COMMONWEALTH OF PUERTO RICO MUNICIPALITY OF AGUAS BUENAS, PUERTO RICO SINGLE AUDIT REPORTING PACKAGE FOR THE YEAR ENDED JUNE 30, 2013

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1 SINGLE AUDIT REPORTING PACKAGE FOR THE YEAR ENDED JUNE 30, 2013

2 SINGLE AUDIT REPORTING PACKAGE FOR THE YEAR ENDED JUNE 30, 2013 TABLE OF CONTENTS FINANCIAL SECTION PAGE Independent Auditor s Report 1-2 Management s Discussion and Analysis 3-12 Basic Financial Statements: Governmental wide financial statement: Statement of Net Position 13 Statement of Activities Fund Financial Statements: Balance Sheet Governmental Funds 16 Reconciliation of the Governmental Funds Balance Sheet to Statement of Net Position 17 Statement of Revenues, Expenditures and Changes in Fund Balance - Governmental Fund 18 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balance to the Statement of Activities 19 Statement of Financial Position Proprietary Fund 20 Statement of Activities Proprietary Fund 21 Statement of Cash Flows Proprietary Fund Notes to the Financial Statements REQUIRED SUPPLEMENTARY INFORMATION 42 Schedule of Budgetary Comparison 43 Notes to Schedule of Budgetary Comparison Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards Independent auditor s report on Internal Control Over Financial Reporting and on Compliance and other Matters based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent auditor s report on Compliance with Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A SCHEDULE OF FINDINGS AND QUESTIONED COSTS 56 Section I. Summary of Auditor s Results 57 Section II. Financial Statements Findings Section III. - Federal Awards Findings And Questioned Costs 60

3 FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013

4 CARLOS R. DIAZ, CPA, PSC CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS INDEPENDENT AUDITOR S REPORT To the Honorable Mayor and Municipal Legislative Body Municipality of Aguas Buenas Aguas Buenas, Puerto Rico Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, each major fund and the aggregate remaining fund information of Municipality of Aguas Buenas, Puerto Rico as of and for the year ended June 30, 2013, and the related notes to the financial statements, which collectively comprise the Municipality of Aguas Buenas, Puerto Rico s basic financial statements as listed in the table of contents. We did not audit the financial statements of Espiritu Santo Project, which represent 100% percent of the total assets, net position and revenue of the business type activities. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; 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. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of Espiritu Santo Project. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Espiritu Santo Project, is based solely on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. MEMBER: American Institute of Certified Public Accountants Puerto Rico Society of Certified Public Accountants PO BOX 408, 44 RAFAEL LASA ST, AGUAS BUENAS, PUERTO RICO TEL: FAX: cdiaz@carlosrdiazcpa.com

5 INDEPENDENT AUDITOR S REPORT (CONTINUED): An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s 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 report of other auditor, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the Municipality of Aguas Buenas, Puerto Rico as of June 30, 2013, and the respective changes in financial position, and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and budgetary comparison information on pages 3 to 12 and 43-45, respectively, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Municipality of Aguas Buenas, Puerto Rico s basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the basic financial statements. 2

6 INDEPENDENT AUDITOR S REPORT (CONTINUED): Such information is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 30, 2014, on our consideration of the Municipality of Aguas Buenas, Puerto Rico s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Municipality of Aguas Buenas, Puerto Rico s internal control over financial reporting and compliance. Carlos R. Díaz CPA, PSC January 30, 2014 License No. 275 Aguas Buenas, Puerto Rico Expire December 1, 2015 The stamp No. E55467 of the Puerto Rico Society of Certified Public Accountants was affixed to the original of this report. 3

