What Happens When a Council Goes Bankrupt?
There’s been a steady increase in a troubling trend around the United Kingdom: the financial collapse of local councils.
Local councils, also known as local authorities, are governing bodies responsible for providing essential services to millions of citizens. These councils form the backbone of local governance in the UK. They’re tasked with a wide range of responsibilities, including:
- Social care
- Education and schools
- Housing and planning
- Waste collection and recycling
- Road maintenance and transport
- Environmental health and trading standards
Funding for the councils is primarily through a combination of government grants and taxes. In recent years, many councils have faced significant financial challenges due to funding cuts, increased demand for services (especially in social care), and rising costs. These have led some councils to the brink of bankruptcy, raising concerns and leaving people wondering what happens if a council goes bankrupt?
The idea that a council can even go ‘bankrupt’ might never have crossed your mind, you’re reading this and thinking, how can a council go bankrupt? However, the reality is, council finances are often complex and can be confusing for most people.
In this article we’ll look at what happens when a council is bankrupt, why are councils going bankrupt, and how many councils have gone bankrupt.
Why Are Councils Going Bankrupt?
Council bankruptcy, like their finances, is a complex mix of both internal and external factors. To properly understand it, let’s look at the possible circumstances that have pushed many councils to the brink.
Austerity and Funding Cuts
Since the global financial crisis of 2008, funding to the local authorities by the UK Government has been reduced by approximately 40% between 2009/10 and 2019/20, from £46.5bn to £28bn in 2023/24 prices. This massive reduction forced councils to make difficult choices, such as cutting non-statutory services and dipping into their reserves to maintain essential functions.
In a report titled ‘Assumptions and outline results of the 2025 funding gap analysis’, it was found that in 2020/21, council services faced a funding gap of between £1-2 billion. A gap expected to grow to over £6 billion by 2024/25. This shortfall has left many councils struggling to balance their books, with some resorting to risky investments or severe service cuts to stay afloat.
Increased Demand for Services
On the other hand, while funding has decreased, the demand for council services has increased, particularly in social care, both for children and adults. The UK’s ageing population has put immense pressure on adult social care services, with councils often having to divert funds from other areas to meet this growing need. Councils are forced to make decisions like these when faced with squeezing and shrinking funds, as they try to meet statutory obligations while maintaining other services.
Rising Cost
According to a report by the Greenberg Center for Geoeconomic Studies, between the third quarters of 2020 and 2022, global inflation soared from 1.9 percent to 8.8 percent. The result of a combination of inflation, increased wages, and the growing complexity of service provision, council costs are only going to rise. With the introduction of the National Living Wage in 2016 the cost of providing care services increased, a burden which was largely borne by local authorities.
Additionally, the cost of waste management, road maintenance, and other essential services has continued to rise, often outpacing the ability of councils to generate revenue.
Economic Downturns and Unexpected Crises
External shocks like the COVID-19 pandemic and supply chain issues have exacerbated existing financial pressures. These extraordinary situations have led and pushed costs for councils in areas such as public health and social care up, while simultaneously reducing income from sources like parking fees and leisure facilities. This has forced councils to spend, while being unable to generate any significant revenue.
Structural Issues in Local Government Finance
The current system of local government finance in the UK has been criticised as outdated and inflexible. Councils have limited ability to raise funds independently, with restrictions on council tax increases and business rates retention. This leaves them heavily dependent on central government funding and vulnerable to policy changes at the national level.
The convergence of these factors has created a perfect storm for many councils, pushing them towards financial crisis and, in some cases, bankruptcy. As we’ll see, the consequences of this financial instability extend far beyond the balance sheets, affecting the very fabric of local communities.
What Happens When a Council is Bankrupt?
When a council faces insurmountable financial difficulties, it may be forced to issue a Section 114 notice under the Local Government Finance Act 1988. While the primary reason a section 114 notice is issued by most authorities is because they expect their expenditure to exceed their income for a particular financial year, it’s effectively a declaration of bankruptcy.
