Compacts of Free Association
Implementation of New Funding and Accountability Requirements Is Well Under Way, but Planning Challenges Remain Gao ID: GAO-05-633 July 11, 2005From 1987 to 2003, the United States provided economic aid to the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) through a Compact of Free Association. A previous GAO report found little accountability for the assistance provided by the U.S. Department of the Interior under this compact. In 2004, amended compacts with the FSM and RMI went into effect and will provide $3.5 billion in assistance over 20 years, consisting of grants and contributions to trust funds that are to replace the grants after 2023. The amended compacts include funding and accountability requirements that were not present in the original compact. To better understand the status of the compacts' implementation, GAO evaluated actions taken by the U.S., FSM, and RMI governments since fiscal year 2004 to (1) meet funding requirements and plan for the use of this funding, (2) meet accountability requirements, and (3) establish operations to implement the new agreements.
In fiscal years 2004 and 2005, the U.S. government signed grant agreements with the FSM and the RMI focused on six sectors, such as health and education, as provided for in the amended compacts. Authorized grant amounts for each year were about $76 million for the FSM and about $35 million for the RMI. Required trust funds were also established. Strategic planning issues impacting the long-term, effective use of funds have not been addressed. The allocations of the grants to the sectors have not been linked to the countries' development goals; the FSM and RMI have not planned for annual required decreases in grant funding; and trust funds have not been invested to maximize interest earnings (though efforts are currently under way to resolve this final issue). The U.S., FSM, and RMI governments have taken actions to meet compact accountability requirements. For example, the FSM and the RMI have provided financial and performance reports, and the U.S. government has withheld funding to ensure compliance with grant requirements. However, a few important accountability requirements have not been met. For instance, the FSM's development plan has not been approved by the U.S. government, and it is unclear whether the U.S. government has assessed the RMI's planning documents. Finally, the FSM has not completed single audits for fiscal years 2003 or 2004, and none of the three governments has submitted its required annual compact spending and development report for fiscal year 2004. The Department of the Interior took a significant step in October 2003 to facilitate implementation and oversight of the amended compacts by opening a new office in Honolulu, Hawaii. However, Interior has not determined how much oversight of compact activities in the FSM and the RMI is necessary, though the current level of on-site review is viewed as insufficient. The FSM and RMI governments have each taken actions to establish centralized compact management offices; the RMI government is progressing more rapidly in these efforts than the FSM government.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-633, Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Under Way, but Planning Challenges Remain
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Report to Congressional Requesters:
July 2005:
Compacts Of Free Association:
Implementation of New Funding and Accountability Requirements Is Well
Under Way, but Planning Challenges Remain:
GAO-05-633:
GAO Highlights:
Highlights of GAO-05-633, a report to congressional requesters:
Why GAO Did This Study:
From 1987 to 2003, the United States provided economic aid to the
Federated States of Micronesia (FSM) and the Republic of the Marshall
Islands (RMI) through a Compact of Free Association. A previous GAO
report found little accountability for the assistance provided by the
U.S. Department of the Interior under this compact. In 2004, amended
compacts with the FSM and RMI went into effect and will provide $3.5
billion in assistance over 20 years, consisting of grants and
contributions to trust funds that are to replace the grants after 2023.
The amended compacts include funding and accountability requirements
that were not present in the original compact. To better understand the
status of the compacts‘ implementation, GAO evaluated actions taken by
the U.S., FSM, and RMI governments since fiscal year 2004 to (1) meet
funding requirements and plan for the use of this funding, (2) meet
accountability requirements, and (3) establish operations to implement
the new agreements.
What GAO Found:
In fiscal years 2004 and 2005, the U.S. government signed grant
agreements with the FSM and the RMI focused on six sectors, such as
health and education, as provided for in the amended compacts.
Authorized grant amounts for each year were about $76 million for the
FSM and about $35 million for the RMI (see figure below for fiscal year
2005 grant allocations). Required trust funds were also established.
Strategic planning issues impacting the long-term, effective use of
funds have not been addressed. The allocations of the grants to the
sectors have not been linked to the countries‘ development goals; the
FSM and RMI have not planned for annual required decreases in grant
funding; and trust funds have not been invested to maximize interest
earnings (though efforts are currently under way to resolve this final
issue).
The U.S., FSM, and RMI governments have taken actions to meet compact
accountability requirements. For example, the FSM and the RMI have
provided financial and performance reports, and the U.S. government has
withheld funding to ensure compliance with grant requirements. However,
a few important accountability requirements have not been met. For
instance, the FSM‘s development plan has not been approved by the U.S.
government, and it is unclear whether the U.S. government has assessed
the RMI‘s planning documents. Finally, the FSM has not completed single
audits for fiscal years 2003 or 2004, and none of the three governments
has submitted its required annual compact spending and development
report for fiscal year 2004.
The Department of the Interior took a significant step in October 2003
to facilitate implementation and oversight of the amended compacts by
opening a new office in Honolulu, Hawaii. However, Interior has not
determined how much oversight of compact activities in the FSM and the
RMI is necessary, though the current level of on-site review is viewed
as insufficient. The FSM and RMI governments have each taken actions to
establish centralized compact management offices; the RMI government is
progressing more rapidly in these efforts than the FSM government.
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that the Secretary of the Interior direct the Deputy
Assistant Secretary for Insular Affairs to assess on-site review and,
along with officials from the Departments of State and Health and Human
Services, work with the FSM and RMI governments to improve oversight
and planning.
www.gao.gov/cgi-bin/getrpt?GAO-05-633.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David Gootnick at (202)
512-4128, gootnickd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
United States Is Providing Compact Funding to the FSM and the RMI, but
Strategic Issues Impacting Long-Term Use of Funds Have Not Been
Addressed:
United States, FSM, and RMI Have Taken Actions to Meet Key
Accountability Requirements, Though a Few Requirements Remain
Uncompleted:
OIA Opened New Office in 2003, FSM and RMI Took Steps in 2005 to
Establish Centralized Compact Offices:
Conclusions:
Recommendations:
Agency Comments:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Country Sector Grants, Fiscal Years 2004 and 2005:
Appendix III: Status of Accountability Requirements, Fiscal Years 2004
and 2005:
Appendix IV: Comments from the Department of the Interior:
GAO Comment:
Appendix V: Comments from the Department of State:
GAO Comment:
Appendix VI: Comments from the Department of Health and Human Services:
GAO Comment:
Appendix VII: Comments from the Government of the Federated States of
Micronesia:
GAO Comment:
Appendix VIII: Comments from the Government of the Republic of the
Marshall Islands:
GAO Comments:
Appendix IX: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: U.S. Assistance to Be Provided to the Federated States of
Micronesia under the Terms of the Amended Compact, Fiscal Years 2004-
2023:
Table 2: U.S. Assistance to Be Provided to the Republic of the Marshall
Islands under the Terms of the Amended Compact, Fiscal Years 2004-2023:
Table 3: FSM Sector Grant Allocations between the Five Governments,
Fiscal Years 2004 and 2005:
Table 4: FSM Grants by Sector, Fiscal Years 2004 and 2005:
Table 5: RMI Sector Grants, Including Kwajalein Funding, Fiscal Years
2004 and 2005:
Table 6: RMI Grants by Sector, Fiscal Years 2004 and 2005:
Figures:
Figure 1: Time Line of Key Compact Funding and Accountability Event
Deadlines Associated with One Fiscal Year:
Figure 2: FSM and RMI Sector Grant Allocation, Fiscal Year 2005:
Figure 3: FSM and RMI Use of Authorized Sector Grant Funds, Fiscal Year
2004:
Abbreviations:
CNMI: Commonwealth of the Northern Mariana Islands:
FPA: Fiscal Procedures Agreement:
FSM: Federated States of Micronesia:
HHS: Department of Health and Human Services:
JEMCO: Joint Economic Management Committee (FSM):
JEMFAC: Joint Economic Management and Financial Accountability
Committee (RMI):
KADA: Kwajalein Atoll Development Authority:
MTBIF: Medium-Term Budget and Investment Framework (RMI):
OIA: Office of Insular Affairs:
RMI: Republic of the Marshall Islands:
SEG: Supplemental education grant:
Letter July 11, 2005:
The Honorable Pete V. Domenici:
Chairman:
The Honorable Jeff Bingaman:
Ranking Minority Member:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Richard W. Pombo:
Chairman:
The Honorable Nick J. Rahall, II:
Ranking Minority Member:
Committee on Resources:
House of Representatives:
Since fiscal year 1987, the United States has provided economic
assistance to the Pacific island nations of the Federated States of
Micronesia (FSM)[Footnote 1] and the Republic of the Marshall Islands
(RMI) through a Compact of Free Association. In 2000, we reviewed the
accountability over, and impact of, this compact funding and determined
that the U.S., FSM, and RMI governments had all provided limited
accountability over spending and that U.S. assistance had resulted in
little impact on economic development in both countries.[Footnote 2]
Funding under the original compact expired at the end of fiscal year
2003. The U.S. government negotiated new compact provisions with the
FSM and the RMI that established continued U.S. economic assistance
from fiscal year 2004 through fiscal year 2023, with the U.S.
Department of the Interior's Office of Insular Affairs (OIA)
responsible for providing U.S. assistance and monitoring expenditures.
The "amended" compacts with the RMI and the FSM, which will provide an
estimated $3.5 billion in U.S. assistance over 20 years, went into
effect on May 1, 2004, and June 25, 2004, respectively.[Footnote 3]
The amended compacts are substantially different from the original
compact in that they contain several new funding and accountability
provisions. The amended compacts establish annual funding levels ($92.7
million for the FSM and $57.7 million for the RMI in fiscal year 2004)
that are divided primarily between direct grant assistance, which is
targeted to specific areas, with priority in the health and education
sectors, and contributions to trust funds.[Footnote 4] U.S. grant
funding will decrease annually, with the amount of the decrement added
to U.S. trust fund contributions; earnings from the trust funds are
intended to replace grant assistance when the latter expires in 2023.
In addition, numerous accountability requirements have been added to
the amended compacts, including requirements for quarterly financial
and performance reports and strengthened bilateral interaction.
To obtain insights regarding initial efforts to implement the amended
compacts, we evaluated actions taken by the U.S., FSM, and RMI
governments since fiscal year 2004 to (1) meet compact funding
requirements and plan for the use of this funding, (2) meet compact
accountability requirements, and (3) establish operations to facilitate
compliance with funding and accountability requirements.
We reviewed the amended compacts as well as the subsidiary fiscal
procedures agreements and trust fund agreements. We further reviewed
grant agreements as well as budgets, financial data, and performance
reports submitted by the FSM and RMI governments to the U.S.
government. We also examined briefing documents created by the U.S.
government in preparation for annual meetings with the two countries.
We assessed the minutes summarizing the discussion and decisions from
these meetings. We held extensive interviews with officials from OIA
and the U.S. Department of State. In addition, we traveled to the FSM
(Pohnpei and Chuuk) and the RMI (Majuro and Ebeye). We had detailed
discussions with FSM and RMI officials from finance, budget, health,
education, public works, and audit agencies, and we also obtained the
views of U.S. government officials working in each country. (See app. I
for more detailed information on our scope and methodology.)[Footnote
5]
Results in Brief:
The U.S. government has signed sector grant agreements with the FSM and
RMI as provided for in the amended compacts, and trust funds have been
established for both countries; however, certain issues call into
question the three governments' planning for the long-term use of
funds. For fiscal years 2004 and 2005, the U.S. government signed
sector grant agreements with the countries in areas such as health and
education. FSM grants totaled about $76 million annually, with the
largest grants for health and education, while RMI grants totaled $35
million annually, with the largest grants for infrastructure and
education.[Footnote 6] In addition, trust funds have been established
for each country to replace grant assistance after 2023. The FSM and
the RMI each did not spend about one-third of their available compact
funds for fiscal year 2004. The FSM did not complete sufficient
planning required to obtain infrastructure grant funds, while the RMI
did not complete plans and certain reforms necessary for the use of
some funding targeted for Kwajalein Atoll. In addition, both countries
did not spend portions of other sector grants.[Footnote 7] Strategic
planning issues that impact the long-term, effective use of funds have
not been addressed by the three governments: (1) the allocations of
sector grants are not linked to amended compact development goals such
as the promotion of economic advancement and budgetary self-reliance,
(2) the FSM and RMI have not developed strategic plans to manage
required annual grant funding decreases, and (3) the trust funds have
not been placed with investors that can maximize trust fund earnings
(although efforts are currently under way to resolve this issue).
The three governments have taken a number of actions to fulfill key
compact accountability requirements, but a few important requirements
have not been met. The U.S. government held bilateral meetings with
both countries for the past 2 fiscal years to approve grant agreements
and held an additional meeting with the FSM in 2005 to discuss, among
other issues, the FSM's plan for use of infrastructure funding. In
addition, the grants contained numerous special terms and conditions,
such as requiring the FSM and the RMI to collect sector data and
establish a framework for performance measurement. According to OIA
officials, the RMI has met most of the terms and conditions attached to
its grants, but the FSM has met only some of the terms and conditions
for its grants. Both the FSM and the RMI have provided the U.S.
government with all required quarterly performance and financial
reports for fiscal years 2004 and 2005. However, OIA officials viewed
the FSM's early performance reports as inadequate, and FSM and RMI
officials reported that they are still learning how to prepare such
reports. Further, the U.S. government has made use of a key
accountability option that allows for the withholding or suspension of
funds; for example, certain compact education funding for the FSM state
of Chuuk has been suspended due to possible misuse. A few important
actions required under the amended compacts have not yet been
completed. For example, the FSM has not completed required audits for
fiscal year 2003 and 2004, and none of the three governments has
submitted the required annual compact spending and development report
for fiscal year 2004.
The U.S. government has made significant progress in establishing
operations to facilitate the amended compacts' implementation and
oversight, and the FSM and the RMI governments have taken initial
steps. In October 2003, OIA opened an office in Honolulu, Hawaii, to
facilitate implementation and provide oversight of the various compact
sector grants. However, OIA has not determined the extent of on-site
review in the FSM and the RMI that is necessary to adequately promote
compliance with compact and grant requirements. Officials from all
three countries told us that while they view the creation of OIA's
Honolulu office as a positive development, they believe that the
Honolulu staff should spend more time in the FSM and the RMI than they
currently do, to provide additional guidance on meeting compact
requirements and conduct site visits. During fiscal year 2004 through
mid-April 2005, Honolulu staff spent about 15 percent of their time in
the FSM and the RMI. In early 2005, the RMI government determined that
its Office of the Chief Secretary will serve as the central office
responsible for compact issues, overseeing and coordinating the grants'
implementation. The FSM government recently passed legislation to
create a central compact management office to oversee compact matters
and communicate with the U.S. government, although this office is not
yet operating. Further, the RMI has created a unit that is currently
managing infrastructure projects, while the FSM just created such a
unit in June 2005.
In this report, we recommend that the Secretary of the Interior direct
the Deputy Assistant Secretary for Insular Affairs to review the extent
of OIA oversight in the FSM and the RMI that is necessary to promote
compact compliance and, along with officials from the Departments of
State and Health and Human Services (HHS), work with the FSM and RMI
governments to improve oversight and planning.
We provided a draft of this report to the Departments of the Interior,
State, and HHS. We also provided a draft to the FSM and RMI
governments. We received technical comments from the three U.S.
agencies and the two Micronesian governments, which we have
incorporated into this report, as appropriate. We also received formal
letters from all parties. Reproductions of these letters, as well as
our responses to the letters, can be found in appendixes IV through
VIII. All letters found our work to be useful. The Department of the
Interior concurred with our recommendations and expressed its intention
to implement them. State, HHS, and the FSM government did not comment
on our recommendations to Interior. The RMI government stated that some
of the recommendations did not reflect the purpose or intent of the
amended compact.
Background:
Since the FSM and the RMI became sovereign nations, the U.S.
relationship with the two countries has been defined by the original
Compact of Free Association and the subsequent amended Compacts of Free
Association.
Compact of Free Association, 1986 through 2003:
In 1986, the United States, the FSM and the RMI entered into the
Compact of Free Association. 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. 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 ensure certain national security rights for all of the parties, and
(3) to assist the FSM and the RMI in their efforts to advance economic
development and self-sufficiency. The first goal was met; the FSM and
the RMI are independent nations and are members of international
organizations such as the United Nations. The second goal was also
achieved. 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. The compact and its related agreements
established several key defense rights for all three countries. For
example, the compact obligates the United States to defend the FSM and
the RMI against an attack, or the threat of attack, in the same way it
would defend its own citizens. Further, through a compact-related
agreement, the United States secured access to military facilities on
Kwajalein Atoll in the RMI through 2016.[Footnote 8]
The third goal of the compact--advancing economic development and self-
sufficiency for both countries--was to be accomplished primarily
through U.S. direct financial payments to the FSM and the RMI. For 1987
through 2003, U.S. assistance to the FSM and the RMI to support
economic development was estimated, on the basis of Interior data, to
be about $2.1 billion. We found previously that many compact-funded
projects in the FSM and the RMI experienced problems because of poor
planning and management, inadequate construction and maintenance, or
misuse of funds. Economic self-sufficiency had advanced but had not
been achieved; although total U.S. assistance as a percentage of total
government revenue fell in both countries, the two nations remained
dependent on U.S. funds. U.S. direct assistance maintained standards of
living that were higher than could be achieved in the absence of U.S.
support.
