**1. Introduction**

In the European Union member countries, regional and local objectives are implemented by the local governmen<sup>t</sup> units (LGU), i.e., municipalities. Pursuant to the European Charter of Local Self-Government (1985), the municipalities have the right and ability to independently handle and manage a substantial share of public affairs by fully assuming their own responsibility and following the interests of the local residents. Financial autonomy of LGUs influences multifunctional development of the rural areas, which is one of the goals of the EU's Common Agricultural Policy (CAP) (Głowicka-Wołoszyn and Satoła 2018).

The importance of autonomy assessment of LGUs is generally is indisputable if viewed from the financial perspective. Financial autonomy is the prerequisite of existence of a local governmen<sup>t</sup> and the key factor of stable local development. Sustainable financial resources are the foundation of social and economic development in rural areas in particular (Satoła et al. 2019; Łuczak et al. 2018b). Hence, assessment of the level of financial autonomy of rural municipalities has recently become an increasingly important research topic from the economic and socioeconomic perspective. Financial autonomy (FA) is also the basic category assessed in the analysis of financial stability of LGUs (Satoła et al. 2019).

FA of LGUs is closely related to the economic, fiscal policy, fiscal decentralization, and regional development theories. This suggests the multidimensional character of the phenomenon described by a number of indicators. Assessment of revenue indicators of FA is important in FA assessment of rural municipalities, as the revenue indicators demonstrate different aspects of the FA level. The set of indicators used for the analysis of the same phenomenon of FA of rural municipalities differs from researcher to researcher (such as index of subnational autonomy (Shah 1994), composite indicator of fiscal autonomy (Beer-Tóth 2009); indicator of financial self-sufficiency (Kozera et al. 2017); self-financing index, fiscal autonomy index (Głowicka-Wołoszyn and Satoła 2018); fiscal wealth indicator

**Citation:** Miceikiene, Astrida, Laima ˙ Skaurone, and Riˇ ˙ cardas Krikštolaitis. 2021. Assessment of the Financial Autonomy of Rural Municipalities. *Economies* 9: 105. https://doi.org/ 10.3390/economies9030105

Academic Editor: Sajid Anwar

Received: 19 April 2021 Accepted: 7 July 2021 Published: 16 July 2021

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(Satoła et al. 2019). As a result, different research studies often generate contradictory or, in certain cases, even incomparable findings. There is the lack of a single summarizing integrated indicator which would objectively show FA of the rural municipalities analyzed. Moreover, many discussions have emerged in relation to satisfaction of the needs of the rural areas, promotion of their local economic and social development, the amount of financial resources that should be allocated to the municipalities, and the methods of improvement of their FA level.

Viability of the multi-attribute assessment methods, which fall under the group of multi-criteria decision-making methods, has been particularly emphasized in the scientific literature as these methods enable integrated assessment of complex values. Due their versatility, the multi-attribute assessment methods may be employed when dealing with different areas, and are relevant in FA assessment of rural municipalities. The most appropriate method was chosen for analysis of the problematics of FA assessment of rural municipalities in view of the specifics and solution of the problem (*namely, the theoretical principles of FA assessment and the assessment method for FA level of rural municipalities*). The selection of the method was performed by describing the possible multi-criteria, multiattribute decision making methods. TOPSIS (*Technique for Order Preference by Similarity to Ideal Solution*) is one of the multi-attribute methods appropriate for FA assessment as a multidimensional phenomenon. The scientific literature analysis has shown that this method is mostly used in the studies (Vavrek and Pukala 2019; Satoła et al. 2019; Głowicka-Wołoszyn and Satoła 2018; Kozera et al. 2017; Kozera and Głowicka-Wołoszyn 2016) involving FA assessment of rural municipalities. It should be noted that new indicators describing financial autonomy were added to the empirical study conducted by the authors of the present article. Unlike other empirical studies, linear normalization of rural municipalities revenue indicators was performed. The rural municipalities of two regions of Lithuania were first classified according to the constructed synthetic index of financial autonomy. In general, the TOPSIS method has enabled comprehensive and integrated FA assessment of the rural municipalities by using a single integrated, summarizing indicator.

This paper is structured as follows: Section 2 provides a literature review revealing the complexity of assessment of the financial autonomy phenomenon. It explores the relations between the phenomenon of financial autonomy of LGUs and the economic theories and evaluates the applicability of the multi-criteria assessment methods to assessment of the financial autonomy of rural municipalities. Section 3 describes the designed model for assessment of the financial autonomy of rural municipalities. Section 4 presents the research findings by demonstrating its applicability to assessment of the financial autonomy of rural municipalities in two regions of Lithuania. Section 5 provides the conclusions.

