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

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

2 BASIC FINANCIAL STATEMENTS WITH ADDITIONAL REPORTS AND INFORMATION REQUIRED BY THE SINGLE AUDIT ACT Commonwealth of Puerto Rico Municipality of Coamo Honorable Juan C. García Padilla Mayor Municipality of Coamo, P.O. Box 1875, Coamo, Puerto Rico 00769

3 Basic Financial Statements with additional reports and information required by the Single Audit Act Independent Auditors Report Required Supplementary Information: Pages Management s Discussion and Analysis Basic Financial Statements: Government-Wide Financial Statements: Statement of Net Position Statement of Activities Governmental Fund Financial Statements: Balance Sheet Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds Reconciliation of the Balance Sheet Governmental Funds and the Statement of Net Position Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds and the Statement of Activities Notes to Basic Financial Statements Required Supplementary Information: Budgetary Comparison Schedule - General Fund Notes to Budgetary Comparison Schedule General Fund Schedule of the Municipality's Proportionate Share of the Net Pension Liability Schedule of the Municipality's Contributions... 88

4 Basic Financial Statements with additional reports and information required by the Single Audit Act Pages Other Supplementary Information: Financial Data Schedule-Balance Sheet. 90 Financial Data Schedule-Statement of Revenues and Expenses Notes to the Financial Data Schedules Schedule of Expenditures of Federal Awards Notes to the Schedule of Expenditures of Federal Awards 98 Internal Control and Compliance with Laws and Regulations: Independent Auditors Report on internal control over financial reporting and on compliance and other matters based on an audit of financial statements performed in accordance with Government Auditing Standards Independent Auditors Report on compliance for each major program and on internal control over compliance in accordance with Uniform Guidance Findings and Questioned Costs: Schedule of Findings and Questioned Costs Corrective Action Plans Schedule of Prior Years Audit Findings

5 To the Honorable Mayor and The Municipal Legislature Municipality of Coamo Coamo, Puerto Rico Report on the Financial Statements INDEPENDENT AUDITORS REPORT We have audited the accompanying financial statements of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Municipality of Coamo, Puerto Rico (the Municipality), as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the Municipality s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for preparing and fairly presenting these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes designing, implementing, and maintaining internal control relevant to preparing and fairly presenting financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit requires obtaining evidence about financial statement amounts and disclosures. The procedures selected depend on our judgment, including assessing the risks of material financial statement misstatement, whether due to fraud or error, in assessing those risks, we consider internal control relevant to the Municipality s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not to the extent needed to opine on the effectiveness of the Municipality s internal control. Accordingly, we express no opinion. An audit also includes evaluating the appropriateness of management s accounting policies and the reasonableness of their significant accounting estimates, as well as our evaluation of the overall financial statement presentation. We believe the audit evidence we obtained is sufficient and appropriate to support our audit opinions. Summary of Opinions Opinion Unit Governmental Activities Aggregate discretely presented component unit General Fund Debt Service Fund Special Revenue Fund Federal Grants Capital Projects Fund State & Local Grants Aggregate Remaining Fund Information Type of Opinion Adverse Adverse Unmodified Adverse Qualified Adverse Unmodified 1

