Declining financial performance of local governments in Indonesia: An empirical study during Covid-19

____________________________________________________________ This research focuses on assessing the financial performance of Regency/City Governments in Central Java Province after refocusing their budget during the COVID-19 pandemic in 2021. Budget Refocusing is a government policy to cope with the impact of the COVID-19 pandemic. This policy certainly has an impact on the financial performance of local government. The calculation process to measure the financial performance of local government using formulas adopted from the research and development section of the Ministry of Home Affairs as well as the Faculty of Social and Political Sciences, Gadjah Mada University, and applied in previous research to calculate financial ratios such as the local government fiscal decentralization, local government financial dependency, regional original income (PAD) effectiveness


Introduction
The central government authorizes local governments to conduct their affairs independently through the regional autonomy law or decentralization (Pandey, 2020).This is expected to increase public services and create a more democratic process or pattern of decision-making in the public sphere.It was reported that the decentralization system, specifically in developing countries, enhances the ability of local governments to conduct their duties and optimize the use of existing potentials for the greatest prosperity of the people (Rugeiyamu et al., 2018).Explains was observed to follow agency theory, which states that the people as principals have the right to obtain services from agents, which is the government (Halim & Abdullah, 2006).It is also important to note that public services are usually delivered by the government through budget management activities in order to have the ability to measure accountability and performance (Damayanti & Susanto, 2015).
The measurement of government performance makes it possible to determine the success of a public organization in a certain period and to plan different efforts to improve the achievement in the next period (Ropa, 2016).Moreover, assessment of the financial performance of local governments is usually directed towards determining their financial condition and ability to explore and use existing fund sources in their area (Mutiha, 2016).It also assists in allocating resources and making decisions, improving institutional communication, and realising public accountability (Mardiasmo, 2006).
Good local financial performance is observable through several indicators, such as 1) effectiveness in exploring regional potential, 2) low level of dependence on the central government, and 3) the presence of a large portion of Regional Original Income (PAD) in financing development in the region.The Indonesia Minister of Finance stated that the current national average of PAD is limited, and the dependence level on regional transfers is also very high.This was indicated by the fact that 80.1% of local governments depend on the central government, while the average contribution of PAD is only 12.87% (Olivia, 2018).
The COVID-19 pandemic that hit Indonesia in early 2020 forced the central and local governments to reorganize or refocus their budgets to minimise the pandemic's economic effect.This certainly affected local governments' financial performance and required them to respond to the situation through several policies that can protect the community and simultaneously ensure the adequate performance of their regional financial management.Central Java Province was reported to be the region with the third highest cases nationally after Jakarta and West Java, as indicated by the data retrieved from January 26, 2022, that the total number of confirmed cases was 625,903, the number of patients in treatment or isolation was 321, and those who have recovered/completed isolation were 584,531.This research focused on this province because it has more cities and regencies than Jakarta and West Java.
The impact of implementing a budget-refocusing policy aimed at accelerating the handling of the impact of COVID-19 affects the financial performance of local governments due to adjustments to regional revenue and expenditure targets.This adjustment was made in response to the decline in economic activity so that the regional revenue and expenditure targets would undoubtedly experience a decrease due to the COVID-19 pandemic.

Method
The analysis technique used in this research is a quantitative descriptive analysis technique, and the data collection method uses a document study method approach in the form of secondary documents, namely data on the ceiling and realization of the Regional Budget (APBD) of Regency/City in Central Java in 2021.This research aims to assess the financial performance of Regency/City Governments in Central Java in 2021 and to analyze their financial ratios based on the regional budget for the year.The data used include the PAD budget, the realization of PAD, the total realization of regional income, the realization of transfer receipts, the total realization of regional expenditures, and the total realization of capital expenditures.These data were used to calculate the fiscal decentralization, financial dependency, PAD effectiveness, and capital expenditure ratios using the formulas adopted from previous research (Permatasari et al., 2023;Pramono, 2014;Ropa, 2016;Susanto, 2019).

