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BOROUGH OF AVALON NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000

Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Financial Reporting Entity - The Borough of Avalon is a seashore community located on the Atlantic Ocean in the County of Cape May, State of New Jersey. The population according to the 2000 census is 2,143. The Borough of Avalon was incorporated in 1892 and operates under a Mayor and Council form of government. The Mayor is the chief executive officer of the Borough and is elected by the voters. Component Units - The financial statements of the component units of the Borough of Avalon are not presented in accordance with Governmental Accounting Standards Board Statement No. 14. If the provisions of GASB No. 14 had been complied with, no other entity's financial statements would have to be either blended or discretely presented with the financial statements of the Borough, the primary government. Basis of Presentation, Fund Accounting - The financial statements of the Borough of Avalon contain all funds and account groups in accordance with the "Requirements of Audit" as promulgated by the State of New Jersey, Department of Community Affairs, Division of Local Government Services. Such principles and practices are designed primarily for determining compliance with legal provisions and budgetary restrictions and as a means of reporting on the stewardship of public officials with respect to public funds. Under this method of accounting, the Borough of Avalon accounts for its financial transactions through the following separate funds which differs from the funds required by generally accepted accounting principles (GAAP). Current Fund - The Current Fund accounts for resources and expenditures for governmental operations of a general nature, including Federal and State grant funds. Trust Funds - The various Trust Funds account for receipts, custodianship and disbursement of funds in accordance with the purpose for which each reserve was created. The Trust Fund also includes the Bond and Coupon Fund. General Capital Fund - The General Capital Fund accounts for receipt and disbursement of funds for the acquisition of general facilities, other than those acquired in the Current Fund. Water and Sewer Utility Operating and Capital Funds - The Water and Sewer Utility Operating and Capital Funds account for the operations and acquisition of capital facilities of the municipally owned Water and Sewer Utility. Beach Utility Operating and Capital Funds - The Beach Utility Operating and Capital Funds account for the operations and acquisition of capital facilities related to the Borough’s beaches.

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(CONTINUED) Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basis of Accounting - A modified accrual basis of accounting is followed with minor exceptions. Accounting principles prescribed for New Jersey municipalities by the Department of Community Affairs, Division of Local Government Services differ in certain respects from generally accepted accounting principles applicable to local governmental units. The more significant policies are explained in the following paragraphs. Budgets and Budgetary Accounting - The Borough of Avalon must adopt an annual budget in accordance with N.J.S.A. 40A:4 et al. The Mayor submits an annual budget to the Borough Council in accordance with the Faulkner Act on January 15 of each year. N.J.S.A. 40A:4-5 requires the governing body to introduce and approve the annual municipal budget no later than February 10 of each year. At introduction, the governing body shall fix the time and place for a public hearing on the budget and must advertise the time and place at least ten days prior to the hearing in a newspaper published and circulating in the municipality. The public hearing must not be held less than twenty-eight days after the date the budget was introduced. After the hearing has been held, the governing body may, by majority vote, adopt the budget or may amend the budget in accordance with N.J.S.A. 40A:4-9. An extension of the statutory dates for introduction, approval and adoption of the municipal budget may be granted by the Director of the Division of Local Government Services, with the permission of the Local Finance Board. Budgets are adopted on the same basis of accounting utilized for the preparation of the Borough's financial statements. Cash and Investments - New Jersey municipal units are required by N.J.S.A. 40A:5-14 to deposit public funds in a bank or trust company having its place of business in the State of New Jersey and organized under the laws of the United States or of the State of New Jersey or the New Jersey Cash Management Fund. N.J.S.A. 40A:5-15.1 provides a list of securities which may be purchased by New Jersey municipal units. The cash management plan adopted by the Borough of Avalon requires it to deposit funds in public depositories protected from loss under the provisions of the Governmental Unit Deposit Protection Act ("GUDPA"). GUDPA was enacted in 1970 to protect governmental units from a loss of funds on deposit with a failed banking institution in New Jersey. N.J.S.A. 17:9-42 requires government units to deposit public funds only in public depositories located in New Jersey, where the funds are secured in accordance with the Act.


