Act No. 1 of the Legislature of the Commonwealth, approved on June 26, 1987 (“Act No. 1”), authorizes the Secretary of the Treasury Department to issue, from time to time, notes in anticipation of taxes and revenues (“Tax Revenue Anticipation Notes” or “TRANS”) so that the Secretary, in the cash flow management program designed to maximize the use of moneys in the general fund, will have an alternate means of providing a liquidity mechanism to cover any temporary cash shortages projected for a fiscal year. Act No. 139, approved on November 9, 2005, amended Section 2(g) of Act No. 1 to provide that the total principal amount of notes issued under the provisions of Act No.1 and outstanding at any time for any fiscal year may not exceed the lesser of eighteen percent (18%) of the net revenues of the general fund for the fiscal year preceding the fiscal year in which the notes are issued or one billion five hundred million dollars ($1,500,000,000).
TRANS issued during fiscal year 2010 amounted to $2,275 million at interest rates ranging from 2.80% to 3.50%. TRANS proceeds were used to cover temporary cash deficiencies resulting from the timing differences between tax collections and the payments of current expenditures. TRANS were refinanced at various points during the year in order to take advantage of interest rates. The maximum amount of TRANS outstanding at any time during the year was approximately $900 million. As of June 30, 2010, the balance of TRANS outstanding was paid in full.
- 132 - 15. SHORT AND LONG-TERM OBLIGATIONS
(a) Primary Government
Summary of Short and Long-term Obligations — Short and long-term obligations at June 30, 2010 and changes for the year then ended are as follows (expressed in thousands):
Original Issue Other Net Due Balance At (Discounts) Increases Balance At Within Short Term Obligations June 30, 2009 Debt Issued Debt Paid Premiums (Decreases) June 30, 2010 One Year
Notes payable to GDB $ 175,464 $ 100,000 $ (18,256) $ - $ (122,521) $ 134,687 $ 134,687 Long Term Obligations
Governmental activities:
General obligation and revenue bonds $ 25,021,742 $ 4,839,021 $ (1,410,735) $ (45,966) $ 193,654 $ 28,597,716 $ 445,825 Commonwealth appropriation bonds 737,345 - - - 2,732 740,077 - Notes payable to component units:
GDB 1,730,138 956,565 (1,382,817) - 122,521 1,426,407 110,305 Other 87,875 - (7,571) - (17,416) 62,888 7,570 Capital leases 240,084 427 (5,527) - - 234,984 5,559 Total bonds, notes payable and capital
leases payable 27,817,184 5,796,013 (2,806,650) (45,966) 301,491 31,062,072 569,259 Compensated absences 1,616,925 - (794,989) - 684,257 1,506,193 740,546 Net pension obligation 6,754,230 - - - 1,209,720 7,963,950 - Net postemployment benefit obligation 76,606 - - - 55,981 132,587 - Other long-term liabilities 2,202,395 - (177,854) - 168,013 2,192,554 164,112 Total governmental activities 38,467,340 5,796,013 (3,779,493) (45,966) 2,419,462 42,857,356 1,473,917 Business-type activities:
Compensated absences 4,732 - - - (503) 4,229 2,262 Obligation for unpaid lottery prizes 263,591 - - - (39,690) 223,901 56,561 Claims liability for insurance benefits 98,726 - - - 4,543 103,269 103,269 Total business-type activities 367,049 - - - (35,650) 331,399 162,092 Total primary government $ 38,834,389 $ 5,796,013 $ (3,779,493) $ (45,966) $ 2,383,812 $ 43,188,755 $ 1,636,009
- 133 -
The balances of general obligation and revenue bonds paid included within other financing uses and principal as reported in the statement of revenues, expenditures, and changes in fund balances (deficit) – governmental funds do not agree with amounts reported as debt paid in the above table primarily because the above table includes debt paid on general obligation and revenue bonds, which was accrued during the fiscal year 2009 as a fund liability. The prior year fund liability mentioned above amounted to approximately $158 million and was reported as a balance sheet transaction in the fund financial statements in 2009. Also, during fiscal year 2010 the amount of approximately $408 million was accrued as fund liability. The net effect of $250 million is the difference between the debt paid on bonds and notes in the previous table and the payments in the statement of revenues, expenditures, and changes in fund balances (deficit) – governmental funds. The other net increases in bonds and notes payable consist of deferred losses on refunding, net of amortization, and amortization of premiums and discounts on bonds and new notes payables. These adjustments did not require any source or use of cash.
Compensated absences, net pension obligation, net postemployment benefit obligation, other long- term liabilities, obligation for unpaid lottery prizes, and claims liability for insurance benefits reflect other net increases (decreases) resulting from adjustments and changes to agree these obligations to their new estimated balances at June 30, 2010.
