Compact of Free Association: An Assessment of the Amended	 
Compacts and Related Agreements (18-JUN-03, GAO-03-890T).	 
                                                                 
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.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-890T					        
    ACCNO:   A07245						        
  TITLE:     Compact of Free Association: An Assessment of the Amended
Compacts and Related Agreements 				 
     DATE:   06/18/2003 
  SUBJECT:   Accountability					 
	     Economic development				 
	     Economic growth					 
	     Economically depressed areas			 
	     Foreign economic assistance			 
	     Foreign governments				 
	     International agreements				 
	     International economic relations			 
	     International relations				 
	     Compact of Free Association			 
	     Kwajalein Atoll (Marshall Islands) 		 
	     Marshall Islands					 
	     Micronesia 					 
	     Northern Mariana Islands				 

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GAO-03-890T

Testimony Before the Subcommittee on Asia and the Pacific, Committee on
International Relations, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 1: 30 p. m. EDT Wednesday, June
18, 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- 890T

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 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- 890T. 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- 890T, a testimony

before the House Committee on International Relations, Subcommittee on
Asia and the Pacific

June 18, 2003

COMPACT OF FREE ASSOCIATION

An Assessment of the Amended Compacts and Related Agreements

Page 1 GAO- 03- 890T Compact of Free Association

Mr. Chairman and Members of the Subcommittee: 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 April
and May 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. Our testimony is based on our reports on the Compact
published over the past several years as well as our assessment of the
amended Compacts that was requested by Chairman Leach and Ranking Minority
Member Faleomavaega, Subcommittee on Asia and the Pacific, House Committee
on International Relations; Ranking Minority Member Lantos, House
Committee on International Relations; Ranking Minority Member Rahall,
House Committee on Resources; and Congressman Bereuter.

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 renegotiated and approved. 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.

Page 2 GAO- 03- 890T Compact of Free Association

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 $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 (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.

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. Amended
Compact provisions addressing one additional key area * immigration * have
been strengthened by adding new restrictions and

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 forecasted inflation rate (see

appendix). Summary

Page 3 GAO- 03- 890T Compact of Free Association

expressly applying the provisions of the Immigration and Nationality Act
of 1952 (INA), as amended (P. L. 82- 414), to Compact migrants. 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 a Compact migrant*s admission to the United States.

In 1986, the United States and the FSM and the RMI entered into the
Compact of Free Association. This Compact represented a new phase of the
unique and special relationship that has existed between the United States
and these island areas since World War II. It also represented a
continuation of U. S. rights and obligations first embodied in a U. N.
trusteeship agreement that made the United States the Administering
Authority of the Trust Territory of the Pacific Islands. 4 The Compact
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 the 15- year period covering 1987 through 2001,
funding was provided at levels that decreased every 5 years. For 2002 and
2003, while negotiations to renew expiring Compact provisions were
ongoing, funding levels increased to equal an average of the funding
provided during the previous 15 years. Thus, funds available to the two
governments were *bumped- up*

4 From 1947 to 1986, the United States administered this region under a
trusteeship agreement that obligated it to foster the development of
political institutions and move the Trust Territory toward self-
government and promote economic, social, and educational advancement. In
addition, the agreement allowed the United States to establish military
bases and station forces in the Trust Territory and close off areas for
security reasons as part of its rights. In addition to the islands of the
FSM and the RMI, the Trust Territory included Palau and the Northern
Mariana Islands. Background

Page 4 GAO- 03- 890T Compact of Free Association

during the last 2 years of assistance. 5 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. 6 We
have found that many Compact- funded projects in the FSM and the RMI
experienced problems because of poor planning and management, inadequate
construction and maintenance, or misuse of funds. Further the U. S., FSM,
and RMI governments provided little accountability over Compact
expenditures and have not ensured that funds were spent effectively or
efficiently. 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. In
addition, U. S. programs have been extended to the FSM and the RMI 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 the programs* effectiveness. 7 The third goal of the Compact
* securing national security rights for all

parties * has been achieved. At the time that the Compact was negotiated,
the United States was concerned about the use of the islands of the FSM 5
The FSM received additional U. S. grant assistance of about $17.5 million
in fiscal year 2002 and about $18 million in fiscal year 2003. The RMI
received additional U. S. grant assistance of about $3. 1 million in
fiscal year 2002 and $3. 3 million in fiscal year 2003 (excluding
increased payments related to Kwajalein land use).