6 INDEPENDENT AUDITORS REPORT (CONTINUED) Basis for Adverse Opinion on the Governmental Activities Noncompliance with GASB Statement No. 34 Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments The Municipality has not maintained complete and adequate records in order to obtain sufficient and competent evidential matter of the Capital Assets reported value in the accompanying statement of net position of the governmental activities and, accordingly the amount that would affect the assets, net position, and expenses of the governmental activities is not reasonably determinable. Noncompliance with GASB Statement No. 68 Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 The Municipality s employees are provided with defined benefit pensions through cost sharing multiple employer pension plan administered by the Employees Retirement System Administration (ERS) of the Government of the Commonwealth of Puerto Rico. The deferred outflows/inflows of resources and the net pension liability of $1,751,282, $604,102 and $28,843,675, respectively, reported in the government-wide Statement of Net Position as of June 30, 2016, and the pension expense of $1,451,579 for the current period change of that liability in government-wide Statement of Activities, were derived from calculations made by the Municipality s Consultant based on the unaudited data reported in the Actuarial Report issued by (ERS) for the fiscal year ended June 30, These amounts represent 100 percent, 50 percent, and 100 percent of the deferred outflows of resources, liabilities and deferred inflows of resources as of June 30, 2016, respectively, and 7 percent of the expenses for the fiscal year then ended. We were unable to obtain sufficient appropriate audit evidence about the proportional share used to determine the deferred outflows/inflows of resources, net pension liability and pension expense of the governmental activities. Consequently, we were unable to determine whether any adjustments to these amounts were necessary. Impairment loss on deposits with fiscal agent On October 18, 2016, the Puerto Rico Department of Treasury issued Circular Letter No Impairment Loss on Deposits with the Governmental Development Bank of Puerto Rico. This Circular Letter instructs the public corporations and municipalities of the Commonwealth to recognize an impairment loss on the deposits maintained with the Governmental Development Bank (GDB). The deposits with the GDB are not insured nor collateralized with investments; therefore, these deposits are exposed to a significant custodial credit risk: the risk that another party to a deposit or investment transaction (counterparty) will not fulfill its obligations; for example, the issuer of a debt instrument may not redeem the instrument at maturity. Due to the financial and fiscal crisis faced by the Commonwealth and certain public entities, they have been unable to repay their loans and lines of credit with the GDB, seriously affecting the bank s liquidity and ability to repay its own debts. As a result, the GDB was unavailable to pay on May 1, 2016 the principal due on its bonds and notes and the interest payments due thereafter. On April 2016, the Governor of Puerto Rico declared the GDB in a state of emergency and issued a moratorium on the payments of its debts. Also, the GDB has not issued its financial statements for the fiscal years ended on June 30, 2015 and As a result of these events, the management of the GDB believes that a substantial doubt exists as to the bank s ability to continue as a going concern. 2

7 INDEPENDENT AUDITORS REPORT (CONTINUED) However, the management of the Municipality has not complied with the accounting and financial reporting requirements for the recognition of an impairment loss on deposits with a significant custodial credit risk. Accounting principles generally accepted in the United States of America require that nonparticipating interest-earning investment contracts, such as nonnegotiable certificates of deposit with redemption terms that do not consider market rates, should be reported using a cost-based measure, provided that the fair value of those contracts is not significantly affected by the impairment of the credit standing of the issuer or other factors. The amount by which this departure would affect the assets and net position of the Municipality s governmental activities is not determinable. The financial statements referred to above include only the primary government of the Municipality of Coamo which consist of all funds, organizations, institutions, agencies, departments, and offices that comprise the Municipality s legal entity. These primary government financial statements do not include financial data for the Municipality s legally separate component units, which accounting principles generally accepted in the United States of America require to be reported with the financial data of the Municipality primary government. As a result, the primary government financial statements do not purport to, and do not present fairly the financial position of the reporting entity of the Municipality of Coamo, as of June 30, 2016, the changes in its financial position or, where applicable, its cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Adverse Opinion In our opinion, because of the matters discussed in the above section of Basis for Adverse Opinion on the Governmental Activities previously referred to do not present fairly, in all material respects, the financial position of the governmental activities of the Municipality of Coamo, Puerto Rico, as of June 30, 2016, and the changes in financial position, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Adverse Opinion on Debt Service and Capital Projects Fund State & Local Grants Impairment loss on deposits with fiscal agent As previously explained in the Basis for Adverse Opinion on Governmental Activities paragraph, management of the Municipality has not complied with the accounting and financial reporting requirements for the recognition of an impairment loss on deposits with a significant custodial credit risk. Accounting principles generally accepted in the United States of America require that nonparticipating interest-earning investment contracts, such as nonnegotiable certificates of deposit with redemption terms that do not consider market rates, should be reported using a cost-based measure, provided that the fair value of those contracts is not significantly affected by the impairment of the credit standing of the issuer or other factors. The amount by which this departure would affect the assets and fund balance of the Municipality s Debt Service and Capital Projects Fund State & Local is not determinable. Adverse Opinion In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion on Debt Service and Capital Projects Fund State & Local Grants paragraph, the financial statements referred to above do not present fairly the financial position of the Municipality of Coamo, as of June 30, 2016, or the changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. 3