Local Government Financial Performance
Financial performance is usually used to assess the accountability of local government to manage its finances towards providing public services.Accountability is the obligation to convey information to the public on the expenditure and management of funds economically, effectively, and efficiently.This is necessary because every rupiah of funds spent by local governments should be able to fulfil the interests and demands of the public and be accountable to them (Halim & Kusufi, 2014).
According to Mardiasmo, performance measurement provides several benefits for government organizations, such as a) assessment of organizational performance, b) provision of direction to achieve targets, c) monitoring or evaluate the achievement of organizational performance, d) serving as the objective basis to provide previously agreed rewards and punishments, e) function as a communication tool between leaders and subordinates, f) provision of assistance in identifying the fulfilment of community satisfaction, g) assist in understanding the operational activities in government agencies, and h) ensure decisions were made objectively (Mahmudi, 2016).Mahmudi also reported that regional financial ratio analysis, including Fiscal Decentralization, Local Government Financial Dependency, PAD Effectiveness, and Capital Expenditure Ratios, can be used to measure the financial performance of local governments (Mahmudi, 2016).

Local Government Fiscal Decentralization Ratio
The fiscal decentralization ratio can be calculated by comparing the total realization of PAD in the current year with the total realization of regional income in the same year (Mahmudi, 2016).PAD consists of 1) Regional Taxes, 2) Regional Levies, 3) Separated Regional Wealth Management Results (Regional Owned Enterprise/BUMD profit), and 4) Other valid PADs.The results show the public's participation level in conducting their obligations of paying taxes and levies, as well as BUMD profit sharing to support regional income as a whole.It also indicates the level of local government dependence on funding from the central government such that a higher fiscal decentralization ratio represents a lower local government dependence (Agustin et al., 2023;Evia et al., 2022;Indramawan, 2018).
The formula used to measure the fiscal decentralization ratio (FDR) is stated as follows:

Local Government Financial Dependency Ratio
The local government financial dependency ratio is usually calculated by comparing the total realization of transfer income in the current year to the total realization of regional income in the same year (Mahmudi, 2016).The transfer income is part of regional income originating from the central government, such as 1) Balancing Funds, 2) Special Autonomy Funds, 3) Privileges Funds, and 4) Village Funds, as well as the transfers made between local governments.The results from this indicator usually show the level of local government's financial dependence on funding from the Central Government such that the higher local government financial dependency ratio indicates a higher level of financial dependence (Indramawan, 2018).
The formula used to measure the Local Government Financial Dependency Ratio (LGFDR) is stated as follows:

PAD Effectiveness Ratio
The PAD effectiveness ratio was determined by comparing the total realization of PAD in year t to the total PAD budget in the same year.It usually shows the ability of the local government to realize the targets in the PAD budget (Mahmudi, 2016).According to Indramawan (2018), this indicator shows the regional ability to explore regional revenue sources.This means the higher PAD effectiveness ratio indicates the higher financial effectiveness level of the local governments in exploring revenue sources in the region (Indramawan, 2018).
The formula used to measure the PAD effectiveness ratio is as presented as follows:

Capital Expenditure Ratio
The capital expenditure ratio was calculated by comparing the total capital expenditure in the current year to the total regional expenditure as a whole in the same year.It shows the ability of local governments to realize regional expenditures for the acquisition or procurement of fixed or other assets to be used or with the capacity to provide benefits in the long term (more than one fiscal year).Muda and Naibaho showed that there are two types of capital expenditures, which include 1) those felt directly by the community, such as the construction of roads, bridges, hospitals, schools, markets, and others and 2) those that cannot be felt directly by the community such as those applied to support the operational activities of the regional apparatus as indicated by the construction of government office buildings, operational service vehicles, official residences, and others (Guerrero-dib & Portales, 2020;Pradani et al., 2021).
The formula for measuring the Capital Expenditure Ratio (CER) is as follows:  =  . ..    . .. Mahmudi (2016) found that the average capital expenditure in local governments ranges from 5 to 20% of total regional expenditure and a higher ratio was recommended.

Realization of Regency/City Original Revenue in Central Java in 2021
The data published on the official website of the Ministry of Finance official at https://djpk.kemenkeu.go.id /portal/data/apbd showed the realization of regency or city original revenue in Central Java in 2021, as presented in the following Table 1.The table shows that the regencies/cities with the most significant realization of PAD in 2021 include 1) Semarang City, 2) Tegal Regency, 3) Cilacap Regency, 4) Banyumas Regency, and 5) Sukoharjo Regency.
Moreover, the development for the realization of regency or city original revenue in Central Java from 2019 to 2021 is presented in the following graph 1.The graph shows that the average realization of regency or city original revenue in Central Java for the period of 2019 to 2021 was IDR 402.49 billion and those observed to be above average include 1) Semarang City, 2) Banyumas Regency, 3) Cilacap Regency, 4) Surakarta City, 5) Sukoharjo Regency, 6) Tegal Regency, 7) Semarang Regency, 8) Demak Regency, 9) Boyolali Regency, and 10) Brebes Regency.

