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

Despite considerable research on the topic, assessing the financial sustainability of local governments (LGs) remains a complex and contested issue. While there is broad consensus that multiple dimensions should be considered when evaluating financial sustainability (Andersen and Mortensen, 2010; Levine et al., 2013), these approaches vary significantly – from basic accounting indicators and financial reporting ratios to qualitative assessments drawn from audit reviews and sophisticated statistical models (Kleine et al., 2003; Honadle et al., 2003; McDonald, 2018; Murray and Dollery, 2005). Additionally, many approaches developed over time are often rooted in national frameworks, which are difficult to compare across borders. There is a lack of literature concerning multi-country analysis (Iacuzzi et al., 2025).

As noted by Padovani et al. (2018), there is still no universally accepted framework for measuring LGs’ financial sustainability, particularly for cross-country comparisons. Although certain key indicators of municipal financial distress are widely recognised (Groves et al., 2003; Hendrick, 2011; Jacob and Hendrick, 2012), and efforts have been made to harmonise measurement across different accounting systems (Padovani et al., 2018, 2021), these remain insufficient to grasp the different contexts where LGs operate.

As the fiscal health literature (e.g. Maher et al., 2023; McDonald and Maher, 2020; Gomez et al., 2024) shows, LGs’ underlying financial condition is multi-dimensional and shaped by institutional and socio-economic factors. Administrative traditions (Jugl, 2025), institutional and legal structures (Ladner et al., 2023; Kuhlmann, 2010) and institutional contexts vary widely (Kuhlmann and Wollmann, 2019), creating a complex web of interdependencies among local, central and other levels of government. For example, the degree of local autonomy – a critical factor in understanding financial sustainability – cannot be fully captured by financial data alone, demanding more nuanced, qualitative approaches (Ladner et al., 2016). From this derives a first challenge/literature gap: “accounting for context” remains unresolved.

At the same time, LGs’ context has been addressed through parallel streams beyond academic research. One comes from standards and guidelines, developed by international organisations and accounting standard setters. A second comes from risk analysis practice, especially from rating agencies, where credit assessments draw on both financial data and the broader institutional and fiscal setting. Given that these three streams address LGs’ financial sustainability for different purposes – scholarly explanation, financial reporting transparency and comparability and credit risk assessment – a dialogue among them should be considered for identifying where relevant contextual dimensions are omitted, where the approaches offer complementary insights and where apparently similar terms refer to different constructs. An explicit conceptual alignment leads to an unambiguous mapping of the definitions, assumptions, units of analysis and measurement choices adopted by each stream.

International organisations prescribe standards to enhance cross-country comparability and treat context as disclosed assumptions and constraints rather than something to be evaluated (Schmidthuber et al., 2022). Because implementation is often adapted to local contexts, comparability depends on clarifying how context shapes both the application of standards and the resulting information (Manes Rossi et al., 2016; Polzer et al., 2022).

Although rating agencies routinely perform international assessments of LGs' creditworthiness, they have received remarkably limited attention in research on LG financial sustainability and financial resilience. Credit ratings matter for LGs’ financial sustainability because they reflect debt-service risk and influence borrowing costs (e.g. Johnson and Kriz, 2005; Benson and Marks, 2014; Bastida et al., 2017). Nevertheless, public sector financial management scholarship has rarely examined rating agencies as institutional actors and producers of evaluative frameworks, and it may be questioned how they approach the analysis of specific contextual features. From this derives our second challenge/literature gap: the understanding of which LGs’ contextual conditions rating agencies consider in cross-country assessments.

Thus, the current paper addresses a dual challenge in LGs’ financial sustainability: the longstanding problem of “accounting for context” emphasised in research, and the practice-defined concern with how comprehensively major rating agencies incorporate institutional, legal and intergovernmental conditions when conducting international comparisons of LGs’ financial sustainability. This calls for the development of a more robust, context-sensitive conceptualisation of LGs’ financial sustainability, starting with an assessment of rating agencies' approaches against the literature and the guidelines of international organisations and standard setters. Accounting for context in assessing LGs’ financial sustainability will not only enhance practiced methodologies, but also add to the literature, offering an important theoretical contribution.

Thus, this study answers the following research questions (RQs):

The study makes a twofold contribution. First, it brings rating agencies into public sector financial management research as consequential but insufficiently examined actors in the construction, measurement and governance of LGs’ financial sustainability. In doing so, the paper extends a literature that has predominantly examined financial sustainability and resilience through the perspectives of governments, accounting systems, standard setters and academic models, while devoting comparatively limited attention to the organisations that translate fiscal and contextual information into internationally comparable credit judgements.

