    Compacts of Free Association: Micronesia and the Marshall Islands
    Face Challenges in Planning for Sustainability, Measuring
    Progress, and Ensuring Accountability (15-DEC-06, GAO-07-163).

    In 2003, the United States signed Compacts of Free Association
    with the Federated States of Micronesia (FSM) and the Republic of
    the Marshall Islands (RMI), amending a 1986 compact with the
    countries. The amended compacts provide the countries with a
    combined total of $3.6 billion from 2004 to 2023, with the annual
    grants declining gradually. The assistance, targeting six
    sectors, is aimed at assisting the countries' efforts to promote
    economic advancement and budgetary self-reliance. The Department
    of the Interior (Interior) administers and oversees the
    assistance. Complying with a legislative requirement, GAO
    examined, for fiscal years 2004 through 2006, (1) the FSM's and
    the RMI's use of compact funds, (2) their efforts to assess
    progress toward development goals, (3) their monitoring of sector
    grants and accountability for compact funds, and (4) Interior's
    administrative oversight of the assistance. GAO visited the FSM
    and the RMI; reviewed reports; and interviewed officials from the
    FSM, RMI, and U.S. governments.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-163
        ACCNO:   A64245
      TITLE:     Compacts of Free Association: Micronesia and the Marshall
    Islands Face Challenges in Planning for Sustainability, Measuring
    Progress, and Ensuring Accountability
         DATE:   12/15/2006
      SUBJECT:   Accountability
    	     Data collection
    	     Economic development
    	     Federal aid to foreign countries
    	     Financial management
    	     Foreign economic assistance
    	     Fund audits
    	     Grant administration
    	     Grant monitoring
    	     Grants
    	     Internal controls
    	     International agreements
    	     Program evaluation
    	     Reporting requirements
    	     Strategic planning
    	     Executive agency oversight
    	     Compact of Free Association with
    	     Micronesia

    	     Federated States of Micronesia
    	     Republic of the Marshall Islands

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    GAO-07-163

         * [1]Report to Congressional Committees

              * [2]December 2006

         * [3]COMPACTS OF FREE ASSOCIATION

              * [4]Micronesia and the Marshall Islands Face Challenges in
                Planning for Sustainability, Measuring Progress, and Ensuring
                Accountability

         * [5]Contents

              * [6]Results in Brief
              * [7]Background

                   * [8]Compact of Free Association: 1986 through 2003
                   * [9]Amended Compacts of Free Association: 2004 through 2023

                        * [10]Implementation Framework

                             * [11]Country Development Plan
                             * [12]Annual Sector Grant Budget
                             * [13]Joint Management and Accountability Committees
                             * [14]FSM and RMI Grant Management
                             * [15]U.S. Grant Administration

                        * [16]Compact Management Units

                   * [17]Supplemental Education Grant

              * [18]Compact Grants Targeted Infrastructure, Education, and
                Health, but Various Issues Constrained Countries' Use of Funds

                   * [19]Compact Funding Allocation in the FSM
                   * [20]Compact Funding Allocation in the RMI
                   * [21]Several Factors Have Limited Countries' Use of Compact
                     Funds
                   * [22]Lack of FSM and RMI Planning for Decrement Threatens
                     Sustainability of Government Services
                   * [23]FSM Sector Fund Allocation Was Not Based on Population
                     or Informed by State Needs

              * [24]FSM and RMI Have Limited Ability to Measure Progress toward
                Compact Goals

                   * [25]Countries Established Mechanisms for Measuring
                     Performance, but Data Shortcomings Limit Ability to Assess
                     Progress toward Goals

                        * [26]FSM Performance Indicators
                        * [27]RMI Performance Indicators

                   * [28]Shortcomings in Performance Reports Limit Usefulness for
                     Tracking Progress
                   * [29]FSM and RMI Lack Capacity to Collect, Assemble, and
                     Analyze Data to Assess Progress

              * [30]FSM and RMI Provided Limited Monitoring of Grant Operations,
                and FSM Accountability for Compact Funds Faced Challenges

                   * [31]FSM Provided Limited Monitoring and Accountability for
                     Use of Compact Funds

                        * [32]FSM Monitoring
                        * [33]FSM Accountability

                   * [34]RMI Monitoring Was Limited, but Accountability Improved

                        * [35]RMI Monitoring
                        * [36]RMI Accountability

              * [37]Interior Took Oversight Actions but Faced Challenges

                   * [38]OIA Monitored Performance, Assessed Compliance, and
                     Acted to Correct FSM and RMI Shortcomings
                   * [39]OIA Oversight Faced Challenges
                   * [40]Interior's Inspector General Reports Identified Problems
                     but Were Not Published

              * [41]Conclusions
              * [42]Recommendations for Executive Action
              * [43]Agency Comments and Our Evaluation

         * [44]Objectives, Scope, and Methodology
         * [45]U.S. Program Assistance to the FSM and the RMI
         * [46]U.S. Funds to Be Provided to the RMI Related to Kwajalein Atoll,
           2004 through 2023
         * [47]FSM and RMI Sector Grants, 2004 through 2006
         * [48]Single Audit Reports for the FSM and the RMI, 2001 through 2005

              * [49]Single Audits Were Not Timely, but Timeliness Improved
              * [50]Nearly All Audit Opinions on Financial Reporting Were
                Qualified and Contained Material Weaknesses and Reportable
                Conditions
              * [51]All Audit Opinions on Compliance with Requirements of Major
                Federal Programs Were Qualified and Contained Material Weaknesses
                and Reportable Conditions
              * [52]High-Risk Designations and Other Sanctions Threatened by OIA
                as Late Reports and Other Problems Persist

         * [53]FSM Compliance with Special Sector Grant Terms and Conditions
         * [54]RMI Compliance with Special Sector Grant Terms and Conditions
         * [55]Comments from the Department of the Interior
         * [56]Comments from the Federated States of Micronesia

              * [57]GAO Comments

         * [58]Comments from the Republic of the Marshall Islands

              * [59]GAO Comments

         * [60]GAO Contact and Staff Acknowledgments
         * [61]Related GAO Products

    Report to Congressional Committees

    December 2006

    COMPACTS OF FREE ASSOCIATION

    Micronesia and the Marshall Islands Face Challenges in Planning for
    Sustainability, Measuring Progress, and Ensuring Accountability

    Contents

    Tables

    Figures

    December 15, 2006Letter

    Congressional Committees

    From 1987 through 2003,^1 the United States provided $2.1 billion in
    economic assistance to the Federated States of Micronesia (FSM) and the
    Republic of the Marshall Islands (RMI) through a Compact of Free
    Association. In 2000, we reported that the U.S., FSM, and RMI governments
    had provided limited accountability over spending, and that U.S.
    assistance had resulted in little economic development in both
    countries.^2 In 2003, the U.S. government approved amended compacts with
    the FSM and the RMI.^3 These compacts provide for a combined total of $3.6
    billion for the two countries between 2004 and 2023,^4 with the Department
    of the Interior's (Interior) Office of Insular Affairs (OIA) responsible
    for administering and monitoring U.S. assistance.^5 U.S. grant funding
    will decrease annually, paired with increasing contributions to trust
    funds for the FSM and the RMI; earnings from the trust funds are intended
    to provide a source of revenue when the grants expire in 2023. The amended
    compacts identify the 20 years of grant assistance as intended to assist
    the FSM and RMI governments in their efforts to promote the economic
    advancement and budgetary self-reliance of their people. Recently we
    reported that both countries face obstacles to achieving these goals,
    including limited potential for long-term growth; limited progress in
    economic reforms; and
    significant dependence on public sector funding, which is largely
    supported by external assistance.^6

    The amended compacts require the countries to target funding to six
    sectors--education, health, the environment, public sector capacity
    building, private sector development, and infrastructure, with priority
    given to education and health. The amended compacts' subsidiary fiscal
    procedures agreements^7 require the FSM and RMI governments to monitor the
    day-to-day operations of sector grants and activities, submit periodic
    performance reports and financial statements, and ensure annual financial
    and compliance audits. In addition, the compacts and fiscal procedures
    agreements require that the U.S. and FSM Joint Economic Management
    Committee (JEMCO) and the U.S. and RMI Joint Economic Management and
    Financial Accountability Committee (JEMFAC) meet at least once annually to
    evaluate the progress of the FSM and the RMI, respectively, in achieving
    the objectives specified in their development plans; approve grant
    allocations; review required annual reports; identify problems
    encountered; and recommend ways to increase the effectiveness of compact
    grant assistance.^8

    The amended compacts' implementing legislation instructs GAO to report,
    for the 3 years following the enactment of the legislation and every 5
    years thereafter, on the FSM's and the RMI's use and effectiveness of U.S.
    financial, program, and technical assistance as well as the effectiveness
    of
    administrative oversight by the United States.^9 This report examines, for
    2004 through 2006, (1) the FSM's and the RMI's use of compact funds, (2)
    FSM and RMI efforts to assess progress toward their stated development and
    sector goals, (3) FSM and RMI monitoring of sector grants and
    accountability for the use of compact funds, and (4) Interior's
    administrative oversight of the assistance provided under the compacts. In
    addition, appendix II contains information about activities funded by key
    federal programs. A separate correspondence providing additional
    information about the FSM's and the RMI's use of compact funds in each of
    the six sectors is forthcoming.

    To address our objectives, we reviewed the U.S., FSM, and RMI annual
    compact reports for 2004 and 2005; OIA grant documents for 2004 through
    2006; FSM and RMI strategic planning documents, performance budgets, and
    quarterly performance reports for 2004 and 2005, as available; and FSM and
    RMI single audits^10 for 2001 through 2005. We observed 2005 and 2006
    JEMCO and JEMFAC meetings. In addition, we interviewed officials from
    Interior and the Departments of State, Health and Human Services (HHS),
    and Education. We also interviewed RMI officials and FSM national and
    state officials in the six sectors receiving compact funding and visited
    compact-funded facilities and activities in both countries. We determined
    that the grant, program, technical assistance, and performance data
    examined  in this report are sufficiently reliable for our specific
    purposes. However, our interviews with FSM and RMI officials revealed
    important limitations in the financial and activity data in the countries'
    performance reports. We conducted our work from October 2005 to December
    2006 in accordance with generally accepted government auditing standards.
    (For additional details of our objectives, scope, and methodology, see
    app. I.)

    Results in Brief

    In 2004 through 2006, the FSM and RMI governments' allocations of compact
    grants prioritized the education and health sectors, as the compacts
    require, but the countries' use of compact funds was constrained by
    several factors. Education, health, and infrastructure accounted for 34
    percent, 21 percent, and 25 percent, respectively, of the FSM's compact
    funds and for 33 percent, 20 percent, and 40 percent of the RMI's compact
    funds. In both countries, use of the funds was hampered by political
    factors and land use issues. In the FSM, disagreement among the national
    and state governments^11 regarding project implementation and fund
    management delayed infrastructure projects, and the government's inability
    to secure land leases hindered project implementation in Chuuk. In the
    RMI, political disagreements between the government and Kwajalein Atoll
    landowners over the management of compact fund distribution delayed the
    release of funds allocated for special needs on the island of Ebeye,^12
    and disagreements over land use prevented infrastructure projects in the
    Majuro and Kwajalein Atolls. Neither country has planned its allocation
    and use of funds for long-term sustainability in view of the planned
    annual decrements in grant funding^13 and yearly inflation, for which the
    grants are only partially adjusted.^14 Although representatives of both
    countries told us that increased tax revenues could replace declining
    compact funds, economic experts consider the countries' business tax
    schemes to be inefficient. Furthermore, the FSM's grant allocations have
    been distributed according to prescribed percentages rather than the
    states' varying populations and needs.

    Although the FSM and the RMI established mechanisms to measure grant
    performance in each sector, several factors inhibited the countries'
    ability to assess progress toward stated goals. The FSM and the RMI each
    established development plans that contain goals and objectives for most
    sectors and are collecting data for performance indicators for education
    and health. However, incomplete or unreliable baseline data for some
    indicators limited both countries' ability to measure progress toward
    sector goals. In addition, although both countries compiled the required
    quarterly performance reports, the reports have limited usefulness for
    assessing progress, owing to problematic formats in the FSM and to
    incomplete and inaccurate data on program activities in both countries.
    For example, although the RMI's private sector development report for the
    fourth quarter of 2005 states that eight new businesses were created in
    2005, officials from the Ministry of Resources and Development indicated
    that only four businesses had been started that year. A lack of capacity
    to collect, assemble, and analyze performance data also limited both
    countries' ability to measure progress toward sector goals.

    The FSM and RMI governments provided limited monitoring of sector grant
    operations, and their single audit reports--particularly those of the
    FSM--call into question the countries' accountability for all compact
    funds. Although both governments designated offices responsible for
    compact management, these offices lack the capacity to conduct the
    required monitoring of day-to-day sector grant operations. The FSM's
    Office of Compact Management (OCM), in particular, has not been fully
    staffed. In addition, both countries' single audit reports contained
    findings and opinions that call into question the usefulness and
    reliability of their financial statements. Of the FSM's national and state
    audit reports for 2004 and 2005, only one state report showed no problems
    with financial statements. Furthermore, both countries' audit reports
    contained findings of noncompliance with requirements of major U.S.
    programs--for example, the FSM's 2005 reports contained 45 such findings,
    and the RMI's 2005 report contained 11. In 2006, the FSM and the RMI
    developed corrective action plans that address 60 percent and 100 percent,
    respectively, of the 2005 findings.

