It took until after midnight for council members to settle on a 1988-89 budget that includes a small pay increase for city employees and two new part-time positions but no tax increases.

"We were squabbling over $5,000 costs," said Council Chairman Bruce Steadman of this week's meeting. "It really was a struggle to cover some basic, important things."Among the items the council found money for in the new budget year, which begins July 1, was a 3 percent increase for the city's 300 or so employees, a part-time court reporter to take the testimony of child abuse victims and a new member of the summer park maintenance crew.

Council members had to dip $473,000 into the city's fund balance to help pay for the increases and new positions. That brings the account to within about $126,000 of the amount state law requires that the city set aside for emergencies.

During their budget discussions, council members have said unless the economy improves, the city could face across-the-board budget cuts in the 1989-90 fiscal year. Revenues are already lagging because of a slowdown in new construction.

Mayor Steve Newton had recommended using a portion of the fund balance instead of increasing taxes because he said he believes the economy will turn around quickley enough to avoid drastic measures such as layoffs in the 1989-90 budget year.

In earlier budget discussions, council members had questioned whether to give the employees the increase in cash or use it to offset an increase in the cost of health insurance and other benefits.

Byron Jorgenson, the city's chief administrative officer, said employees will be able to vote next week on which option they prefer. The value of the increase to each employee, whether taken as salary or as a benefit, is about $40. Jorgensen said each employee will also be considered for a 1 percent increase based on job performance.

The two new employees will cost the city about $5,000 each, Steadman said. The court reporter will likely work on a contract basis, and the new park employee will help the maintenance crew tend two new parks being developed.