COMMONWEALTH OF PUERTO RICO Financial Information and Operating Data Report October 18, 2013 TABLE OF CONTENTS Page INTRODUCTION ............................................................................................................................. 1 General ....................................................................................................................................... 1 Forward-Looking Statements..................................................................................................... 1 Recent Developments ................................................................................................................ 2 Overview of Economic and Fiscal Condition ............................................................................ 8 Geographic Location and Demographic Trends ...................................................................... 14 Relationship with the United States ......................................................................................... 15 Governmental Structure ........................................................................................................... 15 Principal Officers Responsible for Fiscal Matters ................................................................... 15 Political Trends ........................................................................................................................ 17 THE ECONOMY............................................................................................................................. 18 General ..................................................................................................................................... 18 Fiscal Stabilization ................................................................................................................... 24 Economic Growth .................................................................................................................... 30 Employment and Unemployment ............................................................................................ 37 Economic Performance by Sector ............................................................................................ 39 Higher Education ..................................................................................................................... 53 Tax Incentives .......................................................................................................................... 54 Industrial Incentives Program .................................................................................................. 54 DEBT ............................................................................................................................................... 58 Public Sector Debt ................................................................................................................... 58 Debt Service Requirements for Commonwealth General Obligation Bonds, Appropriation Bonds and Certain Guaranteed Debt................................................................................. 62 Interest Rate Exchange Agreements ........................................................................................ 64 Variable Rate Bonds and Mandatory Tender Bonds ............................................................... 66 Ratings of Commonwealth General Obligation Bonds ........................................................... 69 Commonwealth Guaranteed Debt ............................................................................................ 69 Trends of Public Sector Debt ................................................................................................... 70 PUBLIC CORPORATIONS ............................................................................................................ 72 Government Development Bank for Puerto Rico .................................................................... 74 Other Public Corporations ....................................................................................................... 76 INSURANCE MATTERS ............................................................................................................... 87 RETIREMENT SYSTEMS ............................................................................................................. 87 POST-EMPLOYMENT BENEFITS OTHER THAN PENSIONS .............................................. 113 COMMONWEALTH AUDITED FINANCIAL STATEMENTS ................................................ 116 General ................................................................................................................................... 116 Prior Non-Compliance with Continuing Disclosure Obligations .......................................... 116 PUERTO RICO TAXES, OTHER REVENUES, AND EXPENDITURES ................................. 117 i Summary and Management’s Discussion of General Fund Results ...................................... 118 Major Sources of General Fund Revenues ............................................................................ 122 Administrative Measures to Increase Collections of Income, Sales, and Excise Taxes and Property Taxes ................................................................................................................ 132 Transfers to General Obligation Redemption Fund ............................................................... 134 Components of General Fund Expenditures .......................................................................... 134 BUDGET OF THE COMMONWEALTH OF PUERTO RICO ................................................... 136 Office of Management and Budget ........................................................................................ 136 Budgetary Process .................................................................................................................. 136 Financial Control and Adjustment Procedures ...................................................................... 137 Appropriations ....................................................................................................................... 138 Budget for Fiscal Year 2013 .................................................................................................. 140 Budget for Fiscal Year 2014 .................................................................................................. 141 Differences between Budget and Basic Financial Statements ............................................... 144 LITIGATION ................................................................................................................................. 144 ii COMMONWEALTH OF PUERTO RICO Financial Information and Operating Data Report October 18, 2013 INTRODUCTION General The financial and operating information about the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”) included in this Report has been updated as of June 30, 2013, except as otherwise provided herein. The Commonwealth’s fiscal year runs from July 1 through June 30 of the following year. References in this Report to a particular fiscal year are to the year in which such fiscal year ends. Forward-Looking Statements The information included in this Report contains certain “forward-looking” statements. These forward-looking statements may relate to the Commonwealth’s fiscal and economic condition, economic performance, plans, and objectives. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipates,” “believes,” “continues,” “expects,” “estimates,” “intends,” “aims,” “projects,” and similar expressions, and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions, are generally intended to identify forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by the Commonwealth that are difficult to predict. The economic and financial condition of the Commonwealth is affected by various financial, social, economic, environmental, and political factors. These factors can be very complex, may vary from one fiscal year to the next, and are frequently the result of actions taken or not taken, not only by the Commonwealth and its agencies and instrumentalities, but also by entities such as the government of the United States of America or other nations that are not under the control of the Commonwealth. Because of the uncertainty and unpredictability of these factors, their impact cannot, as a practical matter, be included in the assumptions underlying the Commonwealth’s projections. The projections set forth in this Report were not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of the Commonwealth’s officers responsible for the preparation of such information, were prepared on a reasonable basis, reflect the best currently available estimates and judgments, and present, to the best of such officers’ knowledge and belief, the expected course of action and the expected future financial performance of the Commonwealth. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this Report are cautioned not to place undue reliance on the prospective financial