independence in 1922 (MacCarthaigh
2013).
In general Irish local authorities have a large population base by international

standards (Callanan 2011). In 2012, Irish local authorities finally received greater
fiscal autonomy with the imposition of, initially, a household charge which was
subsequently replaced with a local property tax in mid-2013. This will increase
local autonomy and require a system of increased accountability to local resi-
dents and taxpayers in recognition of the fact that changing the balance in
funding local government has implications for accountability (Watt 2004). The
property tax will affect how local governments finance their activities, and also
influence the (amount and design of) grant income from central government. It is
anticipated that there will be a greater interest in the financial performance of
local authorities.
In 2007 and 2011 Ireland had 34 city and county councils – 5 city and 29
county councils. Viewed from an urban/rural distinction (where urban is defined
by the Central Statistics Office as settlements/towns with a population of 1500 or

more), Ireland has eight predominantly urban councils and 26 rural councils.
Some of our analysis focuses on this distinction. These 34 councils are the
primary units of local government, responsible for infrastructure provision and
the delivery of public services in the areas of housing, environment, planning,
roads and amenities. Funding for these services comes from fees and charges,
local property taxes (on businesses in the form of commercial rates and, from
July 2013, on residential dwellings in the form of the new local property tax, the
LPT) and central government grants.
5. Application and analysis of findings

The financial data presented here for the 34 city and county councils are taken
from the Annual Financial Statements (AFS) which are based on generally
accepted accounting practices and audited by the Local Government Audit
Service (Department of the Environment, Community and Local Government).
The data for 2007 and 2011, for all 14 financial indicators for all 34 city and
county councils, are reported in Tables 3–7. We begin with an examination of the
liquidity measure.
As might be expected given the change in economic conditions, the current
ratio for the 34 city and county councils fell, from 2.6 in 2007 to 1.7 in 2011 (see
Table 3). Although liquidity decreased in 25 councils, and fell by more than half
in 15 councils, eight councils experienced an increase in their current ratio. In
terms of the average collection period for commercial rates income, the results in
Table 3 indicate a noticeable deterioration in payment discipline. The average
collection period increased from 27 days in 2007 to 93 days in 2011, with three
councils having an average collection period of 6 months or more.
Autonomy, measured by the self-income ratio in Table 4, showed more or less
no change between 2007 and 2011. This is not surprising given that there was no
change in revenue assignment in this period. However, what are worth reporting
are the sizeable differences that exist between the local authorities, arising largely
from differences in size, urbanisation, economic activity and fiscal capacity.
10 G. Turley et al.
Table 3. Liquidity
Average collection
Current ratio period (days)
City and county councils 2007 2011 2007 2011
34 city and county councils 2.6 1.7 27 93

Median 2.8 1.6 19 94
Standard deviation 1.7 0.9 14 43
Range – maximum 6.9 4.0 64 201
Range – minimum 0.6 0.6 7 27
29 county councils 2.8 1.8 19 90
5 city councils 2.1 1.4 42 97
Rural – 26 county councils 2.4 1.6 18 90
Urban – 5 city councils and 2.9 1.8 33 95
3 Dublin county councils
Source: AFS; authors’ calculations.
Table 4. Autonomy
Self-income ratio
City and county councils 2007 2011
Average (mean) 0.52 0.53

Median 0.39 0.41
Standard deviation 0.15 0.15
Range – maximum 0.76 0.76
Range – minimum 0.23 0.26
29 county councils 0.47 0.49
5 city councils 0.65 0.65
Rural – 26 county councils 0.40 0.42
Urban – 5 city councils and 0.67 0.68
Within an overall range from 0.26 to 0.76, the less populated and more rural
county councils have a self-income ratio of 0.33 or less, while the heavily
populated and more urban councils have a self-income ratio of 0.65 or higher.
As shown in Table 5, the aggregate operating surplus of the 34 councils
declined from €204 m in 2007 to €184 m in 2011. Although there was a sharp
decline in the aggregate operating surplus (evidence of the beginning of the
financial crisis) between 2007 and 2008, of over €80 m, the small decline in
operating surplus over the 4-year period is in stark contrast to what has happened
to the central exchequer balance. Expressing the operating balance as a percen-
tage of total income, the period 2007–2011 witnessed no change, with the
aggregate operating surplus/income ratio equal to 4%. The explanation for this
is that as aggregate council revenue income fell by over €160 m, expenditures
also fell by about €140 m, leaving the aggregate surplus declining by just €20 m.
Table 5. Operating performance
Operating surplus/ Operating surplus/ Operating surplus/

