COMMONWEALTH OF PUERTO RICO Basic Financial Statements and Required Supplementary Information June 30, 2018 (With Independent Auditors’ Report Thereon) BASIC FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY INFORMATION Fiscal Year Ended June 30, 2018 Commonwealth of Puerto Rico Honorable Pedro Pierluisi Urrutia Governor Prepared by: Puerto Rico Department of the Treasury Francisco Parés Alicea, CPA Secretary of the Treasury Angel Pantoja Rodríguez, Esq. Under Secretary of the Treasury Jeira Belén Ortíz, Esq. Assistant Secretary of Central Accounting COMMONWEALTH OF PUERTO RICO Table of Contents Page(s) Independent Auditors’ Report 1–6 Management’s Discussion and Analysis (Unaudited) 7–27 Basic Financial Statements: Government-wide- Financial Statements: Statement of Net Position 28–29 Statement of Activities 30–31 Fund Financial Statements: Governmental Funds: Balance Sheet 32 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position 33 Statement of Revenue, Expenditures, and Changes in Fund Balances 34 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 35 Proprietary Funds: Statement of Net Position 36 Statement of Revenues, Expenses, and Changes in Fund Net Position 37 Statement of Cash Flows 38 Fiduciary Funds: Statement of Fiduciary Net Position 39 Discretely Presented Component Units: Combining Statement of Net Position 40–41 COMMONWEALTH OF PUERTO RICO Table of Contents Page(s) Combining Statement of Activities 42 Notes to Basic Financial Statements 43–257 Required Supplementary Information (Unaudited): Schedule of Changes in Net Pension Liability for Single Employer- Pension Plans – TRS 258 Schedule of Changes in Net Pension Liability for Single Employer Pension Plans – JRS 259 Schedule of Proportionate Share of the Net Pension Liability of a Cost Sharing- Multiple Employer Pension Plan – ERS 260 Schedule of Employers’ Contributions – All Pension Plans 261 Schedule of Changes in Total Other Postemployment Benefits Liability and Related Ratios for Single Employer Pension Plans - TRS 262 Schedule of Changes in Total Other Postemployment Benefits Liability and Related Ratios for Single Employer Pension Plans - JRS 263 Schedule of Changes in Total Other Postemployment Benefits Liability and Related Ratios for Single Employer Pension Plans - ERS 264 Schedule of Revenue and Expenditures – Budget and Actual – Budgetary Basis – General Fund 265 Notes to Required Supplementary Information 266–269 Combining and Individual Fund Financial Statements and Schedules General Fund: General Fund 270 Schedule of Expenditures by Agency – Budget and Actual – Budgetary Basis – General Fund 271–273 Nonmajor Governmental Funds: Nonmajor Governmental Funds 274–276 Combining Balance Sheet 277–278 Combining Statement of Revenue, Expenditures, and Changes in Fund Balances 279–280 COMMONWEALTH OF PUERTO RICO Table of Contents Page(s) Nonmajor Proprietary Funds: Nonmajor Proprietary Funds 281 Combining Statement of Net Position 282 Combining Statement of Revenue, Expenses, and Changes in Fund Net Position 283 Combining Statement of Cash Flows 284 Fiduciary Funds: Fiduciary Funds 285 Combining Statement of Changes in Assets and Liabilities – Agency Funds 286 Nonmajor Discretely Presented Component Units: Nonmajor Discretely Presented Component Units 287 Combining Statement of Net Position 288–294 Combining Statement of Activities 295 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, 2018, 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 8.06% and 2.65% 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 20.59% and 8.61% of the total assets and revenues, respectively, of the aggregate remaining fund information. These entities and funds collectively represent 35.26% and 3.03% 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, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. – 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 25.93% and 51.58% of the total assets and revenues, respectively, of the aggregate remaining fund information. These entities and funds collectively represent 97.04% and 92.09% of the total assets and revenues, respectively, of the business-type activities. • Aggregate Discretely Presented Component Units The discretely presented component units listed in note 1(c) to the basic financial statements. These entities collectively represent 74.93% and 59.56% 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. Summary of Opinions Opinion unit Type of opinion Governmental activities Unmodified Business-type activities Unmodified Aggregate discretely presented component units Qualified General fund Unmodified Debt service fund Unmodified ERS Special evenue fund Unmodified COFINA Special revenue fund Unmodified COFINA Debt service fund Unmodified Unemployment insurance fund Unmodified Puerto Rico Health Insurance Administration Fund Unmodified Puerto Rico Medical Services Administration Fund Unmodified Aggregate remaining fund information Qualified