Compact of Free Association: An Assessment of the Amended	 
Compacts and Related Agreements (15-JUL-03, GAO-03-1007T).	 
                                                                 
In 1986, the United States entered into a Compact of Free	 
Association with the Pacific Island nations of the Federated	 
States of Micronesia, or FSM, and the Republic of the Marshall	 
Islands, or RMI. The Compact provided about $2.1 billion in U.S. 
funds, supplied by the Department of the Interior, over 17 years 
(1987-2003) to the FSM and the RMI. These funds were intended to 
advance economic development. In a past report, GAO found that	 
this assistance did little to advance economic development in	 
either country, and accountability over funding was limited. The 
Compact also established U.S. defense rights and obligations in  
the region and allowed for migration from both countries to the  
United States. The three parties recently renegotiated expiring  
economic assistance provisions of the Compact in order to provide
an additional 20 years of assistance (2004-2023). In addition,	 
the negotiations addressed defense and immigration issues. The	 
House International Relations and Resources Committees requested 
that GAO report on Compact negotiations.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1007T					        
    ACCNO:   A07548						        
  TITLE:     Compact of Free Association: An Assessment of the Amended
Compacts and Related Agreements 				 
     DATE:   07/15/2003 
  SUBJECT:   Accountability					 
	     Federal funds					 
	     Foreign financial assistance			 
	     International agreements				 
	     International relations				 
	     Compact of Free Association			 
	     Federated States of Micronesia			 
	     Republic of the Marshall Islands			 

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GAO-03-1007T

Testimony Before the Committee on Energy and Natural Resources, U. S.
Senate

United States General Accounting Office

GAO For Release on Delivery Expected at 2: 30 p. m. EDT Tuesday, July 15,
2003 COMPACT OF FREE

ASSOCIATION An Assessment of the Amended Compacts and Related Agreements

Statement of Susan S. Westin, Managing Director International Affairs and
Trade

GAO- 03- 1007T

The amended Compacts of Free Association between the United States and the
FSM and the RMI to renew expiring U. S. assistance could potentially cost
the U. S. government about $6.6 billion in new authorizations from the
Congress. Of this amount, $3.5 billion would cover payments over a 20-
year period (2004- 2023), while $3.1 billion represents payments for U. S.
military access to Kwajalein Atoll in the RMI for the years 2024 through
2086. While the level of annual grant assistance to both countries would
decrease each

year, contributions to trust funds* meant to eventually replace grant
funding* would increase annually by a comparable amount. Nevertheless, at
an assumed annual 6 percent rate of return, earnings from the FSM trust
fund would be unable to replace expiring grant assistance in 2024, while
earnings

from the RMI trust fund would encounter the same problem by 2040. The
amended Compacts strengthen reporting and monitoring measures that could
improve accountability over assistance, if diligently implemented. These
measures include the following: assistance grants would be targeted to
priority areas such as health and education; annual reporting and
consultation requirements would be expanded; and funds could be withheld
for noncompliance with grant terms and conditions. The successful
implementation of the many new accountability provisions will require
appropriate resources and sustained commitment from the United States, the
FSM, and the RMI.

Regarding defense, U. S. military access to Kwajalein Atoll in the RMI
would be extended from 2016 through 2066, with an option to extend through
2086. Finally, Compact provisions addressing immigration have been
strengthened. For example, FSM and RMI citizens entering the United States
would need to carry a passport, and the U. S. Attorney General could,
through regulations, specify the time and conditions of admission to the
United States for these citizens.

Estimated New U. S. Authorizations for the FSM and the RMI, Fiscal Years
2004- 2086 (U. S. dollars in millions)

FSM RMI Total Fiscal years 2004- 2023 $2,296 $1,204 $3,500 Fiscal years
2024- 2086 Not applicable 3,081 3,081

Fiscal years 2004- 2086, total possible new U. S. authorizations for the
FSM and the RMI $2,296 $4,285 $6,581 Source: GAO estimate based on
information in the amended Compacts.

