Highland council is not bankrupt but consider - How Birmingham City Council's Equal Pay Bankruptcy Provided Cover For Ongoing Oracle It Disaster

14th March 2024

The importance of budgets are brought home by what has happened to Birmingham council that has agreed huge cuts to services and jobs. For Highland attention should be paid to the growing deficit that is the result of many years of insufficient funding from central government. While the problems in Highland may be on a smaller scale they are nonetheless serious.

Todays Highland council meeting is looking at the plan and can be viewed live at https://highland.public-i.tv/core/portal/webcast_interactive/817947

Birmingham city council is set to vote through a raft of budget cuts amounting to £149 million. Along with £500 million of asset sales, this amounts to what my colleagues and I, at the Audit Reform Lab, think will be the biggest cuts any local authority has ever made.

The proposals will devastate crucial statutory services, including children's services, home-school transport, early help and adult social care. They will also include a 21% rise in council tax over the next two years and a near complete defunding of the arts.

A local authority cannot technically declare bankruptcy. But it can issue a section 114 notice when it is unable to balance its budget.

Birmingham did so, twice, in September 2023, citing "the cost of providing for equal pay claims", which was revealed in September as being around £700 million (between £650 million and £760 million). This new liability left the council in a negative "usable reserves" position - meaning it would not have the long-term funds to cover its costs.

We have conducted extensive documentary analysis of cabinet and audit committee papers, financial plans, annual reports and other key documents from the past two years. We have also observed public meetings since the section 114 notice. Our investigations show that the initial announcement did not tell the full story.

We have found that the spiralling budget deficits cited in the section 114 notice have little to do with the equal pay issue. Instead, they are the result of a disastrous implementation of a new Oracle IT system, which is compounding a decade of austerity cuts that had already left services severely overstretched.

Our findings suggest that the council must have known this IT disaster would have triggered a section 114 notice, but it issued the notice on equal pay claims grounds instead. This raises the important question of why.

What's more, the council was told there was no reliable financial basis for the amounts of cuts being proposed. The council's IT problems have meant it has not been able to monitor its budget effectively.

Birmingham city council told The Conversation that there has been extensive discussion in the public domain about the IT issue and that the council leader has spoken of the need for a public inquiry.

Budget overspend
Since September, the £700 million equal pay liability has been repeatedly cited, by the council and pundits alike, as the reason for the section 114 notice being issued.

The first point in the notice does cite advice from the external auditors, Grant Thornton, on equal pay. However, we have since confirmed that they were not in fact provided with the equal pay calculations until late November 2023.

According to the agenda for the February 21 2024 audit committee meeting, the auditors have still not been able to sign off on the amount of the liability five months on from the section 114 notice.

Meanwhile, cabinet papers from February 27 2024 show that the majority of the claims are unlikely to be settled until after April 2025. In other words, much of the liability relates to possible future claims, rather than current obligations.

None of the in-year deficit cited in the section 114 notice relates to the settlement of new equal pay claims. And none of the £149 million of cuts to services relate to any deficit created by equal pay settlements.

Instead, the council's spiralling deficit, estimated at more than £300 million, appears to relate to the disastrous launch of the Oracle IT system that went live in April 2022. Originally budgeted at £40 million, the latest report by the head of financial planning to the cabinet on February 27 2024 showed that the Oracle finance and human resources system has now run to an astonishing £131 million.

On top of this £91 million overspend, a further £69 million of savings in 2023-24 had to be written off as planned efficiencies were not delivered. Our investigations, which have included speaking with sources in the council and reviewing cabinet and audit committee documents and council financial plans, suggest much of this was related to Oracle.

The savings delivery rate, for example, was 91% in the year before the Oracle programme was installed and was around 70% over the past five years. In 2023 that rate dropped to just 18%.

Many of the documents show the council was not able to monitor its budget effectively. An operational assessment of Oracle by the auditors released in January 2024 showed that more than 70,000 transaction errors have left the council in chaos, unable to prepare basic financial information. Through the 2022-23 financial year, council tax and business rates were not being effectively collected.

The auditors stated on January 31 2024 that: "No budget monitoring reports have been provided to Directorates during 2022-23 or 2023-24". On February 27 2024 the chief financial officer, meanwhile, said: "Reliance could not be placed on the most basic of financial information from the system, with Directorates unable to receive monitoring reports which reflected the true in-year financial position."

Political and financial consequences
We have reviewed the exceptional financial support package provided by the Department for Levelling Up, Housing and Communities. It now seems clear that by July 2023, senior executives in the council should have been aware that the Oracle disaster was set to trigger a section 114 notice.

We can confirm that if the council had waited for the audit of the equal pay liability to be completed, it would have in any case needed to issue a section 114 in relation to a £400 million hole in usable reserves and a projected £240 million "budget gap".

These figures are over and above the £149 million of cuts the council has now identified. This means that, even if we set aside the equal pay issue, it would not have been a position to set a lawful budget.

This suggests that the council may have effectively jumped before it was pushed.

This has two important consequences. The first is political. Placing the blame on a headline-grabbing equal pay liability puts the problem at the door of the city's trade unions and the elected Labour party leadership.

By contrast, accepting the section 114 notice on the basis of a failed Oracle implementation - much of which appears to have been withheld from elected members and the council's audit committee - would have put the blame squarely at the door of the council's senior executive team. Documents and webcasts of council committees through 2022-23 seem to show senior staff playing down the Oracle issue, with any concerns being "batted away" according to one audit committee member.

The second is financial. Accepting a section 114 notice on the back of the failed Oracle implementation would have fundamentally undermined the current programme of cuts. This is because, as both Grant Thornton pointed out to the January 2024 audit committee, and the chief financial officer repeated in February 27 2024 cabinet papers, there is no reliable financial basis for the sums proposed.

To quote the external auditor's January report to the audit committee: "The council is several months from having an auditable set of accounts for 2022-23. There is no reliable forecast outturn for 2023-24, or a reliable baseline cost position against which to set the 2024-25 budget."

The "revenue outturn report" sets out the actual expenditure for the year. Not having this for either 2022-23 or 2023-24 means the council does not have crucial accounting information on its financial position.

It has also not conducted any meaningful public consultation on the cuts, nor had any independent assurance over their financial sustainability or value for money.

Our research shows that these new proposed cuts could cause a cost spiral due to mounting pressures on statutory services and serious business continuity risks. It could send the council over a financial cliff edge.

It is very possible that if Birmingham city council had waited to issue a section 114 notice linked to Oracle, this would have forced central government to underwrite the council's position until its financial position could be properly assessed. It may have delayed much of the pain until 2025-2026, by which point a new, nationwide funding settlement for local government would have been a real possibility.

With councils like Birmingham facing a steep rise in cost pressures, and an existing £4 billion funding gap across the sector, a new funding settlement for local government will be an urgent priority for any incoming government following the general election later this year.

Author
James Brackley
Lecturer in Accounting, University of Sheffield

Note
This article is from The Conversation web site. To read it with links to more information go HERE

Update Guardian 5 March 2024
Birmingham council has passed its devastating budget with huge cuts and job losses.
Birmingham council approves biggest budget cuts in local authority history