Second, the study develops a practice-informed framework that connects three streams that have largely evolved in parallel: rating-agency methodologies, academic research and international organisation and standard-setter guidance. Its originality lies not simply in combining existing lists of contextual factors, but in illuminating the criteria selected by different institutional actors, and how they operationalise the context of LGs’ financial sustainability for different purposes. The framework therefore identifies areas of convergence, divergence and omission across the three streams and provides a basis for a broader research agenda on rating agencies within public sector and financial management.

The originality of the study stems from building a practice-informed framework that bridges theory and application. Its major contribution is combining contextual elements that have been discussed across academic research, rating-agency criteria and international/standard-setter guidance. The framework developed is intended as a conceptual and integrative mapping of contextual dimensions (other than financial, incorporating institutional, legal and intergovernmental matters) relevant to assessing LGs’ financial sustainability in a comparative-international perspective. By capturing the institutional, legal and intergovernmental setting within which LGs operate, these dimensions can be integrated into models of financial sustainability and reporting across countries, in line with calls for research that informs standard-setting and regulation (Mechanick and Waymire, 2023; Davidyan and Waymire, 2025). Our research particularly contributes by identifying and structuring the dimensions treated differently across the three streams, and by highlighting where academic and international organisation/standard-setter perspectives point to additional or alternative elements. This yields an integrative framework that helps connect communities currently working in parallel. In doing so, it responds to Ferry et al.’s (2019) and Tucker et al.’s (2020) calls to narrow the research–practice gap in public sector accounting and to “take a stand” on practical relevance, offering implications for LGs’ managers, regulators and the agencies themselves.

The remainder of the paper is organised as follows: Section 2 clarifies the link between rating agencies, financial sustainability and context assessment considered in the current study; Section 3 outlines the research design; Section 4 presents the findings regarding the dimensions and criteria adopted by the rating agencies (4.1), those identified in the literature review (4.2) and those included in the guidelines of international organisations and standard setters (4.3); Section 5 illustrates and discusses the proposed framework, derived from a cross-comparative analysis. Finally, Section 6 concludes the paper, highlighting its originality, theoretical contribution and practical value.

Financial sustainability in LGs can be defined as the ability to fund current service provision and meet financial obligations (including debt service) without compromising the capacity to meet future commitments (e.g. Bisogno et al., 2024; Rodríguez Bolívar et al., 2018). Closely related, but conceptually distinct, is the notion of financial resilience, which focuses on how LGs anticipate, absorb and adapt to fiscal shocks under austerity and crisis conditions (Barbera et al., 2017, 2020, 2023; Steccolini et al., 2017; Ahrens and Ferry, 2020).

Financial sustainability is connected to credit ratings because a core component of sustainability concerns solvency and the ability to service debt over time – precisely the dimension that capital markets price when LGs borrow (Johnson and Kriz, 2005; Benson and Marks, 2014; Bastida et al., 2017; Rodríguez Bolívar et al., 2018). Credit ratings issued by rating agencies are standardised judgements (on a rating scale) on the creditworthiness of an issuer or a specific bond/debt, with the aim of assessing credit risk (e.g. White, 2010). However, rating agencies also operate as a market coordination device, for example, through watch-listing and monitoring, which can shape expectations and issuer behaviour (Boot et al., 2006). To form their assessment, rating agencies consider qualitative, context-specific factors – such as the strength of the local economy, the quality of local management and the political/institutional environment (Martin, 1982; Landry and McCarty, 2007; Spiotto, 2012). They also combine other qualitative information, such as managerial ability, which is reflected in credit risk assessments and relates to spreads/financing costs (Bonsall et al., 2016), while the comparability of financial information reduces uncertainty and is associated with lower spreads and better debt-market outcomes (Kim et al., 2013). Finally, rating agencies are also connected to political economy arguments that reliance on debt markets can place democratic decision-making under market discipline, making the “context” embedded in credit assessments consequential for public governance debates (e.g. Streeck, 2011).

Furthermore, financial resilience is considered in rating agencies' assessments, as they do not look only at LGs’ current conditions but also take into account the entity's exposure to future risks and its capacity to deal with potential crises (Ahrens and Ferry, 2020; Barbera et al., 2020). Such a capacity also affects the credit risk. In fact, local fiscal decisions affect LGs’ borrowing costs (Capeci, 1994), and climate risk raises issuance costs in long-term municipal bonds – an effect that is stronger among lower-rated issuers (Painter, 2020). However, while markets already care about shock vulnerability, ratings may still under-capture some of it unless agencies add an explicit resilience lens (Tran and Uzmanoglu, 2024).

Moreover, rating agencies rate governments worldwide on a single scale and therefore conduct cross-country assessments. In doing so, they interpret each LG's profile within its specific context, and it may be questioned how they approach and weigh contextual, country-specific factors. In Italy, for example, rating agencies such as Moody’s Ratings (2024) upgraded the ratings of several regional and LGs in 2024, as stronger fiscal rules, tighter central oversight and access to EU recovery funds supported sustained improvements in operating balances and debt reduction. In France, by contrast, the 2025 Finance Law introduced measures that reduced local revenue flexibility and increased expenditure pressures (e.g. a cap on shared VAT, new levies and higher pension contributions). Consistent with their focus on debt-service capacity, Moody’s Ratings (2025) downgraded some regions, even where financial management remained sound. This illustrates that ratings embed country-level policy and institutional shocks, so similar ratings across countries may reflect different underlying fiscal contexts.

