Europe’s largest local authority went bankrupt over equal pay claims worth up to $1 billion—turns out, it may not bleed too much money on it after all

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The city council at Birmingham, located in the midlands of the country, was slammed with a ginormous equal pay claim worth up to £760 million ($955 million), following which it said the council had “insufficient resources” to make those payments. 

As a result, the council was forced to make drastic cost cuts, resulting in the sacking of 600 staff, closure of community centers, reduction of household waste collections, and even turning down the brightness of its street lights.

The measures reflected just how precarious the finances of Europe’s largest local authority were as it turned to the government for additional support.  

Now, it turns out the situation may not have been as dire as anticipated. 

A new estimate has put the pay claim in the ballpark of £250 million ($314 million), following assessments by Max Caller, the commissioner on this matter, and the GMB and Unison unions, which were instrumental in pursuing legal action against the council, the Financial Times reported. 

The initial estimate was about 200% higher under the guidance of auditors Grant Thorton because of how Birmingham’s council “had managed its accounts in the past,” Caller said.  

“The £760mn is a provision in the accounts . . . it is probably a worst-case position because when it was calculated there was no prospect of a negotiated process between the council and the trade unions to re-evaluate the jobs and settle the claims,” Caller told the FT.

The actual size of the pay claim is still being reviewed. 

Representatives at Birmingham’s city council didn’t immediately return Fortune’s request for comment. 

What brought Birmingham to this point?

Birmingham’s financial troubles linked to pay disparity began in 2012 when the U.K. Supreme Court ruled in favor of a group of public sector employees—mostly female—who weren’t paid equally compared to their male counterparts for years. 

As of mid-2023, the city council had already paid off £1.1 billion ($1.4 billion) in equal pay claims, although liabilities from the case have lingered. 

The council, which represents over 1 million people, also faced challenges owing to inflation, mounting social services costs, stretched financial reserves and a botched IT system, which compounded its situation.

“We have no alternative than to face these challenges head on. And we will do whatever is necessary to put the council back on a sound financial footing,” John Cotton, head of the Birmingham City Council said in a statement in February. “Our situation has been made much worse by a national crisis in local government finance.” 

In March, as part of the Birmingham City Council’s austerity measures, it approved a slew of cuts to services with the goal of saving £300 million ($377 million). It also hiked council tax by 21% for next year. 

These measures have far-reaching impacts on residents—for instance, Birmingham’s budget restrictions could mean less frequent garbage collection and dimmer street lights. 

The British government has given Birmingham two years to get its accounts back in order and bridge the nearly £300 million deficit.

 A mix of financial mismanagement and a drying spigot of government grants have Birmingham one of the many councils to declare bankruptcy. 

While it’s been equal pay claims for Birmingham, other councils like Woking and Nottingham have tried to cope with limited central government support by making risky bets on commercial property, which haven’t always paid off.

With U.K. general elections slated for this year, the government is under pressure to bring council finances back in order without it impacting Brits’ access to essential services. 

To help ailing local councils, the government said it’ll pump in £64 billion in funding for the current fiscal year, hoping that it’ll ease their financial crunch.

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