AUTOMOBILE ACCIDENT COMPENSATION ADMINISTRATION Financial Statements and Independent Auditors Report
Balance Sheets Assets 2001 2000 Cash and cash equivalents $ 5,175,507 $ 5,012,402 Collateral received under securities lending program 45,211,402 60,204,311 Investments, at fair value 225,769,768 233,359,758 Accounts receivable: Premium receivable 5,542,223 11,618,340 Accrued interest receivable 2,106,259 2,303,861 Receivable from sale of investments 1,683,939 924,582 Other accounts receivable, net 1,072,631 1,712,039 Property and equipment, net 6,066,190 6,201,214 Other assets 33,925 103,218 Liabilities and Reserve Fund 292,661,844 321,439,725 Reserves for future benefits: Accident and health 90,704,994 81,932,955 Death and funeral 15,170,563 16,596,056 Disability 5,803,389 6,321,808 111,678,946 104,850,819 Deferred premiums revenue 33,726,713 33,437,388 Obligation to return collateral under securities lending program 45,211,402 60,204,311 Payable for acquisition of investments 1,718,160 796,607 Accounts payable 8,294,729 7,631,721 Accrued liabilities 4,518,407 3,180,833 Notes payable - 195,381 Total liabilities 205,148,357 210,297,060 Commitments and contingencies - - Reserve fund balance 87,513,487 111,142,665 See accompanying notes to financial statements. $ 292,661,844 $ 321,439,725 2
Statement of Revenues, Benefits and Expenses and Reserve Fund Years ended 2001 2000 Insurance premiums earned $ 71,516,240 $ 71,039,839 Benefits and expenses: Death and funeral benefits 2,479,470 5,291,451 Disability benefits 6,206,320 6,919,226 Accident and health benefits 70,998,345 53,140,464 Claimant services 17,285,601 16,961,915 General and administrative expenses 16,462,276 15,156,637 Total benefits and expenses 113,432,012 97,469,693 Loss from insurance operations (41,915,772) (26,429,854) Other income: Interest and dividends, net of administration costs 9,742,623 9,707,322 Interest - securities lending 3,421,391 3,348,667 Net increase (decrease) in fair value of investments 7,381,661 (11,800,259) Other 1,022,429 1,355,981 Total other income 21,568,104 2,611,711 Other expenses: Cost and expenses - securities lending 3,279,394 3,165,757 Interest expense 2,116 106,702 Total other expense 3,281,510 3,272,459 Net loss (23,629,178) (27,090,602) Reserve fund at beginning of year 111,142,665 138,233,267 Reserve fund at end of year $ 87,513,487 $ 111,142,665 See accompanying notes to financial statements. 3
Statement of Cash Flows Years ended 2001 2000 Cash flows from operating activities: Cash received from insured $ 77,816,487 $ 97,797,563 Interest receipts, net of related cost 11,557,501 9,890,232 Other operating receipts 1,022,429 1,355,981 Cash paid for benefits and expenses (103,003,056) (90,441,342) Interest paid (2,116) (106,702) Net cash (used in) provided by operating activities (12,608,755) 18,495,732 Cash flows from capital and related financing activities: Acquisition of equipment, furniture and fixtures (691,330) (396,005) Principal payments on notes payable (195,381) (1,549,488) Net cash used in capital and related financing activities (886,711) (1,945,493) Cash flows from investing activities: Proceeds from sale of investments 149,751,760 135,036,794 Purchase of investment securities (136,093,189) (151,621,081) Net cash provided by (used in) investing activities 13,658,571 (16,584,287) Net increase (decrease) in cash and cash equivalents 163,105 (34,048) Cash and cash equivalents at beginning of year 5,012,402 5,046,450 Cash and cash equivalents at end of year $ 5,175,507 $ 5,012,402 See accompanying notes to financial statements. (Continued) 4
Statement of Cash Flows Years ended Reconciliation of net loss cash provided by (used in) operating activities: 2001 2000 Net loss $ (23,629,178) $ (27,090,602) Adjustments to reconcile net loss to the net cash used in operating activities: Depreciation and amortization 826,849 1,808,568 Net (decrease) increase in fair value of investments (5,906,384) 11,800,259 Provisions for doubtful accounts 704,603 2,124,855 Change in assets and liabilities: Accounts receivable 6,208,524 27,192,531 Other assets 69,293 (54,584) Liabilities for future benefits 6,828,128 6,872,447 Accounts payable 663,010 (3,656,084) Accrued liabilities 1,337,075 (66,851) Deferred premiums revenue 289,325 (434,807) Net cash (used in) provided by operating activities $ (12,608,755) $ 18,495,732 See accompanying notes to financial statements. 5
(1) Organization and Summary of Significant Accounting Policies Organization and Reporting Entity The Automobile Accident Compensation Administration (the Administration ) is a public corporation and an instrumentality of the Commonwealth of Puerto Rico, created by Law No. 138 of June 26, 1968 (as amended). The Administration operates a system of compulsory insurance for vehicles licensed to be used on public highways in Puerto Rico. This insurance covers bodily injuries caused by automobile accidents. The annual premium is $35 per motor vehicle. As a public corporation, the Administration is exempt from the payment of taxes, except on payroll. A summary of the Administration s significant accounting policies applied in the preparation of the accompanying financial statements