8 INDEPENDENT AUDITORS REPORT (CONTINUED) Basis for Qualified Opinion on Special Revenue Fund -Federal Grants Impairment loss on deposits with fiscal agent As previously explained in the Basis for Adverse Opinion on Governmental Activities paragraph, the management of the Municipality has not complied with the accounting and financial reporting requirements for the recognition of an impairment loss on deposits with a significant custodial credit risk. Accounting principles generally accepted in the United States of America require that nonparticipating interest-earning investment contracts, such as nonnegotiable certificates of deposit with redemption terms that do not consider market rates, should be reported using a cost-based measure, provided that the fair value of those contracts is not significantly affected by the impairment of the credit standing of the issuer or other factors. The amount by which this departure would affect the assets and fund balance of the Municipality s Special Revenue Fund Federal Grants is not determinable. Qualified Opinions In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion on Special Revenue Fund Federal Grants paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of the Special Revenue Fund Federal Grants of the Municipality of Coamo, Puerto Rico, as of June 30, 2016, and the changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Unmodified Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the General Fund and the aggregate remaining fund information of the Municipality of Coamo, Puerto Rico, as of June 30, 2016, and the respective changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 6 through 18 and Budgetary Comparison information on page 84, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers them to be essential parts of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the supplementary information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 4

9 INDEPENDENT AUDITORS REPORT (CONTINUED) Management has omitted historical pension information, as stated in GASB Statement No. 68, that accounting principles generally accepted in the United States of America 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 Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Municipality of Coamo s basic financial statements. The accompanying supplementary information Financial Data Schedules shown in pages 90 through 92 are presented for purposes of additional analysis as required by the U.S. Department of Housing and Urban Development, Office of the Inspector General, and is not a required part of the financial statements. The accompanying supplementary information Schedule of Expenditures of Federal Awards shown in pages 95 through 97 is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, and is also not a required part of the basic financial statements. The Financial Data Schedules and the Schedule of Expenditures of Federal Awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Financial Data Schedules and the Schedule of Expenditures of Federal Awards are fairly stated in all material respects in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 29, 2017, on our consideration of Municipality of Coamo s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of this report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Municipality of Coamo s internal control over financial reporting and compliance. LÓPEZ-VEGA, CPA, PSC San Juan, Puerto Rico March 29, 2017 Stamp No of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. 5

10 Management s Discussion and Analysis 6

11 Management s Discussion and Analysis As management of the Municipality of Coamo (the Municipality), we offer readers the following discussion and analysis of the Municipality s financial activities reported in the accompanying basic financial statements as of and for the fiscal year ended June 30, We encourage readers to consider the information presented here in conjunction with additional information that is furnished in the accompanying financial statements, which follow this narrative. This MD&A is intended to serve as an introduction to the Municipality s basic financial statements. The Municipality s basic financial statements include three components: (1) government-wide financial statements (GWFS); (2) fund financial statements (FFS); and (3) notes to the financial statements (NBFS). This report also contains additional required supplementary information in addition to the basic financial statements themselves. The basic financial statements include two kinds of financial statements that present different views of the Municipality, the government-wide financial statements (GWFS) and the fund financial statements (FFS). These financial statements also include the notes to the basic financial statements (NBFS) that explain some of the information in the financial statements and provide more detail. FINANCIAL HIGHLIGHTS Government-Wide Highlights: Total Net Position of the Municipality Governmental Activities as of the end of the indicated fiscal year amounted to $6,249,795 or ten percent (10%) of the sum of total assets plus total deferred outflows of resources. The Municipality s Governmental Activities total Net Position increased by $2,545,082. At the end of fiscal year 2016, total liabilities of the Municipality Governmental Activities amounted to $57,585,568. Out of said amount, $53,535,048 corresponded to long-term liabilities of which $22,114,825 represented the outstanding balance of bonds issued, and $28,843,675 represented the Municipality s proportionate share of the net pension liability of the Puerto Rico Government Employees Retirement System. The Municipality continued to meet all debt service requirements, most of which was paid from self-generated revenues. Governmental Funds Highlights: As of the close of the current fiscal, the Municipality s Governmental Funds reported combined ending fund balances of $13,593,961 or $334,271 lower than the similar figure corresponding to the previous fiscal year At the end of the current fiscal year, the fund balance of the Municipality s General Fund amounted to $2,685,529, or $192,480 more than the previous fiscal year. The actual General Fund budgetary activities resulted in a favorable balance of $611,324. 7