(CONTINUED) Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Public funds are defined as the funds of any government unit. Public depositories include banks (both State and national banks), savings and loan institutions and savings banks, the deposits of which are federally insured. All public depositories pledge collateral, having a market value of five percent of the average daily balance of collected public funds, to secure the deposits of governmental units. If a public depository fails, the collateral it has pledged, plus the collateral of all other public depositories in the collateral pool, is available to pay the full amount of their deposits to the governmental units. All certificates of deposit are recorded as cash regardless of date of maturity. Interfunds - Interfund receivables and payables that arise from transactions between funds are recorded by all funds affected by such transactions in the period in which the transaction is executed. Interfund receivables in the Current Fund are recorded with offsetting reserves, which are created by charges to operations. Income is recognized in the year the receivables are liquidated. Interfund receivables in the other funds are not offset by reserves. GAAP does not require the establishment of an offsetting reserve. Inventories of Supplies - The costs of inventories of supplies for all funds are recorded as expenditures at the time individual items are purchased. The costs of inventories are not included on the various balance sheets. General Fixed Assets - Property and equipment purchased by the Current and the General Capital Funds are recorded as expenditures at the time of purchase and are not capitalized. Accounting for Governmental Fixed Assets, as promulgated by Technical Accounting Directive No. 2 as issued by the Division of Local Government Services, differs in certain respects from generally accepted accounting principles. The following is a brief description of the provisions of the Directive. Fixed assets used in governmental operations (general fixed assets) are accounted for in the General Fixed Assets Account Group. Public domain ("infrastructure") general fixed assets consisting of certain improvements other than buildings, such as roads, bridges, curbs and gutters, streets and sidewalks, and drainage systems, are not capitalized. All fixed assets are valued at historical cost, or estimated historical cost if actual historical cost is not available, except for land, which is valued at estimated market value. No depreciation on general fixed assets is recorded in the financial statements.


(CONTINUED) Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Expenditures for construction in progress are recorded in the Capital Funds until such time as the construction is completed and put into operation. Fixed assets acquired through grants-in-aid or contributed capital have not been accounted for separately. Utility Fixed Assets - Property and equipment purchased by a utility fund are recorded in the utility capital account at cost and are adjusted for disposition and abandonment. The amounts shown do not represent replacement cost or current value. Contributions in aid of construction are not capitalized. The Reserve for Amortization and Deferred Reserve for Amortization accounts in the utility capital fund represent charges to operations for the cost of acquisition of property, equipment and improvements. GAAP does not require the establishment of a reserve for amortization of fixed capital, whereas it does require the recognition of depreciation of property and equipment by the utility fund. Foreclosed Property - Foreclosed property is recorded in the Current Fund at the assessed valuation when such property was acquired and is fully reserved. Ordinarily it is the intention of the municipality to resell foreclosed property in order to recover all or a portion of the delinquent taxes or assessments and to return the property to a taxpaying basis. For this reason the value of foreclosed property has not been included in the General Fixed Assets Account Group. If such property is converted to a municipal use, it will be capitalized in the General Fixed Assets Account Group. GAAP requires property to be recorded in the General Fixed Assets account group at the market value at the time of acquisition. Deferred Charges - The recognition of certain expenditures is deferred to future periods. These expenditures, or deferred charges, are generally overexpenditures of legally adopted budget appropriations or emergency appropriations made in accordance with N.J.S.A. 40A:4-46 et al. Deferred charges are subsequently raised as items of appropriation in budgets of succeeding years. Appropriation Reserves - Appropriation reserves covering unexpended appropriation balances are automatically created at year end and recorded as liabilities, except for amounts which may be canceled by the governing body. Appropriation reserves are available, until lapsed at the close of the succeeding year, to meet specific claims, commitments or contracts incurred during the preceding fiscal year. Lapsed appropriation reserves are recorded as income. Appropriation Reserves are not established under GAAP. Liens Sold for Other Governmental Units - Liens sold on behalf of other governmental units are not recorded on the records of the tax collector until such liens are collected. Upon their collection, such liens are recorded as a liability due to the governmental unit net of the costs of the initial sale. The related costs of sale are recognized as revenue when received.