Note: These figures are adjusted for inflation. In 2004 U. S. dollars, the
total cost would be $3. 8 billion. In 1986, the United States entered into
a Compact of Free Association with the Pacific Island nations of the
Federated States of Micronesia, or FSM, and the Republic of the

Marshall Islands, or RMI. The Compact provided about $2. 1 billion in U.
S. funds, supplied by the Department of the Interior, over 17 years (1987-
2003) to the FSM and the RMI. These funds

were intended to advance economic development. In a past report, GAO found
that this assistance did little to advance economic development in either
country, and accountability over funding was limited. The Compact

also established U. S. defense rights and obligations in the region and
allowed for migration from both countries to the United States. The three
parties recently renegotiated expiring economic assistance provisions of
the

Compact in order to provide an additional 20 years of assistance (2004-
2023). In addition, the

negotiations addressed defense and immigration issues. The House
International Relations and Resources Committees requested that GAO report
on Compact negotiations. This testimony discusses

negotiated changes to the levels and structure of future assistance,
including the potential cost to the U. S. government. Further, it reviews
accountability, defense,

and immigration changes brought about by the amended Compacts and related
agreements.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 1007T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Susan S. Westin at (202) 512- 4148 or WestinS@ gao.
gov. Highlights of GAO- 03- 1007T, a testimony

before the Senate Committee on Energy and Natural Resources

July 15, 2003

COMPACT OF FREE ASSOCIATION

An Assessment of the Amended Compacts and Related Agreements

Page 1 GAO- 03- 1007T Compact of Free Association Mr. Chairman and Members
of the Committee: I am pleased to be here today to testify on the Compact
of Free

Association between the United States and the Pacific Island nations of
the Federated States of Micronesia, or the FSM, and the Republic of the
Marshall Islands, or the RMI. 1 In 1986, the United States entered into
this Compact with the two countries after almost 40 years of administering
the islands under the United Nations Trust Territory of the Pacific
Islands. The Compact has provided U. S. assistance to the FSM and the RMI
in the form of direct funding as well as federal services and programs for
almost 17 years. Further, the Compact establishes U. S. defense rights and
obligations in the region and allows for migration from both countries to
the United States. Provisions of the Compact that address economic
assistance were scheduled to expire in 2001; however, they can remain and
have remained in effect while the United States and each nation
renegotiated the affected provisions. 2 Today I will discuss our review of
the amended Compacts and related

agreements that the United States signed with the FSM and the RMI in May
and April of 2003, respectively. (According to a Department of State
official, while the original Compact was one document that applied to both
the FSM and the RMI, the Compact that has been amended is now a

separate Compact with each nation.) Specifically, I will discuss changes
to levels and structure of future assistance, including the potential cost
to the U. S. government. Further, I will comment on changes in
accountability and other key issues addressed in the amended Compacts and
related agreements.

The amended Compacts of Free Association with the FSM and the RMI to renew
expiring assistance would require about $3.5 billion in funding over the
next 20 years with a total possible authorization through 2086 of

1 The FSM had a population of about 107,000 in 2000, while the RMI had a
population of 50,840 in 1999, according to each country*s most recent
census. 2 Other Compact provisions are also due to expire in late 2003 if
not renewed. These include (1) certain defense provisions, such as the
requirement that the FSM and the RMI refrain from actions that the United
States determines are incompatible with U. S. defense obligations (the
defense veto) and (2) federal services listed in the Compact. Summary

Page 2 GAO- 03- 1007T Compact of Free Association $6.6 billion from the U.
S. Congress. 3 The amended Compacts would provide decreasing levels of
annual assistance over a 20- year term (2004-

2023) in order to encourage budgetary self- reliance. Simultaneously, the
Compacts would require building up a trust fund (with contributions that
would increase annually) for each country to generate annual earnings that
would replace the grants that end in 2023. Per capita grant assistance
would fall over the 20- year period, particularly for the RMI. At an
assumed trust fund rate of return of 6 percent, in 2024 the RMI trust fund
would cover expiring grant assistance, while the FSM trust fund would be
insufficient to replace grants. By the year 2040, however, RMI trust fund
returns also would be unable to replace grant funding.

The amended Compacts include many strengthened reporting and monitoring
measures that could improve accountability if diligently implemented. The
amended Compacts and related agreements have addressed most of the
recommendations that we have made in past reports regarding assistance
accountability. For example, assistance would be provided through grants
targeted to priority areas, such as health and education, and with
specific terms and conditions attached. Annual reporting and consultation
requirements would be expanded, and funds could be withheld for
noncompliance with Compact terms and conditions.