The evidence on rating agencies suggests that contextual dimensions are often captured only imperfectly, and sometimes in biased or inconsistent ways. In their study on credit rating agencies and the Australian state governments, Hayward and Salvaris (1994) argue that the criteria used are “rubbery and inappropriate” and applied inconsistently, showing how the political values of the agencies influence the assessment of government performance and thereby problematise the use (and abuse) of contextual measures. Laulajainen (1999), in their work on subnational credit ratings, discusses how such ratings are embedded in a “cultural haze”: the implicit weight assigned to evaluative principles varies according to the institutional context and social values, suggesting that the treatment of context by credit rating agencies is neither neutral nor fully transparent. Ioannou et al. (2021) show empirically that Moody's Ratings, on average, assigns higher ratings to subnational governments that host a financial centre, even when fundamentals are similar, revealing a systematic context-related bias, hence questioning the fairness and consistency of rating methodologies. More recently, Columbano (2025) shows that the use of government accounting information and indicators in sovereign rating methodologies is partial and selective, raising doubts about the consistency between standards/guidelines and actual rating practice.

This study adopts a qualitative, multi-step research design to develop a conceptual framework, combining financial and non-financial (institutional, legal and intergovernmental) dimensions relevant to assessing LGs’ financial sustainability, which translates and systematises these dimensions across three parallel streams.

The pathway unfolds the following three main steps:

1. Step 1 – Practitioner-grounded elements (rating agencies' practice). In this step, we analyse the methodologies used by major international rating agencies for LGs to identify the variables they consider and the underlying non-financial dimensions implicit in those assessments (e.g. institutional frameworks, intergovernmental arrangements, governance and management). Specifically, we analyse the methodologies published by Moody's Ratings, S&P Global Ratings and Fitch Ratings. These are the three dominant global rating agencies, often referred to as the “Big Three”, and occupy a central position in international financial markets (Alsakka and ap Gwilym, 2010; Ramírez-Rondán et al., 2023). Their methodologies are publicly available and regularly updated (Marandola, 2021), making them particularly suitable for systematic, cross-country comparisons.

2. Step 2 – Dimensions and variables cross-comparison and complement from authoritative sources, comprising (2a) literature review and (2b) international organisations' guidelines.

   • In Step 2a, we synthesise scholarly contributions from peer-reviewed literature on institutional, legal and intergovernmental arrangements related to LGs’ management.

   • In Step 2b, we analyse the identified dimensions/criteria considered by the International Public Sector Accounting Standards Board – IPSASB (namely the Recommended Practice Guideline 1: Reporting on the Long-Term Sustainability of an Entity's Finances), the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF) and the European Central Bank (ECB). These entities are widely recognised as either public sector accounting standard setters or oversight organisations that provide cross-country comparable frameworks and indicators on public finances (Caruana et al., 2019; Bisogno et al., 2024; Scannell and Tawiah, 2024).

Caruana et al. (2019) identify the IPSASB RPG 1 as a conceptual reference point for long-term financial sustainability in the public sector. Barta (2015) critically discusses how the notion of fiscal sustainability has been constructed and operationalised in supranational policy frameworks, showing the central role of the benchmarks and analytical tools developed by the European Commission and the IMF (and, to a lesser extent, the OECD) in shaping reforms of European welfare states. Moreover, studies on fiscal sustainability in European countries (e.g., Paniagua et al., 2017) show that the indicators and time horizons employed are those derived from or discussed by the IMF, the OECD, and the ECB, reinforcing the view that these organisations define the dominant practice for analysing fiscal sustainability.

1. Step 3 – Framework development. In this step, we integrate and revise the rating-agency variables (Step 1) with results from the literature and guidelines from international entities (Step 2) to specify a coherent framework.

Table 1 summarises the documents analysed in Steps 1 and 2b.

To our knowledge, no existing study systematically starts from rating agencies' methodologies, explicitly triangulates them with both academic literature and international organisations' guidelines, and then develops a unified conceptual framework to assess LGs’ financial sustainability in an international perspective. Yet, the extrapolation of abstract dimensions from the literature into operational frameworks has been a common practice.