However, since the term ‘bankruptcy’ isn’t technically used for public bodies, let’s explore the process and consequences of this notice in detail.
Immediate Consequences
Spending Restrictions
Upon issuing a Section 114 notice, the council must immediately cease all non-essential spending. This means only statutory services and pre-existing contractual obligations can be met. Everything else is placed on hold unless approved by the Chief Financial Officer.
Emergency Meeting
A leadership meeting must be called within 21 days of the notice to discuss how to bring their expenditure in line with funding. This often involves drafting an emergency budget that severely cuts spending to bring it in line with available resources.
Initial Impact on Residents
One initial noticeable change will likely be waste management. Bin collections might move from a weekly to a fortnightly schedule or introduce charges for services that were previously free. This raises potential concerns about hygiene and odour, particularly in densely populated areas or during summer.
Other things may be impacted such as green spaces, local events and youth services. The issuance of a Section 114 notice represents a significant crisis for local authorities. While immediate changes might not be apparent, the long-term consequences can be substantial, affecting service delivery and community wellbeing.
Staff Redundancies
Another unfortunate consequence of council bankruptcy is staff redundancies. We often talk about the financial and service implications but forget to consider the human cost and what happens to staff when a council goes bankrupt. When Croydon Council issued a Section 114 notice in 2020, it announced plans to cut 400 jobs to save £41 million.
Simply put, if you’re wondering what happens to staff when a council goes bankrupt, the same thing that happens to every other business. Local residents employed by the council might lose their jobs, increasing unemployment rates in the area. With fewer council-run events and services, the drop in economic activity in town centres will also affect local businesses that rely on footfall.
Government Intervention
In severe cases, the central government may intervene directly.
This usually involves sending in commissioners to oversee the council’s finances and decision-making processes. These commissioners have the authority to override local elected officials on financial matters.
Long-Term Restructuring
Councils that are recovering from bankruptcy face a long and slow process. They must implement significant structural changes to regain their financial stability. This can involve reorganising departments, outsourcing services, or even entering into shared service agreements with neighbouring authorities to reduce costs.
Reputational Damage
A council forced to declare bankruptcy will face severe reputational damage. This will affect their future ability in not only attracting investments but also a loss in public trust.
The consequences of council bankruptcy are felt both by the authorities and the local residents. The ramifications of this extend far beyond the council chambers. It represents a breakdown in local governance and often leaves lasting scars on the entire community.
What Happens to Staff When a Council Goes Bankrupt?
We’ve examined what happens when a local authority goes bankrupt and how a Section 114 notice works. Now, we’ll consider what happens to staff when a council goes bankrupt because the effect of a council bankruptcy on its staff can be severe and wide-ranging. Here are the issues facing staff of local councils when a Section 114 notice is issued.
Job Losses
Redundancies are often the first measures taken to reduce costs. As mentioned, when Croydon Council issued its Section 114 notice, it announced plans to cut 400 jobs across all levels of the organisation, from frontline staff up till senior management.
Pay Freezes or Cuts
Beyond job losses, council staff often face pay freezes or cuts – a situation that can be extremely demoralising. When staff struggle to meet basic expenses due to unpaid or reduced pay, it takes a toll on workplace morale. A pay cut doesn’t only hurt their wallet but will in turn impact job morale and on-the-job performance. These measures, while aimed at cutting costs, risk creating a demotivated workforce, potentially undermining the very services the council strives to provide.
Changes to Terms and Conditions
When faced with a financial crisis, councils may resort to renegotiating staff contracts. Some changes might include reducing benefits, extending working hours without increasing pay, or broadening job descriptions to encompass additional responsibilities.
This shift in employment relationship will erode trust between management and staff, potentially leading to decreased job satisfaction and loyalty.
Increased Workloads
As councils implement staff reductions to cut costs, the burden often falls on remaining staff to pick up whatever is left. These workers frequently find themselves shouldering significantly increased workloads, without additional compensation or support.