6 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. 7 For
more information on U. S. programs and services provided to the FSM and
the RMI, see 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).

Page 5 GAO- 03- 890T Compact of Free Association

and the RMI as *springboards for aggression* against the United States, as
they had been used in World War II, and the Cold War incarnation of this
threat * the Soviet Union. The Compact and its related agreements
established several key defense rights for all three countries. 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 addition, the Compact grants the

United States a *defense veto* over actions by the FSM or the RMI
governments that the United States determines are incompatible with its
authority and responsibility for security and defense matters in these
countries. Finally, through a Compact- related agreement, the United
States secured continued access to military facilities on Kwajalein Atoll
in the RMI through 2016. 8 In a previous report, we identified Kwajalein
Atoll as the key U. S. defense interest in the two countries. 9 Of these
rights, only the defense veto is due to expire in 2003 if not
renegotiated.

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. 10 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,

8 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.

9 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). 10 Typically, nonimmigrants include
those individuals who are in the United States temporarily as visitors,
students, or workers.

Page 6 GAO- 03- 890T Compact of Free Association

and the Commonwealth of the Northern Mariana Islands (CNMI). 11 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 that year, Guam
received $7.58 million in impact funding, while the other two areas
received no funding. 12 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 State Department, the aims of the amended Compacts are to
(1) continue economic assistance to advance self- reliance, while
improving accountability and effectiveness; (2) continue the defense
relationship, including a 50- year lease extension (beyond 2016) of U. S.
military access to Kwajalein Atoll in the RMI; (3) strengthen immigration
provisions; and (4) provide assistance to lessen the impact of Micronesian
migration on Hawaii, Guam, and the CNMI.

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. Annual grant assistance to the FSM would fall from a real value
of $76 million in fiscal year 2004 to a real value of $55 million in
fiscal year 2023. Annual grant assistance to the RMI would fall from a
real value of $35 million to a real value of $24 million over the same
period. This decrease in

11 Payments were also authorized for American Samoa, but impact
compensation has not been sought. 12 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

Page 7 GAO- 03- 890T Compact of Free Association

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 (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. 13 The cost of this $6.6 billion
new authorization, expressed in fiscal year 2004 U. S. dollars, would be
$3.8 billion (see the appendix for a breakout of estimated new U. S.
authorizations to the FSM and the RMI in fiscal year 2004 U. S. dollars).

This new authorized funding would be provided to each country in the form
of

 annual grant funds targeted to priority areas (such as health,
education, and infrastructure), audit assistance, and disaster assistance;
 contributions to a trust fund for each country such that trust fund
earnings

would become available to the FSM and the RMI in fiscal year 2024 to
replace expiring annual grants;  payments the U. S. government makes to
the RMI government that the RMI

transfers to Kwajalein landowners to compensate them for the U. S. use of
their lands for defense sites; and 13 U. S. access to Kwajalein Atoll in
the RMI has already been secured through 2016 through a Compact- related
agreement. The U. S. proposal to the RMI extends this funding to 2066,
with an additional 20- year optional lease at that point. Amended Compacts
Could

Cost the U. S. Government $6.6 Billion

Page 8 GAO- 03- 890T Compact of Free Association

 an extension of federal services that have been provided under the
original Compact but are due to expire in fiscal year 2003.

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

Possible 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 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 U. S. proposal 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.

In addition to the new authorized funding, the U. S. government has
further expenditures related to the FSM and the RMI. These include (1) the
cost of

Page 9 GAO- 03- 890T Compact of Free Association

U. S. program assistance, estimated at around $1 billion 14 to the two
countries for the next 20 years; (2) payments previously authorized of
about $187 million for U. S. military access to Kwajalein Atoll in the RMI
through 2016; and (3) oversight and administration by the Department of
the Interior, estimated at a cost of around $42 million over the 20- year
period. Combining these three sources of U. S. funding ($ 1.2 billion)
with new authorizations ($ 6.6 billion), the total U. S. cost for all
Compactrelated payments related to the FSM and the RMI would amount to
about $7.8 billion, including estimated inflation.

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 (see figs. 1 and 2). Annual grant assistance to the FSM
would fall from a real value of $76 million in fiscal year 2004 to a real
value of $55 million in fiscal year 2023. 15 Annual grant assistance to
the RMI would fall from a real value of $35 million to a real value of $24
million over the same period.

