Tuesday, September 22, 2020

SWAIN’S WORLD: Overdue 2017 Commonwealth Audit Submitted

By on September 8, 2020

Depicts Bleak Fiscal State that Led to Bankruptcy Declaration under Promesa

SAN JUAN — Three years after then-Gov. Ricardo Rosselló pledged to issue Puerto Rico government audited financial statements in a timely manner, the administration of Gov. Wanda Vázquez Garced released last week the commonwealth’s comprehensive annual financial report (CAFR) for fiscal year 2017, after much prodding from the island’s Financial Oversight and Management Board (FOMB). 

Unsurprisingly, the 320-page report, prepared by accounting firm KPMG, lays bare the dire fiscal, economic and liquidity crisis on the island that ultimately led the FOMB, at the request of Rosselló, to file a petition in U.S. District Court on May 3, 2017, for bankruptcy-like protections overseen by Judge Laura Taylor Swain under the federal Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) Title III. The bankruptcy declaration started an FOMB-directed process of restructuring with creditors more than $120 billion in debt and liabilities—the biggest of any U.S. jurisdiction. 

In the report, KPMG notes how the fiscal year’s balance sheets show a central government and related entities heading toward insolvency, despite the implementation of budget-tightening measures contained in the Government of the Commonwealth of Puerto Rico Special Fiscal and Operational Sustainability Act (Act 66 of 2014). These mandates included cuts to retirement system benefits, reductions and elimination of special appropriations and certain subsidies, and the freezing of the formula-based contributions to the University of Puerto Rico, the judicial branch and municipalities.   

The austerity measures actually led to a commonwealth general fund surplus of $577.2 million— the difference between $9.2 billion in general fund revenues and actual expenditures of $8.6 billion—by the end of the fiscal year on June 30, 2017, according to the KPMG report, which notes that it relied on audits done by other firms for many of the government agencies and public corporations. 

Nonetheless, the audit report states that the “net position,” or deficit, over time “may serve as a useful indicator of a government’s financial position.” This net deficit increased by $981.3 million, to $71.1 billion for fiscal 2017. This is the difference between total assets plus deferred outflows of resources and total liabilities, and deferred inflows of resources, which were $24 billion and $95.1 billion, respectively, by June 30, 2017. 

The “unrestricted deficit for government activities”—which the report defines as “part of the net position that can be used to finance day-to-day government operations without constraints established by debt covenants, enabling legislation or other legal requirements”—was approximately $74.1 billion as of June 30, 2017.  

“The unrestricted deficit in government activities, which increased by approximately $388.1 million, exists primarily because of excessive operating expenses in disparity with actual revenues,” the report states. “The deficit can be expected to continue for as long as the Commonwealth continues to have obligations outstanding for purposes other than the acquisition of government capital assets.” 

In comparison to the net deficit reported in the audit, the size of Puerto Rico’s economy measured in gross national product totaled $70.6 billion in fiscal 2017. 

While the Vázquez administration’s fiscal team has blamed the Covid-19 emergency for delays in the completion of the audited statements as far back as 2017, the FOMB says the government has not addressed “underlying procedural weaknesses” in its auditing and accounting processes, particularly at agencies and departments, that are holding up the reports.  

During an oversight board meeting last month, FOMB Executive Director Natalie Jaresko and several board members expressed disappointment over a plan submitted by the administration to complete and issue the CAFRs corresponding to fiscal years 2018 and 2019 by Jan. 31, 2022, which is well beyond the Dec. 31 deadline set by the board. The government plan makes no mention of scheduled issue dates for the 2020 and 2021 CAFRs.    

Jaresko said that such a plan would have to ensure that the reports are completed by the following dates: the fiscal 2018 report by Nov. 30, and the fiscal 2019 report by Dec. 31. She said the fiscal 2020 report should be finalized and issued by March 31, while the fiscal 2021 report is due by Dec. 31. 

The FOMB said during the meeting that the reports are crucial in achieving sound government finances and exiting the bankruptcy process begun in 2017, which would facilitate the commonwealth’s return to the capital markets—a source of funds for key infrastructure and operational projects.   

The commonwealth government has been unable to resort to the bond market for financing since it started defaulting on its debt in 2015. The following year, the U.S. Congress passed and President Obama enacted Promesa, which created the FOMB to restructure the island’s debt and liabilities, and repair its troubled finances.  

The oversight board has stated that “best practices” call for CAFRs for a given fiscal year to be issued no later than six months after the close of the fiscal year on June 30. 

The financial statements include all of the operations of the government, of the public corporations, the University of Puerto Rico and other entities that make up the government in general and reflect the economic situation in a specific period.