7 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS YEAR ENDED JUNE 30, 2013 This discussion and analysis of the Municipality of Aguas Buenas, Puerto Rico (the Municipality) financial performance provides an overview of the Municipality s financial activities for the fiscal year ended on June 30, The Management Discussion and Analysis (MD&A) should be read in conjunction with the accompanying basic financial statements and the accompanying notes to those financial statements. The discussion and analysis includes comparative data for prior year as this information is available for the fiscal year ended on June 30, This MD&A is prepared in order to comply with such pronouncement and, among other purposes, to provide the financial statements users with the following major information: 1. a broader basis in focusing important issues; 2. acknowledgement of an overview of the Municipality s financial activities; 3. provide for an evaluation of its financial condition as of the end of the indicated fiscal year, compared with prior year results; 4. identification of uses of funds in the financing of the Municipality s variety of activities and; 5. assess management s ability to handle budgetary functions. FINANCIAL HIGHLIGHTS The following comments about the financial condition and results of operations as reflected in the financial statements prepared for fiscal year 2013 deserve special mention: 1. Total assets of the Municipality amounted to $32,946,414 which represents a decrease of 1% compared to prior fiscal year. 2. At the end of fiscal year 2013, total liabilities amounted to $14,076,334. Out of said amount, $10,272,718 corresponded to long-term liabilities of which $8,458,000 represented the outstanding balance of bonds and notes issued. The Municipality continued to meet all debt service requirements, most of which was paid from self generated revenues. 3. Total net position of the Municipality amounted to $18,870,080 which represents an increase of 3% if compared to prior fiscal year. 4. Total revenues available for the financing of activities as reflected in the Statement of Activities amounted to $16,086,191 derived from the following sources: $370,448 charges for services; $2,535,025 from operating grants and contributions; $1,256,782 from capital grants and contributions obtained from other sources, and $11,923,936 from general revenues available. 5. Total expenses incurred to afford the cost of all functions and programs as reflected in the Statement of Activities amounted to $15,485, As reflected in the Statement of Activities, the current fiscal year operations contributed to an increase in the Net Position figure by $600,527. 4

8 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 FINANCIAL HIGHLIGHTS (CONTINUED) 7. As of the close of the current fiscal year, the Municipality s Governmental Funds reported combined ending fund balances of $4,556, As the end of the current fiscal year, the Municipality s general fund deficit amounted to $1,806,120 compared to the deficit of $1,638,355 in the prior fiscal year. 9. The actual General Fund budgetary activities resulted in an unfavorable balance of $131,531. FUNDAMENTALS OF FINANCIAL STATEMENTS PRESENTATION The approach used in the presentation of the financial statements of the Municipality is based on a government-wide view of such statements as well as a presentation of individual funds behavior during fiscal year The combination of these two perspectives provide the user the opportunity to address significant questions concerning the content of said financial statements, and provide the basis for a comparable analysis of future years performance. The comparative analysis is a meaningful and useful management tool for municipal management in the decision making process. Under the aforementioned approach, assets and liabilities are recognized using the accrual basis of accounting which is similar to the method used by most private enterprises. This means that current year s revenues and expenses are accounted for regardless of when cash is received or paid. FINANCIAL STATEMENTS COMPONENTS The basic financial statements consist of the government wide financial statements, the funds financial statements and the notes to the financial statements which provide details, disclosure and description of the most important items included in said statements. The Statement of Net Position reflects information of the Municipality as a whole of a consolidated basis and provides relevant information about its financial strength as reflected at the end of the fiscal year. Such financial level is measured as the difference between total assets and liabilities, with the difference between both items reported as net position. It is important to note that although municipalities as governmental public entities were not created to operate under a profit motive framework, the return on assets performance plays an important role in their financial operations. The higher the increments achieved in net revenues, the higher the capacity to increase the net position figure either thru additional borrowings or thru internally generated funds. This in turn will benefit the welfare of the Municipality of Aguas Buenas constituents. The Statement of Activities is focused on both gross and net cost of the various activities of the Municipality. It presents information which shows the changes in the Municipality s net position at the most recent fiscal year. Based on the use of the accrual basis of accounting, changes are reported as soon as the underlying event occurs, regardless of the timing of the related cash flows. Under said approach, revenues and expenses are reported in the Statement of Activities based on the theory that it will result in cash flows to be realized in future periods. 5

