Official Site of The State of New Jersey

We performed this audit pursuant to the State Comptroller’s authority set forth in N.J.S.A. 52:15C-1 to -24. We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards (GAGAS)^[1] applicable to performance audits. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

In 1928, the Legislature adopted a law that required fourth-class cities^[2] to provide a pension upon retirement to lifeguard officers and lifeguards. N.J.S.A. 43:13-23 to -29, which this report will refer to as the Lifeguard Pension Law, mandates that fourth-class cities establish a pension fund, with contributions from both the city and its lifeguard employees, and appoint a commission to manage the fund and its administration. The Borough of Longport (Borough or Longport) was incorporated as a borough in 1898 and is not subject to the Lifeguard Pension Law because it is not a fourth-class city.

The Borough by ordinance created a lifeguard pension plan effective January 1, 1987. The ordinance mirrors the requirements of the Lifeguard Pension Law. This law, as well as the Borough’s ordinance, requires the creation of a pension fund, establishes a system of funding for the program, and empowers a pension commission^[3] to make all necessary rules and regulations as long as they are consistent with the law. In addition to the statutory language, the Borough’s ordinance defines pension program terminology, provides additional information regarding plan membership, and establishes retirement eligibility criteria.

In 2022, the Borough paid pension benefits to 11 retirees at a cost of about $76,200. The Borough’s 2022 budget included approximately $30,000 to meet the Borough’s contribution requirement and obligations under its pension plan. As of December 31, 2022, the Borough had approximately $333,400 in funds reserved to pay lifeguard pensions.

Lifeguard Pension Reserve Activity 2020 through 2022

Active and Retired Lifeguard Population

Our audit identified weaknesses related to the administration of Longport’s lifeguard pension program in the areas of compliance, financial reporting, and internal controls.

Specifically, our audit found that the Borough:

• Created a lifeguard pension plan that was not statutorily required;
• Failed to provide supporting documentation for pension committee member appointments;
• Did not obtain actuary reports and disclose pension liabilities of approximately $2.8 million in accordance with Governmental Accounting Standards Board (GASB) Statement 73; and
• Did not accurately track service years for all lifeguards.

We make four recommendations to improve the Borough’s internal controls and improve compliance with applicable ordinances, financial reporting requirements, and collective bargaining agreements (CBAs).

We note that subsequent to the scope of our audit, the Borough obtained an actuarial calculation of its lifeguard pension liability and appointed a pension committee member via resolution to comply with its ordinance and GASB Statement 73.

The objectives of our performance audit were to examine the operations of the Borough’s lifeguard pension program to determine whether the program complied with local ordinance, disclosed required financial information, and maintained adequate internal controls.

The period January 1, 2020 through December 31, 2022.

To accomplish our objectives, we reviewed relevant statutes, regulations, GASB requirements, and the Borough’s ordinances addressing the administration of its lifeguard pension program. We reviewed financial records, payroll records, CBAs, and other supporting documentation. Additionally, we interviewed local officials responsible for the lifeguard pension program to understand program operations.

GAGAS requires auditors to plan and perform audit procedures to assess internal control when internal control is determined to be significant to the objective. The Government Accountability Office’s Standards for Internal Control in the Federal Government, or “Green Book,”^[4] provides a framework for internal control systems for public entities. The Green Book establishes five components of an internal control system: control environment, risk assessment, control activities, information and communication, and monitoring. The five components include 17 principles that support the effective design, implementation, and operation of an internal control system. GAGAS requires written communication of deficiencies in internal control that warrant the attention of those charged with governance. Deficiencies significant to our audit objectives are included in this report. We communicate internal control deficiencies that are not significant to our audit objectives through separate correspondence to those charged with governance.

We reviewed all items within populations of like transactions identified during the scope of our audit to provide conclusions about the adequacy of internal controls and compliance with applicable laws, regulations, policies, and procedures.

Lifeguard Pension Program

Objectives

Determine whether the Borough complied with the Lifeguard Pension Law, N.J.S.A. 43:13-23 to -29.

Determine whether the Borough complied with local ordinance and CBA requirements.

Determine whether the Borough complied with GASB Statement 73 requirements for lifeguard pension program disclosures within its financial report.

Determine whether the Borough adequately designed and implemented internal controls to ensure compliance with program statutes and internal guidelines for the operation of its lifeguard pension program.

