NARRAGANSETT — Nine months after an actuarial report concluded that the town’s pension fund was short $10.9 million, a new report shows that the deficit improved only marginally in the following year.

Released last month, the new report says the town’s unfunded liability was $10,957,669 as of July 2005 — an improvement of $31,735.

Finance Director David Krugman said he and interim Town Manager Jeffry Ceasrine are preparing a plan to address the shortfall and will present it to the Town Council in the coming weeks. Once approved by the council, the plan would be forwarded to the state auditor general, he said.

State law requires the town to tell the auditor general how the town will make up the shortfall, which represents the difference between the plan’s assets and liabilities as of the report date.

Krugman said the town can either contribute an annual amount that would fully fund the plan after a set number of years, or show how the town will work its way up to annual contributions that would fully fund the plan.

Combined, the town and plan members would have to contribute about $2.8 million a year — about a $1 million more than the current contributions — to set the plan on a path of recovery, Krugman said. The town would have to make up the $1 million difference, roughly doubling its annual contribution, because employee contributions are set in existing contracts, he said.

Krugman downplayed the size of the deficit, saying the plan is “78 percent funded,” and in better shape than many municipal pension plans across the state.

“The problem is the perception of a $10-million liability,” he said. “There are pension plans in the state that are only 5 and 10 percent funded.”

He also said the town has contributed the same amount to the plan — 10.5 percent of employee pay — for “17 or 18 years,” even at times when the plan was more than 100 percent funded. By doing this, the town has avoided sharp fluctuations in the town budget and tax rate, he said.

Krugman said the current level of contributions would likely prevent the deficit from increasing and might even erase the deficit if everything, such as a good rate of return on the plan’s investment portfolio, fell into place.

The plan was more than fully funded six years ago, but the outlook changed after town firefighters won an arbitration case that changed the definition of “regular pay” upon which pensions are based. According to Krugman and John Stone, president of the firefighters union, the change allows holiday pay, longevity and incentive pay to be counted when regular pay is calculated. Other town employee unions obtained the same benefit as they negotiated new contracts, Krugman said.

Asked if the town could have fought the requests by other unions, Krugman said yes, but he stressed that it would have been pointless when one union had already won its case.

“The Police Department could have taken it to arbitration, too. It didn’t make sense to say no,” he said.

The pension plan covers 273 municipal employees and 115 retirees, according to the actuarial report. Municipal employees can retire after 20 years or at age 58 if they have completed 10 years of service. Firefighters can retire after 20 years, while police officers can retire after 20 years or at age 58, whichever comes first.

The normal retirement benefit is 2.5 percent of the final average pay multiplied by the years of service, up to a maximum of 75 percent of the final average pay.