The effects of poor financial information systems on the long term sustainability of local public services. Empirical evidence from the Catalan Municipalities

Eugeni Garcia Alegre and Guillem López Casasnovas

Working Papers, Research Center on Health and Economics from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In this paper we describe the existence of financial illusion in public accounting and we comment on its effects for the future sustainability of local public services. We relate these features to the lack of incentives amongst public managers for improving the financial reporting and thus management of public assets. Financial illusion pays off for politicians and managers since it allows for larger public expenditure increases and managerial slack, these being arguments in their utility functions. This preference is strengthen by the short time perspective of politically appointed public managers. Both factors run against public accountability. This hypothesis is tested for Spain by using an unique sample. We take data from around forty Catalan local authorities with population above 20,000 for the financial years 1993-98. We build this data basis from the Catalan Auditing Office Reports in a way that it can be linked to some other local social and economic variables in order to test our assumptions. The results confirm that there is a statistical relationship between the financial illusion index (FI as constructed in the paper) and higher current expenditure. This reflects on important overruns and increases of the delay in paying suppliers, as well as on a higher difficulties to face capital finance. Mechanisms for FI creation have to do among other factors, with delays in paying suppliers (and thereafter higher future financial costs per unit of service), no adequate provision for bad debts and lack of appropriate capital funding either for reposition or for new equipments. For this, it is crucial to monitor the way in which capital transfers are accounted in local public sheet balances. As a result, for most of the Municipalities we analyse, the funds for guaranteeing continuity and sustainability of public services provision are today at risk. Given managerial incentives at present in public institutions, we conclude that public regulation recently enforced for assuring better information systems in local public management may not be enough to change the current state of affairs.

Keywords: Public management; financial information systems; financial illusion; and Spanish local authorities (search for similar items in EconPapers)
JEL-codes: H72 H74 H81 M14 (search for similar items in EconPapers)
Date: 2004-04
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-ure
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Citations: View citations in EconPapers (1)

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Working Paper: The effects of poor financial information systems on the long term sustainability of local public services. Empirical evidence from the Catalan Municipalities (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfses:746

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