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E. Padovani© 5/2016
Emanuele PADOVANIDepartment of Management, University of BolognaItaly
Alexander HEICHLINGEREuropean Institute of Public AdministrationThe Netherlands and Spain
MEASURING AND COMPARING CITIES’ FINANCIAL HEALTH ACROSS EU COUNTRIES
IJPA Symposium – 7° Azienda Pubblica WSDEMS – CED4, University of Palermo
Palermo, Italy, 25-27 May 2016
E. Padovani© 5/2016
WHY – Context International researchagenda
➥ Financial focus of NPM: “accounting for the cities” research agenda (Lapsley 2010)
➥ Lenders’ credit policy for city governments’ risk premium is based on disclosure and comparability (Bastida et al. 2014)
➥ Increasing % of GDP produced in metropolitan areas => role of city governments and their performance => need of comparative measurement (World Bank and United Cities and Local Government, 2008 )
➥ Financial focus of NPM: comparative public accounting (Caperchione & Mussari 2002; Caperchione & Lapsley 2011 )
E. Padovani© 5/2016
WHY – Context EU fiscal policies
➥ European Public Sector Accounting Standards (EPSAS) by early 2020 (within “Six Pack”)
➥ EPSAS task force’s call for specific attention at the regional and local level (Eurostat, 2015)
➥ International shift: different accounting systems and levelof maturity of accrual (in EU: E&Y, 2012; PwC, 2014)
Facilitating accountability of policymakers and public managers Supporting the access of financial markets Improving efficiency and effectiveness
E. Padovani© 5/2016
WHAT – Objective
International research agenda EU fiscal policies
Understanding the limits, weaknesses and opportunities
Providing a standardized approach for international city government’s financial
health comparison
E. Padovani© 5/2016
WHAT – The Four Dilemmas Prior research
Financial Statistics
vsFinancial Reporting
In EU, progressive harmonization process betweenthe two accounting approaches(Heald & Hodges 2015)
When accounting technologiesare transfered from one contextto another they may be altered(Kurunmäki et al. 2010)
The prevalence of one aspect or another is given by political power(Mennicken & Miller 2012) and contributes to values prioritization(Mussari 2014)
Dilemma #1
E. Padovani© 5/2016
WHAT – The Four Dilemmas Prior research
TraditionalAccounting
vsNPM-like Approach
Move of EU countries, in some cases with difficultiess, from cash to accrual (Lapsley et al. 2009; Pina et al 2009; PwC 2014)
Same new accrual accounting, different domestic standards(European Parliament 2015)
New accounting doesn’t fit with managers’ and stakeholders’ requests to take action (Young and Padovani 2012)
Dilemma #2
Poor accrual accounting as it isnot used (Pinnuck and Potter 2009; Pina et al. 2009 )
E. Padovani© 5/2016
WHAT – The Four Dilemmas Prior research
Measuresof Financial
Health in Municipalities
Dilemma #3 Several definitions: “financial
situation”, “fiscal distress”, “financial risk”, “fiscal crisis”, “fiscal strain”... “financial health”
Several dimensions
Several indicators
Several approaches of analysis(Padovani and Scorsone 2011; Pub. Fin. & Manag. 14(1) of 2014)
E. Padovani© 5/2016
WHAT – The Four Dilemmas Prior research
JurisdictionPerimeter and Consolidationof Accounts
Dilemma #4
Externalization of public servicesthrough corporatization, contracting out, public-private partnership and privatization(Torres and Pina 2002; Bovaird2004; Grossi 2007 and 2009; Reichard 2004)
Measuring and managingfinancial health of all entitiesunder the resonsibility of a city government (Grossi 2009; Brusca and Montesinos 2009)
E. Padovani© 5/2016
WHAT – The Four Dilemmas Prior research
Financial Statistics
vsFinancial Reporting
TraditionalAccounting
vsNPM-like Approach
Measuresof Financial
Health in Municipalities
JurisdictionPerimeter and Consolidationof Accounts
E. Padovani© 5/2016
HOW – Methodology Approach
➥ Insights and lessons from a group of CFOs of six EU cities “City Economic and Financial Governance – CEFG” wanting to compare their cities’ financial health
➥ Exploratory study (Stebbins 2001; Reiter 2013; Krueger and Casey 2000)
They comlpy with different princples and rules Different perspectives of financial health Different interpretations of financial management topics Already demonstrated attitude of international comparison
E. Padovani© 5/2016
HOW – Methodology Selection of cases
E. Padovani© 5/2016
HOW – Methodology Managing the CEFG
➥ Subjects of open discussion for comparison/learning:
➥ Meetings & online discussions (June 2014 to December 2015)
Financial management of the key organizational units and actors Budgeting practices Accounting system implemented and used Linkages financial management <-> management control cycle
➥ Reaching conensus in a short span of time (Pollitt 2008) and with heterogeneous settings (Pollitt and Bouckaert, 2004): quasi experiment
➥ After the 2nd meeting, need to “to converge towards a common solution …” (Mussari 2014, 304) to compare financial health
