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The Office of the Comptroller of Puerto Rico (OCPR) issued a qualified opinion on the fiscal operations of the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF). A qualified opinion is issued when the noncompliance, individually or in the aggregate, is significant but not pervasive.

The Report published ten results of the examination of eight bond issuances, of eight governmental entities, carried out from 2007 to 2014 for $13,806 million. The audit concluded that the approval of the bond issuances was carried out in all significant respects in accordance with the applicable law and regulations.

However, from the tests performed, situations were identified related to the income necessary for the payment of the debt, according to the repayment sources established in the bond issuances. These repayment sources result from legislative appropriations, taxes, or own income. The use of the funds received from the bond issuances will be evaluated in a second audit.

Legislative appropriations as a repayment source

With respect to the bond issuances with legislative appropriations as a repayment source, the audit reveals that the Commonwealth's Debt Service Fund received only 28% of the $9,929 million required from 2000 to 2016. In addition, the General Fund had a deficit of $10,665 million from 2002 to 2014, and from 2011 to 2020 it had no funds in reserve.

On the other hand, from 2000 to 2020, the bonds payable item increased by 398%, and the Commonwealth's debt ratio increased from 87% to 114% from 2000 to 2016. This ratio means that the Commonwealth had more debts than assets.

From the examination of one of the bond issuances of $3,500 million in 2014, the General Obligation Bonds of 2014 Series A, it was determined that it took the borrowing margin to its limit, since as provided by the Constitution, the annual payment of the bonds cannot exceed 15% of the average income of the two previous fiscal years. The rating agencies such as Moody's, Standard & Poor's, and Fitch granted the classification of Ba2, BB+, and BB respectively, due to the speculative elements and uncertainties in meeting the commitments.

The Public Finance Corporation of Puerto Rico, created as a subsidiary of the Government Development Bank (BGF) in 1984, did not receive in 2016 the funds necessary from appropriations of the Legislative Assembly to pay the outstanding bonds, contrary to what Act 164-2001 establishes. Therefore, the Corporation did not have the funds for the payment of $518 million in bond debts, including the June 2012 issuance that the rating agencies had estimated as speculative and of moderate risk.

The audit also points out that the Public Buildings Authority (AEP) depended significantly for its obligations and operations on the funds of the Commonwealth and on the financing of the BGF. From 2000 to 2016, the AEP had to resort to lines of credit of $1,949 million granted by the BGF, and to issue bonds of $4,498 million for its capital improvement program and to meet the debt service payment.

Taxes as a repayment source

The Report published that, from 2000 to 2021, the Puerto Rico Highways and Transportation Authority (ACT) had an accumulated operational loss of $5,177 million. From 2000 to 2013, the ACT carried out 11 bond issuances for a total of $9,217 million.

The examination performed on a bond issuance of $2,184 million detected that, in 2007, the ACT obtained only 83% of the income from taxes on gasoline, diesel, and petroleum as repayment sources. From 2018 to 2021, it had no income for the repayment of $1,342 million, and the level of indebtedness increased to 97%.

The ACT depended on the BGF for its liquidity and the support of its financial activities, but upon experiencing its own limitations, it could not continue its financial role. Act 74 of 1965, which created the ACT, establishes that the manner of employing its expenses is not subject to any provision of law that regulates the expenditure of public funds.

On the other hand, the Puerto Rico Urgent Interest Fund Corporation (COFINA) approved the issuance of bonds for $4,118 million for various purposes, with the collections of the Sales and Use Tax (IVU) as a repayment source. The audit found that, for the fiscal years from 2008 to 2010, from 2012 to 2014, and 2019, COFINA did not have sufficient income for the payment of the debt. In addition, from 2008 to 2021 it reached deficits of $110,986 million, and its debt ratio fluctuated between 94.28% and 97.19%.

The Report comments that COFINA's obligations and bonds must be considered extraconstitutional debt, because this fund is not a direct obligation that commits the good faith, credit, and taxing power of the Commonwealth. This legal state allows not every tax imposed to reach the General Fund and allows it to be used for other purposes.

Own income as a repayment source

The audit also evaluated the bond issuances of the Puerto Rico Ports Authority (AP), the Electric Power Authority (AEE), and the Government Development Bank, whose repayment source is their own income.

The BGF accumulated operational losses of $6,659 million from 2014 to 2015, from 2017 to 2018, and in 2020, after the issuance of senior notes bonds for $1,796 million in 2011 and 2012. In addition, the debt ratio increased between 108% and 430% for that period.

The decrease and delay in the loan payments of governmental and private entities adversely impacted the balance of the Bank's available funds. The liquidity of the BGF's assets depended largely on the capacity of the government and its public corporations to repay their debt.

The BGF's income from investments, fees as a fiscal agent, and interest on loans granted decreased by 99.95% from 2000 to 2020. In addition, the balance of loans granted to the public sector projected a risk of between 29% and 100% of being uncollectible.

On the other hand, the AEE carried out 23 bond issuances for $11,899 million from 2000 to 2016. The issuance carried out on April 7, 2010, for $822 million, was rated as low risk by the rating agencies and that the capacity to pay the financial commitments was considered adequate.

However, as of June 30, 2009, eight months before the issuance, the AEE had recorded $147 million in losses and had a debt ratio with respect to its assets of 100%. In addition, the balance of accounts receivable increased by 91%, from $403 million to $769 million from 2000 to 2020, and the amount of bonds payable increased by 123%, from $3,743 million to $8,330 million.

The AEE faced commercial challenges such as the volatility of petroleum prices and the economic recession of the Commonwealth. Collections were affected by insurance claims, increases due to fuel adjustments, and by billing, among others.

The Infrastructure Financing Authority (AFI) carried out a bond issuance for $669 million in favor of the Ports Authority (AP) on December 28, 2011, despite the consecutive operational losses that totaled $39 million in 2010. As of June 30, 2020, the AP owed $193 million of the loans to the Government Development Bank.

The measures taken by the AP, such as the lease of the Luis Muñoz Marín International Airport, did not generate sufficient financing funds to honor the debt service payment. The payment of the loans depended on the funds of the Commonwealth and legislative approval.

The audit recommends that the Governor of Puerto Rico ensure that the principal officer of public finances and the executive director of the AAFAF continue implementing the public policy directed at the reduction of debts and the sustainable use of public resources so that the situations commented on are not repeated.

The AAFAF's budget was $567 million from 2017 to 2023, and it disbursed $457 million in that period.

This first report of the AAFAF contains 27 exhibits and a brief account of the causes of the fiscal crisis. The document covers the period from January 1, 2017 to June 30, 2023, and is available at www.ocpr.gov.pr..

Audit Report OC-25-39 can be obtained on our website: www.ocpr.gov.pr.