The theory put forward by Locke (1968) emphasizes the importance of the relationship between set goals and performance results. Individual behavior is strongly influenced by their understanding of organizational goals (Locke & Latham, 2002). Regional government officials are expected to have an adequate understanding that quality and sustainable service to the community is one of the government’s goals. Optimal performance requires strong motivation and is based on good intentions from every individual in the organization. Regional governments that have set goals as strategic goals and then formulated them into budget targets make it easier to achieve performance targets.

Based on the Goal Setting Theory approach, setting specific local government goals will increase employee motivation to work better. Setting realistic goals in strategic plans will really help local governments achieve financial sustainability in order to provide sustainable services (Navarro-Galera et al., 2016). To achieve optimal local government performance, it is necessary to align the goals of employees, public managers, and politicians with the goals of local government. The performance of all parties in providing public services can be considered as a regional government goal to be achieved. Regional governments need to set financial sustainability as a target which is then formulated in the budget plan.

Financial management research initially focused on studying the financial difficulties of public sector entities and the factors causing them ((Carmeli et al., 2008); (Cohen et al., 2012); (Zafra-Gomez et al., 2009)), which then turned to the issue of how to improve financial conditions public sector ((Adams et al., 2014); (Drew & Dollery, 2014)). Recent research analyzes the issue of financial sustainability by investigating the determinants of financial sustainability implemented by the government ((Bisogno et al., 2017); (Navarro-Galera et al., 2016); (Rodríguez Bolívar et al., 2016)). Financial sustainability information is not only to anticipate and resolve financial sustainability risks but also aims to maintain the continuity of public services between generations (Wardhani & Payamta, 2020).

A number of previous studies have tried to examine the definition of financial sustainability and develop measures of financial sustainability ((Bisogno et al., 2017);(Carmeli et al., 2008); (Hoque & Adams, 2011);(Navarro-Galera et al., 2016); (Rodríguez Bolívar et al., 2016). (Denek & Dylewski, 2013) argue that financial sustainability not only reflects the ability to generate sufficient income but also the methods taken by local governments to meet their expenditure. According to(Gorina, 2013), it is important to analyze the local government’s financial capabilities to ensure that budget expenditures can be covered by their own revenues.

According to (Brusca et al., 2015), financial sustainability is the government’s ability to continue to provide public services now and maintain them in the future. Financial sustainability by considering the dimensions of income, services, and debt ((Rodríguez Bolívar et al., 2018); (Santis et al., 2021)). Long-term financial sustainability is assessed by the local government’s ability to generate a financial surplus to pay all its debts (Slembeck et al., 2014).

Financial sustainability in the public sector can be assumed to be the regional government’s goal to provide services in a sustainable manner (Rodríguez Bolívar et al., 2018), while the variables of financial independence, financial efficiency, budget solvency, service solvency, population, and GRDP are considered as determining factors for financial sustainability. If these determining factors can be managed well then financial sustainability as a regional government goal will be achieved.

Financial independence shows the ability of local governments to finance their own government operational activities, development, and public services (Halim, 2002). Financial independence influences regional government operational surpluses (Brusca et al., 2015). Furthermore, internal income can increase the financial sustainability of local governments (Navarro-Galera et al., 2016).

Research by (Wardhani & Payamta, 2020) found that the financial independence variable of autonomous regions had a positive effect on financial sustainability. Subsequent research by (Lhutfi & Sugiharti, 2022) also found a positive relationship between financial independence and financial sustainability. Regional governments as autonomous regions will find it easier to achieve financial balance, thereby showing better financial sustainability than other regional governments (Bisogno et al., 2019).

H1: Financial independence influences financial sustainability.

Research by (Wardhani & Payamta, 2020) found that regional government financial efficiency has a positive effect on financial sustainability. Local governments that can manage their finances efficiently will be better able to maintain their financial sustainability. Efficiency in the context of local government finances means optimizing government spending and spending in order to improve community welfare. The more efficient the use of local government financial resources, the better the financial health of public services (Cuadrado-Ballesteros et al., 2019). Therefore, increasing financial efficiency is very important in order to achieve financial sustainability (Luo et al., 2022).

H2: Financial efficiency influences financial sustainability.