follows: Basis of Accounting The Administration reports its financial position and results of operations as an enterprise fund (i.e., similar to private business enterprises) where the periodic determination of revenues earned, expenses incurred, and/or net income is appropriated for capital maintenance. Pursuant to Governmental Accounting Standards Board (GASB) Statement No. 20 Accounting and Financial Reporting for Proprietary Fund and other Governmental Entities that Use Proprietary Fund Accounting, the Administration has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB), including those issued after November 30, 1989 that are not in conflict with GASB pronouncements. Insurance Premiums Insurance premiums are collected in advance and recognized, ratably, as income during the policy year. Cash and Cash Equivalents For financial statements purposes the Administration considers all highly liquid instruments purchased with maturity of three months or less to be cash equivalents. 6
Investments Investments are recorded at their fair market value in conformity with GASB 31, Accounting and Financial Reporting for Investments and for External Investment Pools. The fair value is based on quotations obtained from national security exchanges. When securities are not listed in national security exchanges, quotations are obtained from brokerage firms. Changes in fair value are reported in the Statement of Revenues, Benefits and Expenses and Reserve Fund (see Note 6). The Administration follows the provisions of Governmental Accounting Standards Board GASB Statement No. 28, Accounting and Financial Reporting for Securities Lending Transactions. This Statement establishes accounting and financial reporting standards for securities lending transactions. The statement establishes standards of accounting and financial reporting for securities lending transactions in which governmental entities (lenders) transfer their securities to broker-dealers and other entities (borrowers) for collateral and simultaneously agree to return the collateral for the same securities in the future. Cash collateral of securities received for which the Administration has the ability to invest pledge forward at their discretion are recorded as an asset and a liability. Letters of credit and securities that cannot be pledged are not recorded as assets and liabilities in the Administration s accounts. Receivable from sale of investments / payable for acquisition of investments. Investment transactions, at or close to June 30, for which the settlement date occurs after the fiscal year end are recorded separately for financial statement purposes. Receivables Receivables are stated net of estimated allowances for uncollectible accounts. Such allowances are determined based upon past collection experience and current economic conditions. All receivable balances are unsecured. Accrued interest represents interest on investments earned but not received. Property and Equipment Property and equipment is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets. 7
Expenditures for maintenance and repairs that do not extend the life of the assets are charged to operations, while those for renewals and betterments are capitalized. Benefits Expenses Benefits expenses are recorded when claims are paid. In addition, management has established reserves to cover for the estimated cost of all future benefits for claims reported and incurred but not reported during the year. These reserves are adjusted annually based on the results reported by an independent actuary. Management believes that these reserves are reasonable and reflective of anticipated ultimate experience. Since the reserves are based on estimates, the net amounts that will ultimately be paid to settle the liability may vary from the estimated amounts provided for. The resulting difference between the estimated liability and the actual payment, if any, as subsequently determined, is reflected in current operations. Also, there can be no assurance that the amount ultimately paid will not exceed such estimates. The Law that created the Administration was amended on October 30, 1975 to limit, effective July 1, 1976, medical hospitalization benefits to a maximum of two years after an accident, except in severe trauma cases. The Law permits the Board of Directors to extend the medical benefits beyond the two-year period as deemed necessary. Compensated Absences The Administration accounts for compensated absences in accordance with the provisions of Governmental Accounting Standards Board Statement No.16, Accounting for Compensated Absences (GASB 16). GASB 16 requires accrual of the cost of the benefits through the years that employees provide services until the date of full eligibility for such benefits. The vacation policy of the Administration generally provides for the accumulation of thirty (30) days of vacation and eighteen (18) days of sick leave annually. Vacation time and sick leave is fully vested to the employees from the first day of work. The excess of accumulated vacation over thirty (30) days and over three (3) days of sick leave is paid periodically to those employees under collective bargaining agreement. For administrative employees any excess over thirty (30) days of vacation and fifteen (15) days of sick leave is also paid periodically. In addition, all employees with over ten (10) years of service are entitled upon retirement to a lump-sum payment equal to $95 ($50 in 2000) for each year of service, if the employee has been working in the Administration during the last ten years. 8
