Birmingham city council was probably never bankrupt, says accountancy expert | Local government

Accounting experts claimed Birmingham city council “probably never went bankrupt” and that its decision to issue a section 114 notice two years ago was “based on unaudited and materially inaccurate information”.

The Labour-run council issued a section 114 declaration in September 2023, effectively declaring itself bankrupt, triggering a wave of spending cuts and planning to sell assets worth £750 million. This led to the government appointing commissioners who would run the council for five years.

At the time, council leaders blamed demands for equal pay, problems installing a new IT system and a £760 million bill from the Tory government’s £1 billion in cuts over the previous decade.

But new analysis of the council’s 2022-2025 financial accounts by James Brackley, accounting lecturer at the University of Sheffield, claims the council has underestimated its reserve position by more than £1bn.

The council’s 2022-2024 accounts, published in July this year after delays, £784.7 million general fund reserves As of March 2024, most services are funded here. In November 2023, the council 2023/2024 reserves will be -£677.9 million.

Brackley told the Guardian: “We urgently need answers as to why the biggest program of cuts and asset sales ever faced by any authority has been able to be put in place before a proper assessment of the council’s finances can be made.”

Brackley is one of 34 experts in accounting, finance and local government who have called for an independent public inquiry into the decision to declare bankruptcy.

In an open letter published in the Guardian last week to housing and local government minister Steve Reed, experts call for an investigation to establish “how and why such a damaging Section 114 notice was initiated based on unaudited and materially inaccurate accounting information as has now come to light.”

Liberal Democrat councilor Paul Tilsley said he had always been concerned that the decision to declare bankruptcy was “premature”. “The letter from Brackley and colleagues supports the position taken by me and other colleagues,” he said.

According to Brackley’s analysis, the council underestimated and mischaracterized its reserves in 2023 and overstated its equal pay liability by £650 million to £760 million.

Although details of the equal pay agreement reached with unions Unison and GMB in early October remain confidential, the council said it had made a provision of £404 million for its equal pay obligation in its latest financial accounts.

Brackley also said the council attributed that responsibility to the general fund reserve when it could have been paid for by the capital receipts reserve, as it later did.

Birmingham city council said it was necessary to take into account the potential liability for equal pay in 2023, not a potential settlement figure, which would put the council in a negative reserve position. It was stated that it was not possible to capitalize these costs at that time.

Additionally, the council said ring-fenced legal reserves must be used for a specific purpose and were excluded.

The council’s Conservative leader, Robert Alden, said Birmingham residents faced a “double whammy of higher taxes for fewer services” and blamed the council’s “wrong Oracle allocation” and “Labour’s overspending over the last few years”.

In response, Birmingham city council leader John Cotton said his focus over the last two years had been “equal pay, re-implementing Oracle and tackling a huge budget deficit”.

“We continue to make progress on all three… This year, for the first time in several years, we are on track to deliver a balanced revenue budget without the need for extraordinary fiscal support,” he said.

He said the council was “working to repair the damage caused by 14 years of Tory cuts that have cost Birmingham £1 billion, and under my leadership this council has taken tough decisions and decisive action.”