Budget solvency refers to the local government’s financial ability to maintain the quality of services provided in accordance with income levels. Thus, budget solvency will affect the level of quality of services provided and financial sustainability.

Budget solvency is very important for regional governments in order to achieve financial sustainability (Mbulawa, 2019). (Cuadrado-Ballesteros et al., 2019), found that budget solvency and service level solvency have a positive influence on financial sustainability. Good solvency and liquidity will increase financial sustainability at all levels of government (Caruana et al., 2019).

H3: Budget solvency influences financial sustainability.

Regional governments as managers of public funds have an important role in developing their regions by providing quality public facilities and services to their communities (Sarosa, 2020) (Soares et al., 2015).

Public service delivery is linked to welfare needs (García-Sánchez et al., 2014). Service solvency refers to the ability of local governments to maintain or modify the volume and quality of services provided according to income levels. Research by (Navarro-Galera et al., 2016), found that different levels of regional government expenditure determine the level of service to the community.

H4: Service solvency affects financial sustainability.

Previous research explains that population is an important factor in public finances. According to (Lopez Subires et al., 2019), residents are the main stakeholder group that can increase demand for public goods and services. Local governments with large populations tend to achieve higher financial sustainability due to their larger economic scale and scope (Andrews, 2015).

H6: Population influences financial sustainability.

(Rodríguez Bolívar et al., 2016) , found that the gross domestic product variable had no effect on financial sustainability. Furthermore (Batuo et al., 2018), found that financial sustainability was negatively influenced by economic growth as measured by GDP per capita. This result is in line with research (Wardhani & Payamta, 2020), where GRDP has no influence on the financial sustainability of local governments in Indonesia.

H6: GRDP has no effect on financial sustainability.

This research employed the Aceh Regency/City Government in 2017-2021 as the population. In contrast to previous research, the population taken in this study was regional governments of all sizes, not only focusing on large regional governments ((Rodríguez Bolívar et al., 2021); (Santis et al., 2021)).

The secondary data source for this research used audited Regional Government Financial Reports within the Aceh Province. The documents were information on the APBD Realization Report and Balance Sheet for the 2017-2021 fiscal year period. Meanwhile, population and GRDP data were collected based on data published by BPS.

This research examines financial sustainability (FS) in local governments as a dependent variable. FS is defined as the local government’s ability to provide services to the community today without reducing the ability of these services in the future (Rodríguez Bolívar et al., 2018). The FS concept in this research focuses on assessing the ability of local governments to provide public services and maintain them. This concept is considered more relevant for measuring local government FS in Indonesia because it is in accordance with the government’s goal, namely providing services to the community.

The FS measurement in this study refers to the research of (Rodríguez Bolívar et al., 2016), which uses the income surplus contained in the operational report, with the following formula:

(1): Operational surplus

(2): Extraordinary income

(3): Extraordinary burden

This research applies five independent variables, namely: financial independence, budget solvency, service solvency, population, and GRDP as variables that influence financial sustainability.

a. Financial Independence (FI)

Financial Independence shows the region’s ability to execute its financial rights effectively and efficiently (Ritonga, 2014). FI describes the ability of local governments to independently finance government activities, regional development, and community services. A regional government that is financially independent means that it does not depend on external funding and the Central Government.

This research uses the proxy used (Ritonga, 2014), with the following formula:

In the context of government budgeting and finance, budget solvency refers to the government’s ability to generate income to fulfill its services and financial obligations in one budget year (Jimenez, 2017).

b. Budget Solvency (BS)

Kamnikar & Deal (2006), define service solvency as the local government’s capability to maintain the continuity of public services to the community. The service solvency ratio is measured using the formula used by (Ritonga, 2014), as follows:

According to (Ritonga, 2014), budget solvency shows the local government’s ability to obtain revenue that will be used to fund its operations during one budget year.(Ritonga, 2014) calculates BS using several ratios. The BS ratio in this study does not take into account special autonomy income and capital expenditure incurred by the Regional Government. The BS ratio used is as follows:

An increase in population can influence financial sustainability which is assessed by acceptance or rejection of policies implemented by local governments (Lopez Subires et al., 2019). Population growth increases demand for public services and resources (Rodríguez Bolívar et al., 2021). However, high expenditure is not always directly proportional to the income that the regional government will receive. Increasing public revenues depends not only on population growth but also on financial capacity and economic activity.

