WARWICK — While the city faces some tough financial challenges –– mostly in the form of past and potential School Department deficits –– the preliminary results of the independent audit for the fiscal year that ended June 30 provide some good news.

According to Mayor Scott Avedisian, the audit indicates that the city side of the ledger for fiscal 2008 ended in the black with an operating surplus of about $991,000, even though some fees and other revenues fell short of expectations.

The surplus is largely due to belt-tightening by all city departments, said Avedisian, who also credited Finance Director Ernest Zmyslinski with being “a careful steward of city funds.”

But school officials have already announced that they had an unexpected deficit of about $2 million for fiscal 2008, so the nonschools surplus will not enable Warwick to increase its cash reserve.

Avedisian estimated that if the audit’s preliminary figures hold true, the city’s cumulative surplus will be in the neighborhood of $4 million.

Avedisian and Zmyslinski this week said they still hope the schools will be able to start repaying the city for covering the deficit.

At this point, school administrators have said they have not yet gotten a clear picture of exactly how the deficit occurred, and last month the School Committee voted to bring in an auditing firm to thoroughly examine the books and find out what happened.

The city’s fund balance was a controversial subject in the spring spring when the City Council members were reviewing Avedisian’s proposed budget for the fiscal year that began July 1.

The budget, which the council adopted as presented, relied on an infusion of $3.3 million from the cash reserve.

A number of council members opposed the budget on that basis, noting that the city’s cash reserve had dwindled in recent years and saying that they were not satisfied that the city had enough of a cushion to absorb unforeseen fiscal problems. Some council members also said they wanted to see a specific plan in place to rebuild the fund balance.

Avedisian’s administration said that although there have been ups and downs, the city has been able to slowly grow its fund balance over the past decade and that the current budget’s reliance on the infusion would not jeopardize the city’s financial stability.

In May, Zmyslinski said that the cumulative surplus was relatively high in 2007 at about $12.3 million. It dropped to the $5 million range after it was tapped to feed the fiscal 2008 and 2009 operating budgets.

The annual audit is required by state law and the one for fiscal 2008 must be submitted to the auditor general’s office by Dec. 31.

In trying to calculate the stability of the city’s cash reserve account, one looming question is how the School Department will fare financially in the current fiscal year. Due to no state aid increases in recent years, increasing costs and retroactive pay owed to teachers, it has been estimated that the schools will run a deficit of more than $4 million in the year that ends next June 30.

Last month the School Committee negotiated an extension on the teachers contract in an attempt to whittle the potential deficit by at least $1.4 million, and further cost reduction efforts are being considered.

Avedisian said that the city cannot afford or allow another seven-digit deficit from the schools. “We simply cannot have it,” he said. “We cannot have another deficit binge from the schools.”

bpoliche@projo.com