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TORRE lanes WU SE DO Ver c1] dorso Porn su informaci?n Notes Fora manienerie 0 die if pedien?re for Cuenfc Registrar Frocesor EL CAPITOLIO PO Box 9023431 San Iuan, Puerto Rico 00902?3431 DE PUEHTO RFCO T: 787.722.3460 787.722.4012 F: 787.723.5413 E: manterres?senadopnus W: REFERIDO A: COMISIONES PERMANENTES Hacienda Gobiemo Segun'dad Pablicci 1udica?rura Solud Educaci?n Asunios de lo Desarrolio Eon?mico Ploni?caci?n Urbanismo fnfroesiruc?uru Juridico Penal Juridico Civil Agn'cuifuro Recursos Noiureles Ambien?rales Comarcio Cooperativismo Turismo Cul?uru ?frobajo, Asuni?os del Ve?erono Recursos Humanos Bienesior Social Asum?os Municipoles Recreaci?n Depor?res Boncai Asunfos del Consumidor Corporaciones P?biiccts Desorroilo de it: Regi?n del Oes?ge Asun?ros de ia Mujer Asun?ros Iniernos Reglds Colendario Asunios Fedemles De la Monta?o Eiica COMISIONES ESPECIALES Puerio de los Am?ricos Derecho de Autodeienninaci?n dei Pueblo de Puerro Ric Sobre Reforms Gubemomen?mi COMISIONES CONJUNTAS EDDEUDBUDD Informes Especidles dei Contraior Donaiivos Legisiafivos de Puerio Rico In?rerncido C?rdovc?Fern?s Infernado Piior Barboso iniernado Ramos Comos C?digo Penal Revisi?n Reformcx dei C?digo Civil Alionzcs PL?Jinco Privodcis Auditoria Fiscai Manejo Fondos P?biicos Revisi?n Continua C?d?qo Pena! Reformo cie los Leves WW Fe?ha 4m Referidoa Para su informaci?n Evaluar recomendar ar cuenta a! cuerpo Para otorgar contrato .. Para nombramiento . Autorizado I a 701 Gopierno de Puerto Rico ADMINISTRACEON DE LOS SISTEMAS DE DE LOS EMPLEADOS DEL GOBIERNO LA JUDICATURA PO BOX 42003 0 SAN JUAN, PR 00940-2203 18 de octubre de 2010 Hon. Tomas Rivera Schatz Presidente Senado de Puerto Rico Estimado se?or Presidente: Adjunto para su conocimiento, copia del lnforme Independiente sobre los eventos decisiones que han causado Ia Crisis Financiera de Ios Sistemas de Retire de Ios Empleados del Gobiemo de Puerto Rico. El mismo est? siendo dEvulgado a la prensa el dia de hoy referido para la acci?n correspondiente al Departamento de JusticEa asi, como la Oficina de Etica Gubernamental la Oficina del Contralor. Estoy a su disposici?n para contestar cualquier pregunta al respecto. Atentamente, ?ctor M. Mayo! Kauff Administrador ?35: Anejos Informe de Conway Mackenzie Comunicado de Prensa Presentaci?n a la Prensa Cartas de referidos 62$ mm w? FA 2107 Anejo 1 Review of the Events and Decisions That Have Led to the Current Financial Crisis of the Employees Retirement System of the Government of Puerto Rico Report Prepared for Employees Retirement System of Government of Puerto Rico and Government Development Bank for Puerto Rico, as Fiscal Agent of the Government of Puerto Rico Submitted by Conway MacKenzie, Inc. October 2010 Table of Contents Section 1 Scope of Assignment 2 Section 2 Findings 3 Section 3 Summary of. Conclusions 20 1 Section 1 -- Scope of Assignment On June 30, 2010, Conway MacKenzie, Inc. (?Conway MacKenzie?) was retained to prepare for the Employees Retirement System and the Government Development Bank for Puerto Rico, as ?scal agent, (the this report and to provide professional services in connection with its review of the Employees Retirement System (hereafter referred to as the or ?System?) of the Government of Puerto Rico (the ?Government?). Conway MacKenzie was retained to identify, analyze, and summarize the key events and decisions that have created the current ?nancial crisis of the ERS. Speci?cally, Conway MacKenzie was engaged to: . Review historical decisions, transactions and other actions taken by the Board of Trustees of the ERS and the Board of Directors of the GDB, or any committees thereof, to evaluate the deterioration in the funding ratio, and other key indicators, of the ERS during the period of June 2004 to December 2008; 0 Review financial projections, budgets, strategic plans and other information to assess the current ?nancial situation of the ERS, analysis and validation of key assumptions; 0 Review the analyses supporting the issuance and utilization of funds related to the issuance of Senior Pension Funding Bonds by the ERS in ?scal year 2008; and 0 Review compliance with certain laws and regulations applicable to the ERS, including the Fiscal Reform Law of 2006, by the Board of Trustees of the ERS and the Board of Directors, or any committees thereof, of GDB. In undertaking this assignment, Conway MacKenzie made multiple site visits to both the ERS and GDB offices, located in Puerto Rico. Conway MacKenzie also interviewed, either telephonically or in-person, a number of key personnel from the ERS. Lastly, Conway MaeKenzie reviewed and analyzed various documents including, but not limited to: 0 Historical meeting minutes of the GDB Board of Directors (from 2005 through 2008) 0 Historical meeting minutes of the ERS Board of Trustees (from 2004 through 2009) - Actuarial valuation reports of the ERS - Historical ?nancial statements of the ERS 0 Various financial analyses prepared by ERS personnel - GDB transaction ?les related to the Pension Obligation Bonds transaction of the ERS 0 Various presentations prepared by the ERS or outside parties A complete list of documents relied upon is included as Exhibit 1. Section 2 Findings The Employees Retirement System of the Government of Puerto Rico is a trust funded by the contributions of active participants, governmental employers and proceeds from its investment portfolio to pay pensions and other post-employment bene?ts of government retirees. The current System was created by Act 447 of May 15, 1951 and, since its inception, has lacked proper planning and contribution levels. The ERS is divided into three bene?t structures and administers two separate retirement plans: a de?ned bene?t plan and a defined contribution plan. Contributions to the ERS are set by legislation, and not determined by actuarial calculations. This has negatively impacted funding of the System due to statutorily required contributions being less than actuarially determined reqnired contribution levels for years. The responsibility for the proper operation and administration of the System is vested with the Board of Trustees. As currently structured, the System has inadequate contribution levels relative to bene?t obligation requirements, resulting in negative cash ?ows, a deteriorating asset base and declining funding ratios. Historically, the System has largely ignored many warning signs and addressed and cured its cash ?ow issues in various temporary ways including the sale of investments, obtaining loans from ?nancial institutions and using Pension Obligation Bond proceeds. Actions taken by the ERS to improve its ?scal health and reverse the increasing actuarial liability and deteriorating funding ratio have not been successful. If these problems are not properly addressed and the System is not restructured immediately, annual cash shortfalls will render the ERS insolvent in the near future. While the structure of the System has been fundamentally broken for years, certain concrete actions and events from 2004 to 2008 have exacerbated its problems. Findings Upon the conclusion of our work, we believe the following factors have been fundamental in the deterioration in the ?nancial health throughout its nearly 60 year history, and particularly during our review period which primarily focused on years 2004 and beyond: - Inadequate Funding Procedures; 0 Special Laws; 0 Early Retirement Programs; 0 Personal Loans; and 0 2008 Pension Obligation Bond Transactions. Our ?ndings indicate that the System has essentially been underfunded since its inception in 1951. The underfunding is a direct result of statutory funding requirements that fall below actuarially determined contribution rates. In addition to deficient annual contributions, investment returns and other recurring income levels have been insuf?cient to cover the System?s annual bene?t payments and other operating obligations, resulting in negative cash flows. As a result, the System has been forced to liquidate nearly all of its not plan assets to address cash ?ow shortfalls. In order to bolster the System?s prospects of longwterm solvency, an increase in the statutorily required contribution rates will be necessary, and only suf?cient to reverse the ERS fiscal crisis if done in combination with other actions, some of which are mentioned throughout this report. We also noted that Special Laws, which grant incremental retirement bene?ts to participants beyond those which are provided for under the Act 447 and Act I bene?t structures, have exacerbated the System?s ?scal situation through the years. In fact, many Special Laws that were passed appear to have failed in securing long?term, viable funding sources to compensate for their economic burden to the ERS. As a result, the System has shouldered the obligation of funding many Special Law bene?ts resulting in signi?cant past-due receivables as many public corporations and municipalities simply could not afford to ?nance these incremental obligations. Since Special Law benefits are not an explicit component of the ERS, we believe the underlying legislation should be revisited and analyzed to determine whether much needed structural changes can be enacted, which would serve to reduce or eliminate unfunded Special Law payments, thereby strengthening the ?scal position of the Government, its various municipality and public corporation employers, and most importantly, the ERS. Another factor which has aggravated the System?s fiscal. situation is early retirement programs. These programs were promoted by the Government of Puerto Rico in order to reduce the size of the public workforce, thereby decreasing payroll costs, which account for a substantial portion of the Government?s general budget. Based on available information provided, it appears that early retirement programs did not accomplish their intended goals. In addition, since many of these programs were not funded up-front by the sponsoring employers, the ERS continues to remain exposed to collection problems, as well as future cash ?ow de?cits, assuming the System funds additional early retirement bene?ts for which it is unable to collect reimbursement. It is therefore important that any additional early retirement programs enacted be funded in advance by the sponsoring employer in order to minimize the potential negative cash ?ow impact on the ERS. Furthermore, the decision by the ERS to increase the maximum loan balance for personal loans from $5,000 to $15,000 in 2007 has resulted in a signi?cant cash drain to the System amounting to nearly $600 million over the past four ?scal years. These negative cash ?ows have been funded by the System and necessitated the liquidation of plan assets. In addition, Conway MacKenzie did not come across any documented discussions or relevant documentation which indicated that the decision to increase the personal loan caps in 2007 was supported by a thorough analysis of its projected impacts on the System?s ?nancial health. As a result, we believe that both the System Administrator and Board of Trustees in office during 2007 may have failed to meet the requisite standards of due care and ?duciary duties in approving these changes. Lastly, we believe that the P013 transactions may have negatively impacted the ERS and the Government, in general. In analyzing management?s decision to enter into the POB transaction, we found no basis for the initial assumption made that such a strategy would immediately improve the funded status of the ERS. In fact, the strategy has not improved the funded position of the System and, due to the negative arbitrage realized and fees paid as part of the PCB transaction. actually worsened the funded position of the System. The short-term liquidity fix is costly and these costs may be realized for decades to come. In our opinion, the PCB transaction accomplished little more than passing on, and increasing the complexity of, the burden of ?xing the System?s fundamental structural problems to future administrations of the ERS. In addition, several warning signs, which suggested that the full implementation of the PCB strategy would be dif?cult, if not impossible, were identi?ed but ultimately downplayed or ignored by those responsible for making the decisions to enter into the POB transactions (ERS management, the ERS Board of Trustees, and the GDB Board of Directors in 2008). For these reasons, we believe the decision?makers may have failed to meet the standard of due care and other important ?duciary duties in approving such a transaction. There is a very strong possibility that without immediate, dramatic and encompassing changes to the structure of the System, the aforementioned dynamics will result in the full depletion of the System?s net assets in the near future, potentially as early as 2014 as indicated in the 2009 actuarial valuation report prepared by actuarial Milliman without the PCB available funds and 2018 if using POB available funds. Causes of Distress for the Employees Retirement System The following section provides a more thorough summary of Conway MacKenzie?s ?ndings and conclusions as it pertains to the previously mentioned factors which have been fundamental in the deterioration of the ERS. Inadequate Funding Procedures The current employee and employer contribution rates paid to the System are statutorily determined and have not changed since 1990, despite a precipitous drop in. the System?s funding status and the net assets of the ERS. These contributions are signi?cantly below both the Annual Required Contribution as determined by the actuarial valuation reports, and the level required to meet bene?t and other operating obligations of the System. In fact, the amounts of the annual employee and employer contributions have historically been insuf?cient to cover even new actuarial liabilities incurred on an annual basis. As a result, the funding ratio continues to deteriorate. The following chart depicts the signi?cant difference between historical employer contributions to the System and the ARC during our review period] As demonstrated below, during the 2004 - 2010 period, the ERS amassed an accumulated ARC de?cit of nearly $3.1 billion. 