As depicted in Table 2, which reviews studies employing the components related to this research design, the study by Cabaleiro et al. (2012) is the closest precedent. These authors base their method for assessing municipal financial health on both the Canadian Institute of Chartered Accountants' (CICA) framework and the Governmental Accounting Standards Board's (GASB) guidance, as international frameworks such as IPSASB were not available at that time; they also draw on Fitch Ratings' methodology for local and regional governments as a background reference. They conceptualise municipal financial health as a multidimensional construct, influenced by dependence on higher levels of government and by institutional arrangements; also, they develop a Standardized Financial Health Index. However, their model does not treat rating agencies as the primary conceptual anchor, and does not explicitly unpack non-financial institutional, legal and intergovernmental dimensions or map them against international public sector standards.

Other contributions employ specific components of the research design applied in the present study. Zafra-Gómez et al. (2008) anchor their model of the financial condition of Spanish municipalities in the literature and standards such as CICA and GASB that operationalise those ideas, showing that LGs’ financial positions cannot be understood without considering service quality and the socioeconomic environment. Lara-Rubio et al. (2017) use the classifications of S&P Global and Moody's Ratings as one of the inputs for selecting explanatory variables in their empirical model of credit risk, demonstrating that macro-level and contextual variables related to the broader environment materially affect LGs’ financial trajectories. Coy and Dixon (2004) derive disclosure items for the Public Accountability Index for New Zealand universities from existing reporting practices and regulatory requirements before theorising them. Hooks et al. (2012) construct an index of best-practice performance reporting for Malaysian local authorities, starting from what national and international best-practice guidance expects to be reported. Galane et al. (2025) likewise conduct a systematic and integrative review of frameworks and standards when developing their compliance index for South African state-owned enterprises. More generally, Arianpoor and Borhani (2025) demonstrate how International Financial Reporting Standards (IFRS) can serve as a reference point when designing conceptual frameworks to examine the interaction between blockchain technology and the audit process.

However, none of these works integrate multiple authoritative institutional sources, rating-agency methodologies and scholarly literature into a unified mapping of financial and non-financial institutional, legal and intergovernmental dimensions, as is undertaken in the present study. Therefore, our research design can be viewed as a coherent synthesis and extension of practices that have been applied separately in different strands of the literature to date.

In line with recommendations for team-based qualitative research (Guest and MacQueen, 2008), Steps 1 and 2b were conducted by Researchers A and B, and Step 2a was conducted by Researchers C and D independently, ensuring that the identification of dimensions in each step was not influenced by the findings of the other. This choice follows Miles et al. (2014), who underline the value of independent coding for reducing researcher-driven bias, and Krippendorff (2019), who emphasise the importance of independent analytical work for strengthening the reliability and trustworthiness of qualitative analyses. In both steps, the identification and coding of variables and dimensions were based on a systematic reading of the relevant documents, allowing categories to emerge from the material rather than from a predefined extraction grid, in line with established approaches to inductive document analysis and qualitative coding (Bowen, 2009; Saldaña, 2013). In Step 1, the search implied an overall reading of the reports to find context-related financial risk assessment dimensions and criteria used in the rating agencies' methodologies. From a cross-comparative analysis in Excel files, several dimensions emerged from commonalities.

Step 3 was then carried out collectively by all four researchers through joint discussions and refinement of the emerging framework, thereby implementing investigator triangulation, which is understood as collaborative analysis and consensus-building among multiple researchers to enhance validity and trustworthiness (Denzin, 2009; Guest and MacQueen, 2008; Miles et al., 2014). Divergences were reviewed and resolved through collective discussion until analytic convergence was reached. A key feature of this research design is cross-comparison across sources and researchers.

This section summarises the findings of our analysis, compiling evidence gathered from qualitative content analysis (Hsieh and Shannon, 2005) of rating agencies' reports (Step 1), academic literature (Step 2a) and international organisations and standard setters' guidelines (Step 2b).

The analysis of the methodologies applied by the rating agencies, namely Moody's Ratings, S&P Global and Fitch Ratings, to assess financial risks and sustainability of LGs, enabled the collection of evidence summarised in Table 3, which focuses on contextual dimensions.

All agencies recognise the importance of the macro scenario. Moody's Ratings and S&P Global allocate specific percentages in their assessment grids for this dimension, even though it is broadly assessed.

Regarding the institutional framework and governance issues, for S&P Global, the former embraces formal rules and laws, as well as practices, customs and precedents that shape LGs' institutional arrangements and influence their policies in public finance. Fitch Ratings designates this as the “operational environment,” which is shaped by the rules and circumstances that reflect the wider country-specific context and institutional framework in which the rated issuer operates. Moody's Ratings does not present any particular definition. Even if not explicitly, governance issues are embraced by what the agencies consider the LG institutional framework, inasmuch as issues such as governing powers and responsibilities, tax autonomy and intergovernmental relations are contemplated.

Rules, policies and regulations concerning the accounting and financial reporting system are broadly considered by S&P Global and Fitch Ratings, even if either included in the institutional framework or as “Additive Risk Considerations”; Moody's Ratings does not make any explicit references to those, despite referring to fiscal controls, transparent accounts and in-year monitoring and reporting as included in their institutional framework. None of the agencies specifically refer to either cash versus accrual accounting or the International Public Sector Accounting Standards (IPSAS).

