OFICINA DEL COMISIONADO DE ASUNTOS MUNICIPALES ÁREA DE ASESORAMIENTO, REGLAMENTACIÓN E INTERVENCIÓN FISCAL ÁREA DE ARCHIVO DIGITAL

Transcription

1 OFICINA DEL COMISIONADO DE ASUNTOS MUNICIPALES ÁREA DE ASESORAMIENTO, REGLAMENTACIÓN E INTERVENCIÓN FISCAL ÁREA DE ARCHIVO DIGITAL MUNICIPIO DE MOROVIS AUDITORÍA DE JUNIO DE 2016

2 BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2016

3 BASIC FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2016 Note to Budgetary Comparison Schedule - General Fund Budgetary Comparison Schedule - General Fund 59 PART II- REQUIRED SUPPLEMENTARY INFORMATION Notes to Basic Financial Statements in Fund Balances of Governmental Funds to the Statement of Activities 18 Reconciliation of the Statement of Revenues, Expenditures, and Changes Statement of Revenues, Expenditures, and Changes in Fund Balances 17 Statement of Net Position 16 Reconciliation of the Governmental Funds Balance Sheet to the Balance Sheet Fund Financial Statements-Governmental Funds Statement of Activities 13 Statement of Net Position 12 Government-Wide Financial Statements: Basic Financial Statements: Management s Discussion and Analysis Independent Auditors Report 1-5 PART I - FiNANCIAL SECTION Pages TABLE OF CONTENTS

4 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 BASIC FINANCIAL STATEMENTS Schedule of Status of Prior Year Audit Findings and Questioned Costs 75 Schedule of Findings and Questioned Costs and on Internal Control over Compliance Required by the Uniform Guidance Independent Auditors Report on Compliance for Each Major Federal Program Statements Performed in Accordance with Government Auditing Standards and on Compliance and Other Matters Based on an Audit of Financial Independent Auditors Report on Internal Control over Financial Reporting Notes to Schedule of Expenditures of Federal Awards 65 Schedule of Expenditures of Federal Awards 64 PART III - SINGLE AUDIT SECTION Pages TABLE OF CONTENTS (CONTINUED)

5 -o -I I z z C, I C,) m C, 0 z

6 Accountanis Ceilified PuOlic Accountants and Busineus Advisoru p,,,, oi ( a Iit(i ii Pubik 0 rtiz R iver R vera & CO (PA 7j,raida CrizCIa,dsn AK Pii.(ninpani, Pril,e Seition ( PA Miiiu Aiiiiii Rki id iui(ail(a (AK taj Suitv IS, llt x 70250, Sun juap, lr (XP ib 12K) lhniie ( 187) , l au (787) 274 d562 circumstances, but not for the purpose of expressing an opinion on the effectiveness of the financial statements in order to design audit procedures that are appropriate in the consider internal control relevant to the entity s preparation and fair presentation of the statements, whether due to fraud or error. In making those risk assessments, the auditors judgment, including the assessment of the risks of material misstatements of the financial disclosures in the financial statements. The procedures selected depend on the auditors An audit involves performing procedures to obtain audit evidence about the amounts and assurance about whether the financial statements are free of material misstatement. Those standards require that we plan and perform the audit to obtain reasonable Government Auditing Standards, issued by the Comptroller General of the United States. United States of America and the standards applicable to financial audits contained in We conducted our audit in accordance with auditing standards generally accepted in the Our responsibility is to express opinions on these financial statements based on our audit. Auditors Responsibility from material misstatement, whether due to fraud or error. control relevant to the preparation and fair presentation of financial statements that are free statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal Management is responsible for the preparation and fair presentation of these financial Management s Responsibility for the Financial Statements statements, which collectively comprise the Municipality s basic financial statements as Morovis, as of and for the year ended June 30, 2016, and the related notes to the financial listed in the table of contents. each major fund, and the aggregate remaining fund information of the Municipality of We have audited the accompanying financial statements of the governmental activities, Report on the Financial Statements Municipal Legislature Municipality of Morovis Morovis, Puerto Rico To the Honorable Mayor and INDEPENDENT AUDITORS REPORT (;PA Orlando l,ui, Oirit Cab ia Aim rian lnmnhiv ot ii,ij6iil i thlit Mm1wrs;

7 significant accounting estimates made by management, as well as evaluating the overall provide a basis for our audit opinions. We believe that the audit evidence we have obtained is sufficient and appropriate to presentation of the financial statements. SLHe 52, I( HI \ 1II1 ilifl. P.R. (JO )ifl ]25H $524. Fux 78]) In \((II[ \.ANTS \I F ) 1I) RUS ORTIZ. RiVERA, RIVERA & CO. -2- one or more future events will occur confirming the fact of the loss. the financial statements. It is implicit in this condition that it should be probable that probable that an asset had been impaired or a liability had been incurred at the, date of 1- Information available prior to issuance of the financial statements indicates that it is from loss contingency should be accrued if both of the following condition are met: Pronouncements issued on July 1,2012. This Statement required that an estimated loss Financial Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA the requirements established by Statement No.62 Codification of Accounting and As discussed in Note 23 to the financial statements, the Municipality did not comply with Funds, and Governmental Activities Basis for Qualified Opinion on Debt Service Fund, Loan Fund, Other Governmental cost-sharing multiple-employer pension plan. We were unable to obtain sufficient appropriate audit evidence about the proportional share used to determine the deferred determine whether any adjustments to these amounts and disclosures were necessary. Employees Retirement System of the Government of the Commonwealth of Puerto Rico, in the unaudited financial statements, notes, and required supplementary information of the Statement of Activities were derived from the application of the proportional share included activities of the government-wide Statement of Net position, and pension expense for the outflows/inflows of resources and net pension liability of the governmental activities and the information disclosed in the notes of the pension plan. Consequently, we were unable to The net pension liability and deferred outflows/inflows of resources in governmental current period change in that liability in governmental activities of the government-wide Basis for Qualified Opinion on Governmental Activities Loan Fund Qualified Debt Services Fund Qualified Government Activities Qualified General Fund Unmodified Aggregate Remaining Fund Information Qualified Opinion Unit Type of Opinion Summary of Opinions evaluating the appropriateness of accounting policies used and the reasonableness of entity s internal control. Accordingly, we express no such opinion. An audit also includes

8 collateralized or insured and is probable that exist a loss contingency for these deposits. as having substantial doubt about their ability to continue as a going concern that are not (GDB) a component unit of the Commonwealth of Puerto Rico that have been identified The Municipality has deposits in the Governmental Development Bank for Puerto Rico Sui 52. P() 71)250, Sm urn. PR. (R6 725I} Iuun ) I ix 151)1) 274 1)502 (1 IHI 1) 111 c(o! NTS F Al)I)II) SL(VI(k ORTIZ. RIVERA, RIVERA & CO. -3- require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the standards that accounting principles generally accepted in the United States of America Management has omitted required supplementary information related to new pensions Required Supplementaiy Information Omitted Other Matters As discussed in Note 24 to the financial statements, the 2015 financial statements have this matter. been restated for the correction of an error. Our opinions are not modified with respect to Restatement of Prior Year Financial Statements Emphasis of Matters Morovis, as of June 30, 2016, and the respective changes in the financial position for the fiscal year then ended in accordance with accounting principles generally accepted in the United States of America. respects, the respective financial position of general fund information of the Municipality of In our opinion, the financial statements referred to above present fairly, in all material Unmodified Opinions statements referred to above present fairly, in all material respects, the respective financial Fund, Other Governmental funds, and Governmental Activities paragraphs, the financial position of the debt services fund, loan fund, other governmental fund, and governmental principles generally accepted in the United States of America. activities of the Municipality of Morovis, as of June 30, 2016, and the changes in the financial position thereof for the fiscal year then ended in accordance with accounting Governmental Activities and Basis for Qualified Opinion on Debt Service fund, Loan In our opinion, except for the matters described in the Basis for Qualified Opinion on Qualified Opinion funds, and governmental activities has not been determined. fund balance, deficit, and expenses of the debt service fund, loan fund, other governmental adjustments were necessary. The amounts by which this departure would affect assets, The municipality does not realized an impairment analysis to determine whether any 2- The amount of loss can be reasonably estimated.

9 Required Supplementaiy In formation economic, or historical context. Our opinion on the basic financial statements is not affected by the missing information. Suite 52. ) Ho 71)25)). Sen Juim, RR, )Hi) 725)I Thunc )77) 75( It> )7iI 2Ji )(5 II) i III IC \l :(,\ i S \ \III AIJCDs vuis ORTIZ. RIVERA. RIVERA & CO. -4- over financial reporting and on our tests of its compliance with certain provisions of laws, December 16, 2016, on our consideration of the Municipality of Morovis internal control In accordance with Government Auditing Standards, we have also issued our report dated Other Reporting Required by Government Auditing Standards in all material respects, in relation to the basic financial statements as a whole. of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, schedule of expenditures of federal awards is presented for purposes of additional analysis procedures in accordance with auditing standards generally accepted in the United States as required by Title 2 U. S. Code of Federal Regulations Part 200, Uniform Administrative management and was derived from and relates directly to the underlying accounting and statements or to the basic financial statements themselves, and other additional Our audit was conducted for the purpose of forming opinions on the financial statements directly to the underlying accounting and other records used to prepare the basic financial that collectively comprise the Municipality s basic financial statements. The accompanying required part of the basic financial statements. Such information is the responsibility of other records used to prepare the basic financial statements. The information has been and certain additional procedures, including comparing and reconciling such information subjected to the auditing procedures applied in the audit of the basic financial statements Requirement, Cost Principles, and Audit Requirement for Federal Awards, and is not a Other Information assurance. of preparing the information and comparing the information for consistency with United States of America, which consisted of inquiries of management about the methods Governmental Accounting Standards Board, who considers it to be an essential part of economic, or historical context. We have applied certain limited procedures to the required information, although not a part of the basic financial statements, is required by the financial reporting for placing the basic financial statements in an appropriate operational, to 11 and 59 to 62 be presented to supplement the basic financial statements. Such management s discussion and analysis and budgetary comparison information on pages 6 supplementary information in accordance with auditing standards generally accepted in the management s responses to our inquiries, the basic financial statements, and other 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 Accounting principles generally accepted in the United States of America require that the knowledge we obtained during our audit of the basic financial statements. We do not financial reporting for placing the basic financial statements in an appropriate operational, Governmental Accounting Standards Board who considers it to be an essential part of

10 of Morovis internal control over financial reporting and compliance. performed in accordance with Government Auditing Standards in considering Municipality comphance 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 Suite 52. (1 It 7(125U Suit Juan, R. Ut)t 725h Phunu (757i JSu 552 I. 1a ]5] 274 5ti2 ( 1 Ii ) Pt I It At ( (i I VI \h(ji S(RVICU 1 ORTIZ. RIVERA, RIVERA & CO. -5- Society of Certified The stamp E was affixed to the 2;t)t1Q I. -J;vIA San Juan, Puerto Rico December 16, 2016 report is to describe the scope of our testing of internal control over financial reporting and regulations, contracts, and grant agreements and other matters. The purpose of that

11 b) Provide an overview of the Municipality s financial activity, a) Assist the reader in focusing on significant financial issues, followings goals: The Municipality of Morovis (the Municipality ) discussion and analysis has been designed with the -6- Financial Reporting for Pension ( GASB 68 ). The Municipalitys inability to implement the requirements of the requirements of Statement No, 68 of the Governmental Accounting Standards Board, Accounting and The report on the governmental activities was qualified because the Municipality was not able to implement The Statement of Activities presents information showing how the Municipality s net position changed during analysis of cost of various governmental services. to the change occurs, regardless of the timing of the related cash flows. Thus, revenues and expenses are the government s general tax and other revenues. This is intended to summarize and simplify the user s reported in the Statement of Activities that will only result in cash flows in future fiscal periods. The Statement of Activities is focused on both the gross and net cost of various activities, which are provided by the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise as a useful indicator of whether the financial position of the Municipality is improving or deteriorating. difference between both reported as net position. Over time, increases or decreases in net position may serve The Statement of Net Position presents information on all of the Municipality s assets and liabilities, with the The Government-Wide Financial Statements are designed to provide users of the financial statements with a broad overview of the Municipality s finances in a manner similar to private-sector companies. Government-Wide Financial Statements statements. The focus is on both the Municipality as a whole (government-wide) and the major individual broaden a basis for comparison (year to year or government to government) and enhance the Municipality s accountability. This discussion and analysis report is intended to serve as an introduction to the Municipality s basic financial funds. Both perspectives (government-wide and major fund) allow the user to address relevant questions, USING THIS ANNUAL REPORT b) Fund balance of general fund increased by $307,285. a) The Municipality net position increased by $1,343,100. c) Capital outlays amounted to $1,137,201. FINANCIAL HIGHLIGHTS resulting changes and currently known facts, please read it in conjunction with the Municipality s financial statements. Since the Management s Discussion and Analysis (MD&A) is designed to focus on the current year activities, e) Identify individual fund issues or concerns. d) Identify any material deviations from the financial plan (the approved budget), and; year challenges), C) Identify changes in the Municipality s financial position (its ability to address the next and subsequent MANAGEMENT S DISCUSSION AND ANAL YS1S

