Puerto Rico Health Insurance Administration
(A Component Unit of the Commonwealth of Puerto Rico)

General Purpose Financial Statements for
the Years Ended June 30, 1999 and 1998
and Independent Auditors’ Report



INDEPENDENT AUDITORS’ REPORTTo the Board of Directors of
Puerto Rico Health Insurance Administration:

We have audited the accompanying general purpose financial statements of Puerto Rico Health Insurance Administration (the "Administration"), a component unit of the Commonwealth of Puerto Rico, as of June 30, 1999 and 1998 and for the years then ended, listed in the foregoing table of contents. These general purpose financial statements are the responsibility of the Administration’s management. Our responsibility is to express an opinion on these general purpose financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general purpose financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the general purpose financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such general purpose financial statements present fairly, in all material respects, the financial position of Puerto Rico Health Insurance Administration as of June 30, 1999 and 1998, and its results of operations and cash flows for the years then ended in conformity with generally accepted accounting principles.

The year 2000 supplementary information is not a required part of the basic financial statements, but is supplementary information required by the Governmental Accounting Standards Board, and we did not audit and do not express an opinion on such information. Further, we were unable to apply to the information certain procedures prescribed by professional standards because of the unprecedented nature of the year 2000 issue and its effects, and the fact that authoritative measurement criteria regarding the status of remediation efforts have not been established. In addition, we do not provide assurance that the Administration is or will become year 2000 compliant, that the Administration’s year 2000 remediation efforts will be successful in whole or in part, or that parties with which the Administration does business are or will become year 2000 compliant.

August 27, 1999

Stamp No.

affixed to original.



YEARS ENDED JUNE 30, 1999 AND 1998


Organization - Puerto Rico Health Insurance Administration (the "Administration") is a governmental entity and a component unit of the Commonwealth of Puerto Rico (the "Commonwealth"), created by Act No. 72, as amended, (the "Act") of the Legislature of the Commonwealth on September 7, 1993. The Administration commenced operations on February 1, 1994.

The Administration was created for the purpose of implementing, administering and negotiating a health insurance system, through contracts with insurance underwriters, to provide quality medical and hospital care to the Commonwealth’s residents. Such insurance underwriters bill a monthly premium to the Administration that is generally paid within the same month. Moneys to pay for such premiums are requested from the Commonwealth net of moneys available from all other sources. The Administration is exempt from taxation in the Commonwealth.

Following is a description of the most significant accounting policies of the Administration:

Basis of Accounting - The Administration is accounted for as a component unit of the Commonwealth. The financial statements are presented on the accrual basis of accounting in conformity with generally accepted accounting principles applicable to an enterprise fund.

The Administration applies all applicable Governmental Accounting Standards Board ("GASB") pronouncements as well as Statements and Interpretations issued by the Financial Accounting Standards Board, Accounting Principles Board Opinions, and Accounting Research Bulletins of the Committee on Accounting Procedures that do not conflict with or contradict GASB pronouncements.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment - Property and equipment is stated at cost. Donated property is reported at estimated fair value at the date received. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, which range from four to ten years. Expenditures for repairs and maintenance that do not extend the useful lives of the assets are charged to operations in the year incurred.

Accounting for Compensated Absences - Compensated absences, such as unpaid vacation and sick leave pay, are accrued when incurred using the pay or salary rates in effect at the balance sheet date. An additional amount is accrued for certain salary related benefits associated with the payment of compensated absences.

Statements of Cash Flows - The accompanying statements of cash flows are presented in accordance with the provisions of Governmental Accounting Standards Board Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities that Use Proprietary Fund Accounting. Cash and cash equivalents include cash in bank, demand deposits at interest with depository institutions and short-term highly liquid investments with original maturities at time of purchase of three months or less.

Operating Transfers from Commonwealth of Puerto Rico - Operating transfers from the Commonwealth represent funds received or due from the Commonwealth. Funds received in excess of expenditures incurred are recognized as deferred revenue. When expenditures incurred exceed funds received, the Administration records an account receivable from the Commonwealth for such excess, if funds are available from the Commonwealth for this purpose.

