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. 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). 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. 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. 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. The FSM has  not completed its fiscal year 2004 single audit. 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. 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. The U.S. 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   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. 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 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).
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. 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.