9 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 FINANCIAL STATEMENTS COMPONENTS (CONTINUE) A brief review of the Statements of Activities of the Municipality at June 30, 2013, shows total expenses incurred to afford the cost of all functions and programs amounted to $15,485,664. Upon examining the sources of revenues for the financing of said programs, the Statement reflects that $4,162,255 was derived from the following sources: $370,448 charges for services; $2,535,025 from operating grants and contributions; and $1,256,782 from capital grants and contributions obtained from other sources. General revenues for the year amounted to $11,923,936. When such figure is added to the $4,162,255 previously mentioned, total revenues available for the financing of activities amounted to $16,086,191. There was an excess of revenues over expenses in the amount of $600,527 which contributed with an increase to the figure of net position attained at the end of the fiscal year. The Fund Financial Statement is another important component of the Municipality s financial statements. A fund is a grouping of related accounts that are used to maintain accountability and controls over economic resources of the Municipality that have been segregated for specific activities. The Municipal fund type of accounting is used to demonstrate compliance with related legal requirements. Information offered thru this Statement is limited to the Municipality most significant funds and is particularly related to the local government only, instead of the government as a whole. Government funds are used to account for essentially the same functions as those reported as governmental activities. The funds are reported using an accounting method known as modified accrual accounting which measures cash and all other financial assets that can be readily converted into cash. The fund statement approach gives the user a short term view of the Municipality s government operations and the basic services it provides. Since the focus of government funds is narrower than that of the financial statements as a whole, it also helps the user with comparable information presented in the governmental activities report. By doing so, readers of the basic financial statements may understand better the long-term effect of the Municipality s short-term financial decisions. INFRASTRUCTURE ASSETS Historically, a significant group of infrastructure assets (such as roads, bridges, traffic signals, underground pipes not associated with utilities, etc.) have not been recognized nor depreciated in the accounting records of the Municipality. GASB 34 requires that such type of assets be inventoried, valued and reported under the governmental column of the Government-Wide Statement. According to the requirements of GASB 34, the government must elect to either (a) depreciate the aforementioned assets over their estimated useful life or (b) develop a system of asset management designed to maintain the service delivery to near perpetuity. If the government develops the asset management system, (the modified approach) which periodically (at least every three years), by category, measures and demonstrate its maintenance of locally established levels of service standards, the government may record its cost of maintenance in lieu of depreciation. In this particular respect, the Municipality has elected the use of recognizing depreciation under the useful life method and it contemplates to continue this treatment on said basis. 6

10 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 FINANCIAL ANALYSIS OF THE MUNICIPALITY AS A WHOLE Net Position The Statement of Net Position serves as an indicator of the Municipality s financial position at the end of the fiscal year. In the case of the Municipality of Aguas Buenas, primary government assets exceeded total liabilities by $18,870,080 at the end of 2013, compared to $18,269,553, at the end of the previous year, as showed in the following condensed Statement of Net Position of the Primary Government. Condensed Statement of Net Assets Change % Current and other assets 9,233,168 10,611,447 (1,378,279) -13% Capital Assets 23,713,246 22,816, ,782 4% Total Assets 32,946,414 33,427,911 (481,497) -1% Current and other liabilities 3,803,616 4,036,566 (232,950) -6% Long-term liabilities 10,272,718 11,121,792 (849,074) -8% Total liabilities 14,076,334 15,158,358 (1,082,024) -7% Invested in capital assets, net of related debt 16,883,483 18,007,877 (1,124,394) -6% Restricted 6,451,171 4,913,725 1,537,446 31% Unrestricted deficit (4,464,574) (4,652,049) 187,475 4% Total net assets $ 18,870,080 $ 18,269,553 $ 600,527 3% 7

11 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 FINANCIAL ANALYSIS OF THE MUNICIPALITY AS A WHOLE (CONTINUED) Approximately 30 percent of the Municipality s total revenue came from taxes, while 64 percent resulted from grants and contributions, including federal aid. Charges for Services provide 2 percent of the total revenues. The Municipality s expenses cover a range of services. The largest expenses were for public work and sanitation (38%), general administration (24%), and educational and recreational (9%). As follow, is presented a comparative analysis of governmental-wide data. With this analysis, the readers have comparative information with the percentage of change in revenues and expenses from prior year to current year. Condensed Statement of Activities Change % Program revenues: Charges for services $ 370,448 $ 370,180 $ Operating grants and contributions 2,535,025 2,306, ,702 10% Capital grants and contributions 1,256,782 1,481,697 (224,915) (15%) General revenues: Property taxes 2,529,380 2,586,943 (57,563) (2%) Municipal license tax 756, ,904 37,172 5% Municipal sales and use tax 1,365,582 1,206, ,981 13% Grants and entitlements 6,508,476 6,230, ,681 4% Other local taxes 114, ,843 (213,683) (65%) Interest and investment earnings 225, ,955 (24,120) (10%) Other 424, ,000 4,427 1% Total revenues 16,086,191 15,899, ,950 1% Expenses: General administration 3,677,365 4,173,828 (496,463) (12%) Public safety 521, ,222 (79,822) (13%) Public works and sanitation 5,954,958 4,737,101 1,217,857 26% Health and welfare 1,626,771 1,625,062 1,709 - Culture and tourist development 209, ,483 19,501 10% Economic development 270, ,367 (11,669) (4%) Family and social development 849, ,864 (28,681) (3%) Planning - - Education, culture and recreational 1,440,236 1,810,738 (370,502) (20%) Housing and Urban Development 498, ,105 8,093 2% Interest 436, ,489 64,382 17% Total expenses 15,485,664 15,161, ,405 2% Change in net assets 600, ,982 (137,455) 28% Net assets 18,269,553 17,531, ,982 4% Net assets, end of year $ 18,870,080 $ 18,269,553 $ 600,527 3% 8

