• Several local councils are facing effective bankruptcy
  • Various reasons are given, but mismanagement is common to all
  • If anything is to improve, there must be more accountability

Local government councils in England and Wales don’t generally have a reputation for running tight fiscal ships. But unlike the national government, they can’t just issue debt and print the money to pay the interest as it comes due. They need to keep spending within realistic revenue projections.

Five members of the Special Interest Group of Municipal Authorities (SIGOMA) – a collective of 47 urban councils – said they were in such dire financial straits that they were considering issuing a notice of their inability to balance their annual budget for 2023-24.

A further nine SIGOMA members said they may have to, in effect, declare bankruptcy next year. The group called on the government to provide additional funding to local authorities struggling to manage.

Of course. The solution is never to find ways to reduce spending it seems. Governments, national and local, always find that near impossible. So it is on the funding side where solutions must be found in response to negative surprises.

Here are a few of the more prominent ones…

Take Thurrock Council, which declared effective bankruptcy earlier this year – it is over £1.3 billion in debt. Of the various reasons cited, the one that really stands out is the large losses on substantial investments in solar farms.

Solar farms? What is Thurrock Council doing investing in solar farms? Good question. Apparently the council finance director had “unlimited authority to invest in anything he felt fit,” according to a government report entitled “Thurrock Council Best Value Inspection Report”. The BBC states:

The Council’s “unique investment strategy” could be traced back to May 2016 when it invested £24m in a solar farm in Swindon operated by Rockfire/Toucan.

Mr McArdle said in 2017-18, the council gave the then finance director Sean Clark permission to increase “non-specified” investments from £200m to £550m, and the cash limit for any one external fund manager from £75m up to £425m.

“This is an extraordinary expansion in the delegated authority of officers,” said the report.

For those who know their geography, Swindon is nowhere near Thurrock. One wonders how Mr Clark mentioned above even learned of this particular investment opportunity.

Back in 2022, Croydon Council declared effective bankruptcy for the third time in just two years. The official statement cited “the ongoing impact of historic financial mismanagement” which “has left the authority financially and operationally unsustainable”.

More recently, the largest local council in Europe, Birmingham City Council, gave notice of financial distress. The primary reason given was an unanticipated “£760 million bill to settle equal pay claims”. So apparently the council failed to pay its workers fairly, according to the law?

So we have councils going bankrupt for a variety of reasons: risky investments gone badly wrong, chronic financial mismanagement and an inability to implement employment compensation law correctly.

Those may seem like different causes, but they all can be reduced to one: incompetence.

In the business world, when such mistakes are made, accountability tends to be rather clear. Firms lose money. If a firm loses a lot of money, it might need to raise capital in order to avoid bankruptcy. If it does go bankrupt, its creditors will take over the assets, seeking to retain as much residual value as possible.

When councils get into trouble, they don’t have the option of raising capital. They do have the option of going to the government to seek help. Help will no doubt continue to be forthcoming, funded primarily by taxpayers nationally, not locally.

That said, help tends to come with strings attached. Councils that wandered too far from fiscal prudence are reined in, as it were. Obviously, such reins are not always particularly taut. How else would Croydon have needed to declare effective bankruptcy three times in two years as mentioned above?

Incompetence in council governance, it would seem, is a chronic problem that doesn’t just go away.

At least we can now reassure ourselves, based on the settlement of the Birmingham City Council’s equal pay claims, that in the future, council employees will be receiving equal pay for equal incompetence.

Until next time,

John Butler
Investment Director, Fortune & Freedom