Financial Indicators of Bankruptcy Risk in Local Government Entities

The efficiency and stability of a local government can impact the lifestyle of its citizens. While Chapter 9 bankruptcies are not common, when they do occur, they can be disruptive and extremely costly. Scholarly literature on bankruptcy prediction focuses primarily on corporate bankruptcies. Therefore, a gap exists regarding predictors specific to municipal bankruptcies. This non-experimental quantitative study examined the relationship between the financial indicators of those government entities that have declared bankruptcy as compared to financial indicators from similar government entities that have not declared bankruptcy in order to identify possible predictors of bankruptcy. The analysis established that two financial ratios were successful as predictors for bankruptcy. These two predictors are the net asset ratio and the operating ratio. These ratios may be used by local government officials as early indicators of potential problems. In addition, potential lenders may use these ratios to help measure the solvency and stability of local government entities (LGEs). Lastly, the ratios may be used by citizens to better understand and become involved in local government decision making