12 Fund Financial Statements of the date of this report, it is not known when the required information shall be provided. trust fund of the Commonwealth, which is not under the Municipality s management and control. Therefore, as -7- The largest portion of the Municipality s net position consists of the investment made throughout the years in capital assets such as land, buildings, equipment and infrastructure. The Municipality uses these capital assets overstated of accrued interest. As noted earlier, net position may serve over time as a useful indicator of a government s financial position. at the end of the previous year, as restated. The beginning net position was restated by $1.0 million as per The Municipality s net position totaled $22.4 million at the end of fiscal year 2016, compared to $21.0 million Net Position FINANCIAL ANALYSIS OF THE MUNICIPALITY AS A WHOLE underground pipes [unless associated with a utility], etc.) have not been reported nor depreciated in government financial statements. GASB 34 requires that these assets be valued and reported within the Historically, a government s largest group of assets (infrastructure roads, bridges, traffic signals, governmental column of the Government-Wide Statements. Additionally, the government must elect to either designed to maintain the service delivery potential to near perpetuity. If the government develops the asset management system (the modified approach) which periodically (at least every third year), by category, maintenance of condition of the government infrastructure assets should assist financial statement users in evaluating a local government and its performance over time. The Municipality has elected to depreciate infrastructure assets instead of using the modified approach. may record its cost of maintenance in lieu of depreciation. The information about the condition and measures and demonstrates its maintenance of locally established levels of service standards, the government (a) depreciate these assets over their estimated useful life or (b) develop a system of asset management Infrastructure Assets Expenditures and Changes in Fund Balances provide a reconciliation to facilitate this comparison between is useful to compare the information presented for governmental funds with similar information presented for Because the focus of governmental funds is narrower than that of the government wide financial statements, it governmental activities in the government wide financial statements. By doing so, users of the basic fmancial statements may better understand the long-term impact of the Municipality s near term financial decisions. Both of the Governmental Fund Balance Sheet and the Governmental Fund Statement of Revenues, governmental funds and governmental activities. well as on balances of spendable resources available at the end of the fiscal year. Such information is useful in in the Government Wide Financial Statements. However, unlike the Government Wide Financial Statements, Governmental funds are used to account for essentially the same functions reported as governmental activities Government Fund Financial Statements focus on near term inflows and outflows of spendable resources, as evaluating the Municipality s near term financial requirements. not the Municipality as a whole. The Municipality has only one kind of fund which is the governmental fund. The Fund Financial Statements provide detailed information about the Municipality s most significant funds, GASB 68 resulted from the unavailability of the required information that was expected to be provided by The Employee Retirement System of the Commonwealth of Puerto Rico and its Instrumentality; (ERS), a pension

13 another portion of the net position, and these are resources subject to external restrictions for the purposes themselves cannot be used to liquidate these liabilities. The amounts restricted for debt service represents explained above. Invested in capital assets, net of related debt Total net position Restricted Unrestricted Noncurrent liabilities Total liabilities Curt-rent liabilities Total assets Capital assets Current assets Condensed Statement of Net Position June 30, 2016 and2ol5 Municipality of Morovis to provide services to its citizens; consequently, these assets are not available for future spending. Although, $ 22,382,144 $ 21,039,044 (10,633,683) 2,210,274 (11,870,591) 30,812,359 2,203,468 30,699,361 21,537,014 2,047,083 23,584,097 3,436,894 21,156,450 24,593,344 5,064,396 40,697,359 45,761,755 45,632,388 41,179,361 $ $ 4,453, resources needed to repay this debt must be provided from the Debt Service Fund, since the capital assets the Municipality s investment in its capital assets is reported net of related debt, it should be noted that the

14 Municipality s total revenue came from taxes while I 8 percent resulted from grants and contributions, general government, economic development and public housing and welfare. including federal aid. The Municipality s expenses cover a range of services. The largest expenses were for The net position increased by $1,343,100 in comparison with prior year. Approximately 70 percent of the -9- Netposition,endofyear $ 22,382,144 $ 20,014,250 Expenses General government 8,731,945 5,808,061 Public safety 836, ,806 Public housing and welfare 1,086,519 1,071,608 Culture and recreation 902, ,917 Net position, beginning of year, as restated 2 I,039, ,944,082 Total expenses 14,476,101 13,504,255 Change in net position 1,343,100 1,070,168 Interest on long-term debt 737,52 I I,024,794 Economic development 2,181,300 3,869,069 Property taxes 8,641,001 8,455,355 Capital grants and contributions I,094, ,501 Total revenues 15,819,201 14,574,423 Operating grants and contributions 912, ,446 General revenues Municipal license taxes 858, ,670 Sales and use taxes 1,453,225 1,414,554 Grants and contributions not restricted to Gain on sale of capital assets - 282,000 Chargesforservices $ 454,803 $ 398,100 Program revenues Interest, fines, and penalties 167, ,367 specific programs 1,836, ,615 Miscellaneous 402,051 1,260,815 June 30,2016 and 2015 Condensed Statement of Activities Mimi ci pal i ty of Morovi s Changes in Net Position

15 Governmental Funds As noted earlier, the Municipality uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements The Municipality finances a significant portion of its construction activities through bond issuances. The proceeds from bond issuances designated for construction activities are committed in its entirety for such purposes and cannot be used for any other purposes. for the year. Depreciation charges for the year totaled $1.4 million. The total increase in the Municipality s investment in capital assets for the current fiscal year was about 2 percent in terms of book value. Actual expenditures to purchase or construct capital assets were $1. 1 million The Municipality s investment in capital assets as of June 30, 2016, amounts to $60.4 million, and capital assets includes land, buildings, improvements, equipment, intangibles, infrastructure and construction roads, bridges, streets and sidewalks, drainage systems, lighting systems, and similar items. in progress. Infrastructure assets are items that are normally immovable and of value only to the state, such as accumulated depreciation of $19.7 million, leaving a net book value of $40.7 million. This investment in Capital Assets CAPITAL ASSETS AND DEBT ADMINISTRATION the developments that affected the Municipality s finances. Over the course of the year, the Municipality Council revised the Municipality s budget to reclassify certain expenditures among the different governmental functions. Such reclassifications were necessary to provide for GENERAL FUND BUDGETARY HIGHLIGHTS As of June 30,2016, the general fund has a balance of $(0.8) million. The fund balance increased by $333,701 The general fund is included within the governmental funds; it is the chief operating fund of the Municipality. during fiscal year ) to pay debt service $1.3 million, and 3) to pay for capital projects $2.1 million. 1) to liquidate contracts and purchase orders of the prior fiscal year $56,236, and balances of $2.6 million, an increase of $333,701 in comparison with the prior year. There are reservations of fund balance amounting to $3.4 million. This is the fund balance that is not available for new spending because it has already been committed: As of the end of the current fiscal year, the Municipality s governmental funds reported combined ending fund requirements. In particular, unreserved fund balance may serve as a useful measure of a government s net The focus of the Municipality s governmental funds is to provide information on near-term inflows, outflows, resources available for spending at the end of the fiscal year. and balances of spendable resources. Such information is useful in assessing the Municipality s financing FINANCIAL ANALYSIS OF THE MUNICIPALITY S INDIVIDUAL FUNDS

16 The applicable law also requires that in order for a municipality to be able to issue additional general obligation pledged. 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 -[1- Municipality s Chief Financial Officer. accountability. If you have questions about the report or need additional financial information, contact the The Municipality s financial statements are designed to present users (citizens, taxpayers, customers, investors and creditors) with a general overview of the Municipality s finances and to demonstrate the Municipality s FINANCIAL CONTACT expenses is due to capital assets improvements in relation to prior year. The property taxes revenue is based on estimates made by the Agency of the collection of all real and personal some state contributions were not recurrent all fiscal years. The decrease in general government expenses is due to less transitory employees and less activities and festivals. The increase in economic development property taxes; the decrease is as an overstated estimates. The decrease in grant and contribution is due to b) Increase in grant and contribution revenue of $1,532,130. d) Decrease in economic development expenses of $1,687,769. c) Increase in general government expenses of $2,923,884. a) Increase in property taxes revenue of $185,646. most significant change between the budget for fiscal year and the prior year are the following: Those factors were considered when preparing the Municipality s budget for the fiscal year The may vary if new grants are available but the revenue also is very predictable. governmental activities. Actually, property and municipal taxes may vary as per economic conditions of the The Municipality relies primarily on property and municipal taxes as well as federal grants to carry out the Island and have not been very predictable with increases of approximately 2 percent. Federal grant revenues ECONOMIC FACTORS AND NEXT YEAWS BUDGETS AND RATES interest on all general obligation municipal bonds and notes, and on all municipal notes issued in anticipation 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. make debt service payments on general obligation municipal bonds and notes to the extent that the Special 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 and 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 Additional Tax levied by the Municipality, together with moneys on deposit in the Municipality s Redemption 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 has sufficient payment capacity to incur additional general obligation debt if the deposits in municipality s outstanding general obligation debt and the additional proposed general obligation debt ( Payment Capacity ). bonds and notes such municipality must have sufficient payment capacity. Act No. 64 provides that a Debt Administration

17 Governmental JUNE 30, 2016 STATEMENT OF NET POSITION The accompanying notes are an integral part of these basic financial statements. Capital assets, net (Note 10) 40,697,359 Total assets 45,966,245 Provision for claims and judgments 25,000 Due within one year 1,618,431 Total liabilities 23,584,101 Net Position Debt service 1,270,090 Due from other agencies (Note 8) 444,831 Due to other agencies (Note 11) 377,366 Liabilities Municipal taxes 17,901 Accounts receivable: Accounts payable and accrued liabilities 778,549 Accrued interest 309,829 Capital projects 933,378 Total net position $ 22,382,144 Due in more than one year 19,918,583 Noncurrent liabilities: (Note 15) Cash (Notes 2 and 4) $ 1,114,904 Cash with fiscal agent (Notes 2,4, and 23) 3,691,180 Others 70 Investment in capital assets, net of related debt 30,812,359 Restricted for: Unrestricted (10,633,683) Unearned revenues (Note 12) 556,343 Assets Activities

18 737,521 Contributions Net (Expense) Revenue and Changes in Net Position Governmental Activities $ (8,277,142) (836,723) (174,478) (902,093) (1,087,289) (737,521) $ (12,015,246) COMMONWEALTh OF PUERTO RICO STATEMENT OF ACTIVITIES FOR THE FISCAL YEAR ENDED JUNE 30, 2016 Functions/Programs Charges for Expenses Services Program Revenues Operating Grants and Capital Grants and Contributions Primary Government: General government Pubhc safety Public housing and welfare Culture and education Economic development Interest on long-term debts Total governmental activities $ 8,731, ,723 1,086, ,093 2,181,300 $_14,476,101 $ 454,803 $ 454,803 $ 912,041 $ 1,094, ,041 1,U4,011 General revenues: Property taxes (Note 5) Municipal license taxes (Note 6) Sales and use taxes (Note 7) Grants and contributions not restricted to specific programs Interest and investment earnings Miscellaneous Total general revenues Change in net position Net position at beginning of year Prior period adjustment (Note 24) Net position at beginning of year, as restated Net position at end of year $ 8,641, ,313 1,453,225 1,836, , ,051 13,358,346 1,343,100 20,014,250 1,024,794 21,039,044 $ 22,382,144 The accompanying notes are an integral part of these basic financial statements. -13-

19 $ 1,114,904 3,691,180 17, ,831 1,403,149 $ 6,672,035 BALANCE SHEET-GOVERNMENTAL FUNDS JUNE 30, 2016 Assets Debt Other Total General Service Loans Governmental Governmental Fund Fund Fund Funds Funds Cash (Notes2and 4) $ 336,270 $ 371,782 $ Cash with fiscal agent (Notes 2, 4, and 23) 6,973 2,543, ,378 Accounts receivable: Municipal taxes 17,901 Others Due from other agencies (Note 8) 325,431 Due from other funds (Note 9) 598,739 $ 406, , , ,410 Total assets $ 1,285,314 $ 2,915,762 $ 933,378 $ 1,537,581 The accompanying notes are an integral part of these basic financial statements

20 $ 593, ,366 1,403, , , ,343 25,000 4,104,911 BALANCE SHEET-GOVERNMENTAL FUNDS (CONTINUED) JUNE 30, 2016 Liabilities and Fund Balance (Deficit) General Fund Debt Service Fund Other Total Loans Governmental Governmental Fund Funds Funds Liabilities Accounts payable and accrued liabilities Due to other agencies (Note 11) Due to other funds (Note 9) General obligations: Bonds Interest Unearned revenues (Notes 5 and 12) Provision for claims and judgments Total liabilities $ 390,766 $ 377, , , , , ,343 25,000 2,068,528 1,645,672 $ $ 202, , ,711 Fund Balances (Deficit) Reserved for: Restricted Committed Assigned Unassigned Total fund balance (deficit) Total liabilities and fund balances 56,236 (839,450) (783,214) $ 1,285,314 1,270,090 1,270,090 $ 2,915, , ,378 $ 933, , ,475 1,146,870 2,090,485 1,259,853 56,236 (839,450) 2,567,124 $ 1,537,581 $ 6,672,035 The accompanying notes are an integral part of these basic financial statements