(CONTINUED) Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fund Balance - Fund Balances included in the Current Fund and Utility Operating Fund represent amounts available for anticipation as revenue in future years budgets, with certain restrictions. Revenues - Revenues are recorded as received in cash except for certain amounts which are due from other governmental units. Revenue from Federal and State grants is realized as revenue when anticipated as such in the Borough's budget. Other amounts that are due the Borough which are susceptible to accrual are also recorded as receivables with offsetting reserves and recorded as revenue when received. GAAP generally requires that grant revenue be recognized when the actual expenditure financed by the grant is made. Property Tax Revenues - Property tax revenues are collected in quarterly installments due February 1, May 1, August 1, and November 1. Property taxes unpaid on April 1 of the year following their final due date are subject to tax sale in accordance with the statutes. The amount of tax levied includes not only the amount required in support of the Borough's annual budget, but also the amounts required in support of the budgets of the entities that follow. Receivables for property taxes are recorded with offsetting reserves on the balance sheet of the Borough's Current Fund; accordingly, such amounts are not recorded as revenue until collected. GAAP requires such revenues to be recognized when they are available and measurable reduced by an allowance for doubtful accounts. School Taxes - The municipality is responsible for levying, collecting and remitting school taxes for the Borough of Avalon School District. Operations is charged for the full amount required to be raised from taxation to operate the local school district for the period from January 1 to December 31. County Taxes - The municipality is responsible for levying, collecting and remitting county taxes for the County of Cape May. Operations is charged for the amount due the County for the year, based upon the ratables required to be certified to the County Board of Taxation by January 10 of the current year. In addition, operations is charged for the County share of Added and Omitted Taxes certified to the County Board of Taxation by October 10 of the current year and due to be paid to the County by February 15 of the following year. Reserve for Uncollected Taxes - The inclusion of the "Reserve for Uncollected Taxes" appropriation in the Borough's annual budget protects the Borough from taxes not paid currently. The Reserve, the minimum amount of which is determined on the percentage of collections experienced in the immediate preceding year, is required to provide assurance that cash collected in the current year will provide sufficient cash flow to meet expected obligations. A Reserve for Uncollected Taxes is not established under GAAP.


(CONTINUED) Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Expenditures - Expenditures are recorded on the "budgetary" basis of accounting. Generally, expenditures are recorded when an amount is encumbered for goods or services through the issuance of a purchase order in conjunction with the encumbrance accounting system. Outstanding encumbrances at December 31 are recorded as a cash liability. Appropriations for principal payments on outstanding general capital and utility bonds and notes are provided on the cash basis; interest on general capital indebtedness is on the cash basis, whereas interest on utility indebtedness is on the accrual basis. GAAP requires expenditures to be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on long-term debt, which is recognized when due. Compensated Absences and Post-Employment Benefits - Compensated absences for vacation, sick leave and other compensated absences are recorded and provided for in the annual budget in the year in which they are paid, on a pay-as-you-go basis. Likewise, no accrual is made for post-employment benefits, if any, which are also funded on a pay-as-you-go basis. Amounts estimated to be paid to employees in future years are included as gross debt and funded reserve is shown as a reduction of gross debt. GAAP requires that the amount that would normally be liquidated with expendable financial resources be recorded as an expenditure in the operating funds and the remaining obligations be recorded as long-term obligations. Total Columns on Combined Statements - Total columns are captioned "memorandum only" to indicate that they are presented only to facilitate financial analysis. Data in these columns do not present financial position, results of operations, or changes in financial position in conformity with generally accepted accounting principles. Neither is such data comparable to a consolidation. Interfund eliminations have not been made in the aggregation of this data.


(CONTINUED)

Note 2: CAPITAL DEBT Summary of Municipal Debt

General: Bonds and Notes $15,789,750.00 $16,029,750.00 $15,215,000.00 Loans 142,500.00 171,000.00 199,500.00

Beach Utility: Bonds and Notes 679,250.00 679,250.00

Water/Sewer Utility: Bonds and Notes 9,537,000.00 10,422,000.00 10,006,000.00

26,148,500.00 27,302,000.00 25,420,500.00 Less: Funds Temporarily Held to Pay Bonds and Notes: General 1,718,595.91 368,413.85 524,864.35

Total Deductions 1,718,595.91 368,413.85 524,864.35

Net Debt Issued 24,429,904.09 26,933,586.15 24,895,635.65

Authorized but notIssued Bonds and Notes: General 3,331,831.04 873,616.06 1,189,458.04 Water/Sewer Utility 5,500.00 613,500.00

Total Authorized but not Issued 3,331,831.04 879,116.06 1,802,958.04

Net Bonds and Notes Issued and Authorized but not Issued $27,761,735.13 $27,812,702.21 $26,698,593.69


(CONTINUED)

Note 2: CAPITAL DEBT (CONTINUED) Sewer Bonds of 1981 On January 1, 1981, the Borough issued $308,000 aggregate principal amount of Sewer Improvement Bonds for various improvements authorized by Borough Council. The 1981 Sewer Bonds are non-callable and are dated and bear interest which is payable on the first date of January and July, at the respective interest rates per annum which are set forth below.

