Drivers and risk factors of German local financial sustainability focusing on adjusted income
| Published date | 01 March 2024 |
| DOI | http://doi.org/10.1177/00208523221143289 |
| Author | Markus Frintrup,Dennis Hilgers |
| Date | 01 March 2024 |
Drivers and risk factors of
German local financial
sustainability focusing on
adjusted income
Markus Frintrup
Johannes Kepler University Linz, Austria
Dennis Hilgers
Johannes Kepler University Linz, Austria
Abstract
Analysing the financial sustainability of local governments is of great interest, as they
offer a wide range of services and are close to citizens. Various organizations have
pointed out the need to analyse the determinants of financial sustainability, and recent
research has focused on several European countries, using adjusted income as a depend-
ent variable. To fill the research gap in the context of German local governments, we
conduct an empirical analysis with 5 years of data from 363 local governments from
North Rhine–Westphalia to analyse the impact of socio-demographic and financial-eco-
nomic factors on financial sustainability, focusing on the adjusted income. Our results
indicate that financial sustainability is influenced by factors on which the local govern-
ments have no impact or at least only a limited impact. Specifically, the debt level and
the level of population are identified as risk factors, whereas own taxes, rate support
grants and the net cash surplus serve as drivers of financial sustainability.
Points for practitioners
Understanding the determinants of financial sustainability is important for politicians and
public managers in order to improve their risk management and decision-making pro-
cesses and to prevent future sustainability problems. This paper identifies several
socio-demographic and financial-economic determinants of FS, on which the local gov-
ernments have only a limited impact. Considering that the financial sustainability of
Corresponding author:
Markus Frintrup, Johannes Kepler University Linz, Altenberger Straße 69, 4040 Austria.
Email: markus.frintrup@gmx.de
Article
International
Review of
Administrative
Sciences
International Review of Administrative
Sciences
2024, Vol. 90(1) 29–47
© The Author(s) 2023
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/00208523221143289
journals.sagepub.com/home/ras
German local governments in North Rhine–Westphalia largely depends on external fac-
tors might be of great interest for policymakers with regard to future financial crises.
Keywords
Financial sustainability, intergenerational equity, local governments, drivers and risk
factors
Introduction
Local governments (LGs) offer a wide range of services, such as water disposal, energy
supply and cultural entertainment, which affect citizens’lives in a basic way (Gardini and
Grossi, 2018) and are close to citizens (López-Subires et al., 2019). A lack of financial
sustainability (FS) might prevent these entities from delivering their services and
reduce citizens’quality of life (Cuadrado-Ballesteros et al., 2014). Therefore, analysing
LGs’FS is of great interest. Taking into account the recent international financial crisis,
austerity policies, budget cuts in the public sector and financial problems of several gov-
ernments around the world, international bodies have started to pay particular attention to
FS in the public sector (Bisogno et al., 2017; European Union (EU), 2012;
Navarro-Galera et al., 2016).
International bodies such as the EU (2012) and the International Federation of
Accountants (IFAC, 2013) have outlined that demographic and financial–economic
factors have an essential influence on public sustainability, which has also been con-
firmed by relevant public sector research (Navarro-Galera et al., 2021;
Rodríguez-Bolívar et al., 2021). Recent European research on influential factors in
LGs’FS based on the adjusted income focuses mainly on Spain and recently on
England and Italy (for an overview, see Gardini and Grossi, 2018). German literature
mainly analyses FS while focusing on debt grades, net cash surpluses and primary bal-
ances (see e.g. Bogumil et al., 2014; Seuberlich, 2017). In this context, we want tocon-
tribute to relevant research by shedding some light on the financial–economic and
socio-demographic factors that might influence the FS of German LGs in North
Rhine–Westphalia (NRW) based on adjusted income. FS, focusing on the adjusted
income, is a broader concept than considering debts or net cash surplus, as it includes
non-liquid elements like provisions and depreciations and is a measure for intergenera-
tional equity. Using this broader concept, we tend to expand the understanding of the
impact of socio-demographic and financial–economic factors on FS.
Our findings make several contributions. First, our study is the first to analyse the
determinants of FS in the German LG setting, relying on adjusted income. Second, we
reveal an impact of variables on which the LGs have only a limited or no actual influ-
ence. Although bailouts helped LGs to consolidate and to reduce cash credits on an aggre-
gated level, various NRW LGs in structurally weak regions still face financial problems.
Against this backdrop and with regard to expected rising interest rates, which burden the
adjusted income (due to a still persisting high number of LGs’old debts), federal states
30 International Review of Administrative Sciences 90(1)
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