(GFR Media)

Three years after the deadline to submit financial situation documents, the government of Puerto Rico submitted its consolidated financial statements without external auditors being able to verify that the information provided in the document is reliable. 

In the evening of June 30, Ricardo Rosselló Nevares administration announced the audited consolidated financial statement for FY 2014-15 (CAFR-2015), an X-ray that reveals that, until three fiscal years ago, the government and its instrumentalities accumulated deficit reached $ 67.037 billion, that is, almost 27 percent more than FY 2013-14.

For FY 2014, the accumulated government deficit was estimated at $ 49.2 billion.

However, the accumulated insufficiency for FY 2015 is based on a special calculation that had to be conducted by the Department of the Treasury and its advisers. This happened because, when examining the government´s numbers, the external audit firm KPMG found that several agencies and government instrumentalities did not follow applicable accounting standards, they did not include pensions payment as part of their budget responsibility or applied "inappropriate" formulas to get to that calculation. Some agencies never made adjustments to their finances, except for the University of Puerto Rico (UPR), despite the fact that it was already known that the Government Development Bank (GDB) had no funds to return the deposits they had there.

Reputational crisis 

As a result, facing the "material" errors identified and probably for the first time in a financial state of a US state jurisdiction, KPMG provided a mixed opinion of the Puerto Rican financial statements. In some cases, it issued an adverse opinion, in others, a qualified report or issued a warning or "disclaimer" before the impossibility of obtaining required information or verifying the information they received information.

"If we had not done this, the statements would not have been out," admitted Finance Secretary Raul Maldonado, acknowledging that KPMG's decision is a serious blow to the projection of Puerto Rico and its ability to properly manage its finances.

"There were public corporations that had already issued their financial statements. To correct them, it would have been necessary to adjust each (financial) statement and issue them again. It is expensive to pay additional charges to carry out those audits," said Omar Rodríguez, responsible for government accounting at the Department of Treasury.

For fiscal year 2015, Puerto Rico, like all United States governments, was obliged to incorporate in the statements their pension projections and financial situation.

What KPMG says

This requirement was established in the GASB-68 government accounting principle, but in the case of Puerto Rico, according to KPMG, this was not followed and almost thirty agencies, each with different auditors, closed their books.

Rodriguez explained that, instead of adopting GASB-68, "a work plan was not established to fulfill this responsibility and they allowed the financial statements to be issued without complying with these provisions."

Something similar happened with agencies that continued to count on the deposits they had in GDB, although it was clear that the fiscal agent was going down.

"We were not able to obtain enough audit evidence regarding the amounts (of obligation) of pensions included in the financial statements," reads one of KPMG's explanations, issuing its qualified opinion on a dozen agencies and dependencies.

The analysis includes, among others, the Superintendence of the Capitol, the Senate and the House of Representatives, the Public Housing Administration and the Puerto Rico State Insurance Fund Corporation (CFSE, Spanish acronym).

"In our opinion, based on the audit procedures we performed and the report of other auditors, due to the significant matter discussed in (the segment) 'Basis for an adverse opinion for the Medical Services Administration Fund (ASEM, Spanish acronym)' , the financial statements referred do not reasonably present the financial position of the ASEM fund as of June 30, 2015 or the changes in the financial position and cash flows for that year in accordance with generally accepted accounting principles of the United States," reads another part of KPMG's opinion.

The issue is not to be taken lightly. In the same way that the credit report goes on about the ability of a person to meet their obligations on time or in arrears, the companies or government accounting should be carried out following specific methods or formulas. This allows an analysis of the financial health of an entity based on uniform parameters and, in turn, it is a reference for the markets. In the case of the government, showing good financial management and compliance with established metrics also serves as a reference to access federal funds. 

In addition, through federal law requirement, the government must submit audited statements every year, given the fact that it issues debt in the US market.

Breach: Method and Treasury 

At the beginning of June, Maldonado and Rodriguez told El Nuevo Día that CAFR would reflect the impact of GASB-68, and also that KPMG opinion would be complex, but they did not reveal the impact of accounting pensions. Nor did they explain that KPMG would suggest in its opinion that it could not properly verify Puerto Rico's public finances.

KPMG's decision comes to light just as the government is seeking a relief on its obligations through PROMESA Title III already filed with the federal district court and being examined by Judge Laura Taylor Swain.

This week, Rob Bishop,  chairman of Congress Committee on Natural Resources, praised the publication of CAFR-2015. The Oversight Board, through its Executive Director, Natalie Jaresko, did the same at a press conference on the budget struggle.

KPMG has not only criticized non-complying with accounting standards but also the practice of spending more than what coffers have, something that the firm had already warned in the CAFR 2014.

That year, for the first time, KPMG expressed that it had "substantial" doubts that the government of Puerto Rico could continue operating in the future, which in accounting is described as "going concern."

At that time, the government's report admitted that both the central structure and most of the public corporations were insolvent.

In the CAFR-2015, the situation only gets worse. While the government's obligations (which include pensions, debt, operating expenses and similar) totaled $ 84,4 billion for that year, the assets were barely calculated at $ 16,1 billion.

In the case of the budget charged to the General Fund, fiscal year 2015, according to CAFR, closed with a deficit of $ 735 million, excluding financing.

How to tackle insolvency?

"As a result of these fiscal difficulties, on May 3, 2017, the Board, at the request of the government, filed a petition under PROMESA Title III," reads the CAFR, where the management explains the situation of the Treasury.

CAFR-2015 details the juggling that the government has done to face the three-year liquidity crisis. From not paying bondholders and withdrawing money through the "clawback" clause of public corporations to continue financing the central government until internal loans from state insurers.

To questions from El Nuevo Día about the alternatives that Puerto Rico has to face obligations, Maldonado said that on the administrative side there is progress already.

He argued that, during the next six months, the Treasury will take control of the Finance and Budget departments of all government agencies, through the new office of the Chief Financial Officer (CFO), which will avoid overdrafts in spending and facilitate financial statements to be filed on time.

The second alternative is to try to clean up accumulated deficit by reducing, through PROMESA Title III, what is owed to creditors, contractors and bondholders, acknowledged Maldonado.

In that context, however, regarding the loans the government took from itself and that partly explain the accumulated deficit, there is no certainty that state agencies and insurers will recover what they lent to the General Fund.

"We are in a process of reorganization under Title III, this allows us to execute a work plan to reduce government spending and, based on this and complying with the provisions of the fiscal plan, we would have a sustainable economy and we could pay a reasonable and fair amount," said Maldonado, accepting that although the government has historical liquidity levels, this is partly due to the fact that bondholders have not been paid for two years.

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