A dimension of assessment central to all agencies addresses the LGs’ risk profile, involving criteria relating to the vulnerability of expenditures and revenue, debt and interest burden, risk mitigants and cash and financial management capacity.

No universally accepted framework currently exists in the literature for assessing LGs’ financial sustainability across countries (Padovani et al., 2018). While financial distress indicators are relatively standardised (Groves et al., 2003; Hendrick, 2011; Jacob and Hendrick, 2012), measurement systems struggle to account for the distinct institutional and administrative contexts in which LGs operate (Padovani et al., 2018, 2021).

Indeed, as prior literature considered in the section above shows, existing empirical models of municipal financial condition and credit risk (e.g. Cabaleiro et al., 2012; Zafra-Gómez et al., 2008; Lara-Rubio et al., 2017) and disclosure-based approaches to performance reporting (e.g. Hooks et al., 2012) only partially incorporate these contextual features, typically treating socio-economic or institutional variables as controls or background conditions rather than as core dimensions of LGs’ financial sustainability. On the other hand, some literature (e.g., Iacuzzi et al., 2025) consistently underscores that LGs’ financial sustainability cannot be understood in isolation from the broader institutional, legal and intergovernmental context. Finally, despite efforts to harmonise financial sustainability measurement tools internationally, there is still a dearth of comparative multi-country studies (Jacob and Hendrick, 2012; Padovani and Scorsone, 2011; Padovani et al., 2021).

Nevertheless, from the literature, as outlined below, it emerges that comparative analyses must consider:

1. Administrative traditions, which define the institutional arrangements and the scope of LGs;

2. Legal constrains, which affect local discretion and define debt management procedures;

3. Accounting systems and adoption of international standards, which influence measurement and comparability;

4. Supervision, auditing and accountability mechanisms, which enforce compliance and transparency; and

5. (De)centralisation and coordination, which structure intergovernmental arrangements and the dependency of LGs from higher levels of government.

Collectively, these dimensions reveal that financial sustainability is not merely a financial condition dependent on LGs' performance on some key financial criteria, but a multidimensional construct embedded within each country's institutional, legal and intergovernmental fabric.

A country's administrative tradition profoundly affects its institutional framework and hence the structure, autonomy and performance of its LGs (Kuhlmann, 2010; Kuhlmann et al., 2025; Ladner et al., 2023). Administrative traditions influence governance patterns, decision-making logics and the implementation of fiscal and accounting systems (Jugl, 2025). Drawing on new institutional theory, Lounsbury (2008) emphasises that shared cultural beliefs and rules shape organisational decision-making and thus affect how financial sustainability is perceived and pursued.

Kuhlmann et al. (2025) propose six distinct European administrative profiles – Continental European Napoleonic, Continental European federal, Nordic, Anglo-Saxon, Central Eastern European and Southern Eastern European – each with differing legalistic traditions, decentralisation levels and LG autonomy. In Napoleonic systems, whether with a centralised administrative structure like in Portugal and Greece or more decentralised like in Italy, a legalistic and hierarchical culture constrains local discretion, while federal systems combine legalistic frameworks with stronger decentralisation and LGs. Nordic, i.e., Scandinavian countries, also have a strong law tradition in unitary, though decentralised states, but combine it with transparency in recruiting and public career systems and the explicit accessibility of the public administrations by citizens. Anglo-Saxon systems stem from a public interest culture and emphasise pragmatism, managerial flexibility and functional responsibility. Central Eastern European systems saw the reestablishment of the rule of law but are still characterised by a socialist cadre administrative heritage within unitary states with strong LGs, whereas Southern Eastern European systems, also transitioning from socialist legacies, display weaker LGs’ administrative capacity and more centralised administrative control. Nevertheless, not every country which would naturally be identified with these models will follow all their characteristics.

Using a different perspective, which includes all countries, not only European ones, Jugl (2025) identifies two underlying dimensions of administrative traditions, namely citizen orientation and structural concentration. These dimensions characterise four possible ideal settings, i.e., extreme and theoretically pure types to which empirical cases can be more or less closely aligned. They are: a “providing public administration” that is structurally concentrated with the (central) state as core player to deliver public services in line with citizens' needs, such as are Denmark, Iceland and the Netherlands; a “liberal public administration”, which is equally oriented towards citizens' needs but much more dispersed structurally to allow for more diversity within administrative and governance practices, such as in Canada and New Zealand; a “detached public administration”, an administrative system that is dispersed horizontally and vertically and revolves around itself and the preferences of politicians and bureaucrats such as in Bangladesh, Bosnia and Herzegovina or India; finally, a “dominant public administration” that gives those in power vast control over a centralised and influential bureaucracy allowing them to force the will of the governing on citizens as in Hungary, Serbia and Turkey.

