Accounting for context in assessing the financial sustainability of local governments: are rating agencies' approaches comprehensive enough?

Purpose – This study is motivated by a longstanding problem of “accounting for context” in public sector financial sustainability research, namely, the difficulty of capturing how institutional, legal and intergovernmental dimensions shape local governments (LGs) financial sustainability. Design/methodology/approach – Given that rating agencies consider financial sustainability issues while assessing LGs credit risk, this research investigates the dimensions employed by major international rating agencies in their evaluation processes, analysing their scope relative to those emphasised in scholarly work and in international organisations' and standard setters' guidelines. Findings – On this basis, we develop a conceptual framework combining financial and non-financial dimensions (institutional, legal and intergovernmental) relevant to assessing LGs' financial sustainability, which surfaces and systematises perspectives across three parallel streams – rating agencies, academic literature and international organisations and standard setters. Originality/value – The resulting practice-informed framework constitutes an important contribution, inasmuch as, by systematising existing approaches to LGs financial sustainability, it extends and complements that of rating agencies. In this way, it provides a roadmap for rating analysts, LG managers, regulators, researchers and standard setters to better integrate institutional, legal and intergovernmental dimensions into the assessment, reporting and regulation of LGs financial sustainability.