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. Under the original compact, citizens of both nations
were allowed to live and work in the United States as "nonimmigrants"
and could stay for long periods of time, with few restrictions.
Further, the compact exempted FSM and RMI citizens from meeting U.S.
passport, visa, and labor certification requirements when entering the
United States. In recognition of the potential adverse impacts that
Hawaii and nearby U.S. commonwealths and territories could face as a
result of an influx of FSM and RMI citizens, the Congress authorized
compact impact payments to address the financial impact of these
nonimmigrants on Guam, Hawaii, and the Commonwealth of the Northern
Mariana Islands (CNMI).[Footnote 9]
Amended Compacts of Free Association:
In the fall of 1999, the United States, represented by the Department
of State, and the two Pacific island nations began negotiating economic
assistance and defense provisions of the compact that were due to
expire in 2003. The negotiations also addressed immigration issues.
Separate compacts were completed for the RMI and the FSM and went into
effect on May 1, 2004, and June 25, 2004, respectively. Prior to formal
implementation of the amended compacts, the United States provided
funding via a continuing resolution and the Department of the
Interior's fiscal year 2004 appropriation legislation. According to the
Department of State, the aims of the amended compacts are to (1)
continue economic assistance to advance self-reliance, while improving
accountability and effectiveness; (2) continue the defense
relationship, including a 50-year lease extension (beyond 2016) of U.S.
military access to Kwajalein Atoll in the RMI; (3) strengthen
immigration provisions; and (4) provide assistance to lessen the impact
of Micronesian migration on Guam, Hawaii, and the CNMI.
The amended compacts' second objective, continuing the U.S.-RMI defense
relationship, has been addressed, as expiring defense provisions of the
compact have been renewed and U.S. access to Kwajalein Atoll has been
extended. However, one notable difficulty remains regarding this
objective; although the U.S. government negotiated an agreement with
the RMI government that allows for U.S. access to Kwajalein Atoll until
2086, the RMI government has not reached an agreement with Kwajalein
Atoll landowners (who own the land under use by the U.S. government)
that allows for this long-term access. The U.S. government is not
involved in efforts to negotiate such an agreement, and neither the RMI
government nor the Kwajalein Atoll landowners are actively pursuing
resolution of this issue. The third and fourth objectives have also
been addressed. Compact immigration provisions have been strengthened
by, for example, requiring passports from FSM and RMI citizens entering
the United States and clarifying requirements for bringing FSM and RMI
children into the United States for adoption. Further, the amended
compacts' enabling legislation appropriates specific annual
nonimmigrant impact compensation of $30 million for Guam, Hawaii, and
the CNMI for fiscal years 2004 through 2023, with the distribution of
funding between the locations based on periodic surveys identifying the
number of FSM and RMI nonimmigrants in each location.[Footnote 10]
Continuing Economic Assistance under Amended Compacts:
The U.S. government intends to achieve its first objective--continuing
economic assistance to advance self-reliance, while improving
accountability and effectiveness under the amended compacts--by
annually providing direct financial assistance, in the form of grant
agreements, to the FSM and the RMI, for 20 years (fiscal years 2004
through 2023) (see tables 1 and 2). Grant assistance to the FSM and RMI
is targeted to six specific sectors--education, health, public
infrastructure, the environment, public sector capacity building, and
private sector development--although the priority sectors are education
and health. RMI grants must also target some funding to Ebeye and other
Marshallese communities within Kwajalein Atoll. The U.S. Congress, in
approving the amended compacts, also authorized a supplemental
education grant for each country. The Congress determined that rather
than remaining eligible for appropriations under certain education and
labor program assistance, such as Head Start and Job Corps,the FSM and
the RMI would instead receive supplemental direct grant
assistance.[Footnote 11]
In addition to providing sector grant funds, the amended compacts
provide for the establishment of trust funds for both countries. While
providing the direct grant assistance, the U.S. government will also
contribute to the trust funds for both countries, and the FSM and the
RMI will replace the grant assistance with trust fund earnings
beginning in 2024. In addition, the FSM and the RMI must each make one-
time contributions to its trust fund of $30 million, and other donors
can contribute to the funds as well. Except for the fixed amounts set
aside as audit grants, the amounts listed in tables 1 and 2 will be
partially adjusted for inflation, with fiscal year 2004 as the base
year. Grant funding can be fully adjusted for inflation after fiscal
year 2014 under certain economic conditions. Including estimated
inflation adjustments, total U.S. assistance to both countries combined
is projected at more than $3.5 billion over the 20-year assistance
period.
Table 1: U.S. Assistance to Be Provided to the Federated States of
Micronesia under the Terms of the Amended Compact, Fiscal Years 2004-
2023:
Budget authority in millions of dollars.
Fiscal year: 2004;
Annual grants: Section 211: $76.2;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: $16.0;
Total: $92.7.
Fiscal year: 2005;
Annual grants: Section 211: $76.2;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 16.0;
Total: $92.7.
Fiscal year: 2006;
Annual grants: Section 211: $76.2;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 16.0;
Total: $92.7.
Fiscal year: 2007;
Annual grants: Section 211: $75.4;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 16.8;
Total: $92.7.
Fiscal year: 2008;
Annual grants: Section 211: $74.6;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 17.6;
Total: $92.7.
Fiscal year: 2009;
Annual grants: Section 211: $73.8;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 18.4;
Total: $92.7.
Fiscal year: 2010;
Annual grants: Section 211: $73.0;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 19.2;
Total: $92.7.
Fiscal year: 2011;
Annual grants: Section 211: $72.2;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 20.0;
Total: $92.7.
Fiscal year: 2012;
Annual grants: Section 211: $71.4;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 20.8;
Total: $92.7.
Fiscal year: 2013;
Annual grants: Section 211: $70.6;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 21.6;
Total: $92.7.
Fiscal year: 2014;
Annual grants: Section 211: $69.8;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 22.4;
Total: $92.7.
Fiscal year: 2015;
Annual grants: Section 211: $69.0;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 23.2;
Total: $92.7.
Fiscal year: 2016;
Annual grants: Section 211: $68.2;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 24.0;
Total: $92.7.
Fiscal year: 2017;
Annual grants: Section 211: $67.4;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 24.8;
Total: $92.7.
Fiscal year: 2018;
Annual grants: Section 211: $66.6;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 25.6;
Total: $92.7.
Fiscal year: 2019;
Annual grants: Section 211: $65.8;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 26.4;
Total: $92.7.
Fiscal year: 2020;
Annual grants: Section 211: $65.0;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 27.2;
Total: $92.7.
Fiscal year: 2021;
Annual grants: Section 211: $64.2;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 28.0;
Total: $92.7.
Fiscal year: 2022;
Annual grants: Section 211: $63.4;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 28.8;
Total: $92.7.
Fiscal year: 2023;
Annual grants: Section 211: $62.6;
Audit grant: Section 212(b) (amount up to): $0.5;
Trust fund: Section 215: 29.6;
Total: $92.7.
Source: Compact of Free Association, as Amended, Between the Government
of the United States of America and the Government of the Federated
States of Micronesia, U.S. Public Law 108-188.
Note: Within the annual grant amounts, $200,000 will be provided
directly by the Secretary of the Interior to the U.S. Department of
Homeland Security, Federal Emergency Management Agency for disaster and
emergency assistance purposes.
[End of table]
Table 2: U.S. Assistance to Be Provided to the Republic of the Marshall
Islands under the Terms of the Amended Compact, Fiscal Years 2004-2023:
Budget authority in millions of dollars.
Fiscal year: 2004;
Annual grants: Section 211: $35.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $7.0;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2005;
Annual grants: Section 211: $34.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $7.5;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2006;
Annual grants: Section 211: $34.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $8.0;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2007;
Annual grants: Section 211: $33.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $8.5;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2008;
Annual grants: Section 211: $33.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $9.0;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2009;
Annual grants: Section 211: $32.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $9.5;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2010;
Annual grants: Section 211: $32.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $10.0;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2011;
Annual grants: Section 211: $31.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $10.5;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2012;
Annual grants: Section 211: $31.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $11.0;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2013;
Annual grants: Section 211: $30.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $11.5;
Kwajalein impact: Section 212: $15.0;
Total: $57.7.
Fiscal year: 2014;
Annual grants: Section 211: $32.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $12.0;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2015;
Annual grants: Section 211: $31.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $12.5;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2016;
Annual grants: Section 211: $31.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $13.0;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2017;
Annual grants: Section 211: $30.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $13.5;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2018;
Annual grants: Section 211: $30.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $14.0;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2019;
Annual grants: Section 211: $29.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $14.5;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2020;
Annual grants: Section 211: $29.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $15.0;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2021;
Annual grants: Section 211: $28.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $15.5;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2022;
Annual grants: Section 211: $28.2;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $16.0;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Fiscal year: 2023;
Annual grants: Section 211: $27.7;
Audit grant: Section 213(b) (amount up to): $0.5;
Trust fund: Section 216: $16.5;
Kwajalein impact: Section 212: $18.0;
Total: $62.7.
Source: Compact of Free Association, as Amended, Between the Government
of the United States of America and the Government of the Republic of
the Marshall Islands, U.S. Public Law 108-188.
Notes:
"Kwajalein Impact" funding is provided to the RMI government, which in
turn compensates Kwajalein Atoll landowners, for U.S. access to the
atoll for military purposes.
Beginning in 2014, the total amount of funding provided to the RMI will
increase by $5 million. Of this amount, $3 million is allocated to
"Kwajalein Impact," while an additional $2 million is added to annual
grants to address the special needs of Kwajalein Atoll.
Within the annual grant amounts, $200,000 will be provided directly by
the Secretary of the Interior to the U.S. Department of Homeland
Security, Federal Emergency Management Agency for disaster and
emergency assistance purposes.
[End of table]
Accountability Requirements under Amended Compacts:
The amended compacts and their subsidiary fiscal procedures agreements
(FPA) also establish numerous new accountability requirements.[Footnote
12] For example, under the amended compacts, the United States
established a Joint Economic Management Committee (JEMCO) with the FSM
and a Joint Economic Management and Financial Accountability Committee
(JEMFAC) with the RMI to strengthen management and accountability and
to promote the effective use of the compact funding. Each committee
comprises five members, three from the United States and the other two
from the FSM for the JEMCO and from the RMI for the JEMFAC. The
Departments of the Interior, State, and HHS supply the three U.S.
representatives, with the Department of the Interior representative
serving as Chairman.[Footnote 13] The FSM and RMI governments select
their respective representatives. The amended compacts require the
committees to meet at least once annually, no later than 30 days before
the beginning of the fiscal year, to review the budgeting and
development plans of each of the governments, approve grant allocations
and performance objectives, attach special conditions to any or all
annual grant awards to improve program performance and fiscal
accountability, and evaluate progress made under the amended compacts.
JEMCO and JEMFAC render decisions by majority vote, except decisions
regarding the division of RMI grants, which are made by consensus.
Budget consultations with each country are also required prior to JEMCO
and JEMFAC meetings to ensure that proposed compact budgets estimate
sector grant requirements for the upcoming fiscal year. In addition,
trust fund committees are required to address issues associated with
the operations and investments of the FSM and RMI trust funds. The
trust fund committee for each country is comprised of representatives
from the United States and the FSM or the RMI, and other contributors
may also join the committees. Language contained in the amended
compacts' enabling legislation states that it is the sense of the U.S.
Congress that U.S. appointees to the trust fund committees "should be
designated from the Department of State, the Department of the
Interior, and the Department of the Treasury."
The FSM and RMI must also adhere to specific financial and performance
reporting requirements as part of the amended compacts and the FPAs.
The FPAs state that financial management systems must meet several
standards addressing financial reporting, accounting records, internal
and budget controls, cash management, and source documentation, and
also specify applicable procedures regarding real property, equipment,
and procurement where compact funds are involved. As part of their
budgeting process, both countries must submit plans for the division of
annual economic assistance among sectors. Additionally, per the terms
of the FPAs, the FSM and RMI must submit quarterly financial status and
cash transaction reports, and final annual financial reports and single
audits[Footnote 14] must be completed following the end of each fiscal
year.[Footnote 15] Further, for each sector grant, the FSM and RMI must
submit quarterly performance reports comparing actual accomplishments
with program objectives and identifying any problems or issues
encountered during the reporting period. The FSM and RMI are
responsible for the management and monitoring of the day-to-day
operations of all sector grants and their activities to ensure
compliance with all grant terms and conditions. In addition, the FSM
and RMI must prepare and submit an annual report to the President of
the United States on the use of grant assistance and describe progress
toward mutually agreed-upon program and economic goals. Similarly, the
President of the United States must submit an annual report to the
Congress regarding several issues such as general social, political,
and economic conditions in each country; the use and effectiveness of
financial assistance; status of efforts to increase investments; and
recommendations on ways to increase the effectiveness of assistance and
to meet overall economic performance objectives. (See fig. 1 for a time
line of key funding and accountability events that are required for
each fiscal year.)
Figure 1: Time Line of Key Compact Funding and Accountability Event
Deadlines Associated with One Fiscal Year:
[See PDF for image]
Note: Grant funding is provided to each country on a monthly basis,
except for the first month of the fiscal year when funding is provided
to cover the first 2 months of the year. However, infrastructure
projects and projects that are not funded by other grants are paid on
the basis of accrued expenditures.
[End of figure]
OIA staff work closely with Department of State staff in Washington,
D.C. and the U.S. embassies in the FSM and the RMI regarding compact
matters. Department of State officials emphasized to us that they are
primarily responsible for conducting foreign relations with the two
countries and safeguarding U.S. strategic interests in the region, and
these objectives necessarily include involvement in compact issues. An
executive order is currently under preparation that identifies the
specific responsibilities of U.S. agencies regarding compact matters.
Further, OIA coordinates with HHS, a U.S. JEMCO and JEMFAC member, and
in February 2005 a senior official from HHS began work in OIA's
Honolulu field office (which opened in 2003) and told us that he
provides support to the OIA health sector efforts under the amended
compacts, provides technical assistance for an array of U.S. federal
health grants in the Pacific, and works to improve coordination with
other public health entities in the region, such as the World Health
Organization.
Key Differences between Original Compact and Amended Compacts:
The amended compacts differ from the original compact chiefly in that
they provide for direct assistance through sector grant agreements,
establish trust funds, and strengthened accountability and reporting
provisions (all discussed earlier). In addition, unlike the original
compact, the amended compacts do not include a "full faith and credit"
guarantee, which had made it impracticable for the U.S. government to
withhold compact funds. Instead, the FPAs contain provisions that
explicitly allow for the withholding of funds if compact, FPA, or grant
requirements are not met. Further, the FPAs allow for the suspension of
funds if the FSM or RMI engage in gross negligence, willful misconduct,
or material breach of terms and conditions with respect to the use of
financial assistance provided under the amended compacts. In addition,
funds can be withheld if the FSM and RMI do not cooperate in
investigations regarding whether funds are being used for purposes
outside what is authorized in the compact.
Finally, the FPAs prohibit the FSM and RMI from issuing negotiable or
transferable obligations evidencing indebtedness or encumbrance of
compact economic assistance funds. In 2000, we found that under the
original compact, the FSM and the RMI issued compact revenue-backed
bonds in order to obtain greater funding in the earlier years of the
compact. The funding was used to retire existing debt, pay for capital
projects, and make financial investments. In later compact years, FSM
and RMI bond debt payments (especially for the RMI) limited the
availability of compact funds for other uses.
United States Is Providing Compact Funding to the FSM and the RMI, but
Strategic Issues Impacting Long-Term Use of Funds Have Not Been
Addressed:
The U.S. government has signed sector grant agreements with the FSM and
RMI as provided for in the amended compacts, and trust funds for both
countries have been established. The two countries did not spend about
one-third of available funding in fiscal year 2004. Some of this
unspent funding resulted from a lack of planning required to obtain
access to certain grants--the FSM did not complete plans to obtain
infrastructure grant funding and for the RMI did not complete plans and
reforms for the use of funds targeted to address the special needs of
Kwajalein Atoll. The U.S. government has not provided either country
with a supplemental education grant established in the amended
compact's enabling legislation. Strategic planning issues that impact
the long-term, effective use of funds have not been addressed by the
three governments: (1) the allocations of sector grants are not linked
to amended compact development goals such as the promotion of economic
advancement and budgetary self-reliance, (2) the FSM and RMI have not
developed strategic plans to manage required annual grant funding
decreases, and (3) the trust funds have not been placed with investors
that can maximize trust fund earnings (although efforts are under way
to resolve this issue).
