Foreign Assistance: Effectiveness and Accountability Problems	 
Common in U.S. Programs to Assist Two Micronesian Nations	 
(22-JAN-02, GAO-02-70). 					 
								 
The domestic programs extended by the United States to the	 
Federated States of Micronesia (FSM) and the Republic of the	 
Marshall Islands (RMI) were used to provide a wide range of	 
critical services, such as health care, education,		 
telecommunications, and job training, but in most cases local	 
conditions have impaired their effectiveness. GAO found that	 
local conditions limited the effectiveness of nine of the 13	 
programs in both countries. GAO found that these programs,	 
originally designed for the United States, faced a variety of	 
problems operating in developing island nations because of	 
differing geographic, economic, and social conditions. The two	 
nations' administration of the 13 programs GAO reviewed generally
did not ensure financial accountability. Nine of the 13 programs 
GAO reviewed experienced accountability problems, including five 
that experienced instances of theft or misuse of program funds.  
The two nations lacked the administrative capacity necessary to  
meet the complex accountability requirements of federal programs,
and federal program managers did not provide the necessary	 
training. Just as the two nations were unable to ensure financial
accountability for their program administration, so too was U.S. 
government oversight unable to ensure financial accountability.  
Although some federal departments attempted to provide oversight,
even these departments could not ensure effective accountability 
because of the travel cost, distance, and time involved, and	 
because of the relatively small size of the programs in the	 
region. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-70						        
    ACCNO:   A02690						        
  TITLE:     Foreign Assistance: Effectiveness and Accountability     
Problems Common in U.S. Programs to Assist Two Micronesian	 
Nations 							 
     DATE:   01/22/2002 
  SUBJECT:   Accountability					 
	     Economic development				 
	     Foreign economic assistance			 
	     Foreign governments				 
	     International agreements				 
	     International relations				 
	     Reporting requirements				 
	     Economically depressed areas			 
	     Compact of Free Association			 
	     Federal Disaster Assistance Program		 
	     Freely Associated States Educational		 
	     Grant						 
								 
	     Head Start Program 				 
	     HHS Maternal and Child Health Program		 
	     Job Training Partnership Act Program		 
	     Marshall Islands					 
	     Maternal and Child Health Block Grant		 
	     Micronesia 					 
	     Pell Grant 					 
	     Pohnpei Head Start Program 			 
	     Special Education Program for Pacific		 
	     Island Entities					 
								 

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GAO-02-70
     
A

Report to Congressional Requesters

January 2002 FOREIGN ASSISTANCE Effectiveness and Accountability Problems
Common in U. S. Programs to Assist Two Micronesian Nations

GAO- 02- 70

Letter 1 Results in Brief 3 Background 5 Federal Programs Provided Important
Services, but

Effectiveness Was Generally Hindered by Many Factors 11 Most Programs Have
Accountability Problems 44 Federal Administration Has Not Ensured Financial

Accountability 54 Conclusions 59 Recommendation for Executive Action 60
Agency Comments 61

Appendixes

Appendix I: Objectives, Scope, and Methodology 64

Appendix II: GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands 66

Appendix III: Comments from the Department of the Interior 88 GAO Comments
90

Appendix IV: Comments from the Department of State 91 GAO Comments 94

Appendix V: Comments from the Department of Health and Human Services 95 GAO
Comments 100

Appendix VI: Comments from the Government of the Federated States of
Micronesia 102 GAO Comments 109

Appendix VII: Comments from the Government of the Republic of the Marshall
Islands 113 GAO Comments 123

Appendix VIII: GAO Contact and Staff Acknowledgments 125 GAO Contact 125
Acknowledgments 125

Related GAO Products 126 Tables Table 1: Overview of 13 Programs Reviewed by
GAO 13

Table 2: The Head Start Program 66 Table 3: The Special Education Program
for Pacific Island Entities

(SEPPIE) 68 Table 4: The Freely Associated States Educational Grant (FASEG)
Program 70

Table 5: The Pell Grants Program 72 Table 6: The Job Training Partnership
Act (JTPA) Program 73 Table 7: The Maternal and Child Health (MCH) Block
Grants Program 75

Table 8: The U. S. Department of Agriculture?s (USDA) Rural Housing Service
(RHS) Housing Loan Program 76 Table 9: U. S. Department of Agriculture?s
(USDA) Rural Utilities

Service (RUS) Telecommunications Loans Program 79 Table 10: The U. S.
Department of Agriculture?s (USDA) Rural Utilities Service (RUS) Electrical
Loans Program 81

Table 11: The Federal Emergency Management Agency (FEMA) Program 83 Table
12: The U. S. Postal Service (USPS) Program 84 Table 13: The Federal
Aviation Administration (FAA) Program 86 Table 14: The National Weather
Service (NWS) Program 87

Figures Figure 1: Location and Map of the Federated States of Micronesia and
the Republic of the Marshall Islands 7

Figure 2: SEPPIE, Child Find Poster for Special Education, Pohnpei, FSM 18
Figure 3: FASEG, Marshallese- English Story Book and Marshallese Phonics
Book, Developed by and Published with FASEG

Support, Majuro, RMI 19 Figure 4: Pell Grant- Assisted Students in Class,
College of the Marshall Islands, Majuro, RMI 20

Figure 5: JTPA Carpentry Class, Majuro, RMI 21 Figure 6: Maternal and Child
Health Laboratory in Hospital,

Majuro, RMI 22 Figure 7: FEMA Assistance (Bridge Replacement) in Pohnpei,

FSM 23 Figure 8: FEMA Drought Assistance (Home Water Catchment

Container), Kosrae, FSM 24 Figure 9: Head Start Center, Science Area [shows
lack of space],

Majuro, RMI 27 Figure 10: Head Start Playground [shows inadequate
playground],

Majuro, RMI 28

Figure 11: Mail Awaiting Sorting and Placement in Post Office Boxes at the
Pohnpei Post Office, FSM 34 Figure 12: FSM Telecommunications Corporation
Building Exterior,

Pohnpei, FSM 36 Figure 13: Rural Utilities Service Electric Loan: New
Electric Power

Facility, Marshalls Energy Corporation, Majuro, RMI 37 Figure 14: Aviation
Services: FAA- Provided Electrical Power

Generator in Honolulu, Hawaii, Headed for the FSM and the RMI 39 Figure 15:
Aviation Services: FAA- Provided Equipment in Honolulu, Hawaii, Headed for
the FSM and the RMI 40

Figure 16: Weather Service: Sign Showing Close Collaboration between NWS and
Pohnpei Weather Service Office in Pohnpei, FSM 41

Figure 17: Rural Housing Loans: Home of the FSM President, Financed with Two
RHS loans; Typical RHS Loan- Financed Homes, Pohnpei, FSM 48 Figure 18:
Rural Housing Loan: Home of Former Pohnpei State

Housing Authority Director, Financed with an RHS Loan, Pohnpei, FSM 50
Figure 19: Postal Services: Open Safe Reflects Lax Security,

Pohnpei, FSM 52

Abbreviations

FAA Federal Aviation Administration FASEG Freely Associated States
Educational Grants FEMA Federal Emergency Management Agency FSM Federated
States of Micronesia FSMTC Federated States of Micronesia Telecommunications

Corporation HHS Health and Human Services JTPA Job Training Partnership Act
MCH Maternal and Child Health MINTA Marshall Islands National
Telecommunication Authority NWS National Weather Service RHS Rural Housing
Service RMI Republic of the Marshall Islands RUS Rural Utilities Service
SEPPIE Special Education Program for Pacific Island Entities USDA U. S.
Department of Agriculture USPS U. S. Postal Service

Lett er

January 22, 2002 The Honorable James V. Hansen Chairman Committee on
Resources House of Representatives

The Honorable Tom Lantos Ranking Minority Member Committee on International
Relations House of Representatives

The Honorable James A. Leach Chairman, Subcommittee on East Asia and the
Pacific Committee on International Relations House of Representatives

The Honorable Doug Bereuter House of Representatives In 1986, the U. S.
government entered into a Compact of Free Association (Compact) with the
Federated States of Micronesia and the Republic of the Marshall Islands.
Under the Compact, the United States was authorized to provide federal
programs, such as grants, services, technical assistance,

and loans to the two nations. The United States was also authorized to
provide aviation, disaster relief, postal, and weather services. 1 The cost
of program assistance extended to the two countries was about $700 million

for the period beginning in fiscal year 1987 and ending in fiscal year 2001.
2 The United States designated the Department of the Interior as the agency
responsible for coordinating and monitoring these federal programs, loans,
and services.

1 Under the Compact, the United States also provided direct financial
assistance. We reported on this assistance in Foreign Assistance: U. S.
Funds to Two Micronesian Nations Had Little Impact on Economic Development
(GAO/ NSIAD- 00- 216, Sept. 22, 2000). 2 Relying on information from U. S.
agencies, we previously documented the amount of program assistance provided
during 1987- 99. See Foreign Relations: Better Accountability

Needed over U. S. Assistance to Micronesia and the Marshall Islands (GAO/
RCED- 00- 67, May 31, 2000). We have estimated program costs for fiscal
years 2000 and 2001. The figure of $700 million does not include payments to
the Republic of the Marshall Islands related to nuclear testing compensation
and is based on partial data, known to understate amounts.

In the fall of 1999, the United States and the two nations began
negotiations on extending the financial provisions of the Compact, which
expired in 2001. These negotiations also included discussions about the
continued

provision of several U. S. programs. 3 To assist the Congress in its review
of proposals for extending assistance, you asked us to report on the
effectiveness and accountability of U. S. programs, loans, and services
provided to the Federated States of Micronesia and the Republic of the
Marshall Islands. In response, we (1) assessed the use and effectiveness of
key U. S. programs, loans, and services provided to both nations; (2)
evaluated whether each nation?s administration of these programs ensured
financial accountability; and (3) evaluated whether the U. S. government?s
oversight of these programs ensured financial accountability. 4 We selected
13 programs and services to review, 5 including those with the largest
expenditures and loans over the past 15 years, as well as each of the
services that the U. S. government agreed to provide under the Compact. To
determine the use and effectiveness of U. S. programs and services, we
reviewed legislation, regulations, and monitoring reports. We also
interviewed program recipients and program managers in the United States, in
Pohnpei and Kosrae States of the Federated States of Micronesia, and in
Majuro, in the Republic of the Marshall Islands. We determined that these U.
S. domestic programs were effective by using two separate measures. The
first considered whether the programs met their program

performance requirements and standards, as detailed in their legislation 3
Compact provisions related to economic assistance, access to U. S. federal
services and certain programs, and defense obligations were to expire on
October 21, 2001, for the Republic of the Marshall Islands and on October 1,
2001, for the Federated States of Micronesia. The expiring provisions of the
Compact remain in full force and effect for up to 2 additional years while
negotiations are underway.

4 At your request, we attempted to report on the administrative costs of
implementing these programs in the islands. However, this information was
not available. Most agencies administering programs in the islands from
Washington, D. C., or San Francisco were unable to segregate their costs for
running the programs. 5 These programs were (1) Head Start for preschoolers,
(2) Special Education Program for Pacific Island Entities, (3) Freely
Associated States Education Grants, (4) Pell Grants for college education,
(5) job training for adults (Job Training Partnership Act), (6) Maternal and
Child Health, (7) U. S. Department of Agriculture?s Rural Housing Service
single family home loans, (8) U. S. Department of Agriculture?s Rural
Utilities Service Telecommunications loans, (9) U. S. Department of
Agriculture?s Rural Utilities Service Electrical loans, (10) Federal
Emergency Management Agency?s assistance, (11) U. S. Postal Service, (12)
Federal Aviation Administration service, and (13) U. S. National Weather
Service.

and regulations. The second measure considered whether the programs were
able to achieve broader program goals given the conditions that existed in
the Federated States of Micronesia and the Republic of the Marshall Islands,
including those that could significantly reduce potential program
accomplishments or increase costs. To be considered effective, the program
had to meet all performance requirements and standards and had to overcome
conditions that could significantly reduce broader program accomplishments
or increase costs. To evaluate whether the joint U. S., Micronesian, and
Marshallese administration of these programs ensured financial
accountability, we identified requirements in legislation

and regulations, reviewed monitoring reports and financial audits, and
discussed accountability issues with program managers in each country. (For
further details regarding our scope and methodology, see app. I.)

Results in Brief The domestic programs extended by the United States to the
Federated States of Micronesia and the Republic of the Marshall Islands were
used to provide a wide range of critical services, such as health care,
education,

telecommunications, and job training, but in most cases local conditions
have impaired their effectiveness. In total, we found that local conditions
limited the effectiveness of 9 of the 13 programs in both countries. 6 We
found that these programs, originally designed for the United States, faced

a variety of problems operating in developing island nations because of
differing geographic, economic, and social conditions. 7 For example, four
education and health programs were hindered by the lack of local government
financial support for each sector, the poor state of the local education
system, or the lack of medical capacity commonly found in the

United States. The four effective programs generally shared the following
characteristics: they were focused in scope, they were principally managed
by U. S. employees or well- trained nationals, and they used the same
infrastructure that supported these services in the United States. 8 A

6 Programs that either could not meet their performance requirements or
faced local conditions that hampered their effectiveness were (1) Head Start
for preschoolers, (2) special education, (3) elementary and secondary school
improvements, (4) Pell Grants for college education, (5) job training for
adults, (6) Maternal and Child Health, (7) housing loans, (8) disaster
response, and (9) postal services. 7 These programs were ineffective,
despite generally meeting their performance

requirements and standards, because of problems related to implementing
domestic programs in the FSM and the RMI: (1) special education, (2)
elementary and secondary school improvements, (3) Pell Grants for college
education, (4) housing loans , (5) disaster response, and (6) postal
services.

separate problem, loan repayment, may adversely affect the three loan
programs in the future if U. S. Compact assistance to the two countries is
reduced. The two nations? administration of the 13 programs we reviewed
generally did not ensure financial accountability. In all, 9 of the 13
programs we reviewed experienced accountability problems, including 5 that
experienced instances of theft or misuse of program funds. 9 Instances of

theft, fraud, or abuse of program funds were documented in (1) Head Start,
(2) elementary and secondary school improvement grants, (3) rural housing
loans, (4) disaster response, and (5) postal services. In general, the two
nations lacked the administrative capacity necessary to meet the complex
accountability requirements of federal programs, and federal program
managers did not provide the necessary training. In contrast, accountability
was adequate for aviation and weather services and for power and
telecommunications loans, primarily because the United States controlled
program funds and little direct funding was provided to each

nation. Just as the two nations were unable to ensure financial
accountability for their program administration, so too was U. S. government
oversight unable to ensure financial accountability. The Department of the
Interior, which was charged with coordinating and monitoring the individual
federal programs, neither coordinated nor monitored the federal programs

because it lacked the necessary resources, according to Interior officials.
In addition, the State Department, whose chief of mission was responsible
for direction and coordination of U. S. agency officials in foreign
countries, could not meet its responsibility because the U. S. program
managers often bypassed the State Department and U. S. embassies. Although
some federal departments attempted to provide oversight, such as for the
Head Start and

Pell Grants programs, even these departments could not ensure effective
accountability because of the travel cost, distance, and time involved, and
8 Programs that generally met their performance requirements and did not
face limitations attributable to local conditions were (1) aviation
services, (2) weather services, (3) telecommunications loans, and (4)
electric power loans. 9 We found that several of the programs had met their
program performance requirements yet still had accountability problems; in
many cases, the program and finance offices were completely separate offices
and operations. Programs that experienced accountability

problems included (1) Head Start for preschoolers, (2) special education,
(3) education grants, (4) Pell Grants for college education, (5) job
training for adults, (6) Maternal and Child Health, (7) rural housing loans,
(8) disaster response, and (9) postal services.

because of the relatively small size of the programs in the region, as
compared with larger programs in the United States. During the Compact?s
existence, few U. S. program managers had ever visited the region to conduct
on- site assessments. In this report, we recommend that the Secretaries of
the Interior and State report to the Congress on strategies for improving
the performance and delivery of any future program assistance.

We provided a draft of this report to the Departments of the Interior,
State, Agriculture, Commerce, Health and Human Services, Education, Labor,
and Transportation, as well as to the Federal Emergency Management Agency
(FEMA); the U. S. Postal Service; and the governments of the Federated
States of Micronesia and the Republic of the Marshall Islands. The
Departments of Agriculture, Commerce, Education, Labor, and

Transportation, as well as FEMA and the U. S. Postal Service, chose to
provide informal comments, which we incorporated into the report as
appropriate. The Departments of the Interior, State, and Health and Human
Services generally agreed with our draft report. The Federated States of
Micronesia government generally agreed with our findings and recommendation.
The government also provided technical comments and indicated that we did
not fully appreciate that the programs have been

?surprisingly successful against almost insurmountable odds.? The Republic
of the Marshall Islands government also generally agreed with the draft
report but had numerous comments on individual programs, as well as a
historical perspective on the Compact and its relation to U. S. program

management and oversight options. Where we agreed that the additional
information was appropriate, we incorporated the changes into the final
report. Background The Federated States of Micronesia (FSM) is a grouping of
607 small islands with a total land area of about 270 square miles. FSM is
located in the western Pacific, about 2,500 miles southwest of Hawaii, lying
just above

the equator. FSM comprises four states- Chuuk, Pohnpei, Yap, and Kosrae-
that had an estimated total population of 107, 000 in 2000. 10 The Republic
of the Marshall Islands (RMI) is made up of more than 1,200

10 The FSM Department of Foreign Affairs provided this population figure to
us. The FSM Department of Economic Affairs is finalizing the FSM 2000 census
results and has not yet released the updated FSM population figure.

islands, islets, and atolls, with a total land area of about 70 square
miles. RMI is located in the central Pacific, about 2,100 miles southwest of
Hawaii. The RMI had a total population of approximately 50,840. See figure 1
for a map of the FSM and the RMI.

Figure 1: Location and Map of the Federated States of Micronesia and the
Republic of the Marshall Islands

Note: These maps do not represent the actual territory of the FSM and the
RMI. Source: GAO.

Since World War II, the United States has provided government support to the
FSM and the RMI and extended federal programs, such as housing and food
assistance. 11 In addition, the United States provided for their defense;
built roads, hospitals, and schools; provided support for government
operations; and funded health and education systems. In 1986, the United
States entered into a Compact of Free Association with the FSM and the RMI,
a process that ended U. S. administration under a United Nations mandate and
secured both nations? self- governance and certain defense rights for the
FSM, the RMI, and the United States. The Compact provided direct financial
payments to promote economic development in each

nation. These annual financial payments totaled about $2 billion from fiscal
year 1987 through fiscal year 2001. Previously we reported that these
payments supported general government operations but had led to little
improvement in economic development, with both nations remaining highly
dependent on U. S. assistance. Economic self- sufficiency at current

living standards remains a distant goal for the FSM and the RMI. In
addition, in reviewing these expenditures, we found that the island
governments and the U. S. Departments of the Interior and State have
provided limited accountability over the Compact expenditures. 12

The Compact also stated that U. S. federal agencies could provide direct
program assistance as authorized by the Congress, which included the grants,
loans, and technical assistance provided by individual federal agencies. In
addition, the Compact identified several federal services to be supplied by
specifically identified agencies: postal services, aviation, and

weather were to be provided by specific agencies (and then reimbursed by
Interior), while the Federal Emergency Management Agency was to provide
disaster relief. In total, the program assistance provided by 19 U. S.
departments and agencies from 1987 through 2001 totaled about $700 million,
which included money for the 13 grant, loan, and service programs that were
the focus of this report. 11 See David Hanlon, Remaking Micronesia:
Discourses over Development in a Pacific Territory, 1944- 1982 (Honolulu:
University of Hawaii Press, 1998). Having driven the

Japanese from these islands in World War II, the U. S. Department of the
Navy began civil administration of Micronesia and the Marshall Islands on
July 18, 1947, as part of the United Nations Trust Territory of the Pacific
Islands. This responsibility was transferred to the Department of the
Interior in July 1951.

12 See Foreign Assistance: U. S. Funds to Two Micronesian Nations Had Little
Impact on Economic Development (GAO/ NSIAD- 00- 216, Sept. 22, 2000). Our
estimate of Compact payments excludes payments to the RMI related to nuclear
compensation.

