Department heads in the Town of East Hampton have tightened their belts and watched their spending, and that means the town will end the year with a $1.5 million to $2 million surplus, which will go to paying down the $28 million debt, Budget Director Len Bernard told the Town Board Thursday night.

The year began with a standard set by Supervisor Bill Wilkinson for not overspending, he said. “Department heads were told from the first variance report issued at the end of January that spending would not exceed budget.”

The 2009 audit has shown the town what needs to be done in terms of repayments and deficit financing to make all funds whole for the Community Preservation Fund and capital funds in particular, Mr. Bernard said. “There is actually light at the end of the tunnel.”

The audit showed the current deficit to be $28 million. “We did hit $30 million at the end of 2008,” he said, citing the figure often used to estimate the depth of the town’s financial hole.

The 2011 budget process was initiated in the third quarter, and the budget adopted in late November. The spending in the 2011 budget was reduced to $64,063,908, a bit lower than the $64,092,582 contained in the three-year plan submitted to the State Comptroller on March 9, 2010, Mr. Bernard reported.

General operation improvements were begun this year, he said, and they include a series of internal checks and controls that results in all bank transfers being reviewed at three levels.

“The accounting staff, the budget officer and the supervisor review and approve all transfers of funds,” he said. The town also no longer issues manual checks, even for emergencies. All checks are produced electronically, he said.

The town has established an open line of communications with the Office of the State Comptroller in Hauppauge, and the town has complied with every aspect of the deficit financing requirements, Mr. Bernard said.

A general fund deficit will be certified by the state comptroller by the end of December. “At that point a decision will be made as to the amount of additional short-term deficit borrowing that will be required, the timing of the borrowing and when the long-term notes will be converted to long-term debt in 2011,” he reported. Enough was budgeted in 2011 for deficit-related debt service, he said.

In November, the state comptroller’s office suggested some changes to the 2011 budget. Those suggested changes, which included an increase in budgeted amounts for employee health benefits of $800,000, the elimination of anticipated revenues of $250,000 from the sale of town property, and a suggestion that the town boost its budget line for contingencies.

In a letter to Steven Hancox, deputy comptroller earlier this month, Mr. Wilkinson rejected the suggestion that the town budget more money for health insurance because last year some employees with family coverage didn’t return the dependents’ questionnaires to the insurance provider on time, resulting in the insurance company covering them as individuals.

“The town paid too little in 2009 for those employees,” the letter stated. “As the corrections began to be made in 2009 and early 2010, the town was retroactively charged for the difference between individual and family rates that had occurred. Therefore the town’s 2010 billings are a combination of what we actually owe for 2010 and what we are being back-billed for 2009.”

The 2010 year-to-date payments do not accurately reflect 2010 costs, the letter continued. Thirty-two employees retired as of October 15 and although the town will continue to provide medical benefits to the retirees, the cost per retiree is about $10,000 lower per active employee, the letter said.

As far as the $250,000 sale of town property, the letter says that amount is “a portion of what we expect to realize in property sales in 2011.”

The letter also says that the $850,000 budgeted for contingencies will be enough. There is also $120,000 budgeted for contingency in other funds such as Highway and Sanitation.

When he announced his 2011 tentative budget at the end of September, Mr. Wilkinson said in a message included with the budget that he created the spending plan using a zero-based approach, in which all expenses had to be justified regardless of what was spent the previous year. The supervisor said his budget “moves the town away from the six-year financial wasteland from 2004 to the period prior to January 1, 2010, when general fund deficits exploded to a projected $30 million, proper accounting of finances ceased to exist, and the budget process lacked basic discipline, toward the priorities of closing our huge structural deficit, properly guarding and accounting for the people’s money, and making the processes of government professional, honest and open.”