City of Long Beach

Financial Condition and Payroll and Personnel Records - Executive Summary

The City of Long Beach (City) is located within the Town of Hempstead, in Nassau County and has a population of approximately 33,000. The City is governed by its Charter and other general laws of the State of New York. The City Council (Council), which consists of five members, has overall responsibility for the City’s operations, with the City Manager and other administrative staff having responsibility for overseeing and managing the City’s daily operations. The City’s 2003-2004 year operating costs of approximately $56 million were financed primarily with the collection of real property taxes, refuse and garbage charges, and water and sewer rents. During the year ended June 30, 2004, the City had approximately 350 full-time employees, including 72 police officer and 22 paid firefighters, and more than 600 part-time and seasonal employees.

Scope and Objectives

We interviewed appropriate City officials, tested selected payroll and personnel records for the period July 2003 through June 2004, and reviewed financial records and transactions for the period July 2003 through June 2005, to address the following questions:

• Has the Council taken adequate action to address recurring deficits in the general, water and sewer funds, and to monitor revenues and expenditures?
• Are internal controls over the payroll and personnel functions ensuring the accuracy of payroll and leave records?

Audit Results

Our audit disclosed that beginning in fiscal year 2004-2005, the Council increased general fund and water fund revenues to eliminate ongoing operating deficits in these two funds. However, the Council did not take sufficient action to address the operating deficit in the sewer fund, or the accumulated fund deficits in the water and sewer funds.

On June 30, 2004, the end of its fiscal year, the City had unreserved fund deficits of $2.3 million, $1 million and $233,000 in the general, water and sewer funds, respectively. On October 16, 2005, the City Comptroller projected a fund balance of $2.8 million for the fiscal year ended June 30, 2005, because of an operating surplus in the general fund. We could not verify this projection due to a lack of complete financial information and lack of an independent audit. City officials could not provide a reliable projection of water or sewer fund balance on June 30, 2005.

As a result of the deficits, the City experienced cash flow problems requiring interfund borrowings and the issuance of budget notes. The water and sewer funds collectively had to borrow a total of approximately $1.6 million from the general fund during the two year period ending June 30, 2004, to pay necessary expenses. In addition, the general fund was forced to issue budget notes totaling $4.7 million during the 2003-2004 fiscal year to pay the cost of termination salaries and retirement system contributions.

Major factors that contributed to the deterioration of the general fund’s unreserved fund balance between June 30, 2002 and June 30, 2004 included: actual expenditures exceeding the adopted budget estimates from July 2001 to June 2005 for termination salaries, police overtime, and temporary salaries for the sanitation department; overestimated revenues for the sale of property; and the lack of repayment of loans from the water and sewer funds. For the fiscal year ended June 30, 2004, expenditures exceeded budgetary appropriations by $4.1 million.

Revenue shortfalls caused deficits in the water fund. The City collected approximately $2.7 million in water rents in each of the fiscal years 2001-2002 to 2003-2004. However, the City budgeted for revenues of $3.2 million, $3.4 million, and $3.5 million, respectively, during those fiscal years. In the 2005-2006 year budget, City officials estimated revenues from water rents to be $3.6 million. We found this estimated revenue to be reasonable, because the City increased water rates by an additional 15 percent effective July 1, 2005.

Revenue shortfalls caused deficits in the sewer fund. Sewer rents budgeted during the fiscal years 2001-2002 to 2003-2004 were $3 million, $3.1 million, and $3.1 million, while the rents collected were only $2.8 million, $2.7 million, and $2.7 million, respectively. Despite a 30 percent rate increase for sewer rents, effective June 1, 2004, the City collected $3.3 million instead of the $3.5 million budgeted. City officials anticipate collecting $4 million in sewer rents for the fiscal year 2005-2006 based on an additional 15 percent increase in sewer rents effective July 1, 2005. However, based on the City’s collection of $3.3 million in sewer rents during the 2004-2005 fiscal year, and the 15 percent rate increase in July 2005, we estimate that sewer rent for the 2005-2006 fiscal year will be $3.8 million. We believe that City officials have overestimated revenue for the next fiscal year by more than $200,000, which could result in an increase in the fund deficit.

The City’s internal controls over payroll and personnel functions have not been sufficient to ensure the accuracy of payroll and leave records. Our tests of payroll records, attendance records, leave accrual records, and personnel records disclosed a significant number of errors that could have been prevented if controls were strengthened. Controls such as adequate segregation of duties over the payroll process, approval and verification of individual attendance records, and the adequate monitoring of leave accrual and payroll records may have prevented these errors.

Comments of Local Officials

The results of our audit and recommendations have been discussed with City officials and their comments, which appear in Appendix A, have been considered in preparing this report. City officials generally agreed with our recommendations and indicated they planned to initiate corrective action.