However, the successful implementation of the many new accountability
provisions will require a sustained commitment and appropriate resources
from the United States, the FSM, and the RMI.

The amended Compacts address other key issues. One key change to Compact
defense provisions would occur* U. S. military access to Kwajalein Atoll
in the RMI could be extended from 2016 to 2086. This extension would cost
$3.4 billion of the total possible authorization of $6.6 billion. Further,
amended Compact provisions on immigration have been strengthened. FSM and
RMI citizens entering the United States would need to carry a passport,
and regulations could be promulgated that would impose time limits and
other conditions on admission to the United States for these citizens.

3 Although the amended Compacts have been signed by the U. S., FSM, and
RMI governments, they have not been approved by the legislature of any
country. Therefore, in our testimony we describe the amended Compacts*
requirements and potential impact in a

conditional manner in recognition that the Compacts have not yet been
enacted. The total possible cost to renew expiring assistance in fiscal
year 2004 U. S. dollars would be $3.8 billion on the basis of the
Congressional Budget Office*s forecasted inflation rate.

Page 3 GAO- 03- 1007T Compact of Free Association The 1986 Compact of Free
Association between the United States, the FSM, and the RMI provided a
framework for the United States to work

toward achieving its three main goals: (1) to secure self- government for
the FSM and the RMI, (2) to assist the FSM and the RMI in their efforts to
advance economic development and self- sufficiency, and (3) to ensure
certain national security rights for all of the parties. The first goal
has been met. The FSM and the RMI are independent nations and are members
of

international organizations such as the United Nations. The second goal of
the Compact* advancing economic development and self- sufficiency for both
countries* was to be accomplished primarily through U. S. direct financial
payments (to be disbursed and monitored by the U. S. Department of the
Interior) to the FSM and the RMI. For 1987 through 2003, U. S. assistance
to the FSM and the RMI to support economic development is estimated, on
the basis of Interior data, to be about $2.1 billion. 4 Economic self-
sufficiency has not been achieved. Although total U. S. assistance
(Compact direct funding as well as U. S. programs and services) as a
percentage of total government revenue has fallen in both countries
(particularly in the FSM), the two nations remain highly dependent on U.
S. funds. U. S. direct assistance has maintained standards of living that
are higher than could be achieved in the absence of U. S. support.
Further, the U. S., FSM, and RMI governments provided little
accountability over Compact expenditures.

The third goal of the Compact* securing national security rights for all
parties* has been achieved. The Compact obligates the United States to
defend the FSM and the RMI against an attack or the threat of attack in
the same way it would defend its own citizens. The Compact also provides
the United States with the right of *strategic denial,* the ability to
prevent access to the islands and their territorial waters by the military
personnel of other countries or the use of the islands for military
purposes. In

4 The cost of prior assistance in fiscal year 2004 U. S. dollars was $2.6
billion. This estimate does not include payments for Compact- authorized
federal services or U. S. military use of Kwajalein Atoll land, nor does
it include investment development funds provided under section 111 of
Public Law 99- 239. Additionally, the Compact served as the vehicle to
reach a full settlement of all compensation claims related to U. S.
nuclear tests conducted on Marshallese atolls between 1946 and 1958. In a
Compact- related agreement, the U. S.

government agreed to provide $150 million to create a trust fund. While
the Compact and its related agreements represented the full settlement of
all nuclear claims, it provided the RMI with the right to submit a
petition of *changed circumstance* to the U. S. Congress requesting
additional compensation. The RMI government submitted such a petition in
September 2000, which the U. S. executive branch is still reviewing.
Background

Page 4 GAO- 03- 1007T Compact of Free Association addition, the Compact
grants the United States a *defense veto.* Finally, through a Compact-
related agreement, the United States secured

continued access to military facilities on Kwajalein Atoll in the RMI
through 2016. 5 In a previous report, we identified Kwajalein Atoll as the
key U. S. defense interest in the two countries. 6 Of these rights, only
the defense veto is due to expire in 2003 if not renewed.