    OIA provided administrative oversight of the countries' sector grants, but
    its oversight was hampered by several challenges. OIA monitored the
    countries' sector grant performance, fiscal performance, and sector grant
    outlays and assessed the countries' compliance with sector grant
    conditions. OIA's efforts also included actions such as suspending or
    withholding grant payment in response to persistent shortcomings that it
    identified in the FSM. OIA's administrative oversight of the compacts was
    constrained by the need to respond to persistent problems in the FSM as
    well as the office's difficulty in filling staff positions.

    In this report, we recommend that the Secretary of the Interior direct the
    Deputy Assistant Secretary for Insular Affairs, as Chairman of JEMCO and
    JEMFAC, to work with the FSM and the RMI to undertake planning to minimize
    the impact of reduced future funding; fully develop mechanisms for
    measuring sector grant performance; and improve the reliability of
    information used by the FSM, RMI, and U.S. governments to monitor the
    compacts.

    The Assistant Secretary of Policy, Management and Budget, Department of
    the Interior, provided written comments on a draft of this report, stating
    that the report was accurate, well balanced, and concurred with our
    recommendations (see app. VIII). The FSM also commented on a draft of the
    report, characterizing it as a balanced and fair assessment of its
    progress in planning for sustainability, measuring progress, and ensuring
    accountability. The FSM, however, defended its distribution formula for
    allocating compact funds to the national and state governments (see app.
    IX). The RMI government noted that its decisions, in light of budgeting
    constraints, to refrain from expanding ministry staffs has affected its
    capacity for performance monitoring and reporting; it also provided
    several comments regarding our discussion of the grant decrements (see
    app. X). In addition, the Departments of State, Education, and Health and
    Human Services provided technical comments, which we incorporated where
    appropriate.

    Background

    U.S. relations with Micronesia and the Marshall Islands began during World
    War II, when the United States ended Japanese occupation of the region.
    The United States administered the region under a United Nations
    trusteeship beginning in 1947.^15 The four states of the FSM voted in a
    1978 referendum to become an independent nation, while the Marshall
    Islands established its constitutional government and declared itself a
    republic in 1979. Both locations remained subject to the authority of the
    United States under the trusteeship agreement until entry into force of
    the compact in 1986.

    The FSM is a loose federation of four states, and has a population of
    approximately 108,500,^16 scattered over many small islands and atolls.
    The FSM states maintain considerable power, relative to the national
    government, to allocate U.S. assistance and implement budgetary policies.
    Chuuk, the largest state, has 50 percent of the FSM's population, followed
    by Pohnpei (32 percent), Yap (11 percent), and Kosrae (7 percent). The RMI
    has a constitutional government, and its 29 constituent atolls have local
    government authority. About two-thirds of its approximately 56,000^17
    residents are in Majuro Atoll, the nation's capital, and Kwajalein
    Atoll.^18 The two countries are located just north of the equator in the
    Pacific Ocean. (See fig. 1.)

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

    Compact of Free Association: 1986 through 2003

    The United States, the FSM, and the RMI entered into the original Compact
    of Free Association in 1986 after lengthy negotiations. The compact
    provided a framework for the United States and the two countries to work
    toward achieving the following three main goals: (1) secure
    self-government for the FSM and the RMI, (2) ensure certain national
    security rights for all of the parties, and (3) assist the FSM and the RMI
    in their efforts to advance economic development and self-sufficiency. The
    first and second goals were met; the FSM and the RMI are independent
    nations, and the three countries established key defense rights, including
    securing U.S. access to military facilities on Kwajalein Atoll in the RMI
    through 2016.^19 The compact's third goal was to be accomplished primarily
    through U.S. direct financial assistance to the FSM and the RMI. For the
    15-year period covering 1987 to 2001, funding was provided at levels that
    decreased every 5 years, with an extension for 2002 and 2003 during
    negotiations to renew expiring compact provisions. For 1987 through 2003,
    the FSM and the RMI are estimated to have received about $2.1 billion in
    compact financial assistance.^21 economic ^20 As we previously
    reported,self-sufficiency was not achieved under the first compact.

    Under the original compact, the FSM and the RMI used funds for general
    government operations; capital projects, such as building roads and
    investing in businesses; debt payments; and targeted sectors, such as
    energy and communications. The FSM concentrated much of its spending on
    government activities, while the RMI emphasized capital spending. Compact
    funds to the FSM were divided among the FSM's national government and four
    states, according to a distribution agreement first agreed to by the five
    governments in 1984. In 2000, we reported that compact funds spent on
    general government operations maintained high government wages and a high
    level of public sector employment, discouraging private sector growth, and
    that compact funds used to create and improve infrastructure likewise did
    not contribute to significant
    economic growth.^22 Furthermore, many of the projects undertaken by the
    FSM and the RMI experienced problems because of poor planning and
    management, inadequate construction and maintenance, or misuse of funds.
    While the compact set out specific obligations for reporting and
    consultations regarding the use of compact funds, the FSM, RMI, and U.S.
    governments provided little accountability over compact expenditures and
    did not ensure that funds were spent effectively or efficiently. The "full
    faith and credit" provision made withholding funds impracticable. In
    addition, under the original compact, both nations also benefited from
    numerous U.S. federal programs, while citizens of both nations exercised
    their right under the compact to live and work in the United States as
    "nonimmigrants" and to stay for long periods of time.^23

    Amended Compacts of Free Association: 2004 through 2023

    In 2003, the United States approved separate amended compacts with the FSM
    and the RMI that went into effect on June 25, 2004, and May 1, 2004,
    respectively.^24 The amended compacts provide for direct financial
    assistance to the FSM and the RMI from 2004 to 2023, decreasing in most
    years, with the amount of the decrements to be deposited in the trust
    funds for the two nations established under the amended compacts^25 (see
    table 1). Moreover, the amended compacts require the FSM and the RMI to
    make one-time contributions of $30 million each to the trust funds, which
    both
    countries have done.^26 In addition, the RMI amended compact includes an
    agreement that allows the U.S. military access to certain sites in
    Kwajalein Atoll until 2086 and provides $15 million annually starting in
    2004, rising to $18 million^27 in 2014, to compensate for any impacts of
    the U.S. military on the atoll.^28

    Table 1: U.S. Assistance to Be Provided to the FSM and the RMI under the
    Amended Compacts, 2004 through 2023

    Dollars in
        millions
    Fiscal year   FSM grants (Section FSM trust RMI grants RMI trust Kwajalein
                                    211)      fund                 fund    Impact
                                                     (Section
                                          (Section       211)  (Section  (Section
                                              215)                 216)    212)^a
    2004                        $76.2     $16.0      $35.2      $7.0     $15.0
    2005                         76.2      16.0       34.7       7.5      15.0
    2006                         76.2      16.0       34.2       8.0      15.0
    2007                         75.4      16.8       33.7       8.5      15.0
    2008                         74.6      17.6       33.2       9.0      15.0
    2009                         73.8      18.4       32.7       9.5      15.0
    2010                         73.0      19.2       32.2      10.0      15.0
    2011                         72.2      20.0       31.7      10.5      15.0
    2012                         71.4      20.8       31.2      11.0      15.0
    2013                         70.6      21.6       30.7      11.5      15.0
    2014                         69.8      22.4       32.2      12.0      18.0
    2015                         69.0      23.2       31.7      12.5      18.0
    2016                         68.2      24.0       31.2      13.0      18.0
    2017                         67.4      24.8       30.7      13.5      18.0
    2018                         66.6      25.6       30.2      14.0      18.0
    2019                         65.8      26.4       29.7      14.5      18.0
    2020                         65.0      27.2       29.2      15.0      18.0
    2021                         64.2      28.0       28.7      15.5      18.0
    2022                         63.4      28.8       28.2      16.0      18.0
    2023                         62.6      29.6       27.7      16.5      18.0

    Source: Pub. L. No. 108-188.

    Notes:

    Within both the FSM and the RMI annual grant amounts include $200,000 to
    be provided directly by the Secretary of the Interior to the Department of
    Homeland Security, Federal Emergency Management Agency, for disaster, and
    emergency assistance purposes. The grant amounts do not include the annual
    audit grant, capped at $500,000 that will be provided to both countries.

    These dollar amounts shall be adjusted each fiscal year for inflation by
    the percentage that equals two-thirds of the percentage change in the U.S.
    gross domestic product implicit price deflator, or 5 percent, whichever is
    less in any one year, using the beginning of 2004 as a base. Grant funding
    can be fully adjusted for inflation after 2014, under certain U.S.
    inflation conditions.

    ^a"Kwajalein Impact" funding is provided to the RMI government, which in
    turn compensates Kwajalein Atoll landowners for U.S. access to the atoll
    for military purposes.

    The amended compacts and fiscal procedures agreements require that grant
    funding be targeted to support the countries, in six defined sectors, with
    the following general objectives:

    oEducation: Advance the quality of the basic education system.

    oHealth: Support and improve the delivery of preventative, curative, and
    environmental care.

    oEnvironment: Increase environmental protection and engage in
    environmental infrastructure planning.

    oPublic sector capacity building: Build effective, accountable, and
    transparent national, state (in the FSM), and local government and other
    public sector institutions and systems.

    oPrivate sector development: Attract foreign investment and increase
    indigenous business activity.

    oInfrastructure: Provide adequate public infrastructure, prioritizing
    primary and secondary education capital projects and projects that
    directly affect health and safety, with 5 percent dedicated to
    maintenance.^29

    The RMI must also target grant funding to Ebeye and other Marshallese
    communities within Kwajalein Atoll: $3.1 million annually for 2004 through
    2013 and $5.1 million annually for 2014 through 2023. In addition, $1.9
    million is provided from annual grant funds to address special needs
    within Kwajalein Atoll, with emphasis on the Kwajalein landowners. Other
    funds are provided to the RMI government related to U.S. use of the atoll
    for military purposes. (See app. III for Kwajalein-related compact funding
    provisions.)

    Implementation Framework

    Under the amended compacts and according to the fiscal procedures
    agreements, annual assistance for the six sectors in the FSM and the RMI
    is to be made available in accordance with an implementation framework
    with several components. Prior to the annual awarding of compact funds,
    the countries must submit development plans that identify goals and
    performance objectives for each sector. In addition, the countries must
    submit a budget for each sector that aligns with its development plan. The
    joint management and accountability committees for each country are to
    approve annual sector grants and, subsequent to the awards, evaluate
    sector management and progress. Finally, for each sector, the FSM and the
    RMI are to prepare quarterly financial and performance reports to serve as
    a mechanism for tracking progress against goals and objectives and
    monitoring performance and accountability. Figure 2 shows the amended
    compact implementation framework.

    Figure 2: Amended Compact Implementation Framework

    Note: This figure does not list all of the compact or fiscal procedures
    agreements requirements.

    Country Development Plan

    Both countries are to develop multiyear development plans that are
    strategic in nature and continuously reviewed and updated through the
    annual budget process and that address the assistance for the defined
    sectors.^30 The plans are to identify how the countries will use compact
    funds to promote broad compact development goals such as economic
    advancement and budgetary self-reliance. The plans are also to identify
    goals and objectives for each sector.

    Annual Sector Grant Budget

    In addition, through the annual budget process, the FSM and the RMI are to
    prepare annual sector grant budget proposals that are based on the
    development plans, including performance goals and indicators. U.S.
    officials are to evaluate the sector budget proposals each year to ensure
    that they are consistent with compact requirements and have the
    appropriate objectives and indicators and that the expenditures are
    adequate to achieve their stated purposes. Budget consultations between
    the governments are to take place regarding the sector proposals.

    Joint Management and Accountability Committees

    JEMCO and JEMFAC--jointly established by the United States and,
    respectively, the FSM and the RMI--are to strengthen management and
    accountability and promote the effective use of compact funding. Each
    five-member committee comprises three representatives from the United
    States and two representatives from the country.^31 JEMCO's and JEMFAC's
    designated roles and responsibilities include

    oreviewing the budgeting and development plans from each of the
    governments;

    oapproving grant allocations and performance objectives;^32

    oattaching terms and conditions to any or all annual grant awards to
    improve program performance and fiscal accountability;

    oevaluating progress, management problems, and any shifts in priorities in
    each sector; and

    oreviewing audits called for in the compacts.

    The FSM, the RMI, and the United States are required to provide the
    necessary staff support to their representatives on the committee to
    enable the parties "to monitor closely the use of assistance under the
    Compacts."

    FSM and RMI Grant Management

    The FSM and the RMI are responsible for grant management, including
    managing and monitoring the day-to-day operations and financial
    administration of each sector.

    oProgram monitoring. The FSM and RMI governments are to manage the sector
    and supplemental education grants and monitor day-to-day operations to
    ensure compliance with grant terms and conditions. Monitoring also is
    required to ensure the achievement of performance goals. The governments
    are to report quarterly to the United States, using a uniform format that
    includes

    oa comparison of actual accomplishments to the objectives and indicators
    established for the period;

    oany positive events that accelerate performance outcomes;

    oany problems or issues encountered, reasons, and impact on grant
    activities and performance measures; and

    oadditional pertinent information, including, when appropriate, an
    analysis and explanation of cost overruns.