12 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 FINANCIAL ANALYSIS OF THE MUNICIPALITY AS A WHOLE (CONTINUED) 9

13 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 FINANCIAL ANALYSIS OF THE MUNICIPALITY S INDIVIDUAL FUNDS Governmental Funds The focus of the Municipality s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the Municipality s financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government s net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the Municipality s governmental funds reported combined ending fund balances of $4,556,521, a decrease of $1,525,931 in comparison with the prior year. Within the governmental funds, it is included the general fund which is the chief operating fund of the Municipality. As of June 30, 2013, the Municipality s deficit amounted to $1,806,120. GENERAL FUND BUDGETARY HIGHLIGHTS Over the course of the year, the Municipality Council revised the Municipality s budget in order to include increases in revenues that were identified during the course of the fiscal year based on current developments that positively affected the Municipality s finances. Increases in budgeted expenditures were also made since the law mandates a balanced budget. The actual General Fund budgetary activities resulted in an unfavorable balance of $131,531 caused mainly due to unexpected variances in revenue and expenditures. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets The Municipality s investment in capital assets as of June 30, 2013, amounts to $41,429,335 with an accumulated depreciation of $17,716,089 (including depreciation charges for the year totaled $1,116,097), leaving a net book value of $23,713,246. This investment in capital assets includes land, construction in progress, buildings, improvements, equipment, infrastructure, furnishing, computers and vehicles. Infrastructure assets are items that are normally immovable and of value only to the state, such as roads, bridges, streets and sidewalks, drainage systems, lighting systems, and similar items. The Municipality finances a significant portion of its construction activities through bond or notes issuances. The proceeds from bond and notes issuances designated for construction activities are committed in its entirety for such purposes and cannot be used for any other purposes. As of June 30, 2013, the Municipality has $2,765,046 of unexpended proceeds mainly from bonds and notes issuances that are committed to future construction activities. 10

14 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 Debt Administration The Puerto Rico Legislature has established a limitation for the issuance of general obligation municipal bonds and notes for the payment of which the good faith, credit and taxing power of each municipality may be pledged. The applicable law also requires that, in order for a Municipality to be able to issue additional general obligation bonds and notes, such Municipality must have sufficient payment capacity. Act No. 64 provides that a Municipality has sufficient payment capacity to incur additional general obligation debt if the deposits in such municipality s Redemption Fund and the annual amounts collected with respect to such Municipality s Special Additional Tax (as defined below), as projected by GDB, will be sufficient to service to maturity the Municipality s outstanding general obligation debt and the additional proposed general obligation debt ( Payment Capacity ). The Municipality is required under applicable law to levy the Special Additional Tax in such amounts as shall be required for the payment of its general obligation municipal bonds and notes. In addition, principal of and interest on all general obligation municipal bonds and notes and on all municipal notes issued in anticipation of the issuance of general obligation bonds issued by the Municipality constitute a first lien on the Municipality s Basic Tax revenues. Accordingly, the Municipality s Basic Tax revenues would be available to make debt service payments on general obligation municipal bonds and notes to the extent that the Special Additional Tax levied by the Municipality, together with moneys on deposit in the Municipality s Redemption Fund, are not sufficient to cover such debt service. It has never been necessary to apply Basic Taxes to pay debt service on general obligation debt of the Municipality. ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES The Municipality relies primarily on property and municipal taxes as well as federal and state grants to carry out the governmental activities. Historically, property and municipal taxes have been very predictable. Federal State grant revenues may vary if new grants are available but the revenue also is very predictable. Those factors were considered when preparing the Municipality s budget for the fiscal year As part of this plan, the Municipality of Aguas Buenas will benefit from federal grants to improve its services to its constituents and from the economic activity generated within its territory due to projects funded by ARRA. 11