1 The data included in this graph was taken directly from the June 30, 2009 and 2005 Audited Financial Statements, as well as the June 30, 2009 Actuarial Valuation Report, as prepared by Milliman. Actual Employer Contribution for the year ended lune 30, 2010 is an estimate and assumes contributions of 9.275% of expected payroll for the basic system benefits, plus contributions of $149.9 million for special law pension benefits, plus contributions of $42.7 million for early retirement incentives. i-iisterieai Centr-iiautien versus actuarial Required Contributie?n for years ended lune seem tn sine - 3?;me 4 ?gasses,? arms-M were? ~aea- inseam-v $433135; gag: - Wren-as. Me Mn: 9?9 "gameae?m In addition, annual contributions and investment and other recurring income have not been suf?cient to cover annual bene?t payments and other operating obligations. As a result, the ERS is being forced to liquidate System assets in order to meet payment obligations. System assets are expected to continue to decline as negative cash ?ow (contributions less bene?t payments) exceeds current and projected investment income. Simply put, the System is liquidating assets to meet its current obligations. The following chart highlights the anticipated cash ?ow shortfalls for plan years ended June 30, 2010 through 2020 under current laws, as well as the estimated declines in net plan assets through the same period.2 2 The figures in this chart were obtained from the June 30, 2009 Actuariai Valuation Report, as prepared by Milliman. Certain key assumptions utilized in compiling this analysis are as foliows: - Estimated net plan assets at yea r-end assumes that the investment return assumption of 7.5% is met; 0 Estimated payroll is assumed to grow 2.5% annuaily; Member and empioyer contributions were estimated to be t7.55% of estimated payroll for each plan year; 0 The estimated benefit payments do not include amounts expected to be made to future participants, such as refund or contributions to tetminated non?vested participants, disability benefits, death benefits, or retirement benefits due to service purchase, and thus are slightiy understated; 0 Administrative expenses are assumed to grow 2.5% annualiy, 0 Contributions on behalf of and benefit payments to members of System 2000 are included in the table, and 0 Estimated gross plan assets submitted by Milliman millions) Estimated Estimated Bene?t Member and Payments and Estimated Net Estimated Gross Year lauded Enployer Administrative Plan Assets at Plan Assets at June 30 Estimated Payroll Contributions Expense Net Cash Flow Year-111m 20i0 $4,293 $753 $1,181 ($428) $546 $4,554 201 1 4,400 772 1 ,19i (419) 1,228 4,284 20:2 4,510 792 1,210 {418) 887 3,996 20:3 4,623 81 1 1,232 (420) 51 8 3,684 2014 4,739 832 1,258 (426) 1 15 3,342 2015 4,857 852 1,292 (440) (333) 2,961 2016 4,978 874 1 ,330 (456) (831 2,534 2917 5,102 895 1,370 {475) (1,385) 2,055 2018 5,230 918 1,415 (497) (2,005) 1,5 7 2019 5,361 941 1,464 (523) (2,697) 9% 3 2020 5,495 964 1,513 (549) (3,469) 236 In order to bolster the prospects of the System?s long-term solvency, an increase in the statutorily required contribution rates will be necessary, but that alone will most likely not be suf?cient. Conversely, decreases in ERS bene?ts could also serve to bridge the gap between the statutorily required contributions and the ARCS, thereby enhancing the long-term solvency prospects. However, reductions in bene?t obligations are considered long?term corrections and will not address the System?s immediate cash ?ow issues. While such changes are both straightforward and logical, they remain iong overdue as numerous actuarial recommendations stressing the need to implement these changes have been submitted to the ERS for decades. Unfortunately, failure to address the mismatch between bene?ts earned and contributions made has now resulted in the near total elimination of net plan assets and put the System at the brink of not being able to make current bene?t payments. Special Laws Special Laws, which are a series of post?employment bene?ts granted to ERS participants through enabling legislation passed by previous legislators and governors, provide incremental retirement bene?ts to participants beyond. those which are provided for under the Act 447 and Act 1 bene?t structures and include: 0 Additional minimum pension bene?ts; 0 Additional minimum death bene?ts; 0 Adshoc costwof-living adjustments (COLAS) provided in past years; 0 Additional bene?ts due to death or disability for reasons speci?ed in Act 127 (speci?ed high-risk positions who died in line of work); 0 Medical insurance plan contributions; 0 Summer bonuses; 0 Medication bonuses; and 0 Christmas bonuses. Many of the Special Laws appear to have been introduced and approved throughout the years by way of highly political processes, often with competing and conflicting goals relative to those which would serve to bolster the longuterrn viability of the ERS. Importantly, Special Law approvals also seem to have overlooked the importance of ensuring long-term, viable funding sources are available to compensate for their economic burden. Ostensibly, these incremental bene?ts are funded on a pay?was" you?go basis from the General Fund or speci?c public employer entities of the Government and are therefore obligations which should not be funded by ERS assets. However, many public corporations and municipalities, which bear the responsibility of funding the Special Laws, simply cannot afford to ?nance these incremental obligations and as a result, have not paid the System the appropriations and have generated signi?cant past-due receivables with the ERS. Speci?cally, as of June 30, 2010, ERS assets have been used to fund approximately $92.5 million of Special Law obligations, for which various municipalities and public corporations are yet to reimburse the ERS.3 As of June 30, 2009, Special Laws accounted for nearly $2.3 billion of the roughly $19 billion in actuarial liabilities.4 A summary of the costs of Special Laws for plan years ended June 30til 2004 2010 is as follows:5 in millions) Special Laws 2004 2005 2006 2007 2008 2009 2010 Total Co St $163.20 $201.60 $245.80 $232.30 $261.30 $272.50 $272.40 Please refer to Exhibit 3 for a detailed analysis of the cost of each Special Law to the Government for ?scal years ended June 30, 2004 2010.6 Special Law bene?ts play a large role in the ?scal situation plaguing both the Government?s General Fund and the ERS. Stated frankly, we question how these Special Laws could have ever been passed with what appears to be such little attention to con?rming that long-term, Viable funding sources would be available to cover their costs and minimize their potential negative impacts on the System?s cash ?ows and funding ratio. Because the Special Law bene?ts are not an explicit component of the ERS, we believe the underlying legislation should be revisited and analyzed to determine whether much needed structural changes can be enacted, which would serve to reduce or eliminate unfunded Special Law payments, thereby strengthening the ?scal position. of the Government, its various municipality and public corporation employers, and most importantly, the ERS. Conway MacKenzie?s scope of work did not include determining whether the various participating employers had the ability to fund Special Laws. Early Retirement Programs The Government of Puerto Rico began to promote early retirement programs in 1994 in order to reduce the size of the public workforce, thereby decreasing payroll costs, which account for a substantial portion of the general budget. Since 1994, nearly 20 early retirement programs have been implemented, at a total cost of approximately $631 million.7 3 Refer to Exhibit 2 for a summary of outstanding municipality and public corporation Special Law accounts receivable. 4 Per ERS's June 30, 2009 Actuarial Valuation Report, as prepared by Miiliman. 5 This information was provided by Teresa Meaux Pereda, of the ERS. 6 . lbld. 7 This information was obtained from "Estudio Reiacionado con los Programas de Retire Temprano Aprobados desde el 2005 hasta el 2008, Prop?sito, Resultados Recomendaciones, Voiumen 2? published in March 2010. Conway MacKenzie was provided with two studies prepared by The Government of Puerto Rico?s Permanent Special Committee on Retirement Systems, which both appeared to indicate that the early retirement programs did not accomplish their intended goals of shrinking the size of the government workforce. Because many of these programs were not funded rip-front by the sponsoring employers, the ERS continues to remain exposed to collection problems, as well as future cash ?ow de?cits, assuming the System funds additional early retirement bene?ts for which it is unable to collect reimbursement. Speci?cally, as of July 31, 2010, the ERS was owed approximately million8 in past?due early retirement program costs by certain employers who did not remit their payments to the System in accordance with previously agreed upon payment plans. In total, the ERS currently has approximately $80.5 million9 in outstanding accounts receivable pertaining to early retirement programs. To the extent additional employers don?t comply with previously agreed upon payment plans, the exposure to early retirement program expenses could continne to grow. While opining on the overall success or failure of any particular early retirement plan (as defined by the costs saved from payroll reductions versus the costs spent on early retirement bene?ts) was outside of the scope of our engagement, it is clear to us that early retirement programs have indeed had, and could continue to have, a negative cash ?ow impact on the ERS. To this end, it is important that any additional early retirement programs enacted be funded in advance or have speci?c funding plans by the sponsoring employer in order to minimize the potential negative cash ?ow impact on the ERS. Personal Loans The ERS currently offers and administers a Personal Loan program to its plan members. Personal loans can be obtained by System participants for a variety of different reasons and can be taken for up to 15,000. The decision by the ERS to increase the maximum loan balance for personal loans from $5,000 to $15,000 in 2007 has resulted in a signi?cant cash drain to the System amounting to nearly $600 million over the past four ?scal years. These negative cash flows have been funded by the System and necessitated the liquidation of ERS assets. As a result, the investment portfolio is now heavily weighted in illiquid assets personal loans) and includes a large amount in receivables from participants that have questionable short term cash recovery. This overconcentration of illiquid assets has also accelerated the System?s forecasted insolvency date by nearly two years. The chart below illustrates the signi?cant growth in the personal loan portfolio as a result of the System?s decision to increase the loan caps in 2007.10 8 This figure was obtained from the July 31, 2010 Early Retirement Accounts Receivable Schedule, provided by Cecile Tirade Soto, Controller of the ERS. 9 . lbid. 10 Figures referenced in this chart are in 000's and as of 6/30 for each respective year included. All figures were obtained from Luis Garcia Lopez, Director of investment Officer at the ERS. ERS P01159359 {in {humanity $1206.000 e? sanitation essence essence w? $409,000 $200,000 1" so 2000 200! 