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    Mercer Gilbert_A Financial Condition Index for Nova Scotia Municipalities

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    21 views3 pages

    Mercer Gilbert - A Financial Condition Index For Nova Scotia Municipalities

    Uploaded by

    Nave Inod

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
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    STATE OF THE ART A Financial Condition Index for Nova Scotia Municipalities By Timothy Mercer and Mark Gilbert The importance and increasing demand for local government financial condition indicators is well evidenced by the many recent articles and studies devoted to the subject by practitioners and academics in ‘North America and throughout the world. In Canada, where municipalities are, Tegally, “creatures” ofthe provinces, the need for eliable and consistent financial information atthe provincial level of government is essential co the formulation of fair and effective public policy. This is especially true in the province of Nova Scotia where recent changes to provincial legislation, including the amalgamation of urban municipalities and provincial- ‘municipal service exchange, have had a significant financial impact upon the province's 55 remaining local governments. Thus, inthe fll of 1995, the Nova Scotia Department of Municipal Affairs under- took a research study to establish a single comprehensive index by which it could ‘compare the financial health of various local governments and monitor the condi- tion of specified manicipalities over time entifying Potential Indicators In developing this index, examples from various jurisdictions were feviewed t0 ensure that the wheel was not being rein- vented. In Canada, with the exception of the Province of Saskatchewan, existing indicators tended to focus almost exclu sively on borrowing limits and levels of municipal debt. The overriding purpose of ‘many of these indicators seems to have been the provision of a quasi credit rating +o provincial lending agencies or other nongovernmental investors. While the “10- Point Test of Financial Condition” featured in the December 1993 issue of Government Finance Review was arguably the most practical model encountered, its emphasis fon simplicity of use contradicted Nova Scotia's goal of establishing a comprehen- sive index, Conversely, an index rating for local governments, developed by the “Harvard Institute for International Affairs and Indonesia's Department Keuangan, appeared to be extremely cumbersome and reliant upon a great deal of qualitative information. Somewhere between these two ‘models it was hoped that an index could be developed which would include as many ‘measures of financial condition as possible while at the same time avoiding excessive complesity ‘The first step towards realizing this end was the identification of potential indica- tots. The goal was to develop a truly comprehensive list and then eliminate those which were deemed to be irrelevant or not susceptible o quantitative measurement. More than 100 measures of financial condition were identified and categorized initially as revenue and expenditure, taxation, debt burden, economic, oF ser vice-level indicators. In the final analysis, service-level indicators were eliminated, as these were deemed to reflect individual ‘municipal expenditure preferences as. opposed to actual measures of financial condition. Many more were eliminated due to the absence of consistent daca at the ‘municipal level in Canada, Seventeen indicators of financial condi: tiom illustrated in Exhibit 1, were consid- cred to be both relevant to the structure of ‘municipal government in Nova Scotia and amenable to statistical comparison and ‘manipulation. Many ofthese indicators appear to measure the same general dimen- sion of financial condition; for example, i ccan be argued that debt per taxable assess: ment, per capita debt, and debt service burden all measure the general level of indebtedness of a particular municipality Rather than simply select one of these Exhibi ‘SELECTED INDICATORS ACCOF Revenue and Expenditure ‘Texation ‘Own-source revenue Commerciabresidential, perdweling uni taxvate spread Intergovernmental Percentage commercial Property tax revenues Taxes per dwelling unit Total expenditures per Fiscal capaciy® Figcal eto efor toa munciiys residential tax rate “In Nove Sco, gener! goverment expenditures te {Government as cepooed to operating a aptal xoend 36 Ocronen 1996 + Govern Fans REVIEW indicators and disregard the remaining two, analysts used a process known as factor analysis, which made it possible to include the information contained in all 17 indica tors in the final index and to weigh them according to their value as a measure of Financial condition, Applying Factor Analysis Factor analysis is a complex statistical procedure which is now available in easy: to-use formats on many microcomputer Statistical software packages. The advan- tage of factor analysis is that it allows the user to determine the number and nature of the broad dimensions that underlie a larger number of measures. The disadvantage is that it involves mathematical formulas that are often to0 cumbersome to perform by hhand. As a consequence, results are often abstract and difficult to justify in plain language. In terms of scientific rigor and reliability, however, few alternatives com Tn the Nova Scotia example, factor analysis provided a means of assessing ‘whether the 17 variables in Exhibit 1 were actually measures ofthe five preconceived categories of dimensions. When the vari lables were arrayed and weighted, as illus- trated in Exhibit 2, i was concluded that the initial categories of revenue and expen:

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