Regardless of the framework considered, the differences among the various types of LGs highlight how administrative traditions condition the institutional power and financial sustainability outcomes of LGs.

Legal factors, including fiscal rules, debt limits and insolvency procedures play a decisive role in shaping local financial sustainability. Central governments typically define these frameworks, influencing local discretion over borrowing and spending (Allers and de Natris, 2021; Sutherland et al., 2018). Fiscal rules determine permissible levels of indebtedness and the extent of intergovernmental transfers, thereby constraining local fiscal autonomy and independence. National insolvency and bailout procedures also differ in effectiveness and legal design (Canuto and Liu, 2013; Person, 2021; Padovani and Scorsone, 2011), affecting how LGs manage financial crises (Padovani et al., 2021).

The diversity of fiscal and legal settings underscores that evaluating LGs’ financial health cannot rely solely on financial performance criteria; rather, contextual legal frameworks must be incorporated into comparative analyses of fiscal indexes, such as fiscal autonomy (Ladner et al., 2016).

Accounting systems determine how LGs’ financial health is measured and communicated, which in turn can influence financial sustainability. The adoption of global accounting standards and practices, such as accrual accounting and the IPSAS, has contributed to greater comparability across jurisdictions (Jorge et al., 2019). However, despite efforts toward harmonisation (Schmidthuber et al., 2022), significant divergences persist (Polzer et al., 2022), even within the European Union (European Commission, 2020).

These differences influence not only how financial data are reported but also how LGs perceive their fiscal position and make policy decisions (Donatella and Karlsson, 2025). National accounting systems reflect broader institutional legacies and administrative cultures (Meyer and Hammerschmid, 2010; Nobes and Parker, 2016), reinforcing the view that financial sustainability assessments are embedded in country-specific institutional settings.

Beyond the abovementioned issues related to financial reporting, the non-financial dimension of accounting is also critical. As a key component of financial health, service solvency – defined as the ability of a government to provide the services its citizens require and desire (Groves et al., 2003) – plays an essential role in evaluating the financial condition of (local) governments (IPSASB, 2025). Increasingly, the literature recognises the strong interdependence between service solvency and financial health as captured by accounting information.

Within the context of the Sustainable Development Goals’ (SDGs) non-financial framework, empirical evidence highlights a complex interdependence between financial and non-financial accounting information in the implementation of the SDGs (European Commission, 2025). Benito et al. (2023) and Ríos et al. (2024) demonstrate that stronger engagement with the SDGs improves stakeholder-related outcomes but often coincides with lower fiscal surpluses. In contrast, greater financial autonomy supports sustainability actions. Bisogno et al. (2024) and Cuadrado-Ballesteros et al. (2014) further demonstrate that financial sustainability enables broader social and environmental outcomes. At the same time, Alonso-Morales et al. (2024) reveal SDG-specific financial trade-offs, and Gil-García et al. (2024) stress that effective SDGs performance depends on efficient, impact-oriented budgeting rather than funding allocations alone.

Finally, the non-financial side of accounting has become increasingly important for public-sector risk management (Gourbier et al., 2025) and may hinder effective resource use if it is not properly embedded within internal control mechanisms (Padovani et al., 2021).

Auditing and supervision practices constitute another critical institutional dimension affecting LGs’ financial sustainability. These mechanisms vary widely across countries in terms of independence, frequency and enforcement power (Geissler and Wegrich, 2021; Ferry and Ruggiero, 2022). In some contexts, auditing systems serve primarily a compliance role, while in others they foster transparency and performance-based accountability (Jorge et al., 2023).

The design of these systems reflects the balance between administrative control and managerial autonomy (Ferry et al., 2023), influencing how effectively LGs can maintain fiscal discipline and respond to early warning signals of financial distress.

Intergovernmental dynamics, particularly the degree of decentralisation and the extent of supervision and regulation by higher tiers of government, may play a vital role in shaping LGs’ financial sustainability. The vertical distribution of authority affects both resource allocation and fiscal responsibility (Pollitt and Bouckaert, 2017; Geissler et al., 2019). Pollitt and Bouckaert (2017) identify two basic dimensions: the degree of vertical dispersion of authority, i.e., how far authority is shared between different levels of government, where some countries are highly centralised, with most significant decisions concentrated at the top level, while some are much more decentralised; and the degree of horizontal coordination at central government level, i.e., how far central executives work in a coordinated or fragmented fashion. Moreover, in federal countries, intermediate governments (states or regions) often define local fiscal frameworks, adding an additional subnational layer of institutional complexity (Wang and Scorsone, 2020).