Under the Compact?s implementing legislation and by executive order,
Interior was made responsible for supervising, coordinating, and monitoring
program assistance to the FSM and the RMI. 13 The Foreign Service Act of
1980 (P. L. 96- 465) stated that the Department of State Chief of Mission
was responsible for the direction and coordination of all U. S.

government employees in foreign countries. Further, presidential
instructions to U. S. chiefs of mission in foreign nations charged them with
the direction, coordination, and supervision of all executive branch offices
and personnel in their nation. 14 The FSM and the RMI were developing
countries that, like other Pacific

island nations, faced significant development challenges because of their
small economies, few natural resources, remote location, and limited
institutional capacity. 15 The economies of both nations were dependent on
U. S. assistance provided through the Compact for most of their income, as
they had almost no commercial production. U. S. assistance accounted for a
majority of government revenues in both nations, and the governments were
the primary employer in both nations. Significant unemployment

existed and has increased as the governments have cut employment in response
to scheduled reductions in U. S. payments made under the Compact,
contributing to outward migration. 16 The FSM and the RMI, as developing
nations, faced unique challenges in operating their health and education
programs, as compared with the United States. According to a 1998 study,
challenges for the FSM and the

RMI?s delivery of health care services included (1) lack of preventive
health care, (2) long distances to travel in order to provide care in remote
places, (3) dependence on declining levels of U. S. foreign aid, (4)
inadequate fiscal and personnel management systems, (5) poorly maintained
and equipped

13 The Compact of Free Association Act of 1985, Public Law 99- 239. The
Compact implementing legislation said that all programs and services
provided to the FSM and the RMI may be provided only after consultation with
and under the supervision of the Secretary of the Interior. This role and
responsibility was reinforced in Executive Order 12569, issued in 1986. 14
This does not apply to employees under the command of U. S. area military
commander.

15 See Foreign Assistance: Lessons Learned from Donors? Experiences in the
Pacific Region (GAO- 01- 808, Aug. 17, 2001). 16 The Compact grants the
citizens of the FSM and the RMI the right to live and work in the United
States. See Foreign Assistance: Migration from Micronesian Nations Has Had
Significant Impact on U. S. Island Areas (GAO- 02- 40, Oct. 5, 2001).

health care facilities, (6) the enormous costs associated with sending
patients off- island for specialized care, and (7) shortages of adequately
trained health professionals. 17 Likewise, the education system in both
countries faced challenges not found throughout the United States, including
high drop- out rates, poorly trained teachers, lack of adequate buildings
and supplies, and low academic achievement. The education

systems of both nations were also dependent on declining levels of U. S.
aid, which may place additional challenges on the education systems. In the
RMI, 68 percent of education funding came from the United States; in the
FSM, 98 percent of education funds were from the United States.

In June 2000, the Department of State?s negotiator for the Compact testified
that the general approach to the new negotiations with the FSM and the RMI
included sector grants, a trust fund, and continued provision of some U. S.
program assistance for the term of the annual financial assistance. The
negotiator testified that the executive branch was considering reporting
annually to the Congress on actions that could improve program

effectiveness, including the consideration of grant consolidation across
programs. The November 2000 U. S. proposal to the FSM for future economic
assistance through fiscal year 2016 included a reduction in total assistance
but an increase in U. S. Compact funds for health and education, as compared
with current levels. The proposal also included a section on services and
program assistance scheduled through 2016. Weather and aviation services
were to be continued at a level to be negotiated. The proposal eliminated
the commitment of disaster relief from the United States, but it included a
modest disaster preparedness grant for the first 5 years of the agreement.
Additionally, the USPS was to continue service, with the provision of
special services set forth in a subsidiary agreement.

These special services to be negotiated may include "express mail" and money
orders, but not collect- on- delivery. The proposal stated that the United
States would continue to provide, through fiscal year 2016, the programs of
the Departments of Education, Health and Human Services, and Labor on the
same basis or to the same extent as they were provided on October 1, 1999.
The United States did not propose providing Department of Agriculture
programs to the FSM. 18 The United States had not presented an assistance
proposal to the RMI. 19

17 See Pacific Partnerships for Health, Charting a New Course (Washington,
D. C.: National Academy Press, Institute of Medicine, 1998).

Federal Programs The 13 federal grant, loan, and service programs we
reviewed provided a

Provided Important wide array of assistance to the FSM and the RMI that U.
S. embassy and

country officials viewed as critical to these nations. However, local
Services, but conditions limited the effectiveness of 9 of the 13 programs.
We determined Effectiveness Was that these U. S. domestic programs were
effective by using two separate Generally Hindered by measures: first,
whether the programs met their program performance

requirements and standards, as detailed in their legislation and
regulations; Many Factors

second, whether the programs were able to achieve broader program goals,
given the conditions that existed in the FSM and the RMI, including those
that could significantly reduce potential program benefits or increase

costs. To be considered effective, the program had to meet all performance
requirements and standards and to overcome conditions that could
significantly reduce broader program accomplishments or increase costs. We
found that, even in programs that met their requirements and standards,
local conditions often reduced their potential effectiveness. Almost all of
them faced problems caused by attempting to implement programs in the FSM
and the RMI that were designed for the United States. Such problems included
(1) the lack of complementary public and private health care

services and financing typically found in the United States, necessary to
support the Head Start, special education, and Maternal and Child Health
programs; (2) limited opportunities for graduates of the job training
program; and (3) the lack of contractors, building supplies, and support
services typically found in the United States and used to respond to
disasters. In addition, the federal education and health programs and
resources usually supplement state and local resources in the United States.
These resources did not exist in the FSM or the RMI, where federal programs
were the primary and often the only funding source for an

activity. As a result of these problems, the effectiveness of the U. S.
programs was limited. The aviation and weather programs, as well as two of
the three loan programs, were effective in large part because they were
narrow in scope or relied on well- trained local staff and dedicated U. S.
resources. In 18 The U. S. proposal discusses additional programs and
services that were not part of this report?s scope. In addition, there were
sections dealing with sector grants, a trust fund, and

accountability requirements. 19 During 2001, the United States has met with
both the FSM and the RMI regarding extending Compact provisions.

addition, all three loan programs (two of which were effective, and one
ineffective) may experience future repayment problems if U. S. Compact
assistance levels are reduced. (See app. II for a more detailed discussion
of each program, including the program performance requirements and
standards, our assessment against those standards, and our assessment of
whether the program encountered conditions in the countries that
significantly reduced potential program accomplishments.)

Programs Provided Diverse We found that the 13 programs we reviewed, which
encompassed grants,

and Important Services loans, and operational support, provided numerous,
and in many cases

important, services to the citizens of the FSM and the RMI. For example,
because of the U. S. programs, preschool children received health,
education, and nutritional services; special needs children received special
education services; elementary and secondary schools received school
supplies and teacher training; and college students received tuition grants.
In addition, mothers and children were provided health services, and adults
received job training to improve their employment prospects. The housing

stock, telecommunications capacity, and electrical supply were improved
through U. S. loan programs, while disaster response, postal delivery,
aviation, and weather forecasting were provided by U. S. agencies.

U. S. embassy, FSM, and RMI officials reported that these were critical
programs in each country. Without exception, FSM and RMI program officials
said that their countries were dependent on these programs. For example,
according to FSM and RMI officials, the loss of U. S. programs would end
special education assistance, the poorly supplied school systems might stop
functioning entirely, and the sole U. S.- accredited colleges in the FSM and
the RMI might collapse. Program officials further

stated that the loss of disaster assistance, postal services, aviation
programs, and weather services would severely affect their economic
development. Program managers doubted that their own governments would have
sufficient resources to finance these activities in the absence of the U. S.
federal programs.

Table 1 identifies the 13 programs we reviewed, the purpose and funding
level of each program, and a brief description of program accomplishments in
each country.

Table 1: Overview of 13 Programs Reviewed by GAO Accomplishments Program,
department, and purpose funding - FY 1987- 1999/ FY 2000 FSM RMI

dollars in millions Head Start:

Head Start provided comprehensive health, Head Start provided comprehensive
health, education, and nutrition services to about 1, 800 education, and
nutrition services to about 1,200 Department of Health and preschool
children each year through 94 centers preschool children each year. Services
were Human Services

and 391 support staff. Accomplishments included provided through 48 centers
and 74 teachers, 54 (HHS)

(1) helping children with health, nutrition, and teachers? aides, and 71
support staff. The program learning deficits; (2) creating preschool
programs; has served more than 8,400 children since it began Provides
health, education,

(3) encouraging parental support for the children?s in 1994. Accomplishments
included (1) helping

and other services to prekindergarten education; and (4) initiating a
preschool teaching children with health, nutrition, and learning deficits;
children

certificate program at the College of Micronesia. (2) preparing children for
school; and (3) fostering parental support for education.

FSM: $12. 8 /$ 4.1 RMI: $17.6/$ 2. 6

Special Education Program This grant provided the majority of program funds
This grant provided the majority of program funds

for Pacific Island Entities for children with disabilities needing special
for children with disabilities needing special (SEPPIE):

education. In school year 1998- 99, about 2,074 education. In September
2000, about 625 students students were in the special education program in
were in the special education program in the RMI. Department of Education

the four states of the FSM. They were taught by They were taught by about 86
teachers. The about 191 teachers. The special education

program was at work in 54 public schools Provides direct service needs
program provided assistants for home- bound throughout the RMI. The special
education and long- term capacity children, transportation to schools, and
facility program provided assistants for home- bound building for children
with modifications. Because of the low educational level

children, transportation to schools, and facility special needs

of special education teachers, approximately 16 modifications. Because of
the low educational level percent of the grant was spent providing teacher
of special education teachers, almost 19 percent of FSM: $ 23. 7/ $3.8
training. SEPPIE funded almost all special

the grant was spent providing staff training. RMI: $ 9.4/ $1. 7

education expenses. The remaining expenses SEPPIE funded all special
education expenses.

were covered by U. S. Compact funds passed In instances where disabilities
were so severe that

through the FSM governments. the children would never achieve independence,

In instances where disabilities were so severe that parents reported that
SEPPIE training made the the children would never achieve independence,
children less of a burden at home. parents reported that SEPPIE training
made the children less of a burden at home.

(Continued From Previous Page)

Accomplishments Program, department, and purpose funding - FY 1987- 1999/ FY
2000 FSM RMI

dollars in millions

Freely Associated States This grant has provided most of the school supplies
This grant has provided most of the school supplies Educational Grant
(FASEG)

in the FSM. Each state administered its own grant. in the RMI. Throughout
this island nation, 77 public Program: a Nationwide, 166 public elementary
schools served elementary schools served almost 8,800 children, about 23,
600 children, and 28 public secondary and 3 public secondary schools served
almost Department of Education

schools served about 5, 500 students. Generally 1,200 students. Generally,
FASEG?s $860,000 FASEG?s $3. 1 million in grants provided most grant
provided most educational materials, books, Provides funds for direct
educational materials, books, school supplies, vocational education
materials, computers, etc. It educational services in

copiers, computers, air conditioners, etc. It also also provided teacher
training funds, with about 200 elementary and secondary provided teacher
training funds. Generally, teachers trained annually. Teachers? salaries
were schools such as school

teachers? salaries were paid by using Compact paid from Compact funds.

supplies, teacher training, and funds. school improvement

FSM: $8. 3/ $3. 1 RMI: $2. 4/ $0. 860

Pell Grants: Pell Grants provided 13, 704 students with grant

Pell Grants provided 4,375 students with grant assistance to attend the
College of Micronesia (a 2year, assistance to attend the College of the
Marshall Department of Education U. S.- accredited college) between 1988 and

Islands (a 2- year, U. S.- accredited college) between 2000. In addition,
Pell Grants also provided grant 1993 and 2000. In addition, Pell Grants also
Provide access to college assistance for FSM students attending U. S.
provided grant assistance for RMI students education colleges. Pell Grants
were the major source of attending U. S. colleges. Pell Grants were the
major funding for the college; loss of Pell Grants would

source of funding for the college; loss of Pell Grants FSM: $19. 3/$ 4.4
bankrupt the college and eliminate the sole

would bankrupt the college and eliminate the sole RMI: $6. 6/$ 1.7
opportunity for most citizens to obtain a local, U. S. accredited
opportunity for most citizens to obtain a local U. S.-

college education. accredited college education.

[The Department of Education provided an additional $6 million for Pell
Grants from 1987 through 1991 but could not report the amount by country.]
Job Training Partnership Act FSM JTPA officials said that 3,263 adults and

The JTPA program reported that it provided (JTPA): Adult Training teenagers
were trained from 1995 to 1999, of training to 2,474 clients from 1995 to
1999. JTPA whom 1,204 were employed 90 days after their

was the primary job training program in RMI. It Department of Labor
training. JTPA was the primary job training employed 28 staff persons to
administer the program in the FSM. The Pohnpei program

program and provide training. RMI officials said that Provides job training
for adults

employed 23 staff in training and administrative JTPA was critical in
helping the disadvantaged for increased employment and

positions. Officials said that the training significantly improve the lives
of trainees through employment. earnings

contributed to their ability to improve the lives of trainees through
employment. This included 210 FSM: $10.9/$ 0. 2 b youths working in the
United States as nurses and RMI: $5. 5/$ 0.4 b amusement park attendants.
The Kosrae program trained 270 clients, and 65 were placed in employment.
Many trainees have moved overseas for better- paying jobs.

(Continued From Previous Page)

Accomplishments Program, department, and purpose funding - FY 1987- 1999/ FY
2000 FSM RMI

dollars in millions Maternal and Child Health The FSM reported that health
services were The RMI reported that health services were (MCH) Block Grants
Program:

provided to 70, 810 mothers and children in 1999 provided to 4, 756 mothers
and children in 1999

alone. Services were provided by 36 staff in alone. Services were provided
at 2 hospitals and Department of Health and hospitals and clinics. The
program has resulted in 60 clinics. The program has resulted in a large
Human Services

a large increase in health services provided to increase in health services
provided to mothers and mothers and their children. Reported their children.
RMI/ MCH officials listed the following

Provides health services to accomplishments include (1) an increase in MCH
as accomplishments of the MCH program: (1) the

mothers and children services to the target population; (2) a reduction in
provision of preventive health services to the fertility rates; (3) no
recent outbreaks of measles, majority of the population and (2) reduced

FSM: $7. 0/$ 0. 56 mumps, or polio because of immunizations; and (4)

childhood diseases through immunizations. RMI: $3. 9/$ 0. 24

greater social acceptance of children with special needs.

Rural Housing (loans and USDA loans have built or renovated an estimated
USDA loans have built 14 percent of the RMI

grants): 37 percent of the FSM housing stock since the

housing stock, making RHS the primary housing beginning of the Compact. In
fact, the Rural financier. Between 1987 and 2000, about 937 U. S. Department
of Housing Service was the primary financier of home

housing loans, valued at almost $3.2 million, and Agriculture (USDA)

construction and renovation in the FSM. Each 218 housing grants, valued at
about $913, 000, state of the FSM had a separately administered

were provided to residents to build, renovate, or Provides housing grants
and program. Between 1987 and 2000, more than

repair their housing structures. low- interest housing loans to

5, 500 loans, valued at more than $27.6 million, and This assistance was all
provided specifically for the the economically

more than 1,200 grants, valued at more than $4.26 Majuro Atoll, which
comprised 47 percent of the disadvantaged million, were provided to
residents to build,

RMI population. USDA planned to expand renovate, or repair their housing
structures. assistance to Ebeye Island (18 percent of RMI FSM: c $30.0/ $1.
9 Although Chuuk State comprised 50 percent of the

population) in the Kwajelein Atoll with more housing RMI: c $3. 5/ $0.590

FSM population and some 46 percent of the programs and other assistance.

housing units, it received only 14 percent of the housing loan dollars.
Pohnpei, with 32 percent of the population, received 67 percent of housing
dollars loaned in the FSM. Telecommunications:

The USDA loans have resulted in an increase in The USDA loans have resulted
in an increase in telephones and communications available to telephones and
communications available to U. S. Department of homes and businesses. In
1987, when USDA homes and businesses. In 1987, when USDA Agriculture (USDA)

approved a loan to the FSM Telecommunications approved the loan application
from the Marshall Corporation (FSMTC), the company had 1,300

Islands National Telecommunications Authority Provides rural telephone
telephone subscribers. By 1993, the number of

(MINTA), the company had 653 subscribers. In loans and loan guarantees
telephone subscribers in the FSM had increased to June 2001, MINTA provided
telephone service to

6, 000. In 2001, the FSMTC provided telephone 4,183 subscribers on major
islands of the Majuro

FSM: $40.0/$ 0 service to more than 9,870 customers on four

and Kwajalein Atolls, with a total population of RMI: $22.8/$ 0

islands of the FSM, with a total population of some 32,799. More than half
of these customers 69, 000. FSMTC provided service to about 38 purchased
residential service. MINTA provided percent of FSM households. service to
more than 32 percent of RMI households.

(Continued From Previous Page)

Accomplishments Program, department, and purpose funding - FY 1987- 1999/ FY
2000 FSM RMI

dollars in millions Electric Power:

The Pohnpei Utilities Company had a loan The USDA loans have resulted in a
large increase application with USDA?s Rural Utilities Service

in electricity available to homes and businesses. U. S. Department of (RUS).
The proposed loan for $10.8 million had not The Marshalls Energy Company
commissioned its Agriculture (USDA)

yet been approved by RUS, as of October 2001. new, 12.8 megawatt generating
station on

The difficulty of obtaining clear title to the land December 16, 1999. This
plant, the island?s Provides loans for electric where the power plant would
be built was second, was built with a $12. 5 million loan from power
facilities

preventing groundbreaking according to company USDA to relieve the old power
plant?s five officials. generators, all of which operated at peak hours with
FSM: $0/$ 0

no backup. The number of private electricity RMI: $12.5/$ 0

consumers rose by 11 percent, and the number of new business users rose by
34 percent from 1997 through the end of 1999. Disaster Assistance: Since
1986, FEMA has provided $36. 3 million in Since 1986, FEMA has provided
$18.5 million in

direct assistance and through other U. S. agencies direct assistance and
through other U. S. agencies Federal Emergency provided an additional $6.3
million for seven

provided an additional $7. 5 million for seven Management Agency (FEMA)

typhoons and two droughts. Through FEMA?s disasters including typhoons,
droughts, and high assistance programs (Disaster Preparedness

wave actions. Through FEMA?s assistance Provides typhoon and severe
Improvement Grants, Hazard Mitigation Grant programs, the RMI has been able
to ensure that drought disaster assistance Program, and disaster
assistance), the FSM has

almost all funds for the disaster relief and hazard including individual and
family been able to ensure that almost all the disaster mitigation
assistance and preparedness were grants, temporary housing, assistance funds
have been obligated over the past obligated over the past 15 years.
infrastructure assistance, and 15 years. hazard mitigation grants FSM:
$35.9/$ 0. 4 RMI: $17.4/$ 1. 1

Postal Services: USPS has provided for transportation of mail and USPS has
provided for transportation of mail and

parcels and has given equipment, materiel, parcels and has given equipment,
materiel, U. S. Postal Service (USPS) supplies, technical advice, and
assistance to the supplies, technical advice, and assistance to the FSM.
During 2000, the FSM received 1.2 million

RMI. During 2000, the RMI received 0.5 million Transports mail, provides
pounds of mail and sent out almost 220,000 pounds of mail and sent out
almost 73, 000 pounds. money orders, and furnishes pounds. Intrastate mail
volume for the same period Records for intrastate mail volume and for other
supplies

totaled about 67, 000 pounds. years were not maintained by the RMI.

FSM: d $ 4.9/$ 0. 9 RMI: d $ 1. 6/$ 0. 3

(Continued From Previous Page)

Accomplishments Program, department, and purpose funding - FY 1987- 1999/ FY
2000 FSM RMI

dollars in millions Aviation Services:

FAA?s main task was to provide for safe air travel. FAA?s main task was to
provide for safe air travel. The 15- year record of air traffic safety
showed two

The RMI?s record showed no reported aircraft Federal Aviation aircraft
accidents, both within the past 2 years, but accidents, injuries, or
fatalities over the past 15 Administration (FAA) no serious injuries and no
fatalities. The two years. accidents were attributed to factors, events, and
Provides for safe air transport conditions unrelated to FAA assistance. and
transit around and through FSM and RMI air space

FSM: e $ 5.4/$ 3.3 RMI: e $ 0. 9/$ 0.1 Weather Services:

The FSM weather service offices located at The RMI weather service office
provided weather Pohnpei, Yap, and Chuuk provided weather

forecasts and data to RMI citizens. The office was National Weather Service
forecasts and data to FSM citizens. These offices

fully staffed by RMI citizens. It received funding on (NWS) were fully
staffed by FSM citizens. They received a cost- reimbursable contract
arrangement, funding on a cost- reimbursable contract

technical assistance, advice, and training through Provides weather
forecasting arrangement, technical assistance, advice, and the U. S. NWS.
According to NWS evaluations, the capacity

training through the U. S. NWS. According to NWS weather service office was
as capable and as well evaluations, the three weather service offices are

trained as comparable U. S.- based weather service FSM: $ 28. 9/$ 2.0

as capable and as well trained as comparable U. S. based offices.

RMI: $ 10. 6/$ 0.9 weather service offices. a The program has been changed
to include U. S. insular territories under the reauthorization of the

Elementary and Secondary Education Act in fiscal year 2002. As of
publication, the Department is in process of determining the program name
and implementation timetable for new competitions and awards. b This figure
is for the Workforce Investment Act, which supplanted JTPA beginning in
fiscal year 2000.

c We used data provided by USDA. d This figure represents the Department of
the Interior?s payments to USPS for services under the Compact. According to
USPS, the actual cost was much higher, and it has sought an additional $30
million in reimbursement from Interior. e This figure represents the
Department of the Interior?s payments to the FAA for services under the

Compact. This figure excludes the cost of air traffic control to the region,
which is provided from Los Angeles, and FAA provided airport improvements
funded from the Department of the Interior?s capital improvement funds.

