Commonwealth of Puerto Rico Comprehensive Annual Financial Report Year Ended June 30, 2012 COMPREHENSIVE ANNUAL FINANCIAL REPORT Fiscal Year Ended June 30, 2012 Commonwealth of Puerto Rico Honorable Alejandro García Padilla Governor Prepared by: Puerto Rico Department of the Treasury Melba Acosta Febo, CPA, Esq. Secretary of the Treasury Karolee García Figueroa, CPA, Esq. Under Secretary of the Treasury This document is available on the Puerto Rico Department of the Treasury homepage On the World Wide Web: http://www.hacienda.gobierno.pr COMMONWEALTH OF PUERTO RICO TABLE OF CONTENTS Page Part I: Introductory Section (Unaudited) LETTER OF TRANSMITTAL 1–13 PRINCIPAL OFFICIALS 14 ORGANIZATIONAL CHART 15 Part II: Financial Section INDEPENDENT AUDITORS’ REPORT 17–19 MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) 20–33 BASIC FINANCIAL STATEMENTS: Government-Wide Financial Statements: Statement of Net Assets (Deficit) 34–35 Statement of Activities 36–37 Fund Financial Statements: Balance Sheet — Governmental Funds 38–39 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets (Deficit) 40 Statement of Revenues, Expenditures, and Changes in Fund Balances (Deficit) — Governmental Funds 41–42 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances (Deficit) of Governmental Funds to the Statement of Activities 43 Statement of Revenues and Expenditures — Budget and Actual — Budget Basis — General Fund 44 Statement of Net Assets (Deficit) — Proprietary Funds 45 Statement of Revenues, Expenses, and Changes in Fund Net Assets (Deficit) — Proprietary Funds 46 Statement of Cash Flows — Proprietary Funds 47–48 Statement of Fiduciary Net Assets — Fiduciary Funds 49 Statement of Changes in Fiduciary Net Assets — Pension Trust Funds 50 Combining Statement of Net Assets (Deficit) — Major Component Units 51–54 Combining Statement of Activities — Major Component Units 55 Notes to Basic Financial Statements 56–238 Required Supplementary Information (Unaudited): SCHEDULE OF FUNDING PROGRESS — RETIREMENT SYSTEMS 240 SCHEDULE OF FUNDING PROGRESS — POSTEMPLOYMENT HEALTHCARE BENEFITS 241 Supplementary Information: Combining and Individual Fund Financial Statements and Schedules: GENERAL FUND: Supplemental Schedule of Expenditures by Agency — Budget and Actual — Budget Basis 244–246 NONMAJOR GOVERNMENTAL FUNDS: Combining Balance Sheet 249–250 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 251 NONMAJOR PROPRIETARY FUNDS: Combining Statement of Net Assets 253 Combining Statement of Revenues, Expenses, and Changes in Net Assets 254 Combining Statement of Cash Flows 255 FIDUCIARY FUNDS: Combining Statement of Fiduciary Net Assets — Pension Trust Funds 257 Combining Statement of Changes in Fiduciary Net Assets — Pension Trust Funds 258 Combining Statement of Changes in Assets and Liabilities — Agency Funds 259 NONMAJOR DISCRETELY PRESENTED COMPONENT UNITS: Combining Statement of Net Assets (Deficit) 261–278 Combining Statement of Activities 279 Part III: Statistical Section (Unaudited): SCHEDULES OF FINANCIAL TREND INFORMATION: Changes in Net Assets (Deficit) for the Last Ten Fiscal Years 283–284 Net Assets (Deficit) by Component for the Last Ten Fiscal Years 285 Changes in Fund Balances (Deficit) of Governmental Funds all Governmental Fund Types for the Last Ten Fiscal Years 286 Fund Balances (Deficit) of Governmental Funds for the Last Ten Fiscal Years 287 SCHEDULE OF REVENUE CAPACITY INFORMATION — General Fund Net Revenues for the Last Ten Fiscal Years 289–290 SCHEDULES OF DEBT CAPACITY INFORMATION: Legal Debt Margin Information for the Last Ten Fiscal Years 292 Ratio of Annual Debt Service for General Bonded Debt to Total General Expenditures for the Last Ten Fiscal Years 293 SCHEDULES OF DEMOGRAPHIC AND ECONOMIC INFORMATION: Demographic and Economic Statistics for the Last Ten Fiscal Years 295 Average Employment by Sector for the Last Ten Fiscal Years 296 Tourism Indicators for the Last Ten Fiscal Years 297 SCHEDULE OF OPERATING INFORMATION — Operating Indicators by Function for the Last Ten Fiscal Years 299 INTRODUCTORY SECTION Commonwealth of Puerto Rico DEPARTMENT OF THE TREASURY San Juan, Puerto Rico Melba I. Acosta Febo, Esq. Secretary of the Treasury September 16, 2013 To the People of the Commonwealth of Puerto Rico, Gov. Alejandro García Padilla and Members of the Legislature: The Comprehensive Annual Financial Report (CAFR) of the Commonwealth of Puerto Rico (the “Commonwealth”) for the fiscal year ended June 30, 2012 is submitted herewith in