Reflections on the bankruptcy of Birmingham City Council

Birmingham City Council has announced it is effectively bankrupt after being hit with a £760m bill to settle equal pay claims. In a statement the council said all new spending, with the exception of protecting vulnerable people and statutory services, must stop immediately. #birmingham #uk #bankruptcy 

GB News's Economics and Business Editor, Liam Halligan breaks down Birmingham City Council declaring themselves bankrupt following compensation payments to council workers that hadn't received bonuses.

I agree with the view that the cost of settling equal pay claims is to blame for Birmingham City Council declaring bankruptcy and that the takeover policy is viable.

Birmingham City Council in the UK issued two 114 notices in September (Birmingham City Council, 2023) effectively declaring itself bankrupt and, with claims increasing by an estimated £5 million to £14 million per month, suggesting that this is one of the biggest challenges the council has ever faced (Birmingham City Council, 2023).

that Birmingham City Council's negligence in its equal pay policy has led to such a large compensation award, creating an imbalance between revenue and expenditure. The Equal Pay Claims incident has exposed many problems with Birmingham City Council's governance capacity, low delivery capacity and poor management of employee relations (Vanessa Pearce and Rob Mayor, 2023). Birmingham City Council, as a government authority, derives its income mainly from central government funding and grants, followed by council tax and business rates (Tomlinson et al., 2022). The central government has a stronger repayment ability compared to the Birmingham government, by analyzing the council's revenue sources it can be seen that the council itself is unable to fill the financial gap, Birmingham City Council has previously sought funding from the central government in order to increase the support and opportunities for the citizens of Birmingham(Birmingham City Council, 2023), therefore I agree that the takeover policy is feasible.

Birmingham City Council can sell off assets, reduce staff, reduce services, and increase council tax to mitigate the crisis of insolvency (Sophie Madden, 2023), but I do not think these are the best means to do so, and from a risk management point of view I think the best mitigation means is takeover, the policy can reduce the risk of internal change for the council, maintaining the integrity of the original internal structure to avoid further turbulence, including the risk of staff transfers, legal, financial, and operational risks. Overall, takeover is a viable option to help Birmingham City Council restore its financial health, ensure continuity of services to the community, and continue to protect the interests of taxpayers.

I disagree that inflation is the reason behind bankruptcy and that acquisition is not the best mitigation strategy.

I think that other local authorities in the UK have faced problems with inflation but they have not gone bankrupt and I think that takeovers can be done in many ways and do not necessarily involve the sale of assets, thus reducing services to citizens, I cite the example of the American city of Detroit.

Inflation is a common factor in economic activity, with record Breaking Fall in Inflation to 4.7% in October, With Inflation Set to Fall to 2-3% by May 2024 (Huw Dixon, 2023). Manchester Council has been cutting the pressure on government funding since 2010 through effective programs such as budget savings (MANCHESTER CITY COUNCIL, 2023). Like local authorities across the UK, Cardiff is again facing a range of significant pressures brought about by the cost-of-living crisis, the energy crisis and the lasting effects of Covid-19. But Cardiff Council is not bankrupt as a direct result (Cardiff Council, 2023). The UK's taxes and incentives rate is the most business-friendly of the major European economies (GOV.UK, 2023).

A bailout acquisition is when a government or financially stable company takes over control of a weaker company with the aim of helping the latter regain its financial strength (CFI Team, 2023). On 18 July 2013, Detroit became the largest city ever to file for bankruptcy in the United States (EY Global, 2023). The state of Michigan and the federal government took over the city of Detroit (Poppy Harlow and Chris Isidore, 2013). Their newly elected mayor led the citizens to come out of bankruptcy together and announced a series of plans to help Detroit recover from its bankruptcy predicament, including education, family, health care, economic support for public services, water resources, transport environment and many other aspects (U.S. Department of the Treasury(.gov), 2021). After getting out of $7 billion in debt and emerging from bankruptcy, the city was restored to a new life 10 years later (Quinn Klinefelter, 2023). The example of Detroit can be a lesson for Birmingham Council.

I therefore disagree with both of the above.

In the above article, I affirmed the view that equal pay claims were the direct cause of BCC's insolvency and confirmed the soundness of the takeover policy by citing the example of Detroit, an American city, which was revitalized after the city was taken over.