U.S. Government Signed Grant Agreements with Both Countries, and Trust
Funds Have Been Established:
The U.S. government signed grant agreements with the FSM and the RMI
for fiscal years 2004 and 2005[Footnote 16] in the compact-designated
areas of health, education, infrastructure, environment, private
sector, and public sector capacity building (see fig. 2 for FSM and RMI
fiscal year 2005 grant allocations). FSM sector grant funding totaled
$76 million annually for both years.[Footnote 17] The FSM national
government, which directly signs grant agreements with the U.S.
government and is the "grantee," provides the majority of grant funds
to the four FSM states, which are "subgrantees." RMI grant funding
totaled about $35 million annually for the 2 years.[Footnote 18]
Figure 2: FSM and RMI Sector Grant Allocation, Fiscal Year 2005:
[See PDF for image]
Notes:
The RMI's public sector capacity building grant was $103,514. This
amount accounts for under 1 percent of total grant funding.
While section 211(b)(2) of the amended compact with the RMI provides
for an annual $1.9 million (with a partial inflation adjustment) for
Kwajalein impact, these funds have not yet been provided pending the
completion of a spending plan for these funds.
[End of figure]
* The FSM's largest grant for fiscal years 2004 and 2005 is in the area
of education. This grant accounted for over a third of total sector
grants. The health sector received the second highest grant amount for
2005, at 23 percent of total grant funding. The FSM has not yet met the
goals outlined in the amended compacts' enabling legislation, which
states that it is the sense of the U.S. Congress that infrastructure
improvements and maintenance should account for not less than 30
percent of all sector grant funding each year; the amount of funding
intended for infrastructure for 2005 is slightly smaller than the
funding for health grants and also accounted for about 23 percent of
grant funding in that year (a grant in this area was awarded by
Interior on May 13, 2005, and accepted by the FSM national government
on May 26, 2005). A resolution adopted by the JEMCO during an August
2004 meeting requires the FSM to move to reach the goal of funding
infrastructure at not less than 30 percent of annual compact grant
funding by fiscal year 2006. In addition, the United States agreed to
an FSM request for fiscal year 2004 to spend about 90 percent of its
$11.6 million public sector capacity building grant to fund basic
government operations, rather than to support this sector's principal
compact objective of promoting effective, accountable, and transparent
government. According to a senior OIA official, the FSM needed to use
these grant funds for basic government operations to be able to
adequately support the use of other sector grant funds. As a 2004 grant
condition, the FSM is required to stop funding basic government
operations from Compact grant assistance over a 5-year period.
Similarly, in 2004, the FSM also had to commit to shifting basic
government operations out of its much smaller private sector
development grant--a grant primarily intended to support efforts to
attract new foreign investment and increase indigenous business
activity.
* The RMI's largest grant for fiscal years 2004 and 2005 is in the area
of infrastructure. The RMI has easily met the "sense of the U.S.
Congress" language regarding infrastructure for fiscal years 2004 and
2005, with an infrastructure grant of about $13.5 million accounting
for around 39 percent of total sector grant funding in 2005. The next
largest grant is in the area of education, which represents more than
30 percent of total grant funding for both years, followed by health
grants at 20 percent of the total funding. An additional grant of $1.9
million authorized in amended compact section 211(b)(2) (representing 6
percent of total grant funds in fiscal year 2005) exists specifically
to address needs on Kwajalein Atoll, although grant documents had not
been signed as of mid-May 2005.[Footnote 19] In contrast to the FSM,
the RMI allocated no compact funding to a public sector capacity
building grant in fiscal year 2004 and less than 1 percent of compact
sector grant funding to such a grant in fiscal year 2005. (For a more
detailed description of FSM and RMI sector grant allocations for fiscal
years 2004 and 2005, see app. II.)
As provided by the amended compacts, trust funds have been established
for both countries, the earnings from which are to replace sector
grants when grant assistance ends in 2023. According to an OIA
official, the RMI trust fund was incorporated in April 2004, and the
FSM trust fund was incorporated in August of that year. The FSM
government contributed $30 million to its trust fund in October 2004,
while the RMI government, as of March 2005, had contributed $26.5
million to its trust fund and was $1 million behind with its scheduled
trust fund contributions. As provided in the amended compacts, the U.S.
government has provided $32 million to the FSM trust fund and $14.5
million to the RMI trust fund for fiscal years 2004 and 2005. In
addition, according to a State official, the RMI has signed an
agreement that will provide for a $50 million trust fund contribution
from Taiwan (which has also provided economic assistance to the RMI).
FSM and RMI Did Not Spend About One-Third of Authorized Fiscal Year
2004 Funds:
The FSM and the RMI each did not spend about one-third of authorized
grant funding for fiscal year 2004 (the only completed year under the
amended compacts). Some of this unspent funding resulted from a lack of
planning required to obtain access to certain grants--the FSM did not
complete plans to obtain infrastructure grant funding, and the RMI did
not complete plans and reforms for the use of funds targeted to address
the special needs of Kwajalein Atoll. Further, both countries did not
spend (obligate) some portion of other available sector grants for
2004; the FSM spent a smaller percentage of each of these grants than
the RMI (see fig. 3 for FSM and RMI use of sector grants for fiscal
year 2004). These funds remain available for use in future years.
Figure 3: FSM and RMI Use of Authorized Sector Grant Funds, Fiscal Year
2004:
[See PDF for image]
Notes:
The RMI allocated no compact funding for a public sector capacity
building grant in fiscal year 2004.
The Kwajalein impact funding ($1.9 million) is specific to the RMI and
is authorized in section 211(b)(2) of that country's amended compact.
[End of figure]
* The FSM did not spend almost $25 million (33 percent) of its
authorized sector grant funding of $76 million for fiscal year 2004.
This amount includes more than $17 million in infrastructure funding
(100 percent of the grant amount) that was not provided to the country
because of the time it has taken the FSM to complete a required
infrastructure development plan that identified infrastructure projects
that adequately integrated state and national priorities.[Footnote 20]
Further, the FSM has only recently established a required project
management unit to oversee individual infrastructure projects.[Footnote
21] Finally, the FSM did not spend more than $7.7 million in other
available sector funds (primarily in health and education); OIA
officials have expressed frustration that financial management
practices in the FSM allowed over 10 percent of the available compact
grant funds to go unused for fiscal year 2004. Of this amount, Yap
state had the largest unobligated, or carryover, compact fund balance,
at more than $4 million.[Footnote 22]
* The RMI did not spend about $12 million (35 percent) of its total
authorized grant funds of $35 million. The RMI, which met compact
requirements related to infrastructure spending, did not spend $9.6
million (66 percent) of its infrastructure grant, owing to the time
involved in bidding and initiating infrastructure projects.[Footnote
23] According to an OIA official, infrastructure activity is now well
under way in the RMI. Further, the RMI government did not spend $1.9
million targeted for special needs on Kwajalein Atoll. These funds
remain with OIA until the RMI government submits a plan regarding how
the funds will be spent. The funds will be used by a local government
agency, the Kwajalein Atoll Development Authority (KADA), which has
experienced problems in effectively and efficiently using funds in the
past. As of early 2005, legislation had been passed that contains plans
for KADA's restructuring, but the agency was not operating. Finally,
the RMI had a carry-over balance of about $750,000 from other available
fiscal year 2004 sector grants, chiefly in the education sector (5
percent of funding under this grant, the RMI's second largest for 2004,
was unspent for the year).
In addition, the U.S. government has not provided one grant established
in the amended compacts' enabling legislation. Neither the FSM nor the
RMI has received a supplemental education grant (SEG) that is to begin
in fiscal year 2005. The Departments of the Interior, Education, Labor,
and Health and Human Services are still finalizing an interagency
agreement to determine how funds authorized under the amended compacts'
enabling legislation for this grant will be transferred from other
agencies to Interior. The annual SEG amount--$12.23 million for the FSM
and $6.1 million for the RMI--is substantial, compared with the funding
amounts provided for other compact sector grants.[Footnote 24]
Strategic Issues Impacting Long-Term Use of Funds Have Not Been
Addressed:
The U.S., FSM, and RMI governments have not addressed several strategic
issues that impact the long-term, effective use of funds.
Grant Allocations Not Tied to Broader Goals:
Fiscal year 2004 and 2005 allocation of compact sector grant
allocations were not clearly tied to broad development goals, and
therefore the extent to which existing grants contribute to the FSM's
and the RMI's long-term development is unclear. The JEMCO and JEMFAC
reviews of sector grant allocations for fiscal years 2004 and 2005 did
not include discussions of FSM and RMI plans to establish goals
regarding the amended compacts' primary objectives of economic
advancement and budgetary self-reliance, and how grant allocations in
each sector will help to achieve these larger goals. FSM and RMI plans
that could assist in this effort are incomplete. The required
development plan for the FSM and the medium-term budget and investment
framework (MTBIF) for the RMI are to be strategic in nature and
identify how the countries will use compact funds to promote broad
compact development goals such as economic advancement and budgetary
self-reliance.[Footnote 25] However, JEMCO has not considered the FSM
development plan. Further, U.S. officials are unclear as to whether
JEMFAC has approved RMI's framework plans for the use of grant funds
and have acknowledged that this issue needs attention. U.S. government
officials have noted that the issue of linking the use of grant funds
to the achievement of long-term development goals has not been
addressed to this point.
Further, while the amended compact states that grant funding is
provided to assist the economic advancement of the people of the FSM,
the FSM's process for internally distributing sector grant funding does
not address national sector priorities or consider sector disparities
between the FSM states. Compact funds are allocated among the five FSM
governments--the FSM national government and the four state
governments--primarily according to a formula used under the original
compact.[Footnote 26] In addition to providing funds to the four
states, the formula established funding to the FSM national government,
which resulted in a funding allocation percentage for Chuuk and Pohnpei
states that is notably lower than their percentage of the FSM's
population. An FSM law enacted in January 2005 establishes a very
similar distribution among the five governments.[Footnote 27]
Although the U.S. government has signed grant agreements for fiscal
years 2004 and 2005 that provide for the distribution of funds to the
five governments according to this formula, U.S. government officials
have stated that this formula may not result in grant allocations that
reflect national needs. For example, there are currently substantial
differences in sector per capita funding in the FSM states. We
calculated that the Yap state compact education grant provides at least
twice as much funding per student as the Chuuk state education grant,
and almost three times as much funding per person regarding health
grants. The extent to which such variances between states benefit the
nation or reflect differences in state needs is not clear.
FSM and RMI Have Not Planned for Future Funding Decreases:
Lack of strategic planning in both countries to address necessary grant
decreases could result in funding allocations that do not facilitate
the most critical and effective use of remaining compact resources. For
example, the FSM and the RMI have not developed a strategy to manage
the annual sector grant decreases--for the FSM, $800,000 starting in
fiscal year 2007 and for the RMI, $500,000 since fiscal year 2005--
mandated in the amended compacts. A senior RMI official told us that
although the government recognizes that the decrements should be of
major concern, government officials are not addressing the problem.
Likewise, a senior FSM official reported that although the government
has created a task force to examine ways to increase tax revenues to,
among other things, compensate for lost compact grant funding, no plan
is currently being devised to determine how to respond to the annual
decreases. This official also noted that such issues are up to each of
the five governments to address as they see fit.
In addition, the FSM has no strategic plan to shift basic government
operations expenditures from the public sector capacity building grant
to local revenues. Although the FSM, according to the terms of a grant
condition, provided OIA with a document that calculates percentage
decreases of these expenditures from the grant through 2009, there is
no additional plan describing the policy steps that will be taken or
the agencies and activities that will be affected. Funding for this
grant began decreasing in fiscal year 2005, and some officials have
expressed concern over the consequences of reduced compact funding to
support routine government activities.
Trust Funds Have Earned Low Returns:
The FSM and RMI trust funds are earning low returns on trust fund
contributions, raising concerns about the future adequacy of the trust
funds to ultimately replace grant assistance. All trust fund
contributions are currently in commercial bank accounts earning up to
2.63 percent in interest, because neither trust fund has been placed
with an investment advisor that will work to maximize returns.
According to an OIA official, this circumstance has resulted from the
time it took the FSM and the RMI to approve the amended compacts as
well as the process involved in selecting an investment advisor and
placing funds with money managers. In February 2005, the RMI trust fund
committee selected a trust fund investment advisor; no advisor has been
selected for the FSM as of mid-May 2005, although the process to select
one is under way.
This situation is important in the context of our prior analysis that
raised questions about the sufficiency of the trust funds to generate
earnings that could replace compact grants beginning in 2024.[Footnote
28] For example, assuming an annual return of 7.9 percent realized by
the trust funds at the beginning of fiscal year 2004, we projected that
the FSM trust fund earnings by 2048 would be inadequate.[Footnote 29]
However, future earnings in excess of 7.9 percent could counterbalance
the slow start for the trust funds. The FSM appears to be in a weaker
position relative to the RMI, in that it has not selected a trust fund
investment advisor and has not yet obtained additional contributions
from other donors.
Regarding a separate trust fund issue, U.S. membership in the FSM and
RMI trust committees is not yet aligned with language contained in the
amended compacts' enabling legislation, which states that it is the
sense of the U.S. Congress that U.S. appointees to the trust fund
committees "should be designated from the Department of State, the
Department of the Interior, and the Department of the Treasury."
Current U.S. government trust fund committee participants are from the
same U.S. agencies that participate in the JEMCO and JEMFAC: the
Departments of the Interior, State, and Health and Human Services. An
OIA official noted that an effort is under way to eventually include
the Department of the Treasury as an additional member of the RMI trust
fund committee when Taiwan contributes to the RMI trust fund and can
become a member of the committee. (The trust fund agreements allow
additional donors to become members of the committees but also require
a U.S. majority vote in trust fund committees; therefore, the U.S.
government will add another member if Taiwan joins the RMI trust fund
committee.)
United States, FSM, and RMI Have Taken Actions to Meet Key
Accountability Requirements, Though a Few Requirements Remain
Uncompleted:
The U.S., FSM and RMI governments have taken several actions to fulfill
key accountability requirements, such as meeting annually to approve
grants, establishing special grant terms and conditions, and preparing
various reports. Further, the U.S. government has withheld grant
funding for noncompliance with compact and grant requirements and
initiated an investigation into the possible misuse of compact funds in
the FSM state of Chuuk. However, a few important requirements, such as
the preparation of annual compact spending and development reports,
remain uncompleted. (See app. III for a table listing requirements that
have and have not been met.)
Most Required Meetings and Consultations Have Occurred:
In August 2003 and 2004, the U.S. government held bilateral meetings
with the FSM through JEMCO and with the RMI through JEMFAC to discuss
and approve fiscal year sector grants allocations. The minutes for the
August 2004 JEMCO and JEMFAC meetings showed a discussion of committee
procedures and approval of specific sector grant levels.[Footnote 30]
JEMCO and JEMFAC have focused on grant approval and performance
assessment, while other committee duties, such as reviewing other donor
assistance or audit findings, have received limited attention. Although
the JEMFAC meetings with RMI reached consensus on grant issues, the
JEMCO meetings with the FSM showed areas of strong disagreement between
the U.S. and FSM representatives; these disagreements were decided by a
vote, split between the countries, that adopted the U.S.
position.[Footnote 31] The FSM government sent a letter to the U.S.
government expressing frustration over the 2004 JEMCO meeting and the
manner in which decisions were reached. Special meetings can be called
by three JEMCO or two JEMFAC members. A special bilateral meeting with
the FSM was held in Honolulu on March 11, 2005, to discuss grant
management problems regarding one of the FSM subgrantees, Chuuk state,
and a special JEMCO meeting was held that same day to reach decisions
regarding the FSM infrastructure development plan and the use of fiscal
year 2004 carry-over funds.
In addition, the amended compacts require budget consultation meetings
before the compact budgets are submitted and the formal JEMCO and
JEMFAC meetings are held. These consultations were held with the FSM
before the 2005 JEMCO meeting. However, no consultations were held with
the RMI because that government was late in providing a draft budget to
the U.S. government; a budget was not provided until 1 week before the
JEMFAC meeting. Budget consultations were held with both countries in
2003 in preparation for fiscal year 2004.
Special Grant Conditions Have Been Established:
JEMCO and JEMFAC specified additional accountability requirements by
including special terms and conditions that were included in the fiscal
year 2004 and 2005 individual grants agreements. These special terms
and conditions ranged widely, from requiring information on the three
FSM health insurance programs to requiring that both countries submit
appropriate environmental performance measures and baseline data for
approved activities to OIA.
According to OIA officials, the RMI met most of the special grant terms
and conditions attached to the country's grants; however, the FSM met
only some of its specific terms and conditions. For example, according
to OIA staff, the FSM has had difficulty identifying useful performance
baseline data for most sectors because of information disorganization
and fragmentation. OIA officials reported that the FSM was unable to
satisfy more conditions because of a lack of skilled staff in all four
FSM states and the national government. They stated that the staff
members with responsibility for sector grant compliance did not always
have the requisite level of understanding or skill to make sure that
problems were being addressed.
Key Reports Have Been Prepared:
The FSM and the RMI have submitted their annual compact budgets to the
U.S. government, as well as all quarterly financial and performance
status reports, and annual financial reports. OIA has asked for FSM to
revise its budgets to include more specific data, such as the number of
people working on a particular program. OIA officials have found the
FSM's 2004 quarterly financial and performance reports to be in need of
improvement, while such reports from the RMI were viewed as adequate. A
senior HHS official noted that the FSM has had significant difficulty
in providing standardized performance data between the states that can
be compared. FSM officials told us that the national government does
not assess the quarterly performance reports prepared by the five
governments and simply compiles them for transmission to OIA. Both
countries have submitted financial and performance reports to the U.S.
government on time, and Pohnpei and Chuuk states have withheld pay for
officials responsible for performance reports that were not provided on
time to the FSM national government.
