Compact of Free Association
An Assessment of Current U.S. Proposals to Extend Assistance
Gao ID: GAO-02-857T July 17, 2002
The United States entered into the Compact of Free Association with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) In 1986. The Compact has provided U.S. assistance to the FSM and the RMI in the form of direct funding as well as federal services and programs. The Compact allows for migration from both countries to the United States and established U.S. defense rights and obligations in the region. Provisions of the Compact that deal with economic assistance were scheduled to expire in 2001; however, they will remain in effect for up to 2 additional years while the affected provisions are renegotiated. Current U.S. proposals to the FSM and the RMI to renew expiring assistance would require Congress to approve $3.4 billion in new authorizations. The proposals would provide decreasing levels of annual grant assistance over a 20-year term. Simultaneously, the proposals would require building up a trust fund for each country with earnings that would replace grants once those grants expire. The U.S. proposals include strengthened accountability measures, though details of some key measures remain unknown. The proposals have addressed many, but not all, recommendations that GAO made in past reports regarding assistance accountability.
GAO-02-857T, Compact of Free Association: An Assessment of Current U.S. Proposals to Extend Assistance
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United States General Accounting Office:
GAO:
Testimony:
Before the Committee on Resources U.S. House of Representatives:
For Release on Delivery:
Expected at 2:00 p.m., EDT:
Wednesday, July 17, 2002:
Compact Of Free Association:
An Assessment of Current U.S. Proposals to Extend Assistance:
Statement of Susan S. Westin, Managing Director:
International Affairs and Trade:
GAO-02-857T:
Mr. Chairman and Members of the Committee:
I am pleased to be here today to testify on the Compact of Free
Association between the United States and the Pacific Island nations of
the Federated States of Micronesia, or FSM, and the Republic of the
Marshall Islands, or RMI. [Footnote 1] In 1986, the United States
entered into this Compact with the two countries after almost 40 years
of administering the islands under the United Nations (U.N.) Trust
Territory of the Pacific Islands. The Compact, which consists of
separate international agreements with each country, has provided U.S.
assistance to the FSM and the RMI in the form of direct funding as well
as federal services and programs for more than 15 years. Further, the
Compact allows for migration from both countries to the United States
and establishes U.S. defense rights and obligations in the region.
Provisions of the Compact that deal with economic assistance were
scheduled to expire in 2001; however, they will remain in effect for up
to 2 additional years while the United States and each nation
renegotiate the affected provisions. [Footnote 2]
Today I will discuss our review of the current U.S. proposals to extend
economic assistance to the FSM and the RMI. Specifically, I will discuss
the potential cost of assistance to the U.S. government, the amount of
per capita assistance for the FSM and the RMI, and the projected
earnings of proposed trust funds. Further, I will identify
accountability measures that are in the proposals and discuss whether
the proposals address past GAO recommendations in this area. It is
worth emphasizing that all of the above issues are still under
negotiation, and therefore final Compact assistance levels and
accountability measures could differ from those I will discuss
today.
Summary:
Current U.S. proposals to the FSM and the RMI to renew expiring
assistance would require the Congress to approve about $3.4 billion in
new authorizations. [Footnote 3] The proposals would provide decreasing
levels of annual grant assistance over a 20-year term (2004 through
2023). Simultaneously, the proposals would require building up a trust
fund for each country with earnings that would replace grants once
those grants expire. Per capita grant assistance would fall during the
term of Compact assistance, particularly for the RMI. At the Department
of State‘s assumed trust fund rate of return (6 percent), the RMI trust
fund would cover expiring assistance at the 2023 level, while the FSM
trust fund would not achieve this goal. Further, at this rate of
return, neither trust fund would build up buffer funds that could be
used during years of low or negative trust fund earnings.
The U.S. proposals include strengthened accountability measures, though
details of some key measures remain unknown. The proposals have
addressed many, but not all, recommendations that we have made in our
past reports regarding assistance accountability. For example, proposals
call for grant terms and conditions and eliminate a pledge of ’full
faith and credit“ for funds. Proposals also allow for the withholding
of funds and give the United States control over the annual
consultation process and trust fund management. The details of grant
and trust fund management will be addressed in separate agreements that
remain in draft form or have not yet been released. Some of our
recommendations, such as those calling for a review of program
assistance and ways to specifically target health and education grants
to address the adverse impact of migration, have not been addressed at
this point.
