NORTH SMITHFIELD — The town and the nonprofit private contractor that runs its fire department formally signed a new two-year contract, representatives of both sides said yesterday.

Town Administrator Robert B. Lowe said the agreement calls for a 4.25-percent increase, to about $2.31 million in the current year’s budget, and a 4-percent increase in 2009-10. The increase will cover overall operations for the North Smithfield Fire and Rescue Service, such as maintaining its fire houses, utilities, employee health insurance and pensions, as well as salaries.

North Smithfield Fire and Rescue Service Treasurer Daniel O’Brien said the nonprofit corporation was glad to get the agreement signed, as it had gone several years without one. Both sides had been living under the terms of the previous agreement while the talks went on.

Lowe said the most difficult issue had been whether the town would cover medical expenses for injured firefighters once the department’s $50,000 worth of insurance per person was exceeded. Lowe said the town’s advisers were leery of assuming the obligation, but he said he and Town Council President Linda Thibault felt that the town had a moral obligation to cover those costs.

North Smithfield does not have its own municipal fire department. Instead, it hires a private contractor that runs the fire and rescue services that cover the town. It pays the fire and rescue service a contracted amount each year to run the fire stations and manage the firefighters.

The town has no direct control over the 21-member department’s budget. It negotiates and then agrees to the amount it pays the Fire and Rescue Service and the service is free to appropriate those funds as it sees fit to run the department.

The North Smithfield Fire and Rescue Service was created by the merger of the old Primrose and North Smithfield fire departments, which were run by their own boards of directors as nonprofit corporations. The merged department, the North Smithfield Fire and Rescue Service, is also a private, nonprofit corporation.

jhill@projo.com