Why is Birmingham City Council effectively bankrupt, and what does it mean?

Birmingham City Council has said it does not have the money to pay the bill (Phil Addis/PA) (PA Archive)
Birmingham City Council has said it does not have the money to pay the bill (Phil Addis/PA) (PA Archive)

Following Birmingham City Council’s decision to declare effective bankruptcy over equal pay claims, Housing Secretary Michael Gove has outlined plans to appoint commissioners to take over the city council and to launch an inquiry into the cash-strapped authority.

Europe’s largest local authority said all new spending, with the exception of protecting vulnerable people and statutory services, has to stop because they have no money.

Mr Gove, Secretary of State for Levelling Up, Housing and Communitie, has now told MPs that he was satisfied the council is “failing to comply with its best value duty” after it effectively declared itself bankrupt by issuing a section 114 notice.

He explained the commissioners would be able to exercise certain functions as required, including financial governance, and added that the council would be expected to prepare and agree on an improvement plan within six months.

Birmingham City Council chief finance officer Fiona Greenway issued a section 114 notice on the basis that the authority was unable to pay a “potential liability” relating to equal pay claims in the region of £650 million and £760 million.

A spokesperson said: “Birmingham City Council has issued a s.114 notice as part of the plans to meet the council’s financial liabilities relating to equal pay claims and an in-year financial gap within its budget which currently stands in the region of £87m.”

But what does this all mean?

Why is Birmingham City Council bankrupt?

The pressures have been linked to a £760m bill to settle equal pay claims.

In a joint statement, the leader and deputy leader of the Labour Authority said the move to stop all spending was a “necessary step as we seek to get our city back on a sound financial footing”.

The council has so far paid out almost £1.1bn in equal pay claims since a landmark case was brought against the authority in 2012 after a majority of female employees brought cases against them.

The Supreme Court ruled in favour of 174 mostly female employees - working in roles such as teaching assistants, cleaners and catering staff - who had missed out on bonuses which were given to staff in traditionally male-dominated roles such as refuse collectors and street cleaners.

The authority said the cost of the pay claims was increasing at a rate of £5m to £14m per month and it must fund the liability accrued to date but did not have the resources to do so.

What does it mean when a council is bankrupt?

Councils that cannot meet spending commitments are forced to issue section 114 notices - something Birmingham has done - but cannot officially go ‘bankrupt’.

A council’s chief financial officer is the person in charge of this. In their role, they have a strict legal duty to issue a ‘section 114 notice’ if they believe the council will be unable to pay what is due to go out with the money they are due to be getting in from its income. The chief financial officer does not need councillors’ consent to issue this notice and must make the alert if they have a belief the threshold has been met by issuing what is known as a Section 114.

What is Section 114?

A Section 114 notice is a public notice that publicly declares there is an issue. To issue a Section 114 means the council is forbidden from making new spending commitments and must meet within 21 days to discuss what to do next and look at all of the options on the table.

Previously, other councils in this situation have then passed an amended budget to recoup money and reduce the spending on some services.

Other councils that have been bankrupt in recent years?

Thurrock, Croydon, Slough and Northamptonshire have all issued Section 114 notices in recent years.

Thurrock issued the notice at the end of 2022 and said the funding gap was the result of financial losses from the council’s investments and due to the need to repay investment debt.

Croydon’s Section 114 was in November 2022 and Slough’s was in July 2021.

Northamptonshire has also found itself in trouble in the past and issued a Section 114 in 2018, becoming the first council to do so in 20 years, after racking up debts of around £1 billion.

A Best Value Report was carried out and led to plans to abolish the county council and the seven local borough councils and replace them with two unitary authorities.