Local government in the UK is facing similar pressures to US cities such as Detroit and Stockton. But it still seems unlikely that a UK council will find itself filing for bankruptcy
Detroit has become the latest city council in the United States to face significant financial distress, filing for bankruptcy last week. This follows a number of council bankruptcies over the past two years, which have included Jefferson County in Alabama, Central Falls in Rhode Island and both Stockton City and San Bernardino in California.
In the recent past large city councils in the US faced, but ultimately avoided, bankruptcy; such as New York in the mid-1970s and Philadelphia in the early 1990s. But Detroit is the first US council of its size to find itself in this position – with a population of 700,000 it is the eighteenth largest city in the country.
Detroit has filed with debts estimated to be $18-20bn, with the city council claiming that its debts represent 38 cents on every $1 it receives in revenue, which will rise to 65 cents by 2017. Stockton City was the largest city by population (296,000) to file for bankruptcy prior to Detroit, and it had a $26m (17%) deficit on its General Fund. Jefferson County held the previous record in terms of debt, with a $4bn filing.
Whilst there are differences between US and UK councils, for example the provision of utilities by some councils in the US, local government in both countries obtain their revenue funding from broadly similar sources – from federal/central government, fees and charges and from local taxes.
These recent bankruptcies represent a very small proportion of the approximate 90,000 state and local authorities in the US, but could something similar happen to one of the 433 principal local authorities in the UK?
Detroit and San Bernardino are two of the most deprived cities in the US, and this has been seen as a key factor in their respective financial tipping points. In 1950 Detroit, then at the heart of a thriving automotive industry, had a population of 1.8 million.
It has been in economic decline for a number of decades, seeing its population more than halve, but the economic downturn since 2007/08 has escalated its financial problems, impacting on the city council's ability to raise taxes from local business, employees and residents, and to generate income via fees and charges.
In the UK there have been a number of high-profile case where NHS trusts have required a financial bailout by the Department of Health, but nothing similar has yet happened to a local authority.
With central government funding reductions of 33% in real terms during the current spending review period to 2014/15, and the most recent spending round confirming a further 10% funding reduction in 2015/16, English local authorities are facing unprecedented financial pressures to sustain front-line services over the medium term.
As local taxation and income from fees and charges increase in their significance as a proportion of their income, the financial resilience of some local authorities may become precarious.
Nonetheless, because there is a statutory duty to set a balanced budget each year, it remains unlikely that we will see a UK local authority filing for bankruptcy. If this were to happen, it is worth noting that successfully filing for bankruptcy – whilst an action of last resort – is not a panacea.
Raising finance will remain difficult, especially in the short to medium term, and a root cause of financial distress – the economic downturn – will remain a challenge, particularly in the most deprived localities.
Paul Dossett is head of local government at Grant Thornton UK LLP
