A Financial Risk Ranking System for Municipal Governments in Pennsylvania

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Abstract

The purpose of this study is to develop a system to assess and rank the financial risk of a municipal government (“municipality”). Financial risk is the likelihood that a municipality will experience financial distress. Financial distress exists when the needs of the citizenry are greater than the resources of the municipality. We operationalize financial risk as a municipality that provided an affirmative answer on the Survey of Financial Condition (SOFC) gathered by the Pennsylvania Department of Community and Economic Development (DCED) between 2007 and 2010. Financial indicators espoused by the DCED are used to determine financial risk, and municipalities are ranked according to this risk. Our model is able to correctly classify up to 99 percent of the municipalities as either at risk of financial distress or not at risk.

Authors

• John M Trussel, University of Tennessee-Chattanooga

• Patricia A. Patrick, Pennsylvania State University