FRANKLIN—The Franklin City Council has proposed a $22.5 million budget that does not include a tax increase but does include a 5.8 percent increase in electric bills.

The spending plan also includes 1.5 percent raises for city employees.

“This is one of the most difficult budgets we’ve had to develop,” City Manager June Fleming told council. “It has not been an easy process, and the reason for that is the reality of the financial situation we are facing.”

The electric rate increase reflects a 14-percent rate increase passed on from the Virginia Municipal Electric Authority to municipalities in January, said Shelia Minor, interim finance director. The average impact would be $5.23 per month.

The proposed budget does not cut or create new services.

The first pay raise for employees in three years is expected to cost $107,000, Minor said.

The budget proposal includes a loss of $100,000 in revenue due to the closure of International Paper mill. The loss includes real estate, personal property, and machinery and tools taxes paid by the paper mill. That loss will increase to $1 million for the 2012-2013 budget, Minor said.

The refinancing done in 2010 brought some relief to the budget process as the burden of paying principal on seven outstanding loans has been lifted for a couple of years, although she said the debt service would pick back up in 2014.

“The city agreed to set that money aside in order to be prepared to mitigate loss of revenue from the closure of the IP mill,” Minor said.

Minor said $2.25 million would be saved by June 30, 2012, as part of the debt refinancing to be used for future revenue shortfalls.

Thirty-four percent of the proposed budget revenue comes from property tax, while 26 percent comes from other local taxes.

The biggest increase in expenditures for the proposed budget is for police. That portion increased by $223,000 to $3.46 million. Minor said the majority of these costs come from overtime and grant payments for new vehicles that will be reimbursed.

Funding for agencies is at an all-time low with this budget proposal, Fleming said. There is no money in the budget for capital improvements. Nearly $400,000 in roofing projects for city buildings will take a hit, Minor said.

Fleming gave warnings in regard to the future financial health of the city. She said the city would need an infusion of revenue in the coming years to continue with “business as usual.”

“We cannot continue the business as usual approach,” Fleming told council. “We have not solved the financial problem. You have no policies in place to solve it.”

The council took no action on the budget Monday, as members of council will meet with city staff in the coming weeks to discuss it before making a final decision.