(b) Debt Limitation
The Constitution of the Commonwealth authorizes the contracting of debts as determined by the Legislature. Nevertheless, the Constitution of the Commonwealth provides that direct obligations of the Commonwealth evidenced by bonds or notes and backed by the full faith, credit, and taxing power of the Commonwealth are not to be issued if the amounts of the principal of, and interest 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 Commonwealth in the preceding fiscal year on account of bonds or notes guaranteed by the Commonwealth, exceeds 15% of the average annual revenue raised under the provisions of Commonwealth legislation and conveyed into the Treasury (hereinafter internal revenue) in the two fiscal years preceding the current fiscal year. Section 2, Article VI of the Constitution does not limit the amount of debt that the Commonwealth may guarantee so long as the 15% limitation is not exceeded. Internal revenue consists principally of income taxes, sales and use tax, property taxes and excise taxes. Certain revenue, such as federal excise taxes on offshore shipments of alcoholic beverages and tobacco products, and customs duties, which are collected by the U.S. government and returned to the Commonwealth, motor vehicle fuel taxes and license fees, which are allocated to the PRHTA, a discrete component unit, are not included as revenue for the purpose of calculating the debt limit. At June 30, 2010, the Commonwealth is in compliance with the debt limitation requirement. In addition, the portion of sales and use tax allocated to COFINA is not included as internal revenue in consistency with the legislation creating COFINA, which legislation transfers ownership of such portion of the sales and use tax to COFINA and provides that such portion is not “available resources” under the constitutional provisions relating to the payment of debt service.
- 134 - (c) Bonds Payable
The Constitution of the Commonwealth provides that public debt will constitute a first claim on the available revenue of the Commonwealth. Public debt includes general obligations and revenue bonds of the Commonwealth and any payment required to be made by the Commonwealth under its guarantees of bonds issued by blended or discretely presented component units. The full faith, credit, and taxing power of the Commonwealth are irrevocably pledged for the prompt payment of the principal and interest of the general obligation bonds.
Act No. 83 of August 30, 1991, as amended, provides for the levy of an annual special tax of 1.03% of the assessed value of all real and personal property not exonerated from taxation. The levy is made by CRIM, a municipal corporation, not a component unit of the Commonwealth. CRIM is required to remit the 1.03% of property tax collected to the Commonwealth to be used by the Commonwealth’s debt service fund for payment of debt service on general obligations and revenue bonds of the Commonwealth. During the year ended June 30, 2010, the total revenue and receivable reported by the Commonwealth amounted to approximately $115 million and $27 million, respectively, which are included in the debt service fund.
For financial reporting purposes, the outstanding amount of bonds represents the total principal to be repaid, net of unamortized premiums, discount, and deferred refunding losses; for capital appreciation bonds, it represents total principal and unaccreted interest to be repaid.
COFINA
Short-Term Debt — During the year ended June 30, 2010, COFINA issued demand notes and bond anticipation notes to GDB and another financial institution amounting to approximately $708 million. These notes were repaid with the issuance of sales tax revenue bonds issued in fiscal year 2010, as explained below.
Bonds Payable — On February 9, 2010, COFINA issued Sales Tax Revenue Bonds, First Subordinate Series 2010A amounting to approximately $1,824 million. The proceeds from the issuance of the Series 2010A bonds were mainly used to (1) repay bond anticipation notes issued to a financial institution, (2) cover operational expenses of the Commonwealth for fiscal years 2010 and 2011, and (3) fund the Puerto Rico Economic Stimulus Fund.
On June 30, 2010, COFINA issued Sales Tax Revenue Bonds, First Subordinate Series 2010C, Series 2010D (Issuer Subsidy Build America Bonds) and Series 2010E (Issuer Subsidy Recovery Zone Economic Development Bonds) amounting to approximately $1,619 million, $89.4 million, and $92.8 million, respectively. Upon compliance with certain requirements of the United States Internal Revenue Code, COFINA will receive a subsidy payment from the U.S. federal government equal to 35% and 45% of the amount of each interest payment on the Series 2010D bonds and the Series E bonds, respectively.
The proceeds from the issuance of the Series 2010C, Series 2010D and Series 2010E were mainly used to (1) repay demand notes issued to GDB, (2) cover operational expenses of the Commonwealth for fiscal year 2011, (3) fund the Puerto Rico Stabilization Fund and (4) provide $732,797,165, along with $17,500,000 of other funds, to purchase U.S. Government State and Local Government Series securities that were placed in an irrevocable trust with an escrow agent for the purpose of generating resources for all future debt services payments of the $700,000,000 Series 2009A mandatory tender notes outstanding at June 30, 2010 (the “Refunded Bonds”), which are subject to mandatory tender for purchase on August 1, 2011. Accordingly, the Refunded Bonds are considered to be defeased and the liability has been removed from the statement of net assets (deficit). In the event the Refunded Bonds were not remarketed on August 1, 2011, the interest rate
- 135 -
would have increased from five percent (5%) to ten percent (10%). The reacquisition price exceeded the net carrying amount of the old debt by approximately $40,850,000, of which $39,899,000 are being netted against the new debt and amortized over the remaining life of the Refunded Bonds, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce the total debt service payments over the next 30 years by $628 million (assuming the Refunded Bonds interest rate would have increased to 10% effective August 1, 2011), and resulted in an economic gain of $370 million.
