What is happening in ‘bankrupt’ Birmingham?

After the announcement that Birmingham City Council is – in effect – bankrupt, BBC News looks at how it got into this situation and what it will mean for the 1.14 million people served by the authority.

The current financial strife has been more than a decade in the making.

In April 2010 – 5,000 mostly female council staff won their case for equal pay at an employment tribunal

It heard workers in roles such as teaching assistants and catering staff, had missed out on bonuses given to staff in jobs traditionally done by men, like refuse collectors and street cleaners.

Since then, the council has paid out almost £1.1bn in equal pay claims and right now has a £760m bill, which is increasing by up to £14m every month.

And if that wasn’t bad enough, it has got problems with a new cloud-based IT system by Oracle.

It was supposed to cost £19m but after three years of delays in getting it in place and problems once it was installed mean it is now expected to cost £100m.

The council’s leadership pointed to other pressures on its budget: increases in demand for adult social care, reductions in business rates income, the impact of inflation and cuts to local government funding.

These issues have been known about for some time, and in July the council ended all non-essential spending with immediate effect.

On Tuesday it issued a Section 114 notice, effectively a declaration that it doesn’t have the means to meet its financial liability and cannot commit to any new spending.

The city has also been criticised by a former adviser for its decision to host last year’s Commonwealth Games.

The government has previously said the event contributed at least £870m to the UK economy, but Max Caller said last summer’s event had been a “challenge too far” for a council beset with difficulties.

The reason for the notice being issued now, is that concerns were raised on Friday by external auditors over the money put aside by the authority for equal pay claims in its accounts for 2020-21 and 2021-22, the council’s interim director of finance, Fiona Greenway, said.

They said it was understated and meant the council would have “exhausted its general fund balance on an accounting basis”.

The auditors also questioned how the authority would be able to generate the savings or extra income needed to reduce the financial challenges.

Ms Greenway said there was also a projected deficit of £87m for 2023-24 for which the council did not have enough in its reserves, given the equal pay claims in previous years, to cover.

Reporting of the Section 114 notice was described as the council going “essentially bankrupt” – this is because councils cannot officially go bankrupt due to services they have to provide by law to residents – known as the statutory services.

They include:

But it does mean there are likely to be cuts to other services which the council deems as “unessential”. It’s not yet clear what those are.

The BBC asked Birmingham City Council if it had any more information about which services might be scaled back or ended…. it simply repeated that the notice means all new spending, with the exception of protecting vulnerable people and statutory services, must stop immediately.

Popular events, like the annual Christmas Market, could be at risk as the council looks to balance its book.

There are also questions over the 2026 European Championships, which are due to be held in Birmingham.

Council leader John Cotton has insisted vital services would be protected, but warned “tough and robust decisions” were needed.

In terms of what could lie ahead for Birmingham, it is not the first council to declare it has run out of money.

Thurrock Council in Essex declared itself bankrupt in December and the leader of its Labour opposition, John Kent, said people in Birmingham would notice rapid change.

“We’ve seen dirtier streets, grass being cut less frequently, our only theatre is now under threat and every subsidised bus route in the borough was just cancelled.”

He also said council tax in the area rose by 10% last year and was likely to go up by the same amount again this year.

Birmingham City Council is a Labour-run authority, so there has been a lot of criticism from other parties.

The leader of its Conservatives, Robert Alden, said the council had “failed to show the proper speed and urgency needed to tackle equal pay”.

Birmingham’s Liberal Democrats called it a “failure of Titanic proportions”.

But, the Labour MP for Birmingham Edgbaston, Preet Gill, has also said there are questions to be answered over what happened.

She asked why money was “not being set aside every year” given the £760m equal pay claim the council has been facing.

Labour leader Sir Keir Starmer said there were versions of Birmingham’s financial crisis “across the country” as he pledged to look at a settlement for local authorities.

Birmingham City Council is also a part of the West Midlands Combined Authority, which has a Conservative mayor, Andy Street.

He said: “I am incredibly concerned that citizens – and the services they rely on – have been let down in this way.”

He also suggested there were some projects currently funded by the city council that the combined authority will have to step in and take on.

The council will hold an emergency meeting later this month and it’s said there will be more talks with the government to decide a way forward.

The government has said it is “in contact” with Birmingham City Council and has “requested more detail from them”.

Asked if ministers would step in to bail the council out, the prime minister’s official spokesman said “councils are the ones who are first and foremost responsible”.

The government had provided access to “additional support”, they added.

As we have said before, the money struggles facing Birmingham have been known for some time, and when Prime Minister Rishi Sunak was in the West Midlands in July he was asked about the possibility of emergency funds to help the council.

He said it was “not the government’s job to bail out the council for its financial mismanagement” and it should “do a better job of managing the figures properly and delivering good quality services to residents”.

Community groups which get money from the council are worried about what it might mean for them – like Kynton Swingle, from the Fox Hollies Community Association in Acocks Green.

He fears groups such as his, which provides free meals for youngsters and a warm space for people struggling with heating bills, might not be able to continue key services.

And of course, there are worries about what all this could mean for the people who work at Birmingham City Council.

The GMB union, which represents council workers, said: “Due to the reckless incompetence of council bosses, thousands of city employees will be worrying for the future of their jobs and of the essential services that they provide for the people of Birmingham.”

Unite has called for urgent meetings with the council to discuss the workers in its union.

In case you want to understand more about what the notice means…

Under the Local Government Finance Act 1988, the notice must be issued if a council’s chief financial officer believes it doesn’t have enough money to meet its spending commitments from its income

They don’t need to get the agreement of councillors to do so.

Local authorities in the UK can’t go bankrupt but the issuing of the notice is often described as “being effectively bankrupt”.

Once issued, the council can’t sign-off any new spending and must meet within 21 days to discuss next steps.

Statutory services are not included in the restrictions but existing commitments and contracts will continue to be honoured.

Most councils in such a position pass an amended budget, reducing spending on services.