Operating Transfers and Contributions from Puerto Rico Health Facilities and Services Administration ("AFASS") - Operating transfers from AFASS represent funds received by the Administration for financing its operations and are recorded as nonoperating revenue when collected. Contributions represent charges made to AFASS by the Administration based on an established formula as a partial reimbursement of the premiums paid by the Administration to insurance underwriters related to beneficiaries eligible to receive Medicaid benefits. Contributions from AFASS are recorded as deferred revenue when due and as operating revenues when collected. Contributions collected during the years ended June 30, 1999 and 1998 amounted to $90,626,619 and $54,074,663, respectively. The Administration had accounts receivable from AFASS amounting to $806,344, which were also included in deferred revenue in the balance sheet at June 30, 1999. Effective June 30, 1999, AFASS was liquidated and its operations were transferred to the Deparment of Health of Puerto Rico.

Contributions from Municipalities - Contributions from municipalities represent charges made by the Administration based on established percentages applied to the corresponding municipality’s operational budget for the preceding fiscal year. These contributions are withheld by Centro de Recaudación de Ingresos Municipales from moneys assigned to municipalities and remitted monthly to the Administration.

Accounting for Pensions - The Administration follows the provisions of GASB Statement No. 27, Accounting for Pensions by State and Local Government Employers, which establishes standards for measurement, recognition and display of pension expense and related liabilities in financial statements of state and local governmental employers.

New Accounting Pronouncement – In June 1999, the Governmental Accounting Standards Board issued Statement No. 34, Basic Financial Statements for State and Local Governments (GASB Statement No. 34). This statement establishes new financial reporting requirements for state and local governments. In the case of entities engaged only in business-type activities, the statement will require, among other, the inclusion of management’s discussion and analysis of the entities’ financial activities along with other required supplementary information. Entities such as the Administration with total annual revenues of $100 million or more should apply this statement for periods beginning after June 15, 2001.


The Administration is authorized to deposit cash only in financial institutions approved by the Department of the Treasury of the Commonwealth (the "Department of Treasury"). As of June 30, 1999 and 1998, the bank balances of deposits in financial institutions ($9,048,280 and $1,217,930, respectively) were either covered by Federal depository insurance or collateralized with securities held by the Department of Treasury in the Commonwealth’s name, except for $8,325,359 and $808,179 at June 30, 1999 and 1998, respectively, which were uninsured and uncollateralized.


The Employees’ Retirement System of the Commonwealth and its instrumentalities (the "Retirement System") is a cost-sharing multiple-employer defined benefit pension plan sponsored by, and reported as a component unit of the Commonwealth. All regular employees of the Administration under age 55 at the date of employment become members of the Retirement System as a condition to their employment.

The Retirement System provides retirement, death and disability benefits pursuant to legislation enacted by the Commonwealth’s legislature. Disability benefits are available to members for occupational and non-occupational disabilities. However, a member must have at least ten years of service to receive non-occupational disability benefits. Retirement benefits depend upon age at retirement and number of years of credited service. Benefits vest after ten years of plan participation.

Members who have attained 55 years of age and have completed at least 25 years of creditable service or members who have attained 58 years of age and have completed at least ten years of creditable service, are entitled to an annual benefit, payable monthly for life.

The amount of the annuity shall be one and one-half percent of the average compensation, as defined, multiplied by the number of years of creditable service up to twenty years, plus two percent of the average compensation multiplied by the number of years of creditable service in excess of twenty years. In no case will the annuity be less than $200 per month.

Participants who have completed at least 30 years of creditable service are entitled to receive the Merit Annuity. Participants who have not attained 55 years of age will receive 65% of the average compensation, as defined, otherwise they will receive 75% of the average compensation. Disability benefits are available to members for occupational and nonoccupational disability.

No benefits are payable if the participant receives a refund of his/her accumulated contributions.

Commonwealth legislation requires employees hired on or before March 31, 1990 to contribute 5.775% for the first $550 of their monthly gross salary and 8.275% for the excess of $550. Employees hired on or after April 1, 1980 are required to contribute 8.275% of their monthly salary. The Administration’s contributions are 9.275% of participants’ gross salaries. Total employee contributions during the years ended June 30, 1999 and 1998 amounted to approximately $178,000 and $149,000, respectively. Employer contributions, which represented 100% of the required contributions, amounted to approximately $202,000 in 1999 and $170,000 in 1998, and the total payroll covered for these years was approximately $2,187,000 and $1,871,000, respectively.