OIA has been working with the FSM to improve and standardize the FSM's
performance reporting format; and, as of the first quarter of fiscal
year 2005, all FSM governments were using a uniform reporting format
that was approved by OIA. Officials in both countries told us that the
requirement to produce performance reports was a positive step and
would help to create a linkage between expenditures and their impact.
However, the officials acknowledged that they are still in the process
of learning how to generate such reports, and that, although the
reports have the potential to be used as a management tool, the
governments are not yet able to use the reports in this capacity.
Interior Has Withheld FSM Grants and Initiated a Misuse Investigation:
In several instances, the U.S. government has not provided compact
funds to the FSM or RMI in order to ensure compliance with compact
requirements, and accountability over sector grants. In two instances,
OIA withheld compact funding from the FSM when the country was slow to
meet grant conditions. Further, OIA suspended FSM funding due to
possible misuse in another situation. Finally, in an effort to ensure
prudent financial operations, OIA has delayed providing FSM and RMI
grant funding due to cash management concerns. A Department of State
official noted that the FSM and RMI governments are definitely taking
note as the U.S. government makes use of this new tool to ensure the
appropriate use of compact funding.
In the first instance, in approving FSM use of most of its public
sector capacity-building grant funds for basic government operations
rather than for the principal compact objectives for this sector, as
mentioned earlier, JEMCO also adopted a grant condition for the fiscal
year 2004 public sector capacity building grant. This condition
required a "transition plan" by March 2004 explaining how these
expenses would be removed from this grant. When the FSM did not provide
such a plan, OIA withheld FSM public sector capacity-building grant
funding, totaling approximately $1.9 million in May and June 2004
combined. After the FSM provided the plan to the U.S. government in
July, OIA released the funding.[Footnote 32] The second, similar
instance occurred simultaneously with a much smaller grant. JEMCO
attached a special grant condition to the FSM's private sector
development grant, requiring that the FSM provide a 5-year transition
plan for shifting basic government operating costs away from this grant
to local revenues. When the FSM did not provide the plan on time, OIA
withheld about $630,000 of sector funding in May and June 2004 until
the FSM provided a plan in June 2004.
Further, as of March 2005, OIA suspended the Chuuk education grant's
meal service program funding, because of questions surrounding the
delivery of meals to students. The program was allocated almost $1
million in fiscal year 2005. Because OIA staff were unable to verify
that food purchased by the program was received by the Chuuk Education
Department or served to students, OIA has suspended--following a
bilateral meeting that addressed this issue--$80,380 each month until
the FSM national government reports on corrective actions to ensure
that the meal service program operates effectively. As of May 2005,
this issue, which was uncovered during a field visit to Chuuk by an OIA
Honolulu office employee, had not been resolved. OIA also contacted
Interior's Office of the Inspector General for a follow-up
investigation to determine whether Chuuk is misusing compact grant
funds.[Footnote 33] According to a senior OIA official, the FSM
national government is cooperating with this investigation.
Finally, OIA took action in response to FSM and RMI cash management
issues (an area not directly related to fulfillment of grant conditions
or misuse of funds). OIA delayed payments to the FSM and the RMI in
August 2004, when the required third-quarter cash transactions report
showed that both countries had notable excess grant sector funding that
had not been spent. OIA subsequently resumed funding when the
governments reported that they needed cash to meet their obligations.
OIA also stopped payments to the FSM in May 2005 when an OIA review
showed that the FSM had about $9.7 million in cash on hand. Compact
payments will be delayed until the FSM demonstrates its need for
additional funding.
A Few Important Requirements Remain Uncompleted:
Despite progress in many areas, a few important accountability
reporting requirements have not been met, preventing the U.S., FSM, and
RMI governments from fully gauging FSM and RMI performance in utilizing
compact funds and from beginning to assess the impact of compact
funding.
* Required broad annual reports summarizing compact spending and
progress in meeting development goals have not been completed by any of
the three governments. The U.S. government has not provided its fiscal
year 2004 report from the President to the U.S. Congress, due in
December 2004, though a draft is being circulated for interagency
approval. Similarly, the FSM and the RMI have not submitted fiscal year
2004 reports to the U.S. President, although they were due in February
2005.[Footnote 34]
* Key development planning efforts remain incomplete, as mentioned in
the previous section. These plans were due no later than 90 days after
the amended compacts went into effect. The FSM has prepared a
development plan, and the FSM Congress approved transmittal of this
plan to the U.S. government in May 2005. JEMCO has not yet considered
the plan. The RMI has provided the U.S. government with a required
medium-term budget and investment framework, as well as a policy
framework paper and annual plans for each sector, but it is unclear
whether the JEMFAC has approved RMI planning documentation addressing
the use of grant funds. OIA officials have provided contradictory
views; while one senior official reported that the RMI's approach was
approved during the 2003 bilateral meeting, another official disagreed,
and no record exists to document this meeting. No subsequent action has
been taken to approve the RMI's planning efforts. A senior OIA official
noted that this particular issue has not received the attention it
requires.
Required audits that OIA intends to use to gauge compact compliance in
specific areas such as procurement, remain outstanding or have been
late. Single audits for fiscal year 2004 were due on April 1, 2005. The
FSM has not completed its fiscal year 2004 single audit.[Footnote 35]
The RMI has been late in meeting this requirement; the RMI completed
its fiscal year 2004 single audit in June 2005.[Footnote 36]
OIA Opened New Office in 2003, FSM and RMI Took Steps in 2005 to
Establish Centralized Compact Offices:
In October 2003, OIA took a significant step toward facilitating
implementation and oversight of the amended compacts by opening a
Honolulu field office to manage compact issues. However, OIA has not
conducted a review to determine the extent of oversight of compact
activities in the FSM and the RMI that would adequately promote
compliance with compact requirements, though officials from all three
governments told us that OIA staff should be spending more time in the
two countries. Staff are currently spending about 15 percent of their
time in the two countries. The FSM and the RMI governments have
subsequently acted to create or identify central offices responsible
for compact matters. The RMI government is progressing more quickly
than the FSM government in this regard, and it has also taken other
actions to facilitate compact implementation, such as creating an
infrastructure project management unit.
OIA Opened a Honolulu Field Office to Facilitate Compact Implementation
and Monitoring, but Extent of Required On-Site Review Has Not Been
Established:
In October 2003, OIA opened a new Honolulu field office specifically
intended to facilitate implementation and oversight of the amended
compacts, although OIA has not determined how much on-site review of
compact activities in the FSM and the RMI is necessary. During the
congressional approval process for the amended compacts in 2003, in
addressing why OIA should open an office in Honolulu rather than
placing OIA staff in the FSM and the RMI, the Deputy Assistant
Secretary for Insular Affairs reported to the House Committee on
International Relations, Subcommittee on Asia and the Pacific, that
"The Honolulu team will be able to travel frequently to the [FSM and
the RMI]. While travel costs are high from Honolulu, additional travel
costs are offset by not having to supply permanent housing, post
differential, home leave, and education for dependents that come with
foreign posts." The office has five professional staff--specialists in
health, education, infrastructure, private sector development, the
environment, and financial management--that provide program and
financial expertise along with a knowledge and understanding of the
region, and work with the OIA Compact Coordinator in Washington,
D.C.[Footnote 37] The Honolulu staff perform activities such as
analyzing FSM and RMI budgets and other required reports, traveling to
the islands to discuss and review expenditures and performance with FSM
and RMI government officials and conduct site visits, providing
briefings and advice to OIA and State officials regarding progress and
problems, and providing support for bilateral meetings.[Footnote 38]
However, in conjunction with establishing the Honolulu office, OIA did
not determine the extent of on-site review of compact activities in the
FSM and the RMI that would adequately promote compliance with compact
and grant requirements. OIA fieldwork in the FSM and the RMI is
necessary to ensure accountability over funds and compliance with
compact and grant requirements, and is one of the principle reasons why
the office was established in Honolulu. According to a cable from the
U.S. Ambassador to the FSM "The constant flow of compact-related
queries highlights the need for continued, intensive hands-on [OIA]
involvement— [E]ffective oversight by Interior's staff in Hawaii will
be critical in realizing the compact's full potential— [OIA] staff will
need to meet regularly with [FSM] state officials from both the
executive branch and the legislatures. Working more closely with state
officials as they develop their budgets would enable [OIA] staff to
spot and resolve problems well before budgets are finalized— Oversight
by e-mail is not an option."
Officials from all three countries told us that while they view the
creation of OIA's Honolulu office as a positive development, they
believe that the Honolulu staff should spend more time in the FSM and
the RMI than they currently do, to provide additional guidance on
meeting compact requirements and conduct site visits. For example:
* The Deputy Assistant Secretary for Insular Affairs told us that he is
not satisfied with the amount of on-site review that his staff is able
to conduct but that his office must deal with the budget available to
it. The OIA Compact Coordinator and staff from the Honolulu office
report that on-site time in the field is inadequate and does not allow
for detailed reviews of federal funds in the various remote islands.
* The U.S. Ambassadors to the FSM and the RMI both told us that OIA
Honolulu staff should have the resources to conduct more work in the
two countries. For example, more on-site work by OIA staff with country
budget and finance issues is needed, as well as sufficient time to
conduct site visits to schools.
* The HHS official that participates in the JEMCO and the JEMFAC noted
the value of OIA on-site review in Chuuk and said that there needs to
be more on-the-ground work.
* FSM and RMI officials also noted a need for additional on-site review
and inspection by OIA staff, including site visits to schools in
Pohnpei and infrastructure projects that are under way in the RMI.
For fiscal year 2005, the OIA Honolulu office has a travel budget of
$170,000, and for fiscal years 2004 and 2005 (through mid-April), staff
in OIA's Honolulu office spent about 15 percent of their total work
time reviewing compact-related activities in the islands. OIA officials
report that they are allocating their travel based on available funds
for travel, while the OIA Honolulu office reports that they have had no
input into the preparation of OIA's budget or the allotment process.
Examples of the impact of on-site review include the previously
mentioned visit to Chuuk state by OIA Honolulu staff that uncovered
possible misuse, as well as meetings OIA program specialists have held
in the islands to discuss key issues, such as standardizing and
improving both financial and performance measurement reporting, with
FSM and RMI officials. According to OIA officials, the office has no
assessment under way to establish if this amount of time spent in the
FSM and the RMI meets oversight needs. While OIA officials believe the
funding for on-site review is insufficient, the department has not
supported increased funds for this purpose.
FSM and RMI Governments Have Taken Initial Steps to Create Central
Compact Offices:
Both the FSM and the RMI are seeking to centralize their government
contact with the U.S. government and provide for day-to-day management
of grant operations, as required in the FPAs. Although the RMI is
making more rapid progress than the FSM in this area, both countries
are in the early stages of establishing centralized offices responsible
for compact matters.
* In early 2005, the RMI government identified the Office of the Chief
Secretary as the official point of contact for all communication and
correspondence between the U.S. government and the RMI government
concerning compact sector grant assistance. The Chief Secretary is the
head of RMI public service and will coordinate and direct the various
ministries receiving compact funding with respect to the FPA and
compact provisions. The Chief Secretary will also work closely with the
RMI Economic Policy, Planning, and Statistics Office to develop the
annual budget and sector portfolios and quarterly and annual monitoring
and evaluation reports. While the Office of the Chief Secretary will
provide oversight and coordination, the Chief Secretary has reported
that most of the daily activities and compliance will be conducted by
the ministries themselves. The Chief Secretary has outlined his plan to
coordinate with agencies and reported to us that he will hold weekly
meetings with all secretaries to address compact implementation issues,
review reports on specific issues, and provide guidance to the
ministries and agencies of the RMI government on compact matters.
* The FSM Congress recently enacted legislation to establish a Compact
Management Board and a supporting Office of Compact Management. The
board will consist of seven members; the FSM President will appoint two
members, each state will appoint one member, and the final member will
be the head of the Office of Compact Management. Whereas the board will
be responsible for actions such as formulating JEMCO guidelines for FSM
members, the compact office will be responsible for daily
communications with JEMCO and the United States with regard to JEMCO
and compact matters. A senior FSM official told us that although he
expects compact office staff to undertake actions such as compliance
visits to the FSM states, he does not expect the constitution of the
board to be completed and the office ready to function until October
2005.[Footnote 39] Although there are ongoing differences between the
FSM executive and legislative branches over which branch the compact
office should be accountable to, the FSM Congress appropriated $100,000
in 2005 for the operation of the board.[Footnote 40]
Although both countries have taken steps to provide for a centralized
approach to addressing compact implementation and day-to-day management
of grant operations, neither government's efforts in this important
area are yet under way, and the ultimate effectiveness of such efforts
is unknown. The FPAs state that the FSM and RMI are responsible for the
management and monitoring of the day-to-day operations of all sector
grants to ensure compliance with all applicable grant terms and
conditions; however, officials from both countries told us that this
issue had not received much attention. Further, a senior FSM government
official told us that the national government is not monitoring the day-
to-day implementation of the compact by the states.[Footnote 41]
Notably, a senior OIA official emphasized that the FSM's and the RMI's
partnership with OIA in monitoring compact implementation is key to the
success of the amended compacts.
The RMI has also made more rapid progress than the FSM in managing
implementation of its infrastructure grant. The RMI government hired a
foreign firm to be the project management unit that designs and
oversees individual infrastructure projects and work is under way.
Following an extensive survey to assess the state of RMI education and
health infrastructure and determine priority infrastructure projects,
several contracts have been awarded, for example, for the construction
and maintenance of schools and a hospital. The FSM just established a
project management unit in June 2005. Per a JEMCO resolution, such a
unit must be established in order to receive infrastructure grant
funds.
In addition, the FSM and RMI are each working to improve their
accounting software systems. The RMI government has adopted a new
accounting software system that meets with OIA's approval and is
currently being reviewed within the RMI to ensure that it allows for
compliance with compact FPA requirements. Further, the RMI Ministry of
Finance has hired fixed-asset and procurement specialists and
established a satellite office in Ebeye to handle the specific needs of
that area. The FSM, which currently has three different accounting
software programs spread among the four states and the national
government, is in the process of purchasing a unified accounting
system. It will install the program and train each government's
personnel to satisfy compact reporting requirements.
Conclusions:
The amended compacts differ significantly from the original compact in
that they target funding to identified priority areas; require grant
agreements; substantially increase accountability requirements to
include new dimensions, such as performance measurement; and allow for
the withholding of funds for noncompliance with compact or grant
requirements. Diligent and sustained effort by the U.S., FSM, and RMI
governments will be required to adapt fully to this new approach for
providing and accounting for U.S. economic assistance to the FSM and
the RMI.
Within this new environment, all three countries have demonstrated a
commitment to meeting new compact funding and accountability
requirements. The U.S. government has undertaken notable actions during
the early stages of compact implementation that reflect its commitment.
It has embraced new accountability options in the amended compacts by,
for example, requiring data that will facilitate performance
measurement and suspending funds as a result of possible misuse.
Further, by holding infrastructure funding until the countries provide
sufficient infrastructure project and identification management, the
U.S. government has taken a new approach to ensuring the effective use
of compact funds. In addition, by establishing a Honolulu field office
and investing in staff to provide monitoring and oversight, OIA has
demonstrated its commitment to successful implementation of the amended
compacts. Such staff are critical to conducting work in the field to
monitor performance and financial accountability, as OIA's review of
education expenditures in the FSM state of Chuuk has demonstrated.
However, officials from all three governments believe that more OIA
field work is in order. OIA needs to determine the extent of on-site
work in the FSM and the RMI necessary to adequately promote compliance
with amended compact and grant requirements.
The FSM and the RMI have also acted to meet compact requirements,
although many of these actions are in an early stage. Both countries
have taken steps to establish centralized offices responsible for
ensuring compact implementation and day-to-day oversight; however, it
is too early to assess how well these offices will meet this goal.
Further, both countries have responded in a positive fashion to many
new reporting requirements. For example, the FSM and the RMI expressed
a desire to provide useful performance reports and have been responsive
to working with OIA to strengthen and improve this new approach to
accounting for compact funds. In addition, both countries have been
timely in providing quarterly financial and performance reports. While
both countries are moving to meet compact requirements, to date the RMI
is progressing more quickly than the FSM in spending authorized grant
funding, meeting special grant conditions, preparing adequate required
reports, taking steps to centralize compact management, and selecting
an investment advisor who can work to maximize trust fund returns.
Although the three governments' commitment to meeting compact
requirements is clear, challenges for future performance exist. The
failure of all three governments to complete required annual compact
spending and development reports means that, for the first year under
the amended compacts, there is no assessment of the use of U.S.
assistance and initial performance in key areas such as health and
education. Similarly, the lack of timely single audits deprives the
United States of a key source of information on the FSM's and the RMI's
compliance with detailed compact requirements. Additionally, the FSM's
difficulties in preparing a national infrastructure development plan to
obtain substantial infrastructure grant funding demonstrate the
difficulty the country is having integrating state and national
priorities and using compact funds to advance national goals. Finally,
it is unclear why strategic issues, such as the need for planning to
use compact funds to achieve long-term economic advancement or to
address annual grant decreases, are not being actively considered by
all three governments, regardless of the early stage of the amended
compacts' implementation. The U.S. government has not pursued
resolution of these issues, which have implications for the FSM's and
the RMI's long-term, effective use of funds.