21 JUNE 30, 2016 BALANCE SHEET TO STATEMENT OF NET POSITION RECONCILIATION OF THE GOVERNMENTAL FUNDS The accompanying notes are an integral part of these basic financial statements. Net position of governmental activities $ 22,382,144 reported in the funds. (Note 3) (20,882,339) and payable in the current period and therefore are not Some liabilities, including bonds payable, are not due reported in the governmental funds balance sheet. 40,697,359 not current financial resources and therefore are not Capital assets, net used in governmental activities are of net position are different because: Amounts reported for governmental activities in the statement Total fund balances - governmental funds $ 2,567,124

22 178,864 7,333, ,118 1,086, ,385 1,815,586 1,137,201 2,051, , , ,701 MUNICIPAUTY OF MOROVIS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES-GOVERNMENTAL FUNDS FOR THE FISCAL YEAR ENDED 30, JUNE 2016 REVENUES Property taxes (Note MunLcppal 5) license taxes (Note Sales and use taxes (Note Licenses and permits Charges for 6) 7) service and rents Intergovernmental revenues (Note Federal grants and contributions State contributions Interest, fines, Other revenues Total revenues and penalties 14): $ 7,882, , , ,534 36,145 1,736, ,408 Debt Other Total General Service Loans Governmental Governmental Fund Fund Fund Funds Funds $ 758, ,996 11,660,210 1,529,689 83,737 $ 75,804 7,670 7,933 - $ - $ 8,641, ,313 1,453, , , ,006, , ,187 2,545,565 2,006,052 1,836, , ,051 15,819,201 EXPENDITURES General government Public Public safety housing and welfare Culture and education Economic development Capital Debt Principal outlays service: retirement Interest and other Total expenditures 6,834, , , ,385 1,815,586 10,128,576 2,051, ,521 2,789, ,183 55, ,616 35, ,799 1,082, ,343 Excess (deficiency) of revenues over (under) expenditures 1,531,634 (1,259,519) 28,364 33,222 OTHER FINANCING in Transfers Transfers out Total Net other change financing in fund SOURCES (USES) sources (uses) balances FUND BALANCE (DEFICIT) AT BEGINNING OF YEAR FUND BALANCE (DEFICIT) AT END OF YEAR $ 502,594 (1726,943) (1,224,349) 307,285 1,819,218 (502,594) 1,316,624 57,105 (92,275) (92,275) (63,911) 33,222 2,321,812 (2.321,812) 333,701 (1,090,499) 1,212, ,289 1,113,648 2,233,423 (783,214) $ 1,270,090 $ 933,378 $ 1,146,870 $ 2,567,124 The accompanying notes are an integral part of these basic financial statements

23 STATEMENT OF ACTIVITIES FOR THE FISCAL YEAR ENDED JUNE 30, 2016 CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND The accompanying notes are an integral part of these basic financial statements. Changes in net position of governmental activities $ 1,343,100 funds. (560,286) are not reported as expenditures in the governmental not require the use of current financial resources, therefore, Some expenses reported in the statement of activities do statement of activities. 2,051,687 payments reduces the long-term obligations in the obligations as expenditures, whereas the principal Governmental funds report principal payments on long-term funds. (1,395,961) expense is not reported as expenditure in governmental current financial resources. Therefore, depreciation statement of activities, but they do not require the use of Depreciation expense on capital assets is reported in the reported as depreciation expense. 913,959 assets is allocated over their estimated useful lives and However, in the statement of activities, the cost of those Governmental funds report capital outlays as expenditures. activities are different because: Amounts reported for governmental activities in the statement of Net change in fund balances - total governmental funds $ 333,701

24 1. ORGANIZATION NOTES TO THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, The financial reporting entity included in this report consists of the financial organizations, institutions, agencies, departments, and offices that are not legally organization is part of a primary government, its financial data should be included any state government or general purpose local government. All funds, relationship with the primary government are such that exclusion would cause the accountable or organizations for which the nature and significance of their separate are, for financial reporting purposes, part of a primary government. If an separate organizations for which the primary government is financially with the financial data of the primary government. Component units are legally statements of the Municipality (the primary government). A primary government is a. Financial Reporting Entity accordance with accounting principles generally accepted in the United States as (Statements and Interpretations), constitutes GAAP for governmental units. reporting. The GASB periodically updates its existing Governmental Accounting and Financial Reporting Standards, which, along with subsequent GASB pronouncements (GASB) is the standard-setting body for governmental accounting and financial applied to governmental units. The Governmental Accounting Standards Board The accompanying financial statements of the Municipality have been prepared in 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Assembly, which has 14 members. The members of these branches are elected every four years in the Puerto Rico general elections. executive power is exercised by the Mayor, and the legislative by the Municipal The Municipal Government comprises the executive and legislative branches. The general and administrative services. including health, public works, environmental control, education, public safety, public Municipality is a political legal entity with full legislative and administrative faculties in identity, separate and independent from the central government of the The Municipality of Morovis, Puerto Rico (Municipality) was founded in The every affair of the municipal character, with perpetual succession existence and legal Commonwealth of Puerto Rico. The Municipality provides a full range of services housing and community development, culture, and recreation as well as many other

25 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Professional judgment should be applied in determining whether the relationship between a primary government and other organizations for which the primary government is not financially accountable and that do not meet the above criteria ability to otherwise access, are significant to the primary government. specific primary government, or its component units, is entitled to, or has the 3) The economic resources received or held by an individual organization that the held by the separate organization. ability to otherwise access, a majority of the economic resources received or 2) The primary government, or its component units, is entitled to, or has the component units, or its constituents. entirely or almost entirely for the direct benefit of the primary government, its 1) The economic resources received or held by the separate organization are criteria should be discretely presented as component units: government s financial statements to be misleading or incomplete. Organizations that are legally separate, tax-exempt entities and that meet all of the following organizations as a component unit if the exclusion would cause the primary In addition, as described above, it would be necessary to include other financial benefit/burden between the primary government and the entity. 2) The entity is fiscally dependent on the primary government and there is a The primary government can impose its will on the entity. A financial benefit/ burden exist between the primary government and the entity or body, and either: 1) The primary government appoints a voting majority of the entity s governing The following circumstances set forth a primary government s financial accountability for a legally separate organization: for-profit corporation. component unit may be a governmental organization, a nonprofit corporation or a reporting entity s financial statements to be misleading or incomplete. A

26 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) be included as part of the financial statements. Based on the above criteria there are no potential component units which should included as discretely component units. separate, tax-exempt organizations that meet the applicable criteria should be government ( discretely component units ). As discussed earlier, other legally Otherwise, the component unit should be presented as discrete. Those and its data is presented discretely (separately) from the data of the primary component units does not function as an integral part of the primary government 3) The component unit s debt is expected to be paid by the primary government. the primary government. primary government or otherwise exclusively, or almost exclusively, benefits 2) The component unit provides services entirely, or almost entirely, to the the primary government. entity or A financial benefit! burden exist between the primary government and the Management of the primary government has operational responsibility for governing body of the primary government and there is either: 1) The component unit s governing body is substantively the same as the units should be reported as blended if meets any of the following criteria: units ). That is, the component unit s funds are treated just as though they were its data is blended with those of the primary government ( blended component When a component unit functions as an integral part of the primary government, statements: (a) blending the financial data of the component units balances and transactions and (b) discrete presentation of the component unit s financial data. There are two methods of presentation of the component unit in the financial funds of the primary government with one exception: the general fund. Component the reporting entity misleading or incomplete. is such that exclusion of the organization would render the financial statements of

27 b. Basis of Presentation, Measurement Focus and Basis of Accounting NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, by the function. This Statement reduces gross expenses, including general government revenues, is compared to the revenues generated directly gross and net cost of the function, which is otherwise being supported by the capital (long-lived) assets and receivables as well as long-term debt and obligations. The Statement of Activities reports revenues and expenses in a format that focus on the net cost of each function of the Municipality. Both the Statement of Net Position - The Statement of Net Position incorporates all available to finance government programs, are excluded from the governmentwide statements. The effect of inter-fund activities is eliminated. reported on the accrual basis of accounting. Revenues are recognized in the liability is incurred. Fiduciary activities, if any, whose resources are not period earned and expenses recognized in the period in which the associated prepared using the economic resources measurement focus, which refers to the reporting of all of the net position available to the governmental unit for the purpose of providing goods and services to the public. The statements are Statement of Net Position and a Statement of Activities. These statements are Government-Wide Statements - The government-wide statements consist of a categorize primary activities as governmental type, which are primarily supported by taxes and intergovernmental revenues. government-wide and fund financial statements. Both levels of statements Basic Financial Statements - Basic financial statements include both annual reports. introduction and analytical overview of the Municipality s financial activities. This analysis is similar to the analysis the private sector provides in their Management s Discussion and Analysis - This consists of a narrative summary presentation of each, including the measurement focus and basis of recorded within the various financial statements. Basis of accounting refers to The financial report of the Municipality consists of the Management s Discussion when transactions are recorded regardless of the measurement focus: and Analysis (MD&A), basic financial statements, notes to the financial statements and required supplementary information other than the MD&A. Following is a accounting. Measurement focus is a term used to describe which transactions are

28 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) statements include a Balance Sheet and a Statement of Revenues, Expenditures based on a minimum criterion, that is, a percentage of the assets and deferred column combining all non-major governmental funds. Major funds are determined The financial transactions of the Municipality are recorded in individual funds, helps management in demonstrating compliance with legal, financial and deferred outflows, liabilities, deferred inflows, fund equity, revenues and contractual provisions. Governmental Funds are those through which most and Changes in Fund Balances with one column for each major fund and one expenditures. Funds are segregated according to their intended purpose which governmental functions of the Municipality are financed. The governmental fund for by providing a separate set of self-balancing accounts that comprise its assets, each of which are considered an independent fiscal entity. Each fund is accounted c. Fund Financial Statements requirements have not been met (in case of certain federal expenditure-driven grants if resources are received before allowable expenditures are incurred). In the statement of net position and the revenue is recognized. eligibility requirements are met the liability for unearned revenues is removed from statements. Unearned revenues arise when (1) resources received in advance of subsequent periods, after related exchange transactions occur or applicable The Municipality reports a liability for unearned revenues in the government-wide an exchange transaction and (2) resources received in advance related to voluntary non-exchange transactions when eligibility requirements other than time assets for expenses incurred for which both restricted and unrestricted assets are Statement of Activities are not allocated. The Municipality first uses restricted eligibility requirements (which include time requirements) imposed by the provider (either operating or capital) grants; and capital grants which are capital-specific available. allowable expenditures are incurred. As a policy, indirect expenses in the The types of transactions included as program revenues are charges for services and fees and operating grants which include operating-specific and discretionary grants. Internally dedicated resources are reported as general revenues rather than as program revenues. Revenues on operating grants are recognized when all have been met. For expenditure-driven grants, revenue is recognized after Program revenues must be directly associated with the function. depreciation, by related program revenues, operating grants and contributions.

29 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) paid to the Municipality. Revenue is, therefore, recognized as expenditures are available. There are, however, essentially two types of these revenues. In the first the specific project or purpose (eligibility requirement), before any amounts are case, on expenditure-driven grants, allowable expenditures must be incurred on requirements) imposed by the provider have been met and revenue becomes revenues are recognized when all eligibility requirements (including time In applying the susceptible to accrual concept to intergovernmental revenues, period. For this purpose, the Municipality considers revenues to be available if available). Revenues are considered to be available when they are collectible they are collected within 120 days of the end of the current fiscal period. within the current period or soon enough thereafter to pay liabilities of the current The governmental funds reported in the fund financial statements are accounted accrual basis of accounting. Under this method of accounting, revenues are recognized when they are susceptible to accrual (i.e. both measurable and for using the current financial resources measurement focus and the modified Governmental Development Bank for Puerto Rico. The purpose is for construction of projects around the Municipality. This fund is used to account the movement of the loans through the 3) Loans Fund governmental funds. made for principal and interest on long-term general obligation debt of This fund is used to account for the resources accumulated and payments 2) Debt Service Fund resources, except those required to be accounted for in another fund. This is the operating fund of the Municipality and accounts for all financial 1) General Fund The Municipality reports the following major governmental fund: statement users. Municipality s official s criteria if the fund is particularly important to financial outflows; liabilities and deferred inflows; revenues or expenditures or based on the

30 FOR THE FiSCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) term investments with original maturities of three months or less from the date of Cash and cash equivalents consist of cash on hand, demand deposits and short d. Cash and Cash with Fiscal Agent reconciliation is part of the financial statements. transform the fund financial statements into the government-wide statements. This measurement focus and basis of accounting than the government-wide statements, reconciliation is necessary to explain the adjustments needed to Since the governmental fund statements are presented on a different them) are also not accounted for in the FFS. those un-matured that will not require the use of current financial resources to pay Sheet Governmental current liabilities are generally not accounted for in the accompanying Balance Funds of the FFS. Likewise, long-term liabilities (generally, Long-term assets and those assets that will not be converted into cash to satisfy include vested compensated absences, claims and judgments and special termination benefits which are recorded as expenditures only to the extent that Expenditures are generally recognized when the related liability is incurred as they are expected to be liquidated with expendable financial resources (in the government-wide statements the expense and related accrual liability for long term portions of debt must be included). under accrual basis of accounting. Certain exceptions to this fundamental concept incurred). In subsequent periods, after related exchange transactions occur or than time requirements have not been met (in case of certain federal expendituredriven grants if resources are received before allowable expenditures are advance of an exchange transaction and (2) resources received in advance funds statements. Unearned revenues arise when (1) resources received in related to voluntary non-exchange transactions when eligibility requirements other applicable eligibility requirements are met the liability for unearned revenues is removed from the statement of net position and the revenue is recognized. The Municipality reports a liability for unearned revenues in the governmental unrestricted and are generally revocable only for failure to comply with prescribed compliance requirements. In these cases revenues are recognized as the time of receipt or earlier if the susceptible to accrual criteria is met. incurred to the extent available. In the other cases, monies are virtually