(deficit) €m (deficit) per resident, € (deficit) ratio
City and county councils 2007 2011 2011 2007 2011
34 city and county councils 204.3 183.8 45 0.04 0.04

Median 40 0.04 0.03
Standard deviation 30 0.03 0.03
Range – maximum 30.1 28.8 122 0.14 0.11
Range – minimum (1.3) (2.4) (39) (0.02) (0.04)
29 county councils 163.4 137.0 42 0.05 0.04
5 city councils 40.9 46.8 57 0.03 0.04
Rural – 26 county councils 112.0 81.4 32 0.04 0.03
Urban – 5 city councils and 92.3 102.4 65 0.05 0.05
Table 6. Collection efficiency
Commercial rates Housing rents Commercial water Housing loans

collection collection charges collection collection
efficiency ratio efficiency ratio efficiency ratio efficiency ratio
City and county councils 2007 2011 2007 2011 2007 2011 2007 2011
Average (mean) 0.94 0.76 0.90 0.88 0.61 0.56 0.89 0.74
Median 0.95 0.78 0.90 0.89 0.60 0.55 0.90 0.75
Standard deviation 0.04 0.08 0.06 0.06 0.18 0.13 0.10 0.11
Range – maximum 0.98 0.92 0.98 0.98 0.95 0.82 1.11 1.00
Range – minimum 0.84 0.57 0.75 0.75 0.19 0.32 0.69 0.48
29 county councils 0.95 0.77 0.90 0.88 0.61 0.54 0.88 0.74
5 city councils 0.90 0.72 0.86 0.84 0.64 0.65 0.92 0.74
Rural – 26 county councils 0.95 0.77 0.91 0.89 0.61 0.54 0.86 0.73
Urban – 5 city councils and 0.92 0.75 0.87 0.83 0.61 0.62 0.97 0.79
Local government income did not fall as much as central government tax
revenues, but likewise local governments did not face rising demands from
health and social welfare budgets.
Although local authorities are required to run balanced budgets, three of the 34
councils reported an annual operating deficit in 2007, and two in 2011. The
average operating surplus per resident was €45 in 2011, with a range from a
surplus per resident of €122 to a deficit per resident of €39.
Between 2007 and 2011, collection efficiency ratios across our four main
income streams fell in most councils (see Table 6). Beginning with commercial
rates, all 34 local authorities saw falls in this ratio, with decreases from 6% to
37%. In terms of housing rents there was little or no change, with the average
ratio for both 2007 and 2011 close to 0.90. As for commercial water charges, the
12 G. Turley et al.
Table 7. Solvency
Net financial Net financial Debt-to-income Debt-to-assets

liabilities €m liabilities ratio ratio ratio
City and county councils 2007 2011 2007 2011 2007 2011 2007 2011
34 city and county councils (49.0) 1,262.6 (0.01) 0.28 1.17 1.39 0.06 0.06
Median 0.02 0.17 1.02 1.31 0.04 0.05
Standard deviation 0.34 0.36 0.42 0.50 0.03 0.03
Range – maximum 74.0 264.7 0.66 1.03 2.10 2.42 0.13 0.15
Range – minimum (157.2) (38.2) (0.79) (0.24) 0.42 0.33 0.01 0.01
29 county councils (102.2) 985.8 (0.03) 0.31 1.12 1.43 0.05 0.06
5 city councils 53.2 276.8 0.04 0.22 1.29 1.32 0.08 0.08
Rural – 26 county councils 194.8 920.5 0.08 0.37 1.07 1.33 0.04 0.05
Urban – 5 city councils and (243.7) 342.1 (0.12) 0.18 1.29 1.48 0.08 0.09