2002 2003 2004 260.5 2006 2007 2008 2009 20?) The potential impact of increasing the cap on personal loans from $5,000 to $15,000 on the System?s liquidity pro?le and investment portfolio should have been thoroughly vetted before the ERS decided to amend the regulations pertaining to personal loans. Based on our review of the relevant documentation that was provided to us and interviews with various key employees of the ERS, it appears that appropriate due care was not exercised by the System?s management and Board of Trustees in allowing this change in 2007. Speci?cally, we did not come across any documented discussions or other data which indicated that this change was supported by a thorough analysis of its projected impacts on the System?s ?nancial health. We were advised by ERS personnel that such analyses were, in fact, never prepared in connection with the decision to increase the personal loan caps in 2007. Given the current liquidity crisis that the ERS is facing, we believe the System should immediately consider its options to reduce personal loan exposure, with the ultimate goal of reallocating these assets into more liquid and diversi?ed investment options to ensure that funds will be available in the near-term to fund plan bene?t expenses. While securitization of the personal loan portfolio could serve as one potential option of accomplishing this goal, the ERS may not be able to execute on a securitization clue to legal implications. 2008 Pension Obligation Bond Transactions In addition to identifying the above factors which have negatively impacted the ?nancial condition of the ERS, Conway MacKenzie also reviewed the 2008 Pension Obligation Bond transactions. The POBs were issued by the ERS with the intent of providing the System with increased assets to pay bene?t obligations, reduce the unfunded accrued actuarial liability and generate additional revenue to the System through speculative arbitrage. In evaluating the POB transactions, we focused our attention on the following three questions: 1. Was the Pension Obligation Bond strategy reasonable? 2. Was it prudent to issue the Pension Obligation Bonds? 3. Were Pension Obligation Bond proceeds utilized appropriately? 10 As discussed in greater detail below, the PCB transaction was speculative and subject to signi?cant risks which do not appear to have been fully understood or vetted by the Board of Trustee?s prior to undertaking the bond issuance strategy in 2008. In addition, several early warning signs which existed prior to the issuance of the POBs appear to have been ignored by the Board of Trustees. Therefore it is our opinion that given the risks inherent in the transactions, several of which appear to have increased signi?cantly in probability prior to the issuance of these bonds, the decisions to pursue and enter into Series A, Series and Series transactions were not prudent and may not comply with the general standards of ?duciary responsibilities of a Board of Trustees. Furthermore, our analyses indicate that a significant portion of the PCB proceeds were not invested as originally anticipated. 1. Was the Pension Obligation Bond strategy reasonable? in addressing this question, Conway MacKenzie evaluated the following: a. If issued, would the PCB transaction resolve the System?s liquidity needs? b. If issued, would the PCB transaction increase the System?s funded ratio? c. Were the likelihood of success and potential risk factors properly vetted? Would the POB transaction resolve the system?s liquidity needs? Based upon its ?nancial analysis, in an August 7, 2007 presentation to the ERS, Merrill highlighted that $7.0 billion in bond proceeds were required to address the liquidity needs of the System.11 The employer contributions, which solely secured the PCB obligations, were forecasted to be suf?cient to service the debt obligations related a $7.0 billion POB issuance. The POB transaction was essentially a pull ahead of future employer contributions to fund short term cash ?ow requirements. As the de?ned bene?t plan matured and its bene?t obligations declined, future employer contributions would continue to be used to fund POB debt service. Based on analysis and advice from its lead underwriter, Merrill it appears that the GDB and ERS had reason to believe that the proposed $7.0 billion POB transaction would be suf?cient to resolve the System?s short term liquidity crisis and meet the System?s long~term cash flow requirements but the ERS and GDB should have known the $3.0 billion of proceeds issued would not solve the long- terrn cash flow requirements. Would the PCB transaction increase the System?s funded ratio? As described in ERS Board of Trustee minutes and various presentations by the ERS, an underlying reason for the P013 transaction was to increase the total assets of the System and therefore increase the funding ratio. For ERS Board of Trustee minutes and various rating agency reports, the funding ratio of the System was expected to increase to approximately 70% with the issuance of $7.0 billion of pension obligation bonds. However, the current funding ratio calculated by Milliman in the June 30, 2009 actuarial report is signi?cantly less than 70% as communicated and estimated by the ERS during the POB issuance process. A primary reason for this signi?cant variance is treatment of the 11 See Exhibit 4 for the complete Merrill Global Markets Investment Banking Group presentation to the Employee Retirement System regarding Pension Funding Bonds: Debt Structure and Funding Analysis dated August 7, 2007. ll bond debt liability in the ?nding calculation. The June 30, 2009 actuarial valuation report calculates the funding ratio based upon ?net assets? in which the $2.961 billion of bond debt is netted or subtracted from the total market value of assets, consistent with how prior funding ratios were determined. However, in calculating the estimated 70% funding ratio, the proposed $7.0 billion of bond debt was not netted or subtracted from the total market value of assets to calculate net assets, essentially ignoring the liability. Given the treatment by the System?s actuarial consultants, we do not believe it was reasonable to conclude that the PCB transactions would positively impact the funded ratio immediately, as was originally communicated. We further question how those responsible for making the decision to enter into the POB transaction could have overlooked this fundamental ?aw in the forecasted funding ratio?s computation methodology. Given the dramatic increase in the funding ratio presented to them, ERS management, the Board of Trustees and GDB Board of Directors had a responsibility to fully understand if the increase was reasonable and calculated consistently with prior period calculations. This lack of understanding falls short of what is expected from a director or a ?scal agent that is exercising prudence or acting within the general standards of reasonability. Were the likelihood of success and potential risk factors properly vetted? Given the ?nancial leverage that it imposed upon the System, the proposed POB transaction was a very risky and speculative transaction, such that if certain assumptions failed to materialize, the System could be forced to bear higher costs and/or face increased liquidity requirements. Potential risks that existed when the PCB transaction was undertaken included, among others, the risk of a failed or undersubscribed offering and the System?s potential inability to generate arbitrage on the POB proceeds. Both of these risks became realities as the POB transaction was not only undersubscribed, but it also failed to experience the planned investment returns, thereby resulting in negative arbitrage. It appears that numerous warning signs existed, foretelling dif?culties with placing the bonds and realizing the returns required, yet action plans were not altered. Conclusion Based upon Merrill analyses, the ERS had the capacity to issue $7.0 billion of pension obligation bonds. While it was a reasonable strategy to help address near term liquidity requirements, it was not likely to significantly improve the System?s funding status when calculated consistently With prior methodologies. In addition, the transaction was subject to signi?cant risks among others, the risk of a failed or undersubscribed offering and the System?s potential inability to generate arbitrage on the POB proceeds. Based upon our review of supporting documents, it appears that these risks were not fully understood or vetted by the decision?makers prior to undertaking the bond issuance strategy and several of these risks actually materialized. Given the importance, magnitude and potential risks associated with a failed strategy, by not understanding or vetting the risks associated with the P013 transaction, it appears the ERS management, the Board of Trustees and GDB Board of Directors did not exercise due care. 2. Was it prudent to issue the Pension Obligation Bonds? The ERS and then lead underwriter, Merrill pursued a $7.0 billion POB issuance during 2007 but Merrill was unable to consummate the transaction due to a lackluster demand in the global market. UBS then replaced Merrill as underwriter and placed approximately $3.0 billion of the bonds in the local Puerto Rico market. Given the System?s signi?cant current and projected annual 12 net cash ?ow shortfalls, the transaction was not large enough to create arbitrage opportunities since a signi?cant portion of the proceeds have been (and will continue to be) utilized to address annual cash flow shortfalls, as opposed to being invested for the long term. This means that the transaction has also resulted in costly annual interest expense for the ERS. In determining if it was prudent to proceed with the PCB transaction, emphasis should be placed on whether or not the ERS ignored early warning signs prior to issuing the P085. Based upon our review of the information, we believe that the following early warning signs existed related to the POB issuance: a. It appears that Merrill failed offering in the global marketplace during December 2007 should have been. an indication that there was no viable market to raise the full $7.0 billion necessary to comprehensively address the objectives. b. Series A, and of the POBs were all issued in the local Puerto Rican market by UBS after Merrill was unsuccessful in generating suf?cient interest in the international market. A reasonable concern that should have been. assessed thoroughly by the ERS management, Board of Trustees and GDB Board of Directors prior to moving forward on the PCB transaction strategy with UBS was whether the local market was large enough to absorb a $7.0 billion bond offering. 0. In an ERS Board meeting held in May of 2008, an issue was raised that the ?market has deteriorated around 35 basis points since January 2008? (when the ?rst series of bonds were placed) and that ?this represented a substantial difference in interest rates of the bonds, making it more expensive to obtain ?nancing.?12 d. By June 2008 there were also signs that the stock market was deteriorating, which should have signaled to the ERS that its arbitrage goals were jeopardized. Conclusion Based upon advice and analysis from Merrill the ERS believed that at least a $7.0 billion POB issuance was required to resolve the System?s liquidity needs. Although POB proceeds of less than $7.0 billion would assist the System by improving liquidity in the short term and extending the date by which it would deplete its assets, they did not provide a permanent solution to the System?s problems and actually harmed the System because negative arbitrage was realized. The parties responsible for the oversight and administration of the ERS had a ?duciary responsibility to ensure market conditions were supportive of issuing at least the full $7.0 billion transaction required to solve the System?s ?nancial crisis before proceeding with the transaction. It is Conway MacKenzie?s opinion that several warning signs existed concerning market conditions, principally Merrill inability to issue the POBs in the global market, that should have given ERS management, Board of Trustees and GDB Board of Directors probable cause to either postpone the bond transaction or request additional due diligence be performed. ?2 Based on the ERS Board of Trustees meeting minutes dated May 27, 2008. 13 Additionally, we believe that by June 2008 it should have been apparent to the decision?makers and their advisors, that it was very unlikely that the incremental $5.5 billion in POB issuances required to reach the full $7.0 billion could be raised given deteriorating market conditions. For these reasons, it is our opinion that the decisions made by the governing boards of the ERS and GDB to pursue and enter into Series A, Series and Series transactions were not prudent given the risks inherent in the transactions, several of which risks appear to have increased signi?cantly in probability prior to the issuance of these bonds. 3. Were the Pension Obligation Bond proceeds utilized appropriately? Two objectives of the P08 issuance were to raise funds to cover the System?s operating expenses (cash flow objective) and to generate a pro?t (arbitrage objective). In determining whether the POB proceeds were utilized in accordance with these objectives, we note following: 0 Of the $1.6 billion raised from Series A, approximately $937 million was transferred to Citibank which was eventually invested in various stocks and bonds. The balance of $642 million in Series A proceeds were utilized to pay closing costs, fund debt service reserves and pay the Department of Treasury for overdrafts. 