EMPLOYEES’ RETIREMENT SYSTEM OF THE GOVERNMENT OF …

1 EMPLOYEES' RETIREMENT SYSTEM OF THE GOVERNMENT . OF THE COMMONWEALTH OF PUERTO RICO. (A Component unit of the Commonwealth of Puerto Rico). Basic Financial Statements and Required Supplementary Information June 30, 2014. (With Independent Auditors' Report Thereon). EMPLOYEES' RETIREMENT SYSTEM OF THE GOVERNMENT . OF THE COMMONWEALTH OF PUERTO RICO. (A Component unit of the Commonwealth of Puerto Rico). Table of Contents Page(s). Independent Auditors' Report 1 2. Management's Discussion and Analysis (Unaudited) 3 19. Basic Financial Statements: Statement of Fiduciary Net Position 20 21. Statement of Changes in Fiduciary Net Position 22.

2 Notes to Basic Financial Statements 23 65. Required Supplementary Information (Unaudited): Pension Benefits: Schedule of Changes in the Employers' Net Pension Liability and Related Ratios 66. Schedule of the Employers' Contributions 67. Schedule of Investment Return 68. Other Postemployment Healthcare Benefits: Schedule of Employers' Contributions 69. Schedule of Funding Progress 70. Notes to Required Supplementary Information 71 74. KPMG LLP. American International Plaza Suite 1100. 250 Mu oz Rivera Avenue San Juan, PR 00918-1819. Independent Auditors' Report The Board of Trustees Employees' RETIREMENT SYSTEM of the GOVERNMENT of the Commonwealth of Puerto Rico: We have audited the accompanying financial statements of the Employees' RETIREMENT SYSTEM of the GOVERNMENT of the Commonwealth of Puerto Rico (the SYSTEM ), which comprise the statement of fiduciary net position as of June 30, 2014, the related statement of changes in fiduciary net position for the year then ended, and the related notes to the financial statements, which collectively comprise the SYSTEM 's basic financial statements.

3 Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America.

4 Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.

5 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the fiduciary net position of the Employees' RETIREMENT SYSTEM of the GOVERNMENT of the Commonwealth of Puerto Rico as of June 30, 2014, and the changes in its fiduciary net position for the year then ended, in accordance with generally accepted accounting principles.

6 KPMG LLP is a Delaware limited liability partnership, the member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity. Emphasis of Matters Adoption of New Accounting Pronouncements As discussed in note 2(i) to the basic financial statements, the SYSTEM adopted Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities, effective for periods beginning after July 1, 2012. The SYSTEM also adopted GASB Statement No. 67, Financial Reporting for Pension Plans an Amendment of GASB Statement No. 25. Our opinion is not modified with respect to these matters.

7 Insolvency of the SYSTEM As discussed in note 3 to the basic financial statements, the SYSTEM 's fiduciary net position as a percentage of total pension liability was less than one percent as of June 30, 2014. In the opinion of management, based on information prepared by consulting actuaries, if measures are not taken to significantly increase contributions, the SYSTEM will become insolvent by fiscal year 2018 depending on the timing of receipt of contributions and the SYSTEM 's ability to dispose of illiquid assets. Further, as described in note 10, future employers' contributions have been pledged for debt service, consequently, further depletion of SYSTEM 's assets could result in an inability to pay benefits.

8 Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information generally accepted accounting principles require that the Management's Discussion and Analysis and the schedules included under the Required Supplementary Information in the accompanying table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context.

9 We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

10 San Juan, Puerto Rico June 1, 2016. Stamp No. E217470 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. 2. EMPLOYEES' RETIREMENT SYSTEM OF THE GOVERNMENT . OF THE COMMONWEALTH OF PUERTO RICO. (A Component unit of the Commonwealth of Puerto Rico). Management's Discussion and Analysis June 30, 2014. (Unaudited). Introduction The following discussion and analysis of the financial performance of the RETIREMENT SYSTEM of the GOVERNMENT of the Commonwealth of Puerto Rico (the SYSTEM ) provides an overview of its activities for the fiscal year ended June 30, 2014. Its purpose is to provide explanations and insights into the information presented in the basic financial statements, notes to the basic financial statements, and required supplementary information.