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Stress test for a Dutch municipality

Kemperink, T.F.J. (2013) Stress test for a Dutch municipality.

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Abstract:Municipalities are currently facing major financial challenges and uncertainties. The retrenchment of the central government and the related decline in revenues for the municipalities, the large and comprehensive decentralizations and the stagnated labor- and house markets have a significant impact on the financial position of municipalities. The municipality X is no exception to these trends and encounters these developments in their businesses. In order to deal with these developments, the municipality outlined control mechanisms in their corporate strategy. The stress test is one of those mechanisms. The municipality is not called by name because of the political sensitivity. That is why the name of the municipality is replaced by a random letter; X. The first chapter provides an overview of the thesis and describes the research conducted. First, the occasion of the subject, the research and the municipality X will be introduced, followed by an explanation of a stress test. The purpose of the stress test is to examine how stress resistant the financial position of the municipality X is and present which room for maneuver in policy and budget there is, now and in the coming years. The central research question in this thesis is based on the definition and purpose of a stress test and is defined as:  How to develop a financial stress test to measure the financial position of a municipality and its ability to coop with stress? A research model is illustrated to outline the steps that are important to answer the research question and the illustrated sub questions. The second chapter gives an overview of the existing literature. Even though the research for financial stress in the public sector is rare, there are some scientific perspectives, which will be presented and illustrated. The two kinds of stress testing emerged out of these perspectives will be further explained in the second chapter. An effort was made to collect all the possible indicators and their variables with the literature research. In chapter three these indicators and variables are defined and emphasized. The actual operationalization is presented in the appendices two and three. The collection of data and the explanation of how to guarantee the reliability and validity of this stress test is described in the remainder of chapter three. The results are presented in chapter four and are based on the financial statements of the municipality X for the years 2008 to 2012. The numbers for het years 2013 to 2016 are forecasted and based on the multi-year budget and other relevant information. These numbers are only a forecast based on expectations and assumptions and therefore not definitive. The results of the stress test show that the financial position of the municipality X is under pressure through a number of important issues. The most important findings are: - The municipality has a relatively high debt position and this will increase in the coming years to a ‘dangerous’ level; - Interest expenses increased due to the increased long-term loans; - The exploitation has fallen sharply in recent years and it is expected that it still fall slightly; - The municipality has a relatively high local tax burden; - The reserves would be markedly reduced in the coming years; - Investment in land development and assets are extensive and financed with long-term loans; - There are major risks related to the land development projects; - There are major risks in scenarios such as the real estate crisis, the decentralizations and the government retrenchments. There are some recommendations made to deal with the mentioned issues. The final chapter critically reviews the results of this study and indicates to what extent the empirical investigations can be conducted to other municipalities and over time. Further investigation and continue improvements are necessary to coop with the developments and changing conditions for municipalities. This study not only proposes a conceptual model for measuring performance in financial terms but also exemplifies its usefulness for both researchers and practitioners. The stress test can serve as a useful tool for controlling the financial position and thereby reducing the risks. It should not only be carried out during crisis years, but as well in prosperous years and become a structural tool to map the financial position.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/63494
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