Birmingham city council was “likely never bankrupt” and the decision to issue the section 114 notice two years ago was “based on unaudited and materially incorrect information”, accounting experts have claimed.
The Labour-run council issued a section 114 notice in September 2023, in effect declaring itself bankrupt, which triggered a wave of spending cuts and plans to sell £750m worth of assets. This prompted the government to appoint commissioners to run the council for five years.
At the time, council leaders blamed a £760m bill for equal pay claims, problems installing a new IT system and £1bn in Tory government cuts over the previous decade.
However, having done a fresh analysis of the council’s 2022-25 financial accounts, James Brackley, a lecturer in accounting at the University of Glasgow, claims the council underestimated its reserves position by more than £1bn.
The council’s 2022-24 accounts, which were published in July this year after delays, show the council had £784.7m in general fund reserves – from which most services are funded – as of March 2024. In November 2023, the council forecast the 2023-24 reserves to be -£677.9m.
Brackley told the Guardian: “We urgently need answers as to why the largest ever cuts and asset sales programme any authority has ever faced was able to be pushed through before a proper assessment of the council’s financial situation had taken place.”
Brackley is one of 34 experts in accounting, finance and local government calling for an independent public inquiry to investigate the decision to declare bankruptcy.
The experts sent an open letter, seen by the Guardian, to the housing and local government secretary, Steve Reed, last week calling for an inquiry to establish “how and why such a damaging section 114 notice could have been initiated based on unaudited and, as has now come to light, materially incorrect accounting information”.
The Liberal Democrat councillor Paul Tilsley said he had always been concerned the decision to declare bankruptcy was “premature”. “The letter from Brackley and his colleagues supports the stance that I and other colleagues have taken,” he said.
According to Brackley’s analysis, the council underestimated and mischaracterised its reserves in 2023 and overestimated its equal pay liability at £650m to £760m.
Although details of the equal pay settlement reached with the Unison and GMB unions this month remain confidential, in its latest financial accounts the council stated it had set aside £404m for its equal pay liability.
Brackley also said the council attributed that liability to its general fund reserve, when it could have been paid for by its capital receipt reserve, as was later the case.
The council said it was required to account for the potential liability for equal pay in 2023, not a potential settlement figure, and that would have put the council into a negative reserves position. At the time, it was unable to capitalise those costs, it said.
In addition, the council said statutory ring-fenced reserves had to be used for a specific purpose and were excluded.
The Conservative leader on the council, Robert Alden, said Birmingham residents had been left facing a “double whammy of higher taxes for fewer services” and blamed the council’s “botched Oracle rollout” and “Labour’s overspends over the last few years”.
In response, the leader of the council, John Cotton, said his focus in the past two years had been on dealing with “equal pay, the re-implementation of Oracle and with tackling a huge budget deficit”.
“We continue to make progress on all three … This year we’re on track to deliver a balanced revenue budget without the need for exceptional financial support for the first time in several years,” he said.
He said the council was working to “repair the damage of 14 years of crippling Tory cuts that cost Birmingham over £1bn, and under my leadership, this council has taken the tough decisions and decisive action”.