15 MUNICIPALITY OF AGUAS BUENAS MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUE) YEAR ENDED JUNE 30, 2013 FINAL COMMENTS The Municipality is an autonomous governmental entity whose powers and authority vested on its Executive and Legislative Branches are specifically established in the Municipal Autonomous Act approved in August By virtue of such powers, it provides a wide range of services to its constituents which includes, among others, public works, education, public safety, public housing, health, community development, recreation, waste disposal, welfare and others. The Municipality s principal sources of revenues are derived from property taxes, municipal license taxes, subsidies from the Commonwealth of Puerto Rico s General Fund and contributions from the Traditional and Electronic Lottery sponsored by said Government. The Municipality s management is committed to a continued improvement in the confection of a budget that will response to the needs of the public and private sectors in accordance with its permissible revenues levels. It further contemplates to maintain or improve its current levels of Net Position as indicative of a strong financial position which has been identified as one of the main short and long-term objectives of the Municipality. FINANCIAL CONTACT The Municipality s financial statements are designed to present users (citizens, taxpayer, customers, investors and creditors) with a general overview of the Municipality s finances and to demonstrate the Municipality s accountability. If you have questions about the report or need additional financial information, contact the Municipality s Chief Financial Officer. 12

16 STATEMENT OF NET POSITION AS OF JUNE 30, 2013 ASSETS GOVERNMENTAL ACTIVITIES PRIMARY GOVERNMENT BUSINESS TYPE ACTIVITIES TOTAL Cash and cash equivalents $ 1,840,814 $284,997 $ 2,125,811 Cash with fiscal agent 4,241,352 4,241,352 Account receivable: Governmental agencies 499, ,586 Property tax 2,212,609 2,212,609 Sale tax 113, ,662 Municipal tax 2,682 2,682 Other assets 37,466 37,466 Capital assets, net 23,302, ,573 23,713,246 Total Assets $32,213,378 $733,036 $32,946,414 LIABILITIES AND NET POSITION Liabilities: Accounts payable and accrued expenses 1,678,107 23,175 1,701,282 Advances 730, ,241 Due to other agencies 59,298 59,298 Long-term debt: Due within one year 1,255,801 56,994 1,312,795 Due in more than one year 9,951, ,982 10,272,718 Total liabilities 13,675, ,151 14,076,334 Net Position: Invested in capital assets, net of related debt 16,850,886 32,597 16,883,483 Restricted for: Debt service 2,456,675 2,456,675 Replacements and others 211, ,489 Capital project and others 3,783,007 3,783,007 Unrestricted (4,552,373) 87,799 (4,464,574) Total Net Position 18,538, ,885 18,870,080 Total Liabilities and Net Position $32,213,378 $733,036 $32,946,414 The accompanying notes are an integral part of these financial statements. 13

17 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2013 PROGRAM REVENUE FUNCTIONS AND PROGRAMS EXPENSES CHARGE FOR SERVICES OPERATING GRANTS AND CONTRIBUTIONS CAPITAL GRANTS AND CONTRIBUTIONS NET (EXPENSE)/ REVENUE Governmental activities: General administration $ (3,677,365) $ 340,199 $ (3,337,166) Public safety (521,400) 35,402 (485,998) Education and recreational (1,440,236) $ 28, ,929 (915,289) Public works and sanitation (5,954,958) $1,256,782 (4,698,176) Health and welfare (1,626,771) 1,662,495 35,724 Culture and tourist development (209,984) (209,984) Economic development (270,698) (270,698) Family and social development (849,183) (849,183) Housing and Urban Development (204,131) (204,131) Interest (411,050) (411,050) Total governmental activities (15,165,776) 28,018 2,535,025 1,256,782 (11,345,951) Business type-activities: Housing (294,067) 342,430 48,363 Interest (25,821) (25,821) Business type - activities (319,888) 342,430 22,542 Total $(15,485,664) $370,448 $2,535,025 $1,256,782 $(11,323,409) (Continue) 14

18 STATEMENT OF ACTIVITIES (CONTINUED) FOR THE YEAR ENDED JUNE 30, 2013 GOVERNMENTAL ACTIVITIES BUSINESS-TYPE ACTIVITIES TOTAL Net (expense)/revenue $(11,345,951) $ 22,542 $(11,323,409) General revenue: Taxes: Property taxes 2,529,380 2,529,380 Municipal tax 756, ,076 Sale tax 1,365,582 1,365,582 Construction excise tax 114, ,160 Grants and entitlements 6,508,476 6,508,476 Rent 112, ,012 Interest 225, ,835 Other 312, ,415 Total general revenues 11,923, ,923,936 Changes in net position 577,308 23, ,527 Net position at beginning 17,960, ,666 18,269,553 Net position at end $ 18,538,195 $331,885 $18,870,080 The accompanying notes are an integral part of these financial statements. 15