Another aspect of the special relationship between the FSM and the RMI and
the United States involves the unique immigration rights that the Compact
grants. Through the original Compact, citizens of both nations are allowed
to live and work in the United States as *nonimmigrants* and can stay for
long periods of time, with few restrictions. 7 Further, the Compact
exempted FSM and RMI citizens from meeting U. S. passport, visa, and labor
certification requirements when entering the United States. In recognition
of the potential adverse impacts that Hawaii and nearby U. S.
commonwealths and territories could face as a result of an influx of FSM
and RMI citizens, the Congress authorized Compact impact payments to
address the financial impact of these nonimmigrants on Guam, Hawaii, and
the Commonwealth of the Northern Mariana Islands (CNMI). 8 By 1998, more
than 13,000 FSM and RMI citizens had made use of the Compact immigration
provisions and were living in the three areas. The governments of the
three locations have provided the U. S. government with annual Compact
nonimmigrant impact estimates; for example, in 2000 the total estimated
impact for the three areas was $58.2 million. In

5 U. S. access to Kwajalein Atoll is established through the U. S.- RMI
Military Use and Operating Rights Agreement (MUORA). Funding provided for
U. S. military access to Kwajalein for the years 1987 to 2003 is
estimated, on the basis of Interior data, to be $64 million for
development assistance and $144 million for the RMI government to
compensate landowners for U. S. use of their lands.

6 See U. S. General Accounting Office, Foreign Relations: Kwajalein Atoll
Is the Key U. S. Defense Interest in Two Micronesian Nations, GAO- 02- 119
(Washington, D. C.: Jan. 22, 2002). 7 Typically, nonimmigrants include
those individuals who are in the United States temporarily as visitors,
students, or workers.

8 Payments were also authorized for American Samoa, but impact
compensation has not been sought.

Page 5 GAO- 03- 1007T Compact of Free Association that year, Guam received
$7.58 million in impact funding, while the other two areas received no
funding. 9 In the fall of 1999, the United States and the two Pacific
Island nations

began negotiating economic assistance and defense provisions of the
Compact that were due to expire. Immigration issues were also addressed.
According to the Department of State, the aims of the amended Compacts are
to (1) continue economic assistance to advance self- reliance, while
improving accountability and effectiveness; (2) continue the defense
relationship, including a 50- year lease extension (beyond 2016) of U. S.
military access to Kwajalein Atoll in the RMI; (3) strengthen immigration
provisions; and (4) provide assistance to lessen the impact of Micronesian
migration on Hawaii, Guam, and the CNMI.

Under the amended Compacts with the FSM and the RMI, new congressional
authorizations of approximately $3.5 billion in funding would be required
over the next 20 years, with a total possible authorization through 2086
of $6.6 billion. Economic assistance would be provided to the two
countries for 20 years* from 2004 through 2023* with all subsequent
funding directed to the RMI for continued U. S. access to military
facilities in that country. Under the U. S. proposals, annual grant
amounts to each country would be reduced each year in order to encourage
budgetary self- reliance and transition the countries from receiving
annual U. S. grant funding to receiving annual trust fund earnings. This
decrease in grant funding, combined with FSM and RMI population growth,
would also result in falling per capita grant assistance over the funding
period* particularly for the RMI. If the trust funds established in the
amended Compacts earn a 6 percent rate of return, the FSM trust fund would
be insufficient to replace expiring annual grants. The RMI trust fund
would replace grants in fiscal year 2024 but would become insufficient for
this purpose by fiscal year 2040.

Under the amended Compacts with the FSM and the RMI, new congressional
authorizations of approximately $6.6 billion could be required for U. S.
payments from fiscal years 2004 to 2086, of which $3.5 billion would be
required for the first 20 years of the Compacts

9 See U. S. General Accounting Office, Foreign Relations: Migration From
Micronesian Nations Has Had Significant Impact on Guam, Hawaii, and the
Commonwealth of the Northern Mariana Islands, GAO- 02- 40 (Washington, D.
C.: Oct. 5, 2001). Amended Compacts

Would Alter Assistance Levels and Structure

Amended Compacts Could Cost the U. S. Government $6.6 Billion

Page 6 GAO- 03- 1007T Compact of Free Association (see table 1). The share
of new authorizations to the FSM would be about $2.3 billion and would end
after fiscal year 2023. The share of new authorizations to the RMI would
be about $1.2 billion for the first 20 years, with about $300 million
related to extending U. S. military access to

Kwajalein Atoll through 2023. Further funding of $3.1 billion for the
remainder of the period corresponds to extended grants to Kwajalein and
payments related to U. S. military use of land at Kwajalein Atoll. 10 The
cost

of this $6.6 billion new authorization, expressed in fiscal year 2004 U.
S. dollars, would be $3.8 billion.