Background:
In 1986, the United States and the FSM and the RMI entered into the
Compact of Free Association. [Footnote 4] This Compact represented a
new phase of the unique and special relationship that has existed
between the United States and these island areas since World War II. It
also represented a continuation of U.S. rights and obligations first
embodied in a U.N. trusteeship agreement that made the United States
the Administering Authority of the Trust Territory of the Pacific
Islands. [Footnote 5] The Compact provided a framework for the United
States to work toward achieving its three main goals”(1) to secure self-
government for the FSM and the RMI, (2) to assure certain national
security rights for all the parties, and (3) to assist the FSM and the
RMI in their efforts to advance economic development and self-
sufficiency. The first two goals have been met through the Compact and
its related agreements. The third goal, advancing economic development
and self-sufficiency, was to be accomplished primarily through U.S.
direct financial payments (to be disbursed and monitored by the U.S.
Department of the Interior) to the FSM and the RMI. However, economic
self-sufficiency has not been achieved. Although total U.S. assistance
(Compact direct funding as well as U.S. programs and services) as a
percentage of total government revenue has fallen in both countries
(particularly in the FSM), the two nations remain highly dependent on
U.S. assistance. In 1998, U.S. funding accounted for 54 percent and 68
percent of FSM and RMI total government revenues, respectively,
according to our analysis. This assistance has maintained standards of
living that are artificially higher than could be achieved in the
absence of U.S. support. [Footnote 6]
Another aspect of the special relationship between the FSM and the RMI
and the United States involves the unique immigration rights that the
Compact grants. Through the Compact, citizens of both nations are
allowed to live and work in the United States as ’nonimmigrants“ and can
stay for long periods of time, with few restrictions. [Footnote 7]
Further, the Compact exempts FSM and RMI migrating citizens from
meeting U.S. passport, visa, and labor certification requirements.
Unlike economic assistance provisions, the Compact‘s migration
provisions are not scheduled to expire in 2003. In recognition of the
potential adverse impacts that Hawaii and nearby U.S. commonwealths and
territories could face as a result of an influx in migrants, the
Congress authorized Compact impact payments to address the financial
impact of migrants on Guam, Hawaii, and the CNMI.
Finally, the Compact served as the vehicle to reach a full settlement
of all compensation claims related to U.S. nuclear tests conducted on
Marshallese atolls between 1946 and 1958. In a Compact-related
agreement, the U.S. government agreed to provide $150 million to create
a trust fund. While the Compact and its related agreements represented
the full settlement of all nuclear claims, it provided the RMI the
right to submit a petition of ’changed circumstance“ to the U.S.
Congress requesting additional compensation. The RMI government
submitted such a petition in September 2000.
Current U.S. Compact Proposals Would Cost Billions and Create Trust
Funds:
Under the most recent (May 2002) U.S. proposals to the FSM and the RMI,
new congressional authorizations of approximately $3.4 billion would be
required for U.S. assistance over a period of 20 years (fiscal years
2004 through 2023). The share of new authorizations to the FSM would be
about $2.3 billion, while the RMI would receive about $1.1 billion (see
table 1). This new assistance would be provided to each country in the
form of annual grant funds, extended federal services (that have been
provided under the original Compact but are due to expire in 2003), and
contributions to a trust fund for each country. (Trust fund earnings
would become available to the FSM and the RMI in fiscal year 2024 to
replace expiring annual grants.) For the RMI, the U.S. proposal also
includes funding to extend U.S. access to Kwajalein Atoll for U.S.
military use from 2017 through 2023. In addition to new authorized
funding, the U.S. government will provide (1) continuing program
assistance amounting to an estimated $1.1 billion to the two countries
over 20 years and (2) payments previously authorized of about $189
million for U.S. access to Kwajalein Atoll in the RMI through 2016.