Patterns of vertical coordination may enhance local fiscal capacity or reinforce dependency on central government transfers. The structure of intergovernmental relations, including shared tax bases, grants and supervision mechanisms, thus critically conditions LGs’ financial sustainability (Padovani et al., 2021). Moreover, as for the central level, horizontal coordination at the local level may influence financial conditions and responses to crises (Bocchino and Padovani, 2021).

All in all, the preceding review has revealed specific dimensions and/or criteria, which can be used to explain an LG’s context in the assessment of financial sustainability, which are summarised in Table 4.

Table 5 displays the dimensions derived from cross-analysing guidelines and reports from international organisations, namely the OECD, IMF and ECB, which assess countries’ and governments’ financial sustainability in comparative approaches. In addition, we also considered the IPSASB's RPG 1 for public sector entities to report (financial and non-financial information) about their long-term financial sustainability. Despite addressing and defining several measurement criteria, it is curious that none of the analysed documents presents an explicit definition of financial sustainability.

Among the criteria to assess subnational governments’ financial sustainability and risks, international organisations appear to distinguish between the countries' context and the macro international economic and social scenario. Issues related to inflation and interest rates are also considered, notably by the IMF, which oversees monetary policy. The IMF also differentiates from the other analysed organisations by considering political criteria (which may be part of the institutional framework) such as the electoral cycle, and government accountability and communication strategies to build trust among citizens.

Regarding the accounting and reporting systems, while international organisations primarily base their systems on fiscal and national statistics figures (GFS and ESA), which rely on cash-based information with some accruals, the IPSASB clearly supports accrual-based financial accounting and reporting. The OECD also recognises the importance of accrual accounting and reporting systems in enhancing information comparability and transparency.

In order to propose a framework that integrates several contextual dimensions (institutional, legal and intergovernmental) to evaluate LGs’ financial sustainability across countries worldwide, the results of each step in the previous section were systematised in a criterion-level traceability matrix, represented by Table 6. It codes candidate dimensions/criteria from rating agencies (Step 1), the literature (Step 2a) and international organisations (Step 2b), incorporating them in one final framework, where these criteria are then grouped in sub-dimensions and dimensions.

This framework portrays four dimensions for evaluating the context in which LGs operate when assessing their financial sustainability from a global perspective: (0) administrative traditions, (1) international and national macroeconomic, political and financial operating environment, (2) institutional, fiscal, governance and intergovernmental environment and (3) accounting and reporting system. While dimensions 1, 2 and 3 are subject to change over time, dimension 0 remains relatively stable and, to a certain extent, defines the cross-national context in which LGs operate – a sort of institutional culture shaping administrative behaviour, decision-making and accountability practices. Also, administrative traditions are not considered by rating agencies nor international organisations' frameworks and standards. Each of dimensions 1, 2 and 3 is further divided into sub-dimensions, representing homogeneous groups of criteria.

From a practical standpoint, this combined analytical framework provides practitioners with a comprehensive and integrated set of elements to be considered when assessing the contextual conditions in which an individual LG operates. At the same time, the framework has important theoretical implications. Given that rating agencies are currently the primary actors conducting cross-country comparative assessments of LGs’ financial health – implicitly assuming the comparability of LGs across national systems – this framework highlights several contextual aspects that are not systematically considered in rating methodologies.

The differences identified across the three streams primarily reflect their distinct purposes and analytical lenses. Rating agencies prioritise credit-material factors and comparability across issuers, whereas public management scholarship and international standard-setting frameworks consider a broader range of institutional, governance, service-delivery and reporting conditions. More broadly, much of the literature informing comparative assessments of LGs originates from public administration and public (financial) management research, whereas rating agencies primarily adopt a banking and finance perspective. For instance, administrative traditions (dimension 0) illustrate this complementarity. Although they are not explicitly treated as a cross-country contextual variable in rating methodologies, they can help explain differences in governance arrangements, accountability mechanisms and service-delivery models that may affect the interpretation of LG financial health. Our proposal, therefore, does not seek to replace one perspective with another. Rather, it makes their underlying assumptions more explicit and identifies complementarities, tensions and omissions across them. The proposed framework should consequently be understood as a situated synthesis rather than as a neutral or universally applicable representation of LGs’ financial sustainability. Several of the administrative typologies and theoretical contributions on which it draws were developed primarily in European and North American democratic-state contexts, while international standards and the SDGs reflect particular institutional and policy commitments. Their relevance and interpretation in other political and administrative settings should therefore be examined empirically rather than assumed (e.g. Liu et al., 2024).