Pension Cost Pension costs are accounted in accordance with the provisions of Governmental Accounting Standards Board Statement (GASBS) No. 27 Accounting for Pensions by States and Local Governmental Employers. GASBS No. 27 establishes standards of accounting and financial reporting for pension expenditures/expenses and related pension liabilities, pension assets, note disclosures, and required supplementary information in the financial statements of state and local governmental employers. The Statement defines that pension expense is equal to the statutory required contribution to the employees retirement system. A pension liability or asset is reported equal to the cumulative differences between statutory required contributions and actual contributions up to June 30, 2001. Early Retirement Window On July 28, 1998, the Legislature of Puerto Rico enacted Law No. 182 to provide for early retirement for certain government employees. Eligible employees were those that had met certain specified requirements on or before March 31, 1999. The election period to participate in the early retirement program was from August 1, 1998 to November 2, 1998 for a retirement date effective, on or before June 30, 1999. As of June 30, 1999, the Administration accrued the present value of the cost related to this program of approximately $6.5 millions. When participants reach normal retirement age and years of service, the participant will receive 100% of the pension benefits from the Employee Retirement System of the Government of Puerto Rico. The accrued early retirement cost as of June 30 2001 and 2000 amounted to approximately $2,222,000 and $3,992,000, respectively. Also, on August 12, 2000, the Legislature of Puerto Rico enacted Law No. 174 to provide for early retirement for certain government employees. Eligible employees were those that had met certain specified requirements on or before December 31, 2000. As of June 30, 2001, the Administration accrued the present value of the cost related to this program of approximately $2.8 millions. Risk Management The Administration is exposed to various risks of loss from torts, theft of, damages to, and destruction of assets, errors and omissions, employee injuries and illnesses, natural disasters, environmental and other losses. Commercial insurance coverage is obtained for claims that may arise from such matters. The commercial insurance coverage is negotiated by the Department of Treasury of the Commonwealth of Puerto Rico, and the cost is paid by the Administration. No additional payments were made after the annual insurance costs were determined. 9
Derivative Instruments and Hedging Activities In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities. In June 2000 the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133. SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133 and SFAS No. 138 on July 1, 2000. Under these statements, all derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Administration designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ( fair value hedge), a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ( cash flow hedge), a foreign-currency fair-value or cash-flow hedge ( foreign currency hedge), a hedge of a net investment in a foreign operation, or a held for trading ( trading instrument). Changes in the fair value of derivatives are recorded each period in current earnings. The Administration enters into foreign exchange forward contracts to hedge its exposure to exchange rate fluctuations on its foreign currency denominated fixed income international portfolio. Gains and losses on these foreign currency hedges are included in income in the period in which the exchange rates change. At June 30, 2001, the Administration had contracts maturing in up to 3 months to purchase and sell approximately $16,400,000 and $15,900,000 in foreign currency, respectively. 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 at the balance sheet date 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 may differ from estimated amounts. Reclassifications Certain amounts in the 2000 financial statements were reclassified to conform to the 2001 presentation. 10
