Within the project, we monitor the following indicators of financial stability:

• Basic Balance (2006 - 2013)
• Debt Service (2006 - 2013)
• Total Debt (2009 - 2013)
• Ratio of the obligations at least 60 days overdue to the current revenues (2010 - 2013)
• Immediate liquidity (2006 - 2013)
• Balance of current account (2006 - 2013)
• Balance of capital account (2006 - 2013)
• Overdue financial obligations and current revenue ratio (2006 – 2007, 2012 – 2013)
• Net capital property (2009 - 2013)
• Short term liquidity (2008 - 2013)
• Ratio of the State Housing Development Fund loan to the revenues (2009 - 2013)
• Basic balance per resident (2006 - 2013)
• Total debt per resident (2009 - 2013)
• Net capital property per resident (2009 – 2013)
• Outcome of the financial management per current accounting period per resident (2008 - 2013)

Input financial indicators

For the project, we requested the following data from the towns:

• Current account income (2006 - 2013)
• Capital budget income (2007 - 2013)
• Current budget expenditure (2007 - 2013)
• Capital budget expenditure (2007 - 2013)
• Loans from the State Housing Development Fund (2010 - 2013)
• Overdue financial obligations (2007 – 2008, 2013)
• Obligations at least 60 days overdue (2011 - 2013)
• Non – current asset (2007 - 2013)
• Short-term receivables (2009 - 2013)
• Financial account (2007 - 2013)
• Long term commitments (2007 - 2013)
• Short term liabilities (2007 - 2013)
• Bank loans and assistance (2007 - 2013)
• Population at the beginning of the year (2007 - 2013)
• Expenditure allocated to the repayment of the principal (2007 - 2013)
• Interest payments (2007 - 2013)
• Outcome of the financial management per accounting period (2009 - 2013)

Financial health evaluation

What is financial health?

Financial health of a town, city or a HTU states the degree of the sustainability of the financial management and if it poses a problem for a particular town, city, HTU, or not. Financial health is a figure on a scale from 0 (the worst) to 6 (the best), regardless of the year, and is counted as a combination of five selected indicators of financial stability: total debt, debt service, obligations at least 60 days overdue, immediate liquidity and basic balance.

Overall score of a town or a HTU

Overall score of the financial health of a town/HTU is counted as a weighted average of the scores for each of the five factors: total debt, debt service, obligations at least 60 days overdue, immediate liquidity and basic balance. All the factors, except the first one, have a value equal to 1, and the first one – total debt – has a value of 2. To count the score of these five factors, we employed a different method from the one we used to count the indicators of the financial stability. The process of calculation is derived from the score of the indicators of the financial stability.

Factors of the financial health

Total debt

The score for the total debt in the context of the financial health is equal to the score of the total debt indicator of financial stability for the last available year.

Debt service

The score for the debt service in the context of the financial health is counted in two steps. In the first step, we count the weighted average of the values for the debt service for the last available year and the preceding three years, with values of 4, 3, 2, and 1. If the score for any of these years is unavailable, the given year is disregarded. In the second step, we count the score, on the interval from 0 to 6, of the average value of the debt service by using the same method as for the calculation of the score of the ‘debt service’ indicator of the financial stability.

Obligations at least 60 days overdue

The score for the indicator ‘obligations at least 60 days overdue’ in the context of the financial health is counted as a weighted average of the score of the same indicator in the context of the financial stability.

Immediate liquidity

The score for the ‘immediate liquidity’ in the context of the financial health is counted as a weighted average of the same indicator in the context of financial stability.

Basic balance

The score for the indicator ‘basic balance’ in the context of financial health is counted in two steps. In the first step, we counted a weighted average of the values of the basic balance. In the second step, for the average value of the basic balance, we count the score on the interval from 0 to 6, by using the same method as for the calculation of the score of the ‘basic balance’ indicator of the financial stability.