19 BALANCE SHEET GOVERNMENTAL FUNDS AS OF JUNE 30, 2013 GENERAL FUND DEBT SERVICE LOAN $4,145,000 OTHER GOVERNMENTAL FUNDS TOTAL GOVERNMENTAL FUNDS ASSETS: Cash: Cash in bank $ 171,631 $1,224,766 $1,396,397 Cash with fiscal agent 12,306 $1,920,723 $2,208, ,996 4,685,769 Receivables: Property taxes 1,712, ,622 2,212,609 Sale tax 77,332 36, ,662 Due for others governmental agencies 90, , ,586 Due from other funds 88, , ,458 Other 2,682 2,682 Total assets 2,155,443 2,456,675 2,208,744 2,378,301 9,199,163 Liabilities: Accounts payable and accrued expenses 1,451,238 27,622 1,478,860 Deferred revenues 2,251, ,984 94,015 2,816,026 Due to other fund 200,000 88, ,458 Due to other agencies 59,298 59,298 Total liabilities 3,961, , ,095 4,642,642 Fund balances: Restricted for: Debt service 1,985,691 1,985,691 Capital project 2,208,744 2,208,744 Other purpose 2,168,206 2,168,206 Unassigned (1,806,120) (1,806,120) Total fund balances (1,806,120) 1,985,691 2,208,744 2,168,206 4,556,521 Total liabilities and fund balance $2,155,443 $2,456,675 $2,208,744 $2,378,301 $9,199,163 The accompanying notes are an integral part of these financial statements. 16

20 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION AS OF JUNE 30, 2013 Fund balances in governmental funds Amounts reported for governmental activities in the Statement of Net Position are different because: $ 4,556,521 Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds 23,302,673 Deferred property tax revenue in governmental funds financial statements whereas recorded as revenue in the governmental activities 2,085,785 Long-term liabilities and accrual expenses are not due and payable in the current period and therefore are not reported in the governmental funds: Bonds and notes payable (8,458,000) Compensated absences (1,226,281) Estimated liability for landfill post-closure costs (1,360,000) Accrued interest (199,247) Amount due to CRIM (163,256) Net position of governmental activities $18,538,195 The accompanying notes are an integral part of these financial statements. 17

21 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2013 GENERAL FUND DEBT SERVICE FUNDS LOAN $4,145,000 OTHER GOVERNMENTAL FUNDS TOTAL GOVERNMENTAL FUNDS Revenues: Taxes: Property taxes $ 1,533,916 $ 498,856 $ 2,032,772 Municipal taxes 756, ,076 Sale tax 907, ,395 1,365,582 Construction excise taxes 114, ,160 Grants and entitlements 6,473,798 $3,819,825 10,293,623 Rental income 112, ,012 Interest 224, ,158 Other 340, ,433 Total Revenues 10,462, ,857 3,819,825 15,239,816 Expenditures: General administration 3,246, ,630 3,530,578 Public safety 475, ,243 Education and recreational 793, ,508 1,265,885 Public works and sanitation 4,307, ,948 2,237,856 7,467,437 Health and welfare 332,016 1,294,507 1,626,523 Culture and tourist development 208, ,198 Economic development 268, ,168 Family and social development 630, , ,326 Planning and urban development 171,531 32, ,131 Debt service: Principal 555, ,000 Interest 401, ,258 Total expenditures 10,433, , ,948 4,454,311 16,765,747 Excess (deficiency) of revenue over expenditures 28,904 1,599 (921,948) (634,486) (1,525,931) Other financing sources (uses): Operating transfer in , ,881 Operating transfer out (197,275) (606) (197,881) Total other financing sources ( 196,669) 196,669 Excess of revenues and other financing source over (under) expenditures and other financing sources (167,765) 198,268 (921,948) (634,486) (1,525,931) Fund balance at beginning of year (1,638,355) 1,787,423 3,130,692 2,802,692 6,082,452 Fund balance at end of year $ (1,806,120) $1,985,691 $2,208,744 $2,168,206 $ 4,556,521 The accompanying notes are an integral part of these financial statements. 18