Findings

The Borough created a costly lifeguard pension plan without a statutory requirement to create such a program.

The Borough could not provide evidence that pension committee members were appointed by the mayor with the advice and consent of the governing body as required by local ordinance.

Annual audit reports did not disclose the Borough’s total lifeguard pension liability calculated by an actuary as required by GASB Statement 73. The estimated total lifeguard pension liability was approximately $2.8 million as of December 31, 2022.

The Borough’s system for tracking lifeguard service years contained inaccuracies.

Criteria

Ordinance 11-87 established and designed the Borough’s lifeguard pension program. The ordinance requires the Borough to provide a retirement benefit equal to half-pay to lifeguard employees who are at least 45 years of age and have worked 20 years of eligible service. The pension benefits are funded by contributions from active employees, interest earnings, and budget appropriations. The Borough must budget to provide the Borough’s annual four percent contribution plus any additional amount needed to meet the requirements of the pension program. The Borough accounts for funds in excess of the amount needed to pay current benefits in a separate fund designated for future pension payments. Additionally, the ordinance describes the process for appointing members to the Borough’s pension committee and requires that the four-member committee include one lifeguard officer, one lifeguard employee, and two citizens who are not lifeguards.

The Borough’s lifeguard employees are subject to a CBA. The CBA defines the number of days an employee must work to earn credit for a year of pension-eligible service and other criteria not included in the Borough’s ordinances.

The financial activity and year-end balances for the Borough’s lifeguard pension program are reported in its annual audit report. N.J.A.C. 5:30-6.1 establishes the guidelines for municipal audit reports and requires local governments to include GASB disclosures in the notes to the Borough’s financial statements. GASB issued Statement 73 to improve the usefulness of information about pensions included in financial reports issued by local and state and governments.^[5] GASB Statement 73 requires actuarial reports and disclosure of pension liabilities and reserves.

The Green Book provides a framework for internal control systems for public entities. The Green Book’s five components and the related 17 principles of an internal control system serve as the basis for our assessment of the design, implementation, and operation of the Borough’s internal control system.

Methodology

To meet these objectives, we:

• Reviewed the Lifeguard Pension Law, local ordinances, and CBAs;
• Interviewed relevant Borough officials;
• Reviewed payroll and other financial documentation; and
• Performed audit procedures designed to meet our audit objectives.

Audit Results

We audited the Borough’s lifeguard pension program to assess compliance with statutes, local ordinances, the CBA, and GASB Statement 73. We reviewed the pension program’s operations, assessed internal controls, and tested the design and implementation of the program.

Compliance with Statues and Local Guidelines

Our audit found that the Borough, through a local ordinance, created a pension fund that adopted many of the same elements required of fourth-class cities pursuant to the Lifeguard Pension Law. However, due to its incorporation as a borough, Longport is not statutorily required to create, operate, or fund a pension for its seasonal lifeguard employees. Its ordinance establishing the Borough’s pension fund identifies the Borough as a, “city of the fourth class.” Our audit did not find evidence supporting this claim; evidence shows that Longport has been a borough since 1898. The Borough shared evidence suggesting that at the time of adoption of the ordinance it had interpreted the meaning of “city of the fourth class” to include boroughs such as Longport.

We requested documentation to determine whether pension committee members were properly approved and eligible to serve as members. Ordinance 11-87 requires Longport’s mayor to appoint members with the advice and consent of the governing body. The committee must consist of one senior lifeguard, one lifeguard, and two citizens. The Borough provided minutes of the pension committee meetings listing the four committee members. However, the documentation did not include evidence that the members met the eligibility criteria contained in its ordinance and were appointed by the mayor with the advice and consent of the governing body. On July 17, 2024, the Borough’s governing body reappointed a member of its pension committee by resolution. The resolution memorializes the governing body’s advice and consent to the reappointment, improves compliance with its ordinance, and adds transparency to committee appointments.

Complaince with Financial Reporting Standards

We reviewed the Borough’s audit reports for 2020 through 2022 and found that Longport’s lifeguard pension disclosures failed to comply with GASB Statement 73 requirements. Most significantly, the Borough did not disclose its pension plan liability in its annual audit reports. In addition, Longport’s auditor did not report the Borough’s failure to disclose required and likely material information about the pension program in the Borough’s annual audit reports. The Borough’s failure to obtain required actuary reports limits transparency and impairs oversight of program funding by the governing body.