Recommendations:
To effectively use Interior staff resources and to maximize the
effectiveness of U.S. monitoring of compact expenditures, we recommend
that the Secretary of the Interior direct the Deputy Assistant
Secretary for Insular Affairs to determine, relative to other office
responsibilities, the extent of OIA on-site review in the FSM and the
RMI of compact activities that is required in order to adequately
promote compliance with compact and grant requirements.
To improve grant administration and oversight and to facilitate
planning for the effective use of compact funding, we recommend that
the Secretary direct the Deputy Assistant Secretary for Insular
Affairs, as Chairman of the Joint Economic Management Committee, in
coordination with other U.S. agencies that participate in this
committee, to work with the FSM government to take the following four
actions:
* establish sector grant levels for each of the five governments that
are consistent with national priorities and will assist in promoting
long-term development goals such as economic advancement and budgetary
self-reliance,
* establish a time frame for the completion of required and overdue FSM
single audits,
* establish a time frame for the completion of FSM government plans to
manage decreasing annual grant amounts and to shift basic government
operations under the public sector capacity building to local revenues
in a strategic fashion, and:
* outline specific actions that the FSM government will take in
managing and monitoring day-to-day sector grant operations to ensure
compliance with all grant terms and conditions.
To improve grant administration and oversight and to facilitate
planning for the effective use of compact funding, we recommend that
the Secretary direct the Deputy Assistant Secretary for Insular
Affairs, as Chairman of the Joint Economic Management and Financial
Accountability Committee, in coordination with other U.S. agencies that
participate in this committee, to work with the RMI government to take
the following three actions:
* establish sector grant levels that will assist in promoting long-term
development goals such as economic advancement and budgetary self-
reliance,
* establish a time frame for the completion of an RMI government plan
to manage decreasing annual grant amounts in a strategic fashion, and:
* outline specific actions that the RMI government will take in
managing and monitoring of day-to-day sector grant operations to ensure
compliance with all grant terms and conditions.
Agency Comments:
We received technical comments from the Departments of the Interior,
State, and HHS, as well as the FSM and RMI governments. The RMI
submitted particularly extensive technical comments that stressed,
among other things, that government's detailed strategic planning
efforts and provided suggestions to improve the factual accuracy of
this report. We incorporated technical comments into our report, as
appropriate. We also received formal comment letters from all parties.
All letters found our work to be useful, although the RMI remarked that
the report overstated long-term strategic planning issues, provided
insufficient emphasis on economic components of the amended compact
that have not been fully implemented, and included passages that were
in need of factual correction. The Department of the Interior concurred
with our recommendations and stated its intention to implement them.
State, HHS, and the FSM government did not comment on our
recommendations to Interior. The RMI government stated that some of the
recommendations did not reflect the purpose or intent of the amended
compact.
In addition to providing copies of this report to your offices, we will
send copies of this report to other appropriate committees. We will
also provide copies to the Secretaries of the Interior, State, and
Health and Human Services, as well as the President of the Federated
States of Micronesia and the President of the Republic of the Marshall
Islands. We will make copies available to other interested parties upon
request.
If you or your staff have any questions regarding this report, please
contact me at (202) 512-4128 or [Hyperlink, gootnickd@gao.gov]. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix IX.
Signed by:
David Gootnick:
Director, International Affairs and Trade:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
The Chairman and Ranking Minority Member of the House Committee on
Resources, and the Chairman and Ranking Minority Member of the Senate
Committee on Energy and Natural Resources requested that we report on
the progress of initial efforts to implement the amended compacts. This
report evaluates actions taken by the United States, Federated States
of Micronesia, and the Republic of the Marshall Islands governments
since fiscal year 2004 to (1) meet funding requirements and plan for
the use of this funding, (2) meet accountability requirements, and (3)
establish operations to facilitate compliance with funding and
accountability requirements.
To identify actions taken by the three governments to meet funding
requirements, we reviewed the amended compacts as well as the
subsidiary fiscal procedures agreements and subsidiary trust fund
agreements to identify such requirements as well as expectations of the
U.S. Congress in this area. We reviewed all fiscal year 2004 and 2005
grant agreements with both countries, including special terms and
conditions included in these agreements, and identified instances where
no grant agreement had been signed. We examined annual financial data
prepared by the FSM and the RMI to determine the amount of funding that
was not spent for fiscal year 2004 and what sectors were affected by
this circumstance. We discussed the FSM and RMI data with an Office of
Insular Affairs official who has used this information, and determined
that the data are sufficiently reliable for the purposes of our report.
We also corroborated our calculations of unspent funds with this
official. We did not review funding provided to Kwajalein landowners in
exchange for U.S. military access to Kwajalein Atoll. This funding is
for landowner use and is not included as part of U.S. economic
assistance that is subject to sector grants and accountability
requirements.
To identify issues that impact planning for the use of compact funds,
we discussed planning efforts with U.S., FSM, and RMI government
officials and also identified issues through our own analysis (such as
the use of the distribution formula in the FSM). We then reviewed such
issues by examining documents such as FSM and RMI legislation and
documentation provided to the U.S. government (such as the FSM's
transition plan to shift ineligible spending under the public sector
capacity building grant to local revenues). To identify FSM education
spending per capita, we used FSM education grant data and divided grant
amounts provided to each state by the student population for each
state--the latter data were provided to us by OIA, which received them
directly from the FSM. To identify FSM health spending per capita, we
assessed health grant amounts against FSM population data. We
determined that these data were sufficiently reliable for the purposes
of our report.
To identify actions taken by the three governments to meet
accountability requirements, we reviewed the amended compacts as well
as the subsidiary FPAs to identify such requirements. We also reviewed
the briefing documents created by the U.S. government in preparation
for the annual bilateral meetings with the two countries, as well as
the minutes and resolutions, when available, related to the meetings.
We further reviewed FSM and RMI documents--such as budget
justifications and portfolios, quarterly financial forms and
performance reports, and annual financial reports--submitted by the FSM
and RMI governments to the U.S. government to confirm compliance with
accountability reporting requirements. We discussed the sufficiency of
such reports with OIA officials. We also examined FSM and RMI laws and
letters exchanged between the FSM and U.S. governments.
To identify actions the three governments have taken to establish
operations to facilitate compliance with funding and accountability
requirements, we reviewed the amended compacts and FPAs to identify
specific monitoring responsibilities. In the case of the OIA Honolulu
office, we reviewed senior management statements regarding the purpose
and function of this office and job descriptions for all staff. To
identify the extent of Honolulu office staff travel to the FSM and the
RMI, we obtained the travel records and start dates of all five program
specialists and discussed this information with OIA officials to ensure
that the data was sufficiently reliable for our use. We calculated the
percentage of time spent conducting on-site review in the two countries
over fiscal years 2004 and 2005 (through mid-April) time span and
compared this to the total work time for the program specialists. We
obtained OIA travel budget data for the Honolulu office from OIA
officials. We reviewed FSM and RMI laws that address structural changes
to compact management, as well as unclassified cables from the
Department of State.
To address all objectives, we held extensive interviews with officials
from the U.S. Department of the Interior (Washington, D.C., Honolulu,
Hawaii, the FSM, and the RMI) and the Department of State (Washington,
D.C., the FSM, and the RMI). We also interviewed officials from the
U.S. Department of Health and Human Services (Washington, D.C., and
Honolulu, Hawaii). We traveled to the FSM (Pohnpei and Chuuk) and the
RMI (Majuro and Ebeye). We had detailed discussions with FSM (national,
Pohnpei, and Chuuk governments) and RMI officials from foreign affairs,
finance, budget, health, education, public works, and audit agencies.
Further, we met with the presidents of the FSM and the RMI. We also met
with officials from the U.S. Army Kwajalein Atoll to discuss compact
implementation issues. We met with representatives from private sector
businesses within the Marshall Islands and with leaders from the
Micronesian Seminar, a nonprofit organization in Pohnpei, FSM that
provides public education on current FSM events, to obtain their views
on compact implementation and development issues. We also met with
officials from the Interior Inspector General's Office (Guam, Honolulu,
Hawaii, and Washington, D.C.) to discuss ongoing investigations in the
FSM and RMI.
We conducted our review from August 2004 through May 2005 in accordance
with generally accepted U.S. government auditing standards. We
requested written comments on a draft of this report from the
Departments of the Interior, State and Health and Human Services, as
well as the governments of the FSM and RMI. All comments are discussed
in the report and are reprinted in appendixes IV through VIII. Further,
we considered all comments and made changes to the report, as
appropriate.
[End of section]
Appendix II: Country Sector Grants, Fiscal Years 2004 and 2005:
Table 3: FSM Sector Grant Allocations between the Five Governments,
Fiscal Years 2004 and 2005:
Sector grant and recipient: Education grant:
Sector grant and recipient: FSM National Government;
Fiscal year 2004: Sector grant dollar amount: $4,324,122;
Fiscal year 2004: Percentage of total sector grants: 17%;
Fiscal year 2005: Sector grant dollar amount: $4,511,317;
Fiscal year 2005: Percentage of total sector grants: 17%.
Sector grant and recipient: Chuuk;
Fiscal year 2004: Sector grant dollar amount: $8,140,265;
Fiscal year 2004: Percentage of total sector grants: 31%;
Fiscal year 2005: Sector grant dollar amount: $8,804,369;
Fiscal year 2005: Percentage of total sector grants: 32%.
Sector grant and recipient: Pohnpei;
Fiscal year 2004: Sector grant dollar amount: $7,373,651;
Fiscal year 2004: Percentage of total sector grants: 28%;
Fiscal year 2005: Sector grant dollar amount: $7,469,772;
Fiscal year 2005: Percentage of total sector grants: 28%.
Sector grant and recipient: Yap;
Fiscal year 2004: Sector grant dollar amount: $4,243,681;
Fiscal year 2004: Percentage of total sector grants: 16%;
Fiscal year 2005: Sector grant dollar amount: $4,249,157;
Fiscal year 2005: Percentage of total sector grants: 16%.
Sector grant and recipient: Kosrae;
Fiscal year 2004: Sector grant dollar amount: $1,883,853;
Fiscal year 2004: Percentage of total sector grants: 7%;
Fiscal year 2005: Sector grant dollar amount: $2,070,432;
Fiscal year 2005: Percentage of total sector grants: 8%.
Sector grant and recipient: Total;
Fiscal year 2004: Sector grant dollar amount: $25,965,572;
Fiscal year 2004: Percentage of total sector grants: 100%;
Fiscal year 2005: Sector grant dollar amount: $27,105,047;
Fiscal year 2005: Percentage of total sector grants: 100%.
Sector grant and recipient: Health grant:
Sector grant and recipient: FSM National Government;
Fiscal year 2004: Sector grant dollar amount: $553,613;
Fiscal year 2004: Percentage of total sector grants: 4%;
Fiscal year 2005: Sector grant dollar amount: $763,235;
Fiscal year 2005: Percentage of total sector grants: 4%.
Sector grant and recipient: Chuuk;
Fiscal year 2004: Sector grant dollar amount: $4,691,707;
Fiscal year 2004: Percentage of total sector grants: 30%;
Fiscal year 2005: Sector grant dollar amount: $5,595,636;
Fiscal year 2005: Percentage of total sector grants: 32%.
Sector grant and recipient: Pohnpei;
Fiscal year 2004: Sector grant dollar amount: $5,989,461;
Fiscal year 2004: Percentage of total sector grants: 39%;
Fiscal year 2005: Sector grant dollar amount: $6,200,560;
Fiscal year 2005: Percentage of total sector grants: 36%.
Sector grant and recipient: Yap;
Fiscal year 2004: Sector grant dollar amount: $2,881,672;
Fiscal year 2004: Percentage of total sector grants: 19%;
Fiscal year 2005: Sector grant dollar amount: $3,197,090;
Fiscal year 2005: Percentage of total sector grants: 18%.
Sector grant and recipient: Kosrae;
Fiscal year 2004: Sector grant dollar amount: $1,326,663;
Fiscal year 2004: Percentage of total sector grants: 9%;
Fiscal year 2005: Sector grant dollar amount: $1,674,212;
Fiscal year 2005: Percentage of total sector grants: 10%.
Sector grant and recipient: Total;
Fiscal year 2004: Sector grant dollar amount: $15,443,116;
Fiscal year 2004: Percentage of total sector grants: 100%;
Fiscal year 2005: Sector grant dollar amount: $17,430,733;
Fiscal year 2005: Percentage of total sector grants: 100%.
Sector grant and recipient: Infrastructure grant:
Sector grant and recipient: Total;
Fiscal year 2004: Sector grant dollar amount: $17,119,115;
Fiscal year 2004: Percentage of total sector grants: 100%;
Fiscal year 2005: Sector grant dollar amount: $17,249,121;
Fiscal year 2005: Percentage of total sector grants: 100%.
Sector grant and recipient: Public sector capacity building grant:
Sector grant and recipient: FSM National Government;
Fiscal year 2004: Sector grant dollar amount: $4,287,697;
Fiscal year 2004: Percentage of total sector grants: 37%;
Fiscal year 2005: Sector grant dollar amount: $608,028;
Fiscal year 2005: Percentage of total sector grants: 8%.
Sector grant and recipient: Chuuk;
Fiscal year 2004: Sector grant dollar amount: $2,853,813;
Fiscal year 2004: Percentage of total sector grants: 24%;
Fiscal year 2005: Sector grant dollar amount: $3,001,410;
Fiscal year 2005: Percentage of total sector grants: 39%.
Sector grant and recipient: Pohnpei;
Fiscal year 2004: Sector grant dollar amount: $1,676,163;
Fiscal year 2004: Percentage of total sector grants: 14%;
Fiscal year 2005: Sector grant dollar amount: $1,542,488;
Fiscal year 2005: Percentage of total sector grants: 20%.
Sector grant and recipient: Yap;
Fiscal year 2004: Sector grant dollar amount: $1,831,307;
Fiscal year 2004: Percentage of total sector grants: 16%;
Fiscal year 2005: Sector grant dollar amount: $1,520,446;
Fiscal year 2005: Percentage of total sector grants: 20%.
Sector grant and recipient: Kosrae;
Fiscal year 2004: Sector grant dollar amount: $1,013,866;
Fiscal year 2004: Percentage of total sector grants: 9%;
Fiscal year 2005: Sector grant dollar amount: $1,113,866;
Fiscal year 2005: Percentage of total sector grants: 14%.
Sector grant and recipient: Total;
Fiscal year 2004: Sector grant dollar amount: $11,662,846;
Fiscal year 2004: Percentage of total sector grants: 100%;
Fiscal year 2005: Sector grant dollar amount: $7,786,238;
Fiscal year 2005: Percentage of total sector grants: 100%.
Sector grant and recipient: Environment grant:
Sector grant and recipient: FSM National Government;
Fiscal year 2004: Sector grant dollar amount: $79,477;
Fiscal year 2004: Percentage of total sector grants: 4%;
Fiscal year 2005: Sector grant dollar amount: $111,421;
Fiscal year 2005: Percentage of total sector grants: 5%.
Sector grant and recipient: Chuuk;
Fiscal year 2004: Sector grant dollar amount: $378,394;
Fiscal year 2004: Percentage of total sector grants: 19%;
Fiscal year 2005: Sector grant dollar amount: $502,499;
Fiscal year 2005: Percentage of total sector grants: 21%.
Sector grant and recipient: Pohnpei;
Fiscal year 2004: Sector grant dollar amount: $666,944;
Fiscal year 2004: Percentage of total sector grants: 33%;
Fiscal year 2005: Sector grant dollar amount: $688,181;
Fiscal year 2005: Percentage of total sector grants: 29%.
Sector grant and recipient: Yap;
Fiscal year 2004: Sector grant dollar amount: $595,854;
Fiscal year 2004: Percentage of total sector grants: 29%;
Fiscal year 2005: Sector grant dollar amount: $791,258;
Fiscal year 2005: Percentage of total sector grants: 33%.
Sector grant and recipient: Kosrae;
Fiscal year 2004: Sector grant dollar amount: $302,523;
Fiscal year 2004: Percentage of total sector grants: 15%;
Fiscal year 2005: Sector grant dollar amount: $296,592;
Fiscal year 2005: Percentage of total sector grants: 12%.
Sector grant and recipient: Total;
Fiscal year 2004: Sector grant dollar amount: $2,023,192;
Fiscal year 2004: Percentage of total sector grants: 100%;
Fiscal year 2005: Sector grant dollar amount: $2,389,951;
Fiscal year 2005: Percentage of total sector grants: 100%.
Sector grant and recipient: Private sector grant:
Sector grant and recipient: FSM National Government;
Fiscal year 2004: Sector grant dollar amount: $513,091;
Fiscal year 2004: Percentage of total sector grants: 14%;
Fiscal year 2005: Sector grant dollar amount: $0;
Fiscal year 2005: Percentage of total sector grants: 0%.
