## 2 Theoretical Background
### Individual Financial Analysis at the Level of Local Governments  
An extensive apparatus that uses simpler methods is deployed in the private sector. This apparatus predicts the financial difficulties that companies will suffer at a specific time in the future. The bankruptcy of many enterprises has led to increased interest in the method of prediction. Several prediction methods have been created based on the requirements of the private sector. These methods can more or less successfully forecast the development of the financial health of an enterprise and were created based on the conditions of national economics. The authors in [28; 29] consider two circumstances to be the main driving forces stimulating the development of prediction models:  
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* The implementation of a set of regulatory rules issued by the Basel committee on banking supervision in 2004, known as \"Basel II\", which set new terms for the value of capital and risk requirements for the banking sector;
* The eruption of the global financial crisis in 2008, which manifested in the bankruptcy of a number of enterprises and the destabilisation of individual economies.  
There are very few methods of prediction created for the public sector. The authors in [30] highlighted two main reasons for this fact. The first is that most municipalities and local governments in Europe only started to publish their financial accounting statements several years ago. Consequently, there is a difference between European local governments and local governments in the USA, for which there is a long history of publishing financial statements at the level of municipalities. Since municipalities cannot declare bankruptcy in most countries, researchers and creators of prediction methods cannot rely on historical data, through which it would be possible to identify the characteristics that differentiate unsuccessful municipalities from healthy municipalities. This is the second reason underlying the scarcity of methods for this sector. Although few attempts have been made to predict financial difficulties at the level of local governments in specialist literature, many different techniques have been used to identify municipalities that could face financial issues in the future (e.g., heuristic approaches, such as financial statement analysis, to more sophisticated methods, such as statistical modelling approaches). Conversely, in the private sector, most authors [31; 32; 33; 34] classify the methods as follows:  
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* Statistical techniques (logit and probit models, discriminatory analysis methods, and factor analysis);* Artificial intelligence and data-mining techniques (neural networks, decision-making trees, and supporting vector theory);
* Theoretical models (based on expert assessment).  
Most of the studies in question come from America and Australia, which is due to the circumstances mentioned above, as local governments are required to publicise their accounts in these specific countries. While constructing their model for predicting the financial situations of municipalities, the authors in [30] based their activities on samples from 364 Greek municipalities. The authors took six financial indicators into consideration in their analysis, and their selection was influenced by three important facts:  
* The selected financial indicators should have clear significance for Greek municipalities. In this case, the authors based their concept on specialist literature about the financial characteristics of subjects in the public sector,
* During the selection of financial indicators, the particularities of Greek local governments should be taken into consideration, particularly in relation to acquiring funds from the government;
* The number of evaluation criteria should not be too great and should be restricted to the minimum to ensure ease of use and the ability to update the resulting model.