accordance with our responsibilities of reporting the Commonwealth’s financial activities. To the best of my knowledge, the information presented provides a reasonable understanding of the state’s financial activities. This report reflects my commitment to you, the citizens of the Commonwealth, to our Governor, to our elected officials and to the financial community to maintain and disclose our financial statements in a manner which fully conforms with accounting principles generally accepted in the United States of America (USGAAP) as established by the Governmental Accounting Standards Board (GASB). The report is comprised of three main sections. The Introductory Section includes this letter of transmittal, general information about the Commonwealth, a list of the Commonwealth’s principal elected and appointed officials, as well as an organizational chart. The Financial Section consists of the independent auditors’ report, management’s discussion and analysis (MD&A), the audited basic financial statements as listed in the table of contents with the notes thereto and the required supplementary information. The Statistical Section set forth contains selected unaudited financial and demographic information for the Commonwealth on a multiyear basis. PROFILE OF THE COMMONWEALTH As the governmental entity responsible for the preparation of this report, the Puerto Rico Department of the Treasury relies on information provided by the Commonwealth’s financial and accounting management, in charge of ensuring that assets are safeguarded and financial transactions are properly recorded and adequately documented. The responsibility for both the accuracy of the presented data and the completeness and fairness of the presentation, including all disclosures, rests with the Commonwealth’s management. To the best of our knowledge and belief, the information presented is accurate in all material respects and is presented in conformity with US GAAP. The presentation is designed to set forth the financial position and the results of operations of the governmental activities, the business-type activities, the aggregate discretely presented component units, the major funds, as well as the aggregate remaining funds of the Commonwealth as of June 30, 2012 with the respective changes in financial position and cash flows thereof, where applicable, and the respective budgetary comparison for the General Fund for the year then ended. We have included all the necessary disclosures to enable the reader to gain a thorough understanding of the Commonwealth’s activities. - 1 - The financial reporting entity consists of the primary government as defined below, other organizations for which the primary government is financially accountable, and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s financial statements to be misleading or incomplete. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization’s governing body and it is able to either impose its will on that organization or if the organization can potentially provide specific financial benefits to or impose specific financial burdens on the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. Certain component units, despite being legally separate from the primary government, are blended with the primary government. Blended component units provide services exclusively to the Commonwealth and, thus, are reported as if they were part of the primary government. The Commonwealth has four blended component units. Discretely presented component units are legally separate from the primary government and are reported as such because the Commonwealth appoints a majority of their governing bodies and either is able to impose its will on them or the existence of a financial benefit/burden situation is verifiable. Both major and non-major discretely presented component units are reported in a separate column in the government- wide financial statements to emphasize that they are not part of the primary government and to differentiate their financial position and results of operations from those of the primary government. The Commonwealth has 49 discretely presented component units of which six are considered major component units and 43 non-major component units. In addition, the Commonwealth has three (3) fiduciary component units which have been omitted from the government-wide financial statements, as their resources are not available to fund the operations of the Commonwealth. Generally, each component unit issues audited