Sources: Program documentation and GAO analysis.

Photographs of U. S. Assistance at Work

Figure 2: SEPPIE, Child Find Poster for Special Education, Pohnpei, FSM

Source: GAO.

Figure 3: FASEG, Marshallese- English Story Book and Marshallese Phonics
Book, Developed by and Published with FASEG Support, Majuro, RMI

Source: GAO.

Figure 4: Pell Grant- Assisted Students in Class, College of the Marshall
Islands, Majuro, RMI

Source: GAO.

Figure 5: JTPA Carpentry Class, Majuro, RMI

Source: GAO.

Figure 6: Maternal and Child Health Laboratory in Hospital, Majuro, RMI

Source: GAO.

Figure 7: FEMA Assistance (Bridge Replacement) in Pohnpei, FSM Source: GAO.

Figure 8: FEMA Drought Assistance (Home Water Catchment Container), Kosrae,
FSM Source: GAO.

Foreign Environment and Local conditions in the FSM and the RMI
significantly reduced the Other Factors Hindered

effectiveness of 9 of the 13 programs, loans, and services. These programs
Effectiveness of Nine were (1) Head Start, (2) special education, (3)
elementary and secondary Programs

school improvement grants, (4) Pell Grants, (5) the Job Training Program for
Adults, (6) Maternal and Child Health Block Grants, (7) housing loans, (8)
disaster assistance, and (9) the USPS. We found that programs

designed for the United States faced a variety of problems because of
geographic, economic, and social conditions in the FSM and the RMI. For
example, the four states of the FSM are separated by as much as 2,000

miles, and the RMI is made up of 1,200 atolls and islands scattered over
750,000 square miles of ocean. In addition, the lack of local financial
support, the poor performance of the education system, and the lack of
medical capacity commonly found in the United States hindered the education
and health programs. 20 Limited private sector opportunities and government
downsizing reduced the value of the job training program. Geographic and
social conditions reduced the effectiveness of disaster relief. Finally, the
poor performance of FSM and RMI postal services delayed mail service. Most
managers of the nine programs recognized that they lacked the resources,
training, and technical capacity to meet all program requirements. See
appendix II for a more detailed discussion of each program, including

the program performance requirements and standards, our assessment against
those standards, and our assessment of whether the program encountered
conditions in the countries that significantly reduced broader program
accomplishments or increased program costs. Each table contains separate
sections that provide specific examples of whether or not each program met
requirements and standards and whether the program encountered conditions in
each country that significantly reduced its potential accomplishments. To be
effective, each program had to meet the performance requirements and
standards and had to demonstrate that it did not encounter conditions that
significantly reduced potential program

accomplishments or increased costs. Specifically, in terms of program
effectiveness, we found the following:  Head Start: Head Start was intended
to promote school readiness by

enhancing the social and cognitive development of preschool children.
However, the FSM and the RMI programs could not meet a variety of program
requirements because of a lack of equipment, medical capacity,

and government support for the elementary and secondary education system.
For example, the FSM and the RMI lacked the equipment and 20 In commenting
on this report, U. S. Department of Education officials said that neither
the FSM nor the RMI could comply with all program procedures, noting that it
was difficult to comply with the Federal Acquisition Act requirements for
competitive bidding, since few providers wanted to do business there because
of the cost of travel and transporting supplies.

medical expertise necessary to meet dental and health requirements.
Additionally, the Head Start program could not meet playground and space
standards of the program (see figures 9 and 10). The program also

lacked data to show short- or long- term benefits to the children. In
addition, both FSM and RMI Head Start managers and parents were concerned
that any head start provided by the program was lost because of the poor
performance of the school system. 21

21 For example, according to a 2001 RMI Ministry of Education study,
students leave the 8th grade with ?barely a 2nd- or 3rd- grade level in
English reading ability, and many were unable to read even in their own
language.? An FSM National Division of Education study found that 10th-
grade students barely achieved the expected 2nd- grade score of U. S.

students in the English language.

Figure 9: Head Start Center, Science Area [shows lack of space], Majuro, RMI

Source: GAO.

Figure 10: Head Start Playground [shows inadequate playground], Majuro, RMI

Source: GAO.

 SEPPIE: This program was intended to provide special education and related
services to children with disabilities. Although the program met its limited
performance requirements and standards, it encountered conditions that
significantly reduced potential program accomplishments. For example, for
some children, the program?s effectiveness was limited by the lack of on-
island medical care available

to those suffering severe disabilities. In addition, post- graduation
employment opportunities for program graduates were rare. Lastly, since
neither the FSM nor the RMI contributed funding for special education, as
states and localities do in the United States, this program was the primary
funding source for special education.

 Freely Associated States Educational Grant: The program was intended to
provide elementary and secondary schools with funds for direct educational
services such as school supplies, teacher training, and school improvement.
Although it met its limited program goals to provide funding for school
supplies and teacher training, because the FSM and the RMI did not provide
much funding in these areas, many needs continued to go unmet. The program
was never intended to be the sole source of funding for these activities.
For example, in the United States, most school funding comes from state and
local funds, and the federal government provides only 6.8 percent of the
total elementary and secondary school budgets. In contrast, the FSM and the
RMI provided almost no funding in this area, relying instead on FASEG and
other U. S. grants. However, because the program was so small relative

to needs, it could not meet all school requirements for school supplies and
teacher training.  Pell Grants: Pell Grants were intended to provide
college students with

financial assistance for educational expenses. In addition, the grants
provided graduates with the potential to improve their employment
opportunities and help meet the development and financial needs of the FSM
and the RMI. The Pell Grants program met its limited program goal to provide
financial assistance to FSM and RMI college students. However, the poor
conditions of the elementary and secondary school system, the limitations of
a 2- year college, and the lack of employment opportunities limited the
potential accomplishments of the Pell Grant program. According to the FSM
and the RMI college presidents,

because of the inadequate school systems, many students exhausted their Pell
Grants on remedial classes. 22 As a result, many students could not use Pell
Grants for the credited classes they needed to graduate. In

22 Pell Grants were limited to 1 year of remedial classes.

the RMI, for example, one- half of high school graduates entered the college
with the equivalent of a 4 th to 6 th -grade U. S. education and required 1
to 2 years of remedial classes. This reduced the amount of Pell Grants
available for graduation and contributed to the low, 9percent

graduation rate. In both countries, the low graduation rate and the
limitations of a 2- year college have reduced the contribution of the Pell
Grant program to the economy. As a result, skilled workers and managers were
brought in from the United States, the Philippines, and other countries to
meet the demand for technical and mid- and upperlevel management positions.
 Job Training for Adults: The program was intended to foster increased

employment and earnings. However, poor economic conditions in both the FSM
and the RMI have limited the potential accomplishments of the program. 23
For example, because of the lack of jobs in the FSM, program success in job
placement for graduates dropped from 65 percent in 1995 to 26 percent in
1999. FSM officials said that the program was training people for jobs that
did not exist. In the RMI, poor data precluded determining JTPA?s
effectiveness, and poor economic conditions limited employment
opportunities. For example, the RMI reported that the percentage of trained
adults finding jobs rose from 44 percent in 1993 to 100 percent in 1999.
However, another 1999 report from the RMI stated that only 14 percent found
employment. Neither RMI nor Labor officials could explain the discrepancy,
and Labor officials agreed that such problems precluded determining the
program?s effectiveness. In addition, because of poor economic conditions,
the RMI boosted the

number of adults it reported as being employed by counting numerous ?self-
employed? graduates as employed and simply estimating their potential
income. According to U. S. Department of Labor officials, the subsistence
economy in the RMI and the lack of employment opportunities pushed the
program to categorize people as ?selfemployed? when they were actually
undertaking subsistence work and not receiving market income. Because of the
lack of jobs, as well as the lack of those basic academic and personal
competencies necessary to benefit fully from job training, the RMI has begun
providing training in ?survival skills,? which include subsistence fishing,
agriculture, and

handicraft production. 23 The U. S. Department of Labor exempted the FSM and
the RMI from meeting some performance requirements and standards, including
a key standard for the number of trainees that found employment.

 MCH Block Grants Program: The program was intended to improve the health
of mothers and children and to reduce mortality rates. However, the lack of
equipment, medical specialists, data collection capabilities,

and local government support for preventive health care limited the
accomplishments of this program. Moreover, the FSM and the RMI programs were
exempt from meeting 6 of the 18 performance measures for the program, and
they had difficulty in meeting others, because of a lack of needed
equipment, medical capacity, and support programs (such as Medicaid) that
were available only in the United States.

Additionally, the high mortality rate, a key measure of program success,
could not be reduced because of health care limitations and the lack of
basic sanitary conditions, like clean water and healthy food, necessary for
public health. 24 Moreover, data collection limitations within the FSM and
the RMI have hindered the ability of the HHS to determine program

effectiveness. 25 Lastly, the U. S. MCH Program generally supplements state
and local health care initiatives; both the FSM and the RMI governments
lacked these state or local services. According to the FSM and the RMI MCH
directors, because the FSM and the RMI relied on the program as their
primary preventive health care system, the program was overwhelmed by the
social and economic conditions that were causing declines in the general
health of the populations, including maternal and child health. 26 The
former U. S. MCH officer responsible for the FSM and the RMI programs was
pessimistic about the ability of the MCH programs to succeed because of the
social and economic problems in each nation. 27

24 Officials from HHS said that similar limitations seriously impeded the
goal of reducing infant mortality in many parts of the United States, as
they do in the FSM and the RMI. 25 The U. S. MCH official in charge of the
MCH program in the FSM said he had doubted the accuracy of the data the FSM
states submitted to the FSM national government to send to the MCH program
in Washington, D. C., but that verifying the accuracy of the data was not an
option because of the travel costs involved.

26 For example, the RMI reported that the health of the maternal and child
population has declined as the rates of diabetes, hypertension, heart
disease, tuberculosis, and malnutrition have risen, causing increases in
infant and childhood illness. The RMI?s MCH Director said that, despite the
assistance provided by the Maternal and Child Health program, the positive
effect of the program was being blunted by the social, economic, and
educational problems in the RMI. 27 In commenting on this report, HHS
officials stated the current MCH program officer also acknowledges the
overwhelming needs for technical assistance because of the social and
economic problems in the FSM and the RMI.

 Housing Loans: This program was intended to provide housing loans to the
most needy. However, legal requirements not designed for use in foreign
countries precluded targeting loans to only the most needy. As a result, the
program could not meet its performance requirement to target only the
neediest in each country. To determine program

eligibility, the Rural Housing Service (RHS) was required to use adjusted
income limits set by the U. S. Department of Housing and Urban Development
(HUD). HUD in turn used U. S. Census income data. Because the FSM and the
RMI last participated in the U. S. Census in 1980, prior to their
independence, there were no income data available from the U. S. Census
Bureau. Instead, RHS used HUD?s ?Western Pacific

Islands? adjusted income limits. These limits were relevant only to the
population of Guam and were not an accurate measure for the much poorer
populations of the FSM and the RMI. Consequently, most households in the FSM
and the RMI qualified for the program. This violated the program eligibility
regulations, which stated that it was to serve only those with less than 80
percent of the local median income,

adjusted for household size. Both nations have conducted censuses since 1998
that contained information on household income, so such data was available.
 Disaster Assistance: This program was intended to help localities

prepare for and respond to disasters. Although the program met its
performance requirements and standards, it encountered conditions that
significantly reduced potential program accomplishments and increased costs.
28 For example, because of the vast distances involved and the absence of
capabilities comparable to those in the United States, the implementation of
FEMA?s disaster assistance programs has been costly, difficult, and labor
intensive. In addition, according to FEMA documents, the cultural and social
practices in the FSM and the RMI adversely affected the effectiveness of
FEMA assistance. For example, contrary to FEMA?s mission to foster self-
reliance for disaster preparedness and response, FEMA found that providing
disaster assistance to the FSM and the RMI fostered a dependency on FEMA
assistance. FEMA found that people who would otherwise rebuild their 28 FEMA
maintains that it would be much more appropriate, cost- effective, and
consistent

with efforts toward self- sufficiency to assist the FSM and the RMI through
other U. S. programs and agencies, such as the Office of U. S. Foreign
Disaster Assistance in the U. S. Agency for International Development. The
FSM and the RMI are independent countries and, according to FEMA officials,
should be afforded the same assistance as other foreign nations. FEMA has
formally notified the Department of State that it no longer finds it
appropriate for FEMA to provide disaster assistance to the FSM and the RMI
beyond 2003.

lives immediately after an event did nothing until FEMA money and resources
arrived. Lastly, FEMA officials said that, as a domestic agency, it was not
structured or intended to provide disaster assistance to foreign countries.

 USPS: Postal Services were intended to provide for mail and mailrelated
financial services between the United States and the FSM and the RMI.
Although the program met its performance requirements and standards, it
encountered conditions that significantly reduced potential program
accomplishments and increased costs. For example, the postal

service has had to contract for air transport of mail, at the cost of $2
million annually, because of limited space on the few commercial flights to
the region. Because flights to the region were limited, USPS was not able to
meet delivery guarantees on certain classes of mail. Moreover,

despite USPS?s investment in chartered flights, once the mail arrived, FSM
and RMI postal services delayed delivering the mail to its citizens.
Citizens from both nations said that mail was routinely 2 to 3 months late.
(See figure 11.) In the RMI, mail often sat in the facilities, waiting for
local postal officials to sort and place the mail in post office boxes. In
the FSM, mail was delayed as it awaited clearance through customs.

USPS operations in the FSM and the RMI have also proven costly. In addition
to $5.9 million in costs reimbursed by Interior, USPS estimated that it has
incurred an additional $30 million in extra mail transportation costs.

Figure 11: Mail Awaiting Sorting and Placement in Post Office Boxes at the
Pohnpei Post Office, FSM Source: GAO.

Four Programs Were Two of the loan programs and two of the services have
been effective.

Effective These programs were (1) telecommunications loans, (2) electrical
loans, (3) aviation services, and (4) weather services. These programs met
their performance requirements and standards and did not encounter problems

that reduced potential program benefits or substantially increased costs.
These programs? success was partly attributed to their resource management
approach. The two loan programs were effective in meeting

their narrow program requirements to provide loans to areas that meet the
economic and social conditions that make them eligible for the loans. In
addition, USDA, which managed the loan programs, provided guidance and

strong oversight during the construction of the telecommunication and
electrical systems, to ensure that they met U. S. building standards. For
the aviation and weather services, U. S. employees or well- trained
nationals managed and performed the work.

The following programs were effective:  Telecommunications Loans: The Rural
Utilities Service?s

telecommunications loans met its program goal to expand modern
telecommunication facilities in remote areas by financing telephone system
improvements in both nations. For example, in 1987, when USDA approved a
loan to the FSM Telecommunications Corporation (FSMTC), the company had 1,
300 telephone subscribers. By 1993, the telephone subscribers in the FSM had
increased to 6,000. USDA ensured that both nations? telephone companies met
the eligibility requirements of the program, conducted the feasibility
studies necessary to determine

their economic viability, had the telecommunications systems built to USDA
specifications, and provided construction oversight to ensure that all
specifications were met. (See figure 12.)

Figure 12: FSM Telecommunications Corporation Building Exterior, Pohnpei,
FSM

Source: GAO.

 Electrical Loans: The Rural Utilities Service?s electrical loans were
intended to expand access to modern electrical systems by providing loans
for electrical power facilities, and the USDA met this programmatic goal in
the RMI. 29 The RMI used the loan to build new electric power facilities
that have allowed large increases in electricity 29 One FSM utility had a
loan application pending with USDA as of October 2001.

available to both homes and businesses. The 1999 generating station almost
doubled the RMI?s electrical capacity and allowed the nation to meet its
growing electricity needs. For example, the number of private electricity
consumers rose by 11 percent and the number of new business users rose by 34
percent between 1997 and 1999. USDA ensured that RMI?s power company met the
eligibility requirements, conducted the feasibility studies necessary to
determine their economic viability, had the power facilities built to U. S.
specifications, and provided construction oversight to ensure that all U. S.
specifications were met. (See figure 13.)

Figure 13: Rural Utilities Service Electric Loan: New Electric Power
Facility, Marshalls Energy Corporation, Majuro, RMI

Source: GAO.

 Aviation Services: FAA effectively provided air safety services as
required under the Compact. FAA provided (1) en route air traffic services,
(2) flight inspections and equipment certifications, (3)

assistance in developing and updating aviation procedures and standards, and
(4) technical assistance to help the FSM and the RMI governments develop
civil aviation safety authorities and aviation safety and certification
programs. FAA was effective because of its direct management and
implementation of program activities. Rather than

provide funds directly to the FSM and the RMI governments for air safety,
FAA provided the training, material, equipment, and facilities construction
and maintenance necessary to meet FAA standards. For example, when FAA
funded construction and maintenance, FAA selected the contractors to perform
the work and provided oversight and contract management to ensure that the
work met contract standards. (See figures 14 and 15.)

Figure 14: Aviation Services: FAA- Provided Electrical Power Generator in
Honolulu, Hawaii, Headed for the FSM and the RMI

Source: GAO.

Figure 15: Aviation Services: FAA- Provided Equipment in Honolulu, Hawaii,
Headed for the FSM and the RMI

Source: GAO.

 Weather Service: The NWS provided weather services as stipulated in the
Compact. NWS provided the FSM and the RMI with the facilities, equipment,
technical assistance, and resources needed to operate their weather
services. To ensure that program goals were met, it maintained control of
the funds provided to each government through cost reimbursement contracts.
This allowed NWS to review and disallow inappropriate or unauthorized FSM or
RMI expenditures. NWS officials also performed regular visits and monitored
weather operations by

reviewing required reports and weather data. In addition, NWS required that
local FSM and RMI officials working for the weather stations met the same
educational and proficiency standards as NWS employees in the United States.
For example, NWS provided assistance to local nationals for up to 5 years of
training so that they could meet NWS

standards for meteorologists. (See figure 16.)

Figure 16: Weather Service: Sign Showing Close Collaboration between NWS and
Pohnpei Weather Service Office in Pohnpei, FSM

Source: GAO.

Three Loan Programs May The USDA operated the three loan programs for
homeowners and utilities

Face Future Repayment (telecommunications and electric power) discussed
above. Because of Problems FSM and RMI dependence on U. S. assistance, a
reduction in this assistance could result in future repayment problems.
During the first 15 years of the

Compact, U. S. funding to the FSM and the RMI was decreased every 5

years, and the FSM government has estimated that the November 2000 U. S.
proposal reduces real per capita income in 2017 by almost 40 percent from
its 2001 levels. 30 Moreover, the United States has proposed an end to
annual financial assistance to the FSM and the RMI in 2016, although the
time for repaying these types of loans extends from 2017 to 2030.
Administrators at all three programs were unaware that this extension could
adversely impact their loan repayments. According to USDA officials, there
were no requirements for the U. S. program officials to consider future
reductions in U. S. economic assistance as a condition for extending

authorized program assistance. Also, such considerations of future
reductions in U. S. assistance would have significantly raised the price of
loans to those needing assistance. Specifically:  Housing Loans: USDA did
not, nor was it required to, consider the

effect that a future reduction in U. S. economic assistance could have on
the ability of its borrowers to repay their loans. USDA officials
administered its housing loans and grants based on the applicants?
eligibility for the program and their repayment ability at the time of loan
closing, in accordance with the way in which the programs were administered
in the United States. USDA officials said that they were not required to
consider the effect that future reductions in U. S.

economic assistance could have on the ability of its borrowers to repay
their housing loans. Not considering the effect of such an economic downturn
in nations whose entire economies could shrink dramatically put the U. S.
government at risk of losing some $24.7 million in housing

loans. In addition, many loans have a 33- year term, and some could have up
to a 38- year term, far exceeding the time when U. S. economic assistance is
scheduled to end. According to Rural Housing Service

officials, if they had considered the effect of ending U. S. assistance
payments, they would not have made the loans.

