Budgetary solvency of Italian local governments: an assessment

• Date: 04 March 2019
• Published date: 04 March 2019
• Pages: 122-141
• DOI: https://doi.org/10.1108/IJPSM-11-2017-0328
• Author: Marco Bisogno,Beatriz Cuadrado-Ballesteros,Serena Santis,Francesca Citro
• Subject Matter: Public policy & environmental management,Politics,Public adminstration & management

Budgetary solvency of Italian

local governments: an assessment

Marco Bisogno

Department of Management and Innovation Systems,

University of Salerno, Fisciano, Italy

Beatriz Cuadrado-Ballesteros

Department of Management and Business Economics,

Multidisciplinary Institute for Enterprises (IME),

University of Salamanca, Salamanca, Spain

Serena Santis

Department of Political Science, University of Campania “Luigi Vanvitelli”,

Campania, Italy, and

Francesca Citro

Department of Management and Innovation Systems,

University of Salerno, Fisciano, Italy

Abstract

Purpose –The purpose of this paper is to investigate budgetary solvency (BS) as a part of the financial

condition of local governments (LGs), considering that the growing demand for public services is primarily

affecting this variable.

Design/methodology/approach –The studyinvestigates a sample of 132Italian LGs with more than 50,000

inhabitantsfor the period 2005–2014.The authors obtain a set of indicatorsas proxies of BS, which serve as the

dependentvariable of a regression model aimedat testing several independentvariables which the authorsare

interested in, namely, financial autonomy,current equilibrium, level of indebtedness and investments.

Findings –BS,aswellasitsthreeindicators—sustainability,flexibility and vulnerability—are positively related

to financial autonomy and current equilibrium and negatively related to the level of indebtedness and investments.

Practical implications –To cover citizens’demands for public services guaranteeing sound financial

management, policymakers are advised to control both the balance between current revenue and expenses

and the level of indebtedness while preserving financial autonomy from external sources.

Originality/value –This study adds fresh insight to the literature on financial health, emphasising the

relevance of public financial management.

Keywords Financial condition, Indebtedness, Budgetary solvency, Currentequilibrium, Financial autonomy

Paper type Research paper

1. Introduction

In the last decade, on the basis of the new public management (NPM) paradigm (Dafflon, 2015),

decentralisation of competencies from the central government to other levels of government has

increased, raising the need for resources to comply with new (and additional) competencies

(Grossi and Mussari, 2009; Pérez-López et al., 2015). Taxes and fees paid by citizens to local

governments (LGs) for public services have become insufficient to cover their demands with

regard to quantity and quality, although LGs receive transfers from other public administrations.

Furthermore, this situation has been aggravated by the international financial crisis

suffered by many LGs. This has called attention to the importance of identifying harmful

financial conditions (Kloha et al., 2005a) to avoid financial distress, considering that national

indicators do not capture different performances at local levels (Turley et al., 2015).

Monitoring financial conditions provides public managers with relevant information

(García-Sánchez et al., 2012, 2014), supporting their decision making on public services

delivery. Better decision-making processes will improve the efficiency and effectiveness of

International Journal of Public

Sector Management

Vol. 32 No. 2, 2019

pp. 122-141

© Emerald PublishingLimited

0951-3558

DOI 10.1108/IJPSM-11-2017-0328

Received 30 November 2017

Revised 13 March 2018

6June2018

Accepted 12 June 2018

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0951-3558.htm

122

IJPSM

32,2

resource allocation (Grossi et al., 2017), ameliorating citizens’welfare and quality of life

(Cuadrado-Ballesteros et al., 2014).

Accordingly, many countries have introduced relevant innovations aimed at improving

the quality of public services, at the same time trying to prevent LGs from suffering bad

financial conditions.

In this study, we focus on the Italian context for several reasons. First, public entities

have increased their efforts in the last years to improve the efficiency and effectiveness of

public service delivery. Second, the responsibility of managing financial resources has been

shifted from the central government to local authorities because of the decentralisation of

public finances, coupled with a reduction in central government transfers (Cohen et al.,

2017). Third, several reforms have been introduced to control financial health and to define

financial distress, establishing the so-called long-term financial re-equilibrium procedure

(Bisogno et al., 2014). Moreover, the reforms implemented in Italy (as well as in many other

countries) have progressively emphasised the efficient and effective use of the local taxes

paid by citizens (Caperchione and Mussari, 2000).

Several studies have investigated financial health, at the same time emphasising that it

relates to the tax base (Bradbury, 1982; Cohen et al., 2017; Wilson, 1984). Although there is

no consensus on the best way to represent the financial health of LGs, several studies have

approached it by discussing different kinds of solvency (Greenberg and Hiller, 1995; Wang

et al., 2007; Zafra-Gómez et al., 2009a). One of them is budgetary solvency (BS), namely, the

ability of a public sector organisation to raise sufficient revenues to cover its legally

required expenditures without falling into deficit.

Considering that BS is most affected by increases in demands for public services, this

study aims to investigate whether BS of Italian LGs is affected by financial autonomy

(expressed by the incidence of own revenue to total revenue), the current equilibrium (based

on the relationship between current revenue and current expenses), the level of indebtedness

and the level of investments (namely, capital expenditures).

From a methodological perspective, we investigate a sample of 132 Italian LGs composed

of municipalities with more than 50,000 inhabitants. For the period 2005–2014, we have

calculated a set of indicators as proxies of BS. Through an aggregation process, we have

obtained a global index, which will serve as the dependent variable of a regression model

aimed at testing several independent variables which we are interested in: financial

autonomy, current equilibrium, level of indebtedness and investments.

Results suggest that BSis positively relatedto financial autonomyand current equilibrium

and negatively related to the levels of both indebtedness and investments. Considering that

variations in financial results are obtained mainly from management policies, the main

implication of this study for policymakers is that controlling the balance between current

revenue and expenses is essential for preventing future solvency problems. In the same vein,

policymakers are advised to control the level of indebtedness while preserving financial

autonomy from external sources and to guarantee sound financial management to cover

citizens’demands for public services with available resources. Therefore, this study contributes

to the literature on financial health, emphasising the relevance of public financial management.

The paper is structured as follows. Section 2 will describe the Italian context, while the

Section 3 will deal with the different elements of the financial condition, focussing on BS, as

well as delineating the research hypotheses. Section 4 will define the methodology, while

Section 5 will discuss the results. The last section will offer some concluding thoughts and

look ahead to future prospects for research.

2. Describing the context: Italian LGs

Italian public administration is based on a three-level structure: national government,

regional governments (20) and LGs (110 provinces and 8,092 municipalities). The vast

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BS of

Italian local

governments