Assessing financial condition of municipalities using taxonomic methods

The goal of this paper is to develop a concept of assessing and comparing financial condition of municipalities (communes) using taxonomic methods and implement this concept into communes of Lower Silesia region in Poland. To analyze financial condition of the municipalities authors proposed 14 financial indicators which fall into four categories: related to incomes (four indicators), related to expenditures (four indicators), related to current balance (two indicators) and related to debt (four indicators). Selection of indicators was based on the revision of the literature, guidelines for municipalities, conducted local and international researches and best practices discussing financial condition of local governments. These indicators were calculated for all Lower Silesia municipalities (169 communes) for the year 2015. In order to group similar municipalities, in terms of financial conditions, authors created rating scale. The scale includes five categories and their qualitative description. Among all indicators, using merit and statistic methods, those were chosen which best show the financial condition of examined objects. Subsequently the degree of similarity was computed based on chosen dissimilarity coefficients. Finally communes were split into ordered clusters that present similar financial condition and assigned to previously prepared rating scale. Developed concept allows to compare financial condition of the municipalities, to draw conclusions about sources of incomes as well as usage of financial resources and potential of development. It is also a very useful indicator for investors.