Note: Net financial assets are denoted by brackets.
average collection efficiency ratio fell from 0.61 to 0.56 between 2007 and 2011,
making this the least efficient in terms of collection efficiency. With respect to
housing loans, all councils, with one exception, saw falls in their collection
efficiency ratio.
Solvency is measured using four indicators (see Table 7). In 2007, financial
assets exceeded financial liabilities in 16 councils, leaving them with net finan-
cial assets, and at the aggregate level, net financial assets were just under €50 m.
By 2011, just eight councils had net financial assets, and the aggregate position
swung to nearly €1.3 bn of net financial liabilities. Across the next three
measures of solvency, the general picture is of a deterioration in solvency, albeit
with some councils experiencing a small improvement in some ratios.
There are several findings from applying the framework to the AFS of the local
authorities for the years 2007 and 2011. First, in general the framework is reporting
poorer financial performance across all five measures. The framework is indicating
growing liquidity and/or solvency problems in some councils. Second, some
councils experienced improvements in some ratios, e.g. improving liquidity and
income collection efficiency ratios, falling net financial liabilities. This happened
even though the period 2007–2011 saw sharp drops in household disposable
income and business activity. Third, there is substantial cross-council variation
in many ratios, and in some cases these variations have increased over time. Some
variation is so wide that it is difficult to fully explain. Fourth, there is some
evidence of an urban/rural divide, with urban councils typically having greater
financial autonomy, larger operating surpluses and lower net financial liabilities.
Having identified these differences in financial performance, we proceed to
benchmark the financial performance of Irish local authorities recognising that
the evaluation of organisational performance in both the public and private
sectors has been increasingly facilitated by benchmarking practices over the
past 20 years (Wynn-Williams 2005).
6. Benchmarking
A city has a limited ability to interpret its financial condition other than through
comparisons with similar-sized cities (Brown 1993). With the global adoption of
NPM ideas benchmarking practice spread to the public sector. Benchmarking has
been employed in the Australian public sector to drive improvements and is
consistent with notions of continuous improvement (Bowerman et al. 2002;
Magd and Curry 2003; Ramchandani and Taylor 2011). However, the manner
in which local authorities in OECD countries compare and benchmark their
performance varies widely (Kuhlmann and Jäkel 2013). The fiscal crisis in
Europe and the need to cut public sector costs is resulting in many countries
moving towards compulsory large-scale benchmarking projects (Kuhlmann and
Jäkel 2013). Benchmarking can be used to enhance operational efficiency,
transparency and competition in the public sector (Braadbaart and

Yusnandarshah 2008). It can also be used to create or reinforce external pressures
to improve performance (Tillema 2010). However, a consequence of such pres-
sures is the risk of dysfunctional or defensive behaviours. Benchmarking is not
advanced as a mechanism to improve performance where it is feared that
organisations may take actions that improve reported performance but may
leave actual performance unchanged. In addition, there may be concerns that
when benchmarking scores are published an organisation commits extensive
resources to defending its performance, arguing for instance incomparability,
and ultimately does not use the feedback from the benchmarking process to
reflect on and avail of performance improvement opportunities (Northcott and
Llewellyn 2005; Tillema 2010). Other difficulties or risks associated with bench-
marking include validity and quality problems, the effort needed for appropriate
benchmarking, a possible lack of motivation among public sector employees and
whether or not benchmarking is able to capture desired outcomes (Braadbaart
and Yusnandarshah 2008). Furthermore, one of the consequences of reporting
comparative performance measures for local governments observed elsewhere is
that ‘top performing councils’ in the UK are called upon not only to develop
capacity to improve themselves but in addition, ‘should share their knowledge
and capacity with local government as a whole’ (Audit Commission 2001, 31),
thus increasing demands on the organisational capacity of local governments
(Rashman and Radnor 2005).
To the best of our knowledge, this is the first attempt to systematically bench-
mark the financial performance of Irish local councils. The methodology to rate
the relative financial performance of Irish city and county councils is adapted
from Brown’s (1993) assessment tool used to measure the financial condition of
small cities in the US. We begin with the 14 financial indicators employed in our
framework. Given the similarities between some of the indicators, the relative
importance of some compared to others and the need for a simple and parsimo-
nious model, we reduce the number from 14 to 7, with autonomy, operating
performance and collection efficiency each measured by one indicator, while
liquidity and solvency are each measured by two indicators as they are critical
14 G. Turley et al.
aspects of financial performance in times of reduced budgets and fiscal constraints

