U.S. Assistance to Palau Is Projected to Exceed $852 Million in 1995-2009

The United States’ cost of providing assistance to Palau in 1995-2009 is  projected to exceed $852 million. The three categories of assistance  mandated by the compact—compact direct assistance, compact federal  services, and compact road construction—represent approximately 48  percent, 3 percent, and 17 percent, respectively, of total projected U.S.  assistance for 1995-2009. U.S. agencies provide the remaining 31 percent of  total assistance through discretionary federal programs. This assistance flows as a direct transfer  payment to the government of Palau. The compact provides for federal postal,  weather, and aviation services in Palau at a level equivalent to the services  provided the year before the compact was implemented. Palau has since made efforts to maintain the  road; however, both U.S. and Palau officials expressed concerns regarding  Palau’s ability to maintain the road in a condition that will allow for the  desired economic development. Five agencies—Education, HHS,  Interior, DOD, and DOT—contributed the majority of this assistance (see  attachment V). Palau Made Progress in Accountability but Has Limited Capacity to Address Internal Control Weaknesses, and Interior’s Oversight Has Been Limited

Although Palau’s more recent single audit reports show improvement in its  financial accountability, the reports show persistent weaknesses in its  internal control over financial reporting, its compliance with some federal  award requirements, and its internal control over compliance with these  requirements. However, Palau has limited capacity to address these  weaknesses in a timely way, putting Palau at risk of being unable to  sustain its improvements in financial accountability and to operate a major  federal program according to applicable requirements. Palau met the  majority of the compact’s and related agreements’ reporting requirements  for accountability over compact funds, but Palau and the U.S. government  did not meet all of the consultation requirements. In addition, the recent single audits show that the reliability of Palau’s  financial statements has improved. However, despite the improved reliability of its financial statements, Palau  has long-standing and significant weaknesses in its internal control over  financial reporting and has limited capacity to address these weaknesses. As a result, Palau  is at risk of being unable to sustain its improvements in financial  accountability. Regarding compliance with the compact and its related agreements, Palau  met the majority of the reporting requirements, submitting the required  economic development plans and annual reports. However, according to Palau and U.S.  officials, the required trust fund consultations did not take place. Interior provided limited oversight of Palau’s accountability for compact  and other U.S. assistance. Interior’s OIA and Office of Inspector General  (OIG) reported efforts to assist or oversee Palau’s accountability for  federal funds. For example, according to Interior officials, Interior has  monitored Palau’s progress in completing and issuing its single audit  reports; used Palau’s single audit and compact annual reports to monitor  Palau’s use of compact funds; and worked with Palau to track single audit  findings and resolve issues. Also, according to Interior officials, OIA has  provided general technical assistance funds to train Palau employees as  well as funds to enhance Palau’s financial management systems and  processes. However, an OIA official said that its oversight of compact  funding has not been extensive and that the compact gives Palau broad  discretion in compact spending. Although the expiration of compact direct assistance at the end of 2009  will reduce the national government’s revenues by about $13.3 million,  Palau will gain access to an additional $10 million in annual financing  when its yearly trust fund withdrawals increase in 2010 from $5 million to  $15 million. Moreover, unless the  federal programs and services agreement is renewed or extended past  2009, Palau will lose postal, weather, and aviation services that are  estimated to cost U.S. agencies almost $1.6 million in 2009. Availability and Value of Trust Fund Withdrawals

Palau’s prospects for economic self-sufficiency also depend in part on the  availability of the planned $15 million annual trust fund withdrawals and  the value of those withdrawals over time. Conclusions and Recommendations

In 2009, the U.S. and Palau governments will formally review the terms of  the compact and its related agreements. Interior’s OIA will remain the cognizant agency  for Palau for compact direct assistance through 2009 and will continue to  review Palau’s single audits as long as U.S. federal program funds are  expended in Palau. To strengthen Palau’s ability to  provide accountability and meet applicable requirements for federal  assistance, our recent report recommends that the Secretary of the  Interior direct the Office of Insular Affairs to formally consult with the  government of Palau regarding Palau’s financial management challenges  and to target future technical assistance toward building Palau’s financial  management capacity. Interior agreed with our recommendation and  identified steps it will take to implement it. The compact federal programs and services agreement—establishing the legal status of  programs and related services, federal agencies, U.S. contractors, and personnel of U.S.  agencies implementing both compact federal services and discretionary federal programs in  Palau—expires in 2009. Requires Palau to report annually on its use of compact funds. Establishes that the United States has full authority and responsibility for security and defense  matters in or relating to Palau.
Why GAO Did This Study