This sudden surge may affect the quality of services provided to the community as overworked staff struggle to maintain previous standards across a broader range of tasks. This can create a vicious cycle where stressed staff deliver poorer service, leading to increased complaints and further pressure, potentially culminating in a decline in both employee wellbeing and public satisfaction.
Uncertainty and Stress
The process of council bankruptcy and restructuring often stretches over extended periods. All staff involved are subjected to prolonged uncertainty about their future and job security.
This strain can have profound impacts on their mental health and overall wellbeing, causing anxiety, depression, and stress-related physical symptoms as they grapple with the possibility of job loss or significant changes to their roles.
Impact on Pensions
Public sector pensions are generally protected and almost guaranteed. Even then, once a notice is issued, there may be changes to pension arrangements or concerns about the long-term stability of pension funds that will have to be addressed by both the council leadership and their staff.
Unfortunately, the human cost of council bankruptcy is often overlooked in discussions that focus on financial figures and service cuts. It needs to be understood that the impact on council staff is profound, long lasting and affects not just the individuals but also the broader community that relies on their expertise and dedication.
How Many Councils Have Gone Bankrupt?
It should be noted that the number of councils that have formally declared bankruptcy (through a Section 114 notice) remain relatively small. While we’d like to point out and ask about which councils have gone bankrupt and discuss these failed councils, in truth there are many more councils teetering on the brink of financial collapse.
At the time of writing, the councils Northamptonshire County Council (2018), Croydon Council (2020), Slough Borough Council (2021), Thurrock Council (2022) and Woking Borough Council (2023) have declared bankruptcy.
Between 2018 to 2023, five councils have effectively declared bankruptcy. However, a recent survey by the Local Government Information Unit (LGIU) found that over half of the councils surveyed in England, Wales, and Scotland reported they were at risk of bankruptcy by the next parliament. This survey suggests that while formal bankruptcies remain rare, many councils are struggling financially.
It is unfair to ask what councils have gone bankrupt and blame the ongoing wave of council bankruptcies on the COVID-19 pandemic alone. Rather, the pandemic acted as a catalyst, exposing and intensifying long-standing financial vulnerabilities within local authorities. Years of austerity measures reduced central government funding, and increased demands on social services strained council budgets to their limits. The pandemic accelerated this crisis, finally pushing many councils over the financial edge.
The consequences of council bankruptcies aren’t limited to balance sheets and bruised egos. They affect local communities, impacting essential services, council staff, and the overall quality of life for residents.
As the number of council bankruptcies are expected to increase in the future, and the effects spillover to your community, it’s time you take proactive steps to protect yourself and your business. Reach out to our team of licensed insolvency practitioners for a free, no-obligations consultation. Don’t wait for a crisis to hit your area.
References
Local Government Information Unit. (2023, January 27). Over half of councils face bankruptcy within next parliament. https://lgiu.org/press-release/over-half-of-councils-face-bankruptcy-within-next-parliament/
Butler, P. (2020, November 24). Croydon council outlines drastic cuts to jobs and services. The Guardian. https://www.theguardian.com/society/2020/nov/24/croydon-council-outlines-drastic-cuts-to-jobs-and-services
BBC News. (2018, February 2). Northamptonshire County Council bans spending amid crisis. https://www.bbc.com/news/uk-england-northamptonshire-42815376
Atkins, G. (2023, March 27). Local authority Section 114 notices. Institute for Government. https://www.instituteforgovernment.org.uk/explainer/local-authority-section-114-notices
Greenberg Center for Geoeconomic Studies. (n.d.). Global inflation tracker. Council on Foreign Relations. Retrieved September 23, 2024, from https://www.cfr.org/tracker/global-inflation-tracker
Local Government Association. (2020). Assumptions and outline results of the 2025 funding gap analysis. https://www.local.gov.uk/sites/default/files/documents/Technical%20Document%202020.pdf
Faulkner, D. (2023, May 26). Local government finances: Impact on communities. House of Lords Library. https://lordslibrary.parliament.uk/local-government-finances-impact-on-communities/
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