    In addition, the FSM and the RMI must annually report to the U.S.
    President on the use of U.S. grant assistance and other U.S. assistance
    provided during the prior fiscal year, and must also report on their
    progress in meeting program and economic goals.

    oFinancial administration. The FSM and the RMI must adhere to specific
    fiscal control and accounting procedures. The fiscal procedures agreements
    state that the countries' financial management systems must meet several
    standards addressing financial reporting, accounting records, internal and
    budget controls, allowable cost, cash management, and source
    documentation. The systems must also specify applicable procedures
    regarding real property, equipment, and procurement. Quarterly financial
    reports are to be provided to the United States and used to monitor the
    (1) general budget and fiscal performance of the FSM and the RMI and (2)
    disbursement or outlay information for each sector grant.

    In addition, the FSM and the RMI are required to submit annual audit
    reports, within the meaning of the Single Audit Act as amended.^33
    According to the act, single audit reports are due within 9 months after
    the end of the audited period.^34 Single audits are focused on recipients'
    internal controls over financial reporting and compliance with laws and
    regulations governing U.S. federal awardees. Single audits also provide
    key information about the federal grantee's financial management and
    reporting. A single audit report includes

    othe auditor's opinion (or disclaimer of opinion, as appropriate)
    regarding whether the financial statements are presented fairly in all
    material respects in conformity with generally accepted accounting
    principles, and findings about the internal controls related to financial
    statements;

    othe entity's audited financial reporting;

    othe schedule of expenditures of federal awards and the auditor's report
    on the schedule;

    othe auditor's opinion (or disclaimer of opinion) regarding whether the
    auditee complied with the laws, regulations, and provisions of contracts
    and grant agreements (such as the compact), which could have a direct and
    material effect on each major federal program, as well as findings on
    internal controls related to federal programs;

    oa summary of findings and questioned costs for the federal program; and

    ocorrective action plans for findings identified for the current year as
    well as unresolved findings from prior fiscal years.^35

    U.S. Grant Administration

    The United States is responsible under the fiscal procedures agreements
    for using the performance and financial reports to monitor, respectively,
    the countries' sector grant performance and their budget and fiscal
    performance. Also, U.S. officials are responsible for monitoring
    compliance with grant terms and conditions, including any special grant
    conditions. If problems are found in areas such as the monitoring of
    sector grants or a lack of compliance with grant terms, the United States
    may impose special conditions or restrictions, including requiring the
    acquisition of technical or management assistance, requiring additional
    reporting and monitoring, or withholding funds.

    Under the implementing legislation, the U.S. President is required to
    report annually to Congress on the use and effectiveness of U.S.
    assistance. The President's report also is to include an assessment of
    U.S. program and technical assistance provided to the countries and an
    evaluation of their economic conditions.

    According to federal policy implementing the Single Audit Act,^36 U.S.
    agencies may take actions regarding late audits to ensure that award
    recipients address audit findings contained in single audit reports.
    According to the grants management common rule, awarding agencies may
    issue a high-risk designation to grant recipients if single audits reveal
    substantial and pervasive problems.^37

    Compact Management Units

    In addition to establishing the joint management and accountability
    committees, each of the three countries has designated units that are
    responsible for compact administration.

    oUnited States. OIA has responsibility for U.S. management and oversight
    of the FSM and RMI sector and supplemental education grants. OIA's
    Honolulu field office^38 has four professional staff-- specialists in
    health, education, infrastructure, and financial management--who perform
    various activities, such as

    oanalyzing FSM and RMI budgets and required reports;

    oreviewing expenditures and performance with FSM and RMI government
    officials and conducting site visits;

    oproviding briefings and advice to OIA, HHS, and State officials regarding
    progress and problems;

    oproviding support for JEMCO and JEMFAC meetings;

    omonitoring the countries' compliance with grant terms and conditions; and

    owithholding funds from the countries for noncompliance with requirements
    such as those expressed in the fiscal procedures agreements or in grant
    conditions (such remedies did not exist in the previous compact).

    oFSM. In 2005, the FSM established its Compact Management Board and OCM.
    The board consists of seven members: two FSM national government
    appointees, a member appointed by each state, and the head of OCM. The
    board is responsible for actions such as formulating guidelines for FSM
    JEMCO members and providing oversight of compact implementation, including
    conducting investigations to ensure compliance with all terms of the
    compact. OCM, which has five staff members, is principally responsible for
    daily communications with JEMCO and the United States regarding JEMCO and
    compact matters. OCM is expected to undertake various actions, such as
    visiting the FSM states, to monitor compliance with compact terms.

    oRMI. The RMI government identified the Office of the Chief Secretary as
    the official point of contact for all communication and correspondence
    with the U.S. government concerning compact sector grant assistance. Among
    the Chief Secretary's responsibilities are providing oversight management
    and monitoring of sector grants and activities and coordination. Its role
    is supported by the Economic Policy, Planning, and Statistics Office,
    which works with the ministries receiving grants to prepare the annual
    budget proposals; quarterly reports, including developing performance
    indicators; and annual monitoring and evaluation reports. The ministries
    conduct day-to-day oversight.

    Supplemental Education Grant

    In addition to receiving compact sector grants, the FSM and the RMI are
    eligible for a Supplemental Education Grant (SEG). The amended compacts'
    implementing legislation authorized appropriations beginning in 2005 to
    the Secretary of Education to supplement the education grants under the
    amended compacts. The SEG is awarded in place of grant assistance formerly
    awarded to the countries under several U.S. education,
    health, and labor programs.^39 Under the fiscal procedures agreements, SEG
    funds are to be used to support "direct educational services at the local
    school level focused on school readiness, early childhood education,
    primary and secondary education, vocational training, adult and family
    literacy, and the smooth transition of students from high school to
    postsecondary educational pursuits or rewarding career endeavors." Funding
    for the SEG is appropriated to a Department of Education account and
    transferred to an Interior account for disbursement, with Interior
    responsible for ensuring that the use, administration, and monitoring of
    SEG funds are in accordance with a memorandum of agreement among the
    Departments of Education, HHS, Labor, and the Interior as well as with the
    fiscal procedures agreements. The U.S. appointees to JEMCO and JEMFAC are
    required by the compacts' implementing legislation to "consult with the
    Secretary of Education regarding the objectives, use, and monitoring of
    United States financial, program, and technical assistance made available
    for educational purposes." JEMCO and JEMFAC are responsible for approving
    the SEG grants annually.^40

    Compact Grants Targeted Infrastructure, Education, and Health, but Various
    Issues Constrained Countries' Use of Funds

    JEMCO and JEMFAC approved allocations of compact grants primarily to the
    infrastructure, education, and health sectors. The FSM and the RMI also
    both received a new SEG, meant to support the goals and objectives in the
    education sector development plans. However, the countries' use of compact
    funds has been limited by several factors, including delays in
    implementing infrastructure projects in the FSM and ongoing land use
    disputes with RMI landowners on both Majuro and Kwajalein. In addition,
    neither country has planned for the scheduled annual decrements in compact
    funding, and the FSM has not undertaken local needs assessments to target
    funds.

    Compact Funding Allocation in the FSM

    The three largest FSM sectors--education, infrastructure, and
    health--accounted for almost 85 percent of the compact sector grant
    allocations in 2006. Of this total, education funding represented 33
    percent; infrastructure represented 31 percent, up from 23 percent in
    2004; and health represented 21 percent. The other three sectors--public
    sector capacity building, private sector development, and the
    environment--together accounted for less than 20 percent of the FSM's
    compact funding in 2006. Figure 3 shows the FSM sector grant allocations
    for 2004 through 2006. (See app. IV for a breakout of compact funding, by
    FSM state.)

    Figure 3: FSM Sector Grant Allocation, 2004 through 2006

    Note: SEG funds, which started in 2005, are not included in these amounts.
    Additionally, in cases where funds were unspent and deobligated in one
    fiscal year, and reobligated in a subsequent fiscal year, we included the
    funds only in the fiscal year in which they were initially obligated.

    In general, the funds allocated for each sector were used as follows:

    oEducation. JEMCO approved allocations for the education sector amounting
    to $79 million, or 34 percent of compact funds in 2004 through 2006. U.S.
    assistance is the main source of revenue for the FSM education system. At
    the FSM national government level, compact funding supports, among other
    things, the College of Micronesia, the development of national education
    standards, the national standardized testing program, and the college
    admissions test. At the state level, the funding is principally targeted
    to primary and secondary education. Compact funding levels vary among the
    FSM states, with Chuuk receiving the least funding per student
    (approximately $500) and Yap receiving the most (approximately $1,300).
    The difference in the funding levels for these two states is directly
    reflected in student-to-teacher ratios, with Chuuk having a higher
    student-to-teacher ratio (19:1) than Yap (8:1). Overall, we found the
    condition of school facilities and the adequacy of their supplies and
    equipment to be poorer in Chuuk than in the other FSM states. The FSM is
    making efforts to improve teacher qualifications through a grant from
    Education. Despite some progress, FSM educational outcomes remain poor.
    For example, according to an official from the FSM's Department of Health,
    Education, and Social Affairs, graduates of FSM high schools often are not
    qualified to take college-level courses.

    oHealth. JEMCO approved allocations amounting to $49 million, or 21
    percent of compact funds in 2004 through 2006, for health care activities
    such as medical and nursing services, dispensary services, and public
    health services. According to health officials in Chuuk and Pohnpei,
    funding under the amended compact provided for increased budgets for
    pharmaceuticals and supplies. However, a 2005 FSM Department of Health,
    Education, and Social Affairs assessment of primary care reported that
    most facilities lacked an appropriate range and quantity of medicine and
    supplies in each of the four FSM states. We found that each of the states'
    hospitals and primary care facilities lacked some or all of the following:
    maintenance, adequately trained staff, functional equipment, and medical
    and pharmaceutical supplies. In addition, health sector allocations varied
    considerably across the four FSM state governments. For example, in 2006
    Yap received more than twice as much health sector funding per person as
    Chuuk. During our site visits, we observed that Chuuk's hospital and
    primary care facilities were in the poorest condition of the four states'
    facilities.

    oInfrastructure. JEMCO approved allocations amounting to $58.7 million, or
    25 percent of compact funds in 2004 through 2006, to infrastructure.
    However, the FSM's allocation of funds for 2004 and 2005 did not meet the
    recommendation in the compact's implementing legislation, which stated
    that it was the sense of Congress that not less than 30 percent of annual
    compact sector grant assistance should be invested in infrastructure. In
    addition, the FSM has not completed any infrastructure projects. As of
    November 2006, OIA had approved 14 of the FSM's priority projects,
    including several schools, a wastewater treatment facility, power and
    water distribution systems, and road and airport improvements. However,
    construction on these projects had not begun. Furthermore, according to an
    OIA official, the FSM had not met a compact requirement to establish and
    fund an infrastructure maintenance fund.

    oPublic sector capacity building. JEMCO approved allocations for public
    sector capacity building amounting to $25.6 million, or 11 percent of
    compact funding in 2004 through 2006. About 12 percent of these funds
    supported the operations of the public auditors' offices in three of the
    four states and the FSM national government. OIA found that this use of
    the funds met the grant's purpose. However, according to OIA, most of the
    remaining funds were to be used to support basic government operations,
    rather than for the grant's intended purpose of developing the internal
    expertise needed to build an effective, accountable, and transparent
    government. In 2004, JEMCO required that the FSM develop a plan to
    eliminate funding for such nonconforming purposes by 2009. The FSM
    submitted a plan to OIA that illustrates an annual reduction of such
    funding, but the plan does not detail how the nonconforming activities,
    such as those supporting public safety and the judiciary, will otherwise
    be funded. FSM officials told us that they plan to replace
    capacity-building funds in part with local monies. However, recent tax
    revenues have largely stagnated despite some improvements.^41

    oPrivate sector development. JEMCO approved private sector allocations
    amounting to $10.2 million, or 5 percent of compact funding in 2004
    through 2006. These funds supported more than 38 different offices
    throughout the FSM--including visitor bureaus, land management offices,
    and marine and agriculture departments--and economic development and
    foreign investment activities.

    oEnvironment.  JEMCO approved allocations for the environment amounting to
    $6.6 million, or 3 percent of compact funding in 2004 through 2006. These
    funds supported 21 offices throughout the four states and the FSM national
    government, including offices responsible for environmental protection,
    marine conservation, forestry, historic preservation, public works, and
    solid waste management.

    In addition to receiving compact sector funding, the FSM education sector
    also received $24 million in SEG funds in 2005 and 2006.^42 However,

    SEG funding was "off cycle"^43 in both years. As a result, according to
    Interior, the FSM did not receive its 2005 SEG funding until October 2005
    and did not receive its 2006 SEG funding until September 2006, near the
    end of each fiscal year.  In Chuuk and Pohnpei, SEG funding mainly
    supported early childhood education, while in Yap and Kosrae, the largest
    portion of SEG funding went to school improvement projects that provided
    supplemental instructional services, such as after-school tutoring and
    professional development programs. The SEG funding also supported
    vocational training, skills training, and staff development. In addition,
    the FSM national government received some SEG funding for monitoring,
    coordination, technical assistance, and research. The College of
    Micronesia received SEG funds for financial aid for students and for
    training students to be teachers through the teacher corps.

