Think The Birmingham Bankruptcy Is Bad – Then This Is Worse

By Graham Vanbergen:  As every mainstream media outlet has reported, Birmingham city council, the second-largest city in the UK, effectively declared itself bankrupt on Tuesday. The Independent reported that – “The Labour-run council might have to shut libraries, lessen the frequency of bin collections or raise council tax after it issued a section 114 notice – meaning it cannot meet its financial liabilities. The council has blamed £760m of equal pay claims, the expenses of a new IT system, and years of funding cuts by successive Tory governments for its financial woes. It has an in-year financial gap in its budget of £87m.”

A council spokesperson said – “In June, the council announced it had a potential liability relating to equal pay claims in the region of £650m to £760m, with an ongoing liability accruing at a rate of £5m to £14m per month. The council is still in a position where it must fund the equal pay liability that has accrued to date, but it does not have the resources to do so.”

For residents of Birmingham, it means services like street cleaning, parks and maintenance, leisure, children’s services that are not social care, libraries and even the frequency that bins are collected are all in the cross hairs of financial savings needed.

In other words, Birmingham  City Council will not function correctly and everyone else will lose out … again. For them, it’s austerity 2.0.

Sharon Thompson, deputy leader of Birmingham City Council, told councillors at a meeting on Tuesday that the notice was a “necessary step as we seek to get our city back on sound financial footing”. It’s what political people say when they haven’t got an explanation of what happens next.

It’s like former Chancellor George Osborne defending his failed austerity policies whilst in government, insisting they in fact helped Britain to cope better with the effects of the Covid-19 pandemic as he did for the Covid Inquiry last June.

But if you think the collapse of Birmingham City Council’s finances is bad, then brace yourself.

Carillion

Since the collapse of Carillion in 2018, there have been two reviews, one competition inquiry and a white paper totalling some 700 pages.  Then there’s the 2020 review by Sir Tony Redmond of local government audit, another 85 pages.

From all this, we know that in the 2020-21 year, just 9 per cent of England’s local authorities actually got an audit opinion on their accounts by the September deadline.

In the 2021-22 year, and with an extended deadline, only 12 per cent of audits were finalised. The government said it was 27 per cent. This left a backlog of 520 sets of accounts stretching back to 2015-16.

Companies would have had entire boards and CEOs/CFOs sacked for failing to report accounts for so many years.

Let’s not forget that these councils spend around £100 billion of taxpayers’ money – and no one knows if these councils are solvent.

 

Birmingham

Birmingham follows Woking that went into emergency financial measures in June after loading up on debt to invest in commercial property. They followed Croydon and Thurrock, which effectively declared bankruptcy and issued a section 114 notice that blocks non-essential spending, after risky investments and, let’s be fair … poor governance.

The reality is that these councils were taking risky bets to shore up their accounts – because central government had starved them throughout the austerity years that never really ended.

Birmingham blamed cuts to central government grants, inflation, high energy costs and rising demand for services such as adult social care and homelessness for their woes. It wasn’t just that of course. The lawsuit they lost on equal pay is the vast majority of its debt problems.

 

Black Hole

But then there is Sigoma, a grouping of 47 of the largest urban authorities in England. Just last month, they warned that a third of its membership could declare effective bankruptcy this financial year or maybe next. The word there is ‘could.’ They say ‘could’ because they don’t know either. How could they without audited accounts?

The Local Government Association also adds some colour to the architecture of this unbelievable black hole. It estimates that English councils face a funding gap of £3 billion just to keep their heads above water. It’s a warning by the LGA that as Sigoma say, many councils are expected to sink.

Another problem is that things are so bad – even the auditors, companies who can smell a good invoicing deal for themselves – aren’t that keen to take on councils. All that auditing was outsourced in 2015 – or privatised if you like – and even Deloitte decided it was all too much trouble to be bothered with. So they don’t.

To deal with this, the government decided to do the worst thing possible. It said in July this year that local authorities and auditors must finalise overdue accounts by next September. But it also said they will be given a pass on their quality i.e. the regulator of the Financial Reporting Council will drop its audit inspections up to the 2021-22 year. It will inspect only where there is a clear “public interest.” By clear public interest, it means those councils so perilously close to calling a Section 114 (aka bankruptcy) that it can’t be ignored.

And if all this was not bad enough, you would think that somehow, given the huge sums of money that councils spend collectively – that there would be a functional regulator whose job it is to check. Wrong.

The regulator is the Financial Reporting Council or FRC. To quote an article in the Financial Times this week – “The FRC is still awaiting legislation that will hand it more powers, as the Audit, Reporting and Governance Authority (Arga). The government, rather than creating a new body as suggested by Redmond, in 2020 proposed making Arga the “system leader” for local audit, coordinating a fragmented and troubled market. Given Arga’s non-existence, the FRC is becoming “shadow system leader” but without the full range of powers required.”

In other words, the regulator set up to do the job hasn’t been set up, so it’s been given to a non-regulator who just lets councils off doing anything about their problems until it’s too late.

 

 

 

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