Fiscal Decentralization Ratio Analysis
The results of the Fiscal Decentralization Ratio for 2019-2021 using the aforementioned formula are presented in the following table 5.The table shows that Semarang City is the area with the highest fiscal decentralization ratio for the three consecutive years with 46.75% recorded in 2021 and this means the city has a "GOOD" financial capability.Moreover, the grouping of the financial capability of Regency/City Governments based on the interval scale of the fiscal decentralization ratio in 2021 is presented as follows table 6.Table 6 shows that it is only Semarang City found in the "GOOD" financial capability category, followed by Magelang City in "MODERATE", as well as 7 and 25 Local Governments represented by 20% and 71.43% are in "ENOUGH" and "LESS" financial capability, respectively.The realization of Local Government Revenue (PAD) for Semarang City with "GOOD" financial capability was recorded in 2021 to be IDR 2,307.51 billion which was sourced from tax collection with IDR 1,445.49 billion or 62.64%, regional levies with IDR 97.59 billion or 4.23%, separated regional wealth management with IDR 96.9 billion or 4.20%, and other legitimate PADs with IDR 667.52 billion which contribute 28.93%.

Local Government Financial Dependency Ratio Analysis
The local government dependency ratio was used to the level of dependence on revenue sources from central government and inter-local government transfer funds to finance the expenditures of the local government concerned.The results obtained from the calculation are presented in the following table 7.  Source: www.djpk.kemenkeu.go.id, processed (January 24, 2022) The table shows that Semarang City has the lowest local government financial dependency ratio for three consecutive years with the value recorded to be 41.36% in 2021 and this indicates a "LOW" financial dependence on the central government.Meanwhile, Pubalingga Regency has the highest value with 81.27% and this means it is in the "HIGH" category.The classification for the financial dependence level of Regency/City Governments based on the interval scale of the financial dependency ratio in 2021 is as follows table 8.The table shows that only Semarang City has a "LOW" level of financial dependence while a total of 22 regencies/cities and 12 others represented by 62.86% and 34.29% are in "MODERATE" and "HIGH", respectively.

PAD Effectiveness Ratio Analysis
PAD effectiveness ratio was used to determine the level of regional ability in exploring the potential of regional revenues in the current year's APBD.The results obtained for regencies/cities in Central Java from 2019 to 2021 using the aforementioned formula are presented in the following Table 9.The table shows that Tegal Regency has the highest PAD effectiveness ratio in Central Java in 2021 with 147.52% but the position was previously held by Sukoharjo Regency for two consecutive years of 2019 and 2020.This means Tegal Regency has the ability to realize PAD exceeding the set target and this indicates it is in the "VERY EFFECTIVE" category.Meanwhile, Tegal City has the lowest value in 2021 with 51.45%, indicating it is in the "INEFFECTIVE" category.
The grouping for the financial dependence level of Regency/City Governments based on the interval scale of the local government financial dependency ratio in 2021 is as follows.

Capital Expenditure Ratio Analysis
The capital expenditure ratio was used to compare the amount of government expenditure used to finance the acquisition of fixed and other assets with benefits that are more than one period of the budget year to the total regional expenditure in the same period.The results obtained for this indicator using the formula previously mentioned are shown in the following table 11.The table shows that Semarang City has the highest Capital Expenditure Ratio in Central Java in 2021 with 20.08% while Wonogiri Regency is the lowest with 6.65%.The assessment results for the regional financial ratio of Regency/City Governments in Central Java in 2021 are also presented in the following Table 9.