12 Management s Discussion and Analysis (Continued) OVERVIEW OF THE BASIC FINANCIAL STATEMENTS The purpose of financial reporting is to provide external users of basic financial statements with information that will help them to make decisions or draw conclusions about the Municipality. There are many external parties that use the basic financial statements of the Municipality; however, these parties do not always have the same specific objectives. In order to address the needs of as many parties as reasonably possible, the Municipality, in accordance with required financial reporting standards, presents this Management s Discussion and Analysis (MD&A) as an introduction to the accompanying basic financial statements. This narrative represents an overview and analysis of the financial activities of the Municipality for the fiscal year ended June 30, Because this MD&A is designed to focus on the current year activities, resulting changes and currently known facts, we encourage readers to consider the information presented in this MD&A in conjunction with the additional information furnished in the accompanying basic financial statements. The Municipality s basic financial statements include three components: (1) government-wide financial statements (GWFS), (2) fund financial statements (FFS), and (3) notes to the basic financial statements (NBFS). This report also contains additional required information in addition to the basic financial statements themselves. These components are described below. The basic financial statements focus on: (1) the Municipality as a whole (government-wide financial reporting) and, (2) the Municipality s major individual governmental and proprietary funds. Both perspectives allow the users to address relevant questions, broaden a basis for comparison (year to year or government to government) and enhance the Municipality s accountability. The components of the basic financial statements are described below. a) Government-Wide Financial Statements The government-wide financial statements provide a broad view of the Municipality s operations in a manner similar to commercial enterprises. The statements provide both short and long-term information about the Municipality s financial position, which assists in assessing the Municipality s economic condition at the end of the fiscal year. These are prepared using the flow of economic resources measurement focus and the accrual basis of accounting. This basically means they follow methods that are similar to those used by most businesses. They take into account all revenue and expenses connected with the fiscal year even if cash involved has not been received or paid. The government-wide financial statements include two statements: 1. Statement of Net Position (SNP) This SNP presents the government s entire assets, deferred outflow of resources, liabilities and deferred inflow of resources with the difference between the two reported as net position. Over time, increases or decreases in the Municipality s net position may serve as a useful indicator of whether the financial position of the Municipality is improving or deteriorating. 8

13 Management s Discussion and Analysis (Continued) 2. Statement of Activities (SA) This SA presents information showing how the government s net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenue and expenses are reported in this statement for some items that will not result in cash flows until future fiscal periods (such as uncollected taxes and earned but unused vacation leave). This statement also presents a comparison between direct expenses and program revenues for each function of the Municipality. The government-wide financial statements can be found immediately following this MD&A. b) Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Municipality uses fund accounting to help ensure and demonstrate compliance with finance related legal requirements. The FFS focus on individual parts of the Municipality government, reporting the Municipality s operations in more detail than the government-wide financial statements. All of the funds of the Municipality have been accounted for in the governmental fund financial statements. 1. Governmental funds Most of the basic services provided by the Municipality are financed through governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the GWFS. However, unlike the GWFS, the FFS focus on near-term inflows and outflows of expendable resources. They also focus on the balances of expendable resources available at the end of the fiscal year. Such information may be useful in evaluating the government near term financing requirements. This approach is known as using the flow of current financial resources measurement focus and the modified accrual basis of accounting. These statements provide a detailed short term view of the Municipality s finances that assist in determining whether there will be adequate financial resources available to meet the current needs of the Municipality. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government near term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances (deficit) provide a reconciliation to facilitate this comparison between governmental funds and the governmental activities. These reconciliations are presented on the page immediately following each governmental fund financial statement. The Municipality has four major governmental funds. That is, each major fund is presented in a separate column in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances. The Municipality s four 9