globally. The actual indicators used are the current ratio and the average collection
period (together measuring liquidity), the self-income ratio, the operating
surplus/(deficit) ratio, the average of the four collection efficiency ratios and,
finally, the net financial liabilities ratio and debt-to-assets ratio (together measur-
ing solvency). For each indicator used we divide the data into quintiles, from the
worst 20% (quintile 1) to the best 20% (quintile 5). Each quintile is assigned a
score that ranges from −2 (quintile 1) to +2 (quintile 5), specifically designed so
that a local authority score in quintile 3 is assigned a 0. The scores for our seven
indicators, equally weighted, are added together to calculate a composite score,
with a potential range from −14 to +14. For 2011, the highest composite score
was 9 and the lowest composite score was −12. We then employ a grading scale
adapted from Brown (1993) so as to categorise councils into different groups
based on relative financial performance (see Table 8). For each of the 34 local
authorities there is a scorecard consisting of a score (+2 to −2) for each of the
seven financial indicators and a composite score.
We tentatively categorise councils into different groups, based on the measures
and financial indicators as outlined with individual local council’s aggregated
results measured against aggregated results for all 34 city and county councils.
Although quite rudimentary in design, it helps to identify, in terms of financial
performance, the relatively best performing councils, councils performing better
or worse than most, those middle-of-the-road or average councils, and most
importantly from a public policy perspective, those councils that perform the
worst (in relative terms), and may be showing signs of financial difficulty. Based
on this methodology, the number of councils in each group for 2007 and 2011 is
given in Table 8.
Some of the findings of the benchmarking exercise are surprising. A priori, on
account of the bigger economic base and cost advantages arising from economies
of scale we would have expected the larger urban councils to do better in
financial terms relative to the smaller, less populated and rural councils. In the
end, the results are mixed. Although rural county councils constitute the ‘among
the worst’ councils, they also count for two ‘among the best’ councils. Whereas
the ‘better than most’ category includes many of the larger urban councils, it
does not include the council with the largest population or some of the other city
councils but does include some smaller rural county councils. On a more positive
Table 8. Classification of Councils
Composite score Group 2007 2011
−7 or less Among the worst 3 2

−6 to −3 Worse than most 8 9
−2 to 2 About average 12 12
3 to 6 Better than most 8 8
7 or more Among the best 3 3
Table 9. Correlation between composite score and external variables
External variable R2, 2007 R2, 2011
Population 0.0038 0.0118

Area 0.0947 0.0164
Urbanisation 0.0252 0.0373
note, there are many local councils whose financial performance has been
relatively benign, unlike the record of central government. Although the limited
autonomy and the borrowing restrictions faced by local government in Ireland
may partly account for this, some credit must also go to the local authorities.
Finally, the composite benchmarking score was compared to a number of
external or environmental variables (population, surface area and degree of

urbanisation) to investigate if any of these external factors might help explain
variations in the composite score (see Table 9). Our analysis indicates that none
of these variables were strongly correlated with the composite financial perfor-
mance score used for benchmarking purposes.
7. Conclusions
Our study assesses local government financial performance 1) temporally – pre
and post the fiscal crisis and 2) relatively across individual councils in each of the
years, 2007 and 2011. This paper proposes a framework to facilitate users in
better understanding published financial data. It does so by recommending that a
financial performance measurement framework such as the one we develop in
this paper be included by councils as an extension to their annual published
financial statements. We have applied the framework to the pre- and post-fiscal
crisis period to draw out differences, but the framework can be applied to any
time period to facilitate assessment of relative financial performance across
councils.
We consider that the risks of benchmarking outlined in the literature, such as
concerns with comparability, data validity, the effort required and possible
motivational concerns are not as applicable in the case of benchmarking of
financial performance as with non-financial performance. In this paper, data are
taken from the audited financial statements that must be prepared to meet
legislative requirements. The motivational aspect is more distant in the case of
financial performance information as it is aggregated in the financial statements.
In addition, the temporal dimension for financial data is relatively long – the
year-end financial statements cover a 1-year period. We argue that the risks of
benchmarking are more applicable to benchmarking non-financial performance
with its more subjective data set, shorter temporal dimension, possible links with
performance-related pay and staff progression. Our paper proposes imposing an
interpretative framework on this audited data set which is already available. It
requires extraction of data already verified and published to present the
16 G. Turley et al.
information for local users and for comparative purposes in a manner that
facilitates a comparison of financial performance from year to year and from
one local government unit to another or to an average thus leading to greater
accountability and transparency for use of scarce public resources.
This paper makes a contribution by revising and developing the framework
first used by Carmeli (2002) to facilitate an assessment of the financial perfor-
mance of local authorities. We use this extended and improved framework to
review and then compare the financial performance of local authorities in Ireland
in the ‘boom’ period and post the fiscal crisis. The paper finds that the financial
health of the local government sector is good relative to the central government’s
fiscal performance. Our analysis reveals a small number of local authorities
whose financial performance is worrying as measured by operating deficits,
poor revenue collection and growing debt figures. Our study highlights differ-
ences in financial performance between councils but cannot explain all of the
variations. We recommend an alternative, semi-structured interview, methodol-
ogy to explore and explain these variations in performance.
Our findings have implications for financial transparency. For instance, they
reveal relatively better performance on financial autonomy for urban councils.
This difference has consequences for choices about how rural councils are
funded to compensate for less commercial rates income and other sources of
self-income due to geographical differences and disadvantage. In addition, our
framework has the potential to improve transparency of financial performance
data if it were included as part of the annual financial statements. It draws on
financial data in the published financial reports of local authorities which is
often difficult to understand by those interested in local government perfor-
mance. Applying financial ratios to local authority financial statements will
allow users to better understand the financial performance of local councils.
The indicators in our framework allow users to more easily compare the
relative performance of one council with another, thus allowing citizens to
contribute to political debates about local area developments via their political
representatives.
Our paper also has implications for practitioners. A concern with financial
performance of public sector organisations has grown over the years of the fiscal
crisis. Application of our framework facilitates the provision of accounting and
financial information on local government performance as an addition to the
published financial statements of local councils, thus enhancing non-specialists
and citizens understanding of the financial performance of their local council and
facilitating greater transparency at local level, particularly now as there is direct
funding of subnational government by local taxpayers via the new LPT. A
limitation of our paper is that it is based on the limited data set contained in
the published annual financial statements, and is for 2007 and 2011 only. A
further limitation of the paper is that the analysis applies to an assessment of
financial performance only. Further work in this area will require an analysis of
overall performance to include an assessment of non-financial performance,
subject to the earlier caveat on the risks of benchmarking non-financial
performance. This is our objective for future work using a qualitative methodol-
ogy such as semi-structured interviews in addition to data analysis of published
non-financial performance information. We also wish to investigate the determi-
nants of poor financial performance. Whatever these determinants might be, we
now have a framework to measure and evaluate financial performance across
councils and over time, both in Ireland and elsewhere.
Notes on contributors
Gerard Turley is an economics lecturer at the School of Business and Economics,
NUI Galway. His research interests include local government economics, public
finance and transition economics. He has worked in the UK, the US, Eastern
Europe, Russia and Central Asia.