    Compact Funding Allocation in the RMI

    The three largest RMI sectors--infrastructure, education, and
    health--accounted for 92 percent of the compact sector grant allocations
    in 2006. Infrastructure received approximately 40 percent of the funding
    between 2004 and 2006, while education received approximately 33 percent
    and health received approximately 20 percent. Funding was also allocated
    for Ebeye special needs; however, only a small portion had been expended
    as of August 2006. As in the FSM, public sector capacity building, private
    sector development, and the environment received the least compact
    funding, totaling less than 4 percent between 2004 and 2006. Figure 4
    shows the sector grant allocations for the RMI for 2004 through 2006. (See
    app. IV for a breakout of compact funding, by RMI sector grants.)

    Figure 4: RMI Sector Grant Allocation, 2004 through 2006

    Note: SEG funds, which started in 2005, are not included in these amounts.
    In cases where funds were unspent and deobligated in one fiscal year, and
    reobligated in a subsequent fiscal year, we included the funds only in the
    fiscal year in which they were initially obligated. In 2006, the special
    needs grant to Ebeye for the first time consolidated amounts provided to
    Ebeye across the other sectors. In this figure, these amounts are included
    in the other sector allocations for consistency.

    oEducation. JEMFAC approved allocations for the education sector amounting
    to $34.2 million, or 33 percent of compact funds in 2004 through 2006.
    These funds have primarily supported the operations of the primary and
    secondary schools, providing approximately $800 per student annually. In
    addition, compact education funding has supported the National Scholarship
    Board and the College of Marshall Islands. Furthermore, some 2004 through
    2006 funding was designated specifically for Ebeye's schools. The quality
    of school facilities varies widely in the RMI. Although new classrooms
    were built with infrastructure funds, we found that many existing
    classrooms remained in poor condition. For example, in several Marshall
    Island High School classrooms, ceilings had fallen in, making the
    classrooms too dangerous to use. The RMI is making efforts to improve
    teacher qualifications through a grant from Education. However, although
    improved educational outcomes is a compact priority, standardized test
    scores show that RMI educational outcomes remain poor. Moreover, according
    to the College of the Marshall Islands, graduates of RMI high schools
    often are not qualified to take college-level courses.

    oHealth. JEMFAC approved allocations amounting to $20.6 million, or 20
    percent of compact funds in 2004 through 2006, for health care activities
    such as medical and nursing services, dispensary services, and public
    health services. A large portion of this funding was allocated to hospital
    service improvements, such as hiring additional staff, providing
    specialized training for doctors and nurses, and purchasing equipment in
    both Majuro and Ebeye.

    oInfrastructure. JEMFAC approved allocations amounting to $41.7 million,
    or 40 percent of compact funds in 2004 through 2006, for
    infrastructure--thereby meeting the RMI compact requirement to allocate at
    least 30 percent, and not more than 50 percent, of annual compact sector
    grant assistance funds to this sector. Furthermore, the RMI undertook and
    completed several infrastructure projects and established and funded an
    infrastructure maintenance fund, as required. From October 2003 to July
    2006, 9 new construction projects and 17 maintenance projects in the RMI
    either were completed or were under way. All of the new projects were
    schools where there was a clear title or an existing long-term lease for
    the land.^44

    oEnvironment, private sector development, and public sector capacity
    building. JEMFAC approved allocations of $2.6 million, or 3 percent of
    compact funds in 2004 through 2006, for these three sectors. This funding
    supported four entities, including the Environmental Protection Authority;
    the Land Registration Authority; the Office of the Auditor General; and
    Ministry of Resources and Development, which comprises the Small Business
    Development Council and the Marshall Islands Visitors' Authority. The
    RMI's Chief Secretary indicated during our meeting in March that the RMI
    would no longer seek compact funds for activities in these sectors and
    would instead focus all compact resources on education, health, and
    infrastructure.

    oEbeye. JEMFAC approved allocations amounting to $5.8 million, or almost 6
    percent^45 of all compact funds in 2004 through 2006, for Ebeye special
    needs. However, because OIA obligated none of these funds for Ebeye during
    2004 and 2005, JEMFAC approved the reallocation of the entire amount in
    2006. According to OIA, approximately $500,000 has been used to pay for
    utility costs for certain Ebeye residents,^46 while another $500,000 has
    been used to support utility operations.

    In addition to receiving compact sector funding, the RMI also received $12
    million in SEG funding for 2005 and 2006.^47 However, because SEG funding
    was off cycle in both 2005 and 2006, according to OIA, the RMI did not
    receive its 2005 SEG until August 2005 and its 2006 SEG until September
    2006, near the end of each fiscal year.^48 The SEG mainly supported early
    childhood education but also supported activities at other education
    levels, including the purchasing of textbooks and supplies; supporting
    foreign volunteer teachers and substitute teachers; and funding the
    National Vocational Training Institute, which is an alternative to the
    mainstream high schools.

    Several Factors Have Limited Countries' Use of Compact Funds

    Political factors and land use issues have hindered compact implementation
    in the FSM and the RMI.

    oPolitical factors.

    oIn the FSM, although $58.7 million had been allocated for infrastructure
    as of September 2006, no infrastructure projects were built because of,
    among other issues, a lack of internal agreement among the five FSM
    governments regarding project implementation and the governments'
    inability to demonstrate how the funding will be managed in a unified and
    comprehensive method. For example, one FSM state governor told us that he
    had refused to meet with the FSM national government's project management
    unit because he so strongly disagreed with the unit's management process.
    Such disagreements led to delays in the national government's
    implementation of its project management unit, and, according to OIA
    officials, significant challenges remain with respect to implementing the
    unit.

    oIn the RMI, the government and landowners on Kwajalein Atoll disagreed
    about the management of the entity designated to use the compact funds set
    aside for Ebeye special needs, with an emphasis on the needs of Kwajalein
    landowners. This entity, the Kwajalein Atoll Development Authority (KADA),
    had had problems accounting for and effectively and efficiently using
    funds; moreover, according to the RMI's Chief Secretary, the RMI
    government developed a restructuring plan for the authority but the plan
    was not fully implemented. Moreover, Kwajalein landowners disputed the
    composition of the KADA board and its role in distributing these funds. As
    a result, as of September 2006, only approximately $1.0 million of the
    $5.8 million allocated for Ebeye special needs had been released for the
    community's benefit.

    oLand use issues.

    oIn the FSM, project implementation in Chuuk was hindered by the state's
    inability to secure leases due to the lack of clear title, established
    fair market values, and local revenues to pay for land leases.^49 Because
    of a lack of established fair market values, using compact funding for
    land lease or purchase under the original compact may have led to
    unreasonably high payment. A recent study^50 of land valuation practices
    in Chuuk found sales of comparable land in Weno, the state's capital,
    ranging from $5 per square meter to $1,704 per square meter, with the
    higher payment associated with lease agreements paid for by the compact
    funding.

    oIn the RMI, land disputes prevented construction of the Uliga Elementary
    School on Majuro, the country's main atoll, while another project site on
    Majuro was abandoned because a lease agreement could not be concluded with
    the landowner. On Kwajalein Atoll, construction of Kwajalein Atoll High
    School was delayed because of the inability of the RMI government to
    secure a long-term lease from Kwajalein landowners for a site large enough
    to accommodate new facilities for up to 600 students. Similar problems
    delayed construction of Ebeye Elementary School. RMI projects were built
    where the land titles were clear and long-term leases were available.
    However, future RMI infrastructure projects may be delayed because of
    uncertainty regarding the land titles for remaining projects.

    Lack of FSM and RMI Planning for Decrement Threatens Sustainability of
    Government Services

    The FSM and the RMI lack concrete plans for addressing the annual
    decrement in compact funding and, as a result of revenue shortfalls, will
    likely be unable to sustain current levels of government services as
    compact funding diminishes. In both countries, compact funding represents
    a significant portion of the government revenue--approximately 38 percent
    in the FSM^51 and 27 percent in the RMI, according to the 2005 single
    audits. Personnel expenses account for a substantial share of compact
    funding expenditures. For example, 57 percent of the education sector
    grant in the FSM and 75 percent of the grant in the RMI paid for personnel
    in 2006. Over the past 5 years,  government employment has grown in both
    countries:^52 in the FSM, the public sector employment level has varied
    since 2000 but peaked for this period in 2005, while in the RMI, the
    government wage bill rose from $17 million in 2000 to $30 million in 2005.
    Given the countries' current levels of spending on government services,
    the decrement--$800,000 per year for the FSM, beginning in 2007, and
    $500,000 per year for the RMI since 2005--will result in revenue
    shortfalls in both countries, absent additional sources of revenue. In
    addition, in the FSM, cessation of nonconforming uses of the public sector
    capacity building grant will require government operations currently
    supported by compact funds to rely on a different revenue source.

    Officials in the FSM and the RMI told us that they can compensate for the
    decrement in various ways, such as through the yearly partial adjustment
    for inflation, provided for in the amended compacts,^53 or through
    improved tax collection. However, the partial nature of the adjustment
    causes the value of the grant to fall in real terms, independent of the
    decrement, thereby reducing the government's ability to pay over time for
    imports, such as energy, pharmaceutical products, and medical equipment.
    Moreover, as we recently reported,^54 although tax reform may provide
    opportunities for increasing annual government revenue in the FSM and the
    RMI, the International Monetary Fund, the Asian Development Bank, and
    other economic experts consider both nations' business tax schemes to be
    inefficient because of a poor incentive structure and weak tax collection.
    In the FSM's and the RMI's response to our draft report, both countries
    raised the possibility that the decrement's negative effect might be
    addressed during the periodic bilateral review, which is called for every
    5 years, under the compact.

    FSM Sector Fund Allocation Was Not Based on Population or Informed by
    State Needs

    The FSM distributed compact funding among its four states according to a
    formula that did not fully account for states' differing population sizes
    or funding needs. The formula, established in an FSM law enacted in
    January 2005 and in force through 2006, allotted a set percentage to each
    state as well as 8.65 percent to the national government.^55 Use of the
    distribution formula resulted in varying per capita compact funding among
    the states (see table 2). For example, we calculated that in 2006, Yap
    received more than twice as much education funding per student and health
    care funding per person as Chuuk.

    Table 2: Distribution of Compact Funds to FSM States and States'
    Percentages of FSM Population, 2006

    FSM state Percentage of compact funds      Percentage of FSM population in
                           allotted to state                  state (estimated)**
    Chuuk                             42%                                  50%
    Kosrae                             12                                    7
    Pohnpei                            28                                   32
    Yap                                18                                   11
    Total                            100%                                 100%

    Source: GAO analysis of FSM Public Law 13-93 and the Federated States of
    Micronesia: Fiscal Year 2005 Economic Review.

    Note: The FSM public law distributes 8.65 percent of total compact funding
    to the FSM national government, which leaves 91.35 percent of compact
    funds available to the states. To compare the distribution of funds with
    the distribution of population among the four FSM states, we subtracted
    the funding allocated to the FSM national government from the total
    distributed. Expenditures by the national government, such as support for
    the College of Micronesia, benefit the economies of all the states but
    provide greater benefits to Pohnpei, which contains the largest of the
    college campuses and the FSM capitol.

    Both the FSM government and U.S. officials acknowledged that the funding
    inequality resulted in different levels of government services across
    states, with particularly low levels of services in Chuuk. For example, an
    FSM health official told us that Chuuk's low immunization rate is a result
    of low per-capita health funding, and, according to a U.S. health
    official, HHS immunization staff see Chuuk as vulnerable. However, as of
    October 2006, neither the FSM nor JEMCO had assessed the impact of such
    differences on the country's ability to meet national goals or deliver
    services.

    FSM and RMI Have Limited Ability to Measure Progress toward Compact Goals

    Although the FSM and the RMI established performance measurement
    mechanisms, several factors limited the countries' ability to assess
    progress toward compact goals. The FSM and the RMI development plans
    contain sector goals and objectives, and the countries are collecting
    performance indicators for health and education. However, neither country
    can assess progress using these indicators because of incomplete and poor
    quality data. Moreover, problems in the countries' quarterly performance
    reports--disorganized structure in the FSM reports as well as incomplete
    and inaccurate information in both the FSM and the RMI reports--limit
    their usefulness for tracking performance. A lack of technical capacity
    also challenges the countries' ability to collect performance data and
    measure progress.