14 In addition to Compact authorized federal services, numerous U. S.
federal agencies extend specific programs offered in the United States,
such as Pell grants and Head Start, to the FSM and the RMI in areas such
as education and health. The level of this program assistance has varied
over time as certain programs have been eliminated and other programs have
been introduced. Currently, the U. S. Congress is reviewing a number of
education programs to the FSM and the RMI, and the level of continued
program assistance is uncertain. 15 Although new authorization figures are
provided in current dollars so that total costs to

the U. S. government can be identified, this display of economic
assistance is provided in fiscal year 2004 constant dollars for
comparative purposes to show the impact of changes in government funding
on the economy and population. Amended Compacts Would Reduce U. S. Grant
Support

Annually

Page 10 GAO- 03- 890T Compact of Free Association Figure 1: Estimated New
U. S. Authorizations for Economic Assistance to the FSM by Type of
Funding, Fiscal Years 2004- 2023 (fiscal year 2004 U. S. dollars, in

millions) Note: This analysis excludes program assistance.

Page 11 GAO- 03- 890T Compact of Free Association Figure 2: Estimated New
U. S. Authorizations for Economic Assistance to the RMI by Type of
Funding, Fiscal Years 2004- 2023 (fiscal year 2004 U. S. dollars, in
millions)

Note: This analysis excludes program assistance and payments for U. S.
military use of Kwajalein Atoll land.

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. 3). 16 Using U. S.
Census population growth rate projections for the two countries, the real
value of grants per capita to the FSM would begin 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.

16 The migration impact of the amended Compacts is difficult to determine,
but if migration slows as a result of the amended Compacts or other
economic and demographic influences, then our per capita estimates would
be overstated.

Page 12 GAO- 03- 890T Compact of Free Association Figure 3: 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.

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 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). 17 For the RMI, however,

17 The level of grant assistance in 2001 was converted into fiscal year
2004 dollars for comparison purposes.

Page 13 GAO- 03- 890T Compact of Free Association 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.

Challenges to achieving economic self- sustainability in the long run
remain significant for both countries. First, education and health
indicators show the need to improve basic services in these areas, as the
nations face challenges with regard to literacy rates, high birth rates,
and access to safe water. Second, private sector employment is largely
made up of services and distribution activities that support the public
sector such that

employment prospects are uncertain, given declining U. S. assistance.
Third, private sector growth, which would rely on expanded exports and a
growing tourism industry, is limited by constraining factors common to
small island economies, such as limited domestic markets, a narrow
resource base, and a lack of infrastructure. 18 Fourth, socioeconomic
activities, infrastructure, and population may be vulnerable to the
impacts of climate change because the two countries could experience
coastal inundation, more frequent droughts and floods, and increases in
tropical cyclone intensities that could damage transport infrastructure.
19 Given the challenges for achieving economic self- sustainability, 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 State Department assumed that the trust fund would
earn

18 Potential sources of private sector growth include export earnings from
three sectors: commercial agriculture, fisheries, and tourism. 19 The
Intergovernmental Panel on Climate Change predicts that rising sea levels
over the next 50 years will result in land loss for areas in the RMI and
the FSM that will disrupt virtually all economic and social sectors. The
sea level rises could trigger significant migration because resettlement
within national boundaries, or abandonment of some atolls altogether, may
be the only viable option, with substantial costs for resettlement. For

example, in the RMI the average elevation on Majuro is 2.2 meters. In
Kwajalein Atoll, Ebeye*s average elevation is 2.2 meters, and the maximum
elevation is 2.5 meters. Trust Funds May Be

Insufficient to Replace Expiring Grants

Page 14 GAO- 03- 890T Compact of Free Association a 6 percent rate of
return. 20 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 (see table 2). 21  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. 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.

20 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.

21 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.

Page 15 GAO- 03- 890T Compact of Free Association Table 2: Estimated
Performance for the FSM and the RMI Trust Funds under Alternative Rates of
Return (U. S. dollars in millions)

Fund earns State Dept. assumed return

(6%) Fund earns return from

60% stocks and 40% longterm government bonds

(7.9%) FSM RMI FSM RMI

Projected value of trust fund at the end of FY 2023 $1,013 $575 $1,255
$717 Projected value of FY 2023 trust fund return 57 33 92 53 Surplus of
FY 2023 trust fund return over FY 2024 required

grant funding -27 5 8 25 Year when trust fund return is unable to replace
grant funding FY 2024 FY 2040 FY 2048 a Source: GAO estimate based on
amended Compacts adjusted for expected inflation. Note: The historic
average real rate of return from the U. S. stock market has been 7
percent.

Assuming a trust fund based on 60 percent stocks, which at a forecasted
inflation rate of 2.2 percent would earn a 9. 2 percent return, and 40
percent long- term U. S. government bonds, which would earn the forecasted
nominal rate of return of 5.8 percent, a nominal rate of return of 7.9
percent could be achieved for the trust fund. The estimated value of the
trust funds includes monies accrued in the buffer accounts and reflect the
initial contribution made by the FSM and the RMI to their respective trust
funds. a The RMI trust fund under this scenario continues to grow in
perpetuity. However, this analysis

assumes a steady real rate of return and does not account for volatility
in returns.

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. As I
discuss key proposed accountability measures, I will note where
appropriate whether our previous recommendations have been addressed. 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. Amended Compacts

Have Strengthened Accountability Over U. S. Assistance

Page 16 GAO- 03- 890T Compact of Free Association 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. 22 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. We
recommended in a September 2000 report that the U. S. government should

negotiate provisions that would provide future Compact funding through
grants targeted to priority areas and that funding should be set aside for
infrastructure maintenance. 23  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. In our previously cited

2000 report, we recommended that the U. S. government negotiate an
expanded agenda for future annual consultations. 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

22 Public infrastructure projects would be focused in the areas of
education, health, and safety. Progress reports for each project would be
required, and funding would be provided on a reimbursable basis. For the
RMI, not less than 30 percent or more than 50 percent of

the annual grant assistance would be available for public infrastructure
projects. 23 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.

Page 17 GAO- 03- 890T Compact of Free Association specifications,
architectural and engineering specifications, and performance standards.
Other special conditions or restrictions could be

attached to grants as necessary. Specific post- award requirements address
financial administration by establishing, for example, (1) improved
financial reporting, accounting records, internal controls, and budget
controls; (2) appropriate use of real property and equipment; and (3)
competitive and well- documented procurement. In our 2000 report, we
recommended that future assistance be provided with grants that had
specific requirements.

 The United States could withhold payments if either country fails to
comply with grant terms and conditions. The withholding amount would be
proportional to the breach of the term or condition. 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. In our 2000 report, we
recommended that withholding of funds be allowed.

 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. In our
2000 report, we recommended that expanded reporting requirements be
negotiated.

 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. We have
reported that well- designed trust funds can provide a sustainable source
of assistance and reduce long- term aid dependence. 24 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

24 See U. S. General Accounting Office, Foreign Assistance: Lessons
Learned From Donors* Experiences in the Pacific Region, GAO- 01- 808
(Washington, D. C.: Aug. 17, 2001).

Page 18 GAO- 03- 890T Compact of Free Association demonstrating that an
overall assessment of the appropriateness, effectiveness, and oversight of
U. S. programs, as we recommended, has

been conducted. 25 The successful implementation of the many new
accountability provisions will require a sustained commitment by the three
governments to fulfill their new roles and responsibility. Appropriate
resources from the United States, the FSM, and the RMI represent one form
of this commitment. While the 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. According to an
Interior official, these staff will consist of a health grant specialist,
an education grant specialist, an accountant, an economist, an auditor,
and an office assistant. Interior can also contract with the Army Corps of
Engineers for engineering assistance when necessary. Honolulu- based staff
may spend about half of their time in the FSM and the RMI. 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.
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, 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

25 This recommendation was included in GAO- 02- 70. Amended Compacts

Address Other Key Areas

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

Page 19 GAO- 03- 890T Compact of Free Association 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 $3.4
billion (to cover years 2017 through 2086). 26 The majority of this
funding ($ 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 State
Department. The

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

A few expiring provisions would be extended indefinitely in the amended
Compacts. The *defense veto* * the ability of the United States to veto
actions by the FSM or the RMI governments that the United States
determines are incompatible with U. S. authority and responsibility for
security and defense matters in the two countries * has been extended. In
addition, the ability of FSM and RMI citizens to volunteer to serve in the

U. S. military would be extended. According to a DOD official, this is a
beneficial provision since it, for example, gives the United States access
to persons with specialized knowledge and understanding of Pacific
cultures while also providing career opportunities for FSM and RMI
citizens. 27 26 Our figure of $3.4 billion is adjusted for inflation. 27
In the amended Compacts, DOD*s civic action teams have been eliminated.
Both

countries would now have access to humanitarian assistance programs that
would emphasize health, education, and infrastructure projects that DOD
would carry out.

