Último nivel de estudios que aprobó

The Commonwealth’s economy is currently in a recession that began in the fourth quarter of fiscal year 2006, a fiscal year in which the real gross national product grew by only 0.5% and the government was shut-down during the first two weeks of May. For fiscal years 2008 and 2009, the real gross national product contracted by 2.9% and 4.0%, respectively. For fiscal year 2010, preliminary reports indicate that the real gross national product contracted by 3.8%. The Planning Board projects a decrease in real gross national product of 1.0% for fiscal year 2011 and a slight increase of 0.7% for fiscal year 2012.

The real gross national product for 2010 take into account the estimated effects on the Commonwealth economy of the Fiscal Stabilization Plan and the activity expected to be generated from the Commonwealth’s local stimulus package, as explained before on this MD&A under the heading “General Fund Financial Analysis”. It also considered the effect on the Commonwealth economy of general and global economic conditions, the U.S. economy, the volatility of oil prices, interest rates and the behavior of local exports, including expenditures by visitors. The forecast for fiscal year 2011 took into account the estimated effects on the Puerto Rico economy of the Government’s fiscal stabilization plan, the impact of the initial phase of the tax reform, the ARRA funds, the continuation of the fiscal adjustment plan, the temporary tax measures, and the activity expected to be generated from the Government’s local stimulus package. The revised forecast also considered the effect on the Puerto Rico economy of general and global economic conditions, the U.S. economy, the volatility of oil prices, interest rates and the behavior of local exports, including expenditures by visitors. The forecast for fiscal year 2012 took into account the estimated effect of the projected growth of the U.S. economy, tourism activity, personal consumption expenditures, federal transfers to individuals and the acceleration of investment in construction due to the Government’s local stimulus package and the establishment of public-private partnerships. It also took into account the remainder of the ARRA funds, and the continuation of the implementation of the tax reform.

The United States economy started the contraction in fiscal year 2009 principally due to the downturn in the housing market and the world-wide financial crisis, which continued affecting fiscal year 2010. These crises have made it more difficult for U.S. businesses and consumers to access credit, and have significantly reduced the value of financial assets. As a result of the declines in home values and assets prices, the U.S. Federal Reserve reported that the net worth of American households was reduced by nearly $11 trillion. These developments in the United States have had a significant and negative impact on the Commonwealth economy. In addition, other variables contributing to the decrease of the Commonwealth’s gross national product was the continuous contraction of the manufacturing and construction sectors, the volatility of oil prices experienced during the last years, and the budgetary pressures on government finances.

In terms of budgetary pressures, the Commonwealth has experienced a structural deficiency between recurring government revenues and expenditures. Prior to the current fiscal year, the government bridged the deficit resulting from the structural deficiency through the use of non-recurring measures, such as borrowing from GDB or in the bond market, postponing the payment of various government expenses, such as payments to suppliers and utilities providers, and other onetime measures such as the use of derivatives and borrowings collateralized with government owned real estate. However, during 2009, the current administration took over the Commonwealth and implemented the Fiscal Stabilization Plan and the Economic Reconstruction Plan, among other initiatives, as fully explained before on this MD&A under the heading “General Fund Financial Analysis”.

Due to the Commonwealth dependence on oil for power generation and the level of consumption of gasoline by Puerto Rico residents, the high level of oil prices accounted for an increased outflow of local income during the last years. Oil accounts for approximately 70% of Puerto Rico’s energy resources and each

$10 increase in the average price of oil costs the Puerto Rico economy approximately $750 million annually and could lower Puerto Rico’s economic growth by 0.6%. Although the situation improved significantly

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during fiscal year 2009, oil prices remained volatile during fiscal 2010. During 2009, the current administration adopted an energy-diversification policy that includes a conversion to alternate energy sources, such as natural gas, whose cost is much lower and stable than oil. The Commonwealth, under the actual capital improvement program, has a multi-million dollar new natural gas pipeline project under development. The dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing and services. Manufacturing is the largest sector of the Puerto Rico economy in terms of gross domestic product and the second largest in terms of real gross national product. The Planning Board figures show that in fiscal year 2010 manufacturing generated $44.6 billion, or 46.4%, of gross domestic product. Manufacturing, however, only generated $15.8 billion, or 24.9%, of real gross national product in fiscal year 2010. During fiscal year 2010, payroll employment for the manufacturing sector was 88,275, a decrease of 8.7% compared with fiscal year 2009. Most of Puerto Rico’s manufacturing output is shipped to the U.S. mainland, which is also the principal source of semi-finished manufactured articles on which further manufacturing operations are performed in Puerto Rico. Federal minimum wage laws are applicable in Puerto Rico. For fiscal year 2010, the average hourly manufacturing wage rate in Puerto Rico was approximately 53.2% of the average mainland U.S. rate.