30 The United States has not prepared a similar analysis regarding the
effect of its funding proposal.

 Telecommunications Loans: Because USDA did not generally make such loans
to foreign countries, it did not consider that U. S. assistance might be
reduced in the future, jeopardizing loan repayments. Officials

of both the FSM Telecommunications Company and the Marshall Islands National
Telecommunications Authority stated that severe decreases in Compact funding
could decrease their companies? revenues enough to jeopardize their ability
to repay their USDA loans. 31  Electrical Loans: USDA?s feasibility study
did not include the possibility that Compact funds might be severely reduced
over the life of the loan,

resulting in a decreased demand for power as the economy contracts.
Officials of the Pohnpei Utilities Company and Marshalls Energy Company
stated that severe decreases in Compact funding to the island nations could
decrease their companies? revenues enough to jeopardize their ability to
repay their USDA loans. Although in all three cases the FSM and the RMI
governments have assumed responsibility for these secured loans if the
borrowers were

unable to pay, the dependence of the governments on U. S. funds may put such
repayment at risk. According to an FSM analysis, under the November 2000 U.
S. assistance proposal, which would decrease assistance levels, ?The economy
would be caught in a vicious circle of low growth, compounded by a series of
shocks, requiring downward adjustment, loss of real incomes, unemployment,
and outward migration.? 32 In addition, USDA administrators had not
adequately considered how their programs could be terminated if U. S.
program assistance were to end in 2016.

31 After USDA approval of the telecommunications loans, the Federal
Communications Commission issued an order, effective January 1, 1998, to
reduce the settlement rates paid by U. S. telecommunications companies to
foreign companies for international calls originating in and terminating
outside the United States. According to the order, these benchmark rates
were necessary because, under the current system, the settlement rates U. S.
carriers paid foreign carriers to terminate U. S.- originated traffic were
in most cases substantially above the costs that foreign carriers incur to
terminate that traffic. FSMTC and MINTA both protested that this action
would seriously damage their revenues, cutting their income substantially
and endangering the companies? ability to repay their loans to the

U. S. government. Both companies relied on incoming long distance telephone
calls for a significant portion of their revenue.

32 ?The U. S. Compact Counter Proposal,? Economic Management Policy Advisory
Team of the Federated States of Micronesia (Feb. 8, 2001).

Most Programs Have We found that the FSM and the RMI?s administration of
most of the 13 Accountability

programs we reviewed did not ensure accountability. The accountability of
these 13 programs varied, from being adequate to having a significant loss
Problems of financial control, based on our review of audit and financial
reports; discussions with U. S., FSM, and RMI program managers; and our
evaluation of whether each program?s reporting requirements were met. Nine
of the programs had poor accountability, and five of the nine had

instances of theft, fraud, or misuse of federal funds. Four had adequate
accountability, in large measure because program funds were controlled from
the United States and little direct funding was provided to each nation. FSM
and RMI Officials

We found that nine programs in the FSM or the RMI had not met program
Provided Inadequate accountability standards. These problems were documented
in annual Accountability for Nine

audit reports required under the Single Audit Act of 1984 (P. L. 99- 502)
for Programs federal programs, technical reviews conducted by U. S.
executive branch departments, and discussions with program managers. Each
program had different accountability requirements.

The following programs had instances of theft, fraud, mismanagement,
inadequate accountability, or poor recordkeeping:

 The Pohnpei Head Start Program fired its entire accounting department in
1999 for stealing program funds. A 1999 audit report identified $341,000
that was unaccounted for and found significant mismanagement, fraud, and
loss of control over finances. 33 In response to our questions about the
report, Pohnpei program officials told us that the accounting department
officials admitted to stealing about $11,500.

They said that the head of the accounting department was forging checks and
changing receipts in an attempt to cover up the theft, while her two
assistants were stealing money donated by parents of children in the Head
Start program. A 2000 review of the program in the RMI found that key
management staff did not clearly understand the

program?s 1997 performance requirements or their responsibilities. The 33
HHS, in commenting on this report, said that the Pohnpei program
subsequently provided appropriate documentation for the $341, 000 in
questioned costs. However, neither HHS nor FSM officials indicated during
the audit that the Pohnpei program subsequently provided appropriate
documentation for the questioned costs. As a result, we were not able to
independently verify HHS?s statement or review the supporting documentation.

review also found that key management staff lacked training in basic
financial requirements. Although U. S. program officials said that they
provided training in response to these problems, RMI officials told us that
this training was not sufficient for them to understand how to comply with
the requirements.  For the Special Education Programs for Pacific Island
Entities, both the

FSM and the RMI failed to comply, according to audit documents, with
requirements for (1) awarding contracts competitively, (2) financial
reporting, and (3) reporting on property purchased with federal money. 
Under the Freely Associated States Educational Grant program in the RMI,
both the Minister of Education and a staff person used program funds
intended for teacher training to travel to Paris for more than 3 weeks for a
1999 United Nations Educational, Scientific, and Cultural Organization
meeting.

 Although the Pell Grants program in the FSM has had problems complying
with the program?s accountability requirements since the early 1980s,
improvements have resulted in the college?s meeting its accountability
requirements for the past several years. For example, the 1997 audit
questioned $359,000 in costs from audits performed in 1995,

1996, and 1997. Furthermore, in 1995 the college discovered a ?double
drawdown? of program funds of $1. 2 million and alerted the U. S. Department
of Education. An audit the following year reported that the College of
Micronesia had an outstanding liability to the U. S. Department of Education
for $1.2 million. In response, the Department of Education placed the
college under a provisional certification and

conducted a technical assistance review in 1999. The review concluded that
the colleges in both the FSM and the RMI lacked sufficient knowledge to
administer the federal program adequately, and the Department of Education
subsequently provided the necessary training.

According to the FSM college president and its chief financial officer, the
school has since instituted the improvements necessary to meet program
requirements. The school received its first unqualified opinion in its 1999
audit, 12 years after the Compact went into effect. According to FSM
officials, the college also received an unqualified opinion from its
auditors in 2000.

 The JTPA programs in the FSM and the RMI were exempt from having to meet
the standardized reporting systems used by the U. S. Department of Labor to
verify program performance. Department of Labor managers

exempted the FSM and the RMI because they lacked the necessary data
collection capabilities. Furthermore, U. S. program managers said that they
generally ignored the performance data submitted by the two

nations because it was considered unreliable. As a result, the Department of
Labor cannot verify program performance.  Officials in the MCH program in
the FSM state of Kosrae were not aware of any HHS reporting requirements and
had not submitted any progress or financial reports to the FSM government
for at least 2 years,

according to the Kosrae MCH director. In addition, they lacked any
supporting documentation on how program funds were spent. The FSM assistant
director for public health confirmed this information and said that the
government simply ?guessed? at Kosrae?s financial and

performance data when submitting its annual report to HHS. 34  The Rural
Housing Service in the FSM state of Pohnpei made housing loans to the FSM
president and others that violated program regulations. The service also
mismanaged more than $100,000 of local funds. The loan program was intended
to provide loans to the economically disadvantaged. However, according to
audit reports and rural housing

officials, the local program manager provided 12 unauthorized loans that
violated program regulations. These included loans to the FSM president, the
head of the Rural Housing Services trustee agency, and others, which, among
other problems, violated the program?s requirement that homes built with
program funds be considered modest for the area. The president?s home
exceeded this standard. In addition,

the reports documented other violations of program regulations, including
(1) a loan to the FSM president that exceeded USDA limits, (2) loans for
income- generating buildings, (3) another loan for a

?nonmodest? home, and (4) numerous other weaknesses in internal controls.
(See figures 17 and 18.)

34 HHS officials, who were not aware of this situation, said that such
fabrication could be considered ?criminal wrongdoing,? if true. They noted
that under MCH guidelines, estimates were acceptable, and that all such
estimates should be explained in a footnote. However, based on a review of
the FSM?s 2000 Annual Report, none of the reported performance data from
Kosrae were footnoted.

Figure 17: Rural Housing Loans: Home of the FSM President, Financed with Two
RHS loans; Typical RHS Loan- Financed Homes, Pohnpei, FSM

Source: GAO.

Figure 18: Rural Housing Loan: Home of Former Pohnpei State Housing
Authority Director, Financed with an RHS Loan, Pohnpei, FSM

Source: GAO.

 FEMA experienced fraud and mismanagement in the FSM and the RMI. In the
FSM, for example, FEMA reported that some citizens bought new pickup trucks
and other items not authorized by the home repair assistance. FSM officials
said that they lacked the staff and expertise needed to audit and pursue
most of these cases. In the RMI, FEMA provided the national government
almost $70, 000 to replace flooddamaged hospital facilities, supplies, and
equipment on the island of Ebeye. However, the RMI government never released
the money to the

hospital. FEMA has spent 3 years attempting to rectify this problem.
According to FEMA officials, the incidence of fraud and mismanagement were
no more prevalent in the FSM and the RMI than in the United States. However,
FEMA could not take routine legal action

to recoup fraudulent or mismanaged funds, such as garnishment of wages,
since the FSM and the RMI are sovereign nations.  The USPS, which provided
the FSM and the RMI with money orders and

other financial services, reported theft and misuse of funds and had
difficulty collecting owed funds from the FSM and the RMI postal systems.
The FSM and the RMI have fired several staff for money order theft and
misuse of funds, and both continue to experience theft and financial
irregularities with money order and other cash transactions. In the largest
known case, a postal worker stole $7, 000 in funds. Although the USPS had
difficulty collecting owed funds from the FSM and the RMI postal systems,
both nations ultimately transferred appropriate funds to USPS. In one FSM
case, a special legislative appropriation

enabled stolen and misappropriated funds to be repaid to USPS, although the
payment was late. (See figure 19.)

Figure 19: Postal Services: Open Safe Reflects Lax Security, Pohnpei, FSM

Source: GAO.

Program managers and staff often received little or no training in either
accounting principles or program requirements, causing many of the
accountability problems. For example, the Head Start program manager in
Kosrae was not aware of Head Start performance or reporting requirements
because he had never been trained. Also, the MCH program implementers in
Kosrae had never received training on program performance goals and lacked
the staff to meet reporting requirements. 35 In some cases, training was
provided to the wrong officials. For example,

in the RMI, a manager received training in how to meet MCH financial 35
During our visit to Kosrae, the director of health services told us that the
MCH/ Kosrae office had been unable to obtain the nation?s MCH goals. When we
provided him with a copy of the MCH goals, the director told the FSM
assistant secretary for health, ?Now we have our goals!?

requirements, even though the Ministry of Finance, not the MCH office,
controlled and reported on funding.

FSM and RMI program managers for the education, job training, and health
programs reported that they had difficulty in meeting federal accountability
requirements. They said that their program staff needed extensive onisland

training in how to comply with federal reporting requirements. Offisland
training was not effective, the managers said, because (1) only one or two
members of their staff could attend training; (2) the training was often too
fast- paced for them to understand, or it involved technology not available
in the FSM or the RMI; and (3) they lacked the skills and

proficiency to transfer the training to their staff upon return. Moreover,
the program managers said that on- island training for the entire staff was
necessary to reduce the number of accountability problems commonly found in
the federal programs.

Adequate Accountability There was adequate accountability for the
telecommunications and electric Existed for Four Programs

power loans and the aviation and weather services. U. S. personnel managed
these programs, controlled program accounting from the United States, or
simply required the FSM and the RMI to meet loan repayment schedules. The
following examples illustrate how the four programs provided adequate
accountability:  Telecommunications Loans: When applying for loans to build
new telecommunications facilities, USDA required both the FSM and the RMI

telecommunications companies to meet a variety of USDA requirements. These
requirements included conducting financial and engineering feasibility
studies during the loan application process. These feasibility studies
showed the projects to be viable. USDA

ensured that the companies complied with their required safeguards,
including regular inspection visits from Rural Utilities Service officials
during construction. Once construction was completed, RUS officials

continued to make periodic loan- servicing visits to review operations,
maintenance practices, and procedures for problems that could impair the
companies? ability to repay their federal loans. The RUS also required
companies to submit annual financial and statistical reports, as well as
financial statements to be reviewed in Washington, D. C., for

indicators of financial downturns, improprieties, or management concerns. 
Electrical loans: Before loans were extended to build new power generation
facilities, USDA required both local power companies to

meet engineering and financial feasibility study requirements. These
feasibility studies showed the projects to be both necessary and financially
viable. The Marshalls Energy Company complied with required safeguards, such
as building to U. S. standards. The company withdrew only the loan money
actually needed for its facility and sent annual audited financial
statements to USDA in Washington, D. C. The FSM?s Pohnpei Utilities Company
has not yet received money for its proposed power generation facilities but
has undertaken the same process.

 Aviation Services: The FAA assisted the FSM and the RMI with aviation
services by providing materiel and equipment. FAA services included testing,
inspection, and maintenance of equipment. In addition, facilities
construction was performed either under direct FAA oversight or by
contractors hired by FAA. Under this arrangement, FAA exercised

significant control and accountability over the assistance and thereby the
funding to the FSM and the RMI.  Weather Services: The NWS provided
assistance to the FSM and the RMI through cost- reimbursable contracts.
Expenditures made by the FSM

and the RMI were submitted to the NWS for approval. If the expenditures (for
example, to pay for salaries, materiel, and equipment) were appropriate,
then the weather service authorized reimbursement of expended funds. A
review of FSM and RMI records showed cases in which the NWS requested
additional justification for expenditures and disallowed inappropriate ones.

These programs share the common characteristics of having a narrow mission
and being run directly by the U. S. agencies. The four programs achieved
accountability largely because each agency controlled program

funds from the United States, and little direct funding was provided to
either nation.

Federal Administration We found that the level of U. S. federal oversight
over programs in the FSM Has Not Ensured

and the RMI varied from adequate to almost nonexistent. Sources such as
audits, financial reports, monitoring reports, and U. S., FSM, and RMI
Financial

program managers documented this lack of accountability. Neither the
Accountability

Department of the Interior, which was charged with monitoring and
coordinating the individual federal programs, nor the State Department,
whose ambassadors were responsible for the direction and coordination of U.
S. agency officials in foreign countries, fulfilled these responsibilities,
because federal program managers often bypassed both departments to work
directly with FSM and RMI program managers. Each federal

department was responsible for ensuring program compliance and
accountability. Most federal departments could not ensure accountability,
and oversight was generally neglected because of the cost, distance, and

time involved. In addition to communications difficulties and distance
barriers, the small size of the programs in the nations, compared with the
programs? size in large U. S. states, contributed to poor oversight.

Interior Did Not Provide The legislation and executive order implementing
the Compact designated Effective Monitoring or Interior to coordinate and
monitor program assistance to the FSM and the Coordination

RMI. However, the department has neither monitored nor coordinated the
program assistance. In 1987, the Secretary of the Interior determined that
the most effective method to provide programs to the FSM and the RMI was to
allow the other agencies to create a direct grant relationship with the
Pacific Island governments. In addition, Interior officials reported that
they were not given sufficient authority or resources to coordinate and
monitor the activities of the departments providing program assistance.

Instead, Interior?s principal role has been to provide supplemental
technical assistance and respond to assistance issues identified by federal
agencies or the FSM and the RMI. In a previous review, we found that the
Department of the Interior had not maintained reliable data on the amount of
assistance provided to each country, and that there were inconsistencies
between Interior?s data and that of other agencies. 36

According to Interior officials, Interior did not meet its legislative
requirement to place three monitors in the region for the federal programs
because no funding was provided for the positions. The Palau Compact of

Free Association Implementation Act, Public Law 101- 219, states that the
Secretary of the Interior shall station representatives in the FSM, the RMI,
and Palau in order to provide federal program coordination and technical
assistance to each government. However, Interior did not fill any of these
positions until 1997, 11 years after the Compact went into effect and 8
years

after the public law was enacted. As of 2001, Interior had never stationed
representatives in all three nations but instead relied on one
representative to cover the numerous programs funded by the 19 agencies with
program locations thousands of miles apart. Interior officials said that no
funding

was provided for these positions and that it was able to finance the one
position only when funding was supplied in 1997. Disputes between the 36 See
Foreign Relations: Better Accountability Needed over U. S. Assistance to
Micronesia and the Marshall Islands (GAO/ RCED- 00- 67, May 31, 2000).

Departments of the Interior and State concerning Interior staff selected to
work in the RMI contributed to the lack of Interior staff for the RMI. In
addition, other limitations negated the Interior representative?s ability to
affect the management of federal programs. For example,  the Interior
representative had no authority to modify or suspend

mismanaged programs operated by other executive departments;  although the
Interior official in the field sent weekly reports to Interior

headquarters, the Interior representative made few if any recommendations to
improve program coordination, and no program improvements were implemented
for any program under review; and,

 U. S. departments often do not alert or coordinate with the Interior
representative on proposed or continuing programs, thereby reducing the
ability of the Interior to provide even informal coordination. The number of
programs and the vast distances between islands also precluded effective
monitoring by a single U. S. official. Department of the Interior officials
in Washington, D. C., as well as the Interior representative and the U. S.
ambassador to the RMI, all agreed that one person was insufficient to
monitor federal programs in the region. For example, the Interior
representative was not aware of problems identified in our review, such as
the firing of the Head Start/ FSM accounting staff or the fraudulent
activities of FSM postal employees. In his 1997 report to Interior, the

Interior representative stated that grants should be strictly controlled and
closely monitored, with full- time, on- site monitoring and administration
by the U. S. government. This recommendation was never implemented.

Interior officials said that the United States used to actively coordinate
and monitor federal grants. Prior to the Compact, before the FSM and the RMI
gained political independence, a large U. S. staff located in the region

managed federal programs. For example, in 1985, the year before the Compact
was signed, 31 U. S. officials provided management, coordination, oversight,
and reporting for U. S. programs to the region. In addition, these officials
could modify or suspend programs for poor performance. Once the Compact was
signed, the FSM and the RMI began direct grant relations

with each federal department, and the regional U. S. staff disbanded. Now
Interior has only one official in the region, trying to help coordinate and
monitor programs formerly managed by 31 staff members.

State Could Not Fulfill The State Department, whose chief of mission was
responsible for

Program Coordination Role direction and coordination of U. S. agency
officials in foreign countries,

could not meet its responsibility because the U. S. program managers often
bypassed the State Department and U. S. embassies. The Foreign Service Act
of 1980 (P. L. 96- 465) states that the Department of State Chief of Mission
was responsible for the direction and coordination of all U. S.

government employees in the country. 37 Further, presidential instructions
to U. S. Chiefs of Mission charge them with the direction, coordination, and
supervision of all executive branch offices and personnel in their nation.
However, both the former ambassador to the FSM and the current ambassador to
the RMI said that most U. S. departments ignored this requirement and
bypassed State because of their long- standing relationships with FSM and
RMI ministries. 38 As a result, the Department of State, through its
embassy, could not direct, coordinate, or supervise

employees of other federal agencies in either the FSM or the RMI. Federal
Departments We found that most federal departments have not provided
adequate Generally Provide

oversight of their programs in the FSM and the RMI. While weather and
Inadequate Oversight

federal aviation services? accountability requirements included independent
verification of work performed by others, as well as tests, inspections, and
frequent visits to the islands to ensure that services were meeting U. S.
standards, most programs provided far less oversight. Of the

educational, job training, and health programs, only Head Start and the
special education program required on- island assessments. The job training
and MCH programs simply reviewed information submitted by each nation, and
U. S. program managers said that this information was too

unreliable to determine program effectiveness. We found that many program
managers knew little about the programs, as illustrated by the following
examples:

 The SEPPIE program manager reported that she had never conducted a program
assessment in the region, could not discuss the FSM or the RMI?s program
objectives or accomplishments, and had no idea whether

37 This does not apply to employees under the command of a U. S. area
military commander. 38 In commenting on this draft, USDA officials said that
they were not aware of this requirement and did not coordinate with State;
in addition, the National Weather Service indicated that its policy is to
coordinate with embassies, and their staff members always obtain country
clearances prior to visits.

the programs were operating as intended. Moreover, the manager was not aware
that any on- island assessments were conducted, even though this was the
only program in our review that conducted on- island assessments annually.
Instead, the program manager relied on information collected from annual
meetings in Washington, D. C. with representatives from the FSM and the RMI,
and on semiannual reports,

to monitor this program.  MCH program managers said that they had to rely
on the FSM and the

RMI?s annual reports to determine program effectiveness because they were
the only data available, even though the program managers recognized that
the reports lacked the reliability necessary to determine

program effectiveness.  The JTPA programs in the FSM and the RMI were
exempted from having to meet the program?s national standardized reporting
systems, which

the U. S. Department of Labor used to verify program performance in the
United States. Department of Labor managers exempted these nations because
they lacked the necessary data collection capabilities and the accuracy of
the FSM and the RMI data was suspect. Labor officials said that they lacked
the travel funds necessary to verify FSM or RMI reporting. The FSM and the
RMI provided their program information to

a Department of Labor regional office, where the data could be reviewed but
not verified by program managers. The program managers said that they
generally ignored all performance data that the two nations submitted
because the data were unreliable and because the FSM and

the RMI programs were considered a low priority as compared with the larger
programs in the United States. Most program managers attributed the lack of
oversight to the cost and time needed to visit the FSM and the RMI-- the
islands are about 5,000 miles from the United States-- as well as to the
small size of the programs relative to programs located in states like
California and New York. For example,

according to representatives from the Departments of Labor and of Education,
lack of travel funds severely limited trips needed to provide oversight and
reduced their ability to ensure program effectiveness.

