Drastic council cuts caused by financial crisis misdiagnosis, says report
Cuts and assets sales by Birmingham City Council were implemented under a cloud of financial uncertainty according to a report by The Audit Reform Lab (ARL).
Government intervention came as the local authority issued a Section 114 notice, effectively becoming bankrupt last September. But the drastic measures that followed were progressed without a robust assessment of the council’s dire financial situation says ARL.
The report commissioned by the GMB, Unison and Unite unions, highlights how the demise of the council was misdiagnosed and focused on an “overstated equal pay liability bill”, rather than ongoing service pressures, the failed implementation of the Oracle IT system, the impact of austerity and the Covid-19 pandemic.
Birmingham City Council lost more than a third of its spending power between 2010/11 and 2020/21, more than £1.2bn in real terms (at 2019/20 prices), and was facing a growing population and rising costs, particularly across adult and children’s social care, home to school transport and homelessness.
ARL, a group of academics from Sheffield University, say £300m of budget cuts and £750m worth of asset sales were implemented with “little publication consultation” to pay for a £760m equal pay liability that remains “speculative and unaudited”. The measures potentially breached legal duties, says ARL, and compromised essential services for residents of Europe’s largest local authority.
Levelling-up secretary Michael Gove said the equal pay liability was the main cause of the bankruptcy, and the figure was referenced by the council’s auditors at Grant Thornton.
Grant Thornton claims, however, that it was council management who confirmed the existence of the £760m liability, and that they did not confirm this figure. The firm has not audited the equal pay liability and said it was not asked to “provide any assurance on that figure”. In its response to the Financial Times, the auditor said that the local authority had proceeded “with full knowledge that the estimate was the council’s own figure”.
Grant Thornton was assessing if “intimidation” tactics are being used by an external organisation, which has twice raised the possibility that it would be complaining about the team’s work.
The failed Oracle system, initially budgeted at £19m but escalating to £131m, caused 70,000 transaction errors when it went live in April 2022. However, the issue was not largely disclosed for more than a year, causing the Section 114 notice to appear as an ‘equal pay problem rather than an ‘Oracle and Covid plus austerity’ problem, which “significantly shifted the focus of public accountability”.
ARL says this had a major impact on the £1.255bn of exceptional financial support the council would receive from the government, which recommended cuts and asset sales before the council’s audited financial position was known.
The estimate of the equal pay liability could be closer to £250m, with lead commissioner Max Caller cited by ARL to have described the figures quoted in the section 114 notice as a ‘worst-case’ scenario due to there being no agreed job evaluation in place at that time. This raises issues as any provision for equal pay settlements should be accounted for on a ‘best estimate’ not ‘worst case’ basis.
By July 2024, ARL believes the prospect of issuing a section 114 notice had become “highly likely, if not inevitable, irrespective of the equal pay liability”.
Commissioners have set the council the challenge of disposing £750m worth of assets from its £2.4bn investment property portfolio, to pay back £1.255bn in Exceptional Financial Support (EFS).
However the asset sales, which are “linked to a likely overstated and unaudited equal pay liability”, could “risk delivering poor value for money and may create unnecessary deficits in future revenue budgets”.
ARL has recommended a restructuring of the council’s financial strategy to address the Oracle costs and calls for a public inquiry to investigate the management of the crisis, the role of external auditors, and the adequacy of public consultations.
Cllr John Cotton, Leader of Birmingham City Council, said: “I have been clear from the start that we must take responsibility for the failings that have contributed to our current difficulties, but the mistakes made in Birmingham have not occurred in a vacuum. Report after report shows that there’s a national crisis in local government caused by 14 years of neglect from the previous Tory government, combined with major rises in demand and cost led pressures.
“We’re now working very closely with a new government that clearly understands and values the vital role councils play up and down the country and I am encouraged by Labour’s plans for multi-year settlements. After years of uncertainty, this would help us improve our financial management, and ultimately steer us to becoming a better-run council that delivers the services our residents deserve.”