Year Amount Rate

2001 $18,000 10.75%

$18,000

Water/Sewer Bonds of 1986 On August 1, 1986, the Borough issued $2,679,000 aggregate principal amount, for various water and sewer improvements authorized by Borough Council. The 1986 Bonds are non-callable and are dated and bear interest which is payable on the first date of August and February, at the respective interest rates per annum which are set forth below.

Year Amount Rate

2001 $199,000 6.90%

$199,000


(CONTINUED) Note 2: CAPITAL DEBT (CONTINUED) General and Water/Sewer Bonds of 1990 On November 1, 1990, the Borough issued $7,519,000 aggregate principal amount, $3,719,000 of General Improvement Bonds for various improvements authorized by Borough Council, and $3,800,000 of water and sewer improvements. The 1990 Bonds are non-callable and are dated and bear interest which is payable on the first date of May and November, at the respective interest rates per annum which are set forth below.

Year Amount Rate

2001 $569,000 7.05%2002 250,000 7.05%2003 250,000 7.05%2004 250,000 7.05%2005 225,000 7.05%2006 225,000 7.05%2007 225,000 7.05%2008 200,000 7.05%2009 200,000 7.05%2010 200,000 7.05%2011 200,000 7.05%2012 200,000 7.05%

$2,994,000


(CONTINUED) Note 2: CAPITAL DEBT (CONTINUED) General and Water/Sewer Bonds of 1993 On February 1, 1993, the Borough issued $5,071,000 aggregate principal amount, $3,057,000 of General Improvement Bonds for various improvements authorized by Borough Council, and $2,014,000 of water and sewer improvements. The 1993 Bonds are callable and are dated and bear interest which is payable on the first date of February and August, at the respective interest rates per annum which are set forth below.

Year Amount Rate

2001 $480,000 5.30%2002 480,000 5.30%2003 532,000 5.30%2004 100,000 5.30%2005 100,000 5.30%2006 100,000 5.30%2007 100,000 5.30%2008 140,000 5.30%2009 140,000 5.30%2010 140,000 5.30%2011 140,000 5.30%2012 140,000 5.30%2013 134,000 5.30%

$2,726,000


(CONTINUED) Note 2: CAPITAL DEBT (CONTINUED) Refunding Bonds of 1993 On November 1, 1993, the Borough issued $3,070,000 aggregate principal amount of Refunding Bonds in order to refund higher rate water and sewer bond issues. The 1993 Refunding Bonds are non-callable and are dated and bear interest which is payable on the first date of January and July, at the respective interest rates per annum which are set forth below.

Year Amount Rate

2001 $145,000 4.15%2002 155,000 4.50%2003 155,000 4.50%2004 165,000 4.60%2005 170,000 4.75%2006 185,000 4.90%2007 195,000 5.40%2008 205,000 5.40%2009 215,000 5.40%2010 225,000 5.40%2011 235,000 5.40%2012 250,000 5.40%2013 265,000 5.40%

$2,565,000


(CONTINUED) Note 2: CAPITAL DEBT (CONTINUED) General and Water/Sewer Bonds of 1996 On September 1, 1996, the Borough issued $11,379,000 aggregate principal amount, $9,129,000 of General Improvement Bonds for various improvements authorized by Borough Council and $2,250,000 of water and sewer improvements. The 1996 Bonds are callable and are dated and bear interest which is payable on the first date of March and September, at the respective interest rates per annum which are set forth below.

Year Amount Rate

2001 $575,000 5.25%2002 675,000 5.25%2003 700,000 5.25%2004 850,000 5.25%2005 850,000 5.25%2006 875,000 5.25%2007 875,000 5.25%2008 975,000 5.25%2009 1,000,000 5.25%2010 1,000,000 5.25%2011 979,000 5.25%

$9,354,000


(CONTINUED) Note 2: CAPITAL DEBT (CONTINUED) New Jersey Economic Development Loan of 1994 On December 7, 1994, the Borough obtained a loan for $285,000 aggregate principal amount, Reconstruction of Borough Hall, authorized by Borough Council. The 1994 loan is dated and bears interest which is payable on the seventh day of June and December, at the respective interest rates per annum which are set forth below.