GRDP is defined as the amount of added value produced from all goods and services produced in an area during one year. GRDP is usually used as an indicator to measure regional economic growth which can be seen from the increase in goods and services produced so that the welfare of the population also increases (Sukirno, 2016). GRDP is also related to regional revenues. When revenue increases, regional finances also have the potential to be sustainable because revenue is an indicator of financial sustainability (Wardhani & Payamta, 2020).

c. Service Solvency (SS)

d. Population

e. GRDP

Data analysis used Microsoft Excel to recapitulate and measure the ratio of each variable. The next step was panel data regression testing using Eviews version 12. Panel data testing was intended to measure the extent of the relationship between the dependent variable and the independent variable. Previously, the best model in the research would first be selected and then continued with testing classical assumptions. The results of the regression testing then were interpreted into the research results.

In panel data regression which combines cross-section and time series data, there were three types of models, namely: fixed effect, common effect, and random effect (Widarjono, 2018). Then from the three models, the best model would be selected which best suited the research objectives. The model testing stages were based on panel data criteria, namely: the Chow Test to determine whether fixed effects or common effects would be used. If the probability < significance (0.050) then the fixed effect would be applied, and if the probability > significance (0.050) then the common effect would be applied. The Hausman Test was carried out to determine whether it was a fixed effect or a random effect. If the probability < significance (0.050) then the fixed effect would be applied, and if the probability > significance (0.050) then the random effect approach would be applied. If different models were selected from the two tests, the Lagrange Multiplier (LM) Test would be carried out. The LM Test was carried out to determine whether it was a random effect or a common effect. If the probability < significance (0.050) then random effects would be applied, and if the probability > significance (0.050) then the common effect approach would be applied.

The next stage was testing the classical assumption. The normality test was carried out to prove whether the residual values are normally distributed or not. Multicollinearity test as proof of whether in the selected panel data regression, there was a correlation between the independent variables. Heteroscedasticity test to prove whether there was a residual variance between observations. Then the autocorrelation test was carried out because there were independent residuals between the observations made. There were three hypothesis tests to test the influence of the independent variable on the dependent variable, namely: simultaneous test, partial test, and coefficient of determination test (Ghozali & Ratmono, 2017).

Measurements using the Chow test were carried out to select fixed effects or common effects as the best model.

Table 1 shows the Chi-square probability value < significance value (0.00 < 0.05), so the decision to choose the fixed effect model is taken. Next, the Hausman test is carried out to select between fixed effects or random effects as the model to be used.

The Hausman test produces a Random probability value < significance value (0.00 < 0.05), and then a decision is made on the selected fixed effect model. From the two tests, a fixed effect decision was made as the selected model, so it was concluded that the most appropriate regression test for this research was the fixed effect model.

In Table 5 it can be seen that the F-statistic value is 15.321 > from the F-table value of 2.688 which is calculated using the formula (F.INV.RT(probability; deg_freedom1; deg_freedom2)) and the prob. The f-statistic value is 0.000 < 0.05. These results explain the influence of the independent variables (financial independence, budget solvency, service solvency, population, and GRDP) on the dependent variable (financial sustainability).

The t-statistical test in Table 6 shows that the t-statistic value for FI is 0.023, which is smaller than the t-table of 1.658, and the probability value is 0.821 > 0.050 (significance value), so the result is that the financial independence variable has no effect on financial sustainability. The t-table value is calculated using the formula TINV(probability; deg_freedom). In Table 6 it can also be seen that the t-statistic value for BS is 3.592 which is greater than the t-table of 1.658, and the probability value is 0.005 < 0.050, these results show that the budget solvency variable has a significant positive effect on financial sustainability.

It can also be seen that the t-statistic value for Log_SS is 43.899 which is greater than the t-table of 1.658, with a probability value of 0.000 < 0.050, these results show that the service solvency variable has a significant positive effect on financial sustainability. Then, the t-statistic value for Log_Pop is -11.060, which is smaller than the t-table of 1.658, with a probability value of 0.000 < 0.050, and a coefficient value of -0.661. This scale shows that population variables have a negative effect on financial sustainability. Finally, the t-statistic value for Log_GRDP is 2.278, which is greater than the t-table of 1.658, with a probability value of 0.025 < 0.050, and a coefficient value of -0.070. This scale shows that the GRDP variable has a negative effect on financial sustainability.