Since 1995, when the Compact of Free Association between Palau and the United States entered into force, U.S. aid to Palau has included assistance provided for in the compact and related subsidiary agreements--direct assistance to the Palau national government, including investment in a trust fund intended to provide $15 million annually from 2010 through 2044; federal postal, weather, and aviation services; and construction of a major road--with the U.S. interest of promoting Palau's self-sufficiency and economic advancement. U.S. assistance to Palau has also included discretionary federal programs, such as health, education, and infrastructure services, that are not provided for in the compact. Compact direct assistance is scheduled to expire on September 30, 2009. In addition, the related subsidiary agreement providing for federal services to Palau will expire on that date unless renewed or extended. At that time, Palau's annual withdrawals from its trust fund can increase from $5 million to $15 million. The compact mandates that the U.S. and Palau governments review the terms of the compact and its related agreements in 2009 and concur on any modifications to those terms. The Department of the Interior's (Interior) Office of Insular Affairs (OIA) has primary responsibility for monitoring and coordinating all U.S. assistance to Palau, and the Department of State (State) is responsible for government-to-government relations. To provide accountability for compact funds, the compact's related agreements require an annual audit of Palau's use of compact funds and require Palau to submit economic development plans, identifying planned expenditures of compact assistance, and annual reports on, among other topics, its implementation of these plans. The U.S. and Palau governments are also required to hold annual economic consultations to review Palau's progress toward self-sufficiency and to consult regarding Palau's trust fund every 5 years. My statement is based on our report, which was released this week. In this report, we examined (1) the provision of compact and other U.S. assistance to Palau in 1995-2009, (2) Palau's and U.S. agencies' efforts to provide accountability over Palau's use of federal funds, and (3) Palau's prospects for achieving economic self-sufficiency. We conducted this performance audit from October 2007 to June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

What GAO Found

U.S. aid to Palau in 1995-2009 is expected to exceed $852 million. Compact direct assistance, providing general budgetary support for Palau's government operations, is projected at $411 million, or 48 percent of the assistance provided. The provision of compact federal services--postal, weather, and aviation--is projected at about $25 million, or 3 percent of the assistance, and the compact road construction accounted for $149 million, or 17 percent of the assistance. Palau's receipt of discretionary federal program assistance is projected at $267 million, or 31 percent of the total assistance provided. In 1995-2006, five U.S. agencies--the Departments of Education (Education), Health and Human Services (HHS), Interior, Defense (DOD), and Transportation (DOT)--contributed the majority of discretionary federal program assistance to Palau. Palau has made progress in establishing financial accountability, despite limited capacity to address persistent internal control weaknesses, and has met most compact accountability requirements; however, Interior's monitoring of Palau's accountability has been limited. Palau's single audit reports for 1995-2006 show that it improved its timeliness in submitting the reports and improved the reliability of its financial statements. However, the reports show persistent weaknesses in Palau's internal controls over financial reporting; the reports also indicate that Palau has not complied with all federal award requirements and show persistent weaknesses in Palau's internal controls over compliance with these requirements. Although Palau has developed plans to correct these weaknesses, limited capacity in financial accounting resources and expertise puts at risk Palau's ability to sustain its improvements in financial accountability and to operate a major federal program within applicable requirements. Palau met the majority of the compact's and related agreements' accountability requirements, such as submitting annual reports and economic development plans. OIA and State officials, as well as officials from the government of Palau, reported that they participated in the required economic consultations but that the meetings were not held annually. Moreover, U.S. and Palau officials acknowledged that the required trust fund consultations were not held at all. According to OIA officials, OIA has used Palau's single audit results and compact annual reports to monitor Palau's use of compact funds and has provided technical assistance funds to train Palau employees as well as funds to enhance Palau's financial management systems and processes. However, OIA officials said that Interior views its oversight role as limited. To improve Palau's ability to sustain its improvements in financial reporting and address its internal control weaknesses, our report recommends that the Secretary of the Interior direct OIA to formally consult with the government of Palau regarding Palau's financial management challenges and target future technical assistance toward building Palau's financial management capacity. Responding to a draft of our report, Interior agreed with our recommendation and identified steps it will take to implement it.