Construction represents a relatively small segment of the economy compared to other sectors. However, it has made significant contributions to the growth of economic activity due to its multiplier effect on the whole economy. Since its peak in fiscal year 2000, real construction investment has declined at an average annual growth rate of 8.7%, where such rates started to increase significantly in fiscal year 2005, as a consequence of the current contraction of the local economic activity. During the last three fiscal years (from fiscal year 2008 to 2010) real construction investment decreased at an average annual rate of 20.5%. During the same time period, the total value of construction permits, in current dollars, decreased at an average annual rate of 28.6%. Public investment has been an important component of construction investment. During fiscal year 2010, approximately 49.3% of the total investment in construction was related to public projects, which represents an increase in its share from 37.9% of total construction investment in fiscal year 2000. The total value of construction permits decreased 29.2% in fiscal year 2010 as compared to fiscal year 2009, and total sales of cement decreased by 26.3% between 2009 and 2010, the largest decline registered since 1959. Average payroll employment in the construction sector during fiscal year 2010 was 35,900, a reduction of 26.8% from fiscal year 2009.

Most of the external factors that affect the Puerto Rico economy (other than oil prices) are determined by the policies and performance of the United States economy. These external factors include exports, direct investment, the amount of federal transfer payments, the level of interest rates, the rate of inflation, and tourist expenditures. During fiscal year 2009, approximately 71.6% of Puerto Rico’s exports went to the United States mainland, which was also the source of approximately 46.9% of Puerto Rico’s imports. In fiscal year 2009, Puerto Rico experienced a positive merchandise trade balance of $20.2 billion. During fiscal year 2010, approximately 68.1% of Puerto Rico’s exports went to the United States mainland, which was also the source of approximately 51.2% of Puerto Rico’s imports. In fiscal year 2010, Puerto Rico experienced a positive merchandise trade balance of $20.8 billion.

According to the Household Survey, the number of persons employed in Puerto Rico during fiscal year 2010 averaged 1,102,700, a decrease of 5.6% compared to previous fiscal year; and the unemployment rate averaged 16%.

- 40 - OTHER MATTERS

Insurance matters- Government owned property is insured through policies obtained by the Secretary of the Treasury and through self-insured, except for property owned by the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority, whose properties are insured through arrangements and policies obtained by the respective Authorities. Personal injury against the Commonwealth is limited by law to $150,000 per occurrence.

Differences between budget and basic financial statements- Revenues and expenditures, as reported by the Treasury Department in its basic financial statements, may differ substantially from resources and appropriations in its annual budget for a number of reasons, including the following:

· The budgetary accounts are on a budgetary basis, while financial statements prepared by the Treasury Department include adjustments as required by government accounting standards.

· Expenditures for current purposes in a particular year may include amounts appropriated for earlier periods but not previously expended or amounts not budgeted for a particular fiscal year, but expended during that year, and, conversely, may exclude amounts appropriated for such fiscal year but not expended until later periods.

· Bonds are authorized by the Commonwealth in accordance with a four year capital improvement program. Since bond sale are determined by bond market conditions and other factors, the amounts for bonds sold for these improvements are financed by advances from the General Fund to the Capital Projects Fund, which are later reimbursed from proceeds of a bond or notes sales.

Derivative Instruments- The Commonwealth also implemented GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instrument (“GASB 53”). This Statement enhances the usefulness and comparability of derivative instrument information reported by state and local governments by providing a comprehensive framework for the recognition, measurement, and disclosure of derivative instrument transactions. Derivative instruments such as interest rate and commodity swaps, interest rate locks, options (caps, floors, and collars), swaps, forward contracts, and futures contracts are entered into by governments as investments; as hedges of identified financial risks associated with assets or liabilities, or expected transactions (i.e., hedgeable items); to lower the costs of borrowings; to effectively fix cash flows or synthetically fix prices; or to offset the changes in fair value of hedgeable items. A key provision of GASB 53 is that certain derivative instruments, with the exception of synthetic guaranteed investment contracts that are fully benefit-responsive, are reported at fair value by governments in their government-wide financial statements.

The financial reporting impact resulting from the implementation of GASB 53 in the primary government is the recognition within the government-wide financial statements of a liability for hedging derivative instruments whose negative fair value at June 30, 2010 totaled $300.1 million with a corresponding amount being reported as deferred outflows of resources in the assets section of the government-wide financial statements. Also, investment derivative instruments whose negative fair value at June 30, 2010 totaled $289.7 million were recorded as a liability for investment derivative instruments-interest rate swaps in the statement of net assets (deficit). The cumulative impact of change in accounting for derivative instruments of $207 million was charged to net deficit at July 1, 2009.

- 41 - Requests for Information

This financial report is designed to provide a general overview of the Commonwealth’s finances for all of the Commonwealth’s residents, taxpayers, customers, investors, and creditors. This financial report seeks to demonstrate the Commonwealth’s accountability for the money it receives. Questions concerning any of the information provided in this report or requests for additional information should be addressed to: Department of the Treasury of the Commonwealth of Puerto Rico, Área de Contabilidad Central, P.O. Box 9024140, San Juan, PR 00902-4140.

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COMMONWEALTH OF PUERTO RICO

STATEMENT OF NET ASSETS (DEFICIT)