Another relevant contextual factor that appears to be under-considered is citizens' perceptions, trust and engagement within the institutional framework, despite their importance for fiscal legitimacy, compliance and long-term financial sustainability. These factors shape credibility and public accountability, reduce uncertainty and risk premia, which in turn influence financing conditions and fiscal discipline (e.g. Bastida et al., 2017). Stronger fiscal and administrative institutions constrain opportunistic behaviour and help sustain financial performance; markets and bond raters reflect this institutional strength in credit assessments and borrowing costs (Johnson and Kriz, 2005). Historical analysis similarly suggests that fiscal viability depends not only on debt levels but also on the trust underpinning relations among the state, taxpayers and creditors. In his study of Britain in the 19th century, Daunton (2007) shows how confidence in fiscal rectitude, fairness and constitutional control supported the state's capacity to tax and borrow. Although developed with reference to the central state, this historical insight reinforces the broader argument that perceptions of legitimacy and trust constitute financially consequential contextual conditions.

More broadly, much of the literature informing comparative assessments of LGs originates from public administration and public management research, whereas rating agencies primarily adopt a banking and finance perspective. For example, administrative traditions (dimension 0) are not treated by rating agencies as a cross-country contextual variable influencing LG financial health, even though they shape governance arrangements, accountability mechanisms and service delivery models. By integrating insights from public administration and public management, the framework we propose broadens the analytical spectrum beyond the dominant financial lens, offering a more context-sensitive and theoretically grounded field for comparative-international assessment of LGs’ financial health.

This research contributes to the assessment of LGs’ financial sustainability by highlighting non-financial and non-accounting criteria that previous studies have often overlooked or treated indiscriminately. Our framework systematises institutional, legal and intergovernmental dimensions to be considered in evaluating financial sustainability across LGs internationally, thereby complementing strictly financial approaches.

The integration of those dimensions enhances the capacity for both cross-country comparisons and intra-country analyses, enabling a more comprehensive understanding of financial sustainability when combined with existing theoretical frameworks, such as financial vulnerability (Padovani et al., 2021).

Additionally, this study bridges “siloed” literature and practices across rating agencies' methodologies (rooted in a banking and finance lens), public management scholarship (often overlooked by rating agencies) and international guidelines (which may overlook rating agencies), that have largely developed in parallel, and identifies areas of conceptual convergence and complementarity among them, thereby addressing disciplinary misalignment by identifying a point of convergence.

Furthermore, this paper explicitly addresses a problem defined in practice: understanding which contextual conditions rating agencies consider in LGs’ assessments. Rather than criticising this practice, our research complements it, while making the underlying contextual assumptions explicit and analytically comparable. By examining rating agencies' assessment practices and deriving implications for local managers, regulators and rating agencies themselves, the study seeks not only to describe existing arrangements but also to inform and potentially change them. Therefore, this paper not only speaks to practitioners and rating agencies, but also provides insights that can support public sector standard setters and regulators in designing financial reporting requirements, as advocated by Mechanick and Waymir (2023). Understanding how rating agencies incorporate (or fail to) certain information is relevant for regulators and standard setters when deciding what to require in financial statements and financial sustainability disclosures (Davidyan and Waymire, 2025). In doing so, this paper answers Ferry et al. (2019)'s call to narrow the research–practice gap in public sector accounting and contributes to the debate on the policy relevance of academic work. Also, it aligns with Tucker et al. (2020)'s call to “take a stand” on the practical relevance of public sector accounting research.

The resulting framework holds practical relevance, particularly for international stakeholders – such as rating agencies, multinational firms and banks – by providing a structured approach to evaluating the financial sustainability of LGs across diverse institutional and legal environments. Also, it can be used by researchers (to operationalise context in comparative studies), by LGs' managers (to structure contextual diagnosis) and by regulators/standard setters and rating analysts (to improve the transparency and coverage of contextual assumptions in sustainability-related assessments and disclosures).

Certainly, this study has some limitations. For example, our analysis relies on rating agencies' publicly available methodologies; these documents may be incomplete representations of rating practice, because proprietary models, committee deliberations, case-specific judgements and other internal processes are not observable. Moreover, as in any qualitative content analysis, our coding and interpretation necessarily involve an element of subjectivity and researcher judgement (Neuendorf, 2017; Krippendorff, 2019). Finally, our framework is conceptual in its design; more practical application further requires to operationalise the elicited dimensions, sub-dimensions and criteria. Such operationalisation could be addressed in future research, potentially through separate studies for each dimension and sub-dimension, given the extensive body of literature that could be systematically reviewed or meta-analysed. Also, quantitative or qualitative analyses can be conducted to test specific KPIs. More broadly, the study points to an underdeveloped research agenda in public sector accounting and financial management: the role of external evaluators in defining and governing financial sustainability. This means, therefore, that the study in this paper represents a promising avenue for future research.

The authors gratefully acknowledge the discussant and participants of the international workshop “Crafting Qualitative Research in Management & Accounting” (Naples, 5–6 November 2025) and of the JPBAFM Symposium (online, 13 January 2026), as well as the guest editors of the Special Issue “Accounting and Budgeting in Subnational Governments: Challenges in the Current Time” and the two anonymous reviewers for their insightful, valuable, and constructive comments.