We engaged an actuary to estimate the Borough’s pension liability. This calculation included assumptions regarding salaries, inflation, and life expectancy subject to professional judgement and relied on the data obtained as part of this audit. We made reasonable assumptions when requested data was not provided.^[6] We estimated the future costs associated with Longport’s lifeguard pension program as of December 31, 2022 was approximately $2.8 million, but the Borough’s pension fund had a balance of approximately $333,400 at the end of 2022. Based on this estimate, the Borough’s lifeguard pension fund was underfunded by approximately $2.4 million. During our audit, the Borough engaged its own actuary and obtained an actuarial calculation of its pension liability. The report estimated the Borough’s unfunded lifeguard pension liability to be $3.7 million as of January 1, 2024. The actuarial calculations primarily differ due to variations in the number of retired participants, adjusted assumptions regarding retirement age, and fluctuations in total lifeguard compensation.

Design, Implementation, and Operation of Internal Controls

We audited the Borough’s internal policies, processes, and other internal lifeguard pension program activities. A well-designed system aids in compliance with applicable law, including local ordinances, and guards against errors.

Our audit revealed weaknesses in internal control related to the tracking of pension-eligible service years and maintenance of records. The Borough designed and implemented a system to track employees’ pensionable years of service. We compared the Borough’s tracking system to payroll records during our audit scope to determine whether the Borough accurately awarded years of pension credit. Our testing identified ten occurrences of improperly awarded service credit for the 113 employees tested. We found five employees received credit for a full-year of eligible service without working the minimum number of days established by ordinance. We also found five employees who worked a sufficient number of days but did not receive credit for a full-year of eligible service. Improvements to the operational effectiveness of the Borough’s system of tracking years of eligible service would help prevent the improper award of retirement benefits.

Causes

The Borough created a lifeguard pension program without being required to do so by statute due to confusion related to the applicability of the Lifeguard Pension Law.

The Borough lacked a process to document pension committee members’ eligibility and proper approvals.

The Borough did not obtain actuary reports required for annual financial report disclosures.

The Borough’s procedures for awarding years of service credit did not identify inaccurately awarded or denied years of service.

Effects/Potential Effects

Longport increased costs to taxpayers and lifeguards who failed to meet retirement eligibility by creating a lifeguard pension program that was not legally required.

The failure to maintain documentation for Longport’s pension committee members limits transparency into the committee’s membership.

Inadequate disclosures prevent public transparency into total pension costs and the sufficiency of Borough contributions. In addition, public insight into the cost of the lifeguard pension program was prevented by Longport’s failure to disclose approximately $2.8 million total liability.

The Borough could incorrectly award or deny a retiree’s retirement benefit based on inaccurate information in the Borough’s tracking system.

Recommendations

1. Consult with Borough legal professionals to determine legally permissible options to end the Borough’s lifeguard pension program. Evaluate whether to end the Borough’s lifeguard pension program in a manner consistent with the advice of the Borough’s legal professionals.

2. Continue to memorialize the appointment of pension committee members by the mayor with the advice and consent of the governing body through resolution.

3. Continue to obtain periodic actuary calculations of the Borough’s lifeguard pension fund as required by GASB Statement 73. Improve the adequacy of lifeguard pension disclosures to comply with the requirements of GASB Statement 73.

4. Implement procedures to include an annual reconciliation between the tracking system data and Borough payroll records.

We provided a draft copy of this report to Borough officials for their review and comment. The Borough generally agreed with our audit findings and conclusions, and its response indicated the Borough has taken steps and will continue to implement corrective actions to address our recommendations. The Borough’s comments were considered in preparing our final report and are attached as Appendix A.

We are required by statute to monitor the implementation of our recommendations. In accordance with N.J.A.C. 17:44-2.8(a), within 90 days following the distribution of the final audit report, the Borough is required to provide a plan detailing the corrective action taken or underway to implement the recommendations contained in the report and, if not implemented, the reason therefore. We will review the corrective action plan to evaluate whether the steps taken by the Borough effectively implement our recommendations.

We thank the management and staff of the Borough for the courtesies and cooperation extended to our auditors during this engagement.