"You didn't get into this situation overnight, and you're not going to get out of it overnight, but you certainly can do it," said auditor John Anthony. "You've got to come up with some money by the end of the year to pay your bills."

A town the size of Kenly should keep about $1 million in reserves. But Anthony's audit of the town's 2008-09 finances showed just $2,700 in savings. He blamed the depleted reserves on a lack of oversight by former town manager Scott Shelton and on the Town Council's lax oversight of Shelton.

The biggest drains on Kenly's savings were utility projects that ran over budget by almost $230,000, the audit showed.

In response to the audit, the Town Council voted last week to raise the monthly garbage fee by $2. The increase will generate $6,800.

Mismanaged finances

The audit lays the financial mess at the doorsteps of town management, led at the time by Shelton, who resigned in August, citing personal reasons.

The audit states: "Management is not able to properly monitor the town's financial condition and ongoing operations. It appears that management does not understand what is required to properly administer a town budget."

The audit shows that much of Kenly's overspending stemmed from two drainage projects that cost more than the town had budgeted.

"There was a tremendous amount of bills that came in at the last minute on the drainage projects," Councilwoman Beverly Knight said, noting that the Northwest and Seventh Street projects were necessary. "You can see or feel most of the money that was spent."

The water and sewer fund, which in most towns generates a profit, had an operating loss of almost $100,000.

The town also failed to send tax bills to properties annexed by the town in 2005 and 2007. One of those is the Flying J Truck Stop. Officials are now in the process of billing the property owners for taxes totaling about $40,000.

In its general fund, which pays for police protection and other services, the town spent $17,560 more than the council had authorized for 2008-09. Shelton did not ask the council to OK budget amendments, a step required by state law.

Anthony, the auditor, lectured the Town Council on how to better keep track of finances. "You get those monthly financial statements, and you need to look at them and ask questions," he said. "You're supposed to amend your budget during the year. You can't just do it on June 29 and everything will be fine."

Mayor-elect David Grady spoke often of the need for financial restraint during his campaign. He said he addressed the Town Council in 2007 about his lack of confidence in the town manager.

"Scott Shelton was not a bad guy, but he was really one who was in over his head," Grady said.

Cuts start immediately

After raising the garbage fee, the Town Council went behind closed doors last week and decided to lay off the town's utilities clerk. That move is expected to save about $30,000 a year in salary and benefits.

The job cut was not on a list of about $25,000 in cost-cutting measures suggested by interim town manager Pete Connet, who retired this year as Smithfield's manager. He proposed reducing code enforcement, eliminating employees' Christmas bonuses and suspending the retirement-fund contribution for everybody but police officers. Police are required by law to receive 401k contributions. Town Council members decided against those measures, at least for now, after criticism from department heads in attendance.

"The Christmas bonus is very important because they didn't get a raise this year," Police Chief Josh Gibson. "That's going to be a hard pill for them to swallow. We don't want to lose the employees we got."

Grady, the incoming mayor, said the council should have taken more time to consider all options before cutting the clerk position and raising fees.

"I think some things they did Monday night were knee-jerk," he said. "Within 30 minutes, they're firing people. It's not fair to put [fee increases] on the end user when it's the fault of the manager."

The trash-fee increase might not be the only one Kenly residents will face, Councilwoman Knight said. "As far as raising taxes in the middle of the year, I think that's a last resort, but you may see a slight increase in water and sewer bills," she said.

For his part, Grady wants to examine all aspects of the budget, particularly the police department, where he sees potential for savings.

"I think we're going to have to take the budget apart and put it back together," Grady said.