[Footnote 8] If new and previous authorizations are combined, the total
U.S. cost for all Compact-related assistance under the current U.S.
proposals would amount to about $4.7 billion over 20 years, not
including costs for administration and oversight that are currently
unknown.
Table 1: Estimated New U.S. Authorization and Total U.S. Contribution
to the FSM and RMI under the Current U.S. Proposals (in millions of
U.S. dollars):
Grants:
FSM: $1,637;
RMI: $643;
Total: $2,280.
Trust fund contributions:
FSM: $532;
RMI: $284;
Total: $816.
Compact-authorized federal services[A]:
FSM: $174;
RMI: $39;
Total: $213.
Option for extension of MUORA[B]: 101 101
FSM: Not applicable;
RMI: $101;
Total: $101.
New U.S. authorization:
FSM: $2,343;
RMI: $1,066;
Total: $3,409.
Federal programs authorized separately: 760 385 1,145
FSM: $760;
RMI: $385;
Total: $1,145.
MUORA payments previously authorized:
FSM: Not applicable;
RMI: $189;
Total: $189.
Total U.S. contribution:
FSM: $3,103;
RMI: $1,640;
Total: $4,743.
Note: Numbers may not add due to rounding.
[A] Federal services authorized in the Compact include weather,
aviation, and postal services. Services associated with the Federal
Emergency Management Agency have been excluded.
[B] The 1986 Military Use and Operating Rights Agreement (MUORA) grants
the United States access to certain portions of Kwajalain Atoll in the
RMI and provides funding for Kwajalein Atoll that is used for payments
to landowners and economic development through 2016. The current U.S.
proposal includes an option to extend MUORA for the years 2017 through
2023, with an additional 20-year optional lease at that point.
Source: GAO estimate based on current U.S. proposals adjusted for
expected inflation.
[End of table]
Under the U.S. proposals, annual grant amounts to each country would be
reduced over time, while annual U.S. contributions to the trust funds
would increase by the grant reduction amount. Annual grant assistance to
the FSM would fall from a real value of $76 million in fiscal year 2004
to a real value of $53.2 million in fiscal year 2023. [Footnote 9]
Annual grant assistance to the RMI would fall from a real value of
$33.9 million to a real value of $17.3 million over the same period.
This decrease in grant funding, combined with FSM and RMI population
growth, would also result in falling per capita grant assistance over
the funding period – particularly for the RMI (see fig. 1). The real
value of grants per capita to the FSM would decrease from an estimated
$684 in fiscal year 2004 to an estimated $396 in fiscal year 2023.
[Footnote 10] The real value of grants per capita to the RMI would fall
from an estimated $623 in fiscal year 2004 to an estimated $242 in
fiscal year 2023. [Footnote 11] In addition to grants, however, both
countries would receive federal programs and services, [Footnote 12]
and the RMI would receive funding related to U.S. access to Kwajalein
Atoll. [Footnote 13]
Figure 1: Per Capita Grant Assistance Under Current U.S. Proposals:
[See PDF for image]
This figure is a multiple line graph depicting per capita grant
assistance under current U.S. proposals. The lines represent amounts in
fiscal year 2004 U.S. dollars for proposal to the FSM and for proposal
to the RMI. The previous paragraph describes the value of the grants
over the time period of 2004 to 2023.
Note: This analysis excludes trust fund contributions, federal programs
and services, and MUORA related payments to the RMI.
Source: GAO analysis of current U.S. proposals.
[End of figure]
The U.S. proposals are designed to build trust funds that earn a rate of
return such that trust fund yields can replace grant funding in fiscal
year 2024 once annual grant assistance expires. The current U.S.
proposals do not address whether trust fund earnings should be
sufficient to cover expiring federal services or create a surplus to
act as a buffer against years with low or negative trust fund returns.
At a 6 percent rate of return (the Department of State‘s assumed rate)
the U.S. proposal to the RMI would meet its goal of creating a trust
fund that yields earnings sufficient to replace expiring annual grants,
while the U.S. proposal to the FSM would not cover expiring annual
grant funding, according to our analysis. Moreover, at 6 percent, the
U.S. proposal to the RMI would cover the estimated value of expiring
federal services, while the U.S. proposal to the FSM clearly would not.