(2) Cash and Cash Equivalents As of, cash and cash equivalents consist of deposits in banks and money market accounts categorized following the Guide to Implementation of GASB Statement No. 3 on Deposit with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements." The categories for deposits are the following: Category Description 1 Cash Deposits in local banks collaterized or insured by the Federal Deposit Insurance Corporation or collateralized by securities pledged with the Department of the Treasury of the Commonwealth of Puerto Rico. 2 Deposits are collateralized by securities held by the pledging financial institution s trust department or agent in the Administration s name. 3 Deposits are uncollateralized. A summary of the Administration s cash and cash equivalents by category of risk as of June 30, 2001 and 2000, is shown below: 2001 Credit risk category Bank Carrying 1 2 3 Balance Amount Unrestricted cash $ 5,139,585 $ - $ 41,861 $ 5,181,446 $ (943,282) Money market accounts - - 6,118,789 6,118,789 6,118,789 $ 5,139,585 $ - $ 6,160,650 $ 11,300,235 $ 5,175,507 2000 Credit risk category Bank Carrying 1 2 3 Balance Amount Unrestricted cash $ 3,014,865 $ - $ 139,061 $ 3,153,926 $ 1,718,491 Money market accounts - - 3,293,911 3,293,911 3,293,911 $ 3,014,865 $ - $ 3,432,972 $ 6,447,837 $ 5,012,402 11
(3) Investments The Administration invests in stocks, bonds, obligations of the United States and cash equivalents as described more fully in its investment policy. Also, it can invest in international securities. The Administration s investments are categorized to provide an indication of the level of risk assumed by the Administration. Risk categories are described as follows: Category Description 1 Insured or registered, or securities held by the Administration or its agent in the Administration s name. 2 Uninsured and unregistered, with securities held by the counter party or by its trust department or agent in the Administration s name. 3 Uninsured and unregistered, with securities held by the counter party, or by its trust department or agent but not in the Administration s name. As of June 30 2001 and 2000, the investment securities portfolio was comprised of the following: 12
2001 Fair Amortized 1 2 3 value cost Investments, at fair value as determined by quoted market prices: Common stock $ 75,032,685 $ - $ - $ 75,032,685 $ 69,868,350 Foreign common stock 16,549,858 - - 16,549,858 13,232,906 U.S. Government obligations 33,848,571 - - 33,848,571 33,677,618 U.S. Government agencies obligations 17,017,980 - - 17,017,980 16,953,072 Foreign government obligations 5,539,262 - - 5,539,262 5,829,470 Corporate bonds 60,116,938 - - 60,116,938 60,893,879 Mortgage backed securities 17,079,252 - - 17,079,252 16,791,237 Other 585,223 - - 585,223 - $ 225,769,768 $ - $ - $ 225,769,768 $ 217,246,532 2000 Fair Amortized 1 2 3 value cost Investments, at fair value as determined by quoted market prices: Common stock $ 76,190,682 $ - $ - $ 76,190,682 $ 71,718,792 Foreign common stock 19,513,875 - - 19,513,875 12,602,086 U.S. Government obligations 50,208,559 - - 50,208,559 51,263,201 U.S. Government agencies obligations 9,746,605 - - 9,746,605 10,057,571 Foreign government obligations 6,191,319 - - 6,191,319 6,275,772 Corporate bonds 57,202,986 - - 57,202,986 59,516,765 Mortgage backed securities 14,305,732 - - 14,305,732 14,458,542 $ 233,359,758 $ - $ - $ 233,359,758 $ 225,892,729 The custody of these investments is held by a trust company in the name of the Administration and six asset management firms manage the portfolio. The Administration s investment policy authorizes it to invest a percentage of total assets, with certain limitations, in the following types of investments; no more than 65% in fixed income securities, not less than 35% and no more than 60% in equity securities. From the equity securities no more than 15% may be invested in international markets. More complete information is available in the statement of investment policy, objectives, and guidelines of the Administration. No more than 5% of any debt issue may be purchased as an investment, with the exception of the U.S. government or its agencies paper. No more than 10% of the assets, at cost, may be 13
invested in the securities of a single issuer, with the exception of the U.S. government or its agencies. Investments in bonds must, at the time of purchase, be rated within the highest three or four classifications designated by one of the principal agencies that rate securities. The bond portfolio average maturity must not exceed 7 years. The amortized cost and estimated market value of debt securities at June 30, 2001 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties: Cost Fair Value Due in one year or less $ 19,679,955 $ 19,471,028 Due after one year through five years 76,038,556 75,846,316 Due after five years through ten years 21,227,808 20,815,686 Due after ten years 407,720 389,720 117,354,039 116,522,750 Mortgage backed securities 16,791,237 17,079,252 $ 134,145,276 $ 133,602,002 Common stock may only be acquired if they are rated within the first four categories of Standard and Poor s on the first three of Value Line. Off-balance sheet derivatives, options, commodities, futures contracts, private placements, limited partnership and venture capital investments that are not used for hedging purposes are among other prohibited transactions. The Administration s cash reserve should be invested in high quality short term investments including; negotiable instruments, U.S. Treasury obligations, certificates of deposit, bank acceptances and repurchase agreements. 14