For the year ended June 30, 1997, the Administration contributed approximately $147,000, which represented the required contribution of 9.275%.

Additional information on the Retirement System is provided in its financial statements for the years ended June 30, 1999 and 1998, a copy of which can be obtained from the Retirement System.


The Administration conducts its operations in leased facilities under long-term operating lease agreements expiring through 2002. The Administration also leases equipment under agreements classified as capital leases.

Rent expense for the year ended June 30, 1999 and 1998 amounted to approximately $346,000 and $285,000, respectively.

Future minimum lease payments under operating leases at June 30, 1999 are as follows:

Following is a schedule of future minimum lease payments under capital leases together with the present value of such minimum lease payments at June 30, 1999:


A summary of property and equipment as of June 30, 1999 and 1998 is as follows:



At June 30, 1999 and 1998, there were differences of approximately $276,000 and $2,200,000, respectively, between amounts billed by insurance underwriters and the amounts paid by the Administration. These differences have been communicated to the insurance underwriters for investigation. No accrual has been made in the accompanying general purpose financial statements since management believes that the amounts determined by the Administration are in accordance with the contracts. Management of the Administration believes that amounts finally determined to be owed to the underwriters, if any, in excess of those recorded in the accompanying financial statements, will not have a material effect on the Administration’s financial position and results of operations.

Certain municipalities have challenged the constitutionality of Act No. 29 of July 1, 1997 which established that the "Centro de Recaudaciones de Ingresos Municipales" would withhold from property taxes due to the municipalities an amount to cover the contributions due to the Administration. The outcome of these cases is not presently determinable.

The Administration is also a defendant in other legal actions arising in the ordinary course of business. Management believes, based on advice from legal counsel, that the ultimate outcome of these cases will not have a material effect on the Administration’s financial position and results of operations.


Contributed capital represents data processing equipment and software donated by AFASS to the Administration in 1994 with a fair value of $608,108 at the date received.


Premiums payable at June 30, 1999 and 1998 include certain amounts withheld from payment by the Administration pending investigation of amounts billed. Premiums payable at June 30, 1998 primarily represent premiums related to the month of June 1998 billed by one insurance underwriter at the end of such month and paid in July 1998.


At June 30, 1999 and 1998, the Administration had fully reserved accounts receivable amounting to approximately $75,676,000 and $77,373,000, respectively, due from municipalities related to transactions before July 1, 1997. The Administration continues its collection efforts on these balances since Act No. 29, enacted by the Commonwealth’s legislature on July 1, 1997, stipulates that such balances are to be collected by the Administration from the incremental revenues assigned to the municipalities derived from a specific lottery game up to $16 million annually. During fiscal years 1999 and 1998, the Administration received $1,696,925 and nil, respectively, from this concept. Amounts collected are recorded as operating revenue when received.



The Administration is in the process of preparing its information systems and applications for the Year 2000. The Administration has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 Issue. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Administration’s programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in a major system failure or miscalculations.

As of June 30, 1999, in connection with the Administration’s Year 2000 Compliance Project (the "Project"), the Administration has performed an assessment of mission-critical systems and established a project plan for dealing with the Year 2000 issue. The Administration has identified mission-critical systems and equipment and is in the process of converting certain existing systems and replacing others to compliant systems. The Administration presently believes that, with modification to existing software and converting to new software, the Year 2000 issue will not pose significant operational problems for the computer systems as so modified and converted. However, if such modifications and conversions are not completed on a timely basis, the Year 2000 issue may have a material impact on the operations of the Administration. Completion of the above, however, is not a guarantee that systems and equipment will be Year 2000 compliant.

As of June 30, 1999, the Administration has incurred expenses amounting to approximately $286,000 in equipment upgrades and consulting fees related specifically to the Project. The Administration estimates that it will enter into contracts amounting to approximately $325,000 related to services required to complete the Project.

General Purpose F/S: 6/30/99-98