Individual debt ratio as a way of assessing the financial conditions of local government units

Abstract

PURPOSE: The aim of the study is to analyze existing methodological approaches and developments used to assess the financial condition.

DESIGN/METHODOLOGY/APPROACH: The methodology was based on the methods of analysis and logical construction, the basics of descriptive statistics (to determine the phenomenon of debt), as well as the basic approach typical of the heuristic method.

FINDINGS: Despite the development of methods of assessing the financial condition, practice very often confirms that the primary direction of assessing the financial condition is the ability to absorb debt. This approach forces a search for an answer to the question, can the individual debt ratio (IWZ) be a measure that answers the question about the financial condition of local government units?

PRACTICAL IMPLICATIONS: The IDR applied in Poland seems to be an effective instrument for controlling the debt of local government units. The structure of this indicator allows, on the one hand, systemic control of the debt of the entire public finance sector, and, on the other hand, it is flexibly adapted to the specificity and level of affluence of a given entity. Therefore, it is worth promoting such solutions in individual European Union countries as an effective tool for limiting LGU's uncontrolled debt.

ORIGINALITY/VALUE: Results of the study reflect that IDR concerns the possibility of debt service, but it cannot be a measure of financial condition, because in local government units there are liabilities not only classified as debt obligations. The omission of these obligations and their impact on the financial condition makes the information value of IDR imperfect and incomplete. It is difficult to indicate the optimal solution that would fully reflect the current financial condition. It is possible as well as from the point of view of additional workloads, difficult to implement in practice.