    Countries Established Mechanisms for Measuring Performance, but Data
    Shortcomings Limit Ability to Assess Progress toward Goals

    Both countries established development plans that include strategic goals
    and objectives for the sectors receiving compact funds.  These strategic
    goals are broad--for example, both countries list improving primary health
    care as a strategic goal. In addition, the development plans list various
    objectives related to each strategic goal. For example, in the FSM, the
    objectives related to improving primary health care include (1) increasing
    by 20 percent the use of basic primary health care services provided at
    dispensaries and health centers and (2) decreasing by 50 percent the use
    of primary health care services provided at hospital outpatient clinics.
    According to OIA, outcome measures for some sectors in the FSM were
    inappropriate, absent, or poorly defined. The RMI health sector's complex
    performance hierarchy and lack of readily available baselines for many
    measures initially made it difficult for the Ministry of Health to collect
    data. In 2004, JEMCO and JEMFAC required the countries to submit a
    streamlined and refined statement of performance measures, baseline data,
    and annual targets to enable the tracking of goals and objectives for
    education, the environment, health, private sector development and in
    public sector capacity building.^56 The countries have developed some
    performance indicators that are intended to help demonstrate progress in
    education and health, as required by JEMCO and JEMFAC, but have not done
    so for the other sectors. In 2006, JEMFAC also required the RMI to include
    in its reports six performance indicators for the environmental sector and
    two performance indicators for private sector development.^57

    The FSM and the RMI ministries have begun to collect performance
    indicators for the education and health sectors, as required by JEMCO and
    JEMFAC. However, the ministries are not yet able to assess progress with
    the indicators, because baseline data for some indicators were incomplete
    and the quality of some data was poor.

    FSM Performance Indicators

    oEducation sector. As required by JEMCO, in 2005, the FSM began submitting
    data for 20 indicators to gauge progress in the education sector. In 2005,
    the FSM submitted some data for 11 of the 20 required education
    performance indicators. In 2006, it submitted some data for all of the 20
    indicators, with data for 5 indicators being incomplete because some
    states did not submit them. For example, none of the states submitted data
    for the number and percentage of high school graduates going to college.
    Chuuk and Yap did not provide the required average daily student
    attendance rate, and Kosrae, Pohnpei, and Yap did not provide data to
    establish a baseline for dropout rates. Furthermore, we found some of the
    data submitted to be of questionable quality. For example, Chuuk's 2006
    submission of data for the 20 indicators indicated a dropout rate of less
    than 1 percent. However, according to an expert familiar with the Chuuk
    education system, the actual dropout rate was much higher. Moreover, when
    comparing the 2005 and 2006 submissions, we identified possible problems
    with some of the most basic data, such as the number of teachers,
    students, and schools, due to inconsistent definitions of the indicators.
    For example, the student enrollment figure reported in 2006 was for public
    schools only, but the figure submitted in 2005 included both public and
    private schools, according to an FSM education official. Likewise,
    reporting on the number of teachers in the school system differed among
    states. For example, Chuuk reported only the number of teachers, while the
    other states also included nonteaching staff.

    oHealth sector. FSM state and national health directors agreed on 14
    health indicators in April 2006 as a means to gauge progress. The FSM
    national government and all four states are collecting data for 9 of the
    14 indicators, while data for the other 5 indicators have yet to be
    collected. According to the FSM national government, delays in collecting
    data for some indicators resulted from the time required to establish a
    common methodology--that is, definitions and processes--among all of the
    states and governments. Furthermore, we found that some of the health data
    collected were ambiguous and therefore difficult to use. For example, it
    was unclear whether reports on data from Yap's outer islands relating to 1
    of the 14 health indicators, the number of dispensary encounters, covered
    1 or 2 months; according to a Yap health official, data for this indicator
    may be incomplete. Likewise, OIA's health grant manager indicated that
    there are weaknesses in the FSM's health data.

    RMI Performance Indicators

    oEducation sector. As required by JEMFAC in 2005, the RMI started tracking
    some of the 20 indicators as a way to gauge progress in the education
    sector. The RMI submitted data for 15 of the 20 required education
    performance indicators in 2005, repeating the submission in 2006 without
    updating the data, according to an OIA official. JEMFAC required the RMI
    to submit data for the 5 indicators omitted in 2005--including staff
    education levels and parent involvement--but did not receive them. In
    addition, some of the information reported was outdated. For example, the
    2005 submission of data for an indicator on student proficiency was based
    on a test given in the RMI in 2002.

    oHealth sector. The RMI's Ministry of Health began identifying performance
    indicators when the amended compact entered into force in 2004. Initially,
    the ministry developed numerous indicators, which, according to an OIA
    official, threatened to overwhelm the ministry's capacity for data
    collection and management. The ministry has since made refinements and
    reduced the number of indicators to a more manageable size. However,
    according to an RMI government report for 2005,^58 it is difficult to
    compare the ministry's 2004 and 2005 performances because of gaps in the
    data reported. For example, limited data were available in 2004 for the
    outer island health care system and Kwajalein Atoll Health Services.
    According to the RMI government report, data collection improved and most
    needed data were available, but some data were still missing.

    Shortcomings in Performance Reports Limit Usefulness for Tracking Progress

    Although the FSM and the RMI began compiling quarterly performance reports
    beginning in 2004, as required by the fiscal procedures agreements, the
    usefulness of the reports for assessing progress toward sector goals is
    limited by several factors. First, the FSM's reports had format problems,
    such as a lack of uniform structure, and some FSM reports were missing.
    Second, both countries' reports contained incomplete activity-level
    information. Third, in both countries' reports, some activity-level
    information, such as budget and expenditure data, were inaccurate.

    oProblematic format. The usefulness of  the FSM quarterly performance
    reports is diminished by a lack of uniform structure, excessive length,
    and disorganization. In addition, some FSM reports were missing. The five
    FSM governments' quarterly 2005 performance reports that we reviewed
    lacked the uniform structure required by the fiscal procedures agreement.
    For example, while Kosrae combined sector and activities into one report,
    Pohnpei reported on each activity separately. Moreover,
    the volume of reporting was excessive. For example, the 2005 fourth-
    quarter reports for the FSM education sector totaled more than 600 pages
    for all five governments' quarterly submissions and more than 1,500 pages
    for the entire year. The reports were also disorganized. For example, we
    found misfiled reports in the FSM's submission to OIA. We also found that
    19 sector reports were missing in 2005. Noting shortcomings similar to
    those we observed, officials from OIA and the FSM stated that the
    performance reports could not be used as an effective management tool.

    In contrast, the RMI reports were uniformly formatted, as specified by the
    fiscal procedures agreement, and all required reports were submitted to
    OIA.

    oIncomplete information.  Both countries' quarterly reports lacked
    complete information on program activities. For example, for 2005, the FSM
    national government's second-quarter health sector report lacked
    information on the environmental health and food safety programs (although
    its other quarterly reports included such information), and Pohnpei's
    first-quarter health sector report lacked information on 28 of 31
    activities. In the fourth quarter of 2005, Kosrae did not provide
    budgetary and expenditure information regarding the provision of education
    and support services to individuals with disabilities.

    The RMI's statistics office gathered information from the RMI's 2005
    quarterly performance reports, which contained primarily activity-level
    information, and attempted to assess progress in the various sectors.
    However, because of weaknesses in information collected in 2004, including
    missing information for some activities for entire quarters, the RMI had
    difficulty in making comparisons and determining whether progress was
    being made in many of its sectors.

    oInaccurate information. Both the FSM's and the RMI's quarterly
    performance reports contained inaccurate information on program
    activities. We found that the performance reports for the five FSM
    governments did not accurately track or report annual activity budgets or
    expenditures. For example, a 2005 Pohnpei education performance report
    stated that more than $100,000 per quarter was allocated to pay the
    salaries of two cultural studies teachers. The state's Department of

    Education could not explain the high salary figure^59 but indicated that
    the number was incorrect. According to FSM officials in the departments we
    visited, the departments were not given an opportunity to review the
    budget and expenditure data before the performance reports were sent to
    OCM and OIA and were therefore unaware of the errors.

    Some of the RMI's quarterly performance reports also contained
    inaccuracies. For example, although the RMI's private sector development
    performance report for the fourth quarter of 2005 stated that eight new
    businesses were created in 2005, officials  from the Ministry of Resources
    and Development indicated that only four businesses were started that
    year. In addition, the RMI Ministry of Health's 2005 fourth-quarter report
    contained incorrect outpatient numbers for the first three quarters,
    according to a hospital administrator in Majuro. In the RMI quarterly
    reports for the education sector, we found several errors in basic
    statistics, such as the number of students attending school. In addition,
    RMI Ministry of Education officials and officials in the other sectors^60
    told us that they had not been given the opportunity to review final
    performance reports compiled by the statistics office before the reports'
    submission to OIA, and that they were unaware of the errors until we
    pointed them out.

    FSM and RMI Lack Capacity to Collect, Assemble, and Analyze Data to Assess
    Progress

    The FSM's ability to measure progress is limited by its lack of capacity
    to collect, assemble, and analyze performance data. According to OIA, the
    education sector currently lacks a reliable system for the regular and
    systematic collection and dissemination of information and data. An OCM
    official also stated that the lack of performance baseline data for the
    private sector development and environment sectors  could be attributable
    to "weak capacity in performance budgeting and reporting" and that staff
    lack expertise in one or both areas.

    The RMI statistics office, which is the main entity tasked to collect
    data, indicated that it is not currently able to assess progress toward
    compact and development plan goals because of the government's lack of
    capacity to collect, assemble, and analyze data in all sectors. Likewise,
    the office's own capacity is limited. Officials from the office emphasized
    the importance of building capacity in the ministries to evaluate their
    activities. In particular, they said that improvements in data collection
    would enable ministries to respond quickly to requests for information
    from both national and international sources. For example, the officials
    noted that the Ministry of Education needs to develop measures to report
    on the quality of education. The officials also noted that other offices
    in the ministry should hire more trained professionals, such as the
    recently hired Assistant Secretary of Administration with a graduate
    degree in public administration.

    FSM and RMI Provided Limited Monitoring of Grant Operations, and FSM
    Accountability for Compact Funds Faced Challenges

    The FSM's and the RMI's required monitoring of sector grant performance
    was limited by capacity constraints, among other challenges. In addition,
    the countries' single audit reports for 2004 and 2005, particularly the
    FSM's reports, indicated weaknesses in the countries' financial statements
    and compliance with the requirements of major federal programs, calling
    into question their accountability for the use of compact funds. However,
    the FSM's timeliness in submitting its single audit reports improved from
    2004 to 2005, and the RMI submitted its single audit reports for these 2
    years on time.^61

    FSM Provided Limited Monitoring and Accountability for Use of Compact
    Funds

    The FSM's monitoring of sector grant performance, required by the fiscal
    procedures agreement, was limited at the national and state levels by lack
    of capacity in the FSM's OCM and in the state governments, among other
    factors. In addition, the FSM's single audit reports for 2004 and 2005
    showed weaknesses in its financial statements and a lack of compliance
    with requirements of major federal programs, suggesting that the FSM has
    limited ability to account for the use of compact funds. However, the
    government's timeliness in submitting its audit reports improved.

    FSM Monitoring

    The FSM national government provided limited monitoring of the day-to-day
    operations of sector grants in 2004 through 2006. In addition to
    facilitating coordination and communication between the national
    government and the states and between the FSM and OIA, OCM is intended to
    have some responsibility for overseeing compact-funded programs. However,
    according to the office's director, OCM has neither the staff nor the
    budget to undertake such activities. As of November 2006, OCM had five of
    its own professional staff, including the director. Prior to 2007, staff
    from other FSM national departments were assigned to the office, but only
    the economic affairs and finance departments provided detailees. One staff
    was converted to a permanent hire in OCM and it is unclear if the other
    detailee will remain at OCM or return to the Office of Economic Affairs.
    The FSM Office of the National Public Auditor had not conducted any
    performance or financial audits of compact sector grants.^62

    The FSM states, as subgrantees of compact funds, are required to submit
    performance reports to the FSM national government. However, the Director
    of OCM indicated that he did not know how or whether each state, other
    than Chuuk, was set up to perform day-to-day monitoring of sector grants.
    In Chuuk, a financial control commission was established in July 2005 to
    address financial management and accountability requirements. However,
    while the commission had exercised a financial control function, it had
    not monitored the performance of the sector grants. In addition, the FSM's
    Secretary of Foreign Affairs and JEMCO representative told us that all of
    the states were weak on monitoring. Although the states' public auditors
    could conduct audits of compact performance, their efforts had been
    limited to financial audits. For example, in both Yap and Pohnpei, the
    public auditor's office issued four audits in 2005, two of which were for
    compact-funded activities. Furthermore, in Chuuk, the public auditor
    position required by the state constitution was not filled, prompting
    JEMCO to deny the Chuuk auditor's office state-budgeted funds.