Indicators of the financial stability

The main indicators

Basic balance

The basic balance of a town (HTU) is counted as (current revenue + capital revenue – current expenditure - capital expenditure) / (current revenue + capital revenue). The indicator shows, if the municipality was in surplus, or in deficit. While regarding the current and capital account as a whole. It shows, whether the local government was able to cover its current expenditure (functioning of the municipality) and its capital expenditure (property enhancement) from its current revenue (such as tax revenues) and capital revenues (such as sale of property). If the basic balance of a town is lower or equal to -15%, it receives the score of 0. As the basic balance improves, and the risk for the town is reduced, the score linearly increases. When the basic balance reaches 0%, the score is equal to 3 (mid-range), and with a value equal or higher than +15%, the score is 6. Therefore, if the basic balance is positive, the town receives a score higher than 3, otherwise the score is in the lower half of the interval.

Debt service

Debt service of a town (HTU) is calculated as (principal payment + interest payment) / (current revenue for the preceding year). The indicator shows the amount of the town’s expenditure regarding the managing of its debt. According to the law, the expenditure for the principal payment and the interest payment does not include their early repayment. It is possible that some towns count in the early repayment of the debts, they can therefore appear in the expenditure for the principal and interest payment, and consequently, in the debt service. Our calculated debt service therefore cannot be fully identified by the legal definition, and should be considered as an approximation of the legal criterion. Note: the legal limit is 25%; it a town passes the limit, it cannot receive other repayable funds. If a town’s debt service (HTU) is equal to 0, it receives the score of 6. As the debt services increases and the risk for the town grows, the score linearly decreases. If the debt service reaches 25%, the score equals to 3 (mid-range), and with a value equal or higher than 50%, the score is 0.

Total debt

The data on the total debt of the towns and HTUs, starting with the year 2012, are taken from the Ministry of Finance. The debt is based on the § 17 section 8) Act 583/2004 of the Journal of Laws (it does not include obligations from loans provided by the former state funds and the State Housing Development Fund, as well as the obligations from repayable funds received for the pre-financing of the EU funds). The debt is shown in proportion to the current revenues for the preceding year, and according to the law, it should not exceed the level of 60%. The data on the compliance with the legal debt criterion are not available for years 2006-2011 (The Ministry of Finance does not have the data on the repayable funds received for pre-financing of the EU funds for the given period). We approximated the total debt of the towns (HTUs) upon the available data as (bank loans and assistance + long-term commitments – loans from the SHDF) / (current revenue for the preceding year). Since we were not able to clean the calculated debt of the commitments taken to pre-finance the EU funds, we cannot come to conclusions by comparing the debt to the legal 60% limit. The debt that we monitored between the years 2006-2011, shows the level of commitments that the towns (HTUs) had, with a single conclusion – the bigger they are, the greater is the potential risk of the indebtedness for the towns (HTUs). Warning: the presented debt does not have to include the overall indebtedness of a town (HTU), assuming they “hide” their debts through subsidiary companies, PPP projects or supplier credit. If the total debt of a town (HTU) reaches 0%, it is given the score equal to 6. As the debt grows, the given score linearly decreases, given that the risk for the town (HTU) increases. When the debt reaches 60%, the score is equal to 3 (mid-range) and when it reaches the value equal or higher than 120%, it receives the score of 0.

Obligations at least 60 days overdue in proportion to the current revenue

The amount of the obligations at least 60 days overdue is calculated as (outstanding obligations at least 60 days overdue) / (current revenue for the preceding year). If a town (HTU) did not cover a recognized obligation within 60 days since its due date, it fulfills one of the two conditions for the compulsory recovery regime proposal. INEKO cannot guarantee, that the data provided by the towns (HTUs) correspond with the legal definition of the criterion, and therefore, this indicator needs to be regarded only as an approximation of the legal criterion. If the amount of the obligation at least 60 days overdue is equal to 0 euro or 0%, it is given the score of 6. If the amount of these obligations in proportion to the income reaches a value between 0% and 3%, it is given the score between 3 and 0 (linearly), and if the amount is equal or higher than 3%, the score is 0.

