The Governor is constitutionally required to submit to the Legislature an annual balanced budget of the Commonwealth for the ensuing fiscal year. The annual budget is prepared by the Commonwealth’s OMB and takes into consideration the advice provided by the Puerto Rico Planning Board (annual economic growth forecasts and four year capital improvements plan), the Department of the Treasury of the Commonwealth (revenue estimates, accounting records, and the comprehensive annual financial report), GDB (fiscal agent), and other governmental offices and agencies. Section 7 of Article VI of the Constitution of Puerto Rico provides that “The appropriations made for any fiscal year shall not exceed the total revenue, including available surplus, estimated for the said fiscal year, unless the imposition of taxes sufficient to cover the said appropriations is provided by law”.
The annual budget, which is developed utilizing elements of program budgeting, includes an estimate of revenue and other resources for the ensuing fiscal year under: (i) laws existing at the time the budget are submitted; and (ii) legislative measures proposed by the Governor and submitted with the proposed budget, as well as the Governor’s recommendations as to appropriations that in his judgment are necessary, convenient, and in conformity with the four year capital improvements plan adopted by the Puerto Rico Planning Board.
The Legislature may amend the budget submitted by the Governor but may not increase any items so as to cause a deficit without imposing taxes or identifying other sources of revenue to cover such deficit. Upon passage by the Legislature, the budget is referred to the Governor who may decrease or eliminate any line item but may not increase or insert any new line item in the budget. The Governor may also veto the budget in its entirety and return it to the Legislature with his objections. The Legislature, by two thirds majority in each house, may override the Governor’s veto. If a budget is not adopted prior to the end of the fiscal year, the annual budget for the preceding fiscal year, as approved by the Legislature and the Governor, is automatically renewed for the ensuing fiscal year until a new budget is approved by the Legislature and the Governor. This permits the Commonwealth to continue making payments for its operating and other expenses until the new budget is approved. The appropriated annual budget for fiscal year 2010 amounted to approximately $9.6 billion. The Legislature also made several special budgetary appropriations to the general fund throughout the year, which amounted to approximately $363.5 million.
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The OMB has authority to amend the budget within a department, agency, or government unit without legislative approval.
For budgetary purposes, encumbrance accounting is used. The encumbrances (that is, purchase orders, contracts) are considered expenditures when a commitment is made. For GAAP reporting purposes, encumbrances outstanding at year end are reported as reservations of budgetary appropriations within GAAP fund balances and do not constitute expenditures or liabilities on a GAAP basis because the commitments will be honored during the subsequent year. The unencumbered balance of any appropriation of the general fund at the end of the fiscal year lapses immediately. Appropriations, other than in the general fund, are continuing accounts for which the Legislature has authorized that an unspent balance from the prior year be carried forward and made available for current spending.
During any fiscal year in which the resources available to the Commonwealth are insufficient to cover the appropriations approved for such year, the Governor may take administrative measures to reduce expenses and submit to both houses of the Legislature a detailed report of any adjustment necessary to balance the budget, or make recommendations to the Legislature for new taxes or authorize borrowings under provisions of existing legislation or take any other necessary action to meet the estimated deficiency. Any such proposed adjustments shall give effect to the “priority norms” established by law for the disbursement of public funds in the following order of priority: (i), the payment of the interest on and amortization requirements for public debt (Commonwealth general obligations and guaranteed debt for which the Commonwealth’s guarantee has been exercised); (ii), the fulfillment of obligations arising out of legally binding contracts, court decisions on eminent domain, and other unavoidable obligations to protect the name, credit and full faith of the Commonwealth; (iii), current expenditures in the areas of health, protection of persons and property, education, welfare and retirement systems; and (iv), all other purpose.
In addition, the Legislature may direct that certain revenue be retained and made available for spending within a specific appropriation account. Generally, expenditures may not exceed the level of spending authorized for an individual department. However, the Commonwealth is statutorily required to pay debt service, regardless of whether such amounts are appropriated. Appropriations are enacted for certain departments, agencies, and government units included in the general fund. For these funds, a statement of revenue and expenditures — budget and actual budget basis — general fund is included. Appropriations for capital projects are made for each bond issue and the authorization continues for the expected construction period.
The OMB has the responsibility to ensure that budgetary spending control is maintained on an individual department basis. OMB may transfer part or all of any unencumbered balance within a department to another department subject to legislative approval. Budgetary control is exercised through the Puerto Rico Integrated Financial Accounting System (PRIFAS). PRIFAS ensures that encumbrances or expenditures are not processed if they exceed the department’s total available spending authorization, which is considered its budget. The legal level of budgetary control is at the individual department level for general fund expenditures, principal and interest due for the year for the debt service fund, and by bond authorization for capital expenditures.