0 Of the combined $1.4 billion raised from Series and C, approximately $1.3 billion was transferred to a GDB account, where it was held in cash. Since 2008, $564 million of Series and proceeds have been used to cover the System?s operating cash shortfalls and fund pension liabilities. As such, only approximately $737 million remains in the GDB cash account as ofJune 30, 2010. Conclusion The notion that the P08 transaction would generate arbitrage opportunities for the System was inherently flawed based on the current liquidity needs of the System. In fact, the POB transaction has and will continue to cost the System money, as short-term cash flow problems continue to require the use of the POB proceeds to fund current expenses of the System. Simply put, the ERS cannot generate investment returns on POB proceeds that are used to fund System expenses, as opposed to being invested. For this reason, the POB issuance is currently costing the ERS more than what it is actually earning on invested proceeds. Our ?ndings indicate this occurred because ERS management and Board of Trustees ignored market conditions and were subsequently constrained and blinded by the necessity to utilize cash proceeds to fund cash requirements of the System. This lack of understanding is not reasonable any may not fall within the general standards of fiduciary responsibilities expected by a Board of Trustees. Overall Conclusion on P013 Transaction Review In analyzing management?s decision to enter into the POB transaction, we found no basis for the initial assumption made that such a strategy would improve the funded status of the ERS. The treatment of bond obligations in the calculation of the UAAL by the System?s actuarial consultants appears to support the practical reality that the incurrence of additional debt to increase plan assets should have little l4 effect on the funded status of a pension plan in the short term. If the bond obligations could be excluded from the calculation of net assets or otherwise in the UAAL, we would have expected the ERS to oppose the calculation by Milliman in the System?s June 30, 2009 actuarial valuation report. We did not come across any information to suggest there was a disagreement. This could imply a lack of understanding of the true impacts of the bond transaction on the ERS by ERS management, the Board of Trustees and GDB Board of Directors when they made the decision to enter into the POB transaction. Perhaps even more concerning in our analysis of the decision to enter into the POB transaction is the decision to move forward with the transaction in light of the many warning signs that existed, which suggested full implementation of the strategy would be dif?cult, if not impossible. The successful execution of the PCB transaction was dependent on certain risks not materializing, primarily the risk that the market would be unable to absorb the full $7.0 billion issuance. Consummating a transaction of signi?cantly less than $7.0 billion would merely serve as an expensive, temporary measure to address the System?s liquidity issues, postponing for some period of time the date of the eventual insolvency. For this reason, the PCB transaction resulted in the flawed execution of a failed strategy. The P013 transaction has negatively impacted the ERS and the Government, in general. Rather than addressing the System?s long~term funding problems, the $3.0 billion POB transaction merely provided a short-term temporary measure to address the System?s liquidity needs, as it was not large enough to create arbitrage opportunities. It did nothing to improve the funded position of the System and due to the negative arbitrage realized and fees paid as part of the PCB transaction, actually worsened the funded position of the System. The short-term liquidity ?x is costly and these costs may be realized for decades to come. In our opinion, the P013 transaction accomplished little more than passing on, and increasing the complexity of, the burden of fixing the System?s fundamental structural problems to future administrations of the ERS. Lastly, throughout the review process, it was clear to us that certain critical decisions, or lack thereof, made by those responsible for the oversight and management have negatively impacted the ERS and resulted in further deterioration of the System?s liquidity profile and funding status. Furthermore, we believe that certain actions and omissions of the ERS Board of Trustees, GDB Board of Directors and ERS management during the P013 decision making process were not reasonable and potentially flawed. As such, further investigation into the POB decision-making process should be pursued by the appropriate authorities. Evaltlation of Past Management Practices of the ERS While the combination of Act 447 bene?t arrangements, Special. Laws, and historically inadequate funding procedures have resulted in significant deterioration of the funding ratio throughout its near 60 year history, certain recent decisions made by those responsible for the management and oversight of the ERS have exacerbated this issue. in this section of the report, we focus on the evaluation of certain actions that were taken by the management during the 2004 2008 review periods, namely: 15 The issuance of the Pension Obligation Bonds; 0 Decisions to increase the personal loan portfolio; and 0 Accounts receivable collection efforts. The Issuance of the Pension Obligation Bonds In analyzing management?s decision to enter into the PCB transaction, we question the initial assumption made that such a strategy would improve the funded status of the System. The treatment of bond obligations in the calculation of the UAAL by the actuaries Milliman and Buck Consultants appear to support the practical reality that the incurrence of additional debt to increase assets should have little effect on the funded status of a pension plan in the short term. If the bond obligations could be excluded from the calculation of net assets or otherwise in the UAAL, we would have expected the ERS to oppose the calculation by Milliman in the System?s June 30, 2009 actuarial valuation report. We did not come across any information to suggest there was a disagreement. This could imply a lack of understanding of the true impacts of the bond transaction on the System by the parties that made the decision to enter into the PCB transaction. Perhaps even more concerning in our analysis of the decision to enter into the PCB transaction is the decision to move forward with the transaction in light of the many warning signs that existed suggesting full implementation of the strategy would be dif?cult if not impossible. The successful execution of the PCB transaction was dependent on the assumption that the market would be able to absorb the full $7.0 billion issuance, since consummating a transaction of signi?cantly less than $7.0 billion would merely serve as an expensive, temporary solution to the System?s liquidity issues, further postponing the date of the eventual insolvency. Based on our review of the relevant ERS and GDB POB transaction working paper ?les, which include various meeting minutes of the Board of Trustees and the Board of Directors, it does not appear that this risk was properly considered or addressed by the various Boards. Speci?cally, in proceeding forward with the PCB issuance just after Merrill failed attempts to close the originally contemplated transaction, the decision?makers ignored a major warning sign which indicated that the requisite level of demand did not exist for the planed $7.0 billion POB issuance. Given a successful transaction required issuance of at least $7.0 billion, ERS management, ERS Board of Trustees and GDB Board of Directors had a duty to thoroughly understand the risks associated with not achieving at least of PCB proceeds. The POB transaction has negatively impacted. the ERS and the Government, in general. Rather than addressing the System?s long?term funding problems, the PCB transaction merely provided a short? term temporary measure to address the System?s liquidity needs. This short-term measure is pricey and its costs may be realized for decades to come. In our opinion, the PCB transaction accomplished little more than passing on, and increasing the complexity of, the burden of ?xing the System?s fundamental structural problems to future administrations of the ERS. We also believe that certain actions and omissions of the Board of Trustees, GDB Board of Directors and ERS management during the PCB decision making process were not reasonable and potentially ?awed. As such, Conway MacKenzie l6 recommends that further investigation into the POB decision-making process should be pursued by the appropriate authorities. Decisions to increase the Personal Loan Portfolio As mentioned more thoroughly elsewhere in this report, the decision by the ERS to increase the maximum loan balance for personal loans from $5,000 to $15,000 in 2007 has resulted in a signi?cant cash drain to the System amounting to nearly $600 million over the past four fiscal years. These negative cash flows have been funded by the System and necessitated the liquidation of ERS assets. As a result, the investment portfolio is now heavily weighted in illiquid assets personal loans) and includes a large amount in receivables from participants that have questionable short term cash recovery. This overconcentration of illiquid assets has also accelerated the System?s forecasted insolvency date by nearly two years. The potential impact of increasing the cap on personal loans from $5,000 to $15,000 on the System?s liquidity pro?le and investment portfolio should have been thoroughly vetted before the ERS decided to amend the regulations pertaining to personal loans. Based on our review of the relevant documentation that was provided to us, including the 2007 ERS Board of Trustee minutes, and interviews with various key employees of the ERS, it appears that such due care was not used by the System Administrator in supporting this change or by the Board of Trustees in approving this change. Speci?cally, we did not come across any documented discussions or other data which indicated that this change was supported by a thorough analysis of its projected impacts on the System?s ?nancial health and were advised by key ERS personnel that such analyses were, in fact, never prepared in connection with the decision to increase the personal loan caps in 2007. Approving such a decision without supporting analyses demonstrates lack of ?duciary responsibility by ERS management and the Board of Trustees. Accounts Receivable Collection Efforts Based on interviews conducted with current and former ERS personnel, Conway MacKenzie was informed that ERS invoices were not being issued on a timely basis, and in certain instances, were not being issued at all to certain employers who participated in the System prior to 2005. When this was discovered, the prior ERS Administration put forth significant extra effort in cleaning up, monitoring and managing the invoicing and collection process. Additionally, the ERS vigorously arranged payment plans for delinquent municipalities and corporations to further enhance the collections process during 2007. The lax management of account receivable balances by the Administration prior to 2005 is an area that that has negatively impacted the ERS. Conway MacKenzie was also informed that certain corporations and municipalities have not been remitting both employer and (withheld) employee contributions to the ERS. Upon further investigation by the System?s accountants, it was determined that these contributions were used by certain participating employers to cover their own cash shortfalls or for other unspecified reasons. While investigating the use of these proceeds falls outside of the scope of Conway MacKenzie?s assignment, this is still an area of concern, particularly as it relates to employee withholdings. l7 Lack of Proper and Accurate Record Keeping Mesirow Report Conway MacKenzie learned through various interviews and by review of various POB documents that Mesirow Financial (?Mesirow?) acted as the ?nancial adviser to the GDB for the PCB transaction. We were also advised by ERS personnel that Mesirow may have issued a report or correspondence expressing its concerns or an adverse position regarding the PCB transaction. A physical or electronic copy of such report or position was not included in either ERS or GDB documents provided. Conway MacKenzie attempted to obtain a copy of Mesirow?s report or position on the PCB transaction through Luis Garcia (Director of Investments at the ERS), but was unsuccessful. When contacted by Luis Garcia, Mesirow responded that all information requests