	Background

In 1986, the United States and the FSM and the RMI entered into the  Compact of Free Association. The second 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 be disbursed and monitored by  the U.S. Department of the Interior) to the FSM and the RMI. In addition, the Compact grants the  United States a “defense veto” over actions by the FSM or the RMI  governments that the United States determines are incompatible with its  authority and responsibility for security and defense matters in these  countries. Immigration issues were also addressed. According to the State Department, 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 Hawaii, Guam, and the CNMI. If the trust funds established in the amended  Compacts earn a 6 percent rate of return, the FSM trust fund would be  insufficient to replace expiring annual grants. Amended Compacts Could Cost the U.S. Government $6.6 Billion

Under the amended Compacts with the FSM and the RMI, new  congressional authorizations of approximately $6.6 billion could be  required for U.S. payments from fiscal years 2004 to 2086, of which $3.5  billion would be required for the first 20 years of the Compacts (see table  1). This new authorized funding would be provided to each country in the  form of    annual grant funds targeted to priority areas (such as health, education,  and infrastructure), audit assistance, and disaster assistance;   contributions to a trust fund for each country such that trust fund earnings  would become available to the FSM and the RMI in fiscal year 2024 to  replace expiring annual grants;   payments the U.S. government makes to the RMI government that the RMI  transfers to Kwajalein landowners to compensate them for the U.S. use of  their lands for defense sites; and    an extension of federal services that have been provided under the original  Compact but are due to expire in fiscal year 2003. Nevertheless, the RMI trust fund would become  insufficient for replacing grant funding by fiscal year 2040. The United States could withhold payments if either country fails to  comply with grant terms and conditions. The successful implementation of the many new accountability provisions  will require a sustained commitment by the three governments to fulfill  their new roles and responsibility. Appropriate resources from the United  States, the FSM, and the RMI represent one form of this commitment. While  the U.S. government had already secured access to Kwajalein until 2016  through the 1986 MUORA, the newly revised MUORA would grant the  United States access until 2066, with an option to extend for an additional  20 years to 2086. In  addition, the ability of FSM and RMI citizens to volunteer to serve in the  U.S. military would be extended.
Why GAO Did This Study

In 1986, the United States entered into a Compact of Free Association with the Pacific Island nations of the Federated States of Micronesia, or FSM, and the Republic of the Marshall Islands, or RMI. The Compact provided about $2.1 billion in U.S. funds, supplied by the Department of the Interior, over 17 years (1987-2003) to the FSM and the RMI. These funds were intended to advance economic development. In a past report, GAO found that this assistance did little to advance economic development in either country, and accountability over funding was limited. The Compact also established U.S. defense rights and obligations in the region and allowed for migration from both countries to the United States. The three parties recently renegotiated expiring economic assistance provisions of the Compact in order to provide an additional 20 years of assistance (2004-2023). In addition, the negotiations addressed defense and immigration issues. The House International Relations and Resources Committees requested that GAO report on Compact negotiations. This testimony discusses negotiated changes to the levels and structure of future assistance, including the potential cost to the U.S. government. Further, it reviews accountability, defense, and immigration changes brought about by the amended Compacts and related agreements.

What GAO Found

The amended Compacts of Free Association between the United States and the FSM and the RMI to renew expiring U.S. assistance could potentially cost the U.S. government about $6.6 billion in new authorizations from the Congress. Of this amount, $3.5 billion would cover payments over a 20-year period (2004-2023), while $3.1 billion represents payments for U.S. military access to Kwajalein Atoll in the RMI for the years 2024 through 2086. While the level of annual grant assistance to both countries would decrease each year, contributions to trust funds--meant to eventually replace grant funding--would increase annually by a comparable amount. Nevertheless, at an assumed annual 6 percent rate of return, earnings from the FSM trust fund would be unable to replace expiring grant assistance in 2024, while earnings from the RMI trust fund would encounter the same problem by 2040. The amended Compacts strengthen reporting and monitoring measures that could improve accountability over assistance, if diligently implemented. These measures include the following: assistance grants would be targeted to priority areas such as health and education; annual reporting and consultation requirements would be expanded; and funds could be withheld for noncompliance with grant terms and conditions. The successful implementation of the many new accountability provisions will require appropriate resources and sustained commitment from the United States, the FSM, and the RMI. Regarding defense, U.S. military access to Kwajalein Atoll in the RMI would be extended from 2016 through 2066, with an option to extend through 2086. Finally, Compact provisions addressing immigration have been strengthened. For example, FSM and RMI citizens entering the United States would need to carry a passport, and the U.S. Attorney General could, through regulations, specify the time and conditions of admission to the United States for these citizens.