Federal Managers Federal program managers with programs in the FSM and the
RMI were Concerned about Lack of concerned about the lack of impact,
accountability, and training provided Impact and Accountability to the
region. On this subject, the Federal Regional Council, a consortium of U. S.
Programs in the

of 20 federal departments and agencies based in San Francisco, including
program managers for Head Start, the Job Training Partnership Act, and
Pacific Maternal and Child Health in the Pacific area, released a March 2000
report,

Grants to the Outer Pacific. The report stated that all council members were
concerned about the quality of results achieved with federal funds,
accountability levels, and problems related to training. They found that
fragmented services, inadequate systems of data collection, and inconsistent
attention and follow- up attributable to limited time and travel budgets had
all contributed to the sense that the federal government was simply
?throwing money at problems,? with little effect.

The council reported that limited travel budgets, time, and technical
assistance resources made it difficult for federal agencies to monitor
programs and provide the consistent training necessary to improve program
performance. It also noted that problems and solutions could not be
identified from the United States. Council members reported that onsite
reviews were necessary to disclose causes of program problems and provide
the best solutions necessary for successful program performance. They also
found that an on- site federal presence and follow- through were important
to implement corrective action and coordinate federal programs

for maximum effect. They concluded that it was essential that an on- site
representative be appointed with a mandate to improve the effectiveness of
federal programs. The report also recommended that a working relationship be
established between the federal program managers and the Department of the
Interior to better use federal programs to support monitoring, coordination,
and training.

Conclusions After 15 years of U. S. program assistance, this is an
appropriate time to reassess the basis and conditions of the provision of U.
S. domestic programs to the FSM and the RMI. Three considerations appear
particularly important in this assessment.

First, we found that many of these programs suffered from weaknesses in
effectiveness and accountability, many of which were attributable to the
difficulties associated with delivering programs designed for the United
States to small island nations. For example, we found local administrative
capabilities that were not able to meet the complex requirements of many

federal programs, and U. S. administrative capabilities that were not
designed to implement U. S. programs in foreign countries. These are likely
to be difficult problems to address. Some of the problems are a consequence
of distance, which is immutable, and the state of the islands? economic
development, which is unlikely to improve in the near future.

Second, the U. S. programs provided several fundamental government services
in the FSM and the RMI. The provision of power, telecommunications,
aviation, and postal services are critical for island economic development.
Because of their importance, these services may well be government
priorities if U. S. program support were to end. Other

programs, such as Head Start, special education, and Pell Grants, primarily
assisted individuals. Program administrators believed that these programs,
while also important for economic development, would not be funded if the
United States were to end its support.

Finally, although the U. S. negotiating strategy calls for annual assistance
to end after another term of assistance, the United States has made no such
determination for the program assistance. We believe that the United States
should establish a policy regarding the duration of ongoing program
assistance during the current negotiations. If the United States were to end
the program assistance for U. S. domestic programs when annual assistance
ends, this would involve transferring the responsibility for financing and
providing these services to the FSM and the RMI. Transferring these
responsibilities to the FSM and the RMI will require U. S. agencies to
emphasize the development of local capabilities. Without advance

planning for an ?exit? for the program assistance, it is unlikely that a new
round of U. S. assistance would advance the ability of either nation to
provide these services at the end of the term of new economic assistance.

As a result, the decisions that must be made are how to improve the
performance and accountability of the programs and whether, and for how
long, these programs should be provided to the two nations. We believe

that these decisions should also be made in a way that is consistent with
the U. S. strategy to end annual assistance at a set time.

Recommendation for In order to assist congressional consideration of
continued U. S. program

Executive Action operations in conjunction with its consideration of new
economic assistance to the FSM and the RMI, we recommend that the
Departments of

the Interior and State, in consultation with the relevant government
agencies and the Federal Regional Council, jointly report to the Congress on
(1) whether individual programs should be continued and for how long, with
an exit strategy developed for any concluding program; (2) how local
capabilities can be enhanced in order that the FSM and the RMI can provide
the services; (3) how programs can be redesigned to work more effectively
and efficiently, including the use of alternative mechanisms (such as grant
consolidation, trust funds, foundations, or nonprofit

organizations) to deliver the assistance; (4) how program coordination and
accountability can be improved; (5) what government authority and resources
are required to monitor and coordinate U. S. programs, grants, loans, and
services; and (6) what the future roles and responsibilities of the
Departments of the Interior and State should be in monitoring and

coordinating U. S. programs, grants, loans, and services. Agency Comments We
provided a draft of this report to the Departments of the Interior, State,

Agriculture, Commerce, Education, Health and Human Services, Labor, and
Transportation, as well as to the Federal Emergency Management Agency, the
National Weather Service, the U. S. Postal Service, and the governments of
the FSM and the RMI. The Departments of Agriculture, Commerce, Education,
Labor, and Transportation, as well as the Federal Emergency Management
Agency, and the U. S. Postal Service chose not to provide formal comments on
the draft report. However, we incorporated their informal comments into the
report as appropriate.

The Department of the Interior generally agreed with the draft?s findings,
conclusions, and recommendations. The Department of State generally agreed
with our draft findings and recommendation but raised concerns about the
department?s lack of technical expertise and resources to conduct the
comprehensive assessment we recommended. State also

recommended that no new programs be authorized without assessments to
determine whether the programs could be implemented effectively in the
region. The department also requested changes to improve the balance and

accuracy of the draft. In our response to State?s comments, we agreed that
State lacks the necessary resources and expertise and emphasized that State
should use the resources and expertise of Interior and the other departments
to implement our recommendation. The Department of Health and Human Services
generally agreed with our draft report, stating that the

Federal Regional Council?s Outer Pacific Committee had expressed similar
concerns about the lack of impact, accountability, and technical assistance
to the two nations. In our response to HHS?s comments, we incorporated their
requested changes as appropriate.

The FSM government also generally agreed with our findings, noting that
performance and accountability problems could be expected in adapting
programs designed for the United States to culturally different, undeveloped
regions in the middle of the Pacific Ocean. However, the FSM government
provided a number of specific suggestions to improve the format, balance,
and accuracy of the draft. While the RMI government

agreed that there were effectiveness and accountability problems in the
programs, the RMI emphasized the need for these programs. The RMI?s comments
also stated that the Department of the Interior, not the State Department,
should manage the federal programs. In response, we noted that neither the
draft nor the final report recommended that State be given management
responsibility for the federal programs. The government also requested that
additional information be added to six of the programs under review. We made
a number of clarifications and additions in response to FSM and RMI
comments.

We are sending copies of this report to interested congressional committees
and to the secretaries of the Departments of the Interior, State,
Agriculture, Commerce, Education, Health and Human Services, and Labor, as
well as to the administrator of the Federal Emergency Management Agency, the
Postmaster General, and the presidents of the Federated States of Micronesia
and the Republic of the Marshall Islands. We will also make

copies available to other interested parties on request. If you or your
staff have any questions regarding this report, please contact me at (202)
512- 4128. Another GAO contact and staff acknowledgments are listed in
appendix VIII.

Loren Yager Director, International Affairs and Trade

Appendi Appendi xes x I

Objectives, Scope, and Methodology At the request of the Chairman of the
House Committee on Resources; the Ranking Minority Member of the House
Committee on International Relations; the Chairman of the House Committee on
International Relations, Subcommittee on East Asia and the Pacific; and
Congressman Doug Bereuter, we (1) assessed the use and effectiveness of key
U. S. programs, loans, and services provided to the Federated States of
Micronesia (FSM) and the Republic of the Marshall Islands (RMI); (2)

evaluated whether the administration of these programs by each nation
ensures financial accountability; and (3) evaluated whether the oversight of
these programs by the U. S. government ensures financial accountability. To
gather information for our analysis, we interviewed more than 100 key

officials in the Departments of the Interior, State, Education, Health and
Human Services, Labor, and Agriculture; in the Federal Aviation
Administration, the National Weather Service (NWS), the Federal Emergency
Management Agency (FEMA), and the U. S. Postal Service

(USPS); and in the governments of the FSM and the RMI that were involved
with the provision of U. S. assistance to the two nations between 1987 and
2000.

To assess the use and effectiveness of key U. S. programs and services
provided to both nations, we reviewed the Compact of Free Association,
legislation, regulations, and procedures to determine what the programs were
intended to accomplish and the performance requirements used to assess
whether programs were being effectively implemented. 39 To determine whether
the programs were effectively implemented and performance requirements were
met, we reviewed monitoring reports,

program assessments, site visit reports, and progress reports. To ensure
that we had a full understanding of the programs? intent and to determine
whether the programs were effective, we conducted detailed interviews with
program managers in Washington, D. C., San Francisco, and Honolulu; in the
two Federated States of Micronesia- Pohnpei and Kosrae; and in Majuro, in
the Republic of the Marshall Islands. In addition, we visited clinics,
schools, post offices, weather stations, and other facilities to determine
the use of the assistance, and we spoke with the intended beneficiaries of
the assistance to obtain an independent assessment of its uses. To ensure
accuracy, we shared our program summaries with program managers in the
United States, the FSM, and the RMI, and we incorporated

their comments into the final draft. 39 See appendix 2, Purpose and
legislation section, for the specific program legislation we reviewed.

To assess whether the administration of these programs, by each nation as
well as by the U. S. government, ensured financial accountability, we
determined the accountability requirements for each by reviewing
legislation, regulations, and procedures. 40 To determine whether the
programs were meeting their accountability requirements, we reviewed audit
reports, financial reports, monitoring reports, and site visit reports. To
ensure that we had a full understanding of the programs? accountability
requirements and whether they were met, we conducted detailed interviews
with program managers in Washington, D. C., San Francisco, and Honolulu; in
the two Federated States of Micronesia- Pohnpei and Kosrae; and in Majuro,
in the Republic of the Marshall Islands. In both nations, we conducted
detailed interviews with the accounting departments of each program,
reviewed findings of audit reports with them to obtain their views, and
reviewed financial and audit reports for the past 5 years. We also conducted
a detailed review of the past 14 years of audit reports from

the four Federated States of Micronesia and the Republic of the Marshall
Islands to identify historical trends in accountability problems for the
region. To ensure accuracy, we shared our program summaries with program
managers in the United States, the FSM, and the RMI, and we incorporated
their comments into the final draft.

We performed our work from August 2000 through December 2001, in accordance
with generally accepted government auditing standards. 40 See appendix 2,
Purpose and legislation section, for the specific program legislation we
reviewed.

GAO Assessment of 13 Programs in the Federated States of Micronesia and the

Appendi x II

Republic of the Marshall Islands The following provides our evaluation of
the13 grant, loan, and service programs to the Federated States of
Micronesia and the Republic of the Marshall Islands that we reviewed. Each
table covers one grant, loan, or service and includes information on its
intent, its performance and accountability standards, our assessment of
whether the programs met their performance and accountability standards, and
our assessment of any problems related to implementing programs in the two
foreign countries.

Table 2: The Head Start Program

Purpose and The Head Start program of the Department of Health and Human
Services (HHS) was intended to promote school legislation readiness by
enhancing the social and cognitive development of low- income children
through the provision of health, educational, nutritional, and other
services to children and their families. The Head Start Act (P. L. 97- 35)
authorized FSM and RMI participation.

Requirements Performance: Head Start had numerous results- based performance
standards to measure the quality and effectiveness of programs operated by
Head Start agencies and the effect of services provided through the programs
to children and their families. HHS required full on- site reviews at least
every 3 years to determine compliance with program, administrative,
financial management, and other requirements.

Accountability: Quarterly financial reports and annual Program Information
Reports were required. Audits were to be conducted annually to determine
compliance with program standards and financial requirements.

U. S./ FSM U. S./ RMI Assessment of

Head Start?s overall effectiveness could not be determined because the
program lacked impact data to evaluate its Perfor mance effect on school
readiness and cognitive development. (GAO assessments of Head Start programs
in the United States have concluded that, because of research limitations,
program effectiveness could not be determined.) In addition, the program was
not able to meet all its performance requirements and standards in the FSM
and the RMI. The program was not able to meet all its performance

The program was not able to meet all its performance requirements and
standards. HHS found the FSM to be

requirements and standards. HHS assessments found in general compliance with
most performance standards, the RMI to be in general compliance with most of
its despite identifying numerous problems. Problems performance standards,
but HHS reviews found

included lack of on- island medical capabilities, numerous instances of
standards not being met. The

inadequate space, and unsafe playgrounds. A 1999 1998 site visit found that
no observations or review summarized the program?s ?paramount

assessments of children?s progress were being done, challenges of inadequate
funds, limited or unavailable and the Program Information Report was not
accurate. A resources, and small windows of opportunity for

2000 site visit found that management did not economic growth.?

understand the 1997 performance standards or their responsibilities. HHS
officials said they provided training later that year, although RMI
officials said that the training received from HHS was helpful but not
adequate

to meet all program needs. RMI officials stated the program was effective,
despite numerous constraints.

Assessment of Despite its efforts, HHS was unable to ensure adequate
accountability over the FSM and the RMI programs. HHS accountability used
site visits and audit reports to identify problems and responded with
training and technical assistance. However, the training did not result in
full compliance with Head Start accountability requirements. After a 1999
audit identified theft and mismanagement in Pohnpei, HHS took corrective
measures.

(Continued From Previous Page) The Pohnpei Head Start program had
significant

A 1998 HHS visit found financial management only accountability problems.
The entire accounting division marginally in compliance and identified a
number of was fired for theft in 1999. Nor was the FSM able to

management weaknesses, including noncompliance with provide any financial or
progress reports for the past 5 standards to maintain budgetary control, to
provide cost years. In 1999, HHS found the program substantially out data on
a timely basis, and to conduct inventories of of compliance in
recordkeeping. Head Start properties. Problems in The program encountered
conditions that significantly The program encountered conditions that
significantly implementing U. S. reduced potential program accomplishments.
HHS

reduced potential program accomplishments. HHS programs in the

reported that the FSM had difficulty meeting Head Start?s reported that the
RMI had difficulty meeting Head Start?s

FSM and the RMI performance standards because they were not designed

performance standards because they were not designed for small island
economies. Examples included unmet for small island economies. Examples
included unmet playground and space standards attributable to limited

health and dental requirements attributable to limited land, and unmet
standards for mental, hearing, and

medical staff; unmet partnerships requirements because dental health,
because the FSM lacked the necessary few private sector companies existed
for partnering; and medical facilities and expertise. In addition, FSM Head
unmet environmental requirements because of high air Start officials were
concerned that Head Start conditioning costs. In addition, officials were
concerned accomplishments could be lost once children entered the

that Head Start accomplishments could be lost once resource- poor elementary
school system. According to children entered the resource- poor school
system. For the FSM National Division of Education, 10 th -grade example,
according to a 2001 RMI Ministry of Education students barely achieved the
expected 2 nd -grade score of study, students leave the 8 th grade with
?barely a 2 nd -or U. S. students in the English language. 3 rd -grade level
in English reading ability, and many were

unable to read even in their own language.? a See Head Start: Research
Insufficient to Assess Program Impact (GAO/ T- HEHS- 98- 126, Mar. 26,
1998). Source: GAO.

Table 3: The Special Education Program for Pacific Island Entities (SEPPIE)

Purpose and legislation SEPPIE was a competitive, direct grant program
provided by the U. S. Department of Education to supply special education
and related services to children with disabilities as authorized under the
Individuals with Disabilities Education Act, as amended (P. L. 91- 230). The
act made children with disabilities aged 3 through 21 eligible for special
education. Requirements Performance: The FSM and the RMI were required to
provide information demonstrating that they will meet all conditions that
apply to states under the Individuals with Disabilities Education Act. These
special education grants were awarded on the basis of a competition among
the eligible islands with the requirements that the funds be used to provide
special education and related services to children with disabilities and to
enhance the capacity of the FSM and the RMI to make available to these
children free, appropriate public education. Performance goals of the grants
that fulfill the performance requirements were explained in the grant

applications by the special education departments of the FSM and the RMI.
Each identified child with a disability was to receive specially designed
instruction, at no cost to the parents, to meet the unique needs of that
child. An annual report on grant performance was required for continued
funding.

Accountability: SEPPIE recipients were required to meet all conditions that
applied to U. S. states and to use funds only to provide special education
and related services directly to children with disabilities and to enhance
capacity to make a free, appropriate public education available to all
children with disabilities. The program was subject to the 1984 Single Audit
Act. U. S./ FSM U. S./ RMI Assessment of

SEPPIE fulfilled its performance requirements. Each country?s programs
supported the Individuals with performance Disabilities Education Act?s
requirements. This included (1) providing direct special education and
related

services, such as physical and speech therapists, for eligible children with
disabilities; and (2) building the capacity to provide improved special
education in the future, for example by providing teacher training and
training for the various therapists in these programs, and (3) improving
facilities. The students, GAO saw, seemed to be receiving the level of
education the law requires. Teachers received training. Related service
assistants visited homes. Special education classrooms existed that were
better equipped than regular

classrooms. However, progress toward achieving those goals was slow, because
both school systems were ineffective. Teachers and administrators seemed to
want to improve the systems. Both special education programs had increasing
parental involvement as a specific goal. Both countries had active
organizations for

parents of children with disabilities. This was a step toward increasing
oversight of the programs. About 6 percent of the total student body was
identified

About 4 percent of the total student body was identified for special
education. for special education. Of the 24 inhabited atolls, 23 The FSM
Special Education (SpEd) Program were staffed to provide special education
services.

performed its own annual internal evaluation of In 1999- 2000, the RMI
Ministry of Education monitored individual state programs. Teams made up of
the FSM

37 schools on 10 atolls through personal visits. SpEd Director, another FSM
state?s SpEd Director, a Between October 2000 and March 2001, 6 additional
consultant from San Diego State University, a schools on 3 atolls were
monitored. professor from the College of Micronesia, and parents visited a
state program, reviewed progress toward its performance goals, assessed
problems, and listened to parents.

Assessment of During the annual audits of U. S. programs in the islands,
both countries? programs were found to have accountability problems
complying with federal regulations. These included problems (1) procuring
materials and services competitively, (2) documenting the purposes and costs
for expenditures, and (3) not fulfilling requirements for reporting the
program?s financial status or the status of property purchased with federal
money.

(Continued From Previous Page) Problems in

The program encountered conditions that significantly reduced potential
program accomplishments. The U. S. implementing U. S. Department of
Education provided no direct oversight. The Washington, D. C., program
officer had never visited programs in the FSM

these nations and had limited knowledge of the program. No other Department
of Education Special Education and the RMI

program officials had visited these island nations since 1992. Direct U. S.
Department of Education oversight was a missing element in the FSM and the
RMI special education programs, which were funded almost entirely by the
United States, placing a greater responsibility on the department than it
had in the United States.. This responsibility was greater because, although
the Department of Education does not conduct any direct oversight of U. S.
local special education programs, a variety of other organizations and
government agencies

provide oversight of the local school systems and their performance. No
comparable system of oversight existed in the FSM and the RMI. That left the
SEPPIE funds to be overseen by no one but the FSM and the RMI school
systems. In the United States, federal funds supplement local and state
funds. However, in the FSM and the RMI, U. S. funds accounted for the great
majority of the school systems? budgets. SEPPIE dollars funded virtually the
entire special education program. In the FSM, the states contributed some
money for teachers from Compact funds. Both nations? school systems were
staffed by underqualified teachers: for example, in the RMI, about 68
percent of special education teachers and aides had only a high school
degree. Because of the inadequate medical infrastructure in both the FSM and
the RMI, the special education programs had to deal with severe cases of
disability, where children?s problems were fundamentally medical rather than

educational. Without the proper medical attention, the special education
program could do little to solve the underlying medical conditions. Also,
because of the poor economy and the high unemployment, there were few
employment opportunities for children with disabilities once they had
completed schooling. Source: GAO.

Table 4: The Freely Associated States Educational Grant (FASEG) Program

Purpose and FASEG funds were provided by the U. S. Department of Education
through competitive, direct grants for local legislation programs to
strengthen and improve elementary and secondary education. These included
teacher training, curriculum development, instructional materials, and
general school improvement. The program was

authorized under the Elementary and Secondary Education Act of 1965, as
amended (P. L. 89- 10). Requirements Performance: These grants were awarded
on the basis of a competition among the eligible islands with the
requirements that the funds be used only for programs described in the
Improving America?s Schools Act.

Performance goals for the grants that fulfill their performance requirements
were explained in the grant applications by the state education departments
of the FSM and the education ministry of the RMI: instructional materials,
curriculum development, teacher training, etc. Department of Education
program officials said that an annual report on grant performance was
required for continued funding.

Accountability: U. S. FASEG grantees were required to submit financial
reports. The program was subject to the 1984 Single Audit Act. U. S./ FSM U.
S./ RMI Assessment of

FASEG has met its performance requirements and standards, according to its
program documents. Each performance country?s programs supported the
Improving America?s Schools Act?s requirements: for example, each state?s
performance goals addressed (1) developing curriculum for improved
achievement standards, (2) providing training for teachers, and (3)
improving the involvement of parents and the community in the school system.
The individual programs used the money to pursue the goals stated in their
grant applications. Pohnpei used its funds to improve the curriculum and The
RMI used its funds to develop curriculum, train train teachers while
developing better ties with

staff and teachers, improve community involvement, communities. Kosrae had
similar goals.

and provide instructional materials. Almost 70 percent of Pohnpei?s and
nearly 40 percent

Almost 40 percent of the RMI grant budget was spent of Kosrae?s grant budget
were spent on supplies, on supplies, including instructional materials. The
including instructional materials. These supplies

other funds supported the goals outlined in the grant supported the goals
outlined in the grant application. application.