E. Padovani© 5/2016
Findings and Discussion The situation
Use of accrual accounting
Use of multiple accountingsystemsUse of accounting for planning and controlUse of accounting info for subsidiaries
Implemented, used and comparable in two cases only (but with different maturity)Heterogeneity; phenomenon of multiple perspective on financial performanceLong term perspective only in one city, while on average 1 to 3 yrsThe perimeter is flexible and sometimes unknown; accounting information too heterogeneous
E. Padovani© 5/2016
Findings and Discussion Reaching consensus
“Financial Health Template”
Statement of Operating Performance (OP)
Capital Operations:Capital Financial Flows (CF), Capital Creation or Consumption (CC)
Financial Flows (FF)
Cash Statement and Debt:Cash Statement (CS), Pending Payments (PP), Long Term Debt (LD)
E. Padovani© 5/2016
Findings and Discussion Reaching consensus
E. Padovani© 5/2016
Findings and Discussion Reaching consensus
E. Padovani© 5/2016
Findings and Discussion Reaching consensus
E. Padovani© 5/2016
Findings and Discussion Reaching consensus
E. Padovani© 5/2016
Findings and Discussion Reaching consensus
“Financial HealthKPIs”
E. Padovani© 5/2016
Findings and Discussion Reaching consensus
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Financial Statistics
vsFinancial Reporting
TraditionalAccounting
vsNPM-like Approach
Measuresof Financial
Health in Municipalities
JurisdictionPerimeter and Consolidationof Accounts
?
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Financial Statistics
vsFinancial Reporting
TraditionalAccounting
vsNPM-like Approach
Measuresof Financial
Health in Municipalities
JurisdictionPerimeter and Consolidationof Accounts
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Hybridization of accounting reporting languages
Public finance discipline rules refermostly to statistic accounting language, while financial markets require the financial reporting language
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Financial Statistics
vsFinancial Reporting
TraditionalAccounting
vsNPM-like Approach
Measuresof Financial
Health in Municipalities
JurisdictionPerimeter and Consolidationof Accounts
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Hybridization of accounting reporting languages
Accrual accountingdoes not suffice
Public finance discipline rules refermostly to statistic accounting language, while the financial market wants the financial reporting languageManagers and politicians make decisionsand are accountable on the basis of multiple perspectives and accrualaccounting is just one
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Financial Statistics
vsFinancial Reporting
TraditionalAccounting
vsNPM-like Approach
Measuresof Financial
Health in Municipalities
JurisdictionPerimeter and Consolidationof Accounts
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Hybridization of accounting reporting languages
Accrual accountingdoes not suffice
Simplified and multi-time perspective butinconsistent with P&C
Public finance discipline rules refermostly to statistic accounting language, while the financial market wants the financial reporting languageManagers and politicians make decisionsand are accountable on the basis of multiple perspectives and accrualaccounting is just oneThe KPIs selected reflect a good balance between short-term and long-term; thiscontrasts with the prevailing use of acco. system for P&C (short-medium run)
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Financial Statistics
vsFinancial Reporting
TraditionalAccounting
vsNPM-like Approach
Measuresof Financial
Health in Municipalities
JurisdictionPerimeter and Consolidationof Accounts
E. Padovani© 5/2016
CONCLUSIONS & IMPLICATIONS
Hybridization of accounting reporting languages
Accrual accountingdoes not suffice
Simplified and multi-time perspective butinconsistent with P&C
Public finance discipline rules refermostly to statistic accounting language, while the financial market wants the financial reporting languageManagers and politicians make decisionsand are accountable on the basis of multiple perspectives and accrualaccounting is just one
Comparison limited to the legal boundaries of a city government
The KPIs selected reflect a good balance between short-term and long-term; thiscontrasts with the prevailing use of acco. system for P&C (short-medium run)
Differences in administrative contexts, typologies of subsidiaries, types of accounting used, makes any consolidationof accounts unmanageable
E. Padovani© 5/2016
➥ Possibility to meet current market’s needs of comparison with current accounting systems
CONCLUSIONS & IMPLICATIONS
➥ Standardization vs harmonization
➥ International comparisons of different levels of government with the same framework?
➥ Developing datasets of financial information on city governments worldwide