Bonds payable outstanding at June 30, 2010 are as follows (expressed in thousands): General Revenue
Obligation Bonds Bonds Total Term bonds payable through 2045;
interest payable semiannually at
rates varying from 3.00% to 6.50%. $ 3,931,400 $ 7,022,156 $ 10,953,556 Serial bonds payable through 2037;
interest payable semiannually at
rates varying from 3.25% to 6.50%. 5,160,660 1,081,260 6,241,920 Fixed rate bonds payable through
2058; interest payable at rates
varying from 3.38% to 6.50%. - 5,003,422 5,003,422 Capital appreciation bonds payable
through 2057; no interest rate,
yield ranging from 4.50% to 7.70%. 164,266 3,775,531 3,939,797 Net of accreted discount of
$168 million. (1)
The Children’s Trust Fund tobacco settlement asset-backed bonds payable through 2057; interest payable annually at rates varying
from 4.00% to 8.38%. - 1,405,967 1,405,967 Capital Fund Program Bonds,
maturing in various dates payable through 2024; interest payable at
rates varying from 2.00% to 5.00%. - 548,450 548,450 Bond payment obligation payable
through 2011; interest payable at
rates of 7.00% 48,220 - 48,220 Balance carried forward 9,304,546 18,836,786 28,141,332 (1) Revenue bonds include $743 million capital appreciation
bonds convertible to fixed rate interest bonds on
- 136 -
General Revenue
Obligation Bonds Bonds Total Balance brought forward $ 9,304,546 $ 18,836,786 $ 28,141,332 Yield curve bonds payable from 2009
through 2028; no interest rate,
yield varying from 6.00% to 6.50%. 225,225 - 225,225 LIBOR-Based Adjustable Rate Bonds
due on August 1, 2057; interest
payable at a rate of 1.16%. - 136,000 136,000 Inverse rate bonds payable from 2011
through 2012; interest payable at
a rate varying from 6.00% to 6.50%. 10,300 - 10,300 Insured bonds payable from 2015
through 2019; interest payable
a rate varying from 5.00% to 5.25%. 50,085 - 50,085 Total 9,590,156 18,972,786 28,562,942 Unamortized premium, net 230,823 (14,578) 216,245 Deferred refunding loss, net (65,768) (115,703) (181,471) Total bonds payable $ 9,755,211 $ 18,842,505 $ 28,597,716
- 137 -
As of June 30, 2010, debt service requirements for general obligation and revenue bonds outstanding, including accreted interest of capital appreciation bonds are as follows (expressed in thousands):
Year Ending Interest
June 30 Principal Interest Subsidy (1) Total 2011 $ 445,825 $ 1,193,732 $ (3,512) $ 1,636,045 2012 459,592 1,208,581 (4,200) 1,663,973 2013 484,360 1,178,947 (4,200) 1,659,107 2014 511,315 1,152,822 (4,200) 1,659,937 2015 518,600 1,148,586 (4,200) 1,662,986 2016–2020 3,008,220 5,531,939 (21,000) 8,519,159 2021–2025 3,470,751 4,977,944 (21,000) 8,427,695 2026–2030 4,658,491 4,170,636 (21,000) 8,808,127 2031–2035 5,806,397 3,105,716 (21,000) 8,891,113 2036–2040 6,629,816 1,994,338 (21,000) 8,603,154 2041–2045 6,075,500 643,346 (9,447) 6,709,399 2046–2050 3,955,758 287,802 - 4,243,560 2051–2055 4,882,088 287,802 - 5,169,890 2056–2059 12,028,145 137,684 - 12,165,829 Total 52,934,858 $ 27,019,875 $ (134,759) $ 79,819,974 Less unaccreted interest (24,371,916)
Plus unamortized premium, net 216,245 Less deferred refunding loss, net (181,471) Total $ 28,597,716
(1) Sales Tax Revenue Bonds, First Subordinate Series 2010D and 2010E were issued as Build America Bonds. COFINA will receive a subsidy payment from the federal government equal to 35% and 45% , respectively, of the amount of each interest payment.
- 138 -
At June 30, 2010, COFINA has $136,000,000 of LIBOR based adjustable rate bonds maturing on August 1, 2057. As explained below, COFINA has entered into a $136,000,000 interest rate swap, whereby it receives the same rate paid on the adjustable rate bonds and pays a fixed rate of 4.92% through August 1, 2057. Accordingly, COFINA has synthetically fixed the interest rate on the adjustable rate bonds.
The table that follows represents governmental activities debt service payments on certain general obligation and revenue variable-rate bonds and the net payments on associated hedging derivative instruments (see note 23) as of June 30, 2010. Although interest rates on variable rate debt and the current reference rates of hedging derivative instruments change over time, the calculations included in the table below are based on the assumption that the variable rate and the current reference rates of hedging derivative instruments on June 30, 2010 will remain the same for their term.
Year Ending Hedging Derivative