The numbers that reveal Birmingham didn’t have to go bankrupt

Did Birmingham have to go bankrupt? The Dispatch posed this question in May, at the height of the bin strike, when rubbish lined the streets and rat catchers were doing a roaring trade. 

Accepted wisdom had it that the strike was a result of the city’s financial crisis, which itself was caused by actions taken by the council after the bin strike of 2017. Namely, the decision to create a role in the waste service which caused an equal pay risk, leading to mounting, very expensive, claims.

But, we asked, had the grim situation we found ourselves in been entirely avoidable? Did Birmingham actually need to declare bankruptcy?

In fact, doubts about the ‘bankruptcy’ have been circulating since early 2024. Among the most incredulous voices was a team of accounting researchers at the University of Sheffield, led by Dr James Brackley. They argued that, in 2023 when the council issued a section 114 notice — a kind of SOS flare that announces an authority can’t balance its books — they didn’t even have a clear picture of what those finances looked like.

The council couldn’t possibly have known whether it was bankrupt, Brackley and co said, because the accounts for the previous three years had not been audited. A year and a half later, after government-appointed commissioners had overseen spending cuts and asset sales that hit the city like a jackhammer, these accounts still hadn’t been audited — or even published.

In July of this year, finally, they were made public. And according to Brackley, the newly released accounts prove him right. He recently found a mismatch between numbers in the council’s accounts and the figures used to justify issuing the Section 114 notice.

In an open letter to housing secretary Steve Reed, Brackley and 34 accounting experts from around the country outline their case: that Birmingham City Council’s coffers were in much better financial health than the authority’s leadership claimed.  

Now, armed with this information, the accounting researchers are taking a major step — demanding a public inquiry to discover how the decision to announce Birmingham's bankruptcy was made. 

"In our view, the council wasn't bankrupt and should never have issued that notice when they did," Brackley tells me. “However you stack it up, the reserves position was hundreds of millions of pounds better than they were letting on.”

He says this is the case even before you account for the large amount of money the council owed in equal pay liabilities which, in any case, was overestimated.

"We don't know why the forecasts were so wrong, but we know at that point they didn't have a strong grasp of what the finances were,” he adds. 

“That's ultimately why we're calling for an inquiry. How can a council bankrupt itself based on numbers that we now know were hundreds of millions of pounds out?”

Crunching the numbers

In October 2023, the council’s finance chief Fiona Greenway presented her calculation that the council’s usable general fund reserves — the pot councils put aside for big projects or unexpected costs — risked ending up at -£678m by March 2024. This was partly down to a predicted overspend on services and the cost of dealing with the Oracle IT disaster. 

Then, crucially, the cost of settling equal pay claims was thought to be between £650m and £760m. This alarming financial picture was the basis of the council declaring a Section 114 notice.

But the new analysis reveals very different conclusions. Even before considering the cost of equal pay, the reserves position as of March 2024 was £184.6m better than stated. 

As for equal pay, the latest estimate for the liability in the council’s latest accounts is £404m, much lower than the £700m first predicted.

In the open letter, Brackley argues (as he did last year) that Birmingham should have kept the cost of equal pay out of the general fund, which would be possible through a capitalisation direction granted from the government. This has been done by many other councils to avoid issuing a Section 114 notice by allowing them to borrow or use money from asset sales to balance their budget. It also enables councils to use different reserves to cover big, one off liabilities. 

“It's not an obscure loophole she [Greenway] wasn't aware of,” Brackley said. “It's a well-known accounting treatment to avoid Section 114 notices that many other authorities have taken advantage of.”

Birmingham later requested ‘exceptional financial support’ from the government after it had declared effective bankruptcy and commissioners had been appointed. The capitalisation direction approved by the government totalled £1.24bn and covered multiple years – as far back as 2020/21.

Fiona Greenway, who had become the interim finance chief in May 2023, was replaced earlier this year by Carol Culley, the former number two at Manchester City Council and commissioner appointed to sort out the mess at Woking Borough Council.

The cost of going bankrupt

After the council issued its Section 114 notice in September 2023, the then-government quickly set about appointing commissioners. By early 2024, the council had outlined plans to cut £300m from its spending and sell off £750m worth of assets over a two-year period, prompting the biggest local authority cuts in history.

The combination of these cuts and asset sales have led to libraries, community centres and youth centres across the city facing closure unless community groups can step in to run them. 

Over the last two years, social care budgets have also been cut at a time of rising demand, while hundreds of council staff have been made redundant and Birmingham residents have been hit by a council tax rise of 17.5%.

On top of the wave of cuts, asset sales and council tax rises, Brackley says the Section 114 notice also increased the cost of the council's borrowing and the fees paid to external auditors.

Since the start of 2024/25, the council has generated around £200m from selling public assets, which means a further £550m needs to be generated between now and March 2026 if the target set by the commissioners is going to be met. 

Unanswered questions

The true financial health of the council has only been revealed with the publication of these accounts three months ago. The auditing backlog reflects a national crisis, which the government hopes to address by setting up a new Local Audit Office to oversee the issue.

Asked what would have happened if Birmingham’s accounts had been published on time, Brackley says: "I think there would have been question marks much sooner about the basis for the bankruptcy. 

“It was always quite clear that the commissioners came in with quite arbitrary, top down targets before they knew what the financial position was,” he adds. “And then the line for the next 18 months was ‘we know more than you because the accounts aren't published’.

“If we'd had these accounts even a year ago, I think it would have made it very difficult to pass the recovery plan,” Brackley says, referring to the catalogue of cuts approved by councillors in April 2024. “Because councillors would have rightly been asking why we need to make all these cuts and asset sales if our reserves are actually in quite a good position.”

The open letter has been sent to housing secretary Steve Reed, but the Ministry for Housing, Communities and Local Government did not respond to The Dispatch’s request for comment.

Responding to the open letter, Birmingham City Council leader John Cotton says progress is being made on his three priorities: “dealing with equal pay, the re-implementation of Oracle and with tackling a huge budget deficit”. 

“Oracle remains on track, [last] week we signed the framework agreement with UNISON and GMB to settle the outstanding equal pay claims brought by the two unions on behalf of members working for the local authority and Birmingham Children’s Trust,” he says. “And crucially, this year we are on track to deliver a balanced revenue budget without the need for exceptional financial support for the first time in several years.”

“Under my leadership, this council has taken the tough decisions and decisive action required to return to the mainstream of local government.”

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