During the fiscal years ended, the Administration sold a number of investments in the ordinary course of managing its assets. The results of said sales are as follows: 2001 2000 Proceeds from sale of investments $ 151,230,702 $ 173,816,354 Amortized cost of investments (144,800,458) (163,845,634) Realized gain in sale of investments $ 6,430,244 $ 9,970,720 The accompanying financial statements were prepared in the basis of accounting required by Governmental Accounting Standards Board Statement No. 31. Therefore all investment securities are accounted for at fair market value rather than cost. Thus, the accompanying financial statements reflect changes in the market value as well as realized gains, of the Administration s investment portfolio as follows: 2001 2000 Realized gains $ 6,430,244 $ 9,970,720 Change in fair value of investments securities 951,417 (21,770,979) Net change in fair value of investment $ 7,381,661 $ (11,800,259) (4) Securities Lending Program The Administration lends securities to broker/dealers and other entities (borrowers) for collateral that will be returned in the future for the same securities. The custodial bank manages the securities lending program and receives cash, government securities and letters of credit as collateral. The collateral received cannot be pledged or sold by the Administration unless the borrower defaults. The program provides for an initial minimum collateralization of 102 percent of the market value of the securities lent plus accrued income. Additional collateral has to be provided by the close of the next business day if its value falls to less than 100 percent. The contract with the custodial bank requires that should a collateral deficiency occur beyond custodian s responsibilities the deficiency should be allocated pro-rata among all client lenders within the program. 15
Either the custodian bank or the borrower can terminate all securities loans at any time. Cash collateral is invested in the program s agent short-term investment pools, which at fiscal year-end had a weighted-average maturity of approximately thirty days. The relationship between securities of the investment pool and Administration s loans cannot be determined. The following represents the balances relating to the securities on loan as of June 30, 2001 and 2000: 2001 Fair Value of securities lent Amount of collateral Stock $ 3,391,837 $ 3,464,604 Corporate bonds 8,728,346 8,934,645 U.S. Treasury bills, bonds and notes 30,978,310 31,832,990 U.S. Agencies 4,117,901 4,229,416 Foreign government bonds 1,258,186 1,336,619 Total $ 48,474,580 $ 49,798,274 2000 Fair Value of securities lent Amount of collateral Stock $ 6,514,106 $ 6,695,277 Corporate bonds 4,146,019 4,235,768 U.S. Treasury bills, bonds and notes 50,602,195 51,555,739 U.S. Agencies 3,591,292 3,659,013 Foreign government bonds 436,146 456,928 Total $ 65,289,758 $ 66,602,725 16
(5) Other Accounts Receivable Other accounts receivable consist of the following: 2001 2000 State Insurance Fund Corporation $ 1,412,548 $ 1,397,317 Insureds' accounts 2,110,244 2,124,097 Government agencies and Puerto Rico Safety Traffic Commission 530,013 351,334 Insurance companies 1,198,584 969,293 All other 853,700 1,079,993 6,105,090 5,922,034 Less allowance for doubtful accounts (5,032,458) (4,209,995) $ 1,072,631 $ 1,712,039 For insured accounts, the Authority will only record an amount if deemed collectible at the time the receivable is established. Subsequently, the Authority evaluates that amount for collectibility and establishes a reserve if necessary. (6) Reserve Fund As required by the Law that created the Administration, the excess of revenues collected during any fiscal year over the payment of benefits and operational expenses must be kept by the Administration to cover all unanticipated claims. Also, if in any year the receipts and the reserves accrued are not sufficient to cover the losses and the expenses incurred, the Secretary of the Treasury shall provide as an advance to the Administration, the sums required to remediate the deficiency. Such advance would be obtained from any funds available in the general fund of the Government. 17
(7) Property and Equipment Property and equipment consist of the following: Useful lives 2001 2000 Building 45 $ 5,922,757 $ 5,922,757 Equipment 5 9,402,223 8,904,021 Motor vehicles 4 311,876 311,876 Furniture and fixtures 10 3,673,231 3,480,802 Leasehold improvements 10 1,772,658 1,771,864 21,082,745 20,391,320 Less accumulated depreciation and amortization (15,308,109) (14,481,260) 5,774,636 5,910,060 Land 291,554 291,554 $ 6,066,190 $ 6,201,614 (8) Reserves for Future Benefits The balance of the estimated liabilities for the payment of future benefits consists of the following 2001 2000 Death and funeral: Death $ 14,819,425 $ 16,233,156 Funeral 351,138 362,900 Disability 5,803,389 6,321,808 Accident and health: Medical hospitalization - basic 44,357,999 36,012,375 Medical hospitalization - extended benefits 45,974,080 45,525,376 Dismemberment 372,915 395,204 $ 111,678,946 $ 104,850,819 18
