	Background

In 1986, the United States and the FSM and the RMI entered into the  Compact of Free Association. It also represented a  continuation of U.S. rights and obligations first embodied in a U.N.  trusteeship agreement that made the United States the Administering  Authority of the Trust Territory of the Pacific Islands. Unlike economic assistance  provisions, the Compact’s migration provisions are not scheduled to  expire in 2003. Compact Proposals Would Cost Billions and Create Trust Funds

Under the most recent (May 2002) U.S. proposals to the FSM and the RMI,  new congressional authorizations of approximately $3.4 billion would be  required for U.S. assistance over a period of 20 years (fiscal years 2004  through 2023). This new assistance would be provided to each country in the form of  annual grant funds, extended federal services (that have been provided  under the original Compact but are due to expire in 2003), and  contributions to a trust fund for each country. At a 6 percent rate of return (the  Department of State’s assumed rate) the U.S. proposal to the RMI would  meet its goal of creating a trust fund that yields earnings sufficient to  replace expiring annual grants, while the U.S. proposal to the FSM would  not cover expiring annual grant funding, according to our analysis. In sum, many of our  recommendations regarding future Compact assistance have been  addressed with the introduction of strengthened accountability measures  in the current U.S. proposals.
What GAO Found

The United States entered into the Compact of Free Association with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) In 1986. The Compact has provided U.S. assistance to the FSM and the RMI in the form of direct funding as well as federal services and programs. The Compact allows for migration from both countries to the United States and established U.S. defense rights and obligations in the region. Provisions of the Compact that deal with economic assistance were scheduled to expire in 2001; however, they will remain in effect for up to 2 additional years while the affected provisions are renegotiated. Current U.S. proposals to the FSM and the RMI to renew expiring assistance would require Congress to approve $3.4 billion in new authorizations. The proposals would provide decreasing levels of annual grant assistance over a 20-year term. Simultaneously, the proposals would require building up a trust fund for each country with earnings that would replace grants once those grants expire. The U.S. proposals include strengthened accountability measures, though details of some key measures remain unknown. The proposals have addressed many, but not all, recommendations that GAO made in past reports regarding assistance accountability.