Financial situation and political parties in local governments: Empirical evidence in the Spanish municipalities

Cabaleiro Casal, Roberto; Buch Gómez, Enrique J.; Vaamonde Liste, Antonio Article Financial situation and political parties in local governments: Empirical evidence in the Spanish municipalities Investigaciones Europeas de Dirección y Economía de la Empresa (IEDEE) Provided in Cooperation with: European Academy of Management and Business Economics (AEDEM), Vigo (Pontevedra) Suggested Citation: Cabaleiro Casal, Roberto; Buch Gómez, Enrique J.; Vaamonde Liste, Antonio (2014) : Financial situation and political parties in local governments: Empirical evidence in the Spanish municipalities, Investigaciones Europeas de Dirección y Economía de la Empresa (IEDEE), ISSN 1135-2523, Elsevier, Amsterdam, Vol. 20, Iss. 3, pp. 110-121, https://doi.org/10.1016/j.iedee.2013.11.001 This Version is available at: https://hdl.handle.net/10419/193740 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by-nc-nd/3.0/ Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 w ww.elsevier.es/iedee Financial situation and political parties in local governments: Empirical evidence in the Spanish municipalities Roberto Cabaleiro Casala,∗, Enrique J. Buch Gómeza, Antonio Vaamonde Listeb aDepartment of Financial Economics and Accounting, University of Vigo, Lagoas Marcosende s/n, 36310 Vigo, Spain bDepartment of Statistics and Operations Research, University of Vigo, Torrecedeira, 105, 36208 Vigo, Spain a r t i c l e i n f o Article history: Received 16 May 2013 Accepted 7 November 2013 Available online 25 December 2013 JEL classification: H70 Keywords: Local governments Public finance Public administration Political parties a b s t r a c t In contrast to several studies presented in the literature which analyze how different political elements affect specific aspects of financial management of public institutions, we have investigated from a comprehensive perspective how various political factors influence the financial situation of the municipalities. To do this, we use diverse multivariate techniques, the concept of financial condition and a large sample of Spanish municipalities. By isolating the electoral cycle and analyzing the essence of political factors, our main findings are that conservative and progressive parties do not present different behavior in relation to any of the financial dimensions. The territoriality of political parties influences the relationship between fund transfers received by the municipalities and certain expenses and investments. Furthermore, we did not detect that, in Spain, a partisan alignment exists between municipalities and the upper-level institutions. © 2013 AEDEM. Published by Elsevier España, S.L. All rights reserved. Situación financiera y partidos políticos en los gobiernos locales: evidencia empírica en los municipios espa˜ noles Códigos JEL: H70 Palabras clave: Gobiernos locales Finanzas públicas Administraciones públicas Partidos políticos r e s u m e n En contraste con los diversos estudios presentes en la literatura que analizan cómo los diferentes elementos políticos afectan a aspectos específicos de la gestión financiera de las instituciones públicas, hemos investigado desde una perspectiva integral cómo varios factores políticos influyen en la situación financiera de los municipios. Para ello hemos usado diversas técnicas multivariantes, el concepto de condición financiera y una amplia muestra de municipios espa˜ noles. Aislando el ciclo electoral y analizando la esencia de los factores políticos, nuestros principales hallazgos son que los partidos conservadores y progresistas no presentan distintas conductas en las diferentes dimensiones financieras, y que la territorialidad de los partidos políticos influye en la relación entre los fondos recibidos por transferencias y ciertos gastos e inversiones. Además, no hemos detectado que exista un alineamiento partidista entre los municipios espa˜ noles y las instituciones de nivel superior. © 2013 AEDEM. Publicado por Elsevier España, S.L. Todos los derechos reservados. 1. Introduction Studies analysing the influence of political factors on specific aspects of financial management of public administrations, as deficit, expenditures, tax burden, revenues, public debt, and transfers at different territorial levels are, numerous (Benito & Bastida, ∗Corresponding author. E-mail addresses: [email protected] (R. Cabaleiro Casal), [email protected] (E.J. Buch Gómez), [email protected] (A. Vaamonde Liste). 