relating to the PCB transaction should be channeled to Mesirow?s legal department. The GDB sent a formal request for such information to Mesirow?s Associate General Counsel on September 14, 2010. As of the date that this report was published, we had not obtained any of the requested information from Mesirow. Given the potential implications which Mesirow?s report or position on the feasibility of the PCB transaction may have, we strongly encourage the GDB to review copies of both Mesirow?s report and their working papers related to the PCB transaction. If Mesirow did, in fact, raise concerns regarding the PCB transaction that were communicated to its client, the GDB, reasons why the GDB Board of Directors and/or ERS Board of Trustees did not act on such concerns and advice from the advisor should be investigated to determine whether a lack of due care exists. GDB Minutes During Conway MacKenzie?s review of GDB ?les related to the PCB transaction, including Board of Director and Executive Committee meeting minutes, we noted that numerous GDB meeting minutes during the review period of 2004 - 2008 were either missing or incomplete. As such, we were unable to trace certain discussion threads or validate the timing of certain decisions made by the Board of Directors and/or Executive Committee which could have assisted us in verifying whether certain issues were identi?ed or raised within the GDB organization, either prior to or during the issuance of Series and C. Section 107 of the GDB Board by-laws states that, ?The Secretary of the Board shall issue calls for all regular meetings, shall keep minutes of all meetings, shall be custodian of the minute books and the Seal of the Bank and shall perform such other duties as are incident of his of?ce or properly required of him by the Board of Directors who may also appoint one or more Assistant Secretaries to perform such duties as the Board my Given the poor condition of the GDB Board of Director and. Executive Committee meeting minutes, an investigation should be conducted to evaluate the process and determine who was responsible for the lack proper record keeping. In addition to the individuals responsible for record keeping, former Board of Directors and Executive Committee members should be questioned as to their knowledge of the situation. Current GDB management is aware and has taken remedial actions. Accordingly, we were informed by General Counsel of the GDB that the GDB has made referrals for further investigation to the 18 Department of Justice, the Government Ethic?s Of?ce and the Of?ce of the Comptroller regarding their ?ndings with respect to poor record keeping by the former Secretary of the GDB Board of Directors. We strongly encourage the proper authorities to conduct further investigations as it relates to the state of record keeping by the former GDB Board of Directors. 19 Section 3 - Summary of Conclusions The following table summarizes Conway MacKenzie ?ndings, iliustrates decision-makers, of?cers and directors responsible for the ?ndings during the analyzed period and provides certain recommendations about the System: Factors that led to the Responsible Decision- Financiai Makers, Of?cers and Crisis Findings Dimmers Res?omm?etions Inadequate 3 Failure to address at all from ERS Board of Trustees An increase in the Funding 2000-2008 funding status of and ERS management statutory contribution the System after actions taken in year 1999 to close the de?ned bene?t plans Procedures during relevant period rates and decrease in ERS bene?t obligations is 11606857:le i Early Promotion of early Parties associated with Any additional early Retirement retirement programs that the enactment of early retirement program must Programs were not funded up front by retirement programs and be funded in advance or sponsoring employer ERS management have speci?c funding plans by the sponsoring employer 20 led to the. Financial Crisis 2008 Pension Obligation Bond Transactions . The $3.0 billion POB transaction was inherently flawed, misconceived and speculative as a mechanism to improve the System?s funded ratio. It merely provided a short-term temporary cash measure which blindly guided decision-makers despite many warning signs. The negative arbitrage and fees paid actually worsened the funding position Responsible Decision- Makers, Of?cers and Directors Jorge Irizarry (GDB), Juan Cancel Alegria (ERS), Harold Gonzalez (ERS), Minia Gonzalez (ERS), Other select individuals from ERS management, ERS Board of Trustees and GDB Board of Directors as identified in Exhibit 4 Alfredo Salazar (GDB), Due to lack of care demonstrated by the decision-makers, further investigation is warranted Recommendations 21 Exhibit 1 Exhibit 2 Exhibit 3 Exhibit 4 List of Documents Relied Upon Summary of Outstanding Municipality and Public Corporation Special Law Accounts Receivable as of June 30, 2010 Detailed Cost Analysis by Special Law by Year (2004 2010) List of Decision-makers, Of?cers and Directors 22 Exhibit 1 Exhibit 1 Documents Relied Upon 1 2003-2004 to 2009-2010.xis 2 200708 Pension Funding Bonds Debt Structure and Funding Analysispdf 3 2010?02 ERS General leformationpdf 4 Act 11 Amendment-TRS-English.pdf 5 Act 34 Amendment-TRS-English.pdf 6 Act 35 of 2007.pdf 7? Act 8 Act 70 of 2010.pdr 9 Act 70 Reguiation.pdf 10 Act 11 Actuarial Study in Respect to Active Members as of June 30, 1975 of the Retirement System of the Government of Puerto Rico and Its instrumentalities, and Supplementary Comments (prepared by A. Estrella and C.J. Nesbitt) dated June 20, 197?? 12 Actuarial Valuation 2005.pdf 13 Actuarial Valuation 2007.pdr 14 Actuarial Valuation 2009.pdf 15 Actuarial 16 Actuarial 17 Actuarial 18 acuerdos11AGOSTG.xls 19 Alternate Allocation Scenario Comparison for Administrative Resolution Num. 2008-17 20 America's Prison Hell is a Little Slice of Heavenpdt 21 approved 22 ASR-Generai Information?Actuarial 23 ASR-l?iistorical 24 ASR-Retirement System Overview-20100342-Spanish.pdf 25 Caribbean Empioyee Retirement System is bankrupt-by Carlos Marquezpdf 26 Cash Flows 27 Casn?ow 28 cashfiow201 1 proyeccionxls 29 Chapter? - The Economy of Puerto Ricopdf 30 Comision Reforma Retire-Resource 31 Cornunicado de Prensa-20100342 32 Contact 33 Contact 34 Contact List-Reform Commision Members-Espa?oldoc 35 Employees Retirement System of the Government of the Commonwealth of Puerto Rico (ERS): Covered Payroll Outlook (2008-2059) 36 Enmiendas por decades Sisterna de Retirodoc 37 EnnisKnupp-Asset Liability Study-Completion Ratiow20i0-01-English.pdf 38 ERS 1989-2009345 39 ERS Board of Yrustee By?Laws 40 ERS Board of irustee meeting minutes (2004 - 2009) various files 4% ERS Functional Organization Chart 42 ERS Position Papers for Laws 35, 144, and 524 43 Summaries-English-Ztil0.pdf 44 EST ELA 20092010 (3).xls 45 Estudio Relacionado con ios Programas de Retire Temprano Aprobados desde el 2005 hasta el 2008, Proposito, Resultados Recomendaciones Volt 2.pdf 46 Financial 47 Financial 48 Fiscal Reform Law of 49 F8 2007,pdf 50 F8 2008.pdf ?t FS 2009.pdf 52 GDB Board of Directors By?Laws 53 GDB Board of Directors Meetings, 2004 (Draft) files 54 GDB Board of Directors Meetings, 2005 (Final) files 55 GDB Board of Directors Meetings, 2006-2007 (Final) files 56 GDB Board of Directors Meetings, 2006-2008 (Draft) ?les Page 1 of 2 Exhibit 1 Documents Relied Upon 57 GDB Board of Directors Meetings, 2007 (Final) fites 58 GDB Board of Directors Meetings, 2008-2009 (Draft) files 59 GDB Bond Documents, Series A - File 1 (various flies) 60 GDB Bond Documents, Series A - File Ii (various ?les) 61 GDB Bond Documents, Series A - File 111 (various files) 62 GDB Bond Documents, Series A - File IV - Cost of issuance (various ?les) 63 GDB Bond Documents, Series - Cost of issuance (various fites) 64 GDB Bond Documents, Series - File 1 (various fiies) 65 GDB 80nd Documents, Series - File It (various ?les) 65 GDB 80nd Documents, Series File (various ?les) 67 GDB Bond Documents, Series - File ll - Cost of issuance (various files) 68 GDB Exectuive Committee Meetings, 2006 (Final) files 69 GDB Exectuive Committee Meetings, 2006-2008 (Draft) flies 70 GDB Org 71 Histoncos Flujos de Efectivo 2005 a 2009 eng.xls 72 Internal Financial 73 investment Company Act of 1940,pdf 74 investment Consultantsdoc 75 June 30, 2010 Unaudited Financial Statements 76 June 30, 2010 Unaudited Financial Statements 77 78 Laws and Early Retirement Programs 79 Letter address to the Board of Trustees from Wodward and Fondiller (a division of Martin E. Sega! Co, Inc) dated June 29, 1971 80 Letter from John Thomas Enger of DES Consulting Services of Puerto Rico to Jorge lrizarry Herrans dated June 4, 2008 81 LOAN OVERVIEW JUNE 2009.ppt 82 Memo to the Reform Commission General Overview-ZDtD-Englisn.pdf 83 Law 70 Analysispdf 84 Mailman-Review of Pension Funding and Solvency 85 Miliiman-Review of Pension Funding and Solvency 88 Fund Keith Brainard-2009-10.odf 87 88 89 013201040 Orden Ejecutiva Sistema de 90 Pew Center-Promises with a Pace-Public Sector Retirement 91 Pew Center-The trillion dollar gap-20100248.pdf 92 Programas de Retiro Temprano Aprobados desde el 1994 haste e12005, Proposito, Resultados Recomendacionespdf 93 Related to Series A, 8 and Issuesxls 94 Related to Tetefonica de PR Dividends and Sale of Sharesxls 95 Report to the Governor's Special Commission on Retirement System (submitted by Aon Consulting, Inc.) dated August 2010 98 Return 97 S&P-Puolic Finance?US States OPEB Liabilities-20090603.pdf 98 Santander Credit Linexls 99 Senior Pension Funding Bond Series A $1 .59B.pdf 100 Senior Pension Funding Bond Series - $1 .068.odf 101 Senior Pension Funding Bond Series - $300M.pdf 102 Sistema De Retiro De Los Empieados Del Gobierno: Origen, Deficit Actuarial Recomendaciones (CEPSR report) dated March 2009 103 104 Social Secutiry Reform-National Commission-by Greenspan-1983-D1.pdf 105 Speciai Commission on Retirement Systems 106 The Puerto Rico Government Emplyees' and ?uoiciary Retirement Systems Statement of tnvestment Policy and Perfomance Objectives (dated Aprit 6, 2010) 107 TIMEDEPOSTJUNTA.XIS 108 UBS Consulting Servtces of Puerto Rico Presentation to the Puerto Rico Employee's Retirement System (various dates) 109 UBS in PR Pension_07?27?O9 Bloomberg articlepdf 110 UBS in Puerto Rico Pension Gets Fee Bonanza Seen as Conlicted (Bloomberg articte) (fated February 27, 2009 111 Univ Minnesota Law School-Public Pension Plan Reform-The Legat Framework by Amy B. Monahanpdf Exhibit 2 Exhibit 2 Summary of Outstanding Municipaiity Speciai Law Accounts Receivable As of June 30, 2010 ADJUNYAS AGUADA AGUADILLA AGUAS BUENAS ANASCO ARECIBO ARROYO BARCELONETA BARRANQUITAS BAYAMON CABO ROJO CAGUAS CAMUY CANGVANAS CATAIQO CAYEY CIALES CIDRA COAMO COMERIO COROZAL CULEBRA DORADO FAJARDO GUANECA GUAYAMA GUAYANILLA GUAYNABO GURABO HATILLO HORM1GUEROS HUMACAO JAYUYA JUANA DIAZ JUNCOS LAJAS LARES 301 302 303 304 305 303 337 303 309 310 311 312 313 314 373 315 310 317 313 339 320 321 322 323 324 325 323 377 327 323 329 330 333 332 333 334 335 333 337 333 339 343 2009-201 0 76,951 5 - 3,576 95,240 2,531 243,979 149,829 562,324 136,300 3,211 101,028 202,861 71,233 67,572 107,689 35,105 74,797 97,445 5,567 5,429 18,407 104,573 69,920 226,540 97,928 91,456 101,115 76,951 3, 576 95, 240 2,531 243,979 122,666 $49,829 562,324 140,527 3,211 205,344 202,861 71,233 133,015 290,345 35,105 74,797 97,445 5,567 5,429 38,407 185,424 69,920 226,540 97,928 91,456 101,115 Page 1 of 4 Exhibit 2 Summary of Outstanding Municipaiity Speciai Law Accounts Receivabie As of June 30, 2010 Municipatity LAS MARIAS LAS PEEDRAS LUQUILLO MANATI MARECAO MAUNABO MAYAGUEZ MOCA MOROWS NAGUABO NARANNTO OROCOVTS PATILLAS PENUELAS PONCE PONCE MUELLE RENCON R10 GRANDE SABANA GRANDE SALINAS SAN GERMAN SAN JUAN SAN LORENZO SAN SANTA ISABEL TOA TOA BAJA ALTO UTUADO VEGA ALTA VEGA BAJA VIEQUES YABUCOA YAUCO Total Municipality 341 342 343 344 345 346 347 348 349 359 351 352 353 354 355 356 379 357 358 359 360 361 362 363 364 365 366 367 368 369 379 371 372 373 374 375 376 2992-2907 98,326 228,497 461,831 84,837 88,378 518,438 69,304 89,679 0 1,922,228 368,884 156,986 4,294,729 3 2997-2098 53,933 99,559 455,664 22,152 2,324 72,487 118,262 47,334 199,139 4,796,915 184,473 85,453 0 101,469 6,154,934 2908-2009 69,261 102,944 487,269 79,882 725,509 117,753 98,120 149,962 5,232,328 195,187 88,735 190,516 155,974 87, 899 71,969 8,094,121 COLA Cost Baiance 29992919 68,331 4,270 40,448 6,119 66,703 116,139 552,870 184,731 19,588 96,860 40,745 86,464 148,370 779,971 146,272 75,555 117,491 168,999 5,411,655 229,342 190,450 110,792 184,574 173,825 81,454 2,890 105,972 168,179 12,823,471 in Prior Years 3,906 5 F- 1 68,331 4,270 40,448 6,119 282,229 546,239 1,957,634 291,720 12,913 96,869 49,745 327,219 148,370 2,023,919 442,591 122,899 414,419 318,981 17,363,126 968,885 431,624 211,219 286,943 332,376 81,454 2,809 193,781 249,130 39,489,253 Page 2 of 4 Exhibit 2 Summary of Outstanding Public Corporation Special Law Accounts Receivable As of June 30, 2010 Corporations