    FSM Accountability

    The FSM's single audit reports for 2004 and 2005 showed that the FSM's
    ability to account for the use of compact funds was limited, as shown by
    weaknesses in its financial statements and lack of compliance with
    requirements of major federal programs. However, the FSM's timeliness in
    submitting its audit reports improved during this period.

    o FSM financial statements.  In general, the FSM single audit reports call
    into question the reliability of the country's financial statements. Of
    the single audit reports that the FSM national and state governments
    submitted for 2004 and 2005, only one report--Pohnpei state's report for
    2005--contained an unqualified opinion on the financial statements, while
    the other reports contained qualified, adverse, or disclaimed opinions.^63
    (See app. V for the FSM's single audit financial statement opinions.) For
    example, for the FSM 2005 reports, the auditors' inability to obtain
    audited financial statements for several subgrantees led them in part to
    render qualified opinions. Chuuk reports for 2004 and 2005 contained
    disclaimers of opinion related to seven and eight major issues,
    respectively, including the inability of auditors to determine the
    propriety of government expenses, fixed assets, cash, and receivables; the
    capital assets of one of its subunits; and the accounts payable and
    expenses of the Chuuk State Health Care Plan. In addition, the single
    audit reports include specific findings related to the financial
    statements. For example, the national and state governments' 2005 single
    audit reports contained 57 reportable findings of material weaknesses and
    reportable conditions^64 in the governments' financial statements, such as
    the lack of sufficient documentation for (1) the disposal of fixed assets,
    including a two-story building, and (2) purchases of vehicles and copiers.
    Fourteen of the FSM 2005 findings had been cited as reportable findings in
    previous audits.

    oFSM compliance with requirements of major federal programs. Each of the
    FSM national and state governments' single audit reports for 2004 and 2005
    contained qualified opinions on the governments' compliance with
    requirements of major federal programs, and the 2004 and 2005 reports
    noted 47 and 45, respectively, total reported weaknesses, on compliance.
    (App. V shows the FSM single audit reports' total numbers of material
    weaknesses and reportable conditions regarding compliance with
    requirements of major federal programs.) Four of the 2005 reports' 45
    findings recurred from the 2004 reports. In 2006, the FSM developed
    corrective action plans that addressed 60 percent of the 2005 audit
    findings of noncompliance.

    oTimeliness of audits. The timeliness of the FSM national and state
    governments' submission of single audits reports improved from 2004 to
    2005. The national government submitted its 2004 and 2005 single audits in
    August and September 2006, 14 and 2 months, respectively, after the due
    dates. While the four FSM states submitted their 2004 single audits from 7
    to 13 months after the due dates, three of the four states submitted their
    2005 audits within the 9-month period allowed by OIA.

    RMI Monitoring Was Limited, but Accountability Improved

    The RMI government provided limited monitoring of sector grants, in part
    because of the lack of capacity in the Chief Secretary's office and in
    most ministries that receive compact funds. The RMI's single audit reports
    for 2004 and 2005 indicated weaknesses in its financial statements and
    compliance with requirements of major federal programs. However, the
    government developed corrective action plans to address the 2005 findings
    related to such compliance. The RMI government submitted its single audits
    for 2004 and 2005 on time.

    RMI Monitoring

    The RMI's Chief Secretary, who is responsible for compact implementation
    and oversight, monitored sector grant operations on a limited basis.
    Day-to-day monitoring and oversight responsibilities were delegated to the
    ministries that receive compact funds.  According to the RMI's statistical
    office,^65 it lacked the time and resources to devote to oversight and
    focused instead on helping the ministries to develop the annual budgets
    and sector portfolios and the quarterly and annual monitoring and
    performance reports. The office noted the ministries' lack of personnel
    and skills needed to collect, assemble, and analyze data and emphasized
    the importance of building the ministries' capacity to monitor and
    evaluate their own compact-funded activities. (However, according to an
    OIA official, the Ministry of Health made important strides in measuring
    performance and using performance management to improve the delivery of
    services.) The RMI Auditor General's office conducted financial audits,
    but no performance audits, of compact sector grants. The RMI, like the
    FSM, failed to submit its required annual reports in a timely manner.

    RMI Accountability

    The RMI's single audit reports for 2004 and 2005 contained opinions and
    findings that indicated weaknesses in its financial statements and
    compliance with requirements of major federal programs. However, the
    government developed a corrective action plan that addressed all of the
    findings on compliance in its 2005 single audit report. The RMI submitted
    both of the single audit reports on time.

    oRMI financial statements.  The RMI's single audit reports for 2004 and
    2005 contained qualified opinions on the government's financial
    statements. (See app. V for a list of the opinions on financial statements
    in the RMI's audit reports for 2001 through 2005.) For example, several of
    the RMI's subgrantees, such as the Ministry of Education's Head Start
    program and the Kwajalein Atoll Joint Utilities Resources, Inc., were
    unable to produce audited financial statements.

    In addition, the 2005 single audit found two reportable findings in the
    RMI's financial statements. The report cited the lack of audited financial
    statements and the lack of a complete asset inventory listing in the RMI
    as material weaknesses. Both of these findings had been cited in previous
    audits.

    oRMI compliance with requirements of major federal programs.  Both of the
    RMI's single audit reports for 2004 and 2005 contained  qualified opinions
    on the government's compliance with requirements of major federal
    programs. In addition, the 2005 report noted 11 reported weaknesses in the
    country's compliance with requirements of major federal programs. The RMI
    developed corrective action plans to address all of these findings, 2 of
    which had recurred from 2004. (App. V shows the total number of material
    weaknesses and reportable conditions findings for the RMI for 2001 through
    2005 single audit reports.)

    oTimeliness of audits. The RMI submitted its 2004 and 2005 single audit
    reports within the 9-month period required by the Single Audit Act.

    Interior Took Oversight Actions but Faced Challenges

    As administrator of the amended compact grants, OIA monitored the FSM's
    and RMI's sector grant and fiscal performance, assessed their compliance
    with compact conditions, and took action to correct persistent
    shortcomings. However, although OIA provided technical assistance to help
    the FSM improve its single audit timeliness, the office did not address
    recurrent findings and adverse opinions in the FSM and the RMI audits.
    OIA's oversight efforts were hindered by the need to address problems in
    the FSM and by internal staffing challenges. In addition, Interior's
    Office of Inspector General actively engaged in reviewing the countries'
    implementation of the compact, although the office did not release its
    products to the public, and, as of October 2006, several reports remained
    in draft form.

    OIA Monitored Performance, Assessed Compliance, and Acted to Correct FSM
    and RMI Shortcomings

    OIA undertook several administrative oversight efforts including
    monitoring the countries' sector grant performance, monitoring the
    countries' fiscal performance and sector grant outlays, and assessing the
    countries' compliance with sector grant conditions. OIA's efforts also
    included actions such as suspending or withholding grant payment in
    response to persistent shortcomings that it identified.

    oMonitoring sector grant performance. OIA grant managers monitored the
    countries' sector grant performance, using site visits and analysis of the
    quarterly sector performance reports. For example, in 2006, OIA's visits
    and analyses led it to determine that 14 of the 61 offices in the FSM that
    receive private sector and environment sector grants were underperforming
    or nonperforming. As a remedy, OIA recommended and JEMCO agreed that
    future sector funding for these entities should be on a project basis.
    Also, in response to the shortcomings of the FSM's and RMI's performance
    evaluations for 2004 and 2005, JEMCO and JEMFAC, under OIA's chairmanship,
    called for improved performance measurement and monitoring. In the FSM,
    JEMCO reprogrammed unused compact funds to improve capacity in this area.
    In addition, in response to recurrent lack of uniformity in the FSM's
    performance reports, OIA rejected the first-quarter reports for 2006
    (although it accepted nonuniform FSM reports later in the year). Although
    OIA had used the performance reports to monitor sector performance, it was
    unaware, until we notified the office, that almost 20 percent of the FSM's
    2005 performance reports were missing.

    oMonitoring sector grant outlays and fiscal performance. OIA monitored the
    countries' fiscal performance and sector grant outlays through analyses of
    the countries' quarterly financial reports and, as Chair of JEMCO and
    JEMFAC, through reviews of the countries' single audit reports. In August
    2004, OIA analyses of both countries' third-quarter cash transactions
    reports showed that some sector grant funding had not been spent. In
    response, OIA delayed payments to the FSM and the RMI for those sectors.

    oReviewing single audit reports. As Chair of JEMCO and JEMFAC, OIA led the
    committees' reviews of, and responses to, the FSM's and the RMI's single
    audit reports. At a March 2006 JEMCO meeting, noting that single audits
    were the most important indicator of financial stability provided by a
    grantee to a grantor, OIA's Director of Budget and Grants Management said
    that OIA intended to "apply a remedy" for single audit noncompliance
    beginning October 1, 2006, if the FSM failed to complete all of its audit
    reports by July 1, 2006, or within 3 months of the due date. The Director
    stated that OIA's response would include withholding cash payments for
    various grants not related to the provision of medical care, emergency
    public health, or essential public safety. The Director also stated that
    OIA would notify and seek the concurrence of other U.S. agencies providing
    financial and technical assistance in designating the FSM a "high-risk
    grantee." Three FSM states met OIA's July 1 deadline, while the national
    government and Chuuk missed the deadline by 2 and 1 months, respectively.
    OIA ensured that the FSM received technical assistance to help address its
    single audit reports' lack of timeliness, placing advisors through a third
    party in the state governments to facilitate their completion of overdue
    reports. In 2004, we recommended that OIA initiate appropriate actions to
    correct compact-related single audit findings and respond to violations of
    grant conditions or misuse of funds identified by single audits.^66 Since
    then, OIA has provided technical advice and assistance to help the FSM and
    the RMI improve the quality of their financial statements and develop
    controls to resolve audit findings and prevent recurrences.

    oAssessing compliance with grant conditions. OIA assessed the FSM's and
    the RMI's compliance with sector grant conditions through site visits to
    the countries and reviews of the countries' submitted paperwork. In
    certain instances of the FSM's or the RMI's noncompliance with grant
    conditions, OIA monitored progress toward meeting the requirements and
    allowed the countries more time, while in other instances, OIA did not
    specifically address FSM or RMI noncompliance. (See apps. VI and VII for a
    list of sector grant special terms and conditions and their status.)
    However, OIA took corrective actions in several instances.

    oSuspended grant funding. In December 2004, OIA staff conducting a site
    visit were unable to verify that food purchased by the program had been
    received by the Chuuk Education Department or served to students. In
    response, OIA suspended the Chuuk 2005 education grant's meal service
    program funding of almost $1 million. OIA contacted Interior's Office of
    Inspector General for a follow-up investigation to determine whether Chuuk
    was misusing compact funds.

    oWithheld grant funding. OIA withheld the FSM's May and June 2004 public
    sector capacity building and private sector development grant
    funding--approximately $2.4 million--when the FSM national government
    missed a March 2004 deadline to provide a transition plan for ending
    nonconforming use of the grant. In addition, OIA withheld awarded funds
    for the FSM infrastructure grant and the RMI Kwajalein special needs grant
    until the countries met grant terms.

    After our July 2005 report, which recommended that OIA determine the
    amount of staff travel to the FSM and the RMI needed to promote compliance
    with compact and grant requirements, OIA travel to the countries
    increased.^67 Whereas travel to the two countries accounted for 15 percent
    of overall staff time in 2004, it rose to 20 percent in 2005 and 25
    percent for the first three quarters of 2006. However, according to an OIA
    assessment, OIA's current budget does not support extended, detailed
    reviews of U.S. funds in the various remote islands.

    OIA Oversight Faced Challenges

    OIA's oversight was hampered by the need to respond to problems in the FSM
    as well as by the office's difficulty in filling staff positions.

    oFSM challenges. The need to respond to various challenges facing the FSM
    reduced OIA's administrative oversight of assistance provided under the
    compact. According to the Director of OIA, the FSM's budgets for 2005
    through 2007 were poorly prepared, and, as a result, OIA grant managers
    were forced to spend an inordinate amount of time readying the budgets for
    the JEMCO meetings. In addition, according to OIA's Director of Budget and
    Grants Management, the constant need to respond to emergent issues, such
    as education issues in Chuuk and land issues in the FSM, limited OIA's
    ability to conduct oversight.

    oStaffing challenges. Although OIA increased the 2006 budget for the
    Honolulu field office so that it could increase the number of staff
    positions, those new positions remained vacant. In December 2005, an
    advertised position to be based in Guam went unfilled, while an education
    grant specialist position in Honolulu was advertised twice after April
    2006 but remained vacant for the entire fiscal year. In addition, the OIA
    private sector development and environment specialist position became
    vacant in September 2006.

    Interior's Inspector General Reports Identified Problems but Were Not
    Published

    Interior's Office of Inspector General undertook compact oversight
    activities, finding deficiencies in the FSM's and the RMI's compact
    implementation and accountability.^68 In 2005 and 2006, the Inspector
    General conducted six reviews (three remained in draft form as of October
    2006) addressing issues such as

    oenvironmental and public health concerns in Chuuk (draft dated June
    2005),

    ostudent meal programs in Chuuk (draft dated June 2005),

    othe RMI's progress in implementing the amended compact (final report
    issued August 2005),

    othe FSM's progress in implementing the amended compact (draft dated
    January 2006),

    othe FSM's infrastructure grant implementation (final report issued July
    2006), and

    othe FSM's compact trust fund status (final report issued July 2006).

    Although the Inspector General distributed the three final reports to OIA
    and the FSM and the RMI governments, the final reports were not released
    to the public or disseminated widely in the FSM and the RMI. However, one
    of the draft reports circulated unofficially and was cited by the media.
    According to the Inspector General, the reports are considered advisory in
    nature and, as such, no specific response is required from OIA regarding
    the recommendations. Nonetheless, OIA officials stated that the office has
    found the recommendations useful and has made an effort to address them.