22 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2013 Net change in fund balances total governmental funds $(1,525,931) Amounts reported for Governmental Activities in the Statement of Activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities and changes in net position, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount of capital assets recorded in the current period. 1,968,917 Depreciation expense on capital assets is reported in the statement of activities, but it does not require the use of current financial resources. Therefore, depreciation expense is not reported as expenditure in governmental funds. (1,065,433) Governmental funds report principal payments on long-term debts as expenditures, whereas the principal payments reduce the long-term debt in the statement of net position. 555,000 Change in accrued expenses which does not require the use of current financial resources: Accrued interest (9,792) Compensating absences 151,279 Amount due to CRIM 6,660 Deferred property tax 496,608 Changes in Net Position of Governmental Activities $ 577,308 The accompanying notes are an integral part of these financial statements. 19

23 STATEMENT OF FINANCIAL POSITION PROPRIETARY FUND JUNE 30, 2013 ASSETS PROPRIETARY FUND ESPIRITU SANTO PROJECT Current Assets: Cash $ 73,508 Other current assets 9,385 82,893 Property and Equipment 410,573 Restricted deposits 211,489 Other Assets 28,081 $733,036 LIABILITIES AND NET POSITION Liabilities: Current liabilities: Current maturities of mortgage note 56,994 Accounts payable and accrued expenses 23,175 80,169 Long term-debt, net of current maturities 320, ,151 Net position: Investment in net assets, net affiliated debt 32,597 Uninvestment 299, ,885 Total liabilities and net position $733,036 The accompanying notes are an integral part of these financial statements. 20

24 STATEMENT OF ACTIVITIES - PROPRIETARY FUND YEAR ENDED JUNE 30, 2013 PROPRIETARY FUND ESPIRITU SANTO PROJECT Revenues: Rent $342,430 Financial 677 Total revenues 343,107 Expenses: Administrative 116,507 Utilities 7,628 Operating Maintenance 83,127 Taxes and insurance 36,140 Depreciation 50,665 Interest 25,821 Total Expenses 319,888 Change in net position 23,219 Project net position, beginning of year 308,666 Net position, end of year $331,885 The accompanying notes are an integral part of these financial statements. 21

25 STATEMENT OF CASH FLOWS - PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2013 PROPRIETARY FUND ESPIRITU SANTO PROJECT Cash flow from operating activities: Cash received from rentals $341,680 Interest received ,357 Administrative 30,173 Utilities 14,821 Salaries and wages 125,083 Operating and maintenance 39,640 Property and liability insurance 5,353 Interest on mortgage 26,172 Management fees 26, ,342 Net cash provided by operating activities 75,015 Cash flow from investing activities: Purchase of equipment (43,962) Deductions from reserve for replacements and interest 14,142 Net cash used by investing activities (29,820) Cash flows from financing activities: Mortgage principal payments (52,626) Net cash used by financing activities (52,626) Net increase in cash (7,431) Cash at beginning of the year 80,939 Cash at ending of the year $ 73,508 (Continue) 22

26 STATEMENT OF CASH FLOWS - PROPRIETARY FUNDS (CONTINUED) FOR THE YEAR ENDED JUNE 30, 2013 Reconciliation of change in net position to net cash provided by operating activities: Cash flow from operating activities: PROPRIETARY FUND ESPIRITU SANTO PROJECT Change in net position 23,219 Adjustments to reconcile change in net position to net cash provided by operating activities: Depreciation 50,665 Decrease in tenants accounts receivable (751) Increase (decrease) in: Accounts payable 1,673 Accrued vacations and bonus 560 Interest on mortgage (351) Total adjustments 51,796 Net cash provided by operating activities $75,015 The accompanying notes are an integral part of these financial statements. 23

