An unaffordable settlement for an equal pay claim and £87m deficit have forced Birmingham City Council to issue a section 114 notice, as auditors warn financial situation is grave
The decision to take the section 114 route, effectively putting the council into bankruptcy, was taken after auditors Grant Thornton warned that the accounts for the last two years underestimated the scale of the equal pay settlement together with concerns that the Council had no plans to in place to cut costs quickly enough or raise additional finance.
Last Friday, 1 September, Grant Thornton raised concerns that the provisions for equal pay in prior year accounts, 2020/21 and 2021/22, had been materially understated which meant the Council would have exhausted its general fund balance on an accounting basis. There was also insufficient money in the reserves to cover the claims.
Grant Thornton warned that the Council did not have any contingency plans to ‘generate savings, additional revenue income, and/or capital receipts to mitigate the financial challenges’.
The Council has a projected £87m deficit for the current financial year, which is forecast to grow in 2024/25, but does not have plans in place to deal with the issue.
This means that the Labour run Council will only be able to spend money on statutory services. All new spending, with the exception of protecting vulnerable people and statutory services, must stop immediately. It may also have sell off assets and stop ongoing building plans.
The bankruptcy situation has been exacerbated by the long running dispute over equal pay which has left the Council with a bill for £760m, which it cannot afford to pay, to settle claims from thousands of women who were underpaid compared with men in comparable jobs.
As a result, the Council’s interim director of finance, Fiona Greenway, who was appointed on an interim basis in May 2023, issued a report under section 114(3) of the Local Government Act, which confirms that the Council has insufficient resources to meet the equal pay expenditure and currently does not have any other means of meeting this liability.
The section 114 notice expressed ‘concerns over the speed and effectiveness of the mitigations which have been put in place to address the in-year budget challenges, and the ability of the Council to address our financial position’.
It also confirmed the position on settling the equal pay claim, stating that it was ‘becoming more evident that it is unaffordable for the council based on existing available reserves’.
In a statement the Council said ‘it must fund the equal pay liability that has accrued to date (in the region of £650m to £760m), but it does not have the resources to do so’.
The Council has a three-week deadline until 26 September to come up with an appropriate savings plan and conduct a full assessment of the capital programme including delaying existing projects and reviewing assets for sale. It will also be working closely with the Department for Levelling Up, Housing and Communities (DLUHC), to prepare the grounds for a formal request for Exceptional Financial Support (EFS).
This is the fourth major council to go into effective bankruptcy following Croydon and Woking Councils while Thurrock County Council in Kent lost £650m in a disastrous investment in a solar wind panel farm which went bust in November 2022 forcing it into s144 status.