The Administration has recorded these liabilities, including administrative expenses for claim processing, based on the results of actuarial reports prepared by independent actuaries, determined under two different methods. Death, funeral, disability, dismemberment and the basic medical hospitalization liabilities were determined using a triangulation method. The extended benefits medical hospitalization reserve uses regression methodology to predict the ultimate incurred claims for each incurred calendar quarter. Additionally, assumptions are made about the mortality rates of the extended benefit claimants, recognizing the impact of their traumatic injuries on life span. Changes in the ultimate liabilities for benefit payments may be required as information develops which varies from experience, provides additional data or, in some cases, augments data, which previously were not considered sufficient for use in determining loss reserves. The activity in the reserve for benefits for the year ended June 30, 2001 is as follows: 2001 2000 Reserve for future benefits at beginning of year $ 104,850,819 $ 97,978,372 Incurred claims: Provision for insured events of current year 79,202,517 63,260,187 (Decrease) increase attributable to insured events of prior years (2,274,001) 2,090,954 76,928,516 65,351,141 Payments for claims: Current year insured events 27,541,932 23,514,267 Prior years insured events 42,558,457 34,964,427 70,100,389 58,478,694 Reserve for future benefits at end of year $ 111,678,946 $ 104,850,819 19
(9) Notes Payable Notes payable consist of the following: Notes payable to IBM Finance Corporation for equipment purchases: 2000 a) 4.70% notes payable due in September 2000 $ 16,042 b) 6.63% notes payable maturing from August to September 2000 179,339 $ 195,381 There were no outstanding notes payable as of June 30, 2001. Notes payable carrying amount approximates fair value due to their proximity to maturity. (10) Lease Commitments The Administration leases certain facilities for its regional offices, as well as certain office equipment. Office facilities are leased under non-cancelable lease agreements, which expire on various dates through the year 2017. Future minimum rental payments under the non-cancelable operating leases in force are as follows: Year ended June 30, Amount 2002 $ 1,050,862 2003 1,021,211 2004 976,561 2005 829,944 2006 829,944 Thereafter 4,323,246 $ 9,031,768 20
Rent expense for the years ended amounted to approximately $1,022,000 and $993,000, respectively. (11) Pension Plan The Employee Retirement System of the Government of Puerto Rico and its instrumentalities (ERS) is a cost sharing multiple-employer defined benefit pension plan sponsored by, and reported as a component unit of, the Commonwealth of Puerto Rico. All regular employees of the Automobile Accident Compensation Administration under age 55 at the date of employment become members of the System as a condition to their employment. No benefits are payable if the participant receives a refund of his/her accumulated contributions. The System provides retirement, death and disability benefits pursuant to Act 447, approved on May 15, 1951, as amended. Disability benefits are available to members for occupational and non-occupational disabilities. 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 an age of at least fifty-five (55) years and have completed at least twenty-five (25) years of creditable service or members who entered the System before April 1, 1990 and have attained the age of at least fifty-eight (58) years or sixty five (65) years for members who entered the System after April 1, 1990 and have completed at least ten (10) 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 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 thirty (30) years of creditable service are entitled to receive the Merit Annuity. Participants who have not attained fifty-five (55) years of age will receive 65% of the average compensation, as defined, otherwise they will receive 75% of the average compensation, as defined. Commonwealth legislation requires employees to contribute 5.775% of the first $6,600 of their gross salary and 8.275% of the salary in excess of $6,600. The Administration s contributions are 9.275% of gross salary. Total employee and employer contributions amounted to $1,128,172 and $1,307,293 in 2001 and $1,083,848 and $1,252.828 in 2000, respectively. Total payroll covered for the year ended was $13,856,666 and $13,906,107, respectively. 21
The Administration s contributions represent 100% of required contributions. Additional information of ERS is provided in its financial statements, a copy of which can be obtained from the Retirement System of the Government of Puerto Rico. (12) Puerto Rico Traffic Safety Commission The Act Number 33, Prevention of Traffic Accidents of May 25, 1972, as amended provides that the Administration should contribute to the Puerto Rico Traffic Safety Commission (the Commission) the funds needed for the Commission s operational expenses. For the years ended, the Administration contributed to the Commission approximately $1,076,000 and $1,070,000 respectively. (13) Commitments and Contingencies The Administration is defendant in various legal proceedings. Management, based on the opinion of its legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending proceedings and legal actions in the aggregate will not have a material effect on the Administration s financial statements. 22