14 Management s Discussion and Analysis (Continued) major governmental funds are: The General Fund The Special Revenue Fund Federal Grants The Capital Projects Fund State and Local Grants The Debt Service Fund The remaining non-major governmental funds are grouped and presented in a single column in the FFS. The FFS can be found immediately following the GWFS. c) Notes to Basic Financial Statements The NBFS provide additional information that is essential for a full understanding of the data provided in the GWFS and FFS. The NBFS can be found immediately following the basic financial statements. d) Required Supplementary Information Required Supplementary Information (RSI) follows the basic financial statements and notes to the financial statements. The RSI is mandated by the GASB and includes 1) General Fund budgetary comparison schedules reconciling the statutory to the generally accepted accounting principles fund balances at fiscal year-end and, 2) pension plan and employer trend information related to the net pension liability and employer contributions. FINANCIAL ANALYSIS OF GOVERNMENT-WIDE FINANCIAL STATEMENTS The Statement of Net Position serves as an indicator of the Municipality s financial position at the end of the fiscal year. In the case of the Municipality of Coamo, governmental activities assets and deferred outflows of resources exceeded total liabilities and deferred inflows of resources by $6,249,795 at the end of 2016, as compared with $3,704,713 at the end of the previous year. The following condensed Statement of Net Position of the Primary Government shows on a comparative basis the most important components of the $2,545,082 increase reflected in the governmental activities Net Position figure: Governmental activities June 30, June 30, Assets: Current assets $ 18,321,886 $ 20,345,954 Non-current assets: Capital assets, net 44,366,297 41,774,820 Total assets 62,688,183 62,120,774 Deferred outflows of resources: Deferred outflows for pensions 1,751,282 1,329,842 Total deferred outflows of resources 1,751,282 1,329,842 Liabilities: Current liabilities, excluding long-term obligations 4,050,520 5,554,869 10

15 Management s Discussion and Analysis (Continued) Long-term obligations: Due within one year 2,221,249 2,660,411 Due after one year 51,313,799 51,308,364 Total liabilities 57,585,568 59,523,644 Deferred inflows of resources: Deferred inflows for pensions 604, ,259 Total deferred inflows of resources 604, ,259 Net position: Net investment in capital assets 29,160,617 25,853,452 Restricted 10,416,325 10,794,729 Unrestricted (33,327,147) (32,943,468) Total net position $ 6,249,795 $ 3,704,713 The Statement of Activities reflects that for fiscal year 2016, the revenues derived from several programs plus current operating revenues, when compared to total expenses, represent a net increase amounted to $2,545,082 in governmental activities net position. Approximately thirty-three percent (33%) of the Municipality s governmental activities total revenue came from taxes, while sixty-two percent (62%) resulted from grants and contributions, including federal aid. The Municipality s governmental activities expenses included items such as general government, urban and economic development, health and welfare, public safety, public works, culture, recreation and education, community development and interest on long term obligations. Approximately twenty-nine percent (29%) of total expenses resulted from general government, four percent (4%) of total expenses resulted from urban and economic development, eleven percent (11%) of total expenses resulted from health and welfare, five percent (5%) of total expenses resulted from public safety, twenty-two percent (22%) of total expenses resulted from public works, twenty-four percent (24%) of total expenses resulted from culture, recreation and education, one percent (1%) of total expenses resulted from community development, while four percent (4%) of total expenses resulted from interest on long term obligations. The following is a condensed presentation of the Municipality s results of operations as reported in the statement of activities for the fiscal years ended June 30, 2016 and 2015: 11

16 Management s Discussion and Analysis (Continued) Program revenues: June 30, 2016 Governmental activities June 30, 2015 Program-specific operating grants and contributions $ 6,271,137 $ 5,590,777 Program-specific capital grants and contributions 1,904,497 3,338,374 Charges for services 200, ,380 Total program revenues 8,375,890 9,157,531 General revenues: Property taxes 4,512,756 3,984,729 Municipal license taxes 1,329,832 1,387,988 Sales and use taxes 1,541,554 1,636,060 Construction excise taxes 392, ,128 Unrestricted grants and contributions 6,306,475 6,514,112 Other general revenues (various sources) 780,144 1,289,153 Total general revenues 14,862,832 15,231,170 Total revenues 23,238,722 24,388,701 Program expenses: General government 5,910,355 6,188,928 Health and welfare 2,248,975 2,424,682 Public works 4,645,479 4,783,356 Public safety 1,048,730 1,084,333 Culture, recreation and education 4,896,458 4,955,062 Community development 307, ,291 Urban and economic development 758,467 1,216,681 Interest on long-term obligations 877,214 1,259,549 Total expenses 20,693,640 22,250,882 Change in net position 2,545,082 2,137,819 Net position, at beginning of fiscal year 3,704,713 1,566,894 Net position, at end of fiscal year $ 6,249,795 $ 3,704,713 12

