The state government will advance Central Coast Council $6.2 million to ensure its 2000 employees and creditors are paid after the council admitted it was unable to pay its debts.
The council will also be suspended and an interim administrator appointed.
"It's hard to think of a more fundamental failing of a council than not to pay its own staff," Local Government Minister Shelley Hancock said on Wednesday.
"The local community is sick of excuses from council. In the two weeks since council's financial dire straits came to light, all council has done is write letters, issue media releases and set up a finance committee.
"Council reached a new low last night by deciding once again to approach the government for a bailout at the risk of council staff not being paid.
"To use its own staff as bargaining chips is reprehensible from a governing body that has failed to address its own financial failings.
Under the Local Government Act, the minister is required to provide the Council with the opportunity to make any submission before making a final determination on suspension.
"There is no question that Council needs to be held responsible for these failures.
"That's why today I will begin the process of suspending the mayor and councillors for their role in this sorry state of affairs."
The Council will have seven days to make a submission as to why it should not be suspended and an independent administrator appointed. By law the minister must consider any submission before making a final decision.
Suspension would apply to the mayor and councillors. It would not affect council staff and daily operations. An interim administrator would perform the functions of the mayor and councillors.
The $41 million deficit projected in March was now expected to increase to $89 million.
Central Coast Council Mayor Lisa Matthews said the council had committed to a 100 Day financial recovery plan.
"Our Central Coast community expect us to address these financial issues as urgently as we can and we intend to do that," she said.
"All decisions taken during this period of rapid change will ensure essential services are maintained and the impact on our community is minimised."
"Long term, this is about the financial stability of council operations to deliver effective and efficient services to meet community needs and aspirations."
The United Services Union lodged urgent proceedings in the NSW Industrial Relations Commission on Wednesday seeking an intervention to ensure workers are paid.
"Workers are rightly shocked and concerned by revelations that Central Coast Council's financial crisis has escalated to the point that there isn't enough money available to pay wages this week," General Secretary Graeme Kelly said.
"This is a truly extraordinary situation. It is something you might see in an impoverished developing nation, but it should never be the case at one of the largest councils in NSW.
"The NSW Government implemented the merger that created this council in 2016 and they have a moral obligation to the Central Coast community to ensure its ongoing financial viability.
"Rather than being forced to negotiate an urgent commercial loan or to dip into restricted funds - in breach of the Local Government Act - Central Coast Council should be provided urgent financial assistance from the NSW Government to ensure wage and service costs can be met.
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