A financial condition index for Nova Scotia municipalities.

• Author: Mercer, Timothy

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, legally, "creatures" of the provinces, the need for reliable and consistent financial information at the provincial level of government is essential to 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, in the fall of 1995, the Nova Scotia Department of Municipal Affairs undertook a research study to establish a single comprehensive index by which it could compare the financial health of various local governments and monitor the condition of specified municipalities over time.

Identifying Potential Indicators

In developing this index, examples from various jurisdictions were reviewed to ensure that the wheel was not being reinvented. In Canada, with the exception of the Province of Saskatchewan, existing indicators tended to focus almost exclusively 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 to 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 on simplicity of use contradicted Nova Scotia's goal of establishing a comprehensive 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 complexity.

The first step towards realizing this end was the identification of potential indicators. The goal was to develop a truly comprehensive list and then eliminate those which were deemed to be irrelevant or not susceptible to quantitative measurement. More than 100 measures of financial condition were identified and categorized initially as revenue and expenditure, taxation, debt burden, economic, or service-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 data at the municipal...