17 Management s Discussion and Analysis (Continued) FINANCIAL ANALYSIS OF GOVERNMENTAL ACTIVITIES Analysis of Financial Position of Governmental Funds As discussed earlier, the Municipality uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The focus of the Municipality s governmental funds is to provide information on near-term inflows, outflows, and balances of expendable resources. Such information is useful in assessing the Municipality s compliance with finance-related legal requirements. Specifically, unreserved fund balance may serve as a useful measure of the Municipality s net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the Municipality s governmental funds reported combined ending fund balances amounting to $13,593,961, which represents a decrease of $334,271 when compared with the prior year. Out of the indicated balance, $9,552,260 was restricted for the following purposes: (1) to liquidate statutory debts ($1,647); 2) to pay for capital projects ($3,375,483); 3) for debt service payments ($5,579,084); and 4) for other purposes ($596,046). Also, $1,451,795 were committed for the following purposes: (1) to liquidate contracts and purchase orders corresponding to prior fiscal year ($93,976); 2) to pay for capital projects ($908,379); and 3) for other purposes ($449,440). As of June 30, 2016, the General Fund, which is the main operating fund of the Municipality, reflected an unassigned fund balance of $1,763,991, and a non-spendable fund balance of $825,915 related to long-term due from component units. The following table presents the condensed financial position of governmental funds at June 30, 2016 and 2015: Assets: Total assets - major governmental funds $ 18,167,055 $ 20,435,030 Total assets - other governmental funds 1,440,954 1,844,307 Combined total assets 19,608,009 22,279,337 Liabilities: Total liabilities - major governmental funds 5,495,097 7,550,788 Total liabilities - other governmental funds 395, ,037 Combined total liabilities 5,890,565 8,196,825 Deferred Inflows of Resources: Total liabilities - major governmental funds 123, ,280 Total liabilities - other governmental funds - - Combined total deferred inflows of resources 123, ,280 Fund balances (deficits): Non-spendable - major governmental funds 825, ,000 Restricted - major governmental funds 8,956,214 9,541,288 Restricted - other governmental funds 596, ,940 Committed - major governmental funds 1,002, ,713 Committed - other governmental funds 449, ,330 Unassigned - major governmental funds 1,763,991 2,179,961 Combined total fund balances 13,593,961 13,928,232 Total liabilities, deferred inflows of resources and fund balances $ 19,608,009 $ 22,279,337 13

18 Management s Discussion and Analysis (Continued) BUDGETARY HIGHLIGHTS a) General Fund The original and the final budget of the general fund for the fiscal year ended June 30, 2016 amounted to $13,404,938. Over the course of the fiscal year, the Municipality revised the GF s budget in order to include increases and decreases in revenues that were identified during the course of the fiscal year based on current developments that positively affected the Municipality s finances. The laws and regulations of the Commonwealth mandate a balanced budget. The total actual revenues and other financing sources (budgetary basis) of the general fund for the fiscal year ended June 30, 2016 were $13,580,278, which is 1.31% ($175,340) more than the budgeted revenues and other financing sources. In addition, the total actual expenditures and other financing uses (budgetary basis) of the general fund for the fiscal year ended June 30, 2016 were $12,968,954, which is 3% ($435,984), lower than the budgeted expenditures and other financing uses. The most significant fluctuations in actual revenues occurred intergovernmental grants and contributions which had actual revenues that were $674,722 more than budgeted; in property taxes, which had actual revenues that where $89,995 more than budgeted; and in sales taxes, construction excise taxes and interest on deposits, which had actual revenues that were $54,999, $226,179 and $254,528 less than budgeted, respectively. Also, the most significant fluctuations in actual expenditures and encumbrances occurred in health and welfare, public works, and culture, recreation and education, which had actual expenditures, and encumbrances that were $90,765, $164,075 and $95,217 lower than budgeted. CAPITAL ASSETS AND DEBT ADMINISTRATION a) Capital Assets The Municipality has invested $ 59,868,425 in capital assets used in governmental activities, which have an accumulated depreciation and amortization of $ 15,502,128 at June 30, The net capital assets of governmental activities increased during the current fiscal year due to the current fiscal year s capital additions ($3,671,660), which were partially offset by the depreciation expense ($1,080,183) for the same period. The capital additions made to capital assets during the fiscal year ended June 30, 2016 were the following: Land $ 55,000 Construction in progress 1,271,222 Buildings, structures and improvements 1,584,920 Infrastructure 482,578 Machinery, equipment, furniture and fixtures 277,940 Capital additions for the fiscal year ended June 30, 2016 $ 3,671,660 14