31 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FiNANCIAL STATEMENTS (CONTINUED) The Municipality reports inter-fund loans which represent legally advances that are finance payroll, payroll taxes and other expenditures. The current portion of such and amounts not expected to be repaid are reported as transfer-out from the lender fund and transfer-in in the borrower fund. within a reasonable period of time are reduced to the estimated realizable value portion as advances to/from other funds. Amounts not expected to be collected representative of lending/borrowing arrangements from one fund to other fund to transactions are referred as to either due from/to other funds and the noncurrent g. interfund Receivables and Payables the Municipality for the reimbursement of expenditures incurred. conditions. Amounts due from pass-through grantor represent amounts owed to which are determined upon past collection experience and current economic Receivables are stated net of estimated allowances for uncollectible accounts, f. Receivables Government Development Bank of Puerto Rico ( GDB ). proceeds of grants which are maintained in a cash custodian account by the Restricted assets are liquid assets which have third-party limitations on their use. The Municipality reports as restricted cash with fiscal agent the undisbursed e. Restricted Assets debt service, as established by law. construction of major capital improvements. Cash with fiscal agent in the debt service fund represents special additional property tax collections withheld by the Commonwealth of Puerto Rico and restricted for the payment of the Municipality s of current liabilities, and bonds and notes issued for the acquisition and from appropriations from the Legislative Assembly of Puerto Rico, for the payment Cash with fiscal agent in the capital projects fund consists of unused proceeds 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). acquisition. The Municipality is restricted by law to invest only in savings accounts

32 h. Inventories NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, affect its service utility, and stoppage of construction or development of an asset. changes in circumstances that may give rise to asset impairment. Among the changes in the manner or duration of use of a capital asset that may negatively utility, technological developments that may negatively affect service utility, laws, regulations, or other environmental factors that may negatively affect service to an asset where action would be needed to restore lost service utility, changes in The Municipality periodically evaluates its capital assets to consider events or factors considered by management as part of its evaluation are: physical damages Vehicles 5-20 years Infrastructure years Machinery and equipment 5-10 years Buildings and building improvements years Land improvement years Building years Useful Life calculated on the straight-line basis over the following estimated usefully lives: extend the useful life of an asset are capitalized. Other costs incurred for repairs and maintenance are expensed as incurred. Depreciation in capital assets is donated. Additions, improvements and other capital outlays that significantly historical cost. Contributed assets are recorded at fair market value as of the date Capital assets purchased or acquired are carried at historical cost or estimated statements. governmental or component units columns in the government-wide financial bridges, streets sidewalks, and drainage system), are reported in the applicable is normally immovable and of value only to the Municipality, such as roads, Capital assets, which include property, plant, equipment, and infrastructure (which i. Capital Assets believes is not significant. inventory is not recorded in the Statement of Net Position, as management of those purchases is recorded as expenditure when incurred but the year-end The Municipality purchases expendable supplies held for consumption. The cost

33 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) debt proceeds received, are reported as expenditures in the appropriate fund. the current period. Those issuance costs, whether or not withheld from the actual Related bond issuance costs, whenever rise, are reported as current outflows of Governmental fund types recognize bond issuance costs as expenditures during resources in the Statement of Activities, as required by current standards. Long-term debt and other long-term obligations, which are reported as liabilities in absences, claims and judgments, landfill closure and post-closure costs and longterm liabilities to other governmental entities. general and special obligation bonds and notes, liabilities for compensated the governmental activities column in the Statement of Net Position, include k. Long-Term Obligations available. recognized as an inflow of resources in the period that the amounts become only in the governmental funds balance sheet. These amounts are deferred and which arises only under a modified accrual basis of accounting that may qualify for inflow of resources (revenue) until that time. The government has only one item, position that applies to a future period(s) and so will not be recognized as an reporting in this category. Accordingly, the item, unavailable revenue, is reported statement element, deferred inflows of resources, represents an acquisition of net separate section for deferred inflows of resources. This separate financial In addition to liabilities, the statement of financial position will sometimes report a outflow of resources (expense/ expenditure) until then. net position that applies to a future period(s) and so will not be recognized as an statement element, deferred outflows of resources, represents a consumption of separate section for deferred oufflows of resources. This separate financial In addition to assets, the statement of net position will sometimes report a j. Deferred Outflows/Inflows of Resources effective retirement of a portion of the asset. treated as a proportionate reduction of both the reported value of the asset and its accumulated depreciation, based on the notion that the impairment represents the Any impairment adjustment to the carrying value of a capital asset would be

34 I. Net Position FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) net position in the government-wide financial statements, a flow assumption must before unrestricted net position is applied. restricted (restricted bond or grant proceeds) and unrestricted resources. In order position and unrestricted the government s policy to consider restricted net be made about the order in which the resources are considered to be applied. It is position to have been depleted to calculate the amounts to report as restricted net Sometimes, the government will fund outlays for a particular purpose from both m. Net Position Flow Assumption management can remove or modify them. operations. These types of constraints are internal and does not consider them to be available for genera) position is often designated to indicate that management restricted component of net position. Unrestricted net determination of net investment in capital assets or the inflows of resources that are not included in the Unrestricted net Unrestricted net position is the net amount of the assets, position: deferred outflows of resources, liabilities, and deferred governments) or restrictions imposed by the law through restrictions that are externally imposed (by creditors, grantors, contributors, or laws and regulations of other constitutional provisions or enabling legislation. inflows of resources related to those assets. These include Municipality s control) reduced by liabilities and deferred Restricted net The restricted component of net position consists of position: restricted assets (subject to restrictions beyond the in capital assets: Consists of capital assets, net of accumulated depreciation. Net investment displayed in three components: net investment in capital assets, restricted, and unrestricted, as follows: less liabilities and deferred inflows of resources equal net position, and should be In the government-wide statements, assets plus deferred outflows of resources MUNICIPALiTY OF MOROVIS

35 n. Fund Balances FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) not restricted, committed or assigned. For all other governmental funds the 5) Unassigned - Is the residual classification and includes all spendable amounts used for specific purposes, but are neither restricted nor committed. In balance of the classification of all governmental funds with positive fund balances. Action taken to assign fund balance may be made after year-end. distinction to committed balances, the authority for making an assignment is fund balances. With the exception of the general fund, this is the residual fund remove or modify an assignment is not as prescriptive as it is with committed the Municipal Legislature. Furthermore, the nature of the actions necessary to not required to be the Municipality s highest level of decision-making authority, 4) Assigned - Amounts that are constrained by the Municipality s intent to be will be subject to the constraint, may be determined in the subsequent period. through formal resolutions by the Municipal Legislature. Those committed decision-making authority of the Municipality removes or changes the specified should occur prior to the end of the fiscal year, but the amount, if any, which use by taking the same type of action (formal resolution) it employed to commit those amounts. Formal action to commits fund balance to a specific purpose amounts cannot be used for any other purposes unless the highest level of 3) Committed - Amounts that can be used only for the specific purposes imposed contributors, or laws and regulations of other governments), imposed by law through constitutional provisions or by enabling legislation. 2) Restricted - Amounts constrained by external parties (creditors, grantors, spendable form or (b) legally or contractually required to be maintained intact. 1) Nonspendable - Amounts that cannot be spent because are either (a) not in are as follows: observe constraints upon the use of the resources reported. The classifications hierarchy based primarily on the extent to which the Municipality is bound to for all governments that report governmental funds. It also establishes criteria for Type Definitions ( GASB No. 54 ) establishes accounting and reporting standards The GASB Statement No. 54 Fund Balance Reporting and Governmental Fund classifying fund balances into specifically defined classifications and clarifies definitions for governmental fund types. These classifications comprise a

36 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, governmental fund financial statements, a flow assumption must be made about government s policy to consider restricted fund balance to have been depleted restricted and unrestricted resources (the total of committed, assigned, and restricted, committed, assigned, and unassigned fund balance in the the order in which the resources are considered to be applied. It is the unassigned fund balance). In order to calculate the amounts to report as Sometimes, the government will fund outlays for a particular purpose from both o. Fund Balance Flow Assumptions The classification of the Municipality s individual governmental funds among implementation of GASS No. 54. prior fiscal years for financial reporting purposes was not affected by the general, debt service, special revenue, and capital projects fund types used in resources, and then unassigned resources. Municipality generally spends committed resources first, followed by assigned resources first, and then unrestricted resources. Within unrestricted resources, the available in multiple fund balance classifications, the Municipality uses restricted In situations when expenditure is made for a purpose for which amounts are Municipality has not entered into any stabilization-like arrangements, nor has set identified in sufficient detail and are not expected to occur routinely. However, the formal minimum fund balance amounts as of and for the fiscal year ended (2) the circumstances or conditions that indicate the need for stabilization are resources meet the other criteria for those classifications, as described above and June 30, purpose (restricted or committed fund balance in the general fund) only if: (1) such aside material financial resources for emergencies and has not established any The Municipality reports resources constrained to stabilization as a specified assigned fund balance classification have been reclassified to unassigned fund balances. deficit. Consequently, negative residual amounts in restricted, committed, and Negative fund balance amounts are assigned amounts reduced to eliminate the committed or assigned. the overspending for specific purposes for which amounts had been restricted, unassigned classification is used only to report a deficit balance resulting for

37 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTiNUED) The estimated amount of the liability for claims and judgments, which is due on government-wide financial statements include an amount estimated as a contingent liability for liabilities as incurred. fund when they matured (generally, when payment is due). The accompanying demand, such as from adjudicated or settled claims, is recorded in the general r. Claims and Judgments fiscal year. year. Sick leave is recorded as expenditure in the year paid. Employees are entitled to payment of unused sick leave upon retirement if have been employed next every natural year. Excess of vacations can be paid after July 1 of every supra amended the Article , Section b (2) of the Municipal Law, authorizing December 31 of every year. Excess of sick leave must be paid until March 31 Employees are entitled to 30 days vacations leave and 18 days sick leave per the maximum previously permitted by law. Calculations must be made until the Municipality to pay any excess of vacations and sick leave accumulated over for at least 10 years in the municipal government. On July 1997, state Law 152 q. Compensated Absences June 30, 2016 amounted to $230,953. The current insurance policies have not by the Municipal Revenue Collection Center (the CRIM ) for the year ended costs are allocated among all the municipalities of Puerto Rico. Cost of insurance Insurance policies are negotiated by the Puerto Rico Treasury Department and been cancelled or terminated. The CRIM also deducted by $174,299 for workers compensation insurance covering all municipal employees. Municipality carries insurance to cover casualty, theft, tort claims and other losses. errors and omissions, and employee injuries (workers compensation). The The Municipality is exposed to various risks of loss related to property loss, torts, allocated to the Municipality and deducted from the gross property tax collections p. Risk Financing purpose, committed fund balance is depleted first, followed by assigned fund balance. Unassigned fund balance is applied last. when the components of unrestricted fund balance can be used for the same before using any of the components of unrestricted fund balance. Furthermore,

38 s. Encumbrances FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) ended June 30, included in the accompanying financial statements of the Municipality for the year fiduciary net position of the employee s retirement system of the Government of Accordingly the information related to the pension plans is not available and is not issued, the ERS has not issued the financial statements as of June 30, and deferred inflows of resources and pension expenses, information about the Commonwealth of Puerto Rico (ERS) and addition to reductions from ERS s reported by the ERS. However, as of the date that financial statement has been liabilities net position should have been determined on the same basis as they are For purpose of measuring, the net pension liability, deferred outflows of resources u. Pensions notification of the actual revenues and expenditures to the presented in the financial statements of the agencies mentioned above. from those estimates. The most significant estimates consist of the contribution amounts of assets and liabilities and disclosure of contingent assets and liabilities management to make estimates and assumptions that affect the reported revenues and expenditures during the reporting period. Actual results could differ The preparation of the basic financial statements in accordance with accounting principles generally accepted in the United States of America requires at the date of the basic financial statements and the reported amounts of received from the Puerto Rico Electric Power Authority caused by the delay of the t. Use of Estimates Legislature has authorized that an unspent balance from the prior year be carried control expenditures. The unencumbered balance of any appropriation of the forward and made available for current spending. commitments for expenditures are recorded to reflect the use of the applicable Encumbrance accounting, under which purchase orders, contracts, and other General Fund at the end of the fiscal year lapses immediately. Appropriations, other than in the General Fund, are continuing accounts for which the Municipal spending appropriations, is used by the General Fund during the fiscal year to MUNICIPALiTY OF MOROVIS

