Appendix II provides additional information on the base and  inflation-adjusted amounts of U.S. compact sector grants and trust fund  contributions in fiscal years 2004 through 2023. U.S. 3). grants.) Compact Trust Funds Face Continuing Risks That Trust Fund Committees Have Not Yet Addressed

Previous studies of the FSM and RMI compact trust funds, including a  review we conducted in 2007, found that after fiscal year 2023 the funds  are unlikely to provide maximum annual disbursements, may provide no  disbursements at all in some years, and are unlikely to sustain the funds’  fiscal year 2023 value. The compact  trust fund committees have not yet prepared distribution policies, required  by the trust fund agreements, that could assist the countries in planning  for the transition to trust fund income. Further, the  trust fund committees have not yet addressed a potential misalignment  between the timing of their annual calculation of the amounts available to  disburse and the FSM’s and RMI’s budget timelines, potentially  complicating each country’s planning and management. This likelihood decreases in later years. Compact Trust Fund Committees Have Not Addressed Issues Related to Distribution Policies, Fiscal Procedures, and Disbursement Timing

			Trust Fund Committees Have Not Developed Distribution Policies Required by the Compact Trust Fund Agreements

Under the compact trust fund agreements, each trust fund committee  must develop a distribution policy, with the intent that compact trust fund  disbursements will provide an annual source of revenue to the FSM and  RMI after fiscal year 2023. FSM, RMI, and U.S. Planning Groups Have Been Formed to Prepare for Transition to Trust Fund Income

Both the FSM and the RMI have formed planning committees and  charged them with planning for the fiscal year 2023 transition from  compact sector grants to compact trust fund income. Recommendations for Executive Action

We are making the following six recommendations to Interior:  The Secretary of the Interior should ensure that the Director of the Office  of Insular Affairs, as Chairman of the FSM compact trust fund committee,  works with other members of the committee to develop a distribution  policy for the FSM compact trust fund, as required by the compact trust  fund agreement, that takes into account potential strategies that could  address risks to the fund’s ability to provide a source of income after fiscal  year 2023. The Department of the Interior, the U.S. The U.S. However, the U.S. This report examines (1) the use and role of federal funds and  programs in the FSM and RMI budgets, (2) projected compact trust fund  disbursements and potential strategies to address risks to those  disbursements, and (3) FSM and RMI efforts to prepare for the scheduled  decrements in compact grant funding and the transition to relying on  compact trust fund income. FSM and RMI Plans

To examine FSM and RMI efforts to prepare for the scheduled compact  grant decrements, we reviewed each country’s decrement management  plans to determine the FSM’s and RMI’s planned budget reductions and  other actions. To assess whether the FSM and RMI strategic plans for the key sectors  of health, education, and infrastructure addressed the 2023 transition  from compact grants and other U.S. assistance to compact trust fund  income, we first obtained the relevant plans from department heads in  each key sector of the FSM and RMI national governments and FSM  state governments and confirmed our identification of the documents with  FSM and RMI officials. FSM states rely on U.S. grants scheduled to end in 2023 for the majority  of their health and education expenditures. While these agreements will  end in 2024, under current law, some U.S. agencies may continue to  provide programs and services similar to those provided in the agreement  under other authorities. Some Programs and Services in the Programs and Services Agreement Will End, while Others May Continue under Other Authorities

Although the programs and services agreements with the FSM and RMI  will end in fiscal year 2024, current U.S. law enables U.S. agencies to  continue providing some programs and services now provided under the  agreements. Not implemented. Appendix XI: Comments from the Federated States of Micronesia

	GAO Comments

1. Appendix XII: Comments from the Republic of the Marshall Islands

	GAO Comments

1.
Why GAO Did This Study

In 2003, the United States approved amended compacts of free association with the FSM and RMI, providing a total of $3.6 billion in economic assistance in fiscal years 2004 through 2023 and access to several U.S. programs and services. Compact grant funding, overseen by the Department of the Interior, generally decreases annually. However, the amount of the annual decrease in grants is added to the annual U.S. contributions to the compact trust funds, managed by joint U.S.-FSM and U.S.-RMI trust fund committees. Trust fund earnings are intended to provide a source of income after compact grants end in 2023, but GAO and others have previously found that the trust funds may not provide sustainable income.
GAO was asked to examine preparations for the transition in 2023. This report examines (1) the use and role of U.S. funds and programs in FSM and RMI budgets, (2) projected trust fund disbursements and potential strategies to address risks to those disbursements, and (3) FSM and RMI plans to prepare for grant decreases and the transition to trust fund income. GAO reviewed compact agreements, audit reports, and U.S. law; modeled trust fund performance under existing conditions and using potential strategies; and reviewed FSM and RMI plans. GAO visited each country and interviewed FSM, RMI, and U.S. officials.

What GAO Found

The Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) continue to rely on U.S. grants and programs, including several that are scheduled to end in 2023. U.S. compact sector and supplemental education grants, both scheduled to end in 2023, support a third of the FSM's and a quarter of the RMI's expenditures. Agreements providing U.S. aviation, disaster relief, postal, weather, and other programs and services are scheduled to end in 2024, but some agencies may provide programs and services similar to those in the agreements under other authorities. FSM and RMI eligibility for some other U.S. grants and programs is expected to continue after 2023.
Disbursements from the compact trust funds face risks that the trust fund committees have not addressed. GAO found that the trust funds are increasingly likely to provide no annual disbursements in some years and to not sustain their value. Potential strategies such as reduced trust fund disbursements or additional contributions from the countries or other sources could help address these risks. Changing the trust fund disbursement policies could also address these risks but may require revising the trust fund agreements with each country. However, the trust fund committees have not prepared distribution policies, required by the agreements, which could assist the countries in planning for the 2023 transition to trust fund income. The committees also have not prepared the required fiscal procedures for oversight of the disbursements or addressed differences between the timing of their annual determination of the disbursement amounts and the FSM's and RMI's annual budget cycles.
The FSM and RMI did not implement planned budget reductions to address decreasing compact grants owing to increased revenues from other sources that offset the grant decreases. Current FSM and RMI infrastructure plans address the 2023 transition, while health and education plans focus on strategic goals. Both countries have established new compact planning committees to identify future challenges and develop plans for the 2023 transition to trust fund income.

What GAO Recommends

GAO recommends that Interior work with the compact trust fund committees to develop distribution policies and fiscal procedures for the funds and to address disbursement timing. Interior concurred with the recommendations.