Stockton: lessons for the UK?

The City of Stockton, California, lies about eighty miles west of San Francisco.  One of the largest municipalities in the state,  its population of just under 300,000 is about the same size as a typical London Borough.  

Other parallels exist.  The size of Stockton’s debts is about $1bn, and like most UK authorities, the lion’s share of this is pension liabilities.  The budget deficit was about $26m last July, and at that stage $90m in savings have already been found. The city-wide budget for 2011/12 was about $600m (*). The budget deficit was about $26m last July, and at that stage $90m in savings have already been found since the crash.  In terms of its size, its liabilities and the deficit it faces, Stockton is the equivalent of a fair-sized unitary authority in England.

Last Monday, which in the UK brought the unfortunate conjunction of Easter Monday and April Fool’s Day,  the City of Stockton’s application for bankruptcy was approved by a federal judge.   The judgement buys the city some time to negotiate with counter-parties to bring the debt down, although creditors concern is that, thus far, Stockton has not promised to do anything about the pensions debt. 

It’s a story that brings home the irony that Stockton City Hall is in North El Dorado Street.  

The tale is important in the US because, although Stockton is not, by a very long way, the only municipality ever to enter bankruptcy, in the current crisis it is the first in a line of similarly large authorities that could go the same way.   The issue is not without controversy. Has Stockton’s capital development programme been too large? Have employee benefits been too generous?  Should tax rates have been increased? The city says its citizens and employees have given enough, and its time for creditors to chip in.

US cities are much more exposed economically than their UK equivalents.  They are far more dependent upon local taxes, largely property taxes which have been hit hard by the credit crunch.  In the UK, authorities still get a large proportion of their funding direct from Government and are at least partially protected from economic factors. 

Ah, there’s the rub.  English local authorities might not be exposed as cruelly to taxbase changes as cities in the US,  but government grants have been reduced over time on a similar scale.   The difference is that in the UK this has been a managed process, not dependent upon the overnight impact of economic downturn on local economies but fed through over time and – although I know some will disagree with this - distributed more or less evenly across the country.

But it is also the case that changes in the way English authorities are funded will make authorities much more reliant on tax income in future.  The Business Rates Retention and New Homes Bonus systems both take us in that direction.  Unchecked, the system will gradually make authorities whose local economies are growing richer relative to all the others and it remains to be seen the extent to which the regular resets of the business rates scheme addresses this issue.  

This is not necessarily bad news for English authorities.  We have lobbied for many years for more fiscal autonomy and that long-term aim shouldn’t change just because current economic forces are against us.  We need to bear in mind that more financial freedom comes with responsibilities as well as powers and anything that encourages better financial governance is good news in my view, never more so than when finances are tight. 

The way in which the change of emphasis from government funding to local tax is significant. At the moment, the government seems to want to hand the risks down to local government but keep a lot of the powers for itself.  The benefits and risks of both business rates and council taxbases rest largely with local authorities, but the government retains substantial control over setting the rates of tax for each.  In the case of business rates it sets the rate itself; in the case of council tax it does everything it can legally and politically to restrain local increases.

This is important because the way we manage our liabilities in local government in this country relies on the idea that local authorities have tax raising powers but that the Government is the lender of last resort.  It’s a finely balanced system in which we treat local authorities as kind-of financially independent and kind-of supported by the government.  Were this not the case, actuaries would have to take a different view when it came to the time they allow to recover those pension fund deficits. It is a typically British compromise that kind-of works, but could easily be disrupted. 

So we do need to think about a ‘whole system’ approach to financial reform.  At the moment, as far as I can see, there is no formal system of bankruptcy that applies to local authorities in England.  If a local authority fails – and it’s supposed to be prevented from happening by various checks and balances – then the current system allows the Secretary of State to intervene under the ‘best value’ provisions.   The trouble is this is a blunt edged threat.  The Secretary of State cannot intervene too readily because, while intervention might solve a governance problem, it doesn’t directly address the political and financial issues.  It is question either of the Council sorting out the problem itself or the Secretary of State doing it. No Minister is going to be too eager to take that one on. 

The approach to constitutional matters in this country has always tended to be to make things up as we go along.  At the moment there are no English local authorities saying they face immediate insolvency unless they can renegotiate their debt or liquidate some of their assets, so there is no immediate problem to solve.  The question arises if the 'kind-of this and kind-of that' system breaks down and other agencies start to take a harsher approach to the future financial viability of authorities.  In the longer run, perhaps we will need some clarity – as in the US- over what happens when an English authority gets itself in a pickle.

(*) The current exchange rate is about 2 pounds Sterling to every 3 US dollars.