In year 2000 Statistical institute of Latvia developed a methodology for calculation of territorial development index. Aim of the methodology was to identify specially supportable territories. At present index is used for various purposes related to fostering better governance. However there is a considerable difference in terms of initial usage. Therefore improvement of methodology for calculating territorial development index is a topical issue. Considering that use of Latvian territorial development index has broadened and Latvian Association of Local and Regional Governments and Latvian Association of Big Cities have repeatedly indicated that methodology should be changed, improvement of methodology for calculating territorial development index should be considered from various angles. There should be a clear distinction in approach. On the one hand theoretical issue of what “development” is has to be examined against its meaning for Latvian territories. On the other hand issue of “development” should be treated as dependent, meaning that attention has to be focused on separate governmental issue involved whereby only some aspects related to development are relevant. The purpose of this article is analyzing possibilities to improve methodology for calculating territorial development index in the light of its practical use. As a criterion it is used to nationally co-finance projects of local municipalities funded by European Union structural funds and Cohesion fund. Territorial development index has determined that local municipalities from year 2007 till year 2011 have received national co-financing to amount of 8 857 108 LVL. National co-finance has covered 46% of total payment, whereas the other part was covered by local municipalities themselves. Thus a significant amount of money was saved for budgets of local municipalities. However analysis indicates that territorial development index which shows development in a broader perspective is not a suitable criterion. More specific indicators related to fiscal aspects of development should be used. Therefore a practical use of territorial development index has to be taken into account in the process of improving methodology.