DISCUSSION
Fiscal decentralization involves comparing the PAD ratio to total income, which means a higher decentralization indicates more community participation in contributing to income.The results showed that the average value of the fiscal decentralization ratio in 2021 was 17.60 per cent and is relatively stable when compared to previous years, 18.50 per cent (2020) and 17.59 per cent (2019).This is observed to be the consequence of regional autonomy with the decentralization concept implemented to ensure governments have the financial resources to improve the welfare of the people (Evia et al., 2022;Putra et al., 2021).Decentralization is the right strategy because it allows the local governments to work more efficiently by knowing the desires of the community and increasing their satisfaction (Chattopadhyay, 2018).
It is also important to note that regional autonomy with a high degree of decentralization can assist the local governments in increasing their income and subsequently reduce their dependence on the central government.This is necessary because high regional income usually creates several opportunities and also motivates local governments to explore the potential existing in their community towards becoming more independent (Ristanti & Handoyo, 2017).The success of regional autonomy can be demonstrated through the success of the apparatus deployed by the government to manage resources following the financial needs and priorities of the region (Amin, 2020).
The financial dependency ratio of local governments has increased in the second year of the COVID-19 pandemic in the Central Java region.The average ratio had decreased at the beginning of the Covid-19 pandemic but increased in the second year of the Covid-19 pandemic, namely 70.45 per cent (2019), 69.36 per cent (2020), and 72.26 per cent (2021).However, the low level of independence reported indicates that the local governments are not to increase PAD but to rely more on the General Allocation Fund (Susilawati et al., 2018).
Local government is a non-profit organization, but its budget needs to be efficiently and effectively managed (Jamo, 2021), and the management process is usually better when PAD is higher.PAD effectiveness ratios generally decreased during the COVID-19 pandemic.The average ratios were 109.59 per cent (2019), 101.39 per cent (2020) and 95.17 per cent (2021).Community participation is necessary as the most significant contributor to a region's income at any given time (Benito et al., 2021).This is expected to be conducted by fulfilling all tax obligations to increase regional income and make it easier for the government to execute budgeted programs towards achieving the main goals of public services (Sutopo & Siddi, 2018).
The performance of the budget prepared by the local government can be measured by the stakeholders, such as the community and the high achievement of the things stated in the budget is usually used as the indicator to determine the success of local governments in implementing programs, including those related to capital expenditure (Sutopo & Siddi, 2018).The capital expenditure ratio has generally decreased after the COVID-19 pandemic.The average ratio figures are 16.77 per cent (2019), 11.81 per cent (2020) and 11.47 per cent (2021).The findings of this research are observed to be in line with the previous ones that spending on health and infrastructure increases economic growth, and this means the welfare level is expected to increase when there are higher capital expenditures (Silitonga et al., 2021).Moreover, the authority possessed by local governments can be used to enhance spending efficiency by increasing capital expenditures according to regional needs in order to attract investors with the ability to ultimately improve the community's welfare (Ghozali & Khoirunurrofik, 2020;A. Setiawan et al., 2021).
The limitation of this research is that it does not consider the agglomeration factor of an area, and it is recommended to be further analyzed due to its relationship with productivity (Sabatina, 2020;A. Setiawan et al., 2021) (Sabatini, 2020;A. Setiawan et al., 2021).It is also suggested that further research should be conducted to examine the factors affecting the performance of local governments, such as population, regional status, and capital expenditures (D.Setiawan & Winarna, 2022).

Figure 1 .
Figure 1.Realization of Regency/City Original Revenue in Central Java in 2019-2021

Table 1 .
interval scale Research and Development from the Ministry of Home Affairs and the Faculty of Social and Political Sciences, UGM, 1991 .

Table 2 .
The interval scale of the Local Government Financial Dependency Ratio Research and Development from the Ministry of Home Affairs and the Faculty of Social and Political Sciences, UGM, 1991

Table 3 .
Interval scale Research and Development from the Ministry of Home Affairs and the Faculty of Social and Political Sciences, UGM, 1991.

Table 4 .
Realization of Regency or City Original Revenue in Central Java in 2021

Table 5 .
Fiscal Decentralization Ratio of Regency/City Governments in Central Java in 2019-2021

Table 6 .
The Grouping for the Financial Capability of Regency/City Governments in Central Java Based on the Interval Scale of Fiscal Decentralization Ratio in 2021

Table 7 .
Regency/City Governments Financial Dependency Ratio in Central Java in 2019-2021

Table 8 .
The Grouping for Financial Dependence of Regency/City Governments in Central Java Based on Interval Scale of Local Government Financial Dependency Ratio in

Table 9 .
PAD Effectiveness Ratio of Regencies/Cities in Central Java in 2019-2021

Table 10 .
The Grouping for PAD Effectiveness of Regencies/Cities in Central Java Based on the Interval Scale of PAD Effectiveness Ratio in 2021

Table 11 .
Capital Expenditure Ratio of Regencies/Cities in Central Java in 2019-2021

Table 12 .
Top Five Regency/City Governments in Central Java in 2021 Based on the Regional Financial Ratio