Immediate liquidity

Immediate liquidity of a town (HTU) is calculated as (financial accounts) / (short-terms liabilities). The indicator shows to what extend are the available resources on the financial accounts sufficient for the repayment of the short-term liabilities. If the town’s (HTU’s) immediate liquidity is equal to 0%, it is given the score of 0. As the immediate liquidity grows, the score linearly increases due to the decreasing risk for the town (HTU). When the immediate liquidity reaches the value of 100%, the score is equal to 3 (mid-range), and with the value equal or higher than 200%, it is given the value of 6. In other words, if the amount of the town’s resources in its financial accounts is higher than the level of its short-term liabilities, it is given a score higher than 3 (according to the amount of the ratio). Otherwise the given score is from the bottom half of the scale.

Other indicators

Current account balance

Town’s (HTU’s) current account balance is counted as (current revenue - current expenditure) / (current revenue). The indicator shows, if a municipality’s economy is in surplus, or in deficit regarding the current account. It shows, if a municipality is able to cover its regular expenses (functioning of the municipality) from its current revenue (such as tax income).

Capital account balance

Capital account balance of a town (HTU) is counted as (capital income - capital expenditure) / (capital income). The indicator shows, if a municipality’s economy is in surplus, or in deficit, regarding the capital account. It shows if a municipality is able to cover its capital expenditure (property enhancement) from its own capital revenues (such as sale of property).

Overdue obligations in proportion to current revenue

A ratio of the amount of overdue obligations of a town (HTU) to the revenues is calculated as (overdue obligations) / (current revenue for the preceding year). If the overall amount of the overdue obligation of a town (HTU) exceeds 15% of its actual current revenue from the preceding fiscal year, it fulfills one of the conditions for the compulsory recovery program proposal. INEKO cannot guarantee, that the data provided by the towns (HTUs) correspond with the legal definition of the criterion, and therefore, this indicator needs to be regarded only as an approximation of the legal criterion.

Net assets

Net assets of a town (HTU) for the years 2006 - 2011 is calculated as (non-current assets + financial accounts - (bank loans and assistance + long-term commitments - State Housing Development Fund loans)) / (current revenue for the preceding year). Since 2012, there is available data on the amount of the commitments from repayable funds received for the pre-financing of the EU funds that are not to be counted in the total debt of the towns (HTUs). Therefore, since 2012, we calculate the net assets of a town (HTU) as (non-current assets + financial accounts - (bank loans and assistance + long-term commitments - State Housing Development Fund loans - commitment from the pre-financing of the EU funds)) / (current revenue for the preceding year). Indicator shows the amount of the assets of a municipality (after it was cleaned of the indebtedness) in proportion to its annual current revenue.

Quick ratio

Quick ratio of a town (HTU) is calculated as (financial account + short-term receivables) / (short-term liabilities). The indicators shows to what extend are the available liquid assets sufficient for the payment of the short-term liabilities. Besides the financial account resources, liquid assets include the total sum of the short-term liabilities of the municipalities.

State Housing Development Fund loans per revenues

The amount of the loans from the SHDF in proportion to the revenues is calculated as (SHDF loan) / (current revenue for the preceding year), when the SHDF loans include the obligations derived from the interest.

Indicators per resident

Basic balance per resident

Basic balance of a town in proportion to 1 resident is calculated as (current revenue + capital revenue – current expenditure – capital expenditure) / (number of population at the beginning of the year). The basic balance shows, if the municipality is in surplus, of in deficit, regarding the capital and the current account together as a whole. It shows the ability of the municipality to cover its current expenditure (the functioning of the municipality) and capital expenditure (property enhancement) from its current revenue (tax income) and capital revenue (property sale).

Total debt per resident

The debt of a town in proportion to 1 resident is calculated for the period 2006 – 2011 as (bank loans and assistance + long-term commitments – SHDF loans) / (number of population at the beginning of the year). Starting with the year 2012, it is calculated from the data from the Ministry of Finance on the total debt of the towns (HTUs) in proportion to the current revenues for the preceding year (the data is then recalculated per one resident).

