UK's second largest city Birmingham is bankrupt. How does a city go bankrupt?

UK's second-largest city and Europe's largest local authority, Birmingham, has declared bankruptcy. The city has issued the Section 114 notice, which means that the local council is no longer able to balance its budget. 

Most of us would have heard of businesses or individuals going bankrupt. But it is rare to hear that a city is going bankrupt. What does it mean for the local government and the residents of the cities? 

The case of Birmingham

• In the UK, Birmingham isn't the first city to declare bankruptcy, but it is the biggest one. 
• Section 114 notices are usually said to be a last resort when a financial crisis reaches its peak. The Conversation reports that before 2018, such instances were rare. 
• But since 2018, five local UK councils, Northamptonshire, Croydon (twice in 2020 and 2022), Slough, Thurrock, and Woking, have all issued the Section 114 notice. 

• Others like Coventry have been on the verge of bankruptcy. 
• When Birmingham became bankrupt, it hardly came as a surprise to observers given the mounting financial crisis. 

So, what happened to Birmingham?

• The current bankruptcy was years in the making. Now the massive deficit came to light when the council had to pay around 760 million pounds or around $954 million in equal pay claims.
• CNN reported that Birmingham expects to have a deficit of 87 million pounds ($109 million) for 2023-24.

• Deputy leader of the council, Sharon Thompson, blamed the UK's ruling Conservative Party for Birmingham's state, saying that they had 1 billion pounds in funding taken away by successive conservative governments. 
• The cost-of-living crisis, the increasing cost of adult social care, and other factors have contributed to Birmingham's bankruptcy. 
• A former adviser to Birmingham City Council told BBC that hosting of the Commonwealth Games was among the reasons for Birmingham's bankruptcy.

What does it mean? 

• By declaring bankruptcy, Birmingham gets 21 days to stop all new expenditures other than that required to support vulnerable people and statutory services. 
• After 21 days, the council needs to decide what to do, how to increase local taxation, what cuts to undertake, and what assets to sell. 
• Though, local councils in England cannot be legally liquidated. 
• The Department of Levelling Up, Housing, and Communities intervenes if no agreement is reached. 

Have other cities around the world gone bankrupt? 

• No, different countries have different laws and measures allowing local governments to declare bankruptcy. 
• In the US, Orange County in California declared bankruptcy in 1994. 
• Finance secretaries in India have often warned various state governments of possible bankruptcy if their finances aren't managed well and if local governments go on a freebie distribution craze ahead of elections. But this has never materialised so far, fortunately.