METHODS OF ASSESSING LOCAL GOVERNMENT FINANCIAL CONDITION: A CRITICAL REVIEW

This study is aimed to review and to provide critical review to the methods of assessing the financial condition of local government (LG). Research assessing the financial conditions of LG is relatively new. As a result, there is little agreement about what appropriate methods, procedures, dimensions, and indicators to assess the financial condition of LG. To review the methods, this study utilise the criteria of a good measure (i.e. reliability, validity, and practicality) as a benchmark. The methods reviewed are compared with the criteria. The critical review will identify the strengths and limitations of the methods. The results show that there is no model that satisfies all the attributes of a good measure.Several common weaknesses of the previous methods are involving too many variables; assuming that all dimensions and indicators of the financial condition have equal importance; utilizing non-financial indicator instead of 'financial indicators to assess the financial condition; deriving dimensions and indicators not based on a clear definition of the financial condition; do not testing the reliability and validity of the measure; do not practical; and do not establish key attributes or criteria as guidance. On the other hand, attributes of economy and convenience are always present in all the models. Results of this study provide inputs for scholars, local and central governments, and professional institutions to improve the methods of assessing financial condition of LG. To overcome those weaknesses, this study suggests that the future research should sets up criteria of validity (i.e. face, predictive, convergent, and concurrent validities), reliability (i.e. dimension-level and composite-level reliabilities), and practicality (i.e. interpretability, economy, and convenience). Keywords: financial condition, local government