Geraldine Robbins is a lecturer in accounting and finance at NUI Galway and
senior researcher at the university’s Whitaker Institute for Innovation and
Societal Change. Her research interests include public sector financial manage-
ment practices and reforms, and corporate finance.
Stephen McNena is an economics lecturer at the School of Business and
Economics, NUI Galway. His research interests are fiscal policy, social policy
and the welfare state, including issues such as tax reforms, local public finances,
pensions, poverty and income inequality.
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Gerard Turley Geraldine Robbins

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A Framework to Measure the Financial

ABSTRACT A framework to assess the ﬁnancial performance of local governments is

© 2014 Taylor & Francis

The ﬁscal position of local government units in OECD countries remained

condition has been used in discussions of US state and local government’s

We take Carmeli’s (2002) framework and adapt it for elements of ﬁnan-

own-source revenue reliance, revenue ﬂexibility and levels of indebtedness. Our

Table 1. Framework for assessment of ﬁnancial performance of local authorities

Financial performance measures/indicators considered

Liquidity Current ratio Carmeli (2002, 2008); PricewaterhouseCoopers (2006);

3. Financial performance measurement framework

speciﬁcally, early identiﬁcation of those local councils in, or on a trajectory

3.3. Operating performance

3.4. Collection efﬁciency

Table 2. Financial performance measurement framework

Measure Financial indicator Formula

Liquidity Current ratio Current assets

of our framework to assess the ﬁnancial performance of local authorities in the

4. Irish local government context

In general Irish local authorities have a large population base by international

by the Central Statistics Ofﬁce as settlements/towns with a population of 1500 or

5. Application and analysis of ﬁndings

City and county councils 2007 2011 2007 2011

34 city and county councils 2.6 1.7 27 93

3 Dublin county councils

Source: AFS; authors’ calculations.

City and county councils 2007 2011

Average (mean) 0.52 0.53

Source: AFS; authors’ calculations.

Table 5. Operating performance

Operating surplus/ Operating surplus/ Operating surplus/

City and county councils 2007 2011 2011 2007 2011

34 city and county councils 204.3 183.8 45 0.04 0.04

3 Dublin county councils

Source: AFS; authors’ calculations.

Table 6. Collection efﬁciency

Commercial rates Housing rents Commercial water Housing loans

Source: AFS; authors’ calculations.

Net ﬁnancial Net ﬁnancial Debt-to-income Debt-to-assets

3 Dublin county councils

Source: AFS; authors’ calculations.

transparency and competition in the public sector (Braadbaart and

aspects of ﬁnancial performance in times of reduced budgets and ﬁscal constraints

Table 8. Classiﬁcation of Councils

Composite score Group 2007 2011

−7 or less Among the worst 3 2

Table 9. Correlation between composite score and external variables

External variable R2, 2007 R2, 2011

Population 0.0038 0.0118

external or environmental variables (population, surface area and degree of

Europe, Russia and Central Asia.