#### **2. Literature Review**

*2.1. Relation between the Phenomenon of Financial Autonomy of LGUs and Economic Theories, and Complexity of the Assessment*

Financial autonomy (FA) is the term operated when referring to the complex, multidimensional economic phenomenon based on the economic, fiscal policy, fiscal decentralisation, and regional development theories, and is related to financial resource allocation, redistribution, and stabilisation. Several categories of economic theories could be recognized in the research studies on FA, such as theories on economic growth, sustainable development, inequality, incentive, limiting, centralisation, decentralisation, and regional development theories (see Figure 1). Hence, the theories and the categories thereof demonstrate the multidimensional character of FA of LGUs and the complexity of its assessment.

**Figure 1.** Relation between the phenomenon of financial autonomy and economic theories. Source: made by the authors.

The economic theories related to growth and development enable the researchers studying the FA phenomenon to identify the endogenous factors that are important for improvement of the FA of LGUs. The researchers (Satoła et al. 2019; Standar and Kozera 2019; Głowicka-Wołoszyn and Satoła 2018; Łuczak et al. 2018b; Rudyte et al. 2018 ˙ ; Kozera et al. 2017; Scutariu and Scutariu 2015; Jemna et al. 2013) have not only listed a large number of the factors determining the FA of LGUs, but have also presented different classifications of these factors. Hence, an analysis of the FA factors with particular emphasis on the FA levels of the LGUs is also an important research topic from the economic and social perspective (Standar and Kozera 2019).

The scientific literature analysis has demonstrated that the FA of LGUs depends on the revenues received/earned and rational expenditure management. This is the essence of the (incentive and limiting) fiscal policy theories related to the key measures. The latter include tax revenue received by the state in the form of taxes from natural persons and companies, and the state expenditure that, if properly allocated, enhances the domestic economy. According to Salm (2014), the features of a rational local tax system are based on the decentralization theory. While every tax is required to follow rational criteria, such as economic efficiency and ease and cost of administration, local taxes shall also meet a few additional criteria, such as fiscal autonomy and balance of interest, which specifically apply to the local level.

In FA assssment of LGUs, the majority of researchers usually focus on the revenue autonomy, giving less attention to the expenditure autonomy. The researchers (Satoła et al. 2019) have emphasised that identification of the sources of revenue, which could be deemed as the FA drivers, presents a considerable challenge. Financial autonomy and the issue of revenue generation are one of the key issues related to local governments worldwide. According to Hajilou et al. (2018), municipalities become unsustainable due to the absence of a comprehensive approach towards implementation of the autonomy policy, sources of revenue of the financial sector, municipalities, and macroeconomic system in the area of changes and interventions. Hence, along with FA, financial sustainability is

becoming one of the most widely used terms and is associated with John Hicks' notion of maximum income. This means that assessment of revenue autonomy, where the researchers (Satoła et al. 2019; Standar and Kozera 2019; Głowicka-Wołoszyn and Satoła 2018) place the strongest emphasis on the level of own revenues, plays a significant role where the FA of LGUs is addressed. Nonetheless, the FA of LGUs does not necessarily imply that implementation of local public tasks would only be limited to the duty of autonomous funding. Following the fiscal policy principles, with the own (tax and non-tax) revenue being inadequate, the central governmen<sup>t</sup> allocates funds on the basis of grants in order to assure implementation of public tasks. Nevertheless, where public funds account for a substantial share of budget revenue of the municipality, there are considerable limitations of the freedom of use of the financial resources (Oulasvirta and Turala 2009). Hence, the local governmen<sup>t</sup> becomes highly dependent on the funding from the state budget, considerably affecting the FA of LGUs.

As evidence suggest, transfers induce municipalities to underutilize their own tax bases (Shah 1994). This raises the issue of "convenient dependence" of municipalities on the centralized allocation in the long run. The researchers (Satoła et al. 2019; Hajilou et al. 2018; Jakovljevic et al. 2019; Jakovljevic 2013) have therefore made attempts to validate the need for a sustainable LGUs funding system. The rationale behind this kind of system is that the financial resources received by LGUs correspond to the expenditure incurred by them in implementation of their tasks. This depends on the optimum degree and scope of fiscal decentralisation reflecting rational managemen<sup>t</sup> of public funds. Shah (1994) argues that the decentralization of responsibilities and the rationalization of intergovernmental transfers should be supported by strengthening local institutional capabilities.