Equal pay claims are a big trigger for Birmingham council bankruptcy. The negligence of the equal pay policy is a reflection of Birmingham City Council's lack of focus on internal risk management, the huge compensation caused by the internal staff suits, the debt of up to £650 to £750 million made Birmingham City Council financially unaffordable and created a series of downside risks that may have brought about several unfavourable scenarios that occurred afterwards, for example, it may have brought about a series of external risks such as selling off assets, reducing staff, reduction in services, increase in council tax, etc., which could lead to a credit crisis for Birmingham City Council from citizens and credit organizations with adverse effects.

There is a case for a takeover policy, but it should be analyzed on a case-by-case basis. The feasibility of a central government takeover is confirmed above by quoting the material of Birmingham City Council's income sources, in terms of realizing the operation of the council's policies and maintaining the long-term services, the takeover policy can alleviate the further crisis brought by downside risk to a certain extent, which is an effective risk mitigation strategy, and the takeover policy can transfer the risk treatment and bring lower The takeover policy can transfer the risk treatment and bring lower risk impact.

In summary, an effective approach to risk control is necessary, the element of legal claims resulting from the equal pay policy is one of the legal risks of insolvency in Birmingham, and the adoption of an effective takeover policy can help Birmingham City Council to continue to operate effectively.

Reference:

Birmingham City Council (2023a) Birmingham City Council statement on Equal Pay update. Available at: https://www.birmingham.gov.uk/news/article/1353/birmingham_city_council_statement_on_equal_pay_update (Accessed: 6 December 2023).

Birmingham City Council (2023b) Financial Plan. Birmingham.

Birmingham City Council (2023c) Report to all elected Members of Birmingham City Council Under Section 114(3) of the Local Government Finance Act 1988. Birmingham.

Cardiff Council (2023) Council Budget. Available at: https://www.cardiff.gov.uk/ENG/Your-Council/Council-finance/Council-Budget/Pages/default.aspx (Accessed: 8 December 2023).

CFI Team (2023) Bailout Takeover. Available at: https://corporatefinanceinstitute.com/resources/valuation/bailout-takeover/ (Accessed: 8 December 2023).

EY Global (2023) How a city transformed from bankruptcy to renewal. Available at: https://www.ey.com/en_gl/growth/how-a-city-transformed-from-bankruptcy-to-renewal (Accessed: 8 December 2023).

GOV.UK (2023) UK tax and incentives. Available at: https://www.great.gov.uk/international/content/investment/why-invest-in-the-uk/tax-incentives/ (Accessed: 8 December 2023).

Huw Dixon (2023) Record Breaking Fall in Inflation to 4.7% in October, With Inflation Set to Fall to 2-3% by May 2024. Available at: https://www.niesr.ac.uk/blog/record-breaking-fall-inflation-4-7-october-inflation-set-fall-2-3-may-2024 (Accessed: 8 December 2023).

MANCHESTER CITY COUNCIL (2023) Budget consultation. Available at: https://www.manchester.gov.uk/info/200024/consultations_and_surveys/8647/budget_consultation (Accessed: 8 December 2023).

Poppy Harlow and Chris Isidore (2013) Michigan to take over Detroit city government. Available at: https://money.cnn.com/2013/03/01/news/economy/detroit-takeover/index.html (Accessed: 8 December 2023).

Quinn Klinefelter (2023) 10 years ago Detroit filed for bankruptcy. It makes a comeback but there are hurdles. Available at: https://www.npr.org/2023/07/22/1189093540/detroit-bankruptcy-comeback-hurdle (Accessed: 8 December 2023).

Sophie Madden (2023) “Bankrupt” Birmingham City Council approves finance plan. Available at: https://www.bbc.co.uk/news/uk-england-birmingham-66914455 (Accessed: 6 December 2023).

Tomlinson, C., Pugh, A., Taylor, A., et al. (2022) Insights into Birmingham City Council’s Spending Power, Revenue Funding and Spending between 2010-11 and 2019-2020. Birmingham. Available at: https://www.birmingham.ac.uk/documents/college-social-sciences/business/research/wm-redi/wm-redi-project-docs/insights-into-birmingham-city-councils-spending-power.pdf (Accessed: 6 December 2023).

U.S. Department of the Treasury(.gov) (2021) Detroit 2021 Recovery Plan Performance Report City of Detroit Recovery Plan State and Local Fiscal Recovery Funds 2021 Report.

Vanessa Pearce and Rob Mayor (2023) Government sending in officials to run Birmingham City Council. Available at: https://www.bbc.co.uk/news/uk-england-birmingham-66852048 (Accessed: 6 December 2023).