At a 6 percent return, neither proposed trust fund would generate
buffer funds. If an 8.2 percent average rate of return were realized,
then the RMI trust fund would yield earnings sufficient to create a
buffer, while the FSM trust fund would yield earnings sufficient to
replace grants and expiring federal services. [Footnote 14]
Current U.S. Proposals Contain Stronger Accountability Measures and
Address GAO Recommendations, Some Key Details Remain Unknown:
I now turn my attention to provisions in the current U.S. proposals
designed to provide improved accountability over, and effectiveness of,
U.S. assistance. This is an area where we have offered several
recommendations in the past 2 years. As I discuss key proposed
accountability measures, I will note whether our past recommendations
have been addressed where relevant. In sum, many of our recommendations
regarding future Compact assistance have been addressed with the
introduction of strengthened accountability measures in the current
U.S. proposals. However, specific details regarding how some key
accountability provisions would be carried out will be contained in
separate agreements that remain in draft form or have not yet been
released.
The following summary describes key accountability measures included in
the U.S. proposals that address past GAO recommendations:
* The proposals require that grants would be targeted to priority areas
such as health, education, and infrastructure. Further, grant
conditions normally applicable to U.S. state and local governments
would apply to each grant. [Footnote 15] Such conditions could address
areas such as procurement and financial management standards. U.S.
proposals also state that the United States may withhold funds for
violation of grant terms and conditions. We recommended in a 2000
report that the U.S. government negotiate provisions that would provide
future Compact funding through specific grants with grant requirements
attached and allow funds to be withheld for noncompliance with spending
and oversight requirements. [Footnote 16] However, identification of
specific grant terms and conditions, as well as procedures for
implementing and monitoring grants and grant requirements and
withholding funds, will be addressed in a separate agreement that has
not yet been released.
• The U.S. proposals to the FSM and the RMI list numerous items for
discussion at the annual consultations between the United States and the
two countries. Specifically, the proposals require that consultations
address single audits and annual reports; evaluate progress made for
each grant; discuss the coming fiscal year‘s grant; discuss any
management problems associated with each grant; and discuss ways to
respond to problems and otherwise increase the effectiveness of future
U.S. assistance. In the previously cited report, we recommended that
the U.S. government negotiate an expanded agenda for future annual
consultations. Further, the proposals give the United States control
over the annual review process: The United States would appoint three
members to the economic review board, including the chairman, while the
FSM or the RMI would appoint two members.
* Recommendations from our 2000 report are being addressed regarding
other issues. The U.S. proposals require U.S. approval before either
country can pledge or issue future Compact funds as a source for
repaying debt. The proposals also exclude a ’full faith and credit“
pledge that made it impracticable to withhold funds under the original
Compact. In addition, the U.S. proposals provide specific uses for
infrastructure projects and require that some funds be used for capital
project maintenance.
We also recommended that Interior ensure that appropriate resources are
dedicated to monitoring future assistance. While the U.S. proposals to
the two countries do not address this issue, an official from the
Department of the Interior‘s Office of Insular Affairs has informed us
that his office has tentative plans to post five staff in a new
Honolulu office. Further, Interior plans to bring two new staff on
board in Washington, D.C., to handle Compact issues, and to post one
person to work in the RMI (one staff is already resident in the FSM). A
Department of State official stated that the department intends to
increase its Washington, D.C., staff and overseas contractor staff but
does not have specific plans at this point.
Trust fund management is an area where we have made no recommendations,
but we have reported that well-designed trust funds can provide a
sustainable source of assistance and reduce long-term aid dependence.
[Footnote 17] The U.S. proposals would grant the U.S. government
control over trust fund management: The United States would appoint
three trustees, including the chairman, to a board of trustees, while
the FSM or the RMI would appoint two trustees. The U.S. Compact
Negotiator has stated that U.S. control would continue even after
grants have expired and trust fund earnings become available to the two
countries; in his view, ’the only thing that changes in 20 years is the
bank,“ and U.S. control should continue. He has also noted that it may
be possible for the FSM and the RMI to assume control over trust fund
management at some as yet undetermined point in the future.
