Do English Local-Government ‘Bankruptcies’ Have Any Ramifications for the U.S.?
U.S. governments should learn from the mistakes being made across the pond.
U.S. governments should learn from the mistakes being made across the pond.
B irmingham’s city council has become the seventh English local government to declare a fiscal emergency since 2020, and a recent report suggests that more could follow. Although similar financial distress may not be imminent for U.S. cities and counties, local-government struggles across the pond still offer lessons. With 1.14 million constituents, Birmingham is one of the largest local governments in Europe. Media reports characterizing the council’s financial situation as tantamount to bankruptcy are thus cause for concern.
But Birmingham’s status is not quite the same as that of a U.S. city or county filing a municipal-bankruptcy petition under Chapter 9 of the federal bankruptcy code. Birmingham and the six other troubled English governments have issued Section 114 notices; these declarations are required when a government’s chief finance officer determines that actual and planned expenditures are greater than available financial resources in the current fiscal year. Once the notice is issued, the government cannot take on additional spending obligations other than those in a few essential categories. The government does not necessarily suspend payments to creditors as U.S. governments normally do under a Chapter 9 bankruptcy.
That said, issuance of a Section 114 notice is a drastic step — one that English governments took very infrequently until now. The recent spate of these notices suggests widespread fiscal distress in the English public sector.
The Section 114 filings have been ascribed to council-specific issues and reduced central-government aid to local governments generally. Birmingham, for example, is struggling with the effects of an equal-pay settlement. Under British law, female employees can file claims against employers if their compensation is lower than that of male employees performing work that requires the same level of skill, effort, and decision-making authority. If an employment tribunal rules in favor of the claimant, she is eligible to receive compensatory pay for up to six years of prior service.
When numerous claims aggregated by a public-employee union are successful, the cost to an employer can be steep. In Birmingham’s case, the council’s total equal-pay liability is as high as £760 million ($922 million). This amount approaches the £825 million ($1.01 billion) the Council collected in tax revenue during its 2022 fiscal year.
Although the United States also has equal-pay laws, no U.S. local government has faced a similar liability. Compared with British law, the Equal Pay Act of 1963 allows additional justifications for pay differentials and cannot be readily used in class-action litigation. The latter difference could be eliminated if Congress passes the Paycheck Fairness Act, now pending in the Senate, and so lawmakers may wish to inquire about the potential impact on state and local government if this bill became law.
Another contributor to Birmingham’s financial woes has been a cost overrun on new technology. The Council now expects to spend up to £100 million ($121 million) to replace its enterprise-resource-planning system with a new software that costs roughly five times the amount originally planned.
Cost overruns on financial systems are not unique to local governments in England; they affect both private- and public-sector organizations in the United States. California has spent 17 years and about $1 billion to implement a new statewide financial-reporting system that has contributed to the state’s inability to produce timely financial statements.
The San Francisco Unified School District, which has fewer than 9,000 employees, faced a $7 million cost overrun on a new payroll system that has been plagued by so many bugs the superintendent declared a “payroll state of emergency.” Numerous state and local governments across the country have experienced ransomware attacks.
If governments lack the IT skills necessary to maintain data security and oversee system implementation, they should consider outsourcing more of their IT responsibilities, especially now that cloud computing has become mainstream. Better yet, they should offload as many of their functions to the private sector as possible to reduce their information-technology needs and risks.
But some English governments finding themselves in financial trouble did precisely the opposite: taking on functions well beyond core government responsibilities. In a previous Capital Matters piece, I discussed how the borough of Thurrock was laid low by losses on its solar-farm investments. Warrington Council, deeply in debt but yet to invoke Section 114, lost heavily by investing in a renewable-energy provider.
Two other councils that have issued Section 114 filings — Croydon and Woking — took huge losses on commercial real estate. Woking’s biggest investment, a three-building mixed-use development in the city center, reported a loss of £490 million ($595 million) in 2021 as appraisers reduced the project’s value by more than 75 percent.
U.S. state and local governments should consider these warnings when planning to invest taxpayer funds. Unfortunately, U.S. local governments are slowly embracing the concept of public banking under which they too can place their solvency at risk by lending money to climate enterprises and real-estate projects.
At the national level, the U.S. has had better economic fortunes than the U.K., and, under the Biden administration, federal funding for state and local government has been quite generous. Now, as the country faces $2 trillion deficits and a divided Congress, federal support is likely to diminish. That being the case, state and local governments may go on the hunt for new nontax revenue sources. But to the extent that such revenues require investments of public funds, U.S. governments should learn from the mistakes being made across the pond.