2010; Poterba, 1994; Rattsø & Tovmo, 2002; Roubini & Sachs, 1989; Solé-Ollé & Sorribas-Navarro, 2008; Veiga & Veiga, 2007). Unlike these previous studies, García-Sánchez, Mordan, and Prado-Lorenzo (2012) analyzed the effect that political ideology and strength have on overall financial management of local governments through analysis of the financial condition concept in the largest Spanish municipalities. However, this study was limited because they directly assigned indicators to the financial dimensions, and performed individually the political variables on each of the indicators from a limited set. Furthermore, using various indicators which may reflect the same behavior tends 1135-2523/$ – see front matter © 2013 AEDEM. Published by Elsevier España, S.L. All rights reserved. http://dx.doi.org/10.1016/j.iedee.2013.11.001 R. Cabaleiro Casal et al. / Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 111 to distort the analysis because this promotes the assessment of aspects in a duplicate manner (Cabaleiro, Buch, & Vaamonde, 2012). Different from the rest of the studies presented in the literature, our paper is based on a more comprehensive vision that eliminates the analysis of redundant financial aspects and it intends to explain how different political factors such as ideology, political weakness of governments, and alignment between political hierarchical institutions (which have not presented conclusive results in previous works), or territoriality of political parties (which have not been empirically verified) may be influencing the overall financial health of local governments. 2. Literature review: background and hypotheses 2.1. The financial health of local governments Various terms that correspond to different methodological approaches were used in the literature to analyze the same reality, the financial health (Berne, 1992; Clark, 1994; Carmeli, 2003; Kloha, Weissert, & Kleine, 2005; Wang, Dennis, & Tu, 2007), and the financial condition is one of the terms most widely used (Cabaleiro et al., 2012; Rivenbark & Roenigk, 2011; Sohl, Peddle, Thurmaier, Wood, & Kuhn, 2009; Wang et al., 2007). In this sense, Honadle, Costa, and Cigler (2004) noted that financial condition of local institutions is a term closely linked to the concept of fiscal health and Wang et al. (2007) pointed out that this concept represents the ability of an organization to meet its financial obligations on time. As financial condition is a concept that is not directly observable, literature has focused on assessing the different aspects or dimensions that compose it (Clark, 1977; Groves, Godsey, & Shulman, 1981; Hendrick, 2004; Mercer & Gilbert, 1996). Groves et al. (1981) note that financial condition is composed of cash solvency (government’s capacity to generate enough cash or liquidity to pay its bills), budgetary solvency (the city’s ability to generate sufficient revenues over its normal budgetary period to meet its expenditure obligations and not incur deficits), long-run solvency (the longrun ability of a government to pay all the costs of doing business, including expenditure obligations that normally appear in each annual budget, as well as those that show up only in the years in which they must be paid), and service-level solvency (it refers to whether a government can provide the level and quality of services required for the general health and welfare of a community), and this approach was assumed by the International City/County Management Association [ICMA] (2003) for its extensive application in local governments in USA. Another significant contribution for the local level is made by the Canadian Institute of Chartered Accountants [CICA] (1997, 2009) which assesses the concept through the dimensions of sustainability (degree to which a government can maintain its existing financial obligations without increasing the relative debt or tax burden on the economy within which it operates), flexibility (degree to which a government can change its debt or tax burden on the economy within which it operates to meet its existing financial obligations), and vulnerability (degree to which a government is dependent on sources of funding outside its control or influence or is exposed to risks that could impair its ability to meet its existing financial obligations). To assess the financial condition, numerous indicators have been used. It should be noted that there has not been a common view in their selection, use, and application (CICA, 1997, 2009; Clark, 1977, 1994; Groves et al., 1981; Hendrick, 2004; ICMA, 2003). On the contrary, the financial condition of governments and socioeconomic variables are interrelated aspects (Carmeli & Cohen, 2001; Honadle et al., 2004). The characteristics of a socioeconomic environment are diverse and varied in nature, that is, the economic sectors, nature of the territory, population structure and population movements, and economic policies developed by state public institutions (Honadle, 2003). In addition, the ICMA (2003) includes among the “environmental factors” the variables of population size, density, the level of unemployment, and business activity. Wang et al. (2007) analyzed the relationship between the financial condition and population (population size and growth rate) and economic factors (personal income per capita, gross state product per capita, and percentage change in personal income), and concluded that these variables can be used to predict the financial condition with a certain level of accuracy. 