Evaluating the Validity and Reliability of the Financial Condition Index for Local Governments

Abstract

Understanding the financial condition of local governments is important for public managers and elected officials as they work to align revenues with p ublic demands for services, while maintaining financial solvency. This task becomes even more important when the economic and financial environment, over which local officials have little to no control, is collapsing around them. This article seeks to expand the literature of measuring financial condition of local governments by testing the validity and reliability of the Financial Condition Index (FCI). The FCI is a framework for evaluating financial condition that was initially developed by Groves, Godsey, and Shulman and later applied in US state-level studies by a number of scholars. The results from this article cast serious doubt on the applicability of using the FCI, and the four associated solvency dimensions, as an appropriate methodology for evaluating local government financial condition.