Sector grant and recipient: Chuuk;
Fiscal year 2004: Sector grant dollar amount: $1,338,874;
Fiscal year 2004: Percentage of total sector grants: 35%;
Fiscal year 2005: Sector grant dollar amount: $1,403,876;
Fiscal year 2005: Percentage of total sector grants: 35%.
Sector grant and recipient: Pohnpei;
Fiscal year 2004: Sector grant dollar amount: $525,423;
Fiscal year 2004: Percentage of total sector grants: 14%;
Fiscal year 2005: Sector grant dollar amount: $657,602;
Fiscal year 2005: Percentage of total sector grants: 16%.
Sector grant and recipient: Yap;
Fiscal year 2004: Sector grant dollar amount: $613,470;
Fiscal year 2004: Percentage of total sector grants: 16%;
Fiscal year 2005: Sector grant dollar amount: $989,407;
Fiscal year 2005: Percentage of total sector grants: 24%.
Sector grant and recipient: Kosrae;
Fiscal year 2004: Sector grant dollar amount: $795,261;
Fiscal year 2004: Percentage of total sector grants: 21%;
Fiscal year 2005: Sector grant dollar amount: $988,025;
Fiscal year 2005: Percentage of total sector grants: 24%.
Sector grant and recipient: Total;
Fiscal year 2004: Sector grant dollar amount: $3,786,119;
Fiscal year 2004: Percentage of total sector grants: 100%;
Fiscal year 2005: Sector grant dollar amount: $4,038,910;
Fiscal year 2005: Percentage of total sector grants: 100%.
Sector grant and recipient: Total sector grants;
Fiscal year 2004: Sector grant dollar amount: $75,999,960;
Fiscal year 2005: Sector grant dollar amount: $76,000,000.
Source: FSM fiscal years 2004 and 2005 sector grant agreements,
discussion with an OIA official.
Notes:
Percentages may not add to 100 due to rounding.
While the authorized amount for FSM fiscal year 2004 grants was
$76,000,000, the actual grants total is $40 smaller than this amount.
Since infrastructure grants for fiscal years 2004 and 2005 have not yet
been allocated to specific projects, the total can not be allocated by
recipient.
While authorized grant amounts total $76.2 million, per the amended
compacts' enabling legislation, $200,000 is provided directly to the
U.S. Department of Homeland Security, Federal Emergency Management
Agency for disaster and emergency assistance purposes.
The FSM government did not add a partial inflation adjustment of
$1,117,200 into its fiscal year 2005 sector grants; this adjustment
will be added to fiscal year 2006 sector grant funding.
The FSM national government supports the College of Micronesia, which
has campuses in all four states, with its compact education grant. For
example, in fiscal year 2005, the FSM national government budgeted over
$3.8 million of its compact education grant for use by the college.
[End of table]
Table 4: FSM Grants by Sector, Fiscal Years 2004 and 2005:
Sector grant and recipient: Education grant;
Fiscal year 2004: Sector grant dollar amount: $25,965,572;
Fiscal year 2004: Percentage of total sector grant: 34%;
Fiscal year 2005: Sector grant dollar amount: $27,105,047;
Fiscal year 2005: Percentage of total sector grant: 36%.
Sector grant and recipient: Health grant;
Fiscal year 2004: Sector grant dollar amount: $15,443,116;
Fiscal year 2004: Percentage of total sector grant: 20%;
Fiscal year 2005: Sector grant dollar amount: $17,430,733;
Fiscal year 2005: Percentage of total sector grant: 23%.
Sector grant and recipient: Infrastructure grant;
Fiscal year 2004: Sector grant dollar amount: $17,119,115;
Fiscal year 2004: Percentage of total sector grant: 23%;
Fiscal year 2005: Sector grant dollar amount: $17,249,121;
Fiscal year 2005: Percentage of total sector grant: 23%.
Sector grant and recipient: Public sector capacity building grant;
Fiscal year 2004: Sector grant dollar amount: $11,662,846;
Fiscal year 2004: Percentage of total sector grant: 15%;
Fiscal year 2005: Sector grant dollar amount: $7,786,238;
Fiscal year 2005: Percentage of total sector grant: 10%.
Sector grant and recipient: Environment grant;
Fiscal year 2004: Sector grant dollar amount: $2,023,192;
Fiscal year 2004: Percentage of total sector grant: 3%;
Fiscal year 2005: Sector grant dollar amount: $2,389,951;
Fiscal year 2005: Percentage of total sector grant: 3%.
Sector grant and recipient: Private sector grant;
Fiscal year 2004: Sector grant dollar amount: $3,786,119;
Fiscal year 2004: Percentage of total sector grant: 5%;
Fiscal year 2005: Sector grant dollar amount: $4,038,910;
Fiscal year 2005: Percentage of total sector grant: 5%.
Sector grant and recipient: Total sector grants;
Fiscal year 2004: Sector grant dollar amount: $75,999,960;
Fiscal year 2004: Percentage of total sector grant: 100%;
Fiscal year 2005: Sector grant dollar amount: $76,000,000;
Fiscal year 2005: Percentage of total sector grant: 100%.
Source: FSM fiscal years 2004 and 2005 sector grant agreements,
discussion with an OIA official.
Notes:
While the authorized amount for FSM fiscal year 2004 grants was
$76,000,000 the actual grants total is $40 smaller than this amount.
While authorized grant amounts total $76.2 million, per the amended
compacts' enabling legislation, $200,000 is provided directly to the
U.S. Department of Homeland Security, Federal Emergency Management
Agency for disaster and emergency assistance purposes.
The FSM government did not add a partial inflation adjustment of
$1,117,200 into its fiscal year 2005 sector grants; this adjustment
will be added to fiscal year 2006 sector grant funding.
[End of table]
Table 5: RMI Sector Grants, Including Kwajalein Funding, Fiscal Years
2004 and 2005:
Sector grant: Education grant:
Sector grant: Total;
Fiscal year 2004: Sector grant dollar amount: $10,748,932;
Fiscal year 2004: Percentage of total sector grant: 100%;
Fiscal year 2005: Sector grant dollar amount: $11,566,921;
Fiscal year 2005: Percentage of total sector grant: 100%.
Sector grant: Portion provided to Kwajalein;
Fiscal year 2004: Sector grant dollar amount: $1,100,000;
Fiscal year 2004: Percentage of total sector grant: 10%;
Fiscal year 2005: Sector grant dollar amount: $1,600,000;
Fiscal year 2005: Percentage of total sector grant: 14%.
Sector grant: Health grant:
Sector grant: Total;
Fiscal year 2004: Sector grant dollar amount: $6,894,448;
Fiscal year 2004: Percentage of total sector grant: 100%;
Fiscal year 2005: Sector grant dollar amount: $7,064,197;
Fiscal year 2005: Percentage of total sector grant: 100%.
Sector grant: Portion provided to Kwajalein;
Fiscal year 2004: Sector grant dollar amount: $1,000,000;
Fiscal year 2004: Percentage of total sector grant: 15%;
Fiscal year 2005: Sector grant dollar amount: $1,500,000;
Fiscal year 2005: Percentage of total sector grant: 21%.
Sector grant: Infrastructure grant:
Sector grant: Total;
Fiscal year 2004: Sector grant dollar amount: $14,700,000;
Fiscal year 2004: Percentage of total sector grant: 100%;
Fiscal year 2005: Sector grant dollar amount: $13,485,745;
Fiscal year 2005: Percentage of total sector grant: 100%.
Sector grant: Portion provided to Kwajalein Atoll;
Fiscal year 2004: Sector grant dollar amount: $1,000,000;
Fiscal year 2004: Percentage of total sector grant: 7%.
Sector grant: Public sector capacity building grant:
Sector grant: Total;
Fiscal year 2004: Sector grant dollar amount: $0;
Fiscal year 2004: Percentage of total sector grant: -%;
Fiscal year 2005: Sector grant dollar amount: $103,514;
Fiscal year 2005: Percentage of total sector grant: 100%.
Sector grant: Environment grant:
Sector grant: Total;
Fiscal year 2004: Sector grant dollar amount: $400,000;
Fiscal year 2004: Percentage of total sector grant: 100%;
Fiscal year 2005: Sector grant dollar amount: $404,720;
Fiscal year 2005: Percentage of total sector grant: 100%.
Sector grant: Portion provided to Kwajalein;
Fiscal year 2004: Sector grant dollar amount: $200,000;
Fiscal year 2004: Percentage of total sector grant: 50%;
Fiscal year 2005: Sector grant dollar amount: $202,360;
Fiscal year 2005: Percentage of total sector grant: 50%.
Sector grant: Private sector grant:
Sector grant: Total;
Fiscal year 2004: Sector grant dollar amount: $356,620;
Fiscal year 2004: Percentage of total sector grant: 100%;
Fiscal year 2005: Sector grant dollar amount: $361,943;
Fiscal year 2005: Percentage of total sector grant: 100%.
Sector grant: Kwajalein impact:
Sector grant: Total;
Fiscal year 2004: Sector grant dollar amount: $1,900,000;
Fiscal year 2004: Percentage of total sector grant: 100%;
Fiscal year 2005: Sector grant dollar amount: $1,922,420;
Fiscal year 2005: Percentage of total sector grant: 100%.
Sector grant: Total sector grants;
Fiscal year 2004: Sector grant dollar amount: $35,000,000;
Fiscal year 2005: Sector grant dollar amount: $34,909,460;
Source: RMI fiscal years 2004 and 2005 sector grant agreements,
discussions with RMI and OIA officials.
Notes:
While authorized grant amounts total $35.2 million in fiscal year 2004
and $34.7 million in fiscal year 2005, per the amended compacts'
enabling legislation, $200,000 is provided directly to the U.S.
Department of Homeland Security, Federal Emergency Management Agency
for disaster and emergency assistance purposes.
The RMI's fiscal year 2005 education grant was increased from
$11,141,921 (the amount included in the signed grant agreement) to
$11,566,921 by the RMI's legislature. A subsequent e-mail exchange
between JEMFAC members approved this increase. There is no signed grant
agreement for the final amount.
A portion of the RMI's fiscal year 2005 infrastructure grant will go to
Ebeye for cited projects such as Ebeye elementary school, Ebeye sewer
maintenance, and Ebeye water maintenance, though the specific amount
for Ebeye is not contained in the grant agreement.
Kwajalein impact refers to funding authorized in section 211(b)(2) of
the amended compact between the United States and the RMI.
[End of table]
Table 6: RMI Grants by Sector, Fiscal Years 2004 and 2005:
Sector grant: Education grant;
Fiscal year 2004: Sector grant dollar amount: $10,748,932;
Fiscal year 2004: Percentage of total sector grants: 31%;
Fiscal year 2005: Sector grant dollar amount: $11,566,921;
Fiscal year 2005: Percentage of total sector grants: 33%.
Sector grant: Health grant;
Fiscal year 2004: Sector grant dollar amount: $6,894,448;
Fiscal year 2004: Percentage of total sector grants: 20%;
Fiscal year 2005: Sector grant dollar amount: $7,064,197;
Fiscal year 2005: Percentage of total sector grants: 20%.
Sector grant: Infrastructure grant;
Fiscal year 2004: Sector grant dollar amount: $14,700,000;
Fiscal year 2004: Percentage of total sector grants: 42%;
Fiscal year 2005: Sector grant dollar amount: $13,485,745;
Fiscal year 2005: Percentage of total sector grants: 39%.
Sector grant: Public sector capacity building grant;
Fiscal year 2004: Sector grant dollar amount: $0;
Fiscal year 2004: Percentage of total sector grants: 0%;
Fiscal year 2005: Sector grant dollar amount: $103,514;
Fiscal year 2005: Percentage of total sector grants: 0%.
Sector grant: Environment grant;
Fiscal year 2004: Sector grant dollar amount: $400,000;
Fiscal year 2004: Percentage of total sector grants: 1%;
Fiscal year 2005: Sector grant dollar amount: $404,720;
Fiscal year 2005: Percentage of total sector grants: 1%.
Sector grant: Private sector grant;
Fiscal year 2004: Sector grant dollar amount: $356,620;
Fiscal year 2004: Percentage of total sector grants: 1%;
Fiscal year 2005: Sector grant dollar amount: $361,943;
Fiscal year 2005: Percentage of total sector grants: 1%.
Sector grant: Kwajalein impact;
Fiscal year 2004: Sector grant dollar amount: $1,900,000;
Fiscal year 2004: Percentage of total sector grants: 5%;
Fiscal year 2005: Sector grant dollar amount: $1,922,420;
Fiscal year 2005: Percentage of total sector grants: 6%.
Sector grant: Total sector grants;
Fiscal year 2004: Sector grant dollar amount: $35,000,000;
Fiscal year 2004: Percentage of total sector grants: 100%;
Fiscal year 2005: Sector grant dollar amount: $34,909,460;
Fiscal year 2005: Percentage of total sector grants: 100%.
Source: RMI fiscal years 2004 and 2005 sector grant agreements, fiscal
years 2004 and 2005, discussions with RMI and OIA officials.
Notes:
While authorized grant amounts total $35.2 million, per the amended
compacts' enabling legislation, $200,000 is provided directly to the
U.S. Department of Homeland Security, Federal Emergency Management
Agency for disaster and emergency assistance purposes.
The RMI's fiscal year 2005 education grant was increased from
$11,141,921 (the amount included in the signed grant agreement) to
$11,566,921 by the RMI's legislature. A subsequent e-mail exchange
between JEMFAC members approved this increase. There is no signed grant
agreement for the final amount.
Kwajalein impact refers to funding authorized in section 211(b)(2) of
the amended compact between the United States and the RMI.
[End of table]
[End of section]
Appendix III: Status of Accountability Requirements, Fiscal Years 2004
and 2005:
Compact budget by sector grant;
FSM: FY 2004: Yes;
FSM: FY 2005: Yes;
RMI: FY 2004: Yes;
RMI: FY 2005: Yes.
Budget consultations with U.S. government;
FSM: FY 2004: Yes;
FSM: FY 2005: Yes;
RMI: FY 2004: Yes;
RMI: FY 2005: No.
JEMCO/JEMFAC meetings;
FSM: FY 2004: Yes;
FSM: FY 2005: Yes;
RMI: FY 2004: Yes;
RMI: FY 2005: Yes.
Quarterly financial reports;
FSM: FY 2004: Yes;
FSM: FY 2005: Yes;
RMI: FY 2004: Yes;
RMI: FY 2005: Yes.
Quarterly performance reports by sector;
FSM: FY 2004: Yes;
FSM: FY 2005: Yes;
RMI: FY 2004: Yes;
RMI: FY 2005: Yes.
Annual financial reports;
FSM: FY 2004: Yes;
FSM: FY 2005: N/A[A];
RMI: FY 2004: Yes;
RMI: FY 2005: N/A[A].
Annual compact report to the U.S. President;
FSM: FY 2004: No;
FSM: FY 2005: N/A[A];
RMI: FY 2004: No;
RMI: FY 2005: N/A[A].
Single audit reports;
FSM: FY 2004: No;
FSM: FY 2005: N/A[A];
RMI: FY 2004: Yes;
RMI: FY 2005: N/A[A].
Approved FSM Development Plan or Approved RMI Medium-Term and
Investment Framework (MTBIF)[B];
FSM: FY 2004: No;
FSM: FY 2005: No[C];
RMI: FY 2004: Unknown[D];
RMI: FY 2005: Unknown[D].
Approved FSM Infrastructure; Development Plan and; RMI Infrastructure
Development and Maintenance Plan;
FSM: FY 2004: No[E];
FSM: FY 2005: Yes[E];
RMI: FY 2004: Yes;
RMI: FY 2005: N/A[F].
Source: Annual FSM and RMI budgets, required FSM and RMI quarterly and
annual reports, JEMCO/JEMFAC minutes, development plan documentation,
and interviews with U.S., FSM, and RMI officials.
Note:
N/A = Nonapplicable.
[A] These reports will be due after the end of fiscal year 2005.
[B] Portions of the development plan or MTBIF that address the use of
grant funds require U.S. concurrence.
[C] The FSM submitted a development plan to the U.S. government in
fiscal year 2005; this plan has not yet been considered by JEMCO.
[D] MTBIF documents have been prepared, however it is unclear whether
the JEMFAC has approved such documentation.
[E] At a special JEMCO meeting in March 2005, JEMCO approved portions
of the FSM's infrastructure development plan that contemplate use of
compact infrastructure sector funds for fiscal years 2004 and 2005
projects within the priorities established in the FPA.
[F] Once required documentation was submitted and approved, subsequent
fiscal year 2005 documentation was not required.
[End of table]
[End of section]
Appendix IV: Comments from the Department of the Interior:
United States Department of the Interior:
OFFICE OF THE ASSISTANT SECRETARY POLICY, MANAGEMENT AND BUDGET:
Washington, DC 20240:
JUN 13 2005:
David Gootnick:
Director, International Affairs and Trade:
Government Accountability Office:
Dear Mr. Gootnick:
Thank you for the opportunity to respond to the U.S. Office of
Government Accountability (GAO) draft report aptly entitled, "Compacts
of Free Association: Implementation of New Funding and Accountability
Requirements Underway, but Planning Challenges Remain" (Report).
