On Tuesday the Labour-run Birmingham City Council – Europe’s largest local authority – issued a section 114 notice, meaning it is effectively bankrupt.
All new spending has stopped with the exception of protecting vulnerable people and statutory services.
Council leader John Cotton said the council would continue to deliver “essential services”.
Why has Birmingham City Council declared itself effectively bankrupt?
The council has paid out almost £1.1bn in equal pay claims since a landmark case was brought against it in 2012.
The Supreme Court ruled in favour of 174 mostly female employees – working in jobs such as teaching assistants, cleaners and caterers – who had missed out on bonuses awarded to staff in more traditionally male-dominated roles such as refuse collectors and street cleaners.
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 (in the region of £650m to £760m), but it does not have the resources to do so.”
Issues with equal pay settlements at the council have been ongoing for well over a decade.
In July, Sharon Thompson, deputy leader of the council, said the equal pay liability was “one of the biggest challenges this council has ever faced”.
Mr Cotton and Ms Thompson said the authority had also struggled with its finances owing to failures in the implementation of its Oracle IT system. The IT upgrade to streamline council payments and HR systems was originally expected to cost £19m but now requires around £100 million to fix.
The council also faces an in-year financial gap in its budget which currently stands in the region of £87m.
What has Labour said?
In a statement on Tuesday, council leaders said: “Like local authorities across the country, it is clear that Birmingham City Council faces unprecedented financial challenges, from huge increases in adult social care demand and dramatic reductions in business rates income, to the impact of rampant inflation.
“We implemented rigorous spending controls in July, and we have made a request to the Local Government Association for additional strategic support.”
It added that the “issuing of a Section 114 notice is a necessary step as we seek to get our city back on a sound financial footing so that we can build a stronger city for our residents.”
The statement added: “Despite the challenges that we face, we will prioritise core services that our residents rely on, in line with our values of supporting the most vulnerable.”
Mr Cotton said “tough decisions” would have to be made to save the local authority.
Speaking to BBC Radio West Midlands, he added that the council would “continue to deliver on essential services like children’s safeguarding and social care, social care for adults, education, waste collection, road maintenance and library services”.
The BBC said earlier that Mr Cotton is not in the city owing to “longstanding family commitments”, but that statutory services would continue for the city’s 1.1 million taxpayers.
At a cabinet meeting on Tuesday, Ms Thompson said that the city “had £1bn of funding taken away by successive Conservative governments” and said many other councils around the country were facing financial difficulties.
Birmingham becomes the latest of several councils to issue section 114 notices, after Hackney, Northamptonshire, Croydon, Thurrock and Woking.
What will this mean for jobs?
Talks continue to safeguard the jobs of thousands of staff at the authority.
The Unite union – which represents hundreds of workers at the organisation – claims the council’s bankruptcy came as a result of “chronic financial mismanagement”.
Sharon Graham, Unite general secretary, said: “Birmingham City Council’s workers must not pay the price for the council’s or central government’s incompetence and financial mismanagement.
“Our members undertake vital frontline services that are essential for the communities they serve and they should not be impacted through no fault of their own.
“Unite always prioritises the jobs, pay and conditions of its members and will support those at Birmingham City Council to ensure they are not mistreated due to council and government failings.”
Lee Wiggetts-Clinton, the union’s regional officer, said: “Unite is seeking urgent meetings with the council to ensure that Birmingham’s loyal workforce are not made the scapegoats for the financial crisis, which is not of their making.”
Michelle McCrossen, an organiser at GMB union, which has live equal pay claims ongoing against the council, said the bankruptcy announcement was “a humiliating admission of failure on the part of Birmingham City Council’s officials and leadership.”
She added: “Not only are they responsible for creating this crisis through years of discriminating against their own staff, but even they no longer believe themselves capable of fixing it.
“For decades the council has stolen wages from its low-paid women workers, running up a huge equal pay liability that has brought Birmingham to the brink.”
“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.
What happens now?
It was announced in July that a judge-led inquiry would be launched to find what caused the equal pay bill and who was to blame for it – this is set to begin next year.
However, that will only begin after the conclusion of a separate governance review, announced at the same time.
This will focus on failures in the implementation of the council’s new IT system.
Could other councils go bankrupt?
Jonathan Carr-West, chief executive of the Local Government Information Unit (LGIU)c, has warned several councils were being driven to “financial ruin” due to funding cuts.
He said: “To see the largest local authority in the country effectively declare bankruptcy is a sobering moment. Questions will no doubt be asked about decision-making and governance in Birmingham.
“But questions should also be asked about an inconsistent, fragmented and short-term funding system that is driving dozens of councils across the country to financial ruin.
“LGIU has been supporting councils for 40 years, but our members tell us that they are experiencing the most acute crisis they can remember.
“Not only has the amount of funding been slashed by [the] government but councils have been made to rely on short-term, piecemeal funding that inhibits effective financial management.
“Central government has kept councils living from hand to mouth and from year to year for far too long.
“Birmingham is the biggest council to fail so far, but unless something changes, it won’t be the last.”
What have the Tories said?
The opposition leader at Birmingham City Council, Robert Alden, said: “Labour’s failure in Birmingham has become clear for all to see, what Labour pledged was a golden decade ahead to voters in 2022 turns out to be based on budgets in 2022-21 and 2021-22 that did not balance and were unfunded.
“Combined with Birmingham Labour’s refusal to deal with equal pay over the last decade, this has created this mess where residents will now lose valuable services and investment.”
The Conservative Mayor of the West Midlands, Andy Street, said promises from the council to produce a plan for how to settle the liability had not been produced.
He said: “The city of Birmingham deserves so much better and, truthfully, I am incredibly concerned that citizens – and the services they rely on – have been let down in this way.”
He also warned there could now be an increase in council tax.
In a letter to residents, he wrote: “I am no clearer than any of you about what this will mean for council tax bills or key services — but I can make a promise.
“That promise is that I will leave no stone unturned in ensuring citizens are protected as best as humanly possible from the fallout.
“I will work tirelessly with ministers, government officials, and of course the city council themselves to try and resolve this situation in a way that shields residents, their pockets, their services, and their futures.”