Year Amount Rate

2001 $28,500 1.50%2002 28,500 1.50%2003 28,500 1.50%2004 28,500 1.50%2005 28,500 1.50%

$142,500


(CONTINUED) Note 2: CAPITAL DEBT (CONTINUED) Summary of Statutory Debt Condition - Annual Debt Statement The summarized statement of debt condition which follows is prepared in accordance with the required method of setting up the Annual Debt Statement and indicates a statutory net debt of .85%.

Gross Debt Deductions Net Debt

Water and Sewer Utility Debt $10,216,250.00 $9,578,499.40 $637,750.60General Debt 19,264,081.04 1,718,595.91 17,545,485.13

$29,480,331.04 $11,297,095.31 $18,183,235.73

Net Debt $18,183,235.73 divided by Equalized Valuation Basis per N.J.S.A. 40A:2-2 as amended, $2,139,002,881 = .85%. Borrowing Power Under N.J.S.A. 40A:2-6 as Amended

3-1/2% of Equalized Valuation Basis $74,865,100.84Net Debt 18,183,235.73

$56,681,865.11

Calculation of "Self-Liquidating Purpose," Water and Sewer Utility Per N.J.S. 40A:2-45

Cash Receipts from Fees, Rents or Other Charges for the Year $5,621,883.19

Deductions: Operating and Maintenance Costs $3,553,358.79 Debt Service per Water/Sewer Fund 1,265,195.50

Total Deductions 4,818,554.29

Excess in Revenue $803,328.90

BOROUGH OF AVALON

NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000

(CONTINUED) Note 2: CAPITAL DEBT (CONTINUED) Calculation of “Self-Liquidating Purpose,” Beach Utility Per N.J.S. 40A:2-45

Cash Receipts from Fees, Rents orOther Charges for the Year $689,873

Deductions:Operating and Maintenance Costs $966,512Debt Service per Water/Sewer Fund 31,887.53

Total Deductions 998,400.00

Deficit in Revenue ($308,527)

Footnote: If there is an "excess in revenue," then all utility debt is deductible. If there is a "deficit in revenue," then utility debt is not deductible to the extent of 20 times such deficit. The foregoing debt information is in agreement with the revised Annual Debt Statement filed by the chief financial officer. Schedule of Annual Debt Service for Principal and Interest for Bonded Debt and Loans Issued and Outstanding

Year Principal Interest Principal Interest Total

2001 1,322,500.00$ 483,222.75$ 692,000.00$ 499,705.50$ 2,997,428.25$ 2002 978,500.00 406,662.31 610,000.00 459,157.00 2,454,319.312003 1,010,500.00 355,305.88 655,000.00 423,224.50 2,444,030.382004 728,500.00 314,550.63 665,000.00 385,294.50 2,093,345.132005 728,500.00 277,366.00 645,000.00 346,657.00 1,997,523.002006-2013 4,579,000.00 859,635.00 5,384,000.00 1,300,097.50 12,122,732.50

General Water/Sewer Utility


(CONTINUED) Note 3: COMPENSATED ABSENCES Borough employees are entitled to twelve paid sick leave days each year. Unused sick leave may be accumulated and carried forward to the subsequent year. Upon retirement, employees are eligible for reimbursement of unused sick days to the maximum stipulated in their contract or by ordinance. Vacation days and holidays not used during the year may not be accumulated and carried forward. The Borough of Avalon does not record accrued sick leave or compensatory time. However, at December 31, 2000, it is estimated that accrued sick leave benefits and accrued compensatory time payable in future years is valued at $898,916.30. No provision has been made for any accrued benefits. Note 4: DEFERRED COMPENSATION SALARY ACCOUNT The Borough participates in a Deferred Compensation Plan approved by the Director of the Division of Local Government Services. The Plan permits employees to defer a portion of their salary to future years under the provisions of the Internal Revenue Code. All amounts of compensation deferred under the plan and all income attributed to those amounts are the exclusive property of a trust established and not subject to the claims of the general creditors of the Borough. The Borough has engaged Nationwide Retirement Solutions to provide administrative services for the Plan. Note 5: TAXES COLLECTED IN ADVANCE Taxes collected in advance include amounts set forth as cash liabilities in the financial statements as follows:

Balance BalanceDec. 31, Dec. 31,

2000 1999

Prepaid Taxes - Cash Liability $521,994.43 $447,433.03


(CONTINUED) Note 6: RETIREMENT PLANS Plan Descriptions All eligible employees participate in the Public Employees’ Retirement System (PERS) and the Police and Firemen’s Retirement System which are contributory defined benefit public employee retirement systems which have been established by State statute. These systems are sponsored and administered by the State of New Jersey. The Public Employees’ Retirement System was established in January 1955 under the provisions of N.J.S.A. 43:15A to provide coverage including post-retirement health care to substantially all full-time employees of the State or any county, municipality, school district or public agency provided the employee is not a member of another State-administered retirement system. Membership is mandatory for such employees and vesting occurs after 8 to 10 years of service and 25 years for health care coverage. Members are eligible for retirement at age 60 with an annual benefit generally determined to be 1/60th of the average annual compensation for the highest three fiscal years’ compensation for each year of membership during years of creditable service. Early retirement is available to those under age 60 with 25 or more years of credited service. Anyone who retires early and is under age 55 receives retirement benefits as calculated in the above-mentioned formula but at a reduced rate (one-quarter of one percent for each month the member lacks of attaining age 55). The Police and Firemen’s Retirement System was established in July 1944 under the provisions of N.J.S.A. 43:16A to provide coverage to substantially all full-time county and municipal police or firemen and State firemen appointed after June 30, 1944. Membership is mandatory for such employees with vesting occurring after 10 years of membership. The State of New Jersey, Department of the Treasury, Division of Pensions and Benefits, issues publicly available financial reports that include the financial statements and required supplementary information for PERS. The financial reports may be obtained by writing to the State of New Jersey, Department of the Treasury, Division of Pensions and Benefits, P.O. Box 295, Trenton, New Jersey 08625-0295.


(CONTINUED) Note 6: PENSION PLANS (CONTINUED) Significant Legislation During the year ended June 30, 1997, legislation was enacted authorizing the New Jersey Economic Development Authority (the “Authority”) to issue bonds, notes or other obligations for the purpose of financing, in full or in part, the State of New Jersey’s portion of the unfunded accrued liability under the State of New Jersey retirement systems. On June 30, 1997, the Authority issued bonds pursuant to this legislation and $241,106,642 from the proceeds of the bonds were deposited into the investment accounts of PERS. As a result of additional legislation enacted during the year ended June 30, 1997 (Chapter 115, P.L. 1997) the asset valuation method was changed from market related value to full market value for the valuation reports dated March 31, 1996. This legislation also contains a provision to reduce the employee contribution rates under PERS by ½ of 1 percent to 4.5 percent for calendar years 1998 and 1999, and to allow for a similar reduction in the employee’s rate after calendar year 1999, providing excess valuation assets are available. The legislation also provides for a reduction in the normal contributions of the State to the systems from excess assets for fiscal year’s 1997 and 1998, and local employers for fiscal year 1998, and, thereafter, authorizes the State Treasurer to reduce the normal contributions of State and local employers to the systems, to the extent possible, from up to 100% of excess assets through fiscal year 2002, and on a declining maximum percentage of excess thereafter. Due to the enactment of the legislation described above, the State of New Jersey’s portion of the unfunded accrued liability under each retirement system was eliminated. Funding Policy The contribution policy is set by New Jersey State Statutes and contributions are required by active members and contributing employers. Plan member and employer contributions may be amended by State of New Jersey legislation. PERS provides for employee contributions of 5% of employees’ annual compensation, as defined. Employers are required to contribute at an actuarially determined rate. The actuarially determined contribution includes funding for cost-of-living adjustments, noncontributory death benefits, and post-retirement medical premiums. For the Public Employees’ Retirement System, the State waived the contribution for the year ended December 31, 2000 and 1999. For the Police and Firemen’s Retirement System, the Borough’s contribution was $127,573 for 2000 and $149,007 for 1999.

BOROUGH OF AVALON

NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2000

(CONTINUED)

Note 7: POST RETIREMENT BENEFITS The Borough funds post-retirement medical benefits for those employees who retire and who accumulate 25 years of credited service. The cost of these benefits is funded through contributions to group insurance for employees and is provided for annually in the Borough’s budget. The Borough paid $127,724.17 during the year ended December 31, 2000 for post retirement medical benefits. Note 8: CASH All bank deposits as of the balance sheet date are entirely insured or collateralized by a collateral pool maintained by public depositories as required by the Governmental Unit Deposit Protection Act (see Note 1 - Cash and Investments). In general, bank deposits are classified as to credit risk by the three categories described below: Category 1 Insured or collateralized with securities held by the Borough or by its agent in the Borough's name. Category 2 Collateralized with securities held by the pledging public depository's trust department or agent in the Borough's name. Category 3 Uncollateralized, including any deposit that is collateralized with securities held by the pledging public depository, or by its trust department or agent but not in the Borough's name. At December 31, 2000, the Borough's deposits are summarized as follows:

Category Amount

1 $508,184.5323 13,572,288.58

$14,080,473.11


(CONTINUED) Note 9: PROPERTY TAXES Property valuations (assessments) are determined on true values as arrived at by a cost approach, market data approach and capitalization of net income where appropriate. Current assessments are the results of new assessments on a like basis with established comparable properties for newly assessed or purchased properties. This method assures equitable treatment to like property owners. But it often results in a divergence of the assessment ratio to true value. Upon the filing of certified adopted budgets by the municipality, the local school district, fire districts, regional school district and the county, the rate is struck by the County Board of Taxation based on the certified amounts in each of the taxing districts for collection to fund the budgets. The statutory provision for the assessment of property, levying of taxes and the collection thereof is set forth in N.J.S.A. 54:4 et seq. Special taxing districts are permitted in New Jersey for various special services rendered to the properties located within the special districts. Tax bills are mailed annually in June. The taxes are due February 1 and May 1 respectively, and are adjusted to reflect the current fiscal year's total tax liability. The preliminary taxes, due August 1 and November 1 of the succeeding fiscal year, are based upon one-half of the current year's total tax. Tax installments not paid on or before the due date are subject to interest penalties of 8% per annum on the first $1,500 of the delinquency and 18% per annum on any amount in excess of $1,500. Pursuant to P.L. 1991, c. 75, the governing body may also fix a penalty to be charged to a taxpayer with a delinquent in excess of $10,000 who fails to pay that delinquency prior to the end of the calendar year. The penalty so fixed shall not exceed 6% of the amount of the delinquency. The interest and penalties are the highest permitted under New Jersey statutes. Delinquent taxes open for one year or more are annually included in a tax sale in accordance with New Jersey statutes. The New Jersey statutes provide a taxpayer with remedial procedures for appealing an assessment deemed excessive. Prior to February 1 of each year, the municipality must mail to each property owner a notice of the current assessment and taxes on the property. The taxpayer has a right to petition the County Tax Board on or before April 1 for review. Due to errors or delinquencies in notices sent to property owners, the April 1 deadline to file an appeal petition may be extended. The County Board of Taxation has the authority after a hearing to decrease or reject the appeal petition. These adjustments are usually concluded within the current tax year and reductions are shown as canceled or remitted taxes for that year. If the taxpayer feels the petition was unsatisfactorily reviewed by the County Board of Taxation, appeal may be made to the Tax Court of New Jersey for further hearing. Some Tax Court appeals may take several years prior to settlement and any losses in tax collection from prior years are charged to a reserve set aside for this purpose or directly to operations.


(CONTINUED) Note 9: PROPERTY TAXES (CONTINUED)

The following is a three-year comparison of certain statistical information relative to property taxes and property tax collections for the current and previous two years.

2000 1999 1998

Tax Rate $0.990 $0.990 $0.980

Apportionment of Tax Rate: Municipal $0.370 $0.389 $0.390 County $0.523 $0.498 $0.480 Local School $0.097 $0.103 $0.110

Comparative Schedule of Tax Rates

2000 $2,114,584,304.001999 $1,792,868,358.001998 $1,727,385,442.67

Assessed Valuation


(CONTINUED)

Note 9: PROPERTY TAXES (CONTINUED)

PercentageYear Tax Levy Collections of Collections

2000 $21,088,620.27 $20,777,390.71 98.52%1999 $17,886,620.27 $17,127,892.66 95.76%1998 $16,564,051.90 $16,215,392.79 97.90%

Tax Title Delinquent Total PercentageYear Liens Taxes Delinquent of Tax Levy

2000 $15,406.82 $276,478.87 $291,885.69 1.38%1999 $15,349.34 $758,712.76 $774,062.10 4.33%1998 $15,333.44 $321,517.91 $336,851.35 2.03%

Comparison of Tax Levies and Collections

Delinquent Taxes and Tax Title Liens

Property Acquired by Tax Title Lien Liquidation The value of property acquired by liquidation of tax title liens on December 31, on the basis of the last assessed valuation of such properties, was as follows:

Year Amount

2000 $134,380.201999 $134,380.201998 $134,380.20

Note 10: ECONOMIC DEPENDENCY The Borough of Avalon is not economically dependent on any one funding agency within the Borough or the State of New Jersey.


(CONTINUED)

Note 11: FUND BALANCES APPROPRIATED The following schedule details the amount of funding balances available at the end of each year and the amounts utilized in the subsequent year’s budgets.

Utilized in Budget

Balance of SucceedingYear Dec. 31 Year

Current Fund 2000 $3,614,209.82 $2,333,000.001999 $3,744,155.70 $2,838,749.301998 $4,178,176.58 $1,219,600.001997 $2,099,163.87 $1,044,483.001996 $1,858,284.63 $790,000.00

Water and SewerOperating Fund 2000 $1,517,820.13 $682,526.62

1999 $1,342,626.91 $623,962.111998 $1,231,782.49 $408,943.531997 $1,292,231.28 $704,851.001996 $1,426,525.18 $665,642.16

Note 12: RECEIVABLES AND PAYABLES WITHIN THE REPORTING ENTITY

Amount Due to Due from$10,500.00 Current Water and Sewer Operating175,831.52 Current Beach Operating

250.00 Current Animal Control4,260.00 Federal and State Grants Trust - Other

262.42 Trust - Other Current

$191,103.94 Total Due to and from Funds


(CONTINUED)

Note 13: BUDGETARY DATA The Mayor submits an annual budget to the Borough Council in accordance with the Faulkner Act and the State of New Jersey, Department of Community Affairs, Division of Local Government Services, Local Budget Law 40A:4. In March, the Borough Council adopts the annual appropriated budgets for the Current Fund, Utility Fund and the Capital Improvement Plan. Once approved, the Borough Council may amend the legally adopted budget when unexpected modifications are required in estimated revenues and appropriations. Supplemental appropriations per N.J.S. 40A:4-46, 54, Emergencies and Special Emergencies, become charges against the budget of the following year per N.J.S. 40A:4-47 except when financing is provided for by bonding ordinances. Budget transfers between major appropriation accounts are prohibited until the last two months of the year. The Borough Administrator submits transfers at this time to the Borough Council which are passed by Resolution. Budgetary transfers for the year were not significant. Note 14: FEDERAL AND STATE GRANTS In the normal course of operations, the Borough receives grant funds from various Federal and State agencies. The grant programs are subject to audit by agents of the granting authority, the purpose of which is to ensure compliance with conditions precedent to the granting of funds. Any liability for reimbursement which may arise as a result of these audits is not believed to be material. Note 15: JOINT INSURANCE POOL The Borough of Avalon is a member of the Atlantic County Municipal Joint Insurance Fund. The Fund provides its members with the following coverages:

Workers' Compensation General Liability, Law Enforcement Liability

Employee Benefits Liability Public Official Liability

Property, Real and Personal Automobile Liability

Boiler and Machinery Crime, Fidelity

Contributions to the Fund, including a reserve for contingencies, are payable in two installments and are based on actuarial assumptions determined by the Fund's actuary. The Commissioner of Insurance may order additional assessments to supplement the Fund's claim, loss retention or administrative accounts to assure the payment of the Fund's obligations.


(CONTINUED) Note 16: SUBSEQUENT EVENTS Subsequent to December 31, the Borough of Avalon authorized additional Bonds and Notes as follows:

Purpose Date Amount

General Capital: Bonds and Notes: Beach Replenshment January 2001 1,150,000$ Acquire Land/Demolition March 2001 1,261,500$ Reconstruct Bulkheads March 2001 118,800$ Various Road Improvements April 2001 427,500$

Note 17: LITIGATION The Borough is involved in a class action lawsuit that alleges that Avalon had a policy, practice or procedure of making mass arrests of minors violating the Borough’s noise ordinance and in the presence of alcohol, without an individual determination of probable cause for each arrest. The plaintiffs asserted that this policy was unconstitutional and sought damages, including compensatory and punitive damages, together with an award of counsel fees. The lawsuit was settled in December 1999 for $1,500,000 which was paid by the Borough’s insurance carrier. The Borough’s has charged $235,611 to date to an appropriation provided in the 2000 budget for it’s share of the settlement.

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