The plans are to identify how the countries will use compact  funds to promote broad compact development goals such as economic  advancement and budgetary self-reliance. The FSM, the RMI, and the United States are required to provide the  necessary staff support to their representatives on the committee to enable  the parties “to monitor closely the use of assistance under the Compacts.”
FSM and RMI Grant Management  The FSM and the RMI are responsible for grant management, including  managing and monitoring the day-to-day operations and financial  administration of each sector. OIA’s Honolulu field office has four professional staff—  specialists in health, education, infrastructure, and financial  management—who perform various activities, such as  analyzing FSM and RMI budgets and required reports;   reviewing expenditures and performance with FSM and RMI  government officials and conducting site visits;  providing briefings and advice to OIA, HHS, and State officials  regarding progress and problems;   providing support for JEMCO and JEMFAC meetings;   monitoring the countries’ compliance with grant terms and   withholding funds from the countries for noncompliance with  requirements such as those expressed in the fiscal procedures  agreements or in grant conditions (such remedies did not exist in the  previous compact). Figure 3 shows the FSM sector grant allocations  for 2004 through 2006. Infrastructure. Education. Land use issues. A lack of technical capacity also  challenges the countries’ ability to collect performance data and measure  progress. Health sector. Second, both countries’ reports contained incomplete activity-level  information. FSM and RMI Lack Capacity to Collect, Assemble, and Analyze Data to Assess Progress

The FSM’s ability to measure progress is limited by its lack of capacity to  collect, assemble, and analyze performance data. In addition,  the countries’ single audit reports for 2004 and 2005, particularly the FSM’s  reports, indicated weaknesses in the countries’ financial statements and  compliance with the requirements of major federal programs, calling into  question their accountability for the use of compact funds. However, the  FSM’s timeliness in submitting its single audit reports improved from 2004  to 2005, and the RMI submitted its single audit reports for these 2 years on  time. V shows  the total number of material weaknesses and reportable conditions  findings for the RMI for 2001 through 2005 single audit reports.) However, OIA took corrective  actions in several instances. Suspended grant funding. Withheld grant funding. The need to respond to various challenges facing the  FSM reduced OIA’s administrative oversight of assistance provided  under the compact. Staffing challenges. In 2004 through 2006, compact grants were, for the most part, allocated  among the countries’ six sectors as required, with emphasis on health,  education, and infrastructure, and the countries have made progress in  implementing the grants in most sectors. To improve FSM grant administration, planning, and measurement of  progress toward compact goals, and to ensure oversight, monitoring, and  accountability for FSM compact expenditures, we recommend that the  Secretary of the Interior direct the Deputy Assistant Secretary for Insular  Affairs, as Chairman of JEMCO, to coordinate with other U.S. agencies on  the committee in working with the FSM national government to take the  following actions:  establish plans for sector spending and investment by the FSM national  and state governments to minimize any adverse consequence of reduced  funding resulting from the annual decrement or partial inflation  adjustment;  evaluate the impact of the current FSM distribution between states and  sectors on the ability of the nation to meet national goals or deliver  services;  fully develop the mechanism for measuring sector grant performance  and collect complete baseline data to track progress toward  development goals; and  ensure that the quarterly performance reports contain reliable and  verified program and financial information for use as a monitoring tool  by both the FSM and the U.S. governments. Objectives, Scope, and Methodology

This report examines, for 2004 through 2006, (1) the Federated States of  Micronesia’s (FSM) and the Republic of the Marshall Islands’ (RMI) use of  compact funds; (2) FSM and RMI efforts to assess progress toward their  stated development and sector goals; (3) FSM and RMI monitoring of  sector grants and accountability for the use of compact funds; and (4) the  Department of the Interior’s (Interior) administrative oversight of the  compacts. To report on the FSM’s and the RMI’s use of amended compact funds, we  reviewed the U.S., FSM, and RMI annual compact reports for 2004 and  2005; FSM and RMI strategic planning documents and budgets; briefing  documents prepared by Interior’s Office of Insular Affairs (OIA) in  preparation for the annual bilateral meetings with the two countries; and  FSM and RMI single audits for 2001 through 2005. Compact of Free Association: An Assessment of Amended Compacts and  Related Agreements.
Why GAO Did This Study

In 2003, the United States signed Compacts of Free Association with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI), amending a 1986 compact with the countries. The amended compacts provide the countries with a combined total of $3.6 billion from 2004 to 2023, with the annual grants declining gradually. The assistance, targeting six sectors, is aimed at assisting the countries' efforts to promote economic advancement and budgetary self-reliance. The Department of the Interior (Interior) administers and oversees the assistance. Complying with a legislative requirement, GAO examined, for fiscal years 2004 through 2006, (1) the FSM's and the RMI's use of compact funds, (2) their efforts to assess progress toward development goals, (3) their monitoring of sector grants and accountability for compact funds, and (4) Interior's administrative oversight of the assistance. GAO visited the FSM and the RMI; reviewed reports; and interviewed officials from the FSM, RMI, and U.S. governments.

What GAO Found

For 2004 through 2006, compact assistance to the FSM and the RMI was allocated largely to the education, infrastructure, and health sectors, but various factors limited the countries' use of compact funds. Deterrents to the FSM's use of infrastructure funds included constraints on land use and disagreement on project implementation processes. Land use issues also hindered the RMI's use of infrastructure funds. In addition, the FSM's distribution of the grants among its four states resulted in significant differences in per-student education and per-capita health funding. Neither country has planned for long-term sustainability of the grant programs, taking into account the annual decreases in grant funding. To assess progress toward development goals, the FSM and the RMI established goals and objectives for each sector and are collecting performance data for education and health. However, a lack of complete and reliable baseline data prevents the countries from gauging progress in these sectors. Also, both countries' required quarterly performance reports contained incomplete and unreliable information, limiting the reports' utility for tracking progress. The countries' ability to measure progress is further challenged by a lack of technical capacity to collect, assemble, and analyze baseline and performance data. Although the FSM and the RMI are required to monitor day-to-day sector grant operations, their ability to meet this requirement for 2004 through 2006 was limited. According to officials in the respective governments, the responsible offices have insufficient staff, budgets, and time to monitor grant operations. In addition, both countries' single audit reports for 2004 and 2005 indicated weaknesses in their ability to account for the use of compact funds. For instance, the FSM's audit report for 2005 contained 57 findings of material weaknesses and reportable conditions in the national and state governments' financial statements for sector grants, and the RMI's report contained 2 such findings. Furthermore, both countries' single audit reports indicated noncompliance with requirements of major federal programs. For example, the FSM's audit report for 2005 contained 45 findings of noncompliance, while the RMI's audit report contained 11 findings. Interior's Office of Insular Affairs (OIA) has conducted administrative oversight of the sector grants by monitoring the countries' sector grant performance and spending, assessing their compliance with sector grant conditions, and monitoring the audit process. In response to shortcomings that it identified, OIA took several actions, such as withholding or suspending grant funding and ensuring the provision of technical assistance. However, OIA's oversight has been limited by the need to deal with challenges facing the FSM, such as its difficulty in preparing budgets, as well as by its own staffing challenges.