39 v. Future Adoption of Accounting Pronouncements FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) GASB Statement No. 14 Component Units-an amendment of 80 Blending Requirements for Certain Pool Participant 79 Certain External Investment Pools and Pension Plans 78 Pensions Provided through Certain Multiple-Employer Defined Benefit 77 Tax Abatement Disclosures Local Government 76 The Hierarchy of Generally Accepted Accounting Principles for State and Pensions Postemployment Benefits other the 75 Accounting and Financial Reporting for Postemployment Benefits Plans other than Pension Plans 74 Financial Reporting for Certain Provisions of GASB Statement 68, and Amendments to Statements 67 and 68 Pension and Related Assets that are 73 Accounting and Financial Reporting for not within the Scope of GASB Number Statement Name in Fiscal Year Statement Adoption Required statements that the Municipality has not yet adopted: The Governmental Accounting Standards Board has issued the following

40 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FiNANCIAL STATEMENTS (CONTINUED) to arrive at net position of governmental activities $ Net adjustment to reduce fund balance governmental funds Claims and judgments 54,312 Bonds payable $ 16,382,909 General Services Administration 395,005 Treasury Department 275,040 Christmas bonus 185,325 ASES 241,500 Labor Department 276,674 AAA 566,356 Note payable 586,953 Compensated absences 1,918,265 government-wide statement of net position. One element of that reconciliation approximately $20.8 million differences are as follows: The governmental fund balance sheet includes reconciliation between fund balancegovernmental funds and net position of governmental activities as reported in the explains that some liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. The details of the STATEM ENTS 3. RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL The impact of these statements on the Municipality s financial statement has not yet been determined. 83 Certain Asset Retirement Obligation No. 73 GASB Statements No. 67, No.68, and 82 Pension Issues-an amendment of Irrevocable Split-Interest Agreements Number Statement Name in Fiscal Year Statement Adoption Required MUNICIPALiTY OF MOROVIS

41 4. DEPOSITS - CUSTODIAL CREDIT RiSK FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) declines in fair values by: 1) not including debt investments in its investment investments to three months or less, and 3) keeping most of its bank deposits in portfolio at June 30, 2016, 2) limiting the weighted average maturity of its affect the fair value of an investment. The Municipality manages its exposure to This is the risk that changes in interest rates of debt investments will adversely b. Interest Rate Risk deposits is considered low at June 30, any possible loss related to defaults by commercial banks on the Municipality s Therefore, the Municipality s management has concluded that the risk related to may be significant. aforementioned investment guidelines, the Municipality does not invest in the Municipality has adopted, as it s custodial and credit risk policy, the Statement of Investment Guidelines for the Government of the Commonwealth of Puerto Commonwealth, obligations of the United States of America, certificates of the municipalities of Puerto Rico, which are managed by GDB. According to the marketable securities or any types of investments for which credit risk exposure deposits, commercial paper, bankers acceptances, or in pools of obligations of Rico. Accordingly, the Municipality invests only in obligations of the its obligations. In compliance with the laws and regulations of the Commonwealth, This is the risk that an issuer or other counterparty to an investment will not fulfill a. Credit Risk exposure. This statement requires that state and local governments disclose essential risk main areas: credit risk, interest rate risk, custodial credit risk, foreign exchange information about deposits and investments. The disclosure requirements cover four The Municipality adopted the provisions of GASB Statement No. 40 (GASB No. 40), Deposit and In vestment Risk Disclosure, an Amendment to GASB Statement No. 3. with GDB. Rico and in the Government Development Bank for Puerto Rico (GDB). Proceeds from bonds and funds related to certain grant awards are required by law to be held The Municipality maintains its deposits in various commercial banks located in Puerto

42 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, collateral held by the Secretary of Treasury of Puerto Rico in the Municipality s amounting to $1,192,125 was covered by federal depository insurance or by uncollateralized), amounted to $2,887,417 as of June 30, name. Deposits in governmental banks (all of which are uninsured and At year-end, the Municipality s bank balance of deposits in commercial banks e. Deposits The risk that changes in exchange rates will adversely affect the value of an the Municipality is prevented from investing in foreign securities or any other types the Municipality s deposits is considered low at June 30, Accordingly, management has concluded that the foreign exchange risk related to of investments in which foreign exchange risk exposure may be significant. investment or a deposit. According to the aforementioned investment guidelines, d. Foreign Exchange Risk Refer to Note 23 related to GDB s ability to continue as a going concern. held by the Secretary of Treasury of Puerto Rico in the Municipality s name. Commonwealth of Puerto Rico statutes, public funds deposited in commercial depository insurance. All securities pledged as collateral by the Municipality are Deposits with the GDB are uninsured and uncollaterized. However, no losses related to defaults by the GOB on deposit transactions have been incurred by the deposits in commercial and governmental banks located in Puerto Rico. Under banks must be fully collateralized for the amount deposited in excess of federal Municipality s deposits may not be recovered. The Municipality maintains cash Municipality through June 30, In the case of deposits, this is the risk that in the event of a bank failure, the c. Custodial Credit Risk is considered low. Therefore, the Municipality s management has concluded that, at June 30, 2016, the interest rate risk associated with the Municipality s cash and cash equivalents cost, which approximates their fair value. 30, 2016, the Municipality s investments in certificates of deposits are recorded at interest-bearing accounts generating interests at prevailing market rates. At June

43 5. PROPERTY TAXES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, issued by the state government. of principal and interest of general obligation bonds and certain other obligations The Additional special property tax The Additional special property tax retained by GDB for such purposes and it is recorded as revenue in the Debt Service municipal state is collected by the GRIM for the payment Fund when collected by the GRIM and reported to the Municipality. is restricted for debt service and for general purposes and accounted for in the general fund. The Municipality s basic property tax rate represents the portion which is appropriated 10.83% 7.08% Additional special property state 1.03% 1.03% Additional special property - municipal 4.00% 2.25% Basic property 6.00% 4.00% Discount made by state to tax payer (0.20%) (0.20%) Real Personal The rates are 10.83% for real property and 7.08% for personal property. The composition is as follows: two equal installments in July 1 and January 1, following the assessment date. full together with the return on or before May 15. The tax on real property is due in assessment is made as of January 1 of each year and is based on estimated current May 15 of each year. The tax on real property is assessed by the GRIM. The personal property taxes. The tax on personal property is self-assessed by the values of the property as of year The tax on personal properly must be paid in Rico is responsible by law for the assessment, levy and collection of all real and The Municipal Revenues Collection Center (CRIM) of the Commonwealth of Puerto taxpayer. The assessment is made in a return which must be filed with the CRIM by MUNICiPALiTY OF MOROVIS

44 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) financial statements. (See Note 8) $120,941. Such amount is presented as due from CRIM in the accompanying Municipality from taxpayers and charges for the same period by approximately 2016, the amount for the collected by CRIM exceed the amount advanced to the Based on the preliminary settlement already received for the year ended June 30, The Municipality has received the preliminary settlement from CRIM related to fiscal the financial condition of the Municipality. the finai settlement and that such difference, if any, will not have a material effect on believes, based in part on the experience from prior years, and then when received, year , but not the final settlement as the six months period after fiscal year ends, required by law to CRIM to issue this, has not yet expired. Management advances from fiscal years up to 2001 for $759,770. This amount will be repaid estimated amount of property tax expected to be collected for the ensuring fiscal year. repayment agreement with GDB and CRIM to repay the excess of property taxes on a fiscal year basis, whereby a comparison is made between the amounts However, If advances exceed the amount actually collected by the C RIM, a payable to estimated collections. The CRIM is required by law to prepare a settlement statement advanced to the Municipality and amounts actually collected from taxpayers. This settlement has to be completed on a preliminary basis not later than three months ends. If the CRIM remits to the Municipality property tax advances, which are less to the beginning of each fiscal year, the CRIM informs the Municipality of the is granted to merchants with an annual volume of net sales less than $150,000. Prior Complete exemption from personal property taxes up to an assessment of $50,000 Throughout the year, the CRIM advances funds to the Municipality based on the initial after fiscal year-end, and a final settlement made not later than six months after year than the tax actually collected, a receivable from the CRIM is recorded at June 30. the CRIM is recorded at June 30. During July 2002, the Municipality entered into a through advances from property taxes (refer to Note 14). is made. Revenue related to the basic tax on exempt property is recorded in the Municipality, except for property assessed at less than $3,500, for which no payment amounts, the Department of Treasury assumes payment of the basic tax to the General Fund when payments are received from the CRIM. Residential real property occupied by its owner is exempt by law from the payment of property taxes on the first $15,000 of the assessed value. For such exempted MUNICiPALITY OF MOROVIS

45 6. MUNICIPAL LICENSE TAXES FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) rate of all municipalities from one point five percent (1.5%) to one point zero percent an affiliated public company of GDB, which is authorized to issue bonds and use (1.0%). Simultaneously, Act No.19 created the Municipal Finance Corporation (MFC), Effective July I, 2014, Act No. 18 reduced the statutory municipal sales and usage tax Rico. of Act No. I of January 31, 2011, known as Internal Revenue Code for a New Puerto were enacted to, among other things, amend Sections , and No. 18), and Act No. 19, known as Municipal Finance Corporation Ac, (Act No. 19) On January 24, 2014, Act No.18, known as Municipal Administration Fund Act (Act The Municipality imposes a municipal sales and usage tax within the territorial limits collected on a monthly basis through a tax return that is due ten calendar days after the end of each month. on the purchase price of all usage, storage or consumption of a taxable item. It is of the Municipality. This is a derived tax applied to the sale price of a taxable item or 7. SALES AND USE TAXES $556,343, corresponding to the next fiscal year municipal license. Fund. The Municipality invoiced and collected in advance during the current year The amounts collected in advance are recorded as unearned revenues in the General Financing institution 1.50% Savings and loans associations 1.50% Other organizations.50% municipal license in the Municipality of Morovis are as follows: of 5% is allowed when full payment is made on or before April 15. The rates of year and payable in two equal installments due on July 1 and January 1. A discount An annual return of business volume should be filed on or before April 15 of each Incentive Law of Puerto Rico The annual Municipal License Taxes are determined based on the gross income of all commerce and industrial organizations that have operations in the is due and, accordingly, represent taxes which are due and uncollected at June 30, Municipal License Taxes receivable are recorded in the fiscal year in which payment Municipality of Morovis, and are not totally or partially exempt under the Industrial

46 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) the Commonwealth s Legislature. improvement projects; these funds will be distributed based on legislation from.1% will be deposited in a Municipal Improvement Fund to finance capital from financial institutions) funds in the Municipal Redemption Fund or to transfer funds from the Municipal Development Fund to increase its debt margin and issue loans to be obtained the municipalities general fund (the municipalities have the option to maintain.2% will be deposited in a Municipal Redemption Fund to then be deposited in municipalities,.2% will be deposited in the Municipal Development Fund to be distributed to the For municipalities covered by the agreement, the.5% will be distributed as follows: and distributed to the Municipality on a monthly basis as follows in accordance with Section 4050 of Act No. I, as amended: advances from the collections arising from the zero point five percent (0.5%) of the sales and usage taxes to the MAF of the Municipality. The advances have been made Accordingly, since July I, 2014, the Commonwealth of Puerto Rico has made Municipality. that an amount equal to zero point five percent (0.5%) of the sales and usage taxes lost as a consequence of the reduction in the statutory municipal sales and usage tax stability of the Municipality by allowing it to continue receiving the economic benefits known as Municipal Administration Fund (MAF) in the name and for the benefit of the rate referred to above, Act No. 18 established the mechanisms to protect the financial rate referred to above. For these purposes, effective July I, 2014, Act No. 18 requires collected by the Commonwealth of Puerto Rico be deposited in a special fund to be In order to mitigate the effects of the reductions in the municipal sales and usage tax municipal long-term debt incurred by the Municipality in previous fiscal years, that are other financing mechanisms to directly or indirectly pay or refinance all or part of the payable from or backed by the municipal sales and usage taxes.