Adjusted R-squared of 0.9730 in Table 5 shows that the financial sustainability variable can be expressed by independent variables (financial independence, budget solvency, service solvency, population, and GRDP) of 97.30%. Meanwhile, 2.70% is expressed by other variables outside the indicators in this study.

The results of the panel data regression test show that the financial independence variable has no effect on financial sustainability in the Regional Government in Aceh. In general, the regional government in Aceh has not been able to implement regional autonomy as indicated by a very low independence score, so it is still very dependent on Central Government transfer funds or external loans. Regional original income (PAD) is the main component in assessing the regional government's financial independence. Regional governments with high PAD do not guarantee that the region will achieve sustainable financial sustainability. The allocation of capital expenditure for the benefit of the community is not determined by the amount of PAD generated by the region, many local governments use PAD for personnel expenditure and direct expenditure (Pradita, 2013). In fact, there are local governments that have high financial independence but low financial sustainability because the PAD generated is not used for public service spending (Wardhani, 2022). The allocation of the capital expenditure budget is not based on the real needs of the community but on the mere availability of funds (Abdullah & Halim, 2006).

According to goal setting theory, optimizing the management of existing resources in order to obtain regional income is greatly influenced by the regional government’s goal of producing financial management policies. Policies that support the community can improve financial management performance so that it will have an impact on increasing regional income. So that in the end, the regional government is expected to be able to finance all expenses and expenditures. The results of this research are not parallel with research ((Lhutfi & Sugiharti, 2022); (Wardhani & Payamta, 2020)) which examined regional governments on the island of Java and provincial governments in Indonesia as samples.

The regression results for the Budget Solvency variable have a significant positive effect on financial sustainability in the Regional Government in Aceh. Local governments that have high budget solvency will continue to improve their performance in order to achieve financial sustainability. This is in line with goal setting theory, where the performance of regional governments to improve their solvency is greatly influenced by the policies taken in order to meet financial needs in a sustainable manner. Budget solvency is needed by local governments for the continuity of public services in order to improve community welfare between generations.

The results of this study support previous research by (Cuadrado-Ballesteros et al., 2019), who found that budget solvency and service level solvency have a positive influence on financial sustainability. (Caruana et al., 2019), also found that there is an influence of budget solvency on financial sustainability at all levels of government. Thus, the increasing solvency of regional government budgets has an impact on increasing financial sustainability.

Based on the regression results, the Service Solvency variable also has a significant positive effect on financial sustainability. Service solvency is measured by comparing capital expenditure with population. In general, capital expenditure is allocated for infrastructure development and public facilities. Adequate service facilities will influence the quality of public services and community participation as users, which in turn is expected to increase capital expenditure allocations to increase regional revenues to support local government financial sustainability.

Using the goal setting theory approach, regional governments need to set budget implementation goals to provide public services on an ongoing basis in order to improve community welfare. It is hoped that this concept will improve the performance of all regional government officials, so that the regional government’s goal of sustainable public services will be easier to achieve. The solvency of local government services in maintaining the quality of services required by the community will increase the sustainability of public services.

The Population variable shows the number of residents who live in the Regency/City with the aim of settling. The regression results show that the Population variable has a negative effect on financial sustainability. The higher the population in an area, the higher the public’s demand for services that must be provided by the Regional Government. Demand for public services will increase along with population growth and rising prices of goods/services. Local governments will have many demands to provide facilities or assistance to the community. Thus, increasing local government spending will have an impact on the financial sustainability and continuity of local government services. The results of this study are in line with research by (Lopez Subires et al., 2019), who found that population has a negative effect, while dependent population and unemployment are risk factors for financial sustainability (Rodríguez Bolívar et al., 2021).

The results of the analysis show that GRDP has a negative effect on financial sustainability. The more a region produces GRDP will increase the expenditure budget, and this condition will make it difficult for regional governments to allocate public service budgets. Therefore, an increase in GRDP production will reduce public services by the Regional Government. This research is in line with previous research which found that economic growth as proxied by GDP per capita (Batuo et al., 2018), and GRDP had a negative impact on financial sustainability (Lhutfi & Sugiharti, 2022).