Hardest hit among the six Island towns by the recession, Oak Bluffs ended the fiscal year two months ago with a deficit of approximately $300,000, and is already facing a projected shortfall for the current fiscal year of at least $500,000.

Town leaders met last week to discuss the severe budget shortfalls and the need to schedule a special town meeting in order to address them. The new fiscal year began July 1.

No date has been set for the meeting yet.

But employee layoffs are now considered a certainty.

The town has already offered employees early retirement packages and imposed a townwide spending and hiring freeze. And still it finds itself a month and a half into the new fiscal year staring at an $800,000 deficit.

Town administrator Michael Dutton confirmed last week that the town had closed the books for fiscal year 2009 in the red. Although the final figures are currently under inspection by auditors, Mr. Dutton estimated the town ended the year with a deficit of approximately $200,000 to $300,000.

He said this was the first time he could recall the town ending a fiscal year with a deficit, although he did not anticipate it would create problems with the state Department of Revenue, which certifies municipal budgets. He said many other towns and cities are experiencing similar financial difficulties. And he said he did not think the problem would affect the town’s bond rating.

“We aren’t the only one going through this. I think [the DOR] understands what the towns are going through right now,” Mr. Dutton said. During a joint meeting at the town hall last Thursday, selectmen, finance committee and personnel board members reviewed a financial report from Mr. Dutton and town finance director Paul Manzi, which indicates that, in addition to carrying over a deficit from the last fiscal year, the town will need to come up with another $500,000 this year.

This report concludes that some $200,000 will need to be cut from school spending, and another $300,000 will need to be cut from general government.

Local receipts are projected to drop some $282,000 this year. The report projects that state aid for education will drop about 2.9 per cent, and aid for general government is also expected to see a sharp drop.

Mimi Davisson, chairman of the Oak Bluffs finance committee, said she could not recall a time when the town ended a fiscal year with a deficit. “That hasn’t happened in my lifetime,” she said.

She reiterated that Oak Bluffs, more than other towns, does not solely rely on property taxes to pay for town services, and instead has a diverse revenue stream that includes the harbor, hotel taxes and new construction.

Although this is usually a positive thing for the town, it creates problems when the economy takes a turn for the worse, as it did this year, Mrs. Davisson said.

Mr. Dutton said the financial crisis will almost certainly force the town to make layoffs. The early retirement package that was offered in April still has drawn no takers.

“I hate to say it. But I think [layoffs] are inevitable. We have considered that a last resort all along, but I think we’ve reached that point,” Mr. Dutton said.