- 96 - (b) Budget/GAAP Reconciliation
The following schedule presents comparisons of the legally adopted budget with actual data on a budget basis. Because accounting principles applied for purposes of developing data on a budget basis differ significantly from those used to present financial statements in conformity with GAAP, a reconciliation of entity, timing, and basis differences in the excess (deficiency) of revenue and other financing sources over expenditures and other financing uses for the year ended June 30, 2010 is presented below for the general fund (expressed in thousands):
Excess of revenues and other financing sources over expenditures
and other financing uses - budget basis $ 410,851
Entity differences-excess (deficiency) of revenues and other financing sources over expenditures and other financing uses for:
Nonbudgeted funds 953,466
Inclusion of agencies with independent treasuries (71,975) Timing differences:
Adjustment for encumbrances 134,814
Current year expenditures against prior year encumbrances (515,595) Basis of accounting differences:
Net derease in taxes receivable (net of tax refunds and deferred revenues) (10,050)
Net decrease in other receivables (13,180)
Excess of revenues and other financing sources over
expenditures and other financing uses — GAAP basis $ 888,331
(c) Deficit Net Assets
The following activities, funds, and discretely presented component units reflect deficit fund balance/net assets at June 30, 2010 (expressed in thousands):
Primary Government:
Governmental activities $ 31,223,539
General fund 547,296
Enterprise fund-lotteries 104,141
Component units:
Puerto Rico Infrastructure Financing Authority $ 1,072,599
Puerto Rico Health Insurance Administration 247,500
Special Communities Perpetual Trust 225,431
Puerto Rico Medical Services Administration 181,942
Puerto Rico Electric Power Authority 103,616
Agricultural Services and Development Administration 74,539 Automobile Accidents Compensation Administration 67,571 Cardiovascular Center Corporation of Puerto Rico and the Caribbean 39,445 Puerto Rico Maritime Transportation Authority 26,499
Land Authority of Puerto Rico 21,969
Puerto Rico Metropolitan Bus Authority 12,755
Right to Employment Administration 5,556
Musical Arts Corporation 5,023
Employment and Training Enterprises Corporation 3,067 Puerto Rico Public Private Partnerships Authority 2,852 Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental
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The Commonwealth’s governmental activities show a deficit of approximately $31.3 million, mostly attributed to the Commonwealth outstanding bonds amounting to approximately $28.6 billion, which are recognized in the statement of net assets (deficit). The deficit is attributable to the accumulated effect of high operating expenses in the government along with a decrease in estimated revenues as well as the primary government issuing debt, the proceeds of which are to certain extent transferred to component units and to other governments, and which are not presented in these basic financial statements. On the other hand, the discretely presented component units report net assets of approximately $10.7 billion. This inverse relationship between the governmental activities and component units’ net assets reveal the operational structure of the Commonwealth where the primary government issues debt, the proceeds of which are predominantly transferred to the component units and to other governments, that are not presented in these basic financial statements, to finance their capital projects and other operational needs. The Commonwealth includes within the annual budgetary appropriation process the necessary funds to cover the annual debt service requirements of the aforementioned debt, most of which are the result of Act No. 164 of December 17, 2001, described in note 15(d).
Governmental Activities also include COFINA’s deficit amounting to $11.8 billion principally attributed to bonds payable amounting to $13.9 billion the proceeds of which were used to pay the 2006 Appropriation Debt and for other uses.
In an effort to address the Commonwealth’s fiscal difficulties, the current administration is committed to research and pursue solutions to improve the Commonwealth’s competitive economic performance and the quality of life for its people. The Commonwealth’s economic development program is focused on initiatives aimed at producing more diversified and sustainable economic development.
The Commonwealth has developed and commenced implementing a multi-year Fiscal Stabilization and Economic Reconstruction Plan that seeks to achieve fiscal balance and restore economic growth and acknowledges that fiscal stabilization is central to safeguarding the Commonwealth’s investment-grade credit rating and restoring Puerto Rico’s economic growth and development. During the first quarter of 2009, the Legislative Assembly enacted three bills providing for the implementation of this plan, which is composed of two main elements: the Fiscal Stabilization Plan (the “Fiscal Plan”) and the Economic Reconstruction Plan (the “Economic Plan”).
4. CUMULATIVE IMPACT OF THE ADOPTION OF NEW ACCOUNTING