In the scientific literature, financial autonomy is often mentioned in the context of research of financial decentralisation (Beer-Tóth 2009). The theories of fiscal decentralisation identify the interacting elements which link the components of fiscal autonomy, namely, revenue, expenditure, and budget autonomy of LGUs, to each other. Hence, the FA research have been contributing significantly to the theory and practice of fiscal decentralisation in the recent decades and are becoming the focus of the researchers, supranational organisations, policy makers, and economists. This is supported by the results of the studies conducted by the majority of the researchers analyzed (Satoła et al. 2019; Vavrek and Pukala 2019; Głowicka-Wołoszyn and Satoła 2018; Ladner and Keuffer 2018; Kozera et al. 2017; Kozera and Głowicka-Wołoszyn 2016; Psycharis et al. 2016; Cigu 2014; Jemna et al. 2013; Beer-Tóth 2009), demonstrating the importance of FA of LGUs as an individual, remarkable, and complex phenomenon.

The phenomenon of FA of LGUs and the determining factors are closely related to the theories of regional growth and development. From the perspective of the local governance processes, the theories of use of the regional endogenous (internal) potential are highly important, as they define the internal factors that determine the FA level of LGUs (Standar and Kozera 2019). If viewed from the perspective of the economic theories of self-oriented and independent regional development, LGUs would be expected to be more autonomous and make use of their internal potential. It has been found in the series of studies that the character of the Lithuanian fiscal policy is determined by political limitations. This situation suggests that the fiscal policy measures employed in Lithuania are not ye<sup>t</sup> sufficiently directed at formation and assurance of sustainability of public finance. This obviously has an impact on the autonomy of a local governmen<sup>t</sup> as well as development of its inner financial potential (Skaurone et al. 2020 ˙ ). Hence, empirical studies are needed in order to explore the financial situation and capacities of LGUs.

A lack of an integrated approach towards the analysis or assessment of the differences between the Lithuanian municipalities and, in particular, rural municipalities in terms of financial autonomy has been observed. In the international research domain, researchers (Satoła et al. 2019; Standar and Kozera 2019; Głowicka-Wołoszyn and Satoła 2018) generally agree that there is the lack of assessment of the differences between LGUs of a specific

Number of

7

 7

indicators, units country in terms of FA. They have stressed the need for such research as well as for innovation in development of public finance theories.

Hence, the background analysis has shown a diversity of the contexts of FA studies suggesting the multidimensional nature of the phenomenon (revenue, spending, budget autonomy) by assessing the allocation, redistribution and stabilization functions, and emphasizing the value of FA and sustainability. Analysis of the previous empirical studies has revealed that the researchers employ different number of indicators for FA assessment (see Table 1). This reveals the complexity of assessment of this economic phenomenon.


 8

 11

**Table 1.** Number of indicators used for FA level assessment of rural municipalities in the studies.

> It has been generally suggested in the scientific literature that the complexity and multidimensional character of the phenomenon analyzed determine the choice in favor of multi-criteria methods for FA assessment of rural municipalities.

 9  2  5

#### *2.2. Analysis of the Multi-Criteria Methods and Selection of the Most Appropriate Method for FA Assessment of Rural Municipalities*

The scientific literature analysis has shown that the FA level of LGUs is usually assessed using the Multiple Objective Decision Making (MODM) methods classified as the multi-criteria decision making methods. The scientific literature analysis has revealed that the multi-criteria methods are applicable to both exact and social sciences universally. These methods have been observed to be widely used for assessment of the economic phenomena in Lithuania.

The FA phenomenon is multidimensional; therefore, multiple objective methods are used, as they help analyse the alternatives that belong to the infinite set of solutions. In view of the specifics of the implications pertaining to the empirical study, first, comparison of the multi-criteria decision analysis methods was performed and enabled the authors of the paper to identify the most appropriate FA assessment method (see Table 2).

Based on the comparison analysis of the multi-criteria methods, TOPSIS (*Technique for Order Preference by Similarity to Ideal Solution*) method, which showed the most favorable assessment result, was selected for the design of the methodology for empirical study of FA assessment of rural municipalities. According to Łuczak et al. (2018a), this method is referred to as the benchmark method in the international practice.

The TOPSIS method is based on Hellwig's idea of construction of a synthetic property. It enables synthetic assessment of a phenomenon with multiple properties (Hwang and Yoon 1981).

The rationale behind the choice of TOPSIS methods is generally based on the fact that this method:



**Table 2.** Comparison of the multi-criteria, multi-attribute quantitative methods.

Source: made by the authors according to (Slavinskaite 2017 ˙ ; Aruldoss et al. 2013; Gineviˇcius and Podvezko 2008; Hwang and Yoon 1981; Simanaviˇciene 2011 ˙ ; Zavadskas et al. 2014).