Page 20 GAO- 03- 890T Compact of Free Association While the original
Compact*s immigration provisions are not expiring, the State Department
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 INA
to Compact nonimmigrants. 28 There are several new immigration provisions
in the amended Compacts that differ from those contained in the original
Compact (see table 3).

28 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 21 GAO- 03- 890T Compact of Free Association Table 3: Key Immigration
Issues: A Comparison of the Original and Amended Compacts Issue Original
Compact Amended Compacts

Passports Compact nonimmigrants do not need a passport to be admitted to
the United States. Compact nonimmigrants would need a valid

passport in order to be admitted into the United States. Entry into the
United States for

naturalized FSM and RMI citizens Naturalized FSM and RMI citizens are
eligible to apply for admission to the United States 5 years

after they are naturalized, so long as they were a resident of the FSM or
the RMI during that time.

Naturalized citizens would only be admissible if they are immediate
relatives of a citizen of the FSM or the RMI or if they were naturalized
before April 30, 2003. a Entry into the United States for the

purpose of adoption A child who came to the United States for the purpose
of adoption is not expressly prohibited from seeking admission into the
United States

under the Compact. However, the United States government has maintained
that such children are not admissible under the Compact, but,

rather, that they had to seek admission under general immigration
requirements for adopted children. A child who is 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. This provision would apply to any child who applied for
admission to the United States on or after March 1, 2003.

Conditions on admission to the United States and its territories or
possessions for Compact nonimmigrants

The United States has the authority to establish limitations, either in
statutes or regulations, on a Compact nonimmigrant*s right to establish
habitual residence in a territory or possession of the United States. b
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. c Source: GAO
legal analysis of the original and amended Compacts. Note: In addition,
any of the authorities in the amended Compacts that the United States may

exercise could also be exercised by the governments of the U. S.
territories or possessions where the INA does not apply (i. e., the CNMI
and American Samoa), so long as the exercise of such authority is lawful
under the laws of that territory or possession. a Such naturalized
citizens would also have to meet additional requirements, including
residency

requirements, unless they are an immediate relative of a citizen of the
FSM or the RMI who is serving in the U. S. military. b The United States
promulgated regulations in September 2000 regarding the rights and
limitations of

habitual residents in the territories and possessions of the United
States. These regulations applied to Compact nonimmigrants in Guam, the
Commonwealth of Puerto Rico, and the U. S. Virgin Islands. They did not
apply to Compact nonimmigrants residing in the 50 states, the District of
Columbia,

American Samoa, or the CNMI. c The INA would now expressly apply to any
Compact migrant who seeks admission or is admitted to the United States.
As such, in addition to the Attorney General*s authority to promulgate
regulations,

any grounds of inadmissibility or deportability under the INA would now
apply to Compact migrants except where the amended Compacts specify
otherwise. Some modifications, however, were made to the INA provision,
section 237( a)( 5), allowing for deportation on the basis of an alien
becoming a public charge.

Page 22 GAO- 03- 890T Compact of Free Association 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
nonimmigrants in each location.

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

Page 23 GAO- 03- 890T Compact of Free Association The estimated value of
new congressional authorizations to the FSM and the RMI would be
approximately $3.8 billion from fiscal years 2004 to 2086

measured in fiscal year 2004 dollars (see table 4). Table 4: Estimated New
U. S. Authorizations for the FSM and the RMI, Fiscal Years 2004- 2086
(Fiscal Year 2004 U. S. Dollars in Millions)

FSM RMI Total Fiscal years 2004- 2023 Grants for priority areas $1,323
$572 $1,895

Trust fund contributions 411 218 628

Payments for U. S. military use of Kwajalein Atoll land Not applicable 144
144

Compact- authorized federal services 135 30 165

New U. S. authorization for 2004- 2023 $1,868 $963 $2,832 Fiscal years
2024- 2086 Grants to Kwajalein Not applicable $306 $306

Payments for U. S. military use of Kwajalein Atoll land Not applicable 688
688

New U. S. authorization for 2024- 2086 Not applicable $993 $993 Fiscal
years 2004- 2086, total new U. S. authorizations for the FSM and the RMI
$1,868 $1,956 $3,825

Source: GAO estimate based on the amended Compacts. Note: Numbers may not
sum due to rounding.

Appendix: Estimated New U. S. Authorizations to the FSM and the RMI in
Fiscal Year 2004 U. S. Dollars

(320096)

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