ADM. DE ASUNTOS ASEM JUNTA REYRO PARA MAESTRO COMESION SEGURIDAD EN E3. CORP, FOND. SEG, ESTADO CIA. DE PARQUES NACIONALES DE PR AUT. EDIFICEO PUBLICOS AEE AMA. PUERTOS AUT. DE AUT. CARRETERAS AUT. DE PR AUT, DESP. SOLIDOS ADM. TERRENOS CORP. CEN3RO DE BELLAS ARTES ACT. A.C.A.A. CORP. ARTES AEELA BCO. GUB. FOMENTO BANCO 01A. COMERCIO EXPORTACION CIA. DE FOMENTO 01A DE TURISMO CEN3RO CARDEOVASCULAR COSSEC CORP. AZUCARERA NEGOCEADO SEG. A.C.D. CULEBRA SERV. EXT. AGRICOLA FARO. NACIONALES DE ESTUDIO ESPECIALES GEN. GOBEERNO ASD. ET1CA GUBERNAMENTAL INSTITUTO FORENCE BOO. DES. C. EMP. ADIESTRAMEENTO TRAB. CORPORACION PUBLICA PANEL. INDEP. CONSEJO DE DESARROLLO 112 1 15 1 10 123 163 174 201 203 204 205 203 207 203 209 210 211 212 213 214 217 218 219 220 221 222 224 227 223 229 232 235 230 233 239 241 242 243 245 243 249 250 253 2002-2007 3, 384,895 1,027,073 953,936 141,621 60,040 254,956 2 3 298 911,309 251,013 2007-2008 2,534,629 7,783,447 360,890 591 ,626 1,623,449 90,642 83,621 58,178 559,875 2008-2009 2,533,083 332,777 7,241,263 1,397,217 1,420,982 1,540,172 2,246,007 87.676 454,207 56,800 532,387 10,261 340,934 28,325 2009-2010 2,435,106 13,033 454,349 6,639,442 1,156,694 1,626,817 1,597,859 321,923 2,058,580 76,270 124,428 1,885 202,368 477,740 1,589 5,494 26,245 81 ,414 1,226,695 38,920 12,871 527,039 14,850 1,039,348 44,214 33,476 1,327 12,709 COLA Cost Balance in Prior Years 2,516,515 46,133 Total 13,404,228 46,133 13,033 1,027,073 787,126 21,664,152 2,714,801 3,639,425 5,715,416 321,923 4,304,587 396,209 184,469 1,885 995,152 499,039 1,589 5,494 26,245 81,414 1,226,695 38,920 151,194 2,759,253 83,381 3,974 25,11 1 1,531,294 44,214 75,583 4,127 12,709 Page 3 of 4 Exhibit 2 Summary of Outstanding Public Corporation Special Law Accounts Receivable As of June 30, 2010 COLA Cost Balance Corporations 3 2002-2007 2007-2008 2008-2009 2009-2010 in Prior Years DE SEGUROS AGRICOLAS 270 - 166,794 - 166,794 GUARDIA 271 4,588 3,530 - 8,118 ESCUELA ARTES 272 - 1,410 1.767 8,014 - ??1,192 CENTRO RECAUDACIONES MUN. 279 - - - ADM. SEGUROS DE SALUD 292 - - 400 - 400 CONSEJO EDUCACION 293 - - CONSERVATORIO DE MUSECA 295 16,087 - 16,087 SUNTA DE GOBIERNO 911 296 - - - - - SALUD 417 - - - - - AUTORIDAD TRANSPORTE 502 2,000 2,000 Total Corporations 3 7,005,140 3 13,706,439 18,194,183 20,278,687 2,901,991 62,087,441 Page 4 014 Exhibit 3 Exhibit 3 Empioyees Retirement System of Puerte Rico Detailed Cost Anatysis by Special Law (2003-2004) Estimated Total Estimated Estimated OGP Corgoraticns Estimated Municipaiities Special Laws 2003 - 2004 2003 - 2004 2003 - 2004 2003 - 2004 COLA Act 530. 10. Year 1992 4,070,000 - 8 - 4,070,000 Act Ate. 207, Year 1995 1,531,885 407,777 1,939,662 Act No. 40, Year 2001 20,625,000 2,649,257 766,032 24,040,289 Act No, 157, Year 2003 - 441,240 441,240 Act No. 35, Year 2007 - - - Act No. 41, Year 2001 372.000 - 372,000 Act No. 134, Year 1996 401.000 - 401,000 Act No. 221, Year 1998 ., 2.307.682 2,307,682 Total COLA 25,468,000 6,488,824 1,61 5,049 33,571 ,872 Christmas Bonus Act Me 109. Year 1997 19,528,000 - 19,528,000 Act No. 159. Year 2003 - 1,412,300 965,600 2,377,900 Act 190.433. Year 2004 and Act No. 144, Year 2005 - - - - Act No. 98, Yea? 1980 and Act No. 14, Year 1987 414,000 - 4 414,000 Total Christmas Bonus 1 9,942,000 1,412,300 965,600 22,319,900 Widows Act No. 158. Year 2003 6,431,500 928,703 347,496 7,707,700 Act No. 469. Year 1968 5,019,000 - 5,019,000 Act No. 2, Year 1965 75,000 - - 75,000 Act etc, 82, Year E941 24,000 - - 24,000 Act No. 135. Year 1975 Act 5:0, 33, Yea? 2002 -Jaime Benitez Widow Bene?t 20,000 - - 20,000 Tetai Widows 11,569,500 928,703 347,496 1 2,845,700 Medical Plan Act Ate. 95, Year 3963 45,347,968 - 45,347,968 Act Ate. 155. Year 2003 6,030,000 1,412,700 965,500 8,408,200 Total Medical Pian 51,377,968 1,412,700 965,500 53,756,168 Others Act No. 124. Year 1993 - Pensioe increase 417,000 417,000 Act No. 127, Year 1958 - Bene?ts for htgh-rtsk participants 16,664,000 16,664,000 Act No. 208. Year 2000 - Difference between $200 increase or $1 ,000. whichever is lower 5.000900 5.000.000 Act 920. 37, Year 1941 - Summer bonus 8,083,000 8,083,000 Act No. 27. Year 1955 (Amended by Act 11, Year 1986) - Increase in death bene?ts 3,000 3,900 Act No. 524. Year 2004 - 6250 increase in death bene?ts and Act No. 548. Year - - Act Ate. 23, Year 1983 - Pension increase $3,600 1,436,000 1,436,000 Act No. 156, Year 1941 - $300 minimum pension increase 6,500,000 403,536 1,998,129 8,901,666 Act No. 72, Year 1956 - Culturat travei toans (A88) 270.000 270.000 Act No. 6 and 7, Year 1950 - Bene?ts for participants of mass migra?oa 11.000 11.000 Totat Others 38,384,000 403,536 1,998,129 40,785,666 Totat Special Laws 146,741,468 10,646,063 5,891,775 163,279,306 Page 1 of 7 Exhibit 3 Employees Retirement System of Puerte Rico Detailed Cost Analysis by Special Law (2004?2005) Estimated Total Estimated Estimated OGP Corporations Estimated Municipalities Sgeciat Laws 2004 - 2005 2004 - 2005 2004 - 2005 2004 - 2005 COLA Act No. 10, Year 1992 4,212,000 8 - 4,212,000 Act No. 207, Year 1995 - 1,339,947 361,372 1 ,701,319 Act No. 40, Year 2001 24,262,000 3,031,842 828,098 28,121,940 Act No. 157, Year 2003 - 3,194,452 852,990 4,047,442 Act No. 35, Year 2007 - - Act No. 41, Year 2001 372,000 - 372,000 Act No. 134. Year 1996 401.000 - - 401,000 Act No. 221, Year 1998 - 2,326,406 - 2,326,406 Total COLA 29,247,000 9,892,647 2,042,460 41,182,107 Christmas Bonus Act No. 109, Year 1997 19,549,000 - - 19,549,000 Act No. 159, Year 2003 - 1,434,100 985,300 2,419,400 Act No. 433, Year 2004 and Act No. 144, Year 2005 - - - Act No. 98. Year 1980 and Act No. 14, Year 1987 414,000 - - 414,000 Total Christmas Bonus 19,963,000 1,434,100 985,300 22,382,400 Widows Act No. 158, Year 2003 12,663,000 1,234,898 455,621 14,353,519 Act No. 169, Year 1968 5,019,000 - - 5,019,000 Act No. 2, Year 1965 60.000 - - 60,000 Act No. 82, Year 1941 24,000 - - 24,000 Act No. 135, Year 1975 Act No. 33, Year 2002 -Jalme Benitez Widow Beae?t 20,000 - - 20,000 Total Widows 17,786,000 1,234,898 455,621 19,476,519 Medicai Plan Act No. 95, Year 1963 60,000,000 - - 60,000,000 Act No. 155, Year 2003 6,030,000 1,433,800 985,500 8,449,300 Total Medical Plan 66,030,000 1,433,800 985,500 68,449,300 Others Act No. 124, Year 1993 - Pension increase 426,000 426,000 Act No. 127, Year 1958 - Bene?ts for high-risk participants 16,664,000 16,664,000 Act No. 208, Year 2000 - Difference between $200 increase or $1,000,w?1icheveris lower - 5.990300 5.0001000 Act No. 37, Year 1941 - Summer bonus 8,083,000 8,083,000 Act No. 27, Year 1955 (Amended by Act 11, Year 1986) .. Increase in eeath bene?ts 3,000 3.000 Act No. 524, Year 2004 - 8250 increase in death bene?ts and Act No. 548, Year 398,750 398,750 Act No. 23, Year 1983 - Pension increase $3,600 1,436,000 1,436,000 Act No. 156, Year 1941 - $300 minimum pension increase 13,276,000 779,192 3,674,646 17,729,838 Act No. 72, Year 1956 - Cultural travel tcans (A88) 372,000 372,000 Act No. 6 and 7, Year 1950 Bene?ts for participants of mass migration 12,000 12,000 Total Others 45,670,750 779.1 92 3,674,646 50.1 24,588 Total Special Laws 178,696,750 14,774,637 8,143,526 201,614,913 Page 2 at 7 Exhibit 3 Employees Retirement System of Puerto Rico Detailed Cost Analysis by Special Law (2005-2006) COLA Act No. 10, Year 1992 Act No. 207, Year 1995 Act No. 40, Year 2001 Act No. 157, Year 2003 Act No. 35, Year 2007 Act No. 41, Year 2001 Act No. 134, Year 1996 Act No. 221, Year 1998 Total COLA Christmas Bonus Act No. 109, Year 1997 Act 110. 159, Year 2003 Act Ate. 433, Year 2004 and Act No. 144, Year 2005 Act No. 98, Year 1980 and Act No. 14, Year 1987 Total Christmas Bonus Widows Act No. 158, Year 2003 Act No. 169, Year 1968 Act No, 2, Year 1965 Act No. 82, Year 1941 Act No, 135, Year 1975 Act No. 33, Year 2002 -Jaime Benitez Widow Bene?t Total Widows Medical Plan Act No. 95, Year 1963 Act No. 155, Year 2003 Total Medical Plan Others Act No. 124, Year 1993 Pension increase Act No. 127, Year 1958 - Bene?ts for high-risk participants Act No. 208, Year 2000 - Difference between 6200 increase or $1,000, whichever is lower Act No. 37, Year 1941 Summer bonus Act No. 27, Year 1955 (Amended by Act 11, Year 1986) - increase in death bene?ts Act No. 524, Year 2004 $250 increase in death bene?ts and Act No. 548, Year Act No. 23, Year 1983 - Pension increase $3,600 Act No. 156, Year 1941 - $300 minimum pension increase Act No. 72, Year 1956 - Cultural travel loans (ASR) Act No. 6 ane 7, Year 1950 - for participants of mass migration Additionat Asignmeat Total Others Total Special Laws Estimated Totat Estimated Estimated OGP Corporations Estimated Municipalities Sgeciai Laws 2005 - 2006 2005 - 2006 2005 - 2006 2005 - 2006 4,212,000 6 4,212,000 - 1,313,605 351,995 1,665,599 24,262,000 3,032,595 813,040 28,107,635 - 3,123,329 837,477 3,960,806 372,000 372,000 401,000 - 401,000 2,034,484 - 2,034,484 29,247,000 9,504,013 2,002,511 40,753,524 19,549,000 - 19,549,000 1,479,700 1,005,900 2,485,600 - 1 479,700 1,004,600 2,484,300 414,000 - - 414,000 19,963,000 2,959,400 2,010,500 24,932,900 12,663,000 1,038,666 415,298 14,116,964 4,600,000 - - 4,600,000 60,000 - - 60,000 24,000 - - 24,000 20,000 - - 20,000 17,367,000 1,038,666 415,298 18,820,964 60,000,000 - 60,000,000 6,030,000 1,479,700 1,006,200 8,515,900 66,030,000 1,479,700 1,006,200 68,515,900 426,000 426,000 16,684,000 16,684,000 5,000,000 5,000,000 8,083,000 8,083,000 3,000 3,000 399,000 399,000 1,436,000 1,436,000 13,276,000 708,789 3,487,229 17,472,017 372,000 372,000 12,000 12,000 42,900,000 42,900,000 88,591,000 708,789 3,487,229 92,787,017 221,198,000 15,690,567 8,921,738 245,810,305 Page 3 of 7 Exhibit 3 Emptoyees Retirement System of Puerto Rico Detailed Cost Analysis by Special Law (2006-2007) Estimated Total Estimated Estimated OGP Corporations Estimated Municipaiities Special Laws 2006 - 2007 2006 - 2007 2006 - 2007 2006 - 2007 COLA Act No. 10, Year 1992 6 4,203,000 .. - 4,203,000 Act No. 207, Year 3995 - 972,817 274,108 1,246,925 Act No. 40, Year 2001 21,717,000 2,492,896 771,302 24,981,198 Act No. 157, Year 2003 - 4,070,211 1,246,151 5,316,362 Act No. 35, Year 2007 - - - Act No. 41, Year 2001 500,000 - - 500,000 Act No. 134, Year 1996 415,000 - - 415,000 Act No. 221, Year 1998 - 1,574,730 - 1,574,730 Total COLA 26,835,000 9,110,655 2,291,561 38,237,216 Christmas Bonus Act No. 109, Year 1997 28,200,000 - - 28,200,000 Act No. 159, Year 2003 1,448,400 981,200 2,429,600 Act No. 433, Year 2004 and Act No. 144, Year 2005 1 ,448,400 982,500 2,430,900 Act No. 98, Year 1980 and Act No. 14, Year 1987 414,000 - 414,000 Total Christmas Bonus 28,614,000 2,896,800 1,963,700 33,474,500 Wiriows Act No. 158, Year 2003 9,513,000 1,038,666 414,213 10,965,878 Act No. 169, Year 1968 4,600,000 - 4,600,000 Act No. 2, Year 1965 60,000 60,000 Act No. 82, Year 3943 24,000 - 24,000 Act No. 135, Year 1975 - - Act No. 33, Year 2002 -Jaime Benitez Widow Bene?t 20,000 20,000 Total Widows 14,217,000 1,038,666 414,213 15,669,878 Medicai Plan Act No. 95, Year 1 963 84,500,000 - 84,500,000 Act No. 155, Year 2003 8,400,000 1,448,400 980,900 8,829,300 Total Medical Ptan 90,900,000 1 ,448,400 980,900 93,329,300 Others Act No. 124, Year 1993 - Pension increase 426,000 426,000 Act No. 127, Year 1958 - Bene?ts for highwrisk participants 17,000,000 17,000,000 Act No. 208, Year 2000 - Difference between $200 increase at $1,000, whichever is tower 5.000.000 5,000.000 Act No. 37, Year 1941 Summer bonus 8,880,000 8,880,000 Act No. 27, Year 1955 (Amended by Act 11, Year 3986) - lnctease in death bene?ts 3.000 3.000 Act No. 524, Year 2004 - 6250 increase in death bene?ts and Act No. 548, Year 300,000 300.000 Act No. 23, Year 1983 - Pension increase $3,600 1,436,000 1,436,000 Act No. 156, Year1941 3300 minimum pension inczease 12,760,000 700,112 3,433,883 16,893,995 Act No. 72, Year 1956 - Cultural travel toans (ASR) 650,000 650,000 Act No. 6 and 7, Year 1950 - Bene?ts for participants of mass migration 12,000 12,000 Total Others 47,467,000 700,1 1 2 3,433,883 51 $00,995 Total Special Laws 208,033,000 15,194,632 9,084,257 232,311,890 Page 4 of 7 Exhibit 3 Employees Retirement System of Puerto Rico Detailed Cost Analysis by Special Law (20072008) Estimated Total Estimated Estimated OGP Corporations Estimated Municigaiities Sgecial Laws 2007 - 2008 2007 - 2008 2007 - 2008 2007 - 2008 COLA Act No. 10, Year 1992 4,267,000 6 - - 4,267,000 Act No. 207, Year 1995 1,156,530 418,263 1,574,792 Act No. 40, Year 2001 41,567,000 4,458,409 1,415,432 47,440,841 Act No. 157, Year 2003 - 4,519,890 1,521,935 6,041,825 Act No. 35, Year 2007 - 5,537,768 1,641,943 7,179,710 Act No. 41, Year 2001 597,000 - 597,000 Act No. 134, Year 1996 489,000 - - 489,000 Act No. 221 Year 1998 - 1,749,974 - 1,749,974 Total COLA 46,920,000 17,422,570 4,997,572 69,340,143 Christmas Bonus Act No. 109, Year 1997 28,200,000 28,200,000 Act No. 159, Year 2003 - 1 ,717,700 1,097,500 2,815,200 Act No. 433, Year 2004 and Act No. 144, Year 2005 - 1,717,700 1,097,500 2,815,200 Act No. 98, Year 1980 and Act No. 14, Year 1987 414,000 - 414,000 Totai Christmas Bonus 28,614,000 3,435,400 2,195,000 34,244,400 Widows Act No. 158, Year 2003 7,326,000 1,018,372 368,911 8,713,283 Act No. 169, Year 1968 4,600,000 - - 4,600,000 Act No. 2, Year 1965 51,000 - - 51,000 Act No. 82, Year 1941 12,000 - - 12,000 Act No. 135, Year 1975 - - Act No. 33, Year 2002 -Jaime Beniiez Widow Bene?t 20,000 20,000 Totai Widows 12,009,000 1,018,372 368,91 1 13,396,283 Medicai Plan Act No. 95, Year 1963 87,500,000 - 87,500,000 Act No. 155, Year 2003 6,309,000 1,530,638 921,786 8,761,424 Totai Medical Plan 93,809,000 1,530,638 921,786 96,261,424 Others Act No. 124, Year 1993 - Pension increase 406,000 406,000 Act No. 127, Year 1958 - Bene?ts for high-risk particicants 16,789,000 16,789,000 Act No. 208, Year 2000 - Difference between $200 increase or $1,000, whichever is lower 5.587.000 5.537.000 Act No, 37, Year 1941 - Summer bonus 9,483,000 9,483,000 Act No, 27, Year 1955 (Amended by Act 11, Year 1986) - Increase in death bene?ts 1.000 1,000 Act No. 524, Year 2004 - 8250 increase in death bene?ts and Act N0. 