By Hilary Russ
SCRANTON, Pennsylvania (Reuters) - The Scranton city government learned on Thursday that the state may help the cash-strapped city find ways to plug a $16.5 million budget gap that recently prompted the mayor to cut public employees' pay to the minimum wage.
Pennsylvania, which has intervened in other struggling cities such as the capital Harrisburg, has offered to pay for a mediator to help Scranton's mayor and council resolve differences and craft a financial recovery plan, according to a letter read at the meeting.
If Scranton can enact a plan by August 15, the state will also give an interest-free loan of $2 million to pay expenses, and an additional $250,000 grant.
If the city cannot find lenders to bridge the gap, it could run out of cash to meet payroll and other operating costs. The deficit from 2012 through 2015 could be as high as $37.7 million, council member Robert McGoff Jr. said at the meeting.
"I think this is an opportunity that we need to take advantage of," McGoff said. "At this point in time we need every cent we can."
Until now, city council members and Mayor Christopher Doherty have been unable to agree on a fiscal plan to put Scranton back on track. One of Doherty's proposals is a 78 percent tax increase over three years.
Scranton, which is the setting for "The Office" television show, is one of several in Pennsylvania and across the United States that are scrambling to maintain services with shrinking revenue. Many municipalities have found themselves unable to deal with rising costs for services, employees and pensions while their tax revenue stagnates due to the weak U.S. economy.
One day last week, Scranton had just $5,000 in the bank. Doherty, a Democrat, thrust the city into the spotlight on July 6 when he told firefighters, police and public works employees they would suddenly be earning $7.25 an hour, the state's minimum wage.
He also cut his own pay and that of city council members to minimum wage.
"I am very hopeful that the mayor will sit down with the council and negotiate in good faith," council member Pat Rogan said at the meeting. "This city council is not going to pass a 78 percent tax increase. There are many other ideas for generating revenue."
Tension at the meeting boiled over when Sam Vitris, president of Scranton's Department of Public Works Union, began yelling after one city council member referred to alleged abuse of overtime by public works employees.
Council members recessed, locking themselves in their office for a few minutes before resuming the meeting.
"People are just frustrated with a lot of what's going on," said resident Doug Miller, who attended the meeting.
Scranton, nicknamed "The Electric City" for having one of the nation's first electric streetcar systems, is a former center of anthracite coal mining.
Its total operating budget for 2012 was $85.3 million, up from $75 million in 2011. The police department accounted for 28 percent of the city's expenditures, fire services for 27 percent and public works for 20 percent.
Scranton's drastic action to reduce wages prompted unions to launch three lawsuits: one aimed at blocking the cuts in state court, and two claiming the mayor violated federal wage laws and benefits programs for disabled police and firefighters.
The unions have also asked a state judge to hold Doherty in civil contempt, saying he violated a judge's order not to cut salaries.
(Editing by David Gaffren and Philip Barbara)