We find the Report to be mostly accurate and well-balanced. The
reviewers clearly understand that significant changes have been made in
the Compact of Free Association (Compact) relationships and that the
new accountability regimes are making an impact. The reviewers have
also accurately found that as the governments of the United States, the
Federated States of Micronesia and the Republic of the Marshall Islands
have implemented the new agreements, certain obstacles and problems
have been encountered. As reported, these include oversight issues,
gaps in the Compact nations' strategic planning, and compliance
matters.
We concur with the recommendations to the Secretary of the Interior for
actions by the Deputy Assistant Secretary (DAS) for Insular Affairs,
both in his DAS capacity and as Chairman of the bi-lateral joint
economic management committees. We have arrived at many of these
conclusions ourselves and will implement them through our internal
budget and planning process and, to the extent possible, through the
joint economic management committees.
The Department of the Interior has been deeply engaged in the day-to-
day actions necessary to implement the new agreements and will continue
to work with OIA to identify the necessary resources needed to provide
sufficient on-site, oversight review of OIA grants in the FSM and RMI.
The Department does not believe that the statement on Page 37 of the
Report, stating that the Department has not supported increased funding
for on-site reviews, is accurate. The Department has supported the
creation and establishment of the OIA Hawaii field office and will
continue to support the work that it does overseeing the Compact of
Free Association grants.
We appreciate GAO's review to better understand the status of the
Compacts of Free Association and we commend the professionalism and
experience of the GAO staff assigned to the review. It is to our
benefit that this report emerged early in the new Compact regime.
If you have any questions concerning the response, please contact David
B. Cohen, Deputy Assistant Secretary for Insular Affairs, or Nikolao
Pula, Director of the Office of Insular Affairs, at (202) 208-4736.
Sincerely,
Signed by:
P. Lynn Scarlett:
The following is GAO's comment on the letter from the Department of the
Interior dated June 13, 2005.
GAO Comment:
We recognize that the Department of the Interior has supported the
creation of the OIA Honolulu field office to assist in compact
implementation. However, officials from OIA have stated that budgetary
constraints have prevented staff from conducting sufficient on-sight
review in the FSM and the RMI and that the department has not supported
increased funds for this purpose.
[End of section]
Appendix V: Comments from the Department of State:
United States Department of State:
Assistant Secretary and Chief Financial Officer:
Washington, D.C. 20520:
JUL 1 2005:
Ms. Jacquelyn Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548-0001:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "COMPACTS OF
FREE ASSOCIATION: Implementation of New Funding and Accountability
Requirements Well Underway, but Planning Challenges Remain," GAO Job
Code 320303.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Micah Watson, Pacific Islands Desk Officer, Bureau of East Asian and
Pacific Affairs, at (202) 736-4712.
Sincerely,
Signed by:
Sid Kaplan (Acting):
cc: GAO - Leslie Holen;
EAP - Christopher Hill;
State/OIG - Mark Duda:
Department of State Comments on GAO Draft Report COMPACTS OF FREE
ASSOCIATION: Implementation of New Funding and Accountability
Requirements Well Underway but Planning, Challenges Remain (GAO-05-633,
GAO Code 320303):
We appreciate the opportunity to comment on your draft report,
"COMPACTS OF FREE ASSOCIATION: Implementation of New Funding and
Accountability Requirements Well Underway, but Planning Challenges
Remain." The report is a frank and fair assessment of the
Administration's first year of implementation of the amended Compacts
and highlights successes and challenges that will inform the Department
of State's continuing work.
We are writing to ensure that there is no misunderstanding regarding
the relationship between the annual U.S. grant assistance through
Fiscal Year 2023 to the Federated States of Micronesia (FSM) and the
Republic of the Marshall Islands (RMI) under the amended Compacts of
Free Association and the revenue generated by the Trust Funds starting
in Fiscal Year 2024.
The amounts of U.S. annual grant assistance through Fiscal Year 2023
are listed in sections 216 and 217 of the FSM and RAE amended Compacts
respectively (subject to the inflation adjustment of sections 217 and
218, respectively). The amended Compacts do not provide for U.S. grant
assistance beyond Fiscal Year 2023.
As stated in the preamble and Article 3 of the Trust Fund Agreements
with the two countries, the establishment of the FSM and RMI Trust
Funds reflects the desire "to contribute to the long-term budgetary
self-reliance" of the FSM and RMI to provide their governments "with an
ongoing source of revenue after Fiscal Year 2023." The amended Compacts
and their subsidiary agreements contain no commitments, express or
implied, regarding the level of the revenue that will be generated by
the Trust Funds, nor is there any commitment regarding the degree to
which the revenue will "contribute" to the long-term budgetary self-
reliance of the FSM and RMI. The amended Compacts and subsidiary
agreements do not speak of the revenue from the Trust Funds as
"replacing" the annual U.S. grant assistance but merely as providing
one source of revenue after Fiscal Year 2023. To the extent the term
"replace" is used by anyone to describe a connection between the Trust
Fund revenue and the previous annual assistance grants, it can be
misleading as it could wrongly be interpreted as meaning the Trust Fund
revenue is required to, intended to, expected to, or designed to equal
previous annual grant assistance.
In his July 10, 2003 testimony to the U.S. House Committee on Resources
and July 15, 2003 testimony to the U.S. Senate Committee on Energy and
Natural Resources, Compact Negotiator Albert V. Short similarly and
accurately refers to the Trust Funds as providing "an ongoing source of
revenue." The Administration has consistently made this point for the
past three years.
I would like again to thank the GAO for the collaborative approach they
took to the researching and writing of this report, and for allowing
the Department of State to comment on it prior to publication.
The following is GAO's comment on the letter from the Department of
State dated July 1, 2005.
GAO Comment:
We agree that the amended compacts and their subsidiary agreements
contain no commitments regarding the level of revenue that will be
generated by the trust funds, and they do not speak of the revenue from
the trust funds as "replacing" annual U.S. grant assistance after
fiscal year 2023. However, for the sake of assessing the possible
difficulty of transitioning from grant assistance to trust fund
earnings, we have performed calculations based on U.S., FSM, and RMI
trust fund contributions and various rates of return, to forecast the
possibility that trust fund earnings will fully replace grant
assistance beginning in 2024 (see p. 25).
[End of section]
Appendix VI: Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Office Of Inspector General:
Washington, D.C. 20201:
JUN 7 2005:
Mr. David Gootnick:
Director:
International Affairs and Trade:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Gootnick:
Enclosed are the Department's comments on the U.S. Government
Accountability Office's (GAO's) draft report entitled, "COMPACTS OF
FREE ASSOCIATION-Implementation of New Funding and Accountability
Requirements Well Under Way, but Planning Challenges Remain" (GAO-05-
633). The comments represent the tentative position of the Department
and are subject to reevaluation when the final version of this report
is received.
The Department provided several technical comments directly to your
staff.
The Department appreciates the opportunity to comment on this draft
report before its publication.
Sincerely,
Signed by:
Daniel R. Levinson:
Acting Inspector General:
Enclosure:
The Office of Inspector General (OIG) is transmitting the Department's
response to this draft report in our capacity as the Department's
designated focal point and coordinator for U.S. Government
Accountability Office reports. OIG has not conducted an independent
assessment of these comments and therefore expresses no opinion on
them.
COMMENTS OF THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES ON THE
U.S. GOVERNMENT ACCOUNTABILITY OFFICE'S REPORT ENTITLED, "COMPACTS OF
FREE ASSOCIATION--IMPLEMENTATION OF NEW FUNDING AND ACCOUNTABILITY
REQUIREMENTS WELL UNDER WAY, BUT PLANNING CHALLENGES REMAIN" (GAO-05-
633):
The Department of Health and Human Services (HHS) appreciates the
opportunity to review the Government Accountability Office's (GAO's)
draft report.
As a member of the Joint Economic Management and Financial
Accountability Committee (JEMFAC) and the Joint Economic Management
Committee (JEMCO) overseeing the Compacts with the Republic of the
Marshall Islands (RMI) and the Federated States of Micronesia (FSM),
HHS is committed to working with the U.S. Departments of Interior (DOI)
and State, other U.S. Government agencies, and the two countries in
promoting and improving the health and well-being of the citizens of
the FSM and RMI by maximizing the impact and effectiveness of Compact
resources. HHS finds this report to be a comprehensive and timely
overview of the accomplishments and challenges associated with the
early phases of implementation of the amended Compacts.
We concur with the overall conclusion of the report that over a short
time period both sides have made great strides in implementing the
complex financial and technical oversight requirements of the Compacts,
while some shortcomings exist. As mentioned on page 40 of the report,
by establishing a Honolulu field office and investing in staff to
provide monitoring and oversight, the Office of Insular Affairs (OIA)
within DOI has demonstrated its commitment to successful implementation
of the amended Compacts. We believe HHS has also demonstrated its
commitment to accomplish this goal through the significant time
investment of personnel in our Office of Global Health Affairs, through
the coordination efforts of several HHS agencies, and (as mentioned in
the report) through a senior HHS assignee to DOVOIA's Honolulu office.
This assignment facilitates coordination and collaboration on health
issues pertinent to the Compacts, and will assure smooth integration of
other HHS funds that go to RMI and FSM with pertinent Compact
activities.
We request several minor corrections to the draft document. The report
indicates on page 10 that grant assistance is in six sectors, one of
which is "health care." We believe the term "health," used elsewhere
throughout the document, is more appropriate, as care is only one
aspect of promoting health. Footnote 36 indicates the HHS
representative is expected to spend 40 percent of his time in FSM and
RMI. However, as this new position is meant to support activities in
all six U.S.-affiliated Pacific jurisdictions and to interact with
relevant international agencies such as the World Health Organization
and Secretariat of the Pacific Community (SPC), this figure is more
reflective of likely cumulative travel to accomplish all of these
goals. There is no specific target for travel in the FSM and RMI.
After the initial phase of compact implementation, HHS believes it will
be important to monitor not only adherence to financial and management
requirements, but to assure the expected health, education, and
infrastructure benefits are achieved. Since the compacts are
performance based, it is necessary that the impact of the sector grants
can be measured and documented.
The following is GAO's comment on the letter from the Department of
Health and Human Services dated June 7, 2005.
GAO Comment:
We have made the requested corrections. Specifically, we now use the
term "health grant" to characterize this particular compact sector
grant throughout the report, and we have deleted the footnote
describing travel to the FSM and the RMI by the HHS representative
stationed in Honolulu.
[End of section]
Appendix VII: Comments from the Government of the Federated States of
Micronesia:
EMBASSY OF THE FEDERATED STATES OF MICRONESIA:
1725 N STREET, N.W.:
WASHINGTON, D.C. 20036:
Office of the Ambassador:
TELEPHONE: (202) 223-4383:
FACSIMILE: (202) 223-4391:
EMAIL: FSMAMB®aol.com:
27 June 2005:
Dr Emil Friberg Jr:
US General Accounting Office:
441 G Street, NW, Room 4964:
Washington, DC 20548:
Dear Dr Friberg:
I have the pleasure of transmitting the comments of the Government of
the Federated States of Micronesia on the Draft Report by the General
Accounting Office entitled, "Compacts of Free Association:
Implementation of New Funding and Accountability Requirements Well
Underway, but Planning Challenges Remain."
In the interest of economy of space, the comments are in a summary
form. We would be pleased as well to provide the detailed comments or
explanations upon which the attached summary comments are based, should
you require.
Please do not hesitate letting us know if you have any question.
Sincerely,
Signed by:
Jesse B. Marehalau:
Ambassador:
EMBASSY OF THE FEDERATED STATES OF MICRONESIA:
WASHINGTON, D.C.
Office of the Ambassador:
June 27, 2005:
COMMENTS BY THE GOVERNMENT OF THE FEDERATED STATES OF MICRONESIA ON THE
DRAFT GAO REPORT,
"Compacts of Free Association: Implementation of New Funding and
Accountability Requirements Well Underway, but Planning Challenges
Remain" - GAO-05-633:
Overview: The Government of the Federated States of Micronesia (FSM)
welcomes this initiative by the United States Congress to assess the
effectiveness thus far of the implementation of funding and
accountability requirements under the amended Compacts. We feel that
the timely review provided by the GAO's Draft Report will be of
positive value, not only to the U.S. Congress and Administration, but
to the Micronesian Governments as well.
Before moving on to more specific comments and responses, we would like
to express appreciation to our friends and colleagues within the GAO
who traveled far and worked long and hard to produce this draft. We are
grateful for the overall measured tone of the draft which, without
glossing over shortcomings, seems to give due credit to the efforts
being made by the FSM to rise to the many new challenges presented by
the Amended Compact. One notable feature of the draft that will
contribute much to the usefulness of the final Report is the separate
treatment given, where appropriate, to the performances of the two
Governments, the FSM and the RMI. This allows a far better
understanding of the implementation challenges, given the different
circumstances of the two nations.
We are gratified to state that the reviewer of these comments will find
we are able to report progress made on almost every GAO finding, since
the draft was compiled. Our implementation, particularly of the new
funding and accountability requirements, doubtless will need constant
monitoring, evaluation and improvement throughout the new funding
period. Many might reasonably question, even now, whether we should or
could have done better in the beginning in one area or another, but on
the whole, we are confident that the United States Congress will
conclude from the GAO Report and subsequent oversight hearings, that
the FSM is making a genuine effort at compliance under difficult
conditions, and that that effort is showing results.
The First Year: During the first full year of Amended Compact funding,
FY 2004, the FSM struggled to develop, finalize and approve a number of
plans that are closely tied to decision-making and budgeting as regards
Compact grant funds. It was also necessary to move quickly to establish
a far more elaborate Compact management infrastructure at both State
and National government levels, than had been needed before. All the
while, the Compact funds were being made available and the JEMCO
process was underway. By necessity, it became necessary to proceed on
what we would describe as an informed, ad hoc basis. As noted by GAO,
this resulted in an inability in the first year for the FSM fully to
meet the new requirements and fully utilize all the funds that were
available. The funds do carry over, however, and will be utilized.
Whatever else might be said, this difficult year proceeded in
compliance with the basic mandates of the Fiscal Procedures Agreement.
Meeting the Challenges: The challenge experienced by the FSM in
completing the necessary plans in order to come to grips with
"strategic planning issues" as cited in the GAO draft is not denied,
but it can be reported that the FSM has now put into place most, if not
all that is required. The internal process for the FSM, which by
necessity had to be highly participatory at all levels of our dispersed
governments, required time. The Infrastructure Development Plan,
together with engagement of a firm to assist with contracting, is now
accomplished. More broadly, in early June the FSM submitted to the US
for JEMCO concurrence its overall, multi-year Strategic Development
Plan. This will now provide a concrete basis upon which the JEMCO can
assure that, to use GAO terminology, "the allocations of sector grants
are linked to amended Compact development goals." It will also provide
an appropriate backdrop for discussion, to any extent it might be
appropriate within this forum, of the internal allocation of sector
grant funds within the FSM.
Like much of the rest of the Amended Compact experience, the full
establishment and implementation of the FSM Trust Fund has taken time.
Most importantly, the Fund has been legally established and the
required initial financial contributions have been made and secured. At
this writing, the FSM Financial consultants are in the final stages of
evaluating proposals that were submitted for the positions of Trustee
and Investment Advisor. This process should be completed within the
next 30 days, shortly after which the Trust Fund's investment program
will be launched.
One of the most difficult implementation problems for the FSM has been
the unexpected insistence by the US members of JEMCO that the FSM,
contrary to expectations established during the Amended Compact
negotiations, cannot rely upon funding in the relatively small Public
Sector Capacity Building grant to support a range of vital public
sector operations, such as in law enforcement, judiciary, audit and
others. The difficulty stems from the inescapable fact that local
revenues, the only alternative source, are quite inadequate to support
these vital government services. Realization of the means to increase
local revenues will depend, over time, on the success of various
Compact development-oriented mechanisms. Nevertheless, the US Members
of JEMCO have imposed an arbitrary five-year "withdrawal" from the use
of funds in the Public Sector Capacity Building grant to support these
essential government operations. The theory seems to be that an already-
shrinking economy in the midst of Compact cutbacks can somehow produce
more local revenues by increasing taxes. The GAO draft cites an FSM
"failure" to come up with a "strategy" to meet this US-imposed JEMCO
requirement. Actually, the FSM did, however reluctantly, submit a five-
year plan for meeting this onerous and, in our view, counterproductive
requirement, which was accepted by the Department of the Interior. The
FSM States are bending their best efforts to comply with this "plan,"
and still provide essential public services. To say that this is hardly
the atmosphere in which to move toward the broader development
objectives of the Amended Compact is to state the obvious.
Several of the Departments within the FSM Executive Branch have
prepared technical comments aimed at particular sections of the GAO
draft, which will be supplied separately. It is hoped that these also
will be taken into consideration.
The FSM wishes to express gratitude for the fairness and even-
handedness of the draft report. As experience unfolds under the Amended
Compact, we look forward to the continuing oversight of our efforts by
the United States Congress.
Respectfully submitted,
Signed by:
Jesse B. Marehalau:
FSM Ambassador to the US:
The following is GAO's comment on the letter from the government of the
Federated States of Micronesia dated June 27, 2005.