    Conclusions

    Since enactment of the amended U.S. compacts with the FSM and the RMI, the
    two countries have made significant efforts to meet new requirements for
    implementation, performance measurement, and oversight. However, in
    attempting to meet these requirements, both countries face significant
    challenges that, unless addressed, will hamper the countries' progress
    toward their goals of economic advancement and budgetary self-reliance
    before the annual grant assistance ends in 2023.

    In 2004 through 2006, compact grants were, for the most part, allocated
    among the countries' six sectors as required, with emphasis on health,
    education, and infrastructure, and the countries have made progress in
    implementing the grants in most sectors. However, despite the revenue
    shortfalls they will face with the scheduled grant decrements, neither
    nation has concrete plans to raise the funds needed to maintain government
    services in the coming years. Furthermore, although the FSM's allocation
    of funds among the states and among sectors caused significant
    inequalities in per-student support for education and per-capita funding
    for health care, neither the FSM nor JEMCO evaluated the impact of these
    differences on the country's ability to meet national goals or deliver
    services.

    Furthermore, although the countries worked to develop the sector grant
    performance indicators required by JEMCO and JEMFAC, a lack of complete
    and reliable baseline data limited the countries' use of the indicators to
    measure performance and evaluate progress. Moreover, weaknesses in the
    countries' required quarterly performance reports--including missing and,
    in some cases, inaccurate activity data--limited the reports' usefulness.
    Unless the FSM and the RMI take steps to correct these weaknesses in
    performance measurement, their ability to use the sector grants to optimal
    effect will continue to be curtailed.

    Recommendations for Executive Action

    Given the FSM's and the RMI's need to maximize the benefits of compact
    assistance before the 2023 expiration of annual grants and to make steady
    progress toward the amended compact goals, we are providing the following
    seven recommendations to the Secretary of the Interior.

    To improve FSM grant administration, planning, and measurement of progress
    toward compact goals, and to ensure oversight, monitoring, and
    accountability for FSM compact expenditures, we recommend that the
    Secretary of the Interior direct the Deputy Assistant Secretary for
    Insular Affairs, as Chairman of JEMCO, to coordinate with other U.S.
    agencies on the committee in working with the FSM national government to
    take the following actions:

    oestablish plans for sector spending and investment by the FSM national
    and state governments to minimize any adverse consequence of reduced
    funding resulting from the annual decrement or partial inflation
    adjustment;

    oevaluate the impact of the current FSM distribution between states and
    sectors on the ability of the nation to meet national goals or deliver
    services;

    ofully develop the mechanism for measuring sector grant performance and
    collect complete baseline data to track progress toward development goals;
    and

    oensure that the quarterly performance reports contain reliable and
    verified program and financial information for use as a monitoring tool by
    both the FSM and the U.S. governments.

    To improve RMI grant administration, planning, and measurement of progress
    toward compact goals, and to ensure oversight, monitoring, and
    accountability for RMI compact expenditures, we recommend that the
    Secretary of the Interior direct the Deputy Assistant Secretary for
    Insular Affairs, as Chairman of JEMFAC, in coordination with other U.S.
    agencies on the committee in working with the RMI government to take the
    following actions:

    oestablish plans for sector spending and investment that minimize any
    adverse consequence of reduced funding resulting from the annual decrement
    or partial inflation adjustment;

    ofully develop the mechanism for measuring sector grant performance and
    collect complete baseline data to track progress toward development goals;
    and

    oensure that the quarterly performance reports contain reliable and
    verified program and financial information for use as a monitoring tool by
    the RMI and the U.S. governments.

    Agency Comments and Our Evaluation

    We received comments from the Department of the Interior as well as from
    the FSM and the RMI (see app. VIII through X for detailed presentations
    of, and our responses to, these comments). We also received technical
    comments from the Departments of Education, Health and Human Services, and
    State, which we incorporated in our report as appropriate.

    Interior concurred with our recommendations and stated that the report was
    accurate and well balanced. The FSM also viewed the report as a balanced
    and fair assessment of its progress in planning for sustainability,
    measuring progress, and ensuring accountability and agreed with our
    overall conclusion that it faces significant challenges in meeting the
    various amended compact requirements. The FSM, however, defended its
    distribution formula for allocating compact funds to the national and
    state governments. The RMI acknowledged that its lack of capacity has
    slowed its implementation of the compact's monitoring and reporting
    requirements. The RMI also stated that it has refrained from expanding
    ministry staffs, given the need for budgetary restraint.

    In addition to providing copies of this report to your offices, we will
    send copies to interested congressional committees. We will also provide
    copies of this report to the Secretaries of Education, Health and Human
    Services, the Interior, and State as well as the President of the
    Federated States of Micronesia and the President of the Republic of the
    Marshall Islands. We will make copies available to others on request. In
    addition, the report will be available at no charge on the GAO Web site at
    http://www.gao.gov.

    If you or your staff have any questions regarding this report, please
    contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points
    for our Offices of Congressional Relations and Public Affairs may be found
    on the last page of this report. GAO staff who made major contributions to
    this report are listed in appendix XI.

    David Gootnick
    Director, International Affairs and Trade

    List of Committees

    The Honorable Pete V. Domenici
    Chairman
    The Honorable Jeff Bingaman
    Ranking Minority Member
    Committee on Energy and Natural Resources
    United States Senate

    The Honorable Richard G. Lugar
    Chairman
    The Honorable Joseph R. Biden, Jr.
    Ranking Minority Member
    Committee on Foreign Relations
    United States Senate

    The Honorable Richard W. Pombo
    Chairman
    The Honorable Nick J. Rahall, II
    Ranking Minority Member
    Committee on Resources
    House of Representatives

    The Honorable Henry J. Hyde
    Chairman
    The Honorable Tom Lantos
    Ranking Minority Member
    Committee on International Relations
    House of Representatives

    Appendix I

    Objectives, Scope, and Methodology

    This report examines, for 2004 through 2006,^1 (1) the Federated States of
    Micronesia's (FSM) and the Republic of the Marshall Islands' (RMI) use of
    compact funds; (2) FSM and RMI efforts to assess progress toward their
    stated development and sector goals; (3) FSM and RMI monitoring of sector
    grants and accountability for the use of compact funds; and (4) the
    Department of the Interior's (Interior) administrative oversight of the
    compacts. Appendix II contains information about activities funded by key
    U.S. programs.

    To report on the FSM's and the RMI's use of amended compact funds, we
    reviewed the U.S., FSM, and RMI annual compact reports for 2004 and 2005;
    FSM and RMI strategic planning documents and budgets; briefing documents
    prepared by Interior's Office of Insular Affairs (OIA) in preparation for
    the annual bilateral meetings with the two countries; and FSM and RMI
    single audits for 2001 through 2005. We reviewed all 2004, 2005, and 2006
    grant agreements with both countries obtained from OIA, including special
    terms and conditions included in these agreements.^2 We compared and
    analyzed fund uses with the purposes specified in the amended compacts,
    the implementing legislation, subsidiary fiscal procedures agreements, and
    sector grant special terms and conditions.

    To identify issues that impact the use of compact funds, we discussed
    planning efforts with U.S., FSM, and RMI government officials and
    identified issues through our own analysis that affected planning, such as
    the FSM's use of its distribution formula. We reviewed relevant documents
    such as FSM and RMI legislation, and we also reviewed documentation
    provided to the U.S. government, such as the FSM's transition plan to
    eliminate the nonconforming spending under the public sector capacity
    building grant. To compute education spending per student, we used FSM and
    RMI grant data and student and population statistics. To calculate the
    variability in health spending per capita across the four FSM states, we
    used FSM grant data and population statistics. We did not calculate health
    spending per capita for the RMI. We determined that these data were
    sufficiently reliable for the purposes of our report.

    Although we were asked to evaluate the effectiveness of the compact funds,
    we determined it was too soon after the amended compacts' implementation
    to do this; therefore, we report on whether the countries are able to
    measure progress. To identify FSM and RMI efforts to assess progress
    toward their stated goals, we reviewed FSM and RMI strategic planning
    documents. We evaluated the framework in place for the FSM and the RMI to
    measure the achievement of stated goals in strategic planning documents
    and compared them with the countries' budget and quarterly performance
    documents. To determine whether the quarterly performance reports were
    being used as a tool to measure progress, we analyzed quarterly
    performance reports for 2005 consistently across five sectors and the
    accuracy of the budget information.^3 We then verified the results of our
    analyses with each office or department we interviewed in the FSM and the
    RMI in March and April 2006. We asked if they used these reports to
    measure progress and discussed discrepancies we found in the reports. To
    identify obstacles to measurement and achievement of goals, we reviewed
    the U.S. annual compact reports for 2004 and 2005, FSM and RMI annual
    compact reports for 2004 and 2005, FSM and RMI strategic planning
    documents and budgets, U.S. government briefing documents, and the RMI's
    2005 Performance Monitoring Report. We verified this information with FSM,
    RMI, and OIA officials.

    To identify the extent to which the FSM and RMI governments conducted
    monitoring and accountability activities, we reviewed the amended compacts
    and fiscal procedures agreements to identify specific monitoring
    responsibilities. We also reviewed the U.S. government briefing documents,
    as well as the minutes and resolutions, when available, that were related
    to the Joint Economic Management Committee (JEMCO) and Joint Economic
    Management and Financial Accountability Committee (JEMFAC) meetings. We
    further reviewed FSM and RMI documents--such as budget justifications and
    portfolios, quarterly performance reports, and annual financial reports
    for 2004 through 2006, as available--submitted by the FSM and RMI
    governments to the U.S. government to confirm compliance with
    accountability reporting requirements. We discussed the sufficiency of
    quarterly performance reports with OIA officials. We obtained the single
    audit reports for 2001 through 2005 from the FSM National Auditor's Web
    site and the RMI's Office of the Auditor General. These reports included
    audits for the FSM national government; the state governments of Chuuk,
    Kosrae, Pohnpei, and Yap; and the RMI national government. In total, the
    30 single audit reports covered 5 years, a period that we considered
    sufficient for identifying common or persistent compliance and financial
    management problems involving U.S. funds. We determined the timeliness of
    submission of the single audit reports by the governments using the
    Federal Audit Clearinghouse's (FAC) "Form Date," which is the most recent
    date that the required SF-SAC data collection form^4 was received by the
    FAC. We noted that the Form Date is updated if revised SF-FACs for that
    same fiscal year are subsequently filed. Our review of the contents of the
    single audit reports identified the auditors' opinions on the financial
    statements, matters cited by the auditors in their qualified opinions, the
    numbers of material weaknesses and reportable conditions reported by the
    auditors, and the status of corrective actions. We did not independently
    assess the quality of the audits or the reliability of the audit finding
    information. We analyzed the audit findings to determine whether they had
    recurred in successive single audits and were still occurring in their
    most recent audit, and we categorized the auditors' opinions on the
    financial statements and the Schedules of Expenditures of Federal Awards.

    To determine oversight activities conducted by the OIA Honolulu office, we
    reviewed senior management statements regarding the purpose and function
    of this office and job descriptions for all staff. To identify the extent
    that the Honolulu office staff traveled to the FSM and the RMI, we
    obtained the travel records for all program specialists and discussed this
    information with OIA officials to ensure that these data were sufficiently
    reliable for our use. We calculated the percentage of time spent
    conducting on-site reviews in the two countries between 2004 and the third
    quarter of 2006 and compared these data with the total available work time
    for the program specialists.

    In addition, to report on the FSM's and the RMI's use of noncompact
    federal funds, we updated our prior review of U.S. programs and services
    that GAO issued in 2002.^5 The prior review selected 13 programs and
    services, including those with the largest expenditures and loans over a
    15-year period, as well as each of the services that the U.S. government
    agreed to provide under the compact.^6 Funding for 3 of these programs was
    consolidated into the Supplemental Education Grant under the amended
    compacts and was excluded from this update.^7 Moreover, to report on
    OIA-awarded technical assistance and operations and maintenance
    improvement program grants, we selected several projects that assisted
    compact implementation or complemented sector grant priorities, such as
    education and health, from among grants awarded to the FSM and the RMI for
    2004 and 2005. We also requested applications and grant evaluation
    information for these projects from OIA. To determine the total amount of
    noncompact federal funding that the FSM received from the United States,
    we used the schedule of expenditures of federal awards from the 2004 and
    2005 single audit reports of the FSM national government, the four FSM
    states, and the College of Micronesia to calculate total FSM expenditures.
    For the FSM national government expenditure total, we included only direct
    expenditures and did not include funds that were passed from the national
    government to the states. We compiled the expenditure amounts passed
    directly to the four states from each of the state's respective single
    audit reports and combined these states totals and the national government
    totals to obtain the total FSM expenditure amount. We excluded compact and
    amended compact expenditures from our calculation. For the RMI, the
    federal awards section of the RMI and College of the Marshall Islands 2004
    and 2005 single audit reports was used to calculate total RMI
    expenditures. The amount of compact funding for the FSM and the RMI was
    compared with the total amount of federal expenditures for 2004 and 2005
    to get the percentage of noncompact U.S. federal funding.

