Birmingham City Council bankrupt: What is section 114 notice? - local government act explained

Birmingham City Council has issued a section 114 notice and indicated bankruptcy. The decision is attributed to a £760m equal pay liability which it doesn’t “have the resources” to pay, the council said in a statement released on Tuesday.

Financial difficulties intensified for local councils during the Covid-19 pandemic and many have issued section 114 notices since, including Thurrock and Croydon. However, Birmingham City’s declaration is particularly alarming as England’s second city is also the largest local authority in Europe.

The leader and deputy leader of the Labour-run council, John Cotton and Sharon Thompson, issued a statement on the notice: “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.

“[Tuesday’s] 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.

“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.”

But what is a Section 114 notice, and what does this mean for Birmingham City Council moving forward? Here’s everything you need to know.

What is section 114?

A section 114 notice of the Local Government Finance Act 1988 has been issued by previous councils such as Croydon and Slough and is often used as a final warning to the public and local councillors that the council is financially vulnerable and unable to balance its books. According to a House of Commons report on local authority financial resilience, CFOs have a duty under section 25 of the Local Government Act 2003 to communicate budget estimates and the ‘adequacy of its reserves’.

The notice - which is issued by the council’s chief finance officer - limits a local authority’s expenditure outside of its statutory duty to protect and fund core services. However, existing commitments and contracts will continue to be honoured.

What can Birmingham City Council spend money on?

According to a local council committee report, expenditures permitted after a Section 114 notice include...

• Existing staff payroll and pension costs 
• Goods and services which have already been received
• Statutory services at a minimum spend 
• Services that safeguard vulnerbale citizens 
• Legal agreements and contracts 
• Expenditure funded through special grants e.g. ring-fenced grants  
• Expenditure necessary to achieve value for money and / or mitigate additional costs

How much did Birmingham City Council spend on the Commonwealth games?

The 2022 Commonwealth Games was a momentous occasion for Birmingham City who hosted the sporting event. However, in light of the council’s effective collapse into bankruptcy, it’s worth noting just how much money the council sacrificed for the event.

In 2019, the Commonwealth Games Federation - the organisation that oversees the competition - estimated it would cost a sizeable £778 million for Birmingham to host the games. According to the BBC, Birmingham City Council were expected to contribute £184.2 million to the total sum - £75m of which would come from what was referred to as ‘partners’.

The council financed an extra £25m after only securing £50m of investment from ‘partners’ - an additional cost likely to have impacted Birmingham’s ability to control its financial deficit, which is currently growing at a rate of £14 million a month.

It is not yet known how much money Birmingham is generating from the long-term infrastructure built and renovated for the 2022 Commonwealth Games.

What happens to Birmingham City Council now?

After a Section 114 notice is issued, the full council must meet within 21 days to discuss the chief finance officer’s report and decide what procedure or action to take next. Councils are encouraged to postpone spending that is not essential and operate and monitor an essential spending cap.

What councils have been issued a Section 114 notice?

Local councils which have issued a Section 114 since 2018 are listed below:

• Thurrock Borough Council
• Croydon Borough Council
• Northumberland Council
• Nottingham City Council
• Slough Borough Council
• Northamptonshire County Council