Assessment of During the annual audits of U. S. programs in the islands,
both countries? programs were found to have accountability problems
complying with federal regulations. Both countries had problems (1)
procuring materials and services competitively, (2) documenting the purposes
and costs for expenditures, and (3) fulfilling requirements for reporting
the financial status of the program or the status of property purchased with
federal money. Although financial reports were required, program officials
in Washington, D. C., told us that only the annual performance report was
required in order for the FSM and the RMI to receive funds.

In the FSM, the state education offices were Audits and reviews identified
questionable responsible for maintaining supporting documentation
transactions. For example, when we were in the RMI, for FASEG. Pohnpei and
Kosrae, according to the

we found that about $13,000 in FASEG funds were annual audits, have had
consistent problems adhering

spent in October 1999 to send the minister of to U. S. federal property
standards.

education and the assistant secretary of education to a United Nations
Educational, Social, and Cultural Organization meeting in Paris for more
than 3 weeks. However, this information was not included in any

audit reports submitted to the U. S. Department of Education. Further, in
2000 and 1999, auditors found $350, 000 and $477,000, respectively, in
contracts that did not appear to follow appropriate procurement guidelines.

(Continued From Previous Page) Problems in

The program encountered conditions that reduced potential program
accomplishments. Furthermore, implementing U. S. progress toward achieving
the performance goals was slow, because both school systems were
ineffective. programs in the FSM For example, RMI students left the 8 th
grade with barely a 2 nd - or 3 rd -grade level English reading ability, and
and the RMI

many were unable to read in their own language. The FSM students were
comparable. The dropout rate was also extremely high. Many eligible children
did not go to school, and if they did, the school buildings in many cases
were not conducive to learning, oftentimes lacking running water and
necessary space, as well as teachers and supplies. Moreover, both nations?
school systems were staffed by underqualified teachers.

The FASEG program was hampered by the lack of FSM and RMI financial support
for the school systems. By contrast, in the United States, federal funds
supplement local and state funds and account for only about 6.8 percent of
total elementary and secondary school spending. However, the FSM and the RMI
relied on federal funds for most of their school systems? budgets. For
example, FASEG funds, along with other U. S. grants, provided almost all
education material, and Compact funds provided money for teachers? salaries,
building construction, maintenance, and repairs. Because the FSM and the RMI
did not adequately fund their

educational systems with local revenues, FASEG and other U. S. grants were
not adequate to make significant improvements in the school systems. There
was little U. S. oversight of the program. Although the Washington, D. C.,
program officer knew about the program and its performance goals, she had
never visited the nations before July 2001. According to Department of
Education officials, the U. S. Department of Education did not perform
direct monitoring of the use of the FASEG funds, and there were no periodic
site visits or reports by the department. Great distances and expense
prevented the program from performing a more regular cycle of onsite visits,
annual or otherwise. Oversight of the FASEG program has generally included
long- distance monitoring activities such as telephone, fax, and e- mail
communications to address implementation issues, review performance reports,
and conduct annual meetings of grantees for technical assistance workshops
during the Department of Education?s annual regional meetings for Improving
America?s Schools.

a The program has been changed to include U. S. insular territories under
the reauthorization of the Elementary and Secondary Education Act in fiscal
year 2002. As of publication, the department is in the process of
determining the program name and implementation timetable for new
competitions and awards.

Source: GAO.

Table 5: The Pell Grants Program

Purpose and Pell Grants, from the Department of Education, were intended to
provide eligible undergraduate students with legislation financial
assistance for educational expenses. The Higher Education Act of 1965, as
amended (P. L. 89- 329),

authorized FSM and RMI participation. Requirements Performance: Pell Grants
were to provide eligible undergraduate students who have demonstrated
financial need with grant assistance to help meet educational expenses. The
student was expected to make satisfactory academic progress. Pell Grants may
only be used for 1 year of remedial education.

Accountability: Annual financial and audits reports were required. U. S./
FSM U. S./ RMI Assessment of

The program has met its performance requirements and standards. The Pell
Grants program effectively provided performance grants to eligible FSM and
RMI students. Because of low income levels, most students met the financial
need requirement. Students from both nations used Pell Grants to attend U.
S. colleges as well as their national college. From 1988 to 2000, Pell
Grants provided 13, 704 eligible From 1993 to 2001, Pell Grants helped 4,375
students students with grant assistance to attend the College of

attend the College of the Marshall Islands. More than 90 Micronesia. About
85 percent of the students received percent of the students received Pell
Grants. U. S. and Pell Grants; most others were disqualified for not meeting

RMI Pell Grant managers said the program was highly the academic achievement
requirement. effective.

Assessment of Financial accountability had improved. The Department of
Education used financial and audit reports to identify accountability
administrative weaknesses and provide training. U. S. officials said that
accountability problems in the region were related to inadequate training
necessary to comply with complex program requirements. The Department
provided the FSM and the RMI with training in 2000. The FSM had
accountability problems from the early A 1995 audit concluded that the
College of the Marshall 1980s, including a $1. 2- million double drawdown in
1994;

Islands complied with all major requirements of the Pell the FSM repaid this
in 1997. Because of recent Grants program. RMI officials said that the 1999
audit improvements, a 1999 audit found that all Pell financial found that
all Pell financial requirements were met. The requirements were met. All
financial reports were college had all required annual reports for the past
5 provided.

years, with the exception of 1997. Problems in

The program encountered conditions that significantly The program
encountered conditions that significantly implementing U. S. reduced
potential program accomplishments. Social and

reduced potential program accomplishments. Social and programs in the

economic conditions blunted the potential impact of Pell economic conditions
blunted the potential of Pell Grants

FSM and the RMI Grants to support the FSM?s development goals. Many to
support the RMI?s development goals. One- half of K12

freshman needed 1 to 2 years of remedial classes before graduates entered
the college with the equivalent of a

they could enter accredited courses, because the K- 12 4 th - to 6 th -grade
U. S. education and required 1 to 2 years system did not prepare them for U.
S. college- level of remedial classes. Because Pell Grants were limited to
courses. Because Pell Grants were limited to 1 year of 1 year of remedial
classes, many students could not remedial classes, many students could not
qualify or qualify or afford the credited classes needed to graduate, afford
the credited classes needed to graduate.

contributing to the low 9 percent graduation rate. A 2000 Furthermore, the
ability to meet national needs was

study found that the RMI?s 1 st -12 th -grade school system hampered by the
limitations of a 2- year college, lack of

had not improved since 1986 and may have declined, in jobs, and low pay.
Moreover, most college operating part because of a lack of RMI financial
support. In funds came from U. S. funds, including Pell Grantsupported
addition, U. S. funds, including Pell Grant- supported tuition payments.
Loss of these funds could

tuition payments, made up 90 percent of the college?s bankrupt the FSM
college.

annual budget, and any reduction could bankrupt the RMI college.

Source: GAO.

Table 6: The Job Training Partnership Act (JTPA) Program

Purpose and JTPA, of the Department of Labor, was intended to establish job
training programs that would result in increased legislation employment and
earnings and enhance the nation?s productivity. Compact implementing
legislation authorized that this program be made available to the FSM and
the RMI. Further, the Job Training Partnership Act, as amended (P. L. 97-
300), authorized FSM and RMI participation. As of July 1, 2000, the JTPA
program was replaced by the Workforce Investment Act. Requirements
Performance: Annual Job Training Plans were to include performance goals and
past achievements for

employment and retention. In addition, Labor was to determine whether
performance measures were met and also to provide an annual report to the
state governors on whether performance goals were met.

Accountability: JTPA fund recipients must submit quarterly financial reports
and annual independent audits. U. S./ FSM U. S./ RMI Assessment of

The program was exempt from key performance Inconsistent data precluded
determining JTPA?s

performance requirements and standards because of inadequate effectiveness.
The RMI reported that the percentage of data. In addition, the program was
not effective. While trained adults finding jobs rose from 44 percent in
1993 to the program trained 1,799 adults between 1995 and

100 percent in 1999. The RMI credited its success to 1998, the percentage of
adults who have entered

paying employers to hire JTPA trainees and counting the employment fell from
about 65 percent in 1990 to about

?self- employed? as employed, which was allowed under the 26 percent in
1999. (By comparison, the U. S. average program. However, another RMI 1999
report stated that was 66 percent.) Because of the worsening economy only 14
percent found employment. Neither RMI nor Labor and lack of private sector
jobs, FSM officials reported

officials could explain the discrepancy. that they were training people for
jobs that do not exist. Program graduates have found jobs in the United

States. Assessment of

Financial accountability needed improvement. Labor officials were unable to
conduct assessments of past accountability performance because of unreliable
data submitted by each nation and the lack of sufficient funds to provide
on- site

monitoring. The program manager said that none of JTPA?s reporting systems
could be used to assess program effectiveness, and FSM and RMI data were not
included in Labor?s annual report on whether performance goals were met. In
addition, the JTPA programs in the FSM and the RMI were exempt from JTPA?s
national standardized reporting system, used by the Department of Labor to
verify program performance. Both the FSM and the RMI lacked the necessary
data on unemployment rates, poverty levels, and welfare statistics used by
Labor?s performance system to evaluate JTPA performance. Instead, Labor
required each nation to establish goals and submit performance data.
However, the Labor program manager was not able to verify the accuracy of
the performance data submitted by the FSM or the RMI, and Labor program
managers acknowledged the unreliability of the data. Labor did provide
training and site visits from 1993 to 1997 in an attempt to resolve a
variety of

problems cited in their reports, such as inaccurate data and the inability
of three of the four FSM states to meet their performance requirements.
However, while the Labor program managers recognized the need for
substantial training, lack of funds precluded providing this level of
training. In fact, despite Labor?s training and other technical assistance,
we found many of the same problems in 2001 that Labor identified in 1995.

The FSM, with one exception, provided the required The RMI provided
quarterly reports late in 1997, and they quarterly financial reports for
1995 through 1999. were not provided at all in 1996, though they were Annual
audits were conducted, and they document submitted at a later date. A
limited review of audit reports performance and financial accountability
problems. provided in the RMI found a variety of accounting problems For
example, the 1999 audit found no evidence that and questioned costs. For
example, in 1994, $8,500 was trainees attended or completed training
programs.

advanced to a vendor for supplies that were still not delivered as of 1997.

(Continued From Previous Page) Problems in

The program encountered conditions that significantly reduced potential
program accomplishments. JTPA and its implementing U. S. successor, the
Workforce Investment Act, were designed for the economically advanced U. S.
states expected to programs in the

have the staff and financial resources to conduct oversight and provide the
necessary assistance to ensure that FSM and the RMI performance standards
were met, according to Labor officials. The FSM and the RMI lacked these
capabilities, and U. S. Labor lacked the resources necessary to assist the
FSM and the RMI. In addition, both nations had high unemployment rates (the
RMI?s 1999 unemployment rate was 31 percent) and little private sector
activity. The

primary employer of JTPA graduates had been the government sector, but both
nations have implemented government layoffs and reduced the hiring of JTPA
graduates. JTPA graduates often migrated in search of betterpaying jobs.

Source: GAO.

Table 7: The Maternal and Child Health (MCH) Block Grants Program

Purpose and MCH, of the Department of Health and Human Services (HHS), was
authorized by Title V of the 1935 Social legislation Security Act, as
amended (49 Stat 620). MCH was intended to help states to provide mothers
and children (in

particular those with low incomes) access to quality health services and to
reduce infant mortality and the incidence of preventable disease. The block
grant allowed states to implement the program with maximum flexibility and
minimum reporting requirements. Requirements Performance: Annual
applications must be submitted that include a plan for meeting and funding
health care needs. The MCH program had 18 national performance measures and
6 national outcome measures, such as

prenatal care, immunizations, and mortality rates; states develop 7 to10
additional measures. MCH officials stated that these measures were ambitious
national health goals and that many states had not met all these goals. MCH
officials said that it was not expected that all performance measures would
be met in any given state and that they were targets only.

Accountability: An annual report must be submitted to evaluate the extent to
which the state has met its goals and objectives and the extent to which
funds were spent consistent with the state?s application. Audits were
required every 2 years. U. S./ FSM U. S./ RMI

Assessment of The program could not meet all its performance measures. In
addition, the FSM and the RMI data limitations, performance combined with
the small population, precluded an accurate assessment of MCH effectiveness.
Because of

unreliable data, for example, neither nation could document annual decreases
in mortality rates, a key measure of program effectiveness in states with
large populations and more advanced data collection systems. The FSM
reported that it was able to meet some The RMI reported that it met some
national performance national performance measures, such as those for
measures for immunizations, breast- feeding, and prenatal immunizations and
breast- feeding, but was not able to care but was not able to meet other
measures, such as meet other measures, such as Pap smears or those screening
newborns for a variety of illnesses. Morbidity for prenatal care (fewer than
10 percent of pregnant

(illness) rates were also increasing in areas targeted by women received
early prenatal care in 1999). MCH.

Assessment of In accordance with MCH guidelines, HHS officials said that
they provided limited oversight and had not conducted accountability any
rigorous assessment in the FSM or the RMI. Instead, HHS relied on its annual
assessments of the FSM and

the RMI annual reports. HHS officials stated that they must rely on these
reports, despite the limited accuracy of the data. These limitations make it
difficult to determine FSM and RMI progress toward meeting MCH performance
goals.

The FSM provided the annual reports as required. The RMI provided the annual
reports as required. Audits Audits were conducted as required, but neither
FSM

were conducted as required, but neither RMI nor U. S. MCH nor U. S. MCH
program officials had read them. officials had read the reports. According
to U. S. MCH According to U. S. MCH officials, this responsibility
officials, this responsibility rests with HHS financial staff.

rests with HHS financial staff. Problems in

The program encountered conditions that significantly reduced potential
program accomplishments. The FSM and implementing U. S. the RMI were exempt
from 6 of the 18 national performance measures and had difficulty meeting
others because programs in the

MCH was designed for use in the United States. In addition, the FSM and the
RMI had difficulty in accurately FSM and the RMI reporting on its
performance measures because the MCH reporting system was designed for use
in the United States, where the U. S. Vital Statistics System has been
developed over the past 65 years. An MCH official

estimated that the FSM and the RMI data collection capabilities were 20 to
30 years behind those of the United States. Moreover, U. S. per capita
spending on health care was about $4,000, as compared with $250 in the FSM
and the RMI, and both nations lacked the level of medical expertise,
facilities, and support services used by MCH in the United States. For
example, MCH generally supplements Medicaid, state health programs, and
private health care systems in the United States, while the FSM and the RMI
used MCH as their primary preventive health care system.

Source: GAO.

Table 8: The U. S. Department of Agriculture?s (USDA) Rural Housing Service
(RHS) Housing Loan Program

Purpose and The USDA?s RHS has provided direct housing loans and grants for
single- family dwellings among other legislation services. RHS was
authorized under the Housing Act of 1949, as amended (P. L. 81- 171).

Requirements Performance: Section 502 of the Housing Act of 1949, as
amended, allowed loans to low- income borrowers to buy, build, rehabilitate,
improve, or relocate eligible, modest dwellings for use by the borrower as a
permanent residence. Section 504 allowed loans and grants to very low-
income homeowners to make general improvements to their homes as long as the
dwelling remained modest and was not used for commercial purposes. To be
eligible, applicants were required to have low or very low incomes ?Low
income? was defined as an adjusted income that was greater than the
Department of Housing and Urban Development?s (HUD) established very low-
income limit, but that did not exceed the HUD established low- income limit
(generally 80 percent of median income adjusted for household size for the
area where the property was located. ?Ver y l ow income? was defined as an
adjusted income that did not exceed the HUD- established very low- income
limit

(generally 50 percent of median income adjusted for household size) for the
area where the property was located. For Micronesian or Marshallese
applicants, their income had to be ?low? or ?very low? as determined by the
Department of Housing and Urban Development?s Adjusted Income Limits for
Western Pacific Islands. Section 502 loan terms extended for up to 33 years
and in some cases 38 years but were not to exceed the expected useful life
of the property as a dwelling, at a subsidized interest rate that varied
with the borrower?s income. Section 504 loan terms extended for no longer
than 20 years, at 1 percent interest. Building sites could be inspected by
RHS officials during construction. Loans and grants had to be deposited into
a

supervised account to ensure that funds were disbursed for work completed.

Accountability: Local Rural Housing Offices were to be subjected to a State
Internal Review (SIR) at least once every 5 years. In instances where
problems existed, reviews could be performed more often at the discretion of
the state director.

For each construction or rehabilitation loan, inspections should have
occurred as contractors were paid for work completed. No post- construction
reports were requested or required, although supervised bank accounts were
to be reconciled. USDA delegated responsibility for this program to the
local RHS representative, the community development manager.

U. S./ FSM U. S./ RMI Assessment of

Legal requirements not designed for use in foreign countries precluded
targeting loans to the most needy. The performance Rural Housing Service?s
compliance with its legal and program requirements inadvertently resulted in
its not

targeting housing assistance to low- and very low- income households,
thereby providing assistance to households whose incomes exceeded the local
low- and very low- income levels. This was not attributable to a deficiency
in the FSM or the RMI but to the legal requirement that RHS was required to
use adjusted income limits set by the Department of Housing and Urban
Development (HUD) to determine program eligibility. By the Housing Act of
1949 as amended, RHS was required to use income levels set by HUD. HUD in
turn used U. S. Census income data. Because the FSM and the RMI last
participated in the U. S. Census in 1980, prior to their

independence, there were no current income data available from the U. S.
Census Bureau for HUD to use in writing adjusted income limits on which
program eligibility was based, according to U. S. officials. RHS had used
adjusted income limits published as HUD?s ?Western Pacific Islands? adjusted
income limits table. According to a HUD official, these data were relevant
only to the population of Guam and were not comparable to the much poorer
populations of the FSM and the RMI. As a result, most households in the FSM
and the RMI qualified for

the program, even though the regulations stated that it was to serve those
with less than 80 percent of the local median income, adjusted for household
size.

(Continued From Previous Page) Although many houses were built and repaired
in

With the support of the RMI government, the RHS was accordance with the
requirements, the Pohnpei RHS increasing the programs provided in the RMI
and office clearly violated program requirements with some extending them to
Ebeye on the Kwajelein Atoll.

loans, including loans to the FSM president and the head of the local
housing trustee agency that works with the RHS office. a Specifically, the
Pohnpei office (1) made loans to 12 borrowers who constructed or

repaired houses that were subsequently used for income- producing purposes;
(2) made loans to 2 borrowers, including the president, who constructed
houses that exceeded what would be considered a ?modest design?; and (3)
approved a loan to the FSM president that exceeded the authorized maximum
loan limit by $15, 000. According to the Department of the

Interior audit report, these problems occurred because the Pohnpei office
(1) was not aware that the regulations prohibited using loans for commercial
purposes, (2) did not adequately review loan

documents, (3) did not believe that one house was unacceptably elaborate,
and (4) did not adequately monitor the construction of the elaborate house.

Assessment of Accountability was insufficient and ineffective. The Hawaii
State Office failed to exercise adequate oversight in accountability the FSM
and the RMI. Because of the distance and cost, the RHS state office in
Hawaii had not performed a

state level evaluation of the FSM and the RMI offices since 1993. The SIR
for the Pohnpei office in 1999 was the first since 1993.

(Continued From Previous Page) The Hawaii State Office suspended loan-
making in

Since uncovering the problems in Pohnpei, RHS has Pohnpei and the rest of
the Western Pacific because of

increased its oversight of the RMI program. In May high delinquency rates
from June 1998 until June 2001, the Hawaii State Office conducted a State
1999. In December 1998, the Hawaii State Office Internal Review for the
local office in Majuro. The identified irregularities in loans made to the
president

review team discovered weaknesses in the Section of the FSM. On January 8,
1999, the state office 502 and 504 programs and instructed that more
instructed the Rural Development manager in Guam,

attention be paid to the programs. Still, because of the who had direct
oversight of the Pohnpei local office, to relatively strong compliance, no
further state internal review loans made by the Pohnpei office. This review
reviews were scheduled until 2006.

found that the total outstanding loan amount of approximately $95, 000
exceeded the maximum loan limit of $81,548. Upon these findings, the state
office revoked the loan- making authority of the Community Development
manager in Pohnpei on February 19,

1999. On January 12, 1999, the Department of the Interior Inspector General
began an audit of the Pohnpei office at the request of the U. S. deputy
chief of mission at the Pohnpei embassy. Only after these events was a State
Internal Review undertaken in July 1999 by the Hawaii State Office. Other
audits ensued.