47 8. DUE FROM OTHER AGENCIES FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) - 42 Interfund transfers for the year ended June 30, 2016 consisted of the following: Debt Service Debt Service - Loans General General 1,716,943 92, Debt Service $ 502,594 Transfer In Transfer Out Amount b. Intertund Transfers $ The due from and due to other fund balances as of June 30, 2016, are as follows: Other Governmental General General Other Governmental Other Governmental General Other Governmental 719,053 85, ,896 Debt Service $ 495,843 Receivable Fund Payable Fund Amount a. Due FromlTo Other Funds 9. INTERFUND TRANSACTIONS Total $ 444,831 Other governmental funds 325,431 Municipal Revenues Collection Center (CRIM) Office of Management and Budget Office of the Commissioner of Municipal Affairs 204,490 $ 120,941 General Fund 119,400 Puerto Rico Labor Department Puerto Rico Department of Education 86,384 25,000 8,016 Represents grants and contributions due from local and federal agencies:

48 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, Total $ 377,366 General Fund Puerto Rico Employees Retirement System Puerto Rico Commonwealth Employees Association Puerto Rico Water and Sewer Authority Puerto Rico General Services Administration Puerto Rico Labor Department and Human Resources Internal Revenue Services 58,276 23,693 75, ,963 $ 198,328 Due to other agencies at June 30, 2016 are as follows: 11. DUE TO OTHER AGENCIES Less accumulated depreciation for: Governmental activities capital assets, net $ 41,179,361 Vehicles and equipment Infrastructure Vehicles and equipment Infrastructure Furniture and fixtures Total capital assets, not being depreciated Total capital assets, being depreciated, net Construction in progress Land Buildings and building improvements Buildings and building improvements Capital assets, not being depreciated: Capital assets, being depreciated: Total capital assets, being depreciated Furniture and fixtures Total accumulated depreciation 18,334,901 30,054,401 12,483,267 28,257, ,293 7,363,974 48,389, ,293 4,438,327 5,137, ,960 5,373,263 6,618,558 6,993, ,293 13,040, ,293 7,079,753 28,589,768 7,388,674 7,229,519 $ 5,751,697 $ $ (482,002) $ - $ - 5,373,263-11,124,960-49,303,261-19, ,572,399 5,751,697 $ $ 40,697,359 (482,002) 1395,961 24, , ,970 86, , , ,959 Governmental ActivitIes: Primary Government July 1, 2015 Increases Decreases June 30, 2016 Balance Balance follows: Capital asset activity for the Municipality for the year ended June 30, 2016 was as 10. CAPITAL ASSETS collection to the debt service fund as debt service payments become due. The transfers are used to move receipts restricted to debt service from the fund MUNICiPALITY OF MOROVIS

49 12. UNEARNED REVENUES FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 44 - Puerto Rico and the GRIM, payments in lieu of taxes from the Puerto Rico Electric government. Intergovernmental revenues consist mainly of collections from the Commonwealth of Power Authority and federal financial assistance received from the federal 14. INTERGOVERNMENTAL REVENUES earned; it must also be available to finance expenditures of the current period. earned. revenue recognition in connection with resources that have been received, but not yet liquidate liabilities of the current period (unavailable). Governmental funds also defer Governmental funds Balance Sheet report Deferred Inflows of Resources in connection with receivables for revenues that are not considered to be available to Under the modified accrual basis of accounting, it is not enough that revenue is from assets and liabilities. include guidance for reporting those financial statement elements, which are distinct statements. These items are a consumption of net position by the Municipality that is recognized deferred outflows of resources in the government-wide and fund applicable to a future reporting period. Previous financial reporting standards do not No. 65, Items Previously Reported as Assets and Liabilities, the Municipality Pursuant to GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred inflows of Resources, and Net Position, and GASB Statement 13. DEFERRED OUTFLOWS! INFLOWS OF RESOURCES The unearned revenues of $556,343 in the general fund are related to municipal license taxes collected in fiscal year that will be earned in fiscal year 2016-

50 15. LONG-TERM DEBTS FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) $505,000 series of 2004, payable in annual installments of $10,000 to $40,000 until July 1, 2029, interest at 6%. 370,000 $40,000 to $180,000 until July 1, 2022, interest at 6.5%. 1,540,000 $2,305,000 series of 2003, payable in annual installments of $30,000 to $190,000 until July 1, 2027, interest at 6.55%. 1,670,000 $2,485,000 series of 2003, payable in annual installments of $35,000 to $165,000 until January 1, 2027, interest at 6.5%. 1,420,000 $2,125,000 series of 2003, payable in annual installments of $720,000 series of 1999, payable in annual installments of $10,000 to $65,000 until January 1, 2023, interest at 7%. $ 375,000 a. Bonds Bonds and other long-term liabilities outstanding at June 30, 2016 are as follows: Municipality is in compliance with the debt limitation requirements. There is not legal limitation on the amount of debt that the Municipality may guarantee so long as the 10 percent limitation is not exceeded. At June 30, 2016, the by the Municipality, exceed 10 percent of the total assessed value of the on, such bonds and notes (and on all such bonds and notes issued thereafter) which are payable in any fiscal year, together with any amount paid by the Municipality in the preceding fiscal year on account of bonds or notes guaranteed Municipality s property. b. direct obligations are not to be issued if the amount of the principal of, and interest are backed by the full faith, credit and taxing power of the Municipality; and a. direct obligations of the Municipality (evidenced principally by bonds and notes) debts of the Municipality. Nevertheless, the laws and regulations of the The Municipality s Legislature is legally authorized to determine the contracting of Commonwealth also provide that: MUNICIPALiTY OF MOROVIS

51 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) to 7.5%. 3,565,000 $60,000 to $330,000 until July 1, 2035, interest from 6.0% $3,890,000 series of 2010, payable in annual installments of to 7.5%. 740,000 $805,000 series of 2010, payable in annual installments of $15,000 to $65,000 until July 1,2035, interest from 6.0% to 7.0%. 380,000 $5,000 to $35,000 until July 1, 2035, interest from 6.0% $415,000 series of 2010, payable in annual installments of to 6.5%. 130,000 $85,000 to $130,000 until July 1, 2016, interest from 4.75% $750,000 series of 2009, payable in annual installments of to 7.5%. 630,000 $750,000 series of 2009, payable in annual installments of $10,000 to $70,000 until July 1,2029, interest from 6.00% to 7.5%. 610,000 $840,000 series of 2009, payable in annual installments of $30,000 to $95,000 until July 1, 2024, interest from 4.75% to 7.5%. 2,360,000 $45,000 to $235,000 until July 1, 2032, interest from 2.42% $2,750,000 series of 2009, payable in annual installments of to 7%. 865,000 $995,000 series of 2008, payable in annual installments of $10,000 to $85,000 until July 1, 2032, interest from 3.93% to 7%. 85,000 $195,000 series of 2008, payable in annual installments of $10,000 to $25,000 until July 1, 2019, interest from 3.93% $50,000 to $105,000 until July 1, 2018, interest at to 7%. $ 295,000 $890,000 series of 2006, payable in annual installments of MUNICIPALITY OF MOROV1S

52 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) with monthly installments of $12,991 until June ,674 the Municipality signed a payment plan amounting to $511,513, PR Department of Labor payment plan On May 15, 2015 with monthly installments of $11,460 until July 16, ,040 the Municipality signed a payment plan amounting to $275,040 Treasury Department payment plan On August 16, 2016, $ 395,005 $65,871 and monthly installments of $17,437 until August 6, payment plan amounting to $658,714 with an initial payment of November 6, 2015, the Municipality made an amendment to the General Services Administration payment plan On c. Other Long-term Debts including interest at %. $ payable in annual aggregate principal installments of $58,250 1 of each year through The repayment agreement is the principal and interest from the property taxes advances. The amounts retained by CRIM will be remitted to GDB on July advances from fiscal years up to The CRIM will retain with GDB and CRIM to repay the excess of property taxes Note payable of $759,770 represents a repayment agreement b. Note Payable to CRIM (Law No. 42) Total bonds payable $ $109,851 to $659,101 until July 1,2024, interest at 6.0% ,909 $1,537,909 series of 2015, payable in annual installments of to 7.5%. $ 650,000 $665,000 series of 2012, payable in annual installments of $5,000 to $145,000 until July 1, 2025, interest from 6.0%

53 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Principal Interest Principal Interest $17,222,909 $ 9,327,693 $ 586,953 $345, ,263,505 3,189, , , ,480, ,750 73,115 2, ,910,000 1,470, ,642 58, , ,274 28,470 29, $ 840,000 $ 717,802 $ 22,312 $ 35, , ,822 23,714 34, , ,533 25,203 33, , ,874 26,787 31,463 Bonds Notes Payable June 30, 2016 are as follows: The annual debt service requirements for the bonds payable and note payable at Total other long-term debts $ to fund such costs from future operations. Amount is paid with compensatory time; represents the Municipality s commitment leave and other benefits with similar characteristics such as unrestricted funds. 1,918,265 Compensated absences Includes accrued vacations, sick amount, if any, will be paid with unrestricted funds. 54,312 cases to be paid subsequent to June 30, The awarded Claims and judgments Represents estimated losses of legal Due to Puerto Rico Health Insurance Administration 241,500 $829,196 with an initial payment of $89,920 and installments of $10,000 until August 15, $ 566, , the Municipality signed a payment plan amounting to PR Water and Sewer Authority payment plan On July 30,

54 $ FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTiNUED) Long-term liabilities activity for the year ended June 30, 2016 was as follows: Total $ (783,214) $ 1,270,090 $ 933,378 $ 1,146,870 $ 2,567,124 Unassigned (839,450) (839,450) Public safety 119, ,520 Health and welfare 104, ,760 Public safety 65,902 65,902 Public safety 3,708 3,708 Public works Health and welfare 5,171 5,171 Capital outlays 933, ,378 Culture 13,485 13,485 General government 33,787 33,787 Assigned: General government 555, ,528 General government 260, ,573 Restricted: Committed: Public works 40,587 40,587 Debt service $ - Governmental General Debt Service Loans Funds Total Other As of June 30, 2016, fund balances are comprised of the following: 16. FUND BALANCE Total noncurrent liabilities $22,951,240 $ 592,461 $ 2,006,687 $21,537,014 $ 1,618,431 Compensated absences 1,677, ,210 1,918, ,000 - ASES 241, ,500 Claims and judgments 79,312 25,000 54,312 54,312 Labor Department 454, , , ,888 General Services Administration 538, , , , ,239 Treasury Department 530,417 43, , ,040 91,680 Net pension liability Total other liabilities 4326, ,461 1,191,324 3,727, ,119 Other long-term liabilities: Total long-term debts 18,625, ,363 17,809, ,312 Notes payable 607,316 20, ,953 22,312 Bonds payable $18,017,909 $ - $ AAA 739,277 89, , , ,000 CIRIM 64,987 64, $ 1,270,090 $ - $ - 1,270, ,000 $17,222,909 $ 840,000 Governmental Activities: Primary Government Balance Additions Payments Balance One Year Beginning Ending Due within

55 17. FUND BALANCE DEFiCIT FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Members who had entered the Employees Retirement System before January 1, structure, while those who began to participate on or after April 1, 1990 (Act 1 prior to April 1, 1990 (Act 447 Participants) were entitled to the highest benefits 2000 participated in a defined benefit program. Members who began to participate under the ERS as further discussed below. which represents a comprehensive reform of the ERS Act No. 3 became effective on July 1, 2013 and amended the provisions of the different benefit structures On April 4, 2013, the Governor of Puerto Rico, signed into law Act No. 3 of 2013, unit of the Commonwealth. created by Act No. 447 of May 15, 1951, as amended (Act 447) and a component Substantially all full-time employees of the Municipality participate in the Instrumentalities (ERS). The Employees Retirement System is a statutory trust Employees Retirement System of the Commonwealth of Puerto Rico and its a. Plan Description 19. PENSION PLAN Total invested in capital assets, net of related debt $ 30,812,359 Outstanding balance on capital related debt (9,885,000) Capital assets, net of accumulated depreciation $ 40,697,359 is comprised of the following: Net position invested in capital assets component of net position, net of related debt, 18. NET INVESTMENT IN CAPITAL ASSETS The deficit of the General Fund will be covered by future budgetary appropriations. General Fund $ Fund Deficit The following fund had a deficit in fund balance at June 30, 2016:

56 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) include, among others, additional minimum pension, death and disability benefits, The ERS provides basic benefits under the defined benefit program principally Administered Pension Benefits). The System Administered Pension Benefits for the retirees and beneficiaries (collectively referred to herein as System consisting of a retirement annuity and death and disability benefits (collectively referred to herein as Basic System Pension Benefits). The ERS also administers benefits granted under various special laws that have provided additional benefits Plan members were eligible for merit annuity as long as they have 30 years or maximum of 75% of the average compensation. more of credited service. The annuity is limited to a minimum of 65% and a contribution, Christmas bonus, and medication bonus. death, vested and no vested withdrawals. Employees retiring prior to July 1, 2013, adjustment (COLAs), benefits due to death and disability, medical insurance plan qualifying employees include additional minimum pension, ad-hoc cost-of-living annuity benefits are subject to $500 minimum monthly. Other benefits for Retirement benefits for municipality employees include retirement, disability, and b. Benefits Provided assets corresponding to the defined benefit structure of Act 447 and Act 1 of 1990 separate accounts for System 2000 Participants. Contributions received from System 2000 Participant. System 2000 Participants do not benefit from any System 2000 Participants are used to reduce the accumulated unfunded pension System 2000 Participants are pooled and invested by the ERS together with the lump sum distribution alternative and substitute it for a life annuity payable to the who entered the ERS on or after January 1, 2000 (System 2000 Participants) balance plan (this new benefit structure is referred to as System 2000). Members and the defined contribution structure of System 2000, as amended by Act 3- participants and, prospectively, establish a new benefit structure similar to a cash participate solely in System Act amended the law to eliminate the employer contributions. Instead, employer contributions made on account of benefit obligation of the ERS. System 2000 is not a separate plan as there are no 2013, will be paid from the same pool of assets of the ERS. In 1999, Act 447 was amended to close the defined benefit program for new benefits, as provided by Act No. 1 of February 16, 1990 (Act 1 of 1990). Participants) were subject to a longer vesting period and a reduced level of