Finally, while the departments of State and the Interior have addressed
many of our recommendations, they have not implemented our
accountability and effectiveness recommendations in some areas. For
example, our recommendation that annual consultations include a
discussion of the role of U.S. program assistance in economic
development is not included in the U.S. proposals. Further, the
departments of State and the Interior, in consultation with the relevant
government agencies, have not reported on what program assistance
should be continued and how the effectiveness and accountability of such
assistance could be improved. [Footnote 18] Finally, U.S. proposals for
future assistance do not address our recommendation that consideration
should be given to targeting future health and education funds in ways
that effectively address specific adverse migration impact problems,
such as communicable diseases, identified by Guam, Hawaii, and the
CNMI. [Footnote 19]
Current U.S. Proposals Also Amend Nonexpiring Immigration Provisions:
I would also like to take just a moment to cite proposed U.S. changes to
the Compact‘s immigration provisions. These provisions are not expiring
but have been targeted by the Department of State as requiring changes.
I believe it is worth noting these proposed changes because, to the
extent that they could decrease migration rates (a shift whose
likelihood is unclear at this point), our current per capita grant
assistance figures are overstated. This is because our calculations
assume migration rates that are similar to past history and so use
lower population estimates than would be the case if migration slowed.
Proposed U.S. language on immigration stresses that travel to the United
States by FSM or RMI citizens is intended to be temporary; the Compact
is not intended to provide a stepping-stone for permanent residence or
citizenship in the United States. Proposed U.S. changes to the Compact
immigration provisions include:
* a new requirement for FSM and RMI visitors to carry a machine-readable
passport;
* a new requirement that FSM and RMI citizens visiting the United States
have a specific purpose for their term of stay – such as employment,
school, or tourism - that is listed in the provisions (under the
original Compact, a specific purpose is not required for FSM or RMI
citizens to enter or remain in the United States);
* a statement that FSM or RMI children entering the United States for
adoption purposes are not eligible to do so under the Compact, as they
are intending immigrants;
* a restriction that naturalized FSM and RMI citizens are not eligible
for entry into the United States unless they are an eligible spouse or
dependent of an admissible Compact migrant (under the original Compact,
naturalized citizens are allowed into the United States 5 years after
they are naturalized so long as they are a resident in the FSM or the
RMI during that time); and;
* a new ability for the U.S. Attorney General to promulgate regulations
that could limit the ability of FSM and RMI visitors in the United
States to stay in the country beyond 6 months. [Footnote 20]
Mr. Chairman and Members of the Committee, this completes my prepared
statement. I would be happy to respond to any questions you or other
Members of the Committee may have at this time.
Contacts and Acknowledgments:
For future contacts regarding this testimony, please call Susan S.
Westin or Emil Friberg, Jr., at (202) 512-4128. Individuals making key
contributions to this testimony included Leslie Holen, Kendall Schaefer,
Edward George, Dennis Richards, Mary Moutsos, Ron Schwenn, and Rona
Mendelsohn.
[End of testimony]
Footnotes:
[1] The FSM had a population of about 107,000 in 2000, while the RMI
had a population of 50,840 in 1999, according to each country‘s most
recent census.
[2] Other Compact provisions are also due to expire in 2003 if not
renegotiated and approved. These include (1) certain defense
provisions, such as the requirement that the FSM and the RMI refrain
from actions that the United States determines are incompatible with
U.S. defense obligations (defense veto); and (2) federal services
listed in the Compact.
[3] Our analysis is based on U.S. proposals submitted to the FSM and
the RMI governments in May 2002.
[4] At the time that the Compact was negotiated, the United States was
concerned about the use of the islands of the FSM and the RMI as
’springboards for aggression“ against the United States, as they had
been used in World War II, and the Cold War incarnation of this
threat”the Soviet Union. In addition, the economic viability of both
nations was uncertain at the time the Compact was negotiated.