This new authorized funding would be provided to each country in the form
of (1) annual grant funds targeted to priority areas (such as health,
education, and infrastructure); (2) contributions to a trust fund for each
country such that trust fund earnings would become available to the FSM
and the RMI in fiscal year 2024 to replace expiring annual grants; (3)

payments the U. S. government makes to the RMI government that the RMI
transfers to Kwajalein landowners to compensate them for the U. S. use of
their lands for defense sites; and (4) an extension of federal services
that have been provided under the original Compact but are due to expire
in

fiscal year 2003. 10 U. S. access to Kwajalein Atoll in the RMI has
already been secured through 2016 through a Compact- related agreement.
The amended Compact with the RMI extends this funding to 2066, with an
additional 20- year optional lease extension at that point.

Page 7 GAO- 03- 1007T Compact of Free Association Table 1: Estimated New
U. S. Authorizations for the FSM and the RMI, Fiscal Years 2004- 2086 (U.
S. dollars in millions)

FSM RMI Total Fiscal years 2004- 2023 Grants for priority areas $1,612
$701 a $2,313

Trust fund contributions 517 276 793 Payments for U. S. military use of
Kwajalein Atoll land b Not applicable 191 191 Compact- authorized federal
services c 167 37 204

New U. S. authorization for 2004- 2023 2,296 1,204 3,500 Fiscal years
2024- 2086 Grants to Kwajalein Not applicable 948 a 948

Payments for U. S. military use of Kwajalein Atoll land Not applicable
2,133 2,133

New U. S. authorization for 2024- 2086 Not applicable 3,081 3,081 Fiscal
years 2004- 2086, total new U. S. authorizations for the FSM and the RMI
$2,296 $4,285 $6,581

Source: GAO estimate based on information in the amended Compacts. Under
the amended Compacts, U. S. payments are adjusted for inflation at two-
thirds of the percentage change in the U. S. gross domestic product
implicit price deflator.

Note: Numbers may not sum due to rounding. a The 1986 U. S.- RMI Military
Use and Operating Rights Agreement (MUORA) grants the United States access
to certain portions of Kwajalein Atoll and provides $24.7 million of
funding for development

and impact on Kwajalein from 2004 to 2016. Approximately $112 million of
the new proposed U. S. grant assistance of $701 million is for increasing
this funding to Kwajalein from 2004 to 2016 and for continuation of the
increased level of funding through 2066 and possibly to 2086 if the
agreement is extended. b As part of the 1986 MUORA, the RMI government has
also allocated $162 million of U. S. funding

from 2004 to 2016 under this agreement to landowners via a traditional
distribution system to compensate them for the U. S. use of their lands
for defense sites. The amended Compact increases these payments from 2004
to 2016 and continues the increased level of payments through 2066 and
possibly to 2086 if the agreement is extended. c Federal services
authorized in the Compact include weather, aviation, and postal services.
Services

associated with the Federal Emergency Management Agency have been
excluded. An estimate of assistance from the U. S. Agency for
International Development*s Office of Disaster Assistance has not been
included.

Under the U. S. proposals, annual grant amounts to each country would be
reduced each year in order to encourage budgetary self- reliance and
transition the countries from receiving annual U. S. grant funding to
receiving annual trust fund earnings. Thus, the amended Compacts increase
annual U. S. contributions to the trust funds each year by the grant
reduction amount. This decrease in grant funding, combined with FSM and
RMI population growth, would also result in falling per capita grant
assistance over the funding period* particularly for the RMI (see fig.

1). Using published U. S. Census population growth rate projections for
the two countries, the real value of grants per capita to the FSM would
begin Amended Compacts Would Reduce U. S. Grant Support

Annually

Page 8 GAO- 03- 1007T Compact of Free Association at an estimated $687 in
fiscal year 2004 and would further decrease over the course of the Compact
to $476 in fiscal year 2023. The real value of

grants per capita to the RMI would begin at an estimated $627 in fiscal
year 2004 and would further decrease to an estimated $303 in fiscal year
2023. The reduction in real per capita funding over the next 20 years is a
continuation of the decreasing amount of available grant funds (in real
terms) that the FSM and the RMI had during the 17 years of prior Compact
assistance.

Figure 1: Estimated FSM and RMI Per Capita Grant Assistance for Fiscal
Years 1987- 2023 (Fiscal Year 2004 U. S. Dollars)

Note: This analysis includes only Compact funds available to governments.
Therefore, the analysis excludes investment development funds provided
under section 111 of Public Law 99- 239, trust fund contributions, federal
programs and services, audit assistance, and MUORA- related lease payments
that the RMI government transfers to Kwajalein landowners. U. S. Census
population historical and projected population growth rates are used in
conjunction with the most recent country Census data. U. S. Census
projections are subject to revision.

Page 9 GAO- 03- 1007T Compact of Free Association The decline in annual
grant assistance could impact FSM and RMI government budget and service
provision, employment prospects,

migration, and the overall gross domestic product (GDP) outlook, though
the immediate effect is likely to differ between the two countries. For
example, the FSM is likely to experience fiscal pressures in 2004, when
the value of Compact grant assistance drops in real terms by 8 percent
relative to the 2001 level (a reduction equal to 3 percent of GDP). 11 For
the RMI,

however, the proposed level of Compact grant assistance in 2004 would
actually be 8 percent higher in real terms than the 2001 level (an
increase equal to 3 percent of GDP). According to the RMI, this increase
would likely be allocated largely to the infrastructure investment budget
and would provide a substantial stimulus to the economy in the first years
of

the new Compact. The amended Compacts were designed to build trust funds
that, beginning in fiscal year 2024, yield annual earnings to replace
grant assistance that ends in 2023. Both the FSM and the RMI are required
to provide an initial contribution to their respective trust funds of $30
million. In designing the trust funds, the Department of State assumed
that the trust fund would earn a 6 percent rate of return. 12 The amended
Compacts do not address whether trust fund earnings should be sufficient
to cover expiring federal services, but they do create a structure that
sets aside earnings above 6 percent, should they occur, that could act as
a buffer against years with

low or negative trust fund returns. Importantly, whether the estimated
value of the proposed trust funds would be sufficient to replace grants or
create a buffer account would depend on the rate of return that is
realized. 13  If the trust funds earn a 6 percent rate of return, then
the FSM trust fund

would yield a return of $57 million in fiscal year 2023, an amount
insufficient to replace expiring grants by an estimated value of $27
million. 11 The level of grant assistance in 2001 was converted into
fiscal year 2004 dollars for

comparison purposes. 12 The State Department chose a 6 percent return in
order to reflect a conservative investment strategy. This rate of return
can be compared with the current average forecasted return for long- term
U. S. government bonds of 5.8 percent by the Congressional Budget Office.

13 This analysis does not take into account volatile or negative returns.
The sufficiency of either the FSM or the RMI trust fund to replace grants
has not been tested under conditions of market volatility. Trust Funds May
Be Insufficient to Replace

Expiring Grants

Page 10 GAO- 03- 1007T Compact of Free Association The RMI trust fund
would yield a return of $33 million in fiscal year 2023, an estimated $5
million above the amount required to replace grants in fiscal year 2024.
Nevertheless, the RMI trust fund would become insufficient for replacing
grant funding by fiscal year 2040.

 If the trust funds are comprised of both stocks (60 percent of the
portfolio) and long- term government bonds (40 percent of the portfolio)
such that the forecasted average return is around 7.9 percent, then both
trust funds would yield returns sufficient to replace expiring grants and
to create a buffer account. However, while the RMI trust fund should
continue to grow in perpetuity, the FSM trust fund would eventually
deplete the buffer account and fail to replace grant funding by fiscal
year 2048.

I will now discuss provisions in the amended Compacts designed to provide
improved accountability over, and effectiveness of, U. S. assistance. This
is an area where we have offered several recommendations in past years, as
we have found accountability over past assistance to be lacking. 14 In
sum, most of our recommendations regarding future Compact assistance have
been addressed with the introduction of strengthened accountability
measures in the signed amended Compacts and related agreements. I must
emphasize, however, that the extent to which these provisions will
ultimately provide increased accountability over, and effectiveness of,
future U. S. assistance will depend upon how diligently the provisions are
implemented and monitored by all governments.

The following summary describes key accountability measures included in
the amended Compacts and related agreements:

 The amended Compacts would require that grants be targeted to priority
areas such as health, education, the environment, and public
infrastructure. In both countries, 5 percent of the amount dedicated to
infrastructure, combined with a matching amount from the island
governments, would be placed in an infrastructure maintenance fund.

14 See U. S. General Accounting Office, Foreign Assistance: U. S. Funds to
Two Micronesian Nations Had Little Impact on Economic Development, GAO/
NSIAD- 00- 216 (Washington, D. C.: Sept. 22, 2000) for a review of the
first 12 years of direct Compact assistance. Amended Compacts

Have Strengthened Accountability Over U. S. Assistance

Page 11 GAO- 03- 1007T Compact of Free Association  Compact- related
agreements with both countries (the so- called *fiscal procedures
agreements*) would establish a joint economic management

committee for the FSM and the RMI that would meet at least once annually.
The duties of the committees would include (1) reviewing planning
documents and evaluating island government progress to foster economic
advancement and budgetary self- reliance; (2) consulting with program and
service providers and other bilateral and multilateral partners to
coordinate or monitor the use of development assistance; (3) reviewing
audits; (4) reviewing performance outcomes in relation to the previous
year*s grant funding level, terms, and conditions; and (5) reviewing and
approving grant allocations (which would be binding) and performance
objectives for the upcoming year. Further, the fiscal

procedures agreements would give the United States control over the annual
review process: The United States would appoint three government members
to each committee, including the chairman, while the FSM or the

RMI would appoint two government members.  Grant conditions normally
applicable to U. S. state and local governments

would apply to each grant. General terms and conditions for the grants
would include conformance to plans, strategies, budgets, project
specifications, architectural and engineering specifications, and
performance standards. Other special conditions or restrictions could be
attached to grants as necessary.

 The United States could withhold payments if either country fails to
comply with grant terms and conditions. In addition, funds could be
withheld if the FSM or RMI governments do not cooperate in U. S.
investigations regarding whether Compact funds have been used for purposes
other than those set forth in the amended Compacts.

 The fiscal procedures agreements would require numerous reporting
requirements for the two countries. For example, each country must prepare
strategic planning documents that are updated regularly, annual budgets
that propose sector expenditures and performance measures, annual reports
to the U. S. President regarding the use of assistance, quarterly and
annual financial reports, and quarterly grant performance reports.

 The amended Compacts* trust fund management agreements would grant the
U. S. government control over trust fund management: The United States
would appoint three members, including the chairman, to a committee to
administer the trust funds, while the FSM or the RMI would appoint two
members. After the initial 20 years, the trust fund committee would remain
the same, unless otherwise agreed by the original parties.

Page 12 GAO- 03- 1007T Compact of Free Association The fiscal procedures
agreements would require the joint economic management committees to
consult with program providers in order to

coordinate future U. S. assistance. However, we have seen no evidence
demonstrating that an overall assessment of the appropriateness,
effectiveness, and oversight of U. S. programs has been conducted, as we
recommended. 15 The successful implementation of the many new
accountability provisions

will require a sustained commitment by the three governments to fulfill
their new roles and responsibilities. Appropriate resources from the
United States, the FSM, and the RMI represent one form of this commitment.
While the amended Compacts do not address staffing issues, officials from
Interior*s Office of Insular Affairs have informed us that their office
intends to post six staff in a new Honolulu office. Further, an Interior
official noted that his office has brought one new staff on board in
Washington, D. C., and intends to post one person to work in the RMI (one
staff is already resident in the FSM). We have not conducted an assessment
of Interior*s staffing plan and rationale and cannot comment on the
adequacy of the plan or whether it represents sufficient resources in the
right location.

The most significant defense- related change in the amended Compacts is
the extension of U. S. military access to Kwajalein Atoll in the RMI. 16
While the U. S. government had already secured access to Kwajalein until
2016 through the 1986 MUORA, the newly revised MUORA would grant the
United States access until 2066, with an option to extend for an
additional 20 years to 2086. According to a Department of Defense (DOD)
official,

15 This recommendation was included in U. S. General Accounting Office,
Foreign Assistance: Effectiveness and Accountability Problems Common in U.
S. Programs to Assist Two Micronesian Nations, GAO- 02- 70 (Washington, D.
C.: Jan. 22, 2002).

16 A few expiring provisions would be extended indefinitely in the amended
Compacts. The *defense veto* has been extended. In addition, the ability
of FSM and RMI citizens to volunteer to serve in the U. S. military would
be extended. Amended Compacts Address Other Key

Areas U. S. Military Access to Kwajalein Atoll Could Be Extended Until
2086

Page 13 GAO- 03- 1007T Compact of Free Association recent DOD assessments
have envisioned that access to Kwajalein would be needed well beyond 2016.
He stated that DOD has not undertaken any

further review of the topic, and none is currently planned. This official
also stated that, given the high priority accorded to missile defense
programs and to enhancing space operations and capabilities by the current
administration, and the inability to project the likely improvement in key
technologies beyond 2023, the need to extend the MUORA beyond 2016 is
persuasive. He also emphasized that the U. S. government has flexibility
in that it can end its use of Kwajalein Atoll any time after 2023 by
giving advance notice of 7 years and making a termination payment.

We have estimated that the total cost of this extension would be $3.4
billion (to cover years 2017 through 2086). 17 The majority of this
funding ($ 2.3 billion) would be provided by the RMI government to
Kwajalein Atoll landowners, while the remainder ($ 1.1 billion) would be
used for development and impact on Kwajalein Atoll. According to a State
Department official, there are approximately 80 landowners. Four
landowners receive one- third of the annual payment, which is based on
acreage owned. This landowner funding (along with all other
Kwajaleinrelated funds) through 2023 would not be provided by DOD but
would instead continue as an Interior appropriation. Departmental
responsibility for authorization and appropriation for Kwajalein- related
funding beyond 2023 has not been determined according to the Department of
State. Of

note, the Kwajalein Atoll landowners have not yet agreed to sign an
amended land- use agreement with the RMI government to extend U. S. access
to Kwajalein beyond 2016 at the funding levels established in the amended
Compact.

While the original Compact*s immigration provisions are not expiring, the
Department of State targeted them as requiring changes. The amended
Compacts would strengthen the immigration provisions of the Compact by
adding new restrictions and expressly applying the provisions of the

Immigration and Nationality Act of 1952, as amended (P. L. 82- 414) to
Compact nonimmigrants. 18 There are several new immigration provisions in
the amended Compacts that differ from those contained in the original

17 Our figure of $3.4 billion is adjusted for inflation. 18 As noted in
the background section, FSM and RMI citizens who enter the United States
are legally classified as *nonimmigrants* * that is, individuals who are
in the United States temporarily as visitors, students, or workers.
Amended Compacts Would

Strengthen Immigration Provisions

Page 14 GAO- 03- 1007T Compact of Free Association Compact. For example,
Compact nonimmigrants would now be required to carry a valid passport in
order to be admitted into the United States.

Further, children coming to the United States for the purpose of adoption
would not be admissible under the amended Compacts. Instead, these
children would have to apply for admission to the United States under the
general immigration requirements for adopted children. In addition, the
Attorney General would have the authority to issue regulations that
specify the time and conditions of a Compact nonimmigrant*s admission into
the United States (under the original Compact, regulations could be
promulgated to establish limitations on Compact nonimmigrants in U. S.
territories or possessions).

In addition, the implementing legislation for the amended Compacts would
provide $15 million annually for U. S. locations that experience costs
associated with Compact nonimmigrants. This amount would not be adjusted
for inflation, would be in effect for fiscal years 2004 through 2023, and
would total $300 million. Allocation of these funds between locations such
as Hawaii, Guam, and the CNMI would be based on the number of qualified
nonimmigrants in each location.

Mr. Chairman and Members of the Committee, this completes my prepared
statement. I would be happy to respond to any questions you or other
Members of the Committee may have at this time.

For future contacts regarding this testimony, please call Susan S. Westin
or Emil Friberg, Jr., at (202) 512- 4128. Individuals making key
contributions to this testimony included Leslie Holen, Kendall Schaefer,
Mary Moutsos, and Rona Mendelsohn. Contacts and

Acknowledgments

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