19 Management s Discussion and Analysis (Continued) b) Debt Administration The Puerto Rico Legislature has established a limitation for the issuance of general obligation municipal bonds and notes for the payment of which the good faith, credit and taxing power of each municipality may be pledged. The applicable law also requires that in order for a Municipality to be able to issue additional general obligation bonds and notes, such Municipality must have sufficient payment capacity as defined in Act No. 64. Such Act establishes that a Municipality has sufficient payment capacity to incur additional general obligation debt if its deposits in the Redemption Funds and the annual amounts collected with respect to such Municipality s Sales and Use Tax and Special Additional Tax (as defined below), as projected by GDB, will be sufficient to service to maturity the Municipality s outstanding general obligation debt and the additional proposed general obligation debt. The Municipality is required under prevailing applicable law to levy a Special Additional Tax and a Sales and Use Tax in such amounts as shall be required for the payment of its general obligation municipal bonds and notes. In addition, principal of and interest on all general obligation municipal bonds and notes and on all municipal notes issued in anticipation of the issuance of general obligation bonds issued by the Municipality constitute a first lien on the Municipality s Basic Tax revenues. Accordingly, the Municipality s Basic Tax revenues would be available to make debt service payments on general obligation municipal bonds and notes to the extent that the Special Additional Tax and the Sales and Use Tax levied by the Municipality, together with moneys on deposit in the Municipality s Redemption Funds, are not sufficient to cover such debt service. In the particular case of the Municipality of Coamo, it has never been necessary to apply Basic Taxes to pay debt service on general obligation debt of the Municipality. The Municipality finances a significant portion of its construction activities through bond and note issuances, and through state and federal grants. 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. ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES The Commonwealth of Puerto Rico and its instrumentalities are currently facing a severe fiscal and liquidity crisis. For the past four years, credit rating agencies have downgraded their rating on the Commonwealth debt obligations based on, among other problems, years of deficit financing, pension underfunding, budgetary imbalance and a prolonged economic recession. These downgrades have severely limited the access to markets and the issuance of new debt by the Commonwealth and its instrumentalities (including municipalities), thus worsening the financial and economic conditions for the current and subsequent fiscal years. On April 6, 2016 the Commonwealth approved Act known as the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act ( Act No. 21 ) (as amended) to declare a moratorium on debt service payments and to stay related creditor remedies for a temporary period for the Commonwealth and certain of its instrumentalities. On April 8, 2016 the Commonwealth s Governor signed Executive Order No ( EO No ) declaring the Bank in state of emergency pursuant to Act No. 21. EO No implemented a regulatory framework governing GDB s operations and liquidity by prohibiting loan disbursements by GDB and establishing a procedure with respect to withdrawals, 15

