New London — The city has nearly drained its municipal fund balance to fill a $4.7 million hole in the budget for the fiscal year that ended June 30, a deficit that the mayor's office predicted back in January.

Where there was once about $6 million, now just $311,000 remains in the fund balance account. The fund balance is designed to cover emergencies and is one of the ways bond companies decide how much interest to charge a municipality when lending money.

Finance Director Jeffrey Smith delivered the news to the City Council Finance Committee Monday night.

Smith's preliminary review of the 2011-12 budget shows the city over-estimated revenues by about $3 million and over spent by $1.6 million. The school department finished in the black with an extra $31,966.

No one on the committee was surprised by the numbers. In January, Smith said the city was $1.3 million short in its 2010-11 budget and he estimated that the deficit in the 2011-12 budget could be as much as $4.3 million. It turned out to be $4.7 million.

Both deficits were covered by money from the fund balance, but that leaves only about $311,000 in the account. In 1993, the council adopted a policy that recommends a fund balance of 8.3 percent of the city budget, about $6 million.

Among the reasons for the shortfall in revenue, according to Smith, are an overestimation of tax collection, of earnings from investments and of state revenue projections.

Overages in spending were primarily in the Public Works, police and fire departments.

The finance committee received the information but took no action.

In light of some councilors calling for a forensic audit, which Smith said could cost $1 million to $2 million, Smith recommended the city do an operational audit for the fiscal years ending June 30, 2011, and June 30, 2012.

The operational audit "will see what we did wrong,'' Smith said. "If they find cause for fraud or potential fraud, we can immediately come back and request a full audit.''

"I'm skeptical,'' Council President Michael Passero said. But he added that we wants some kind of report to find out why city departments spent more than was budgeted and where the reductions in revenue came from. He said he also would like to know whether the city is doing something wrong with its books.

When Mayor Daryl Justin Finizio was elected in November, one of the first issues he tackled was a projected three-year, $12 million deficit. Finizio said about $4.3 million would be needed to cover a projected deficit in the 2012 budget and $1.3 million to cover the deficit in the 2011 budget. He said the money would have to come from the fund balance, and that the $6 million in the fund balance would have to be replaced.

k.edgecomb@theday.com

CORRECTION: An earlier version of this story has been corrected to reflect that $311,000 remains in the municipal fund balance account.