548I Year 23?,000 236,000 Act No. 23, Yea;r 1983 - Pension increase 33,600 1,399,000 1 ,399,000 Act No, 156, Year 1941 - $300 minimum pension increase 12,401,000 300,873 1 070,404 13,772,277 Act No, 72, Year 1956 - Cultural travel loans (ASR) 403,000 403,000 Act No, 6 and 7, Year 1950 - Bene?ts for participants of mass migration 3,000 3,000 Total Others 46,708,000 300,873 1,070,404 48,079,277 Total Special laws 228,060,000 23,707,853 3 9,553,673 261 ,321 ,526 Page 5 017 Exhibit 3 Employees Retirement System of Puerte Rico Detailed Cost Analysis by Special Law (2008-2009) COLA Act No. 10, Year 1992 Act :10. 207, Year 1995 Act :00, 40, Year 2001 Act No, 157, Yea: 2003 Act No. 35, Year 2007 Act No. 41, Year 2001 Act No. 134, Year 1996 Act No. 221, Year 1998 Total COLA Christmas Bonus Act No. 109, Year 1997 Act No. 159, Year 2003 Act No. 433, Year 2004 acd Act No. 144, Year 2005 Act No. 98, Year 1980 and Act No. 14, Year 1987 Total Christmas Bonus Widows Act No. 158, Year 2003 Act No. 169, Year 1968 Act No. 2, Year 1965 Act No. 82, Year 1941 Act No. 135, Year 1975 Total Widows Medical Plan Act No. 95, Year 1963 Act No. 155, Year 2003 Total Medical Ptan Others Act No. 124, Year 1993 - Pension increase Act No. 127, Year 1958 Bene?ts for high-risk participants Act No. 208, Year 2000 - Difference between $200 increase or $1,000, whichever is tower Act No. 37, Year 1941 - Summer bonus Act No. 27, Year 1955 (Amended by Act 11, Year 1986) - Increase in death bene?ts Act No. 524, Year 2004 - 8250 increase in death bene?ts and Act No. 548, Year Act No. 23, Year 1983 Pension increase $3,600 Act No. 156, Year 1941 - $300 minimum pension increase Act No, 72, Year 1956 Cultural travel loans (ASR) Act No. 6 and 7, Year 1950 Bene?ts for participants of mass migration Totai Others Totei Speciat Laws Estimated ?fetal Estimated Estimated OGP Corporations Estimated Municipalities Special Laws 2008 - 2009 2008 - 2009 2008 - 2009 2008 - 2009 5,959,000 8 5,959,000 972,917 360,334 1,333,251 33,990,000 4,591,950 1,316,298 39,898,248 4,642,821 1,397,653 6,040,474 - 6,195,013 2,985,579 9,180,592 691,000 - - 691,000 500,000 - - 500,000 1,552,509 - 1,552,509 41,140,000 17,955,211 6,059,864 65,155,075 37,650,000 - 37,650,000 - 1,191,100 1,810,414 3,001,514 - 1,777,205 1,192,500 2,969,705 414,000 - 414,000 38,064,000 2,968,305 3,002,914 44,035,219 7,500,000 589,860 168,425 8,258,285 5,880,000 - 5,880,000 51,000 - 51,000 12,000 - 12,000 13,443,000 589,860 168,425 14,201,285 90,000,000 - - 90,000,000 7,552,000 2,062,867 1,206,200 10,821,067 97,552,000 2,062,867 1,206,200 100,821,067 400,000 400,000 17,000,000 17,000,000 5,500,000 5,500,000 10,200,000 10,200,000 1,000 1,000 400,000 400,000 1,370,000 1,370,000 12,400,000 179,669 211,057 12,790,726 620,000 620,000 3,000 3,000 47,894,000 179,669 211,057 48,284,726 238,093,000 23,755,911 10,648,460 272,497,371 Page 6 of 7 Exhibit 3 Employees Retirement System of Puerto Rico Detailed Cost Analysis by Special Law (2009-2010) Estimated Tote! Estimated Estimated OGP Corporations Estimated Municigaiities Sgecial Laws 2009 - 2010 2009 - 2010 2009 - 2010 2009 - 2010 COLA Act No. 10, Year 1992 3 7,066,000 - 8 7,066,000 Act No. 207, Yeat 1995 - 1,354,292 425,209 1,779,501 Act No. 40, Year 2001 33,786,000 2,748,362 761,427 37,295,789 Act No. 157, Year 2003 3,693,387 914,145 4,607,532 Act No. 35, Year 2007 - 5,570,044 2,268,385 7,838,429 Act No. 41, Year 2001 629,000 - - 629,000 Act No. 134, Year 1996 462,000 - 462,000 Act No. 221, Yeat 1998 - 1,552,448 - 1,552,448 Total COLA 41,943,000 14,918,533 4,369,166 61,230,699 Christmas Bonus Act No. 109, Year 1997 34,862,000 - - 34,862,000 Act etc, 159, Year 2003 1,728,300 1,343,100 3,071,400 Act No. 433, Year 2004 and Act No. 144, Year 2005 1,728,300 1,343,100 3,071,400 Act No. 98, Year 1980 and Act No. 14, Year 1987 414,000 - 414,000 Total Christmas Bonus 35,276,000 3,456,600 2,686,200 41,418,800 Widows Act No. 158, Year 2003 9,553,000 3,334,831 1,293,359 14,1 80,991 Act No. 169, Year 1968 8,481,000 - - 8,481,000 Act Ate. 2, Year 1965 51 ,000 - - 51,000 Act No. 82, Year 1941 12,000 - - 12,000 Act No. 135, Year 1975 Total Widows 18,097,000 3,334,631 1,293,359 22,724,991 Medical Plan Act No. 95, Year 1963 85,755,000 - 85,755,000 Act No. 155, Year 2003 8,000,000 1,746,800 1,356,600 11,103,400 Total Medical Plan 93,755,000 1 ,746,800 1 ,356,600 96,858,400 Others Act No. 124, Year 1993 - Pension increase 386,000 386,000 Act No. 127, Year 1958 Bene?ts for highwrisk participants 17,000,000 17,000,000 Act No. 208, Year 2000 Difference between $200 increase or $1,000, whichever is lower 6,153,000 6,153,000 Act No. 37, Yea; 1941 Summer bonus 10,400,000 10,400,000 Act No. 27, Year 1955 (Amended by Act 11, Year 1986) Increase in deattr bene?ts - - Act No. 524, Year 2004 .. $250 increase in death bene?ts and Act No. 548, Year 473,000 473,000 Act No. 23, Year 1983 - Pension increase $3,600 1,328,000 1,328,000 Act No. 156, Year 1941 - $300 minimum pension increase 11,559,000 425,610 1,928,038 13,912,648 Act No. 72, Year 1956 Cultural travel loans (ASR) 521,000 521,000 Act No. 6 and 7, Year 1950 - Bene?ts for participants of mass migration 2,000 2,000 Total Others 47,822,000 425,81 0 1,928,038 50,175,648 Total Special Laws 236,893,000 5 23,882,174 5 ?533,363 272,408,537 Page 7 of 7 Exhibit 4 Exhibit 4 Seiect List of ERS Personoei (200a: - ZEUS) ERS Board of Trustees (B01) Alfredo Salazar Cono?e Angel A, Ortiz Garcia Angel tvi. Castillo Rodriguez Angel tut Castillo Rodriguez Angel M. Castillo Rodriguez Antonio i?aria Soto Barbara San?oreozo Zaragoza Carlos J. Rosa Jimen ez Dehratee Carrazana Emmalinrl Garcia Garcia Jorge Irizarry Herrans Jorge lrizarry Hermns Jose Daviia Mates Juan A Flores Bataraa Juan C. Mendez Torres Luisa Herrera Innate! Luisa l-ienem June-rte: Marta Bettran Cat-De Marta Vera Ramirez Marta Vera Ramrrez Robert E. Aquino Gmda Robert Aqrz'm?ezzia Robert E. Aquino Gem;- Roberto E. Art Garza Roberto Sarita}; Career Roberto Santiago Cereal Rosa Castro Rosa Castro Rivera Rosa Castro Rivera Willem Lockwood Benet Representative from the Of?ces of the 892m of Trustees Maritza lncfe Figusoa Representative itemize?? swimmcpar?cipated in certain ERS Harold Gonzalez Rosetta Jose L. Monroe Ger-egres- Jose Villafena Ream Jose 0. Reyes Portals-:2 Jose Sierra Morales Juan Cancel Alegna Luis Alvarez Miranda Luis Garcia Lopez Marisol Marchand Castro l-Jlinia Gonzalez Alvarez Ramon Rodriguez Ortega Roberto Rivera Cruz Note: Relevant Area of Responsibility Beebe we. leioation Bonds Personal Loans Receivable a an :1 a ?a Title i' Position Acting Chairman of the GDB: Vice President of the BOT Secretary. Treasury {Department Commissioner ol Municipat Affairs: Chairman of the BOT Commissioner of Municipai Aitairs, Vice Chairman of the BOT Commissioner of Municipai Affairs President of GDB: Vice Chairman oi the HST Commissioner for Municipal Affairs Director at Human Resources. Of?ce of the Commonwealth of Pueno Rico Acting director of Human Resources. Gtiice oi the Commonwealth of PR Administrator, Central Advisory Of?ce Education and Human Resource Adminiwation; Secretarv oi the BOT interim president Vice Chairman o! the BOT President, (5138; Chairman of the B01 Sweaty oi Treasury Seascarj ot Treasury, Chairman oithe Board at Tmstees Secretary at Treasury Special Assistant. Departmental Transportation and Public Works: Secretarv of BOT Spectzi Assistant, Department of irrmocrtation and Public WorlG tuning?iraaor oi the Human Resources ?ance ol the Commonwealth of PR i=1 or r! toe Human Resources Oltice LA the Director of tire Human Resources Of?ce at the Commonwealth Executor: AssistanL Secretary of Efraregeom and Development. Esra-aha Reprsentative Pensioners: 71235125: cf the Ware: Representative - Pensioners ?as. Pensioners Association: im?ar?etnesemative - Pensioners :55. Representative of . JD. "5 Less: Secretary of General Affairs, craft of Labor; Representative - seats new inspector, Of?ce of inspector seam. Representative - . writs Exams-a- Assisrant. Administration at Development and inattrana?ttsz Representative - garments Secretary to the BOT Somme Assistant to the Secretary for Management and Development. Manama-rt of Developers and Home immanent; Representative - Particioanrs: Secretarv oi the BOT President olthe Vice Chairman of the BET Cereal Counsel of the BOT rid-Wait! Ewt??d'r?nistrator Assistant Manager Asmara Director for Finance and rm- tam-S Administrator Emitstra?tor Director. Of?ce of investment and Actuarial Studies D?eao'. investment and Actuarial Suzie; Dttice Monogram Astor; Admitstrator Deputy Administrator Deputy Administrator 2004 - 2009 information based on moadtiy meec?tg minutes of the Board of Trustees - ERS Page?t oft Exhibit 4 Select List of GDB Persennei (2065 - 2908) Reievartt Area of Responsibility Pension Accounts Title 1 Position guns 21101 gens Oblioation Bonds Personal Loans Receivabie Board of ?irecrors - GDB Alfredo Salazar~Conde Chairman Ana I. VilaADavila Member Armando Values Prieto Member Ernesto A. Meiendez-Perez Member ileana I. Pas-Pacheco Member Jorge P. Silva-Purse Member Jose F. Rodrigues-Pareilo Vice Chairman Jose G. Davila lvtatos - Member Juan C. Mendez-Torres Member Luis A. Miles-Pagan Vice Chairman Rafael F. MartinezMargarida Member Raise! F. Martinez-Margarida Chairman Officers ofthe Board - GBB Olga L. Ortiz-Guadalupe Secretary Minis Gozalezwi?tlvarez Assistant Secretary Officers [tithe Bank - GDB Alfredo Salazar-Canoe Acting President Alfredo Salazar-Comte President Ana E. Torres Assistant Vice President Hugo Biaz~Metini Jorge irizany-Herraos Jorge irizany?Herrans Acting President Jorge irizarry-i-lerrans President Jose G. Davila Executive Vice President Luis Aifaro Martinez Vice President Minia Gozalez~Alvarez Senior Vice President Minia Gozalez?Alvarez Acting Genera: Counsel and SVP William Lockwood-Benet Notes Executive Vice President and treasurer Executive Vice President President Alt 2005 designations based on M1010 various resolutions (is) All 2005 designations based on M1032 - various resolutions All 200?] designations based on M1049 - various resoiulions 2903 designations based on ERS meeting minutes and M1078 (308 509 meeting minutes Page 1 of 1 Exhibit 4 Select List of Other Parties of interest - 2003} Merrill ll World Financial Center 250 Vessey Street. 9th Floor New York. NY ?1 0080 UBS Financial Services lncerporated of PR 9th Flour American International Plaza 254 Munoz Rivera Avenue San Juan, PR 00938 DEPFA Bank 623 Fifth Avenue 22nd Finer New York. NY 10022 First Albany Capital One Penn Plaza. 42nd Floor New York. NY 10119 UBS Investment Consuitams of Fueno Rico! USS PR Consulting Mesirow ?nancial 350 North Clark Sec-53 Chicago. IL 50510 Fiddler Gonzalez and Rvd?gua 254 Munoz Rivera Ave. San icor Hato Rey, Puerta Rico 30933 O'Neill Borges American interneuo?tai 91m 250 Munoz Rivera Ava. Sim.