Net assets per resident

Net assets of a town calculated per resident for the period 2006 – 2011 are calculated as (non-current assets + financial accounts - (bank loans and assistance + long-term commitments - loans from the SHDF)) / (population at the beginning of the year). The data on the amount of the obligations from the repayable funds received for pre-financing of the EU funds are available only from 2012. They should not be included in the total debt of the town (HTU). Therefore, since 2012, the net assets of a town per 1 resident are calculated as (non-current assets + financial accounts – (bank loans and assistance + long-term commitments – SHDF loans – obligations from the pre-financing of the EU funds)) / (population at the beginning of the year). The indicator shows the amount of the assets of a municipality (after it was cleaned of the indebtedness) per 1 resident.

Profit per residen

A town’s (HTU’s) economic result for a current accounting period per 1 citizen is calculated as (the economic result for a current accounting period) / (population at the beginning of the year).

Input financial indicators

Revenues and expenditures

Current budget revenues

Revenues of the current budget of a town (HTU) per a calendar year. That is, the actually achieved (not budgetary) revenues and data incorporating also budgetary organizations within the scope of a municipality (HTU). The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Capital budget revenues

Revenues of the capital budget of a town (HTU) per one calendar year. That is, the actually achieved (not budgetary) revenues and data incorporating also budgetary organizations within the scope of a municipality (HTU). The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Current budget expenditure

Expenditure from the current budget of a town (HTU) per one calendar year. That is, the actually achieved (not budgetary) revenues and data incorporating also budgetary organizations within the scope of a municipality (HTU). The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Capital budget expenditure

Expenditure from the capital budget of a town (HTU) per one calendar year. That is, the actually achieved (not budgetary) revenues and data incorporating also budgetary organizations within the scope of a municipality (HTU). The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Obligations and receivables

Overdue obligations

The total amount of a town’s (HTU’s) obligations after their due date. The data also include budgetary organizations within the scope of the given town (HTU). It involves the state of the obligations as per December 31 of a given year. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Obligations at least 60 days overdue

The total amount of the town’s (HTU’s) obligations at least 60 days overdue. The data also include the budgetary organizations within the scope of the given town (HTU). It involves the state of the obligations as per December 31 of a given year. The indicator is monitored since the year 2010, the sums are in euro. Note: if a town (HTU) did not cover a recognized obligation within 60 days since its due date, it fulfills one of the conditions for the compulsory recovery regime proposal. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Short-term receivables

The total amount of the short-term receivables of a town (HTU). The data also include budgetary organizations within the scope of a town (HTU). It involves the state of the obligations as per December 31 of a given year. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Long-term liabilities

The total amount of the long-term liabilities of a town (HTU). It involves the state of the liabilities as per December 31 of a given year. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Short-term liabilities

The total amount of the short-term liabilities of a town (HTU). It involves the state of the liabilities as per December 31 of a given year. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Loans and accounts

State Housing Development Fund loan

The total amount of the loans of a town (HTU) from the SHDF (including the interest obligations). The data also include budgetary organizations within the scope of a town (HTU). The indicator is monitored since the year 2009, all sums are in euro.

Non-current assets

The total amount of the non-current assets of a town (HTU). It involves the state as per December 31 of a given year. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Financial accounts

The total amount of the financial account resources of a town (HTU). It involves the state as per December 31 of a given year. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Bank loans and assistance

The total amount of the bank loans and assistance received by a town (HTU). It involves the state as per December 31 of a given year. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Principal repayments

The total amount of a town’s (HTU’s) expenses for the repayment of the principal. The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Interest payments

The total amount of the interest payments of a town (HTU). The amounts are in euro, data from before 2009 were recalculated at the rate 1 euro = 30,126 SKK.

Other

Population at the beginning of the year

Number of the population of a town (HTU) as per January 1 of a given year.

Profit

Town’s (HTU’s) economic result per current accounting period (calendar year). The data also include budgetary organizations within the scope of a town (HTU). The indicator is shown since 2008, because until 2007 there was a different accounting process, therefore the data would be incomparable. The sums are in euro, figures from before 2008 were calculated at a rate 1 euro = 30,126 SKK.