[5] From 1947 to 1986, the United States administered this region under
a trusteeship agreement that obligated it to foster the development of
political institutions and move the Trust Territory toward self-
government and promote economic, social, and education advancement. In
addition, the agreement allowed the United States to establish military
bases and station forces in the Trust Territory and close off areas for
security reasons as part of its rights.
[6] The economic growth potential of these countries and their ability
to generate revenue to replace U.S. assistance was limited by factors
such as geographic isolation, limited natural resources, and the large
and costly government structure that the United States established.
Major donors (such as Australia) to Pacific Island nations expect that
most of these countries will need assistance for the foreseeable future
in order to achieve improvements in development. In addition, achieving
economic self-sustainability is seen as a difficult challenge for many
of these island nations and an unrealistic goal for others.
See U.S. General Accounting Office, Foreign Assistance: Lessons Learned
From Donors‘ Experiences in the Pacific Region, GAO-01-808 (Washington,
D.C.: Aug. 17, 2001).
[7] Typically, nonimmigrants include those individuals who are in the
United States temporarily as visitors, students, and workers.
[8] See U.S. General Accounting Office, Foreign Relations: Kwajalein
Atoll Is the Key U.S. Defense Interest in Two Micronesian Nations, GAO-
02-119 (Washington, D.C.: Jan. 22, 2002).
[9] While new authorization figures are provided in current dollars so
that total costs to the U.S. government can be identified, grant
assistance is provided in fiscal year 2004 constant dollars for
comparative purposes. In addition to the reduction in grants, the real
value of grants would be eroded over time by a partial, rather than
full, inflation adjustment.
[10] Our per capita calculations assume FSM and RMI migration and
population growth rates that are at the same level as in recent years.
[11] The U.S. proposal to the RMI allocates $4.1 million of grant
assistance in fiscal year 2004 to the island of Ebeye in Kwajalein
Atoll. As such, grants per capita to residents of Ebeye would be higher
than grants per capita to the rest of the RMI population.
[12] For fiscal year 2004, federal programs and services, excluding
federal emergency management assistance, are estimated to be worth
$36.4 million for the FSM and $16.5 million for the RMI.
[13] For fiscal year 2004, Kwajalein landowners would receive $16
million, and the Kwajalein Atoll Development Authority would receive
$1.9 million.
[14] An 8.2 percent average rate of return is the expected rate of
return for a fund with a mix of equities and fixed-income securities
based on historical earnings in the stock market and projected
government bond rates.
[15] Grant conditions will be based, in large part, on the U.S. Federal
Grants Management Common Rule, as set forth in revised Office of
Management and Budget Circular A-102 (Washington, D.C.: Aug. 29, 1997).
[16] See U.S. General Accounting Office, Foreign Assistance: U.S. Funds
to Two Micronesian Nations Had Little Impact on Economic Development,
GAO/NSIAD-00-216 (Washington, D.C.: Sept. 22, 2000) for a review of the
first 12 years of direct Compact assistance.
[17] See GAO-01-808.
[18] See U.S. General Accounting Office, Foreign Assistance:
Effectiveness and Accountability Problems Common in U.S. Programs to
Assist Two Micronesian Nations, GAO-02-70 (Washington, D.C.: Jan. 22,
2002) for an evaluation of 13 U.S. domestic programs, including the
largest programs that the United States provides to the FSM and the
RMI.
[19] See U.S. General Accounting Office, Foreign Relations: Migration
From Micronesian Nations Has Had Significant Impact on Guam, Hawaii,
and the Commonwealth of the Northern Mariana Islands, GAO-02-40
(Washington, D.C.: Oct. 5, 2001).
[20] Such regulations could take into account the ability of FSM or RMI
citizens to support themselves and their immediate relatives. The
option to reduce the ability of FSM and RMI visitors to stay in Guam
and other U.S. territories was provided for in the original Compact. In
2000, regulations were put in place that required Compact migrants to
be self-supporting after 1 year on Guam or be subject to removal. When
we met with Immigration and Naturalization Service officials, they
informed us that enforcing this regulation would prove difficult, since
they did not have the necessary enforcement resources.
[End of section]
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(202) 512-4800:
U.S. General Accounting Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548: