MILLINOCKET, Maine — An audit shows the town has improved its finances, but taxpayers could face a property tax increase due to a $512,237 deficit in the Millinocket School Department’s general fund, officials said Friday.

Auditor Roger Lebreux’s reports Thursday to the Town Council and school board on his audit of the 2012-13 fiscal year showed a $2.2 million surplus in the town government’s general fund, up from $1.5 million in 2012. That’s good news for town officials who worried that Millinocket might need bankruptcy protection last summer.

The bad news: The Millinocket School Department has accumulated a $512,237 deficit in its unassigned fund balance since 2011 by over-anticipating several revenue sources, said Lebreux and Town Manager Peggy Daigle.

And town government officials unknowingly helped perpetuate the deficit by approving expenditures without a detailed explanation of exactly where the money was coming from or how it would be used, said the town’s attorney, Dean Beaupain.

Beaupain warned councilors to meet soon with school leaders to establish better fiscal controls. School leaders set policy and determine how school money should be used, but education is a department within town government. The council and town manager serve as the town’s final financial authority, he said.

“If past history is any guide, the deficit will be higher [at the end of the 2013-14 fiscal year] unless you people do something,” Beaupain told the council.

The money, Beaupain said, needs to be paid back to the town. The council can draft orders to make that happen, he said.

Undesignated fund balances are critical to securing loans and maintaining viable credit ratings. Sometimes referred to as rainy day funds, the funds are set outside annual budgets and used to offset revenue declines, cash shortfalls or balance a budget.

The fund should be at least 20 percent of the town’s total expenses as a backup against cash-flow shortages or disasters, Lebreux said. Subtracting the $512,237 deficit from the $2.2 million surplus leaves the town with a total of $1.7 million in unassigned funds. That’s only 12.95 percent of the town’s total revenues in 2012-13, Lebreux’s report states.

Lebreux recommended that Millinocket have a revenue percentage much higher than 20 because it relies so heavily on Great Northern Paper Co. LLC. The town’s largest single taxpayer, the paper mill’s delay until August in paying a $1.06 million property tax bill on its closed Katahdin Avenue paper site helped cause the $3 million to $4.5 million cash-flow shortage last summer.

School board members and Superintendent Kenneth Smith sat in silence during the council meeting. Afterwards, new board Chairman Michael Jewers declined to comment.

Smith said Friday that school officials had underestimated revenues, and he didn’t know why that wasn’t rectified in previous fiscal years.

According to Lebreux’s report, the $512,237 deficit began as a $206,205 deficit in 2011. It increased to $305,102 the next year and went up $207,135 in the 2012-13 fiscal year, which ended June 30.

Smith doubted that school officials could follow one of Lebreux’s suggestions for eliminating the deficit — cutting the school budget by about $100,000 over the next five years. The town’s other options, Lebreux said, are to raise taxes or bring in more industry, an exceedingly difficult job.

“Every year, we have been forced to cut budgets, and we are doing it to the point where there is not much left to cut,” Smith said. “The people are going to have to decide whether they want to pay for education or not.”

Smith declined to estimate how large a mill rate increase the town would need to eliminate the deficit or continue to fund education.

Daigle said it would probably take a forensic audit, which could cost $70,000 to $100,000, to detail exactly what caused the deficit.

The deficit is among many signs of how the town has struggled financially. The town’s property tax rate has climbed from $19.4 per $1,000 in valuation in 2004 to $29.95, the highest in the Katahdin and Lincoln Lakes regions, for the 2013-14 fiscal year. The town had a 26.4 mill rate for the 2012-13 fiscal year, according to Lebreux’s report.

In response to the town’s financial problems, town officials raised the mill rate, have begun selling foreclosed properties, opened discussions with neighboring towns about consolidating local governments, cut spending and pressed school officials to lower the school budget.

Yet, education represented 46.4 percent of the town’s expenditures in 2012-13. The next highest percentage, public safety, took 11.99 percent. The town also has one of the five most expensive retiree benefits packages in the state, Lebreux said.

The school system’s international program did not contribute to the deficit, Daigle said. As of the 2012-13 fiscal year, that program has netted about $200, he noted.

The school board is due to meet Tuesday and will likely discuss the deficit, Smith said.