27 NOTES TO THE FINANCIAL STATEMENTS JUNE 30, ORGANIZATION The Municipality of Aguas Buena s (the Municipality) is a political and legal entity with full legislative and administrative faculties in every affair of municipal character, with perpetual succession, existence and legal personality separate and independent from the governmental of the Commonwealth of Puerto Rico. The municipal government is comprised of the executive and legislative bodies, which are elected every four years in the Puerto Rico general elections. The executive power is exercised by the Mayor and the legislative power by the Municipal Legislative Body, which has fourteen members. The Municipality provides the following services to its community: health, public works, education, public safety, housing, community and social services, welfare, culture and recreation, as well as many other general and administrative services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Municipality relating to the funds included in the accompanying basic financial statements conform to accounting principles generally accepted in the United States of America applicable to state and local governments. Generally accepted accounting principles for local governments include those principles prescribed by the Governmental Accounting Standards Board (GASB), the American Institute of Certified Public Accountants in the publication entitled Audits of State and Local Governmental Units and by the Financial Accounting Standards Board (when applicable). The more significant policies of the Municipality are described below. Reporting entity A reporting entity consists of the primary government, component units, and other organizations that are included to ensure that financial statements are not misleading. The primary government of the Municipality consists of all funds and departments that are not legally separate from the Municipality. For the Municipality of Aguas Buenas, Puerto Rico, these include various services such as police protection, recreation (including parks), street maintenance and repair, sanitation, and general administrative services. The operation of each of these activities is directly controlled by Municipality s Legislative Body through the budgetary process. Component units are legally separate organizations for which the Municipality is financially accountable. The Municipality has no component units. Government wide and fund financial statements Basic financial statements include both governments-wide and fund financial statements. 24

28 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) JUNE 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Government-wide statements The government-wide financial statements (consists of the statement of net position and the statement of activities) these statements report information on all the activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities which normally are supported mainly by taxes and intergovernmental revenues are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given function or segments are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include a) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Program-specific capital and operating grant and contributions consist of transactions that are either mandatory or voluntary nonexchange transactions with other governments, organizations, or individuals that restrict the resources for use in a particular program. Capital grants and contributions consist of capital assets or resources that are restricted for capital purposes to purchase, construct or renovate capital assets associated with a specific program. Operating grants and contributions consist of resources that are required to be used to finance the costs of operating a specific program or can be used either for operating or capital purposes of a specific program. Restricted capital and operating grants and contributions are program revenues because they are specifically attributable to a program are reducing the net expense of that program to the Municipality. They are reported net of estimated uncollectible amounts. Fund financial statements The fund financial statements segregate transactions related to certain functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. These statements present each major fund as a separate column on the fund financial statements; all non-major funds are aggregated and presented in a single column. The Municipality reports the following major governmental funds: A) General Fund This is the operating fund of the Municipality and accounts for all financial resources, except those required to be accounted for in another fund. 25

29 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) JUNE 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B) Debit service fund This fund accounts for resources accumulated and payments made for principal and interest on longterm general obligation debt of governmental funds. C) Loan $4,145,000 This fund accounts for proceed and disbursements from a general obligation for capital projects. Measurement focus, basis of accounting and financial statement presentation The government-wide Statement of Net Position and the Statement of Activities, both government and business type activities, are presented using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time the liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. The governmental fund financial statements are presented using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Under this method revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if they are collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, except for debt service, compensated absences and claims and judgments expenditures which are reported when payment is due. Property taxes, franchise taxes, licenses, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Only the portion of special assessments receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the government. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989 generally are followed in the government-wide financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their businesstype activities and enterprise funds, subject to this same limitation. The government has elected not to follow subsequent private sector guidance. 26

30 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) JUNE 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Measurement focus, basis of accounting and financial statement presentation (continued) As a general rule the effect of interfund activity has been eliminated from the government-wide financial statements. Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. When both restricted and unrestricted resources are available for use, it is the government's policy to use restricted resources first, than unrestricted resources as they are needed. Proprietary fund financial statements include a statement of financial position, a statement of activities, and a statements of cash flows. The proprietary fund includes a low income housing project know as Espiritu Santo Project. Proprietary funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. Accordingly, all assets and liabilities (whether current of noncurrent) are include on the statement of net position. The statement of revenues, expenses and change in fund net position present increases (revenues) and decrease (expenses) in total net position. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred. Operating revenues in the proprietary fund are those revenues that are generated from the primary operating of the fund. All other revenues are reported as non-operating revenues. Operating expenses are those expenses that are essential to the primary operations of the fund. All other expenses are reported as non-operating expenses. Cash, cash equivalents, cash with fiscal agent and investment The Municipality's finance director is responsible for investing available resources. The Municipality is restricted by law to invest only in savings accounts and certificates of deposit with banks qualified as a depository of public funds by the Puerto Rico Treasury Department (PRTD) or in instruments of the Government Development Bank for Puerto Rico (GDB). The Municipality's policy is to invest any excess cash in interest bearing deposits with institutions qualified by the PRTD. Earnings from these funds are recorded in the corresponding fund as interest income. 27