57 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, ) Eliminated the merit annuity available who joined the ERS prior to April 1, defined contribution plan similar to System ) Transitioning active participants under Act No. 1 and Act No. 447 to a age 60 to age 65. 4) The retirement age for System 2000 participants is gradually increased from age 58to age 61. 3) The retirement age for Act No. 447 participants is gradually increased from month. 2) Increased the minimum pension for current retirees from $400 to $500 per through June 30, 2013 were frozen, and thereafter, all future benefits will participants, and will be paid a retirement through lifetime annuity. accrue under the defined contribution formula used for System 2000 No. 447 of 1951 and Act No. 1 of 1990, all requirement benefits accrued 1) For active participants of the contributory defined benefit program under Act limited to, the following: the provisions of the different benefit structures under the ERS, including, but not a reform of the ERS. Act No. 3 became effective on July 1, 2013 and amended Act No. 3, as enacted by legislation in April 4, 2013, constituted a comprehensive System Administered Pension Benefits for other covered employees are required Municipality are obligations of the Municipality. Most of the funds used to cover the to be paid by the Commonwealth. by the participating employers, including the Municipality. The System The System Administered Pension Benefits are funded on a pay-as-you-go basis Administered Pension Benefits corresponding to former employees of the existing retirees while eliminating the benefits for all future retirees (those retiring 2013 and Act amended the various laws providing some of these after June 30, 2013 and July 31, 2014). ad-hoc cost-of-living adjustments and summer and Christmas bonuses. Act 3- System Administered Pension Benefits to reduce some of the amounts payable to

58 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Required employee contributions for the ERS vary according to how the individual employee s retirement benefits are coordinated with social security benefits. Act increased the employee contribution from 8.275% to 10% of covered payroll (Act 116), the statutory employer contribution for the ERS increased from a for fiscal year 2016 is %. actuarial requirements. As of July 1, 2011, after the adoption of Act 116 of July 6, continue to increase annually until fiscal year The employer contribution rate to the ERS by employers and employees, are determined by law rather than by minimum of 9.275% to a minimum of % of covered payroll, and will Retirement and related benefits provided by the ERS, and required contributions c. Contribution Requirements 12) Survivor benefits were modified. insurance policy. 11) Disability benefits were eliminated and substituted for a mandatory disability employer contribution saving will be contributed to the ERS. eliminated for future retirees. The summer bonus was eliminated. Resulting bonus payable to current retirees was reduced from $600 to $200 and was special laws, including Christmas and summer bonuses. The Christmas 10) Eliminated or reduced various retirement benefits previously granted by sum distribution, instead, they will be paid through a lifetime annuity. 9) For System 2000 participants, the retirement will no longer be paid as a lump 8) The employee contribution rate was increased from 8.275% to 10%. which will be age 58. new state and municipal police officers, firefighters, and custody officers, 7) The retirement age for new employees was increased to age 67, except for

59 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) to the statutorily required contributions, with a liability recorded for any unpaid The pension costs recognized in the accompanying financial statements are equal June 30, Also, additional disclosures required by GASB 68 as well as statements. required supplementary information have been omitted from these basic financial Governmental Accounting Standards Board, Accounting and Financial Reporting the accompanying governmental activities financial statements do not have any proportionate share of the net pension liability, deferred inflow of resources, and deferred outflow of resources in the statement of net assets as of July 1, 2015 and adjustments that will be necessary for the Municipality to account for its As of the date of the release of this report, the ERS has not issued its 2015 basic for Pensions an amendment of GASB Statement No. 27(GASB 68). Therefore, financial statements, nor has it provided the Municipality with the required information to implement the requirements of Statement No. 68 of the criteria as is the case of the ERS. pension plans administered as trusts or equivalent arrangements that meet certain and Local Governmental Employers, as well as the requirements of Statement No. (GASB 68) became effective for the year ended June 30, This Statement 50, Pension Disclosures, as they relate to pensions that are provided through Statement No. 68 of the Governmental Accounting Standards Board, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No.27 replaces the requirements of Statement No. 27, Accounting for Pensions by State liability of $30.1 billion. position of $127 million, total pension liability of $30.2 billion and a net pension The actuarial valuation of the Basic System Benefits and System Administered Benefits as of June 30, 2014 (most recently available) reflects a fiduciary net Plans (GASB 67). GASB 67 specifies certain significant changes for financial Governmental Accounting Standards Board, Financial Reporting for Pension valuation as of June 30, 2013, due to the adoption of Statement No. 67 of the reporting purposes for the ERS. The ERS actuarial valuation as of June 30, 2014 differs from the actuarial and Deferred Inflows of Resources Related to Pensions d. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources

60 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) The Municipality s management and outside counsels believe that is probable that any potential liability that might exist, if any, in excess of the insurance, will not The Municipality is a defendant and/or co-defendant in various lawsuits which claims for actual damages. Some of these lawsuits are covered by insurance. affect significantly the financial position of the Municipality. b. Litigations expenditure disallowances under the terms of the grants, management believes that any required reimbursements would not be material. review and audit by the grantor agencies. Although such audits could generate The Municipality receives Federal Grants for specific purposes that are subject to a. Federal and State Grants 22. CONTINGENCIES During the year ended June 30, 2000, the Governor of the Commonwealth imposed by the Municipality amounted to $402,593 for the fiscal year ended June 30, implementation and administration of the Healthcare Reform. Such contributions are to the municipalities of Puerto Rico an annual contribution to subsidy the costs of the required to be disbursed from general fund operating budget. Total contribution made 21. HEALTHCARE COSTS municipalities. who is responsible for purchasing all property and casualty insurance policies of all Division submits the data regarding the Municipality s properties to the Area of Public Management Division compiles the information of all property owned and its of assuring that the Municipality s property is properly insured. Annually, the Risk The Risk Management Division of the Municipality s Legal Department is responsible respective market value. After evaluating this information, the Risk Management Insurance at the Department of the Treasury of the Commonwealth of Puerto Rico 20. RISK MANAGEMENT required contributions, which is not in accordance with accounting principles generally accepted in the United States of America.

61 23. COMMITMENTS NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, approximately $36,145. Total income from leases during the year ended June 30, 2016 was under operating lease agreements with terms ranging from one to five years. The Municipality leases spaces in its Market Place and Transportation center Leasing Arrangement with the Municipality as Lessor: b. Operating Leases affected the Commonwealth of Puerto Rico, including lack of market access and analysis to determine whether any adjustments were necessary. GDB. GDB s deteriorated financial condition and potential inability to comply with GDB s financial condition and liquidity has been significantly deteriorated during Municipality s deposit on GDB. The Municipality has not prepare an impairment events described above, is probable that a loss contingency exists over the fiscal years 2015 and 2016 as a result of some of the same factors that have municipality s financial condition, deposits and liquidity. Due to the conditions and all of its legal and financial obligations could further adversely affect the the inability of the Commonwealth and its instrumentalities to repay their loans to transfer of deposits from GDB, and imposed a moratorium on debt obligations of of loan disbursements by GDB, imposed restrictions on the withdrawal and Pursuant to recently enacted legislation, the Governor has ordered the suspension sufficient liquid financial resources to meet obligations when they come due. GDB faces significant risks and uncertainties and it currently does not have GDB, among other measures. GDB s ability to continue as a going concern. June 30, 2014 dated June 30, 2016 express on his opinion substantial doubt as to of some of the municipality s funds. These deposit with GDB are uninsured and The Government Development Bank for Puerto Rico (GDB) serves as depository uncollaterized. The last financial statement of Puerto Rico Commonwealth at Continue as a Going Concern a. Government Development Bank for Puerto Rico-Uncertainty about Ability to

62 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, 2016 The Municipality retains title to its leased property. The lessee pays taxes, licenses, insurance, and maintenance costs of the leased assets. Leasing arrangements with the Municipality as lessee: The Municipality leases office space and office equipment under operating lease agreements, which generally have terms of one year or less and are automatically renewed for the same terms. Management believes that the summary of the future minimum rental commitments under non-cancelable equipment leases with terms exceeding one year is not significant. c. Construction The Municipality of Morovis had several planned construction projects as of June 30, These projects are evidenced by contractual commitments with contractors. The construction projects are commitments of the Other Governmental Funds that amounted to approximately $933, RESTATEMENT The beginning net position was adjusted to correct an error, as follows: Governmental Activities Net position, as previously reported Overstated accrued interest Beginning net position, as restated $ 20,014,250 1,024,794 $ 21,039, SUBSEQUENT EVENTS In preparing these financial statements, the Municipality has evaluated events and transactions for potential recognition or disclosure through December 16, 2016, the date on which the financial statements were available to be issued

63 PART II REQUIRED SUPPLEMENTARY INFORMATION

64 $ FOR THE FISCAL YEAR ENDED JUNE 30, 2016 Variance with BUDGETARY COMPARISON SCHEDULE - GENERAL FUND See notes to Budgetary Comparison Schedule. Total expenditures as reported on the statement of revenues, expenditures, and changes in fund balances S 10,128,576 Non-budgeted expenditures (1,672,450) Current year encumbrances recorded as expenditures for budgetary purposes Differences- budget to GAAP: 212,628 Actual amounts (budgetary basis) total changes to appropriations from the budgetary comparison schedule Net change in payables Prior year encumbrances recorded as current year expenditures for GAAP basis (194,075) (123,380) $ 11,905,853 Uses/outflows of resources: Total revenues as reported on the statement of revenues, expenditures, and changes in fund balances $ 11,660,210 Non-budgeted revenues (11,494) Actual amounts (budgetary basis) available for appropriation from the budgetary comparison schedule Net change in receivables 316,243 Differences- budget to GAAP; $ 11,355,461 Sources/Inflows of resources: Explanation of Differences: revenues $ - $ - (550,392) $ (550,392) Excess of expenditures over Health and welfare Total expenditures 240, , ,635 24,267 Public safety General government Current: Intergovernmental revenues: Recreation Charges for services and rent State contributions Licenses and permits Sales and use taxes Municipal license taxes Property taxes Interest, fines, and penalties Other revenues REVENUES Total revenues EXPENDITURES Public works 80,345 53,509 53, ,500 19,413 21,112 1,699 1,094, , ,280 9,053 70, , ,751 7, , , ,149 37, , , ,119 8,169 7,754,794 7,621,835 7,621,835 7,704,594 8,011,887 8,734,706 (722,819) 699, , ,062 49,978 39,500 22,107 27,928 5,821 11,296,979 11,282,662 11,355,461 72,799 1,574,279 1,536,921 1,508,083 28,838 11,296, ,282,662 11,905,853 (623,191) $ 1,734,729 $ 1,918,145 $ 1,918,145 $ - Original Final Budgeted Amounts (Budgetary Basis) (See Note 1) (Negative) Positive Actual Amounts Final Budget- COMMONWEALTH OF PUERTO RiCO

65 STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY NOTE TO BUDGETARY COMPARISON SCHEDULE - FOR THE FISCAL YEAR ENDED JUNE 30, 2016 GENERAL FUND end encumbrances, and may include any additional information requested by the approved budgets, which are subject to the approval of the Municipal Legislature. The Municipal Legislature. The Mayor may request subsequent amendments to the The annual budget may be updated for any estimate revisions as well as fiscal year discuss and approve the Project with modifications. The Municipal Legislature may adopted prior to the end of the deadlines refined to above, the annual budgets for the amend the budgets submitted by the Mayor but may not increase any items so far to renewed for the ensuing fiscal year until the Municipal Legislature and the Mayor operations and other purposes until the new budgets are approved. such deficit. After the Municipal Legislature modifies and preliminarily approves the rejects the Project, the Municipal Legislature will have up to 8 days to adopt or reject the recommendations or objections of the Mayor. The approved Project is sent again to the Mayor, which then would have 3 days to sign and approve it. If the budgets are not preceding fiscal year, as approved by the Legislature and the Mayor, are automatically approve new budgets. This permits the Municipality to continue doing payments for its their entirety and return it to the Municipal Legislature with his objections. If the Mayor within 6 days. The Mayor may decrease or eliminate any line item but may not increase or insert any new line item in the budgets. The Mayor may also veto the budgets in Project, the modified Project is sent back to the Mayor for his approval or rejection cause a deficit without imposing taxes or identifying other sources of revenue to cover The Municipal Legislature has ten (10) business days, but not later than June 13, to comments and suggestions to the Mayor on or before June 13. May 10 and May 15, respectively. The Commissioner preliminarily verifies that the budgetary resolution project (the Project) to the Commissioner of Municipal Affairs of The Mayor must submit, for the fiscal year commencing on the next July 1, an annual the Commonwealth (the Commissioner) and the Municipal Legislature no later than Project complies with all the applicable laws and regulations and may provide performance-based program budgeting and zero-based budgeting, and include estimates of revenues and other resources for the ensuing fiscal year under laws and estimated resources by source. The annual budgets are developed using elements of legally adopted budget is based on expected expenditures by the program and The Municipality prepares its annual budget for all of its operations and activities. Such regulations existing at the time the budgets are prepared. a. Budgetary Control MUNICIPALITY OF MOROV1S

66 FOR THE FISCAL YEAR ENDED JUNE 30, 2016 NOTE TO BUDGETARY COMPARISON SCHEDULE - GENERAL FUND (CONTINUED) appropriations, mainly capital projects appropriations, are continuing accounts for which Unencumbered appropriations and encumbrances lapse at fiscal year-end. Other or otherwise processed for payment. Municipality, and certain other liabilities, are not recognized until they are encumbered of the fiscal year. Amounts required to settle claims and judgments against the the appropriation prior to actual expenditure. In the governmental funds, encumbrance orders, contracts and other commitments of appropriated resources as deductions from accounting is a significant aspect of budgetary control. Accordingly, expenditures are appropriations and encumbrances are established to lapse one fiscal year after the end The Municipality uses encumbrance accounting to record the full amount of purchase generally recorded when the related expenditure is incurred or encumbered. Available accounting, which is not in accordance with GAAP. According to the budgetary basis of accounting, revenue is generally recorded when cash is received, except in the case of finance budgetary excess of expenditures over revenues. are recorded as revenue in the following budget year. Borrowings may be used to municipal license taxes collected prior to June 30 but pertaining to the next fiscal year The Municipality s annual budget is prepared using the budgetary (statutory) basis of b. Budgetary Accounting provided. fiscal year unless the imposition of taxes sufficient to cover said appropriations is year shall not exceed the total revenues, including available surplus, estimated for said exceed appropriations) is at the functions/program level (general government, public The legal level of budgetary control (i.e., the level at which expenditures may not legally safety, urban affairs, culture and recreation, health and welfare, urban development, economic development, education, and capital outlays) within the general fund. Under the laws and regulations of the Commonwealth, the appropriations made for any fiscal The Municipal Legislature may transfer amounts among programs within and among funds. Mayor may transfer unencumbered appropriations within programs and among funds. expenditures plus encumbrances may not exceed budgeted amounts at the spending control is maintained. For day-to-day management control purposes, expenditure-type level of each cost center (activity within a program within a fund). The Municipality s Department of Finance have the responsibility to ensure that budgetary

67 NOTE TO BUDGETARY COMPARISON SCHEDULE - GENERAL FUND FOR THE FISCAL YEAR ENDED JUNE 30, 2016 (CONTINUED) encumbrances in the general fund amounting to $56,236. for the ensuing fiscal year. At June 30, 2016, the Municipality has outstanding The accompanying supplemental budgetary comparison schedule - general fund provides information about the general funds original budget, its amendments, and the actual results of operations of the general fund under the budgetary basis of accounting the Municipal Legislature has authorized that an unspent balance from the prior year be carried forward and made available for current spending.

68 PART III - SINGLE AUDIT SECTION

69 Federal Disbursements? $ $ Expenditures 331,000 1,082,018 1,700 1,414,718 75,508 75, , ,290 1,979,516 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE FISCAL YEAR ENDED JUNE 30, 2016 Federal Grantor/Pass-Through Grantor/Program Title Federal CFDA Number Pass-Through Entity Identifying Number Passed Through Subrecepient U.S. Department of Housing and Urban Development Section 8 Housing Choice Vouchers Pass-through Commissioner Office of Municipal Affairs Community Development Block Grants/State s Program Pass-through the Office Families of Administration for Children and Emergency Solutions Grant Program (ESG) Subtotal U.S. Department of HUD (HUD) U.S. Department of Agriculture Pass-through Puerto Rico Department Child and Adult Care Food Program Subtotal U.S. Department of of Agriculture Education U.S. Department of Health and Human Services (HHS) Pass-through the Office Families Child of Administration for Children and Care and Development Block Grant Subtotal U.S. Department of HHS TOTAL See notes to Schedule of Expenditures of Federal Awards. -64-

70 FOR THE FiSCAL YEAR ENDED JUNE 30, 2016 SIGNIFICANT ACCOUNTING POLICIES NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS The Municipality has elected to use the ten (10) percent of the minimum indirect cost rate allowed under the Uniform Guidance. 3. INDIRECT COST RATE Federal expenditures included in other governmental funds $ within: Federal expenditures per basic financial statements included Total federal expenditures per schedule $ Expenditures Schedule of Expenditures of Federal Awards is as follows: statements. The reconciliation of expenditures in the basic financial statements to the The expenditures of the schedule are included in the Municipality s basic financial 2. BASIS OF PRESENTATION generally accepted in the United States of America. modified accrual basis of accounting in accordance with accounting principles activity of the Municipality of Morovis federal award programs presented on the The accompanying Schedule of Expenditures of Federal Awards is a summary of the

71 Accountants Cerfflied Public Arrniinlarulsand Business Advisors PeoRi(vBnsrdoIuertthcdPuhhc Ld r LIZ. lye, ye is a deficiency, or a combination of deficiencies, in internal control that is less severe than A deficiency in internal control exists when the design or operation of a control does not will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a reasonable possibility that a material misstatement of the entity s financial statements weakness is a deficiency, or combination of deficiencies, in internal control, such that there functions, to prevent, or detect and correct, misstatements on a timely basis. A material allow management or employees, in the normal course of performing their assigned an opinion on the effectiveness of the Municipality s internal control. Municipality s internal control over financial reporting (internal control) to determine the on the effectiveness of the Municipality s internal control. Accordingly, we do not express audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but no for the purpose of expressing an opinion In planning and performing our audit of the financial statements, we considered the Internal Control over Financial Reporting deposits at GDB. because we were unable to determine the estimated loss from loss contingency for the report on the debt service, loan fund, and other governmental funds were qualified we were unable to obtain sufficient appropriate audit evidence about the proportional share June 30, 2016, and the related notes to the financial statements, which collectively the financial statements of the governmental activities, each major fund, and the aggregate Government Auditing Standards issued by the Comptroller General of the United States, comprise the Municipality s basic financial statements, and have issued our report thereon dated December 16, The report on the governmental activities was qualified because used to determine the deferred outflows/inflows of resources and net pension liability. The United States of America and the standards applicable to financial audits contained in We have audited, in accordance with the auditing standards generally accepted in the remaining fund information of the Municipality of Morovis, as of and for the year ended To the Honorable Mayor and Municipal Legislature Municipality of Morovis Morovis, Puerto Rico INDEPENDENT AUDITORS REPORT ON internal CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATIERS BASED ON AN AUDIT OF FINANCiAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS ra o. CPA 7A,raida Cray Ciwdin MCPAe P vaiccuinpanita Pratlice Section (PCI S) (\ + D J1- CPA Orbndo lois ()rtiz Cabrcni Amcrkan Institute of Certified Public CPA Marco Antonio Hivtra Accountants luntg (AILPA) SU1LC I 52 Pt) Box 10250, San iur P.R i8)9ab 7251) Phone (/87) Sf8524, Oax (787)

72 Our consideration of internal control was for the limited purpose described in the first that might be material weaknesses or, significant deficiencies and therefore, material paragraph of this section and was not designed to identify all deficiencies in internal control Decemberl6,2016 L)L.Q -IQ San Juan, Puerto Rico effectiveness of the entity s internal control or on compliance. This report is an integral part Purpose of this Report accompanying Schedule of Findings and Questioned Costs. Municipality s response was Municipality s Response to Findings statements are free from material misstatement, we performed tests of its compliance with statement amounts. However, providing an opinion on compliance with those provisions Compliance and Other Matters weaknesses or significant deficiencies may exist that were not identified. We did identify governance. a material weakness, yet important enough to merit attention by those charged with certain deficiency in internal control, described in the accompanying schedule of findings and questioned costs that we consider to be material weakness as items and As part of obtaining reasonable assurance about whether the Municipality s financial certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial was not an objective of our audit, and accordingly, we do not express such an opinion. Municipality s response to the findings identified in our audit is described in the not subjected to auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. The stamp E of Society of Certified Pul was affixed to the origiaifthi r , f f 67 ORTT, RIVERA, RIVERA & CO. cri-:!)iil3i,i(a cunlanis AI I,A!)111S1 viurs Suic 152 I I3oc lflis(). Swi Jun. R. t)rh_725i. ili)iic 757) i, lax )757) 774-U5

73 Qrti7 Rivera Rivere & Co Certified Public Accountants and Business Advisors Slcmlxis; CPA Orlando Luis 0012 Cabrera American lnsiiiuie of Certified Public CPA Maiio Ajitonlu HkL I Accountants (At( PA) CPA Zoraida Cr07 Claudo Al(lWs Pijiat, C mpanlrs Praiijri Section (?CPS) Puerto Rico Hoard of ( enified Public Accountants INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Honorable Mayor and Municipal Legislature Municipality of Morovis Morovis, Puerto Rico Report on Compliance for each Major Federal Program We have audited Municipality of Morovis compliance with the types of compliance requirements described in the 0MB Compliance Supplement that could have a direct and material effect on each of Municipality s major federal programs for the year ended June 30, Municipalit f s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal program. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of Municipality s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in GovernmentAuditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U. S. code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for the Federal Awards (Uniform Guidance). Those standards and Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Municipality s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances Sn. 152 P1) Isox 11)250 San JL.J P OIY)J 1 )0 IPO ii (1,) 15b-852 lax 1781) 2744nb

74 We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of Municipality s compliance. Opinion on Each Major Federal Program In our opinion, the Municipality complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, Report on Internal Control over Compliance Management of the Municipality is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Municipality s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Municipality s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified ORTTZ, RIVERA. RIVERA & CO. ( I R1 l I)PiflLI(A:(fli N!\.iS.\i IL P ) 7fl)SO Si R (( I 7) hunt (Thi) 7 I) I u(th]) 171 ))1

75 The of this report on internal control over compliance is solely to of our of internal control over and the of that on the of the Uniform Guidance. Accordingly, this report is not suitable for any scope based purpose San December 16, testing requirements other purpose. Juan, Puerto 2016 Rico The stamp E of I Society of Certified Publi was affixed to the origi compliance results I describe the testing ORTIZ, RIVERA, RIVERA & CO. ( I IIFfl iiirl1 AC(Ol L\NFS 1U \T)I)II) SIIRVII ES 152, I) Hi 71)251). Sin )iwn, PR I)1P)7]25() PhT! ]h]) ] lnx (7h7i (2

76 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2016 SUMMARY OF AUDITOR S RESULTS Financial Statements Type of auditors report issued: Opinion Unit Type of Opinion Government ActivitiesQualified General Fund Debt Fund Loan Fund Remaining Fund Information Services Aggregate Unmodified Qualified Qualified Qualified Internal control over financial reporting: Material weakness (es) identified? X Yes No Reportable considered condition(s) identified to that are not be material weakness?yes X None reported Noncompliance material to financial noted? statements X Yes No Federal Awards Internal control over major programs: Material weakness (es) identified? Yes X No Significant deficiency (is) identified? Yes X None reported Type of auditors report major programs: issued on compliance for Unmodified opinion Any audit findings in reported disclosed that are accordance with the 2 CFR required to be (a)? Yes X No

77 Identification of major programs: SCHEDULE OF FINDiNGS AND QUESTIONED COSTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, incurrence of obligations without the proper consideration of current and future available resources. The Mayor and the Finance Director should improve the budgeting procedures to avoid continuing with operating deficit each fiscal year. The deficit is caused by the overestimation of budgeted revenues and by the Cause appropriations in excess of available resources. provide for sufficient resources during the next fiscal year period in order to cover provided for the estimation of future revenues in order to avoid budget Municipalities of Puerto Rico (The Regulation) states that special care must be such deficit. Section 3 of the Revised Regulation over Basic Standards for amended, establishes that municipalities with deficits at their closing dates must Article 7.011(a) of Autonomous Municipal Act (Law 81 of August 30, 1991), as Criteria $783,214. Additional procedures should be implemented in order to eliminate the As of June 30, 2016, the Municipality closed with an accumulated deficit of deficit. Condition : General Fund Deficit Material Weaknesses FINANCIAL STATEMENTS FINDINGS Audited qualified as low-risk auditee? Yes X No $750,000 Dollar threshold used to distinguish between type A and Type B programs: Community Development Block Grant CFDA Numbers Name of Federal Programs or Cluster

78 Effect Finance Director. Based on Section 19 of the Regulation for the Municipal funds or on municipal accounts. expectations by $0.7 million, a 7% budget shortfall. expenditures versus final operating results: Manaaement Resionse accumulated deficit, such as continuing reducing the expenditures. Recommendation represents expended funds in excess of the appropriations. SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) FOR THE FISCAL YEAR ENDED JUNE 30, 2016 The Municipality maintains an accumulated deficit of the General Fund, which We recommend the implementation of additional actions in order to decrease the The Municipality implemented internal control procedures in order to reduce the deficit as soon as be possible : Budget Condition As of June 30, 2016, the Municipality did not include in the budget, expenditures related to some payment agreements deducted from the advance of property tax collections from the Municipal Revenue Collection Center (the CRIM ). This situation caused the shortfall of some budgeted expenditures accounts. The following deficiency was noted based on our comparison of budgeted For general government expenditures, the Municipality failed to meet its Criteria Article (b) of the Municipalities Law establishes that the Municipality cannot obligate or spend funds in excess of the appropriations for the ensuing fiscal year. In addition, according to Chapter IV, Section 17, of the Basic Standards, the responsibility of oversight to prevent deficits in any municipal fund rests with the Administration the Municipality should not make payments that create a shortfall of

79 SCHEDULE OF FINDiNGS AND QUESTIONED COSTS (CONTINUED) FOR THE FiSCAL YEAR ENDED JUNE 30, 2016 Cause The Budget Department failed to give follow-up to obtain the necessary documents before the preparation and approval of the general fund s budget. The Finance Director did not register the payment agreements to follow adequate budgeting procedures. Effect The expenditures exceed the budgeted amount and failed to meet the expectations. Recommendation In order to avoid this situation, the Municipality should review and amend the annual budget as current information regarding payment agreements arises. Manaaement ResDonse The Municipality implemented the procedure of registering payment agreements into the annual budget in order to avoid the situation. III. FEDERAL AWARDS FINDINGS AND QUESTIONED COSTS None

80 SCHEDULE OF STATUS OF PRIOR YEAR AUDIT FiNDINGS AND QUESTiONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 2016 The Municipality has not prior year findings and questioned costs to give follow up