The Hawaii State Office demanded and collected the FSM president?s loans in
full on June 8, 2000. The next day, June 9, 2000, the Pohnpei office was
closed and the Community Development manager removed at the insistence of
the U. S. embassy. The office was quickly reopened under the management of
U. S. citizen employees of USDA. Since uncovering the problems in Pohnpei,
RHS has increased its oversight of the other FSM programs. In May 2001, the
Hawaii State Office conducted a State Internal Review for the local office
in Kosrae. The review team discovered weaknesses in the Section 502 and 504
programs and instructed that more attention be paid to the programs.

Still, because of the relatively strong compliance, no further state
internal reviews were scheduled until 2006. Problems in

The timeline for repayment of many of these loans extends beyond the end of
further Compact assistance. implementing U. S. Because USDA began this
program in the FSM and the RMI before independence and did not modify the
programs in the FSM

program when the islands became foreign countries, USDA failed to consider
that future reductions in U. S. and the RMI economic assistance could affect
the ability of its borrowers to repay their loans. In addition, some loans
had up to a 33- year team, and some had a 38- year term, far beyond the time
when U. S. economic assistance is scheduled to end. Time differences made it
difficult for RHS borrowers to contact USDA?s Centralized Servicing Center
in St. Louis by telephone. In addition, it put the burden of repayment
tracking and collection on the local

RHS offices and officials in the islands. The Rural Housing Service?s (RHS)
compliance with its legal and program requirements inadvertently resulted in
its not targeting housing assistance to low- and very low- income
households. a These issues were extensively covered in these reports: U. S.
Department of the Interior Office of the Inspector General, Audit Report:
Pohnpei Local Office, Rural Development Program, U. S. Department of
Agriculture, Federated States of Micronesia, Report No. 99- I- 953
(Washington, D. C.: Department of the Interior, Sept. 1999); and U. S.
Department of Agriculture, State Internal Review (SIR) Report, Pohnpei Local
Office (Hawaii State Office: U. S. Department of Agriculture, July 12- 22,
1999).

Source: GAO.

Table 9: U. S. Department of Agriculture?s (USDA) Rural Utilities Service
(RUS) Telecommunications Loans Program

Purpose and The Rural Electrification Act of 1936, as amended (49 Stat
1363), authorized USDA to make loans for legislation furnishing and
improving telephone service in rural areas. The loans were intended to be
used to furnish,

improve, expand, construct, and operate telephone facilities or systems in
rural areas. Compact- implementing legislation authorized programs of the
Rural Electrification Administration to be made available to the FSM and the
RMI. The Rural Utilities Service was the successor to the Rural
Electrification Administration. Requirements Performance: Telecommunications
facilities were required to be built and operated according to USDA
specifications, and loans were required to be repaid in a timely manner. The
length of the loans was not

allowed to exceed the expected life of the equipment built, except as
approved by the administrator of RUS. The interest rate varied by the type
of loan: hardship loans were at 5 percent; cost of money loan rates varied
but could not exceed 7 percent.

Accountability: Each loan application was subject to review and to
engineering and financial feasibility studies. A variety of safeguards were
in place to protect U. S. funds. The borrower received no loan funds until
he showed that the work was either under contract or completed. As
contractors completed phases of each project, the borrower?s engineer and
architect were required to provide extensive documentation to RUS. RUS
inspected the site at the completion of major project phases. After
construction, annual audits kept USDA aware of the companies? financial
status. U. S./ FSM U. S./ RMI Assessment of

This program met its performance requirements. Both companies, the FSM
Telecommunications Corporation performance (FSMTC) and the Marshall Islands
National Telecommunications Authority (MINTA), provided access to telephone
service to a significant portion of the national populations. They were also
repaying their loans. The loan to FSMTC totaled $39.9 million for 35 years,
at 5 percent interest. The loans to MINTA totaled $22.80 million and were
also for 35 years, at 5 percent interest.

Assessment of Accountability was effective. Both countries?
telecommunications companies were subject to the feasibility accountability
study requirement. Both feasibility studies showed the projects to be
financially viable. USDA and the companies complied with required
safeguards. Each company was subject to loan fund and accounting reviews
during construction. Each audit had minor findings that were quickly
resolved. The Rural Utilities Service- financed projects had strict
oversight by USDA employees, who required the builders to meet USDA
specifications.

(Continued From Previous Page) Problems in

The program encountered conditions that could significantly increase costs
to USDA. For example, several implementing U. S. developments could
jeopardize loan repayment. Although the feasibility studies predicted the
projects? viability, programs in the FSM

the studies did not assess the possibility that Compact funds might be
severely reduced over the life of the and the RMI

loans. During the first 15 years of the Compact, U. S. funding to the island
nations was decreased every 5 years. Officials of both companies stated that
future severe decreases in Compact funding to the island nations could
decrease their companies? revenues enough to jeopardize their ability to
repay their USDA loans. In addition, USDA administrators had not adequately
considered how their programs could be terminated if U. S. program
assistance were to end in 2016. Also, in 1997 the Federal Communications
Commission issued

an order to establish benchmarks that would govern the international
settlement rates that U. S. carriers were permitted to pay foreign carriers
to terminate international traffic originating in the United States.
According to the order, these benchmark rates were necessary because under
the current system, the settlement rates that

U. S. carriers paid foreign carriers to terminate international traffic
originating in the United States were substantially above the cost that
foreign carriers incurred to terminate that traffic. FSMTC and MINTA both
protested that this would seriously damage their revenues, cutting their
income substantially and endangering the companies? ability to repay their
loans to the U. S. government. Both companies relied on incoming long
distance telephone calls for a significant portion of their revenue. As of
October 2001, settlement rates had not

been adjusted, but negotiations were underway between U. S. carriers and
FSMTC and MINTA to reach an agreement on this issue. The loan to MINTA was
guaranteed by the government of the Marshall Islands. The loan to FSMTC was
secured by the facilities of the company. Under the November 2000 U. S.
proposal for future FSM assistance, U. S. funding would decrease, and as it
decreased, real per capita gross domestic product (GDP) in the islands would
also decrease. As GDP decreased, funds available to the governments

would also decrease, calling into question the governments? ability to repay
any guaranteed loans. Source: GAO.

Table 10: The U. S. Department of Agriculture?s (USDA) Rural Utilities
Service (RUS) Electrical Loans Program

Purpose and legislation RUS electrical loans, authorized under the Rural
Electrification Act of 1936, as amended, were intended to furnish and
improve electrical service in rural areas and to finance the construction of
electric distribution, transmission, and generation facilities. Compact-
implementing legislation authorized programs of the Rural Electrification
Administration to be made available to the FSM and the RMI. The Rural
Utilities Service was the successor to the Rural Electrification
Administration.

Requirements Performance: Electrical facilities were to be built and
operated according to USDA specifications, and the loan( s) were to be
repaid in a timely manner. The terms of the loans varied up to 35 years but
were not to exceed the useful life of the equipment built. The USDA
regulations defined electrical engineering, architectural and design
policies and procedures, electric system construction policies and
procedures, and electric standards and specifications for materials and
construction. Each loan application was required to be reviewed and assessed
through detailed engineering and financial feasibility studies to determine
the

usefulness of the facilities and the borrower?s ability to repay the loans.

Accountability: A variety of safeguards were in place to protect U. S.
funds. The borrower was to receive no loan funds until it showed that the
work was either under contract or completed. Once the borrower received
funds, it was to submit detailed financial reports and annual audited
financial statements. RUS field accountants perform a loan review to ensure
that all funds have been expended for the purposes for which they were
granted. On- site inspections of facilities were supposed to occur every 3
years to ensure that the facilities were being maintained in a satisfactory
manner. U. S./ FSM U. S./ RMI Assessment of

This program has met its performance requirements to date. Both local power
companies were subject to performance engineering and financial feasibility
study requirements. Feasibility studies showed the projects to be both

necessary and financially viable. No loans have yet been made to FSM
electric utilities. The Marshalls Energy Company?s (MEC) RUS loan The
Pohnpei Utilities Company (PUC) currently has an financed the construction
of a new power plant in

application pending with RUS. No construction has Majuro, consisting of two
6.4- megawatt diesel engines occurred. Approval of the application was
contingent and related facilities. This was the first RUS electrical on the
PUC?s obtaining clear title to a parcel of land as loan to the FSM, the RMI,
or Palau. a The new facilities

a site for the plant. This would provide additional became functional in
December 1999. MEC borrowed power to the main island of Pohnpei State.

about $12 million. The terms were 6.9 percent for 20 years. Assessment of
Accountability was effective. The Rural Utilities Service- financed projects
had oversight by USDA- approved accountability consulting engineers, who
required the builders to meet USDA specifications. USDA and the companies

complied with required safeguards. PUC had not yet received loan approval as
of October 2001. MEC borrowed only the money actually needed. MEC had sent 1
year?s audited financial statements. MEC came through loan fund and
accounting reviews during construction, with minor findings that were
quickly resolved. Problems in

Future developments may jeopardize loan repayment. Although the financial
feasibility studies predicted the implementing U. S. projects? viability,
neither study assessed the possibility that Compact funds might be reduced
over the life of programs in the FSM

the loans. Indeed, during the first 15 years of the Compact, U. S. funding
to the island nations was decreased and the RMI every 5 years. Officials of
both companies stated that future severe decreases in Compact funding to the
island nations could diminish their companies? revenues enough to jeopardize
their ability to repay their USDA loans. RUS managers stated that they had
discussed the possibility of severely reduced funding to the FSM and the RMI
and had decided that such a funding decrease was unlikely. The MEC provided
documentation showing that its leases for property on which the plant would
be built were extended until 2017. MEC also provided documentation that the
Republic of the Marshall Islands? legislative assembly, the Nitijela,
authorized the Marshall Islands to guarantee the repayment of the loan.
Under the November 2000 proposal for U. S. assistance to the FSM, U. S.
funding would decrease and, as it decreased, real per capita gross domestic
product (GDP) in the islands would also decrease. As GDP decreased, funds
available to the governments

would also decrease, calling into question the governments? ability to repay
any guaranteed loans.

a Palau was another nation that, along with the FSM and the RMI, is a Freely
Associated State and likewise was formerly subject to U. S. administration
under the Trust Territory of the Pacific Islands. Source: GAO.

Table 11: The Federal Emergency Management Agency (FEMA) Program

Purpose and FEMA assistance was intended to help states and localities
respond to, plan for, recover from, and mitigate against legislation
disasters. Disaster assistance services and programs were to be made
available to the FSM and the RMI in the same manner as assistance was made
available to a U. S. state. The assistance was to be provided in accordance

with the Disaster Relief Act of 1974, as amended, and applicable executive
orders and FEMA regulations. FEMA?s authority for conducting disaster
assistance in the FSM and the RMI was contained in the Compact of Free
Association, sections 221 and 232, and in article X of the Federal Programs
and Services Agreement concluded pursuant to the Compact of Free
Association.

Requirements Performance: FEMA was to make disaster preparedness improvement
grants on an annual basis and to provide hazard mitigation grants and
disaster assistance as determined by the president. The actual amount of
direct disaster assistance provided in a given year varied and was
completely dependent on U. S. presidential disaster

declarations.

Accountability: According to FEMA- provided documents, FEMA exercised
accountability over a variety of programs to the FSM and the RMI, including
disaster preparedness grants, for which it awarded up to $50, 000 per year
on a matching basis, and hazard mitigation grants, to reduce future losses
from disasters. FEMA was required to provide assistance to the FSM and the
RMI at levels equivalent to those available to the Trust Territory of the
Pacific Islands in 1986. The FSM and the RMI were required to provide annual
performance reports to FEMA. U. S./ FSM U. S./ RMI

Assessment of The program has met its performance requirements and
standards. FEMA has provided the assistance required in performance the
Compact; however, the FSM and the RMI have not fully used the available
funds to improve their disaster preparedness as allowed under the grant
agreements. Neither the FSM nor the RMI appeared to be developing the
capability for their states and localities to respond to, plan for, recover
from, and mitigate against disasters. The disaster preparedness grants were
awarded to help develop the capability to respond to disasters. However, the
FSM and the RMI have not taken full advantage of the available funds.

Since 1995, FEMA has responded to a 1997 typhoon Since 1995, FEMA has
responded to a 1998 drought in and a 1998 drought in the FSM. The
obligations totaled

the RMI. The obligations totaled $7. 9 million. Regional $2.7 million and
$1. 8 million, respectively. Regional financial records show that the RMI
has expended financial records show that the FSM has expended only $11,598
of $100, 000 awarded for disaster preparedness $12, 525 of $138,000 awarded
for disaster preparedness grants since fiscal year 1998. Since the start of
the grants since fiscal year 1997. Since the start of the hazard mitigation
grants in 1988, the RMI has committed

hazard mitigation grants in 1988, six disasters occurred less than 100
percent of the available funds. in the FSM, and less than 100 percent of the
available funds were committed.

Assessment of Accountability needed improvements to be more effective.
accountability The FSM last submitted a performance report in October

The RMI did not submit a performance report during 1999 and did not submit a
report as required in 2000. 1996- 2000, although it is required to do so
annually. Problems in

The program encountered conditions that significantly reduced potential
program accomplishments and increased implementing U. S. program costs.
FEMA?s programs were designed to support and supplement viable state
programs and efforts. programs in the

They were not intended to go directly to local communities, supplanting
marginal central government programs. FSM and the RMI Some of the biggest
problems encountered related to implementing traditional programs, developed
for the United States, in a distant island environment and culture.
According to FEMA, providing money and assistance consistent with U. S-
based regulations and laws disrupts social structures and changes relative
priorities in communities, fosters a counter- productive dependency, and
frequently results in adverse long- term effects. For example, temporary and
sustained free food programs discourage traditional fishing and farming.
Assistance as currently provided delayed rebuilding after a disaster until
FEMA resources arrived, and it proved to be difficult to manage.

Source: GAO.

Table 12: The U. S. Postal Service (USPS) Program

Purpose and USPS assistance under the Compact was intended to provide for
(1) mail service between U. S. locations and legislation exchange points in
the FSM and the RMI, including special services; and (2) dispatch,
documentation, statistical, accounting, and settlement operations in
connection with the international exchange of mail. The assistance was to be
provided to help the FSM and the RMI develop the infrastructure and capacity
for independent postal operations. Requirements Performance: USPS was
required to provide mail transportation, technical assistance, postal
financial services such as money orders, and postal transaction and
reporting forms. USPS was authorized to establish cost- related

postal rates for mail going from the United States to the FSM and the RMI.
Additionally, USPS was required to transfer ownership of postal facilities
and equipment in use as of 1986 to the FSM and the RMI. The FSM and the RMI
were required to (1) protect the postal services provided by the United
States from exploitation for monetary gain by individuals and organizations
and (2) ensure that outgoing mail complies with international and U. S.
postal requirements.

Accountability: USPS was required to provide services at levels equivalent
to those available in 1986, such as dispatching and keeping records on
international mail exchanges and reconciling activity on transactions with
the FSM and the RMI. USPS was also required to pay and be reimbursed by
Department of the Interior from appropriations for the cost of transporting
mail to and from six designated FSM and RMI exchange points. The FSM and the
RMI were required to (1) adequately fund internal postal services so the
USPS may perform its responsibilities; (2) issue money orders in compliance
with USPS regulations; and (3) remit money collected to the USPS; for
example, from collect- on- delivery parcels and money orders. U. S./ FSM U.
S./ RMI Assessment of

The program has met its performance requirements and standards. USPS has
provided assistance and services in performance accordance with the Compact,
including mail transportation, technical assistance, postal financial
services such as money orders, and postal transaction and reporting forms.
Additionally, USPS has transferred postal facilities and equipment to the
FSM and the RMI. The FSM has experienced internal problems with its The RMI
has experienced internal problems with its operations; however, reasonable
efforts have been made operations; however, reasonable efforts have been
made to avoid exploitation and to comply with international and

to avoid exploitation and to comply with international and U. S. postal
requirements.

U. S. postal requirements. Assessment of

Accountability needed to be improved. USPS has had difficulties receiving
remittances in a timely manner from the accountability FSM and the RMI post
offices for collect- on- delivery parcels and money order transactions;
however, it has no enforcement or control authority over FSM and RMI postal
operations. The FSM has dismissed staff persons over the past 5 The RMI has
dismissed staff persons over the past 5 years for money order- related and
other theft and misuse years for theft of funds. The RMI continues to
experience of funds. The most recent national public audit of FSM theft and
financial irregularities with money order and postal operations, for fiscal
years 1997- 1998, concluded other cash transactions. External audits of its
postal that internal controls, especially involving revenue, were operations
were not conducted. Internal postal generally inadequate. An FSM legislative
appropriation in operations in the RMI were not adequately funded, fiscal
year 2000 repaid outstanding obligations due to because operating expenses
were not paid. For USPS. Shortages accumulating over a 10- year period
example, monthly rental on the main post office building resulted from bank
deposit errors and money order

was more than 1 year in arrears. Additionally, post office shortages and
errors. The FSM decided to clear all telephone service has been terminated
at least three arrears at one time; thus, it required FSM congressional

times in the past year because of delinquency. action for funding.
Liquidating obligations was a Minister of Finance rather than a postal
responsibility.

(Continued From Previous Page) Problems in

The program has encountered conditions that have significantly reduced
potential program accomplishments and implementing U. S. increased costs.
For example, mail delivery has not met postal standards for prompt and
efficient delivery. Despite programs in the

USPS investment in special contracted mail flights to the islands, mail
delivery was not prompt. Since in- transit mail FSM and the RMI was under
USPS control, the USPS had a shared responsibility for delays when mail was
offloaded from aircraft. The USPS incurred significant costs in providing
mail to the FSM and the RMI. USPS was reimbursed almost $7.6 million from
Interior in transportation, administration, and technical assistance costs
during fiscal years 1987- 2000. However, according to USPS officials,
accumulated though not reimbursed costs for transporting mail totaled $30
million in extra mail transportation costs during those years. Interior was
aware of the USPS?s additional costs but said that USPS has only recently
documented the additional incurred expenses. Interior did not believe a
special appropriation was possible, because the USPS has taken almost 10
years to uncover its costs. Furthermore, though granted authority to
establish cost- related rates for mail going from the United States to the
FSM and the RMI and to apply international postal rates, the USPS has failed
to exercise this authority, thereby contributing to its lack of sufficient
revenue to cover its expenses, including the $30 million in accumulated but
not reimbursed costs.

Source: GAO.

Table 13: The Federal Aviation Administration (FAA) Program

Purpose and The Compact has required the U. S. government to provide
aviation safety services in the FSM and the RMI in order legislation to: (1)
foster safe and efficient air travel and (2) facilitate the establishment of
aviation safety authorities and aviation safety statutory and regulatory
regimes in the FSM and the RMI. Requirements Performance: FAA was the
federal entity that provided aviation services to the FSM and the RMI. The
Compact

required FAA to provide (1) en route air traffic services, (2) flight
inspection and equipment evaluation and certification, (3) assistance in
developing and updating procedures and standards, and (4) technical
assistance to help the FSM and the RMI governments develop civil aviation
safety authorities and aviation safety and certification programs.

Accountability: FAA was required to provide services at levels equivalent to
those provided to the FSM and the RMI in 1986. FAA did not provide any
direct grants or other funds directly to the FSM and the RMI. Therefore, the
accountability for funds was indirect, meaning that FAA was required to
account only for materiel, equipment, facilities, and training.

U. S./ FSM U. S./ RMI Assessment of

The program has met its performance requirements and standards. FAA has
carried out its responsibilities as performance stipulated in the Compact,
according to U. S., RMI, and FSM officials and the FAA?s overall safety
record. FAA has provided training to develop infrastructure (including
rescue and firefighter training), assisted in aviation security, and funded
travel and lodging expenses for local nationals to attend the FAA Training
Academy in Oklahoma City, Oklahoma, and other FAA training facilities.

The FSM?s 14- year record of air traffic safety showed two The RMI has
reported no aircraft accidents, injuries, or aircraft accidents within the
past 2 years, but no serious

fatalities over the past 14 years. injuries and no fatalities.

Assessment of Accountability appeared to be effective, according to U. S.,
RMI, and FSM officials. FAA did not provide any grants or accountability
other funds directly to the FSM and the RMI. As a result, FAA directly
accounted for all materiel, equipment, facilities, and training. There have
been no FAA findings of theft or misuse of materiel or equipment provided by
the United States. FAA was helping local nationals to take over airport
operations and had drafted a plan for the FSM and the RMI to assume a large
share of responsibility for airport operations over the next 10 years.
Problems in Retention of trained staff necessary to operate airports was an
issue for the FSM and the RMI, though some implementing U. S. workforce
stability has been achieved in the past 4 to 5 years. FAA provided training
to local nationals in

programs in the airworthiness safety, certification, and inspection; in
airport operations; and in operating, inspecting, testing, and FSM and the
RMI

maintaining existing and newly installed equipment. Once trained, however,
local nationals have commanded better pay elsewhere and have often left.
Training was also a challenge because of the differences in educational
background, culture, and experience of FSM and RMI trainees in comparison
with U. S.- educated trainees.