20 Management s Discussion and Analysis (Continued) payments and transfer requests with respect of funds held on deposits at GDB by the Commonwealth and its instrumentalities, including the Municipalities. The withdrawal, payment and transfer of funds held on deposit at GDB are restricted to those reasonable and necessary to ensure the provision of essential services and the GDB is authorized to establish weekly limits on the aggregate amount of such disbursements. These measures have significantly decreased the ability of the Municipalities to fulfil their debt obligations with contractors, since the majority of the construction projects are financed through the issuance of bonds and notes whose proceeds are deposited in escrow accounts administered by the GDB. In order to avoid prolonged delays in their construction projects due to nonpayment, many Municipalities have resorted to using their own operating cash balances to pay the contractors and subsequently requesting reimbursement to the GDB. However, this practice has further hindered the liquidity of these Municipalities, affecting the payments of their operational obligations. The Municipality is a participating employer in a retirement plan administered by the Employee s Retirement System of the Government of Puerto Rico and its Instrumentalities (ERS). The ERS is a mature retirement system with a significant retiree population. In order to improve the liquidity and solvency problems of the ERS caused by years of significant underfunding, the Commonwealth approved Act No. 3 of 2013 and Act No. 32 of 2013 which amend the provisions of the different plan structures under the ERS. Among the most significant changes brought upon by these Acts were increases in the employer and employee contribution rates; a supplemental contribution of $2,000 per pensioner to finance the Special Laws and Additional Benefits Program; and the imposition of an Additional Uniform Contribution (AUC) whose amount will be annually determined based on the ERS funding requirements. These additional contributions have significantly increased the pension costs for the Municipalities, which are paid with operational funds, thus aggravating the liquidity crisis faced by the majority of the Municipalities. Even with these measures, there is a high probability that the ERS will become insolvent by fiscal year 2018 causing the Agency to operate on a pay-as-you-go basis. When the benefits to be paid surpass the contributions received, the resulting deficiency will be subsidized by the Commonwealth and its instrumentalities, including the Municipalities. On June 30, 2016, the U.S. President signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which grants the Commonwealth and its component units access to an orderly mechanism to restructure their debts in exchange for significant federal oversight over the Commonwealth s finances. In general, PROMESA seeks to provide Puerto Rico with fiscal and economic discipline through the creation of a control board, relief from creditor lawsuits through the enactment of a temporary stay on litigation, and two alternative methods to adjust unsustainable debt. First, to ensure fiscal and economic discipline, PROMESA creates a federally appointed oversight board that has plenary authority over Puerto Rico s finances. The board s primary function is to provide fiscal oversight through the development and approval of fiscal plans and budgets, and to enforce compliance with those plans and budgets through broad-based powers such as reducing non-debt expenditures and instituting certain hiring freezes. The board also has oversight over legislative processes because PROMESA requires the board to review new laws and deny their enforcement if they are inconsistent with the approved fiscal plans and budgets. The board also has authority to review contracts to ensure compliance with the fiscal plan, and to prevent the execution or enforcement of a contract, rule, executive order or regulation to the extent that it is inconsistent with the approved fiscal plan. 16

21 Management s Discussion and Analysis (Continued) Second, the enactment of PROMESA also operates as a broad-based stay on litigation, applicable to all entities, with respect to claims related Puerto Rico s financial debt, as well as on enforcement of provisions in contracts that allow for termination and the exercise of remedies based on non-payment of financial obligations, among other conditions. Finally, PROMESA contains two methods to adjust Puerto Rico s debts. The first method is a streamlined process to achieve modifications of financial indebtedness with the consent of a supermajority of affected financial creditors. This method has benefits such as potential speed relative to a traditional restructuring through a formal in-court process. The second method is a court-supervised debt-adjustment process, which is modeled on Chapter 9 of the U.S. bankruptcy Code. This process includes the so-called cramdown power, which may provide Puerto Rico with flexibility in debt adjustment, but it also gives the oversight board total control over the adjustment process and includes certain provisions designed to protect creditor interests. The Commonwealth expects that its ability to finance future budget deficits will be severely limited even if it achieves a comprehensive debt restructuring, and, therefore, that it will be required to, among other measures, reduce the amount of resources that fund important governmental programs and services in order to balance its budget. There is no assurance, however, that budgetary balance will be achieved and, if achieved, that such budgetary balance will be based on recurring revenue or expense reductions or that the revenue or expense measures undertaken to balance the budget will be sustainable on a long term basis. Moreover, the measures to achieve budgetary balance through austerity may adversely affect the performance of the Commonwealth s economy, which, in turn, may adversely affect governmental revenues. While the Fiscal and Economic Growth Plan that was released on September 9, 2015 and updated on January 18, 2016 and the proposed comprehensive debt restructuring seek to address these recurring budgetary imbalances and to make debt service payments sustainable, it is at present uncertain that such a restructuring will be consummated or that it will achieve the goals of recurring budgetary balance and debt sustainability. Furthermore, the restructuring proposals presented by the Commonwealth depend on one hundred percent participation, which can only be achieved practically through a mechanism to bind holdout creditors. While PROMESA provides the Commonwealth tools to bind such holdouts and adjust its debts in an orderly manner, PROMESA gives the oversight board total control over such adjustment process and includes certain provisions designed to protect creditor interests, which are untested. There is thus no assurance that the federally appointed oversight board of PROMESA will be successful in achieving budgetary and fiscal balance through a debt restructuring or otherwise. The Municipality relies primarily on property and municipal taxes as well as federal and state grants to carry out the governmental activities. Historically, property and municipal taxes have been very predictable with increases of approximately five percent. Federal and State grant revenues may vary if new grants are available, but the revenue can be also predictable. Those factors were considered when preparing the Municipality s budget for the fiscal year