GAO Comment:
The report notes that the FSM government submitted a document to OIA
that calculates percentage decreases for basic government operations
expenditures from the FSM's public sector capacity building grant
through 2009. We also note that there is no additional plan describing
what policy steps will be taken or the agencies and activities that
will be affected by the decreases. Therefore, we do not believe that
this schedule can be construed as a "strategy" that identifies where
spending decreases will occur and how they will be managed.
[End of section]
Appendix VIII: Comments from the Government of the Republic of the
Marshall Islands:
Republic of the Marshall Islands:
OFFICE OF THE CHIEF SECRETARY:
P.O. BOX 15:
Majuro, Marshall Islands MH 96960:
June 28, 2005:
Mr. David Gootnick:
Director:
International Affairs and Trade:
U.S. General Accounting Office:
441 G St. NW:
Washington D.C. 20548:
Republic of the Marshall Islands Comments on the GAO Report (GAO-05-
633): "Compact of Free Association: Implementation of New Funding and
Accountability Requirements Well Underway, but Challenges Remain
(Draft)"
Dear Mr. Gootnick:
Thank you for providing draft copy of the above-captioned U.S. General
Accounting Office (GAO) report and for allowing us some time to review
and make comments.
The Government of the Republic of the Marshall Islands (RMI) has
endeavored to not only meet the requirements of the Compact of Free
Association, as amended, which went into effect in the Republic of the
Marshall Islands and the United States on May 1, 2004, but also has
maintained an unchanging course, even before the amended Compact was
implemented, to improve our economic and fiscal management in order for
us to realize sustainable and real economic growth along with improving
living standards for all our people. This major task, of which the
amended Compact is only one component, has been addressed by my
Government in a progressive manner and has taken substantial
investments to reform our governmental operations, policies and
priorities. Suffice it to say, this approach is a new way of doing
things and such far-reaching change takes time to not only be
implemented but also to change attitudes, standards and performance,
and to achieve tangible results.
The GAO report is informative and helpful to us: informative in a way
to receive a more objective view regarding how far we have progressed
and to also identify weaknesses or gaps in the areas of public policy
and management; and helpful for us to concentrate on those gaps so that
we improve not only achieving the intent of the amended Compact but
also to achieve the economic advances and social stability that we are
responsible to help achieve for our country.
Overall, the RMI believes that the report provides much detailed
information. However, we think that some representations or analysis
regarding the RMI portrayed in the document needs to be corrected to be
totally accurate. Second, the focus on long term strategic planning for
use of funds and other planning efforts identified in the report are
overemphasized and some of the analysis and recommendations are not the
purpose or intent of the amended Compact's Title Two or Fiscal
Procedures Agreement. Third, there is not sufficient emphasis on major
components of the economic package because of lack of full
implementation on the part of the United States. This last issue
involves the Trust Fund component which is not yet fully invested; the
Supplemental Education Grant for which an adequate U.S. system of
delivery and oversight is not yet clear and funds not yet fully
available; and the lack of an agreement for the allocation and use of
judicial training grants with the RMI as specified in the Fiscal
Procedures Agreement. We are entering Year 3 of the amended Compact and
these issues are not yet resolved.
Please find an attached paper that provides clarifications or
corrections of the report as well as more fully illustrates the RMI's
activities and views.
With regards to the third point unfulfilled implementation of 1) the
Trust Fund, 2) the Supplemental Education Grant (SEG), and 3) judicial
training grants, we urge that these components are fully implemented in
the manner intended in the amended Compact at the earliest time
possible. For the Trust Fund, we have already lost almost three years
of earnings. As pointed out in the previous GAO report Compact of Free
Association: An Assessment of the Amended Compact and Related
Agreements, the Trust Fund, even if it was invested from 2004 to 2023,
would be unable to fully meet its purpose as envisaged in the amended
Compact. Thus, no matter what planning we do today, if the Trust Fund
earnings are insufficient in 2024, any plans to achieve economic and
fiscal stability will not be achieved by that time. The RMI remains
extremely concerned regarding the adequacy of the Trust Fund after
Title Two grant assistance ends in 2023. In addition, we remain
concerned that the cumulative annual decrement from the Compact base
grant (that is added to the Trust Fund) along with only a partial
inflation adjustment to the grant funding will be a difficult challenge
in bringing positive change for reform and development. Currently, we
have been dealing with the decrement reduction and real loss of grant
assistance value by reducing costs and achieving efficiencies. However,
this will be more difficult to do in the future as the cumulative
decrement grows and the real value of the grants decline. We would hope
that GAO looks into this issue during its upcoming economic review.
For the SEG, it has been a difficult transition period from the
existing Federal Programs to the grant implementation. The whole
process would improve with better coordination within the
Administration so that we do not receive differing U.S. views and
interpretations of funding delivery and use. We also believe that there
are issues being encountered within the Administration in terms of
making these funds available to the RMI to replace federal programs as
intended by Congress. Finally, since these funds depend on annual
appropriations, as opposed to a permanent Congressional appropriation
for other amended Compact funding, future planning regarding these
funds has a distinct uncertainty to them. My government, and our
children and educators, would greatly benefit from a more straight-
forward manner regarding the delivery, management and availability of
these funds. Our own efforts for SEG management must also improve. We
have been and will continue to strengthen the planning, management, and
use of these funds so that the amended Compact's education objectives
are fulfilled.
Finally, the Judicial Training Grants were provided to the Pacific
Islands Committee of the Ninth Circuit Judicial Council without the
agreement of the RMI as more fully described in the attached comments.
We hope that the above and attached comments are useful and
constructive to inform readers of the true progress that has been made
and some of the shortcomings that have to be addressed. We also hope
the comments portray the interest of the RMI in assuring the U.S.
Congress and Administration that we take the requirements of the
amended Compact seriously and we are striving to not only meet these
requirements but to apply the amended Compact's economic provisions so
that our country benefits in the short, medium and long term.
Again, thank you and your staff for the time and effort in preparing
the report, and please let us know if you require additional
information.
Sincerely,
Signed by:
Robert S. Muller:
Chief Secretary:
Copy to: Hon. Gerald M. Zackios, Minister of Foreign Affairs, RMI:
Hon. Brenson S. Wase, Minister of Finance, RMI:
Ambassador Banny deBrum, RMI Embassy, Washington, DC:
Attachment: RMI Comments on GAO Report (GAO-05-633) [9 pgs]
The following are GAO's comments on the letter from the government of
the Republic of the Marshall Islands dated June 28, 2005.
GAO Comments:
1. We made several factual corrections to the report, based on the
RMI's technical comments (see comment 5).
2. The RMI's technical comments emphasize the government's detailed
strategic planning efforts. We do not dispute that the RMI government
has undertaken planning initiatives regarding the use of compact funds
in each sector. Our point remains that (1) it is unclear whether JEMFAC
has approved RMI planning documentation addressing the use of grant
funds and (2) there have been no bilateral discussions addressing how
the RMI will achieve the amended compact's stated goals of economic
advancement and budgetary self-reliance.
3. Our recommendations, which are intended to further ensure planning
for the effective use of compact funding, are directed to the
Department of the Interior. In its formal comment letter, Interior
concurred with the recommendations and stated its intention to
implement them through the department's internal budget and planning
process and, to the extent possible, through the joint economic
management committees.
4. We intend to review the trust funds, the supplemental education
grant, and the judicial training funding in more detail during
subsequent work.
5. Per an agreement with the RMI government, we are not reproducing the
RMI's technical paper. However, we have used comments in the paper to
make factual corrections to the report.
[End of section]
Appendix IX: GAO Contact and Staff Acknowledgments:
GAO Contact:
David Gootnick, 202-512-4128:
Acknowledgments:
In addition to the contact named above, Emil Friberg, Leslie Holen,
Eddie Uyekawa, Reid Lowe, Kendall Schaefer, and Mary Moutsos made key
contributions to this report.
(320303):
FOOTNOTES
[1] The FSM is comprised of the four states of Chuuk, Kosrae, Pohnpei,
and Yap.
[2] See GAO, 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).
[3] Whereas the original compact (approved in U.S. Public Law 99-239,
Jan. 14, 1986) was one agreement between the U.S., FSM, and RMI
governments, the amended compacts (approved in U.S. Public Law 108-188,
Dec. 17, 2003) are separate agreements between the United States and
each of the two countries.
[4] The total amount of funding for grants and trust fund contributions
is fixed for the 20-year period and is provided through a permanent
congressional appropriation.
[5] Per the compacts' enabling legislation, we will conduct an
extensive review of implementation, oversight, and impact of the
amended compacts by December 2006.
[6] Although the amended compacts did formally not go into effect until
May and June of 2004, OIA's Compact Coordinator reported that all three
countries agreed to proceed according to compact terms at the beginning
of fiscal year 2004. Fiscal year 2004 signed grant agreements commit
the FSM and the RMI to abide by the terms of the amended compacts and
their related agreements. The FSM and RMI governments use the same
fiscal year as the U.S. government (October through September).
[7] This funding will remain available for use in future years.
[8] In a previous report, we discussed the importance of Kwajalein
Atoll to U.S. defense interests in the region. See GAO, 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] In 2001 we reported on the impact of nonimmigrants in Guam, Hawaii,
and the CNMI and the amount of impact funding that has been provided to
the locations. See GAO, 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).
[10] American Samoa is also eligible for compact impact funding, and
nonimmigrants from the Republic of Palau are included in the periodic
surveys.
[11] The amended compacts also authorize an additional $300,000,
partially adjusted for inflation, for fiscal years 2004 through 2023
for the training of judges and officials of the judiciary in the FSM
and the RMI.
[12] There is a so-called "fiscal procedures agreement" with the FSM as
well as the RMI. These agreements are formally known as the "Agreement
Concerning Procedures for the Implementation of United States Economic
Assistance Provided in the Compact of Free Association, as amended,
Between the Government of the United States of America and the
Government of the Federated States of Micronesia" and the "Agreement
Concerning Procedures for the Implementation of United States Economic
Assistance Provided in the Compact, as amended, of Free Association
Between the Government of the United States of America and the
Government of the Republic of the Marshall Islands." These two
agreements contain detailed requirements concerning implementation of
the amended Compacts' funding and accountability provisions.
[13] While the Departments of the Interior and State have an extensive
history of involvement with compact issues, HHS was interested in
direct involvement with the amended compacts due to the department's
long history of providing assistance to the FSM and the RMI (via
programs such as Head Start, which is now being phased out of both
countries) and its desire to continue its commitment to the islands.
The islands remain eligible for a number of HHS categorical and
competitive grant programs for which the department has an obligation
to maintain oversight and accountability.
[14] A "single audit" is a financial and compliance audit, within the
meaning of the Single Audit Act, as amended. See 31 U.S.C. § 7501 et
seq. The Single Audit Act is intended to, among other things, promote
sound financial management, including effective internal controls, with
respect to the use of federal awards.
[15] Annual financial reports and single audits are due December 31 and
April 1, respectively, following the end of the fiscal year.
[16] The U.S. and FSM governments did not sign an infrastructure grant
agreement for fiscal year 2005 until May 2005. Further, the U.S.
government has not signed grant agreements for fiscal years 2004 and
2005 to provide $1.9 million in annual funding to Kwajalein Atoll, nor
did the RMI allocate funding for a public sector capacity building
grant in fiscal year 2004.
[17] According to an Interior official, the FSM government failed to
initially adjust fiscal year 2005 sector grants to include an inflation
amount of $1,117,200; this amount will be added to grant amounts for
fiscal year 2006.
[18] The RMI government has five subgrantees that receive a small
amount of compact funding. These subgrantees are the College of the
Marshall Islands, the Marshall Islands Visitors Authority, the
Scholarship Board, the Land Registration Authority, and the Kwajalein
Atoll Joint Utility Resources. These subgrantees received less than 1
percent of compact grant funding in fiscal year 2004.
[19] In addition, a certain portion of the RMI's sector grant funding
must be used on Kwajalein Atoll, as provided for in amended compact
sections 211(b)(1) and 211(b)(3).
[20] At a special JEMCO meeting in March 2005, JEMCO approved portions
of the FSM's infrastructure development plan that contemplate use of
compact infrastructure sector funds for projects within the priorities
established in the FPA.
[21] The FSM national government executed a contract with a firm on May
19, 2005, to undertake project engineering, management, and
administration of a project management unit. The consultant team
established a physical presence in Pohnpei and became "operational" on
June 20, 2005.
[22] According to an OIA official, Yap officials report that the state
held spending at fiscal year 2003 levels because fiscal year 2004 funds
were not provided by the FSM national government until December. Per a
2004 JEMCO resolution, all FSM health and education carry-over funds,
amounting to approximately $5.3 million, will be spent on health and
education infrastructure projects.
[23] In addition, rather than receiving funding up-front,
infrastructure projects are reimbursed on an accrued expenditure basis.
[24] The SEG for both countries will be partially adjusted for
inflation and is subject to annual appropriations by the U.S. Congress.
[25] While the amended compact with the FSM calls for a development
plan, the RMI's amended compact states that the RMI is required to
provide the U.S. government with a "medium-term budget and investment
framework."
[26] Once an overall amount of grant funds is allocated to each
government according to the formula, the five governments then
independently determine how the funds will be allocated across sectors.
[27] Per the terms of FSM Public Law 13-72, for fiscal years 2005 and
2006, the distribution of Compact sector grants will be as follows: FSM
national government - 8.65 percent, Chuuk state - 38.57 percent,
Pohnpei state - 25.69 percent, Yap state - 16.03 percent, and Kosrae
state - 11.06 percent. By comparison, according to the FSM 2000
Population and Housing Census Report, the population of Chuuk in that
year accounted for 50 percent of the FSM population, while Pohnpei
accounted for 32 percent, Yap accounted for 11 percent, and Kosrae
accounted for 7 percent. Beginning in fiscal year 2007 and beyond, a
different distribution formula that provides over 13 percent of total
grant funding to the FSM national government will go into effect,
absent an alternative arrangement reached between the five governments.
[28] See GAO, Compact of Free Association: An Assessment of the Amended
Compacts and Related Agreements, GAO-03-1007T (Washington, D.C.: July
15, 2003).
[29] A 7.9 percent rate of return is based on trust funds that are
comprised of both stocks (60 percent of the portfolio) and long-term
government bonds (40 percent of the portfolio).
[30] Subsequent to JEMFAC approval of grant allocations, the RMI's
legislative body (the Nitijela) altered the allocations between health,
education, and infrastructure. The JEMFAC then conducted e-mail
communication to approve these alterations.
[31] For example, the FSM delegation strongly advocated the use of
compact funds for land leases and purchases but was overruled by the
U.S. representatives. The U.S. position is that compact funding should
not go to lease or purchase land when ownership is often unclear and
property value has not been established. This issue remains key for the
FSM, and FSM officials told us they intend to continue raising this
topic with U.S. officials. A senior Interior official told us that if
the FSM can resolve ownership and valuation problems, compact funding
could potentially be used for land lease or purchase.
[32] The impact of this action is unclear. For example, according to a
Chuuk state finance official, the Chuuk government used a portion of
the state's trust fund contributions (which were not yet required to be
submitted for the FSM trust fund) to replace withheld public sector
capacity building funds, and then replaced the trust fund amounts when
the public sector capacity building grant was eventually provided.
[33] Interior's Office of the Inspector General has conducted audit
reviews of FSM and RMI implementation of the amended compacts.
[34] The FSM government asked OIA for an extension of this deadline;
OIA declined to allow such an extension. According to an OIA official,
the RMI government has not asked for an extension.
[35] In addition, the FSM has not completed is fiscal year 2003 single
audit.
[36] Prior to completion of the single audit, the RMI Auditor General
told us that a preliminary review of the draft fiscal year 2004 single
audit showed that the amended compact is resulting in the emergence of
more compliance issues. For example, more procurement problems are
cited now due to the new fiscal procedures agreement requirements in
this area.
[37] One specialist works on both private sector development and
environment issues. In addition, the Honolulu office has one
administrative employee.
[38] Prior to opening the Honolulu office, OIA had a program
coordinator stationed in the FSM, and in July 2004, OIA hired a program
specialist who is stationed in the RMI. OIA staff at the U.S. embassies
in the FSM and the RMI provide direct contact with the local and
national governments and assist the Honolulu staff as needed.
[39] Since the creation of the board and its office has been slow to
start, the FSM government established in the meantime a Compact
Implementation Taskforce in 2003. The task force is overseen by the
vice president and composed of cabinet members and discusses and
follows up on compact-related issues and reporting requirements. The
task force will continue in its role until the Compact Management Board
and its office becomes operational. According to a FSM Department of
Foreign Affairs official, the task force has met as needed, which has
averaged about once a month, and developed a performance-tracking
matrix that lists implementation issues and actions taken.
[40] Some FSM national and U.S. government officials have expressed
concern to us that the compact management board and its office may
reduce the role of the FSM president in managing grant matters and
conducting international affairs.
[41] The FSM national government is the grantee of the compact funds
and is responsible for ensuring compact compliance by the four state
governments, or subgrantees, that receive the majority of Compact
funds.
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