2.2. The political factors on the financial health of local governments The ICMA (2003) considers that issues of a political nature must also be taken into account among the various factors to consider in the analysis of the financial management of public institutions. Except the limited study of García-Sánchez et al. (2012), there have been no empirical studies evaluating the relationship between the global financial situation of public institutions and political factors, although diverse political factors have been used to predict specific aspects of financial management (Alesina & Perotti, 1995; Alesina & Tabellini, 1990; Ashworth, Geys, & Heyndels, 2005; Benito & Bastida, 2010; Curto-Grau, Solé-Ollé, & Sorribas-Navarro, 2012; Solé-Ollé & Sorribas-Navarro, 2008). A first political issue that we could not ignore is “The political cycle theory” or “Political opportunism”, which assumes that the primary interest of a politician or party is being re-elected and there are no ideological motives. Franzese (2002) notes that this theory is focused on the impact of the timing of elections, and this causes changes in some financial variables (debt, deficit, expenses, and transfers). The “partisan theory” attributes central importance to the ideological differences between groups within a society and the parties that represent these groups (Persson & Svensson, 1989; Tuffe, 1978). In this line, unlike the conservative parties, progressives tend to increase public spending, showing greater laxity in public financial management (Tuffe, 1978). However, this theory has not been confirmed empirically in some studies at municipal level as in those made by Bosch and Suarez-Pandiello (1995) and Benito and Bastida (2010). Some papers have examined the effect of political decentralization on the organization or cohesion of political parties (Desposato, 2004; Wildavsky, 1967). Territorial (local and regional) parties are thought to exist because these geographical areas have unique interests and concerns that cannot be or are not being addressed adequately by existing parties to other level (Brancati, 2008; Hearl, Budge, & Pearson, 1996). Following the line of study based on “weak government” or “fragmented governments”, Roubini and Sachs (1989) initiated a line of empirical work studying the influence of fragmentation of governments on the finance of public institutions. At the municipal level, the works that researched any aspect of public finances have been few and they have also presented different results (Ashworth et al., 2005; Borge, 2005; Bruce, Carrol, Deskins, & Rork, 2007; Geys, 2007; Goeminne, Geys, & Smolders, 2008; Rattsø & Tovmo, 2002). Another political factor is based on the “hypothesis of the partisan alignment”. In this context, the research carried out was articulated from different perspectives: “clientelism” (DiazCayeros, Magaloni, & Weingast, 2006; Scheiner, 2005), “perverse accountability” (Stokes, 2005), and the “model of pork barrel” 112 R. Cabaleiro Casal et al. / Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 (Brollo & Nannicini, 2010; Solé-Ollé & Sorribas-Navarro, 2008). If there is a partisan alignment between the municipal government and the upper-level government, these entities receive larger fund transfers (Brollo & Nannicini, 2010; Diaz-Cayeros et al., 2006; Solé-Ollé & Sorribas-Navarro, 2008). The effect of a partisan alignment between regional and local governments has been considered in Spain by Solé-Ollé and Sorribas-Navarro (2008) and by CurtoGrau et al. (2012). 2.3. Hypotheses According to the previous arguments, the aim of our study is concretized on the following hypotheses: Hypothesis 1. The ideology of the municipal government affects the dimensions of financial condition of the Spanish municipalities. Hypothesis 2. The territoriality of political parties of the municipal government affects the dimensions of financial condition of the Spanish municipalities. Hypothesis 3. The municipal government’s weakness affects the dimensions of financial condition of the Spanish municipalities. Hypothesis 4. The partisan alignment of the municipal government affects the dimensions of financial condition of the Spanish municipalities. 3. The financial health and political parties in Spanish local governments 3.1. Data The very short data series available having adequate detailed financial information and the necessity to isolate the impact of political cycle on the global financial situation of the municipalities have forced us to use a transversal analysis, and then we chose the year 2009 because of its intermediate position in the electoral cycle of 2007–2011. The financial data for our study were collected from the databases of the “Settlement of the Local Budgets for 2009” and the “Municipal Debt Volume for 2009” (Ministry of Finances and Public Administrations). The data on socioeconomic indicators for 2009 were extracted from the “Municipal Database” of La Caixa and “Inebase” (National Statistics Institute). The information on the political variables was extracted from the “Database of Electoral Results” of the Ministry of Interior and the “Database of Mayors of Legislature 2007–2011” (Ministry of Finances and Public Administrations). The work is focused on municipalities with more than 20,000 inhabitants and they represent 70% of the population in Spain. After cross-checking all the databases and eliminating municipalities with incomplete and missing data, Madrid and Barcelona because they have a special financial legislation, and Ceuta and Melilla for their different administrative systems, the sample has 387 of 399 municipalities with this population level. 3.2. Methodology The complexity of municipal finances analysis “requires that a mosaic of indicators be employed to account for the multitude of internal and external financial factors that comprise any given community’s financial profile” (Sohl et al., 2009). In previous studies, the financial dimensions are measured through the assignment of indicators by the authors, with any exception (Clark, 1977; Mercer & Gilbert, 1996). However, an inconsistent use of indicators diminishes the reliability of a study (Sohl et al., 2009). For this reason, we used a wide set of financial ratios covering the numerous financial aspects or dimensions included in the approaches developed by ICMA (2003) and CICA (1997, 2009) because they are the more institutional relevant frameworks (see Table 1). As each indicator may reflect aspects of more than one dimension (Cabaleiro et al., 2012), we will try to associate sets of indicators with similar variability to the dimensions conceptually defined by CICA and ICMA, using a multivariate statistical technique that attempts to overcome the limitations of previous works. In this sense, to assign univocally the ratios to the different financial aspects, we applied a sequential, agglomerative and nonoverlapping method (hierarchical clustering with Ward method) based on the minimization of the variance of the dissimilarity measure of the squared Euclidean distance. On each of the clusters of variables obtained, we applied factor analysis. The purpose is to find in each cluster a small number of uncorrelated aspects that explain the behavior of all the variables of the group with minimum loss of information. Consequently, the financial dimensions or sub-dimensions obtained by regression (dependent variables) are integrated by the groups of indicators that have similar variability, that is, similar behavior (Cabaleiro et al., 2012; Clark, 1977; Mercer & Gilbert, 1996). Each of these blocks/groups was identified in coherence with its information and by taking into account the financial dimensions or sub-dimensions from the ICMA and CICA frameworks. To analyze how the political variables (ideology, territoriality of political parties, government weakness, and partisan alignment) (Table 2) might affect the dimensions that make up the financial condition of municipalities, we test if mean values are different. To do this, we performed an analysis of variance–covariance. As noted above, socioeconomic factors are configured as elements of contrasted influence. For this reason, we must control the effect of demographic and economic environment variables (Table 3) on the financial condition of the municipalities. 3.3. Analysis of results Following the methodological process described, after typifying all the financial variables (I1 to I39), we performed a cluster analysis of the variables. Fig. 1 shows the dendrogram where six groups of financial ratios (FG1 to FG6) can be clearly identified (see the cut line for rescaled distance = 10). Following the methodology described, the technique of factor analysis was applied within each one of these groups and has led us to identify the following dependent variables, that is, financial groups (FG) (Table 4): - FG1 (R4, R5, R6, R7, R13, R11, and R12): They are basically indicators related to the dimension of long-term solvency. This group has two distinct behaviors or dimensions (factors). The first aspect gives more importance to the indicators related to the volume of debt of the entity (R4, R5, R6, R7, R13) (FG1 1). The second behavior gives more importance to the indicators R1 and R12 and an opposite direction to the other. This refers to the speed with which the entity is to amortize its debt (FG1 2). - FG2 (R26, R27, R19, R18, R20, R17, R16, and R21) represents a homogeneous group of indicators essentially concerned with budgetary solvency derived from the entity’s ability to generate its own income (FG2 1). - FG3 (R28, R36, R31, R34, R38, R29, R15, R30, R33, and R39) basically consists of a set of service ratios and income tax ratios related to economic activity in the municipal environment with similar variability to all local government revenue. This seems to reflect R. Cabaleiro Casal et al. / Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 113 Table 1 Financial indicators. Indicator Description Min. Max. Mean Std. D R1 (CCE+AR-DAR-EF)/OO Refined short-term solvency: Cash and Cash Equivalents (CCE) plus accounts receivable (AR), less doubtful accounts receivable (DAR) and excess funds to finance expenditures earmarked funding (EF), divided by outstanding obligations (OO) at year end. −1.1296 1.5066 11.0873 1.6055 R2 (CCE+AR–DAR)/OO Gross short-term solvency: Cash and Cash Equivalents (CCE) plus accounts receivable (AR) and less doubtful accounts receivable (DAR), divided by the outstanding obligations (OO) at year end. −0.8021 2.2364 13.3634 2.0883 R3 CCE/OO Quick Ratio: Cash and Cash Equivalents (CCE) divided by outstanding obligations (OO) at year end. −0.8593 1.1921 9.1112 1.6058 R4 Long-term debt/TNBR Long-term debt in relation to the total net budgetary revenues (TNBR) 0.0000 0.4574 1.2448 0.2433 R5 Long-term debt/NBR Ch.a1–8 Long-term debt divided by net budgetary revenues (NBR) from non-financial operations. 0.0000 0.4887 1.3883 0.2657 R6 Long-term debt/NBR Ch. 1–5 Ratio between the long-term debt and net budgetary revenues from current operations. 0.0000 0.5851 1.9421 0.3221 R7 Long-term debt/Pop. Long-term debt per inhabitant (Pop) 0.0000 521.8737 1870.3005 323.2263 R8 NBR Ch. 1–5/NBO Ch. 1–4 Net current budgetary revenues divided by net budget obligations (NBO) from current expenditures 0.6062 1.0993 1.5524 0.1227 R9 NBR Ch. 1 a 5/NBO Ch. 1–4 and 9Net current budgetary revenues divided by budget obligations from non-financial current expenditures and debt service. 0.5750 1.0502 1.4689 0.1229 R10Net savings/Pop. Difference between the receivables from current budget resources and the budget obligations from non-financial current expenditures, minus debt service per inhab. −616.8927 24.1831 608.4843 123.6380 R11NBO Ch. 3 and 9/NBR Ch. 1–5 Debt service (interest and principal) divided by net current budgetary revenues 0.0000 0.0798 0.7883 0.0766 R12NBO Ch. 3 and 9/Pop. Debt service per inhabitant. 0.0000 70.4389 554.4883 64.9648 R13NBO Ch. 3/Pop. Debt interest per inhabitant. 0.0000 14.9772 68.9641 13.0068 R14RBS/Pop. Result of the budget settlement (RBS) per inhabitant. −442.3983 −3.8714 511.9483 135.5810 R15Total NBR/Pop. Total net budgetary revenues per inhabitant. 515.9096 1135.235 2751.8405 303.1544 R16NBR Ch. 1–5/NBR Ch. 4Ratio between net current budgetary revenues and current grants received. 1.4400 3.2518 8.6505 1.0269 R17NBR Ch. 1–3/NBO Ch. 1–3 Direct and indirect taxes and fees divided by obligations from net expenditure of personnel, services and debt interest. 0.3450 0.7763 1.9859 0.1760 R18NBR Ch. 1–3/NBO Ch. 1–4 Direct and indirect taxes and fees divided by net budget obligations from current expenditures. 0.3320 0.7003 1.2644 0.1398 R19NBR Ch. 1–3/Pop. Direct and indirect taxes and fees per inhabitant. 172.2499 576.7365 1711.3735 211.6842 R20NBR Ch. 1 and 3–5/NBO Ch. 1–4 Net current budgetary revenues less current grants received, divided by net budget obligations (NBO) from current expenditures. 0.3550 0.7321 1.2685 0.1491 R21NBR Ch. 1–3, 5, 6, 8, 9/Total NBO Difference between total net budgetary revenues and budgetary current and capital transfers received divided by total net budget obligations. 0.2485 0.5994 1.1400 0.1307 R22NBR Ch. 7/Pop. Capital transfers received per inhabitant 23.3007 151.9534 566.4735 65.6506 R23NBR Ch. 4 and 7/Pop. Current and capital transfers received per inhabitant 227.1974 442.9539 1011.9293 127.7745 R24NBO Ch. 6 and 7/Pop. Investments per inhabitant: Net budget obligations from capital expenditures, capital transfers and capital grants per inhabitant. 37.9950 263.1461 746.5829 122.8229 R25NBO Ch. 6 and 7/Total NBO Investments effort: Net budget obligations from capital expenditures, capital transfers and capital grants divided by total net budget obligations. 0.0360 0.2279 114 R. Cabaleiro Casal et al. / Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 Table 1 (Continued) Indicator Description Min. Max. Mean Std. D 0.5036 0.0781 R26 NBR Ch. 1 and 2/Pop. Tax revenues per inhabitant. 110.1501 389.6998 949.1808 146.7996 R27 NBR Ch. 1, art. 1/Pop. Capital tax revenues per inhabitant. 99.2524 328.5324 912.2925 132.5457 R28 NBR Ch. 1, art. 3/Pop. Economic activity tax revenues per inhabitant. 5.2736 31.1589 210.9601 26.4245 R29 NBR Ch. 2/Pop. Indirect tax revenues per inhabitant. 1.1352 25.6133 227.8817 24.6589 R30 NBR Ch. 3/Pop. Taxes and public fees for services provided per inhabitant 41.8411 187.0366 981.4307 102.6173 R31 Politic.Expend.b13/Pop. Expenditures on civil protection, public safety, vehicle traffic, and fire protection per inhabitant. 4.3280 95.6370 269.4893 40.1052 R32 Politic.Expend. 15/Pop. Expenditures on housing development and urban planning per inhabitant. 0.0000 150.9430 522.9775 97.3866 R33 Politic.Expend. 16/Pop. Community welfare spending (Water supply, sewerage and wastewater treatment, municipal waste collection, street cleaning, cemeteries, street lighting) per inhabit. 0.0000 163.3166 793.1111 82.8298 R34 Politic.Expend. 17/Pop. Expenditures on environmental protection per inhabitant 0.0000 39.5123 230.3696 31.0866 R35 AreacExpend. 2/Pop. Expenditure on social services agency and promoting employment per inhabitant. 24.0672 131.1722 392.2389 58.4665 R36 Area Expend. 3/Pop. Expenditure on preferential public service (Health, education, culture and sport) per inhabitant 26.4085 209.3143 620.2904 98.6590 R37 Area Expend. 4/Pop. Expenditure on promotion of economic activity per inhabitant 0.6357 72.4249 539.8732 73.9392 R38 Politic.Expend. 91/Pop. Expenditure on salaries of political governing per inhabitant 0.0000 22.6730 102.5483 11.2454 R39 Politic.Expend. 92/Pop. Expenditure on general services (administrative staff and expenses) per inhabitant 0.0000 135.6030 736.6846 94.8837 Valid N (listwise) 387. aChapter of the economic classification of the budgets in Spain. bPolicy of expenditure on the Planning Programming Budgeting System in Spain. cArea of expenditure on the Planning Programming Budgeting System in Spain. R. Cabaleiro Casal et al. / Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 115 2520151050 Y R4 R5 R6 R7 R13 R11 R12 R26 R27 R19 R18 R20 R17 R16 R21 R28 R36 R31 R34 R38 R29 R15 R30 R33 R39 R24 R25 R32 R22 R23 R35 R37 R2 R3 R1 R8 R9 R10 R14 14 10 9 8 1 3 2 37 35 23 22 32 25 24 39 33 30 15 29 38 34 31 36 28 21 16 17 20 18 19 27 26 12 11 13 7 6 5 4 Dendrogram using ward linkage Rescaled distance cluster combine Fig. 1. Clustering process of financial variables. 116 R. Cabaleiro Casal et al. / Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 Table 2 Political variables. Political variable Description Freq Relative freq (%) (PV1) Ideology Progressive (1) 204 52.7 Conservative (2) 151 39.0 Not defined (3) 32 8.3 (PV2) Territoriality of political parties National (1) 321 82.9 Regional (2) 46 11.9 Local (3) 20 5.2 (PV3) Government weakness Government party with absolute majority (1) 190 49.1 Government party without absolute majority (0) 197 50.9 (PV4) Partisan alignment (PV4 1) Provincial The same political party that governs the municipality also governs the province (1) 235 60.7 The political party that governs the municipality does not govern the province (0) 152 39.3 (PV4 2) Regional The same political party that governs the municipality also governs the Autonomous Community (1) 213 55.0 The political party that governs the municipality does not govern the Autonomous Community (0) 174 45.0 Valid N (listwise) 387. a level of solvency of services of each entity, which is linked to the activity of local economic environment (FG3 1). - FG4 (R24, R25, R32, R22, R23, R35, and R37). This group is composed of indicators of transfers, investments, and certain spending policies. This seems to reflect a degree of financial dependence on other institutions to provide certain services and investment. The factor analysis shows the existence of two distinct behaviors or dimensions. The first shows a similar behavior between transfers received and transfers made, the real investments, and housing and urban policies and to a lesser extent, the spending policies of social protection and economic policies (FG4 1). The second component reflects a different behavior of the policies of social protection expenditure and economic policies in relation to investments and transfers made (FG4 2); that is, it displays the extent to which the local entity opts for performing one or other expenses. - FG5 (R2, R3, and R1): The group is only composed of indicators of short-term solvency or cash solvency (FG5 1). - FG6 (R8, R9, R10, and R14): The group is only composed of indicators of current and overall balanced budget. This represents general budgetary solvency (FG6 1). Once we identified and obtained the values of the financial dimensions and subdimensions that comprise the financial condition using the regression method, we analyzed the extent of differences based on political factors through an analysis of variance/covariance, controlling the influence of socioeconomic aspects. We found that the normality of the residuals and the homogeneity of variances were met and the test of between-subjects effects indicates that political factors have statistically significant effects only on the volume of debt (FG1 1), on the degree of financial dependence on transfers from other institutions to perform certain services, particularly for real investments and housing and planning policies (FG4 1), and on balanced budget (FG6 1) (Table 5). Ideology. The model reflects a significant influence of the ideology factor (PV1) on the volume of debt of the entity (FG1 1) and on the dimension of cash solvency (FG5 1) (Table 5). Specifically, the municipalities governed by political parties that have no ideology clearly positioned (not defined) as progressive or conservative have a level of debt (FG1 1) significantly lower than that of the entities that are governed by progressive parties or conservative parties (see Table 6). The mean differences between progressives and conservatives parties are not significant. The mean differences in relation to the cash solvency dimension (FG5 1) (Table 6) also show that the entities governed by the parties without an ideological option defined have higher standards of cash solvency than municipalities managed by progressive parties or by conservative parties. Territoriality of political parties. The territorial nature of political parties (PV2) only has a statistically significant influence on the variable (FG4 1) dependence on transfers (Table 5). Therefore, PV2 is only influencing the ratio between transfers received and transfers made, the real investments, housing and urban policies and, to a lesser extent, the implementation of policies of social protection and economic policies. Specifically, municipalities governed by regional political parties have a higher level of dependence on transfers than those governed by national parties (Table 7). Government’s weakness. The government’s weakness (PV3) significantly influences the dimensions FG4 1 and FG6 1 (Table 5). The mean differences (Table 8) indicate that municipalities governed by parties that have an absolute showed a different behavior in relation to fund transfers received and transfers made, real investments, housing and urban development policies (FG4 1). The results seem to move in the opposite direction to the conclusions of Bruce et al. (2007). They note that infrastructure investments are higher when governments lack unity. In addition, if the ruling parties have an absolute majority, they improve the balance in budgets (FG6 1) (Table 8). Partisan alignment. We could not find significant evidence to support the partisan alignment of the municipal governments (PV4 1 and PV4 2). R. Cabaleiro Casal et al. / Investigaciones Europeas de Dirección y Economía de la Empresa 20 (2014) 110–121 117 Table 3 Socieconomic variables. Socioeconomic variable Description Min. Mean Max. Std. D (SV1) Population Population of municipality. 2009. 20040.00 69250.64 809267.00 92007.48 (SV2) Immigrants Registered inhabitants who have no Spanish nationality in the municipality as a percentage of total population. 2009. 0.0166 0.1528 0.7547 0.1083 (SV3) Population change (2004–2009) Variation of the total number of inhabitants in the municipality between 2004 and 2009 (%) −0.0491 0.0984 0.5220 0.0940 (SV4) Immigrants change (2004–2009) Variation of the number of immigrants in the municipality between 2004 and 209 (%) 0.0814 0.6073 2.2511 0.2991 (SV5) Density Number of inhabitants per square kilometer. 2009. 25.85 1750.08 21896.00 2950.26 (SV6) Unemployment index Number of unemployed registered in the Public Employment Service in each municipality in relation to the potentially active population (15–64 years). July 1, 2009. 0.0530 0.1328 0.2630 0.0357 (SV7) Unemployment evolution Variation of the number of unemployed registered in the Public Employment Service in each municipality in relation to the potentially active population (15–64 years) between 2004 and 2009 (%) 0.2323 1.1616 5.0714 0.6381 (SV8) Economic activity index Comparative index of the extent of all economic activity. The index, covering the year 2009, is made by La Caixa (2011) according to the tax (share price) of the economic activity tax for all business and professionals economic activities for estimation and reflects the relative weight of economic activity of the municipality with respect to the total of Spain in base 100,000. The indicator that we use is the index of economic activity of La Caixa multiplied by 100,000 and divided by the population 1.5782 18.9674 243.4437 30.6042 (SV9) Economic activity evolution Variation of the economic activity index between 2004 and 2009 (%) −0.4835 −0.0328 2.0690 0.2312 Valid N (listwise) 387.