- 5-50 San Juan. Pueno Rica mam Sidley Austin LL13 787 Seventh Aventa: New York. NY 103.1% Note: Rule Lead Boekrunner 8: Seniur Manager Lead Bonkrunner 8: Senior Manager (In?Senior Manager {to-Senior Manager investment Consultants Financial Adviser to GDB Emmi Counsel Underwriter?s?ounsel Ewen-mum?s Counsel Relevant Area of Responsibility Pension 2005 2005 2% mg Dbligation Bonds Personal Loans Receivable 2007 - 2008 informatics?. Gases: e03 fame-e: are: 1.12m Plan included in working papers provided by the GDB Page 1 of 1 Gobierno de Puerto Rico DE LOS SESTEMAS DE RETIRO DE LOS EMPLEADOS DEL GOBIERNO LA JUDICATURA 18 de ectubre de 2010 Centacte: Carlos Ra mes Demenech (787) 431-16847 (787) 753-8757 cramesdemenech@vahee.cem: cramesQasrgebiernepr Comunicado de prensa Referido a Justicia, Etica el Centraler per males manejos en Sistemas de Retire Inferme independiente se?ala pesibles vie/acienes de respensebilidadfiduciaria de parte de pasedes Administraderes de Retire pesedes presidentes del Bence Gubernamental de Femente San Juan, PR. -El administrader cle les Sistemas de Retire del Gebierne la Judicatura, H?cter Mayel Kauffmann, refirie en el dia dejhey al Departamente de Justicia, a la Oficina cle Etica Gubernamental, a la Oficina dei Centraler a las carnisienes cerrespendientes de C?mara Senade,_ les hallazges del informe- lndependiente Sebre les Eventes Decislenes que Han Causade la Crisis Financiera de les Sistemas cle Retire de Empleades del Gebierne cle Puerte Rice. En su cenclusi?n, el informe nembra a varies funcienaries de la pasada administracien del Gebemader Anibal Acevedo Vila come les respensabies de una serie de decisienes que han pueste en serie peligre la salud financiera de les Sistemas de- Retire y, per le tante, su capacidad de pagarle les beneficies de retire a les pensionades en el future. La firma independiente de censulteres financieres especializades en evaluaciones an?lisis ferenses Conway MacKenzie realize un minuciese estudie sebre las causas que llevaren al Sistema de Retire a la crisis que ahera enfrenta cencluye que aunque una serie de factores han centribuide al deteriere de la selid?ez financiera del sistema a trav?s de su histeria, las decisienes de les funcienaries que estuvieron a cargo entre el 2004 el 2008 agravaren significativamente la situaci?n. ?Aunque la cembinacien de les beneficies baje la Ley 447, Leyes Especiales precedimientes inadecuades de capitalizacien han resultade en un deteriere significative del nivel de capitalizaci?n del Sistema de Retire a trav?s de sus 60 a?es de historia, ciertas decisienes recientes de parte de aquellos respensables per el maneje ia supervisi?n del Sistema han exacerbade el preblema?, reza el inferme. En particular, el inferme se?ala que del 2004 al 2008 ni la Junta de Sindices ni Ia gerencia del Sistema de Retire atendieren su creciente insu?ciencia actuarial, que quiere decir que el Sistema no tiene suficiente dinere para pagar tedes les beneficies que tendria que pagar en el future. Ademds, dumnte el misme pen?edo se apreberen una serie de Leyes Especiales que eumenteron les beneficies sin identificar fuentes de fendes de les cuales peder pagar cliches beneficies. El inferme tambi?n critica la implantacien de una serie de ventanas cle retire temprane sin que las agencias cencernidas tuvieran el dinere para pagar les cerrespendientes bene?cies de retire. Pero las criticas mas fuertes en el lnforme Independiente est?n dirigidas a las decisiones de la gerencia del Sistema de Retire?en particular de sus Administradores Juan Cancel Alegrl'a, Minia Gonzalez Alvarez Harold Gonzalez, asr? como de los pasados presidentes del Banco Gubernamental de Fomento Alfredo Salazar Jorge lrizarrymen cuanto a subir el balance m?ximo de pr?stamos personales, asf como la controvertible emisi?n de $3,000 millones en bones de obligaci?n de pension por sus siglas en ingl?s). Segun el informe, la decision de sublr cle $5,000 a $15,000 el m?ximo que los mlembros del Sistema pueden coger en pr?stamos personales ha erosionado significativamente la liquidez del Sistema de Retiro. Por otro lado, la controvertible transacci?n de los $3,000 millones en bonos de obligaci?n cle pension, en lugar de reducir el deficit actuarial del Sistema, lo que ha hecho es empeorar la situacic?m financiera del mlsmo. ?Este estuclio que se acaba de recibir sera referido a las autoridades correspondlentes en el dia de hgoy, dado a que el mismo recomienda una investigaci?n a profundidad que solo pueden llevar a cabo las autoridades pertinentes. En particular, el mismo informe recomienda una investigaci?n mas profunda sobre el proceso de analisis llevado a cabo para apoyar la decision de emitir $3,000 millones en bonos de obligaci?n de pension en el a?o 2008, ya que el informe se?ala que la transacci?n de $3,000 millones en POBS fue no solarnente mal concebida especulativa como mecanismo para mejorar el nivel de capitalizaci?n del Sistema, sino que la misma puede haber conllevado violacic?m de las responsabllidades fiduciarias tanto de la gerencia del Sistema de Retire como de su Junta de Sindicos, eso es bier: serio?, afirmo Mayol. Mayo] explic? que segL?m la documentacion Ios Enformes revisados, la firma Conway MacKenzie entiende que la gerencia de la Administracion de los Sistemas de Retiro, el BGF como agente fiscal sus respectivas Juntas de Directores, no analizaron ni entendian en su totalidad las posibles repercusiones que tem'a esta emision de bonos riesgosa totalmente especulativa. Peor aun, el hallazgo mas sorprendente fue la decisi?n del Gobierno de continuar con dicha emision a pesar de las muchas se?ales existentes que evidenciaban que la implantaci?n de esta estrategia serr?a dificultoaa hasta imposible. El Enforme tambi?n pone al descubierto aparentes irregularidades en la documentaci?n de dicha transacci?n toda vez que no aparecen las minutas de reuniones claves de la Junta de Directores del BGF asu? como de su Comit? Ejecutivo en las cuales se habria discutido la transacci?n de los $3,000 millones en POBs. Asi mismo, tampoco aparece un alegado informe que pud-iera haber preparado Ia firma Mesirow Financial, asesor financiero al BGF para esta transaccion. Entre los oficiales directores responsables de tomar estas decisiones fueron Alfredo Salazar Conde Jorge lrizarry Herra?ns del Banco Gubernamental cle Fomento, Juan Cancel Alegrr?a, Minia Gonzalez Alvarez Harold Gonzalez de los Sistemas de Retiro Jos? G. Davila Matos Juan C. Mendez Torres del Departamento de Hacienda. Goigierno de Puerto Rico ADMINISTRACION DE LOS SISTEMAS DE RETIRO DE LOS EMPLEADOS DEL GOBIERNO LA JUDICATURA PO BOX 42003 . SAN JUAN, PR 00940-2203 18 de ectubre cle 2010 Hon. Guillermo Somoza Colembani Seeretario ?Uepartamente de Justieia Apartado 90220192 San Juan, Puerto Rico 00902 Estimado se?or Secretario: El 30 de junio de 2010, la Administraci?n de les Sistemas de Retire de los Empleados del Gobierno la Judicatura (?Administraci?n?) el Bance Gubernamental de Femento para Puerto Rico solicitaron los servicios de la firma de eentabilidad forense Conway MacKenzie, Inc. (?Conway?) con el proposito de investigar las oausas que han agravado la crisis actuarial que afecta al Sistema de Retire de les Empleados de Gebierno (?Sistema?) en los a008- Luego de un proceso de recopilaci?n analisis de la informacion suministrada per directives de la Administracion el BGF sobre varies asuntes que pueden haber agrayade la situaci?n actuarial del Sistema, Conway presento un lnforme detallando los hallazgos que ebtuvieron de su investigaci?n (?lnferme de Hallazgos?). Del lnforme de Hallazgos, se desprende que la gerencia de la Administraci?n, la Junta de Sindicos del Sistema la Junta de Directores del BGF, pudieren haber actuade de manera ilegal anti?tica referente al maneje tema de deeisiones pertinentes a varias transaceiones que afectaron a los actives del Sistema en .contravencion a los Articules 4~102 (Faeultades Deberes de la Junta) 4-103 (?Facultades Deberes del Administraclermayo de 1951, segun enmendadamayo de 2006, seg?n enmendada (Ley para la Reforma Fiscal de 2006); y/o oualquier otra ley reglamento aplicable. Per lo cual, es nuestra obligaci?n referirles copia del lnferme de Hallazgos para su analisis, estudie accien cerrespendiente. (V?ase Aneje) El Exhibit Num. 4 del lnferme de Hallazgos presenta una relaci?n de los miembros de la gerencia de la Administraci?n, Junta de Sindicos del Sistema Junta de Directores del BGF, con su participaci?n en las transaccienes tema de declsiones detalladas en el lnforme de Hallazges. Pagina 2 18 de octubre de 2010 Hon. Guiliermo Somoza A tono con lo anterior, recabamos su cooperaci?n en este asunto que es de suma importancia para el Sistema. Estamos a su disposici?n para proveerle cualquier informaci?n que la sea de utilidad en Ios tr?mites del presente caso. Atentamente, Hector M. Mayo! Ka ffman-n? Administrador Anejo Hon. Luis G. Fortu?o Burset, Gebemador Hon. Tomas Rivera Schatz, Presidente del Senado Hon. Jennifer Gonzalez Col?n, Pres-identa de la C?mara de Representantes gt? Gotgiemo de Puerto Rico 1 ADMINISTRACION DE LOS SISTEMAS DE DE LOS EMPLEADOS DEL LA JUDICATURA PO BOX 42003 SAN JUAN, PR 00940-2203 18 de octubra de 2010 CPA Yasmin M. Valdiviaso Contralcra Oficina del Contralor 105 Ave. Ponce da Lean San Juan, Puerto Rico 009174136 Eatimada sa?cra Contralora: E1 30 de junio (:16 2010, la Administraci?n de toa Sistemas de Ratiro de 103 Emplaados del Gabiernc la Judicatura (?Administracic?nn?) at Bancc Gubernamental de Fomentc para Puerto Rico solicitaron Ios servicios da la firma de ccntabilidad forense Ccnway MacKanzie, Inc. (?Conway") con el propcaito de investigar Ias causas que han agravadc la crisis actuariat qua afacta at Sistama da Retire de 108 Empleadoa del Gobierno (?Sistema?) an Ios Ultimoa a?os. Luago da un procaso de recopilaci?n analisis de la informacicn suministrada por directives de la Administraci?n a! BGF sobre varies asuntcs qua puaden haber agravado 1a situaci?n actuarial dal Sistema, Conway present? un informs detaltando loss hatlazgcs que cbtuvieron de su invastigaci?n (?lnforme de Hallazgca?). Del Informe da Hallazgos, 8a despranda que la gerencia de la Administraci?n, la Junta de Sindicoa det Sistema ta Junta de Directoras def BGF, pudiaron haber actuado da manera ilagal anti?tica referante al manejo tcma de decisiones pertinentas a varias tfansacciones qua afactarcn a los actives dal Sistema en contravancicn a 103 Articulos 4402 (Facuitades Deberea da ta Junta) 4403 (Facultades Deberes de! Administradcrmayo da 1951, segt?m anmendadamayo de 2006, segun enmendada (Ley para la Reforma Fiscal de 2006); y/o cualquiar otra ley ragiamento aplicabta. Por lo cual, as nuestra cbligaci?n refs-ri?es ccpia del Informs de Hattazgcs para su analisis, astudio acci?n correspondiente, (V?asa Anajc) El Exhibit Num. 4 del Informe de Hallazgoa presenta una retaci?n de los de la gerencia de la Administraci?n, Junta da Stndiccs dat Sistema P?gina 2 18 de octubre de 2010 CPA Yasmin M. Valdivieso Junta de Directores del BGF, con su participaci?n en las transacciones 0 toma de decisiones detalladas en el Informe de Hallazgos. A tono con 10 anterior, recabamos su cooperaci?n en este asunto que es de suma importancia para el Sistema. Estamos a su dispos?ci?n para proveerle cualquier Enformaci?n que le sea de utilidad en los tr?mirtes deal presente case. Atentamente, G, if a; '3 I H?Ctor Mayo] Kauffmann Administrador 13" Anejo Hon Luis Fortu?o Burset Gobernador Hon Tomas Rivera Schatz Presidente de! Senado Hon. Jennifer Gonzalez Colon Presidenta de la Camara de Representantes c; Golgiemo da Puerto Rico ?tag; DE LOS SISTEMAS DE <1 DE LOS EMPLEADOS DEL GOBIERNO LA JUDICATURA PO BOX 42003 . SAN JUAN, PR 00940-2203 18 de ectubre de 2010 Lcda. Zulma R. Rosario Directora Ejecutiva Oficina de Etica Gubernamental Urb. Industrial El Paralso 108 Calle Ganges San Juan, Puerto Rico 009262906 Estimada ser?iora Directora: El 30 de junlo de 2010, la Administraci?n de los Sistemas de Retiro de los Empleados clal Gobiemo la Judicatura (?Administraci?n?) el Banco Gubernamental de Fomento para Puerto Rico solicitamn Ios sarvicioa de la firma de contabilidad foranse Conway MacKenzie, Inc. (?Conway?) con el prop?sito de investigar las causas que han agravado la crisis actuarial que afecta al Sistema da Retire de 103 Emplaados dal Gobierno (?Sistema?) en los Ultimos arias. Luego da un process de recopilaci?n analisis de la informaci?n suministrada por directives da la Administraci?n el BGF sobre varies asuntos qua pueden habar agravado la situaci?n actuarial del Sistema, Conway present? un informe detailando los hallazgos qua obtuvieron de su investigaci?n (?Informe de Hallazgos?). Del Informe da Hallazgos, sa desprende que la gerencla de la Administraci?n, la Junta de Sindicos del Sistema la Junta de Directores Ciel BGF, pudieron haber actuado de manera ilegal anti?tica referenta al manejo toma de decisiones pertinentes a variaa lransacoionaa qua afectaron a los activos del Sistema en contravenci?n a las Articulos 4-102 (Facultades Daberes de la Junta) 4403 (Facultades Deberas del Administradormayo de 1951: segun anmendadamayo da 2006, seng enmendada (Ley para la Reforma Fiscal eta 2006); y/0 cualquiar otra lay regiamento aplicabla. Por Io cual es nuestra obligaci?n referirles copia del lnforme de Hailazgos para su ana?lisis, astudio acoi?n carreapondienta. (V?ase Anejo) El Exhibit Nam. 4 del lnforme de Hallazgos presents: una relaci?n de los miembros de la garancia de la Administracl?n, Junta de Sindicos del Sistema P?gina 2 18 de octubz?a de 2010 Leda. Zulma R. Rosarie Junta de Directores del BGF, con su participaci?n en las transacciones toma de decisiones detalladas en eancrme de Hallazgos. A tcno con lo anterior, recabamos su cooperaci?n en este asunto que es de suma importancia para el Sistema. Estamos a su disposioi?n para proveerle cualquier informaci?n que le sea de utilidad en los tr?mites del presents: case. AtentamenteMayo! Kailffmann Administrador Anejo Hon. Luis G. Fortu?o Burset, Gobernador Hon. Toma?s Rivera Schatz, Presidente del Senado Hon. Jennifer Gonzalez Colc?m, Presidenta de la C?mara de Representantes