The category that determines the financial capacity of local government units (LGU) is the free cash flow that can be allocated to the implementation of investment projects and the repayment of debt. Free cash flows are the part of LGU that are not involved in the implementation of obligatory and optional LGU tasks. It should be emphasized here that permanent ability to generate free cash flow is essential. This is due, on the one hand, to the fact that they are the source of funding for new operational and investment tasks, but on the other hand they are at the same time a source of repayment of former debt. [Birgham, Houston 2001]
The practice of financing expenditures not covered by the planned revenues of LGU is inextricably linked to the problem of preserving budgetary balance, and above all with generating possibilities or lack of free cash flow. This also implies defining problems related to the identification of free budgetary resources (balance sheet) as well as legal and the possibility of using debt instruments to finance expenditure, especially in cases of incurring new debt while retaining ability to service and repay debts from previous years. Based on the observations of recent years, a large part of LGU in Poland in practice shows a budget imbalance while maintaining a financial balance (surplus).
The main aim of the article is to analyze and assess the impact of the operating surplus (free cash flow on balance sheet) in LGU’s budgets on investment and financial decisions of LGU.
Data / Methods
The basis of the study was the amount of operating surplus in particular LGU, the level of capital expenditures and the level of liabilities. The data included implementation of local government budgets in 2001-2015. The analysis included an assessment of the dynamics of the main figures characterizing the local government budgets. Based on the assumed assumptions, a correlation was established between the level of operating surplus and the adopted significant variables that could have potential impact.
Results / expected results
The conducted research procedure was the basis for verification of the hypothesis that the size of the operating surplus conditionally determines the investment and financial decisions in the local government.