    To address all of our objectives, we held interviews with officials from
    Interior (Washington, D.C.; Honolulu, Hawaii; the FSM; and the RMI) and
    the Department of State (Washington, the FSM, and the RMI). We also
    interviewed officials from the Departments of Health and Human Services
    (Washington and Honolulu); Education (Washington; San Francisco,
    California; and Seattle, Washington); and Agriculture (Washington,
    Honolulu, and Guam); the Federal Aviation Administration (Honolulu); the
    National Weather Service (Honolulu); the Federal Emergency Management
    Agency (FEMA) (San Francisco and Honolulu); and the U.S. Postal Service
    (Honolulu). We traveled to the FSM (Chuuk, Kosrae, Pohnpei, and Yap) and
    the RMI (Arno, Kwajalein, and Majuro Atolls). In addition, in Chuuk, we
    visited the islands of Fanapangas, Fefan, Polle, Toll, Tonoas, Udot, Uman,
    Ut, and Weno. In both countries, we visited primary and secondary schools,
    colleges, hospitals, dispensaries and community health centers, farms,
    fisheries, post offices, weather stations, telecommunication offices, and
    airport facilities. We discussed compact implementation with the FSM (the
    national, Chuuk, Kosrae, Pohnpei, and Yap governments) and the RMI
    officials from foreign affairs, finance, budget, health, education, public
    works, and audit agencies. Furthermore, we met with the RMI's Chief
    Secretary and the FSM's Office of Compact Management. In Kwajalein Atoll,
    we also met with officials from the U.S. Army Kwajalein Atoll and Ebeye's
    Mayor, with its Ministry of Finance, and with the public utility and
    health and education officials to discuss compact implementation issues.
    We met with a representative from the FSM's Micronesian Seminar, a
    nonprofit organization in Pohnpei that provides public education on
    current FSM events, to obtain views on compact implementation and
    development issues. We also observed 2005 and 2006 JEMCO and JEMFAC
    meetings. We met with officials from Interior's Office of Inspector
    General (Guam, Honolulu, and Washington) to discuss ongoing investigations
    in the FSM and the RMI.

    We conducted our review from October 2005 through December 2006 in
    accordance with generally accepted government auditing standards. We
    requested written comments on a draft of this report from the Departments
    of the Interior, State, and Health and Human Services as well as the
    governments of the FSM and the RMI. All of these entities' comments are
    discussed in the report and are reprinted in appendixes VIII through X. In
    addition, we considered all technical comments and made changes to the
    report, as appropriate.

    Appendix II

    U.S. Program Assistance to the FSM and the RMI

    In addition to compact funding, both the FSM and the RMI received
    approximately 30 percent of their total U.S. expenditures during 2004 and
    2005 from other federal agencies, including the Departments of
    Agriculture, Education, Health and Human Services, and Transportation. As
    part of the amended compacts' subsidiary agreements with the RMI and the
    FSM, the United States agreed to extend and subsidize essential federal
    services, such as weather, aviation, and postal services that were
    provided under the original compact. The amended compacts also extend the
    programs and services of FEMA to the FSM and the RMI, but only until
    December 2008. At that time, responsibility for disaster assistance in the
    countries is transferred from FEMA to the United States Agency for
    International Development.^1

    U.S. program assistance is authorized by various sources, including the
    amended compacts and their implementing legislation as well as other U.S.
    legislation.

    Table 3 shows the amount of noncompact U.S. program funds expended on the
    FSM and the RMI for 2004 and 2005. Details of several key U.S. programs^2
    follow in tables 4 through 14.

    Table 3: Noncompact U.S. Program Fund Expenditures for the FSM and the
    RMI, 2004 and 2005

              Dollars in millions
    Country                                           2004                2005
    FSM                                              $32.2               $39.0
    RMI                                               11.0                11.8

    Sources: Single audit reports 2004 and 2005 from the FSM and the RMI.

    Table 4: Department of the Interior OIA Technical Assistance and
    Operations and Maintenance Improvement Program Grants

        Dollars in
         millions
    Purpose and  The FSM and the RMI continue to be
                    eligible for the discretionary grant
    legislation  program of the Department of the
                    Interior's (DOI) Office of Insular
                    Affairs (OIA), which provides both
                    general technical assistance grants and
                    the operations and maintenance
                    improvement program (OMIP) grants. The
                    legislative authority for these
                    activities is found at 48 U.S.C. 1469d.
                    According to OIA, the technical
                    assistance program provides support not
                    otherwise available in areas where
                    expertise is lacking in the FSM and the
                    RMI. The program allows each government
                    to identify pressing needs and
                    priorities and to develop plans of
                    action to mitigate these problems. OIA
                    reported that many of the technical
                    assistance projects have a direct
                    relationship to improving
                    accountability and performance
                    requirements under the amended compact.
                    OMIP grants are designed to create and
                    support institutions that enhance the
                    capability of the governments of the
                    FSM and the RMI to maintain their
                    capital infrastructure. Specific areas
                    that OIA has targeted for OMIP
                    assistance are water, sewage, or power
                    systems; solid waste disposal; roads;
                    ports; airports; schools; and other
                    public buildings.
                    U.S./FSM                                U.S./RMI
    Funding      FY2004: $1.54                           FY2004: $0.98

                    FY2005: $2.33                           FY2005: $2.22
    Use of funds In the FSM, the technical assistance    In the RMI, the TA
                    (TA) program funded about 40 projects,  program funded about
                    of which 21 were OMIP grants in 2004    35 projects, of which
                    and 2005. The TA grants supported more  8 were OMIP grants in
                    FSM governmentwide projects, while the  2004 and 2005. OIA
                    OMIP grants were, in most cases, for    stated that many of
                    specific projects within individual     the projects have a
                    states. OIA stated that many of the TA  direct relationship
                    projects have a direct relationship to  to improving
                    improving accountability and            accountability and
                    performance requirements under the      performance
                    amended compact. For example, they      requirements under
                    provided training funds for the Public  the amended compact.
                    Auditor's Offices, and funded a project For example, they
                    to evaluate the overseas medical        provided training
                    referral program, which was requested   funds for the Public
                    by the FSM Department of Health.        Auditor's Office,
                    Another TA project was to assist the    including the
                    College of Micronesia with its          training of interns
                    budgeting, long- term planning, and     in accounting and
                    decision making through the hiring of a computer operations.
                    consultant.                             In addition, TA
                                                            grants supported
                    Operations and maintenance projects     several large
                    were funded in each of the four states. projects, such as
                    For example, projects in Kosrae were    purchasing a new
                    for power plants and prepayment         computer system to
                    electric meters; in Pohnpei, for the    improve border
                    Port Authority and Pohnpei State        controls and enhance
                    campus; in Yap, to assist the state     tax collection and
                    college; and in Chuuk, to provide       customs programs,
                    equipment and software for the public   developing and
                    utility corporation.                    implementing a
                                                            performance- based
                                                            budgeting process,
                                                            and installing
                                                            geographic
                                                            information systems
                                                            for support of
                                                            economic development
                                                            and landownership.
                                                            OIA also funded a
                                                            series of TA grants
                                                            to assist and assess
                                                            the College of the
                                                            Marshall Islands
                                                            accreditation
                                                            project.

                                                            The operations and
                                                            maintenance projects
                                                            also focused on
                                                            addressing changing
                                                            conditions that allow
                                                            poor maintenance
                                                            practices to exist
                                                            and not just on
                                                            making repairs.
                                                            Examples of
                                                            operations and
                                                            maintenance projects
                                                            were the writing of a
                                                            landfill operations
                                                            manual, a recycling
                                                            and collection
                                                            project, a project to
                                                            improve the Majuro
                                                            hospital, and
                                                            assistance to the
                                                            Kwajalein Atoll Joint
                                                            Utilities Resource
                                                            apprenticeship and
                                                            management projects.
    Program      OIA has conducted limited oversight
    observations over its TA program. OIA's Financial
                    Assistance Manual states that OIA field
                    staff should conduct on-site surveys or
                    meet periodically with the program
                    manager and submit a Report of Grant
                    Site Visit form to the grant manager.
                    However, we found that the OIA
                    Technical Assistance Division did not
                    have any reports of visits by either
                    OIA's field staff or OIA grant managers
                    who conducted monitoring activities on
                    behalf of the TA division for any of
                    the projects we selected for review. A
                    lack of staffing and insufficient
                    travel funds between 2004 and 2006 were
                    reasons given by the Director of the TA
                    division for the limited oversight
                    activity of his office. We found, once
                    projects were funded, there was little
                    follow-up or evaluation of the
                    projects. For example, we reviewed the
                    consulting grant for the FSM's and the
                    RMI's community college accreditation
                    efforts and found that, in the FSM, the
                    consultant never finished or delivered
                    her report and that OIA never asked for
                    a final product or report. In the RMI,
                    the consultant completed an inferior
                    product that was rejected by the
                    College of the Marshall Islands Board
                    and had to be redone by another
                    consultant. According to RMI officials,
                    some more ambitious projects, such as
                    enhancing the income revenue of the tax
                    division within the RMI, could not be
                    completed within the time frames and
                    funding levels that were allocated and
                    an additional grant would be needed to
                    complete the project. The TA grant
                    manager said that he has started to ask
                    the OIA Honolulu field staff to check
                    on specific TA projects if he knows
                    that staff will be traveling to a
                    particular state or country.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 5: Department of Education Individuals with Disabilities Education
    Act/Special Education Program for Pacific Island Entities

    Purpose and  The Special Education Program for
                    Pacific Island Entities (SEPPIE)
    legislation  was a competitive direct grant
                    program, provided by the Department
                    of Education (DOE), to support
                    special education and related
                    services to children with
                    disabilities aged 3 through 21
                    years, as authorized under the 1997
                    Individuals with Disabilities
                    Education Act (IDEA), as amended
                    (Pub. L. No. 91-230). According to
                    an official from the Office of
                    Special Education Programs,
                    following the Individuals with
                    Disabilities Education Improvement
                    Act of 2004 (Pub. L. No. 108-446),
                    SEPPIE was phased out, and the FSM
                    and the RMI began to receive grants
                    under the IDEA Special Education
                    Program applicable to the 50 states
                    and the outlying areas. The
                    official also stated that during
                    the transition, the FSM and the RMI
                    received both SEPPIE and IDEA grant
                    funding for use in 2005 and that
                    the doubling of funding was a
                    one-time event, and funding
                    beginning in 2006 came only from
                    IDEA.
                    U.S./FSM                            U.S./RMI
    Funding      SEPPIE FY2004: $3.89                SEPPIE FY2004: $1.73

                    FY2005: $3.89                       FY2005: $1.73

                    IDEA FY2005: $3.89                  IDEA FY2005: $1.73

                    FY2006: $3.89                       FY2006: $1.73
    Use of funds According to FSM's Grant            According to the school
                    Performance Report, 2,464 FSM       year 2004-2005 Grant
                    students received special education Performance Report,
                    services during the 2004-2005       special education
                    school year, representing           services are provided to
                    approximately 7 percent of the      847 students, or
                    students enrolled in public schools approximately 10 percent
                    in the four FSM states.             of the students enrolled
                                                        in RMI public schools.
                    The FSM had 176 special education   These services were
                    instructors, of which at least 40   available on all 24
                    percent were not fully certified,   inhabited atolls and in
                    in 2005. According to a FSM Special 72 of the 78 public
                    Education official, the FSM Special elementary schools, as
                    Education Program requires the      well as in all 4 public
                    states to collect teacher           high schools.
                    certification data quarterly. In
                    addition according to a U.S.        Special education
                    Special Education official, the     services were provided by
                    IDEA program requires that all      108 special education
                    instructors have at least a         teachers and 4 support
                    Bachelor of Arts (BA) degree. To    staff funded by SEPPIE.
                    support this effort, a FSM special  Of the 108 teachers, 2
                    education official said that the    have BA degrees, 38 have
                    FSM's Special Education Program has Associate of Arts or
                    allocated funding for 63            Science degrees, and the
                    instructors to attain BAs with      remaining 68 have high
                    funding that will be available      school degrees or less.
                    through 2007.                       The Ministry of Education
                                                        has set December 2008 as
                                                        its goal for ensuring
                                                        that all of its teachers
                                                        have at least an
                                                        Associates Degree.
                                                        However, according to an
                                                        official from the Office
                                                        of Special Education
                                                        Programs, the requirement
                                                        for the IDEA program is
                                                        for all instructors to
                                                        have at least a BA. Under
                                                        IDEA requirements the
                                                        RMI's first Annual
                                                        Performance Report on
                                                        meeting its targets is
                                                        due to the U.S. Office of
                                                        Special Education
                                                        Programs by February 7,
                                                        2007, and so the status
                                                        of this requirement will
                                                        not be available until
                                                        that date.
    Program      Each country's programs support the
    observations objectives of (1) providing direct
                    special education and related
                    services for eligible children with
                    disabilities and (2) building the
                    capacity to provide improved
                    special education in the future by,
                    for example, providing teacher
                    training and training for
                    therapists in these programs, while
                    also improving facilities and
                    service delivery through the use of
                    vehicles such as buses and boats.
                    However, according to FSM and RMI
                    education officials progress toward
                    achