COMMONWEALTH of PUERTO RICO Basic Financial Statements and Required Supplementary Information June 30, 2017 (With Independent Auditors’ Report Thereon)

COMMONWEALTH OF PUERTO RICO Basic Financial Statements and Required Supplementary Information June 30, 2017 (With Independent Auditors’ Report Thereon) BASIC FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY INFORMATION Fiscal Year Ended June 30, 2017 Commonwealth of Puerto Rico Honorable Wanda VázQuez Garced Governor Prepared by: Puerto Rico Department of the Treasury Francisco Parés Alicea, CPA Secretary of the Treasury Angel Pantoja Rodríguez Under Secretary of the Treasury Alfonso Rossy Raíces, CPA Assistant Secretary of Central Accounting COMMONWEALTH OF PUERTO RICO Table of Contents Page(s) Independent Auditors’ Report 1–5 Management’s Discussion and Analysis (Unaudited) 6–28 Basic Financial Statements: Government-wide- Financial Statements: Statement of Net Position 29–30 Statement of Activities 31–32 Fund Financial Statements: Governmental Funds: Balance Sheet 33 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position 34 Statement of Revenue, Expenditures, and Changes in Fund Balances 35 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 36 Proprietary Funds: Statement of Net Position 37 Statement of Revenues, Expenses, and Changes in Fund Net Position 38 Statement of Cash Flows 39 Fiduciary Funds: Statement of Fiduciary Net Position 40 Statement of Changes in Fiduciary Net Position – Pension (and Other Employee Benefit) Trust Funds 41 Discretely Presented Component Units: Combining Statement of Net Position 42–43 COMMONWEALTH OF PUERTO RICO Table of Contents Page(s) Combining Statement of Activities 44 Notes to Basic Financial Statements 45–277 Required Supplementary Information (Unaudited): Schedule of Changes in Net Pension Liability for Single-Employer Pension Plans – TRS 278 Schedule of Changes in Net Pension Liability for Single-Employer Pension Plans – JRS 279 Schedule of Proportionate Share of the Net Pension Liability of a Cost-Sharing Multiple-Employer Pension Plan – ERS 280 Schedule of Employers’ Contributions – All Pension Plans 281 Schedule of Funding Progress for the Postemployment Healthcare Plans 282 Schedule of Employers’ Contributions for the Postemployment Healthcare Plans 283 Schedule of Revenue and Expenditures – Budget and Actual – Budgetary Basis – General Fund 284 Notes to Required Supplementary Information 285–289 Combining and Individual Fund financial Statements and Schedules General Fund: General Fund 290 Schedule of Expenditures by Agency – Budget and Actual – Budgetary Basis – General Fund 291–293 Nonmajor Governmental Funds: Nonmajor Governmental Funds 294–296 Combining Balance Sheet 297–298 Combining Statement of Revenue, Expenditures, and Changes in Fund Balances 299–300 Nonmajor Proprietary Funds: Nonmajor Proprietary Funds 301 COMMONWEALTH OF PUERTO RICO Table of Contents Page(s) Combining Statement of Net Position 302 Combining Statement of Revenue, Expenditures, and Changes in Fund Net Position 303 Combining Statement of Cash Flows 304 Fiduciary Funds: Fiduciary Funds 305–306 Combining Statement of Fiduciary Net Position – Pension Trust Funds 307 Combining Statement of Changes in Fiduciary Net Position – (and Other Employee Benefit) Trust Funds 308 Combining Statement of Changes in Assets and Liabilities – Agency Funds 309 Nonmajor Discretely Presented Component Units: Nonmajor Discretely Presented Component Units 310 Combining Statement of Net Position 311–317 Combining Statement of Activities 318 KPMG LLP American International Plaza Suite 1100 250 Muñoz Rivera Avenue San Juan, PR 00918-1819 Independent Auditors’ Report The Honorable Governor and Legislature Commonwealth of Puerto Rico San Juan, Puerto Rico We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Commonwealth of Puerto Rico (the Commonwealth) as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the Commonwealth’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the following entities and funds: Governmental Activities – Corporation of Industries for the Blind and Mentally Retarded and Incapacitated Persons of Puerto Rico, Office of Legislative Services, Office for the Improvement of Public Schools, Superintendence of the Capitol Building, Puerto Rico House of Representatives, Puerto Rico Senate, Puerto Rico Public Housing Administration, Puerto Rico Housing Finance Department – Sales and Acquisition Fund, and Puerto Rico Department of Economic Development and Commerce, which collectively represent 11.71% and 2.49% of the total assets and revenues, respectively, of the General Fund. – Puerto Rico Maritime Shipping Authority, Special Communities Perpetual Trust special revenue and debt service funds, Public Buildings Authority, University of Puerto Rico Comprehensive Cancer Center, Puerto Rico Infrastructure Financing Authority, The Children’s Trust, Puerto Rico Fiscal Agency and Financial Advisory Authority, and Ponce Authority which are non-major governmental funds that represent 12.39% and 1.86% of the total assets and revenues, respectively, of the aggregate remaining fund information. These entities and funds collectively represent 49.90% and 2.61% of the total assets and revenues, respectively, of the governmental activities. Business-Type Activities – Unemployment Insurance Fund, which is a major enterprise fund. – Puerto Rico Health Insurance Administration, which is a major enterprise fund. – Puerto Rico Medical Services Administration, which is a major enterprise fund. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. – The Additional Lottery System, the Puerto Rico Water Pollution Control Revolving Fund, Puerto Rico Safe Drinking Water Treatment Revolving Loan Fund, the Governing Board of 9-1-1 Services, Disability Insurance Fund, Drivers’ Insurance Fund, and Ponce Ports Authority which are non-major enterprise funds that collectively represent 15.07% and 34.11% of the total assets and revenues, respectively, of the aggregate remaining fund information. These entities and funds collectively represent 87.05% and 89.72% of the total assets and revenues, respectively, of the business-type activities. Other Entities and Funds – The Puerto Rico System of Annuities and Pensions for Teachers, which represents 14.48% and 16.07% of the total assets and revenues, respectively, of the aggregate remaining fund information. Aggregate Discretely Presented Component Units The discretely presented component units listed in note 1(c) to the basic financial statements, except for The Government Development Bank for Puerto Rico. These entities collectively represent 91.66% and 97.08% of the total assets and revenues, respectively, of the aggregate discretely presented component units. Those statements were audited by other auditors whose reports have been furnished to us, and our opinions, insofar as they relate to the amounts included for the entities and funds indicated above, are based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type

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