In addition, construction costs were usually two to four times higher than
in the United States, because most items had to be imported, including the
contractors. When local contractors or others with the appropriate expertise
were available, FAA hired them and gained savings by employing local
contractors.

Source: GAO.

Table 14: The National Weather Service (NWS) Program

Purpose and NWS has generally provided weather forecasts and warnings for
the United States and its territories, adjacent legislation waters, and
ocean areas for the protection of life and property and the enhancement of
the national economy. The NWS services and programs were provided in the FSM
and the RMI as required in the Compact and pursuant to legal provisions
cited in article VII of the Federal Programs and Services Agreement
authorized under section 232 of the Compact of Free Association. The NWS
assistance program under the Compact allowed for the FSM and the

RMI to establish and maintain their own weather services. Requirements
Performance: Under the Compact, NWS was to provide public and aviation
weather forecasts and severe weather

warnings in the FSM and the RMI. The FSM and the RMI weather offices were
required to provide warnings, observations, and forecasts, and also to give
inputs to Guam?s weather service for its daily Western Pacific area
forecasts.

Accountability: NWS was required to provide or reimburse the FSM and the RMI
for materials, equipment, facilities, salaries, maintenance, and other
expenses of its weather service operations. Appropriated funds to support
the FSM and the RMI weather offices went to the Department of the Interior,
and Interior was to reimburse NWS. The reimbursements included costs
incurred by the FSM, the RMI, and the NWS/ Pacific Region to manage,
supervise, operate, and maintain the facilities and offices. NWS was
required to provide assistance to the FSM and the RMI at levels equivalent
to those available to the Trust Territory of the Pacific Islands in 1986.

U. S./ FSM U. S./ RMI Assessment of

The program has met its performance requirements and standards. The program
was effective in that NWS performance provided the FSM and the RMI with
facilities, equipment, technical assistance, and resources for operating
their

weather services. NWS has also trained the FSM and the RMI weather staffs.
The FSM weather offices provided warnings, The RMI weather offices provided
warnings, observations, and forecasts and gave inputs to Guam?s

observations, and forecasts and gave inputs to Guam?s weather service for
its daily Western Pacific area weather service for its daily Western Pacific
area forecasts.

forecasts. Assessment of

The accountability actions appeared responsive to the NWS requirements. NWS
had direct oversight of the FSM accountability and the RMI weather service
offices and exercised quality control over their operations and products.
NWS had undertaken regular inspections of weather stations and required that
the stations operate at U. S. standards. NWS

performed comprehensive audits and regularly received monthly reports on
activities to facilitate exercising quality control over FSM and RMI weather
observations. According to U. S., FSM, and RMI officials, NWS provided
services in accordance with the Compact. NWS reviewed and approved all
reimbursements for FSM and RMI payrolls and their equipment, facilities, and
materials costs. NWS, using Interior- provided funding, paid the operating
costs. NWS had trained the FSM and the RMI weather

staffs and reimbursed these countries for costs incurred for all NWS-
approved training and partly funded the meteorologist training program. The
reimbursements included costs incurred by the FSM, RMI, and NWS/ Pacific
Region to manage, supervise, operate, and maintain the facilities and
offices. The FSM provided reports to NWS and had not been

The RMI provided reports to NWS and has not been cited for significant
deficiencies in observations, reports,

cited for significant deficiencies in observations, reports, and
inspections. Since NWS has the option to refuse and inspections. Since NWS
has the option to refuse any reimbursements or to request justification for
any any reimbursements or to request justification for any reimbursements,
problems with reimbursements to FSM reimbursements, problems with
reimbursements to RMI have been minimal.

have been minimal. Problems in

NWS officials have reported no significant implementation problems.
implementing U. S. programs in the

FSM and the RMI Source: GAO.

Comments from the Department of the

Appendi x II I Interior Note: GAO?s comments supplementing those in the
report text appear at the end of the appendix.

See comment 1. Now on p. 55.

See comment 2 Now on p. 56.

Now on p. 56. Now on p. 51.

GAO Comments The following are GAO?s comments on the Department of the
Interior?s letter dated December 11, 2001. 1. We amended the draft on page
55 to clarify that the Department of the

Interior did not fill the position of federal programs coordinator until
1997. The Department of the Interior, in commenting on this draft, stated
that a field representative covered the FSM, the RMI, and Palau in 1990,
implying that it met its requirement to provide federal program
coordination. However, discussions with the field representative revealed
that he was neither given the authority, nor had the means, to coordinate
the federal programs in the FSM and the RMI until 1997.

2. We amended the draft on page 56 to clarify that the Department of the
Interior?s federal program coordinator?s report did not usually include
recommendations.

Appendi x V I Comments from the Department of State Note: GAO?s comments
supplementing those in the report text appear at the end of the appendix.

See comment 1.

See comment 2. Now on p. 60.

GAO Comments The following are GAO?s comments on the Department of State?s
letter dated November 16, 2001.

1. In commenting on our draft report, the Department of State reported that
it supported GAO?s recommendation but lacked the resources and technical
expertise to conduct a comprehensive assessment of program assistance to the
FSM and the RMI. We recognize that State lacks the resources and technical
expertise. For that reason, our recommendation calls for State to work in
consultation with the Department of the Interior and those federal
departments with

programs in the region, as well as with the Federal Regional Council, to
take advantage of their resources and technical expertise to develop the
joint report to the Congress. Given the unique opportunity presented by the
Compact renegotiations, we believe this is an appropriate time to reassess
the basis and conditions for providing U. S. program assistance to the FSM
and the RMI.

2. We have added language to page 60 to clarify State?s current position.

Comments from the Department of Health and

Appendi x V

Human Services GAO?s comments supplementing those in the report text appear
at the end of the appendix.

See comment 1.

See comment 2. See comment 3.

See comment 4. See comment 5. See comment 6.

See comment 7.

GAO Comments The following are GAO?s comments on the Department of Health
and Human Service?s letter dated December 3, 2001.

1. We believe our report provides a balanced review of the program?s
achievements. We state in the lead sentence of our Results in Brief that
many federal programs provided numerous, and in many cases critical,
services to the FSM and the RMI. Head Start was included in this assessment.
In addition, we stated on page 13 that the Head Start program provided
comprehensive health, education, and nutrition services to 1,800 preschool
children each year in the FSM and 1, 200

each year in the RMI. For both countries, we noted specific accomplishments
of the Head Start program. 2. Our report did not state that Federal Regional
Council made a recommendation; rather, it simply quoted the council report,
in which

the council ?concluded that it was essential that an on- site federal grants
coordinator be appointed...? to each nation. We removed the statement that
council members were not aware that an Interior representative already
provided an on- site presence.

3. We added a footnote to page 44 to incorporate HHS?s statement that the
grantee provided documentation for the $341, 378 in questioned costs.
However, neither HHS nor FSM officials indicated during the audit that the
Pohnpei program subsequently provided appropriate documentation for the
questioned costs. As a result, we were not able to independently verify
HHS?s statement or to review the supporting documentation. 4. HHS is not
correct in stating that GAO and research findings have concluded that the
Head Start program is effective. GAO, in its 2001 report on Head Start,
stated that there is still insufficient research to draw conclusions about
the effectiveness of the program. 41 The report

also stated that, based on GAO?s recommendation, Congress mandated that HHS
fund and conduct an evaluation of the impact of the Head Start program. The
final report is not due until 2006.

5. We added language to page 31 to clarify this point. 41 Early Childhood
Programs: The Use of Impact Evaluations to Assess Program Effects

(GAO- 01- 542, Apr. 16, 2001).

6. We added language to page 31 attributing these statements. 7. We have
clarified on page 31 that it was the former Maternal and Child

Health program manager who provided us with this information just prior to
his retirement. We also added a footnote that the current U. S. MCH officer
responsible for the FSM and the RMI programs also acknowledges the
overwhelming need for technical assistance because of the social and
economic problems in the FSM and the RMI.

Comments from the Government of the

Appendi x VI

Federated States of Micronesia GAO?s comments supplementing those in the
report text appear at the end of the appendix.

See comment 1. See comment 2.

See comment 3.

See comment 4. Now on p. 4.

See comment 5. Now on p. 12.

See comment 6. Now on p. 13.

See comment 7. Now on p. 25.

See comment 8. Now on pp. 29, 14, and 72.

See comment 9.

See comment 10. Now on p. 44.

See comment 11. Now on p. 45.

See comment 12. Now on p. 46.

Now on p. 69.

GAO Comments The following are GAO?s comments on the Government of the
Federated States of Micronesia?s letter dated December 10, 2001.

1. Because of past FSM and RMI concerns about formatting issues, the draft
that GAO provided had separate evaluations of each nation?s performance in
appendix II of the report, to ensure that the two nations

were separately listed. 2. According to the Asian Development Bank and
others, although the college does not track student attrition rates, and
consequently lacks hard data on student graduation rates, it has a low
graduation rate. According to the Asian Development Bank?s study (Federated
States of Micronesia: Human Resources Study: Health and Education, Dec.
1999), the ?actual graduate output of the COM system is quite small, with
only 139 graduates from the national campus in 1998.? During this period,
there were 775 full- time enrollments. In addition, the report

noted that the college lacked an accurate student tracking system necessary
to develop correct statistics. For example, no data were kept on student
attrition rates. In addition, the college?s 1998 accreditation

report found that the college lacked information on student retention rates,
completion rates, and graduation rates, and that with 80 percent of the
incoming freshmen academically unprepared for college, the college could not
effectively help students who experienced academic difficulty. According to
the college president, only 50 percent of the applicants to the college met
the college requirements for entrance; of those, 80 percent were placed in
remedial math and English classes. According to the president, those
students often exhausted their Pell Grants before they were ready for credit
courses and thus lost the financial resources necessary to continue their
schooling, contributing to the low graduation rate from the college.

3. GAO did not state in the report that any of the nine programs were
?failures.? We stated, in the opening sentence of our Results in Brief, that
the programs we reviewed provided numerous, and in many cases important,
services to the citizens of the FSM and the RMI and that U. S. embassy, FSM,
and RMI officials reported that these were critical programs in each
country. We also documented those

accomplishments, by program and by country, in table I of this report. To
the question that the FSM posed concerning how many programs within the
United States itself could meet the assessment standard, we

point out that four of the programs in the FSM and the RMI successfully met
program standards and goals without significantly increased costs. 4. We are
not in a position to know whether or not these programs are rife

with theft, fraud, and abuse. Because of time and resource constraints while
in- country, we were able to conduct only limited evaluations of the
accountability of each program, and we are unable to say what was
undetected. However, the auditors were surprised to find accountability
problems in two- thirds of the programs they selected and instances of
theft, fraud, and abuse in 5 of the 12 programs.

5. We incorporated this clarification on page 12 of the report. 6. Program
managers from SEPPIE, FASEG, Head Start, and other

programs consistently told us that almost all program funds came either from
U. S. program or U. S. Compact funds. In addition, the Asian Development
Bank found in 1998 that only $560,000, or 2 percent of the FSM national and
state budget allocations for education, came from locally generated
revenues. The remaining 98 percent came from U. S. grants or Compact funds.
Although these locally generated revenues may be increasing, FSM special
education officials told us that it is unlikely that greater levels of local
funding for special education would

become available unless new funding sources were identified. We repeatedly
asked FSM program managers, as well as our liaison officer from the FSM
finance department, for data specifying by program the amount of locally
generated revenue, but these data were never provided.

7. We changed the text on page 25 to state that mail delivery was delayed.
8. This information was included in the draft report and can be found on

pages 14 and 72. We agree that Pell Grants offer an important opportunity
for FSM students to pursue college studies in the United States. Although we
tried to examine this aspect of the program, for example, by quantifying the
number of FSM students who graduated from U. S. institutions, neither the
FSM government nor the U. S. Department of Education was able to provide
this information.

9. There is overwhelming evidence that, without Pell Grants, the FSM college
would collapse. For example, in documentation prepared for our visit, the
college provided an analysis of the loss of U. S. student financial aid, of
which Pell Grants are the largest source. The analysis

found that the loss of these funds would have a ?devastating effect,? as 50
percent of the college revenues is derived from this assistance. It also
stated that the FSM government funds are ?non- existent? to make

up for the loss of U. S. student assistance funds and that, therefore, if
the college ?were to lose access to U. S. student financial assistance
programs, most, if not all, of the programs would close down.? In addition,
in its December 1999 report, the Asian Development Bank found that financing
for education was ?almost totally reliant on U. S. funding either through
Compact funds or access to U. S. grant programs. The FSM is largely
dependent on external sources of funding

for its education system- without these funds the system in its current form
would collapse.?

10. We added clarifying language to page 44 of the report. The three
accounting department officials admitted to stealing about $11,500.

11. We added language to page 45 clarifying this point and to emphasize the
efforts made by the FSM college to improve accountability. 12. When people
at or near the top of any nation?s government receive

assistance that was designed for the neediest, they should not be surprised
that such assistance receives extra scrutiny. Our findings draw on our own
review, as well as on reports by the Inspector General. The Department of
the Interior Inspector General detailed this particular case in a September
1999 report:

The Pohnpei Local Office made Rural Development Direct Single Family Housing
Program loans to borrowers who constructed houses that exceeded what would
be considered a modest house design on the island of Pohnpei and made a loan
to one borrower that exceeded the maximum authorized loan amount by
$15,000?.

The Code of Federal Regulations (7 CFR 3550. 57( a)), in defining a ?modest
dwelling,? states, ?The property must be one that is considered modest for
the area, must not be designed for income providing purposes?.?

Our [the Inspector General?s] review of the floor plans in the loan file
disclosed that the design of the house appeared to exceed what would be
considered a modest house on the island of Pohnpei. In addition, we noted a
May 23, 1998, entry in the running case record stating that the Pohnpei
local office?s engineer visited the construction site and found that the
design of the house had been changed to include the construction of a second
floor. However, no action was taken by the Pohnpei local office to stop the
construction of the second floor. We also noted, based on documents in the
loan file, that the borrower had

required an additional loan of $38, 000 to complete the construction of the
house. However, in an October 29, 1998, letter to the borrower, the Pohnpei
local office stated that ?we are unable to approve your application on the
basis that your total indebtedness with the agency

will exceed the present authorized loan limit.? As a result of our review of
the loan file, on March 16, 1999, we visited the construction site and found
that a two- story house, which appeared to be more than modest, was under
construction.

We were told in April 2001 that the local trustee agency for the Rural
Housing Service, the Pohnpei State Housing Authority, had paid off the USDA
loans from the escrow account set up to pay off any defaulted loans. This
depleted the escrow account, and the Pohnpei State Legislature had to
appropriate funds to replenish the account.

We have also added another photograph in figure 17 of a modest house to
contrast with the photographs of the nonmodest houses.

Comments from the Government of the

Appendi x VII

Republic of the Marshall Islands GAO?s comments supplementing those in the
report text appear at the end of the appendix.

See comment 1. See comment 2.

See comment 3.

See comment 4. See comment 5. See See comment comment 6.

6. See comment 7.

See comment 8. See comment 9.

See comment 10.

See comment 12.

GAO Comments The following are GAO?s comments on the Government of the
Republic of the Marshall Islands letter dated December 10, 2001. 1. We do
not assert that the neediest residents were not served. The

report stated that, because of the lack of accurate income data, loans could
not be targeted only to the most needy, which is the purpose of the program.
We assert that, if income data specifically for the FSM and the RMI were
used to calculate the low- and very low- income levels

for each country, fewer people would likely be eligible for the program than
are now eligible with the current Western Pacific income levels.

2. Additional language was inserted to clarify this issue on page 42. 3. The
JTPA Title II Quarterly Status Report, July 1, 1999, to June 2000

(Final Report), signed by the local program manager on September 11, 2000,
reported that only 14 percent of the job training graduates entered
employment. In contrast, RMI reported in its Program Year 1999 Annual Report
that 100 percent entered employment. Both documents stated that 35 trainees
finished their job training; however, the first document reported that only
5 entered employment, while the second

document states that all 35 entered employment. 4. Although the RMI was
exempted from having to meet the program?s

national reporting requirements, the RMI was required to provide accurate
performance reports to the Department of Labor?s regional office in San
Francisco. The Department of Labor?s program manager, as well Department of
Labor documentation stretching back to 1993, documents Labor?s concerns
about the unreliability of the data submitted to the regional office. For
example, a 1994 Department of Labor memorandum on a Pacific Basin JTPA
liaison meeting stated that ?the enrollment and termination rates, as
reported by the RMI, cannot

be trusted.? In 2001, the Department of Labor?s program manager expressed
these same concerns.

5. As noted above, the program was not exempt from providing performance
reports to the regional office.

6. GAO based its conclusion that ?poor economic conditions limited
employment opportunities? on the fact that the program is now focused on
teaching ?survival skills,? or subsistence living, because of a lack of

jobs.

7. We agree with the RMI that having unreliable data precludes knowing with
certainty whether the JTPA program was effective. However, the program was
designed so that the burden of proof was on those implementing the program,
and program effectiveness was determined by having reliable data on the
numbers of trainees that found

employment. 8. We have added this to the report on page 30. 9. Table I
describes the ?usefulness? of this program to the RMI. To further clarify
this point, we have added information on the number of teachers

trained using FASEG funds. 10. Additional language has been added to page 29
to clarify this point. 11. The 9- percent graduation rate was stated by the
president of the

college, who also provided documentation to support the graduation rate.

12. The report notes on page14 that the program has made college education
available for thousands of students and funded the creation of the only U.
S.- accredited college in the RMI.

13. FEMA, not GAO, concluded that these programs should be terminated. 14.
FEMA, not GAO, concluded that these programs foster dependency. 15. Disaster
Preparedness Improvement Grants over two years totaled

$100,000 and are matching grants. According to FEMA records, the funds had
not been expended at the time of our review. The RMI confirmed that the
information had not been timely and properly reported, and added that
reorganization and capacity issues hindered

the timely reporting of these expenditures. GAO agrees that the RMI needs to
institute improvements to better comply with FEMA?s reporting requirements.

Appendi x VI II

GAO Contact and Staff Acknowledgments GAO Contact Emil Friberg, (202) 512-
8990 Acknowledgments In addition to the contact named above, Eugene Beye,
Edward George,

Wyley Neal, Rona Mendelsohn, and Mary Moutsos made key contributions to this
report.

Related GAO Products

Foreign Relations: Kwajalein Atoll Is the Key U. S. Defense Interest in Two
Micronesian Nations (GAO- 02- 119, Jan. 22, 2002).

Compact of Free Association: Negotiations Should Address Aid Effectiveness
and Accountability and Migrants? Impact on U. S. Areas

(GAO- 02- 270T, Dec. 6, 2001).

Foreign Relations: Migration From Micronesian Nations Has Had Significant
Impact on Guam, Hawaii, and the Commonwealth of the Northern Mariana Islands
(GAO- 02- 40, Oct. 5, 2001).

Foreign Assistance: Lessons Learned From Donors? Experiences in the Pacific
Region (GAO- 01- 808, Aug. 17, 2001).

Foreign Assistance: U. S. Funds to Two Micronesian Nations Had Little Impact
on Economic Development (GAO/ NSIAD- 00- 216, Sept. 21, 2000).

Foreign Assistance: U. S. Funds to Two Micronesian Nations Had Little Impact
on Economic Development and Accountability Over Funds Was Limited (GAO/ T-
NSIAD/ RCED- 00- 227, June 28, 2000).

Foreign Relations: Better Accountability Needed over U. S. Assistance to
Micronesia and the Marshall Islands (GAO/ RCED- 00- 67, May 31, 2000).

(711558)

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a

GAO United States General Accounting Office

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Contents

Contents

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Contents

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Contents

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Page 1 GAO- 02- 70 Micronesian Programs United States General Accounting
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Appendix I

Appendix I Objectives, Scope, and Methodology

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Appendix II

Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix II GAO Assessment of 13 Programs in the Federated States of
Micronesia and the Republic of the Marshall Islands

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Appendix III

Appendix III Comments from the Department of the Interior

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Appendix III Comments from the Department of the Interior

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Appendix IV

Appendix IV Comments from the Department of State

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Appendix IV Comments from the Department of State

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Appendix IV Comments from the Department of State

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Appendix V

Appendix V Comments from the Department of Health and Human Services

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Appendix V Comments from the Department of Health and Human Services

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Appendix V Comments from the Department of Health and Human Services

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Appendix V Comments from the Department of Health and Human Services

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Appendix V Comments from the Department of Health and Human Services

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Appendix V Comments from the Department of Health and Human Services

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Appendix VI

Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VI Comments from the Government of the Federated States of
Micronesia

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Appendix VII

Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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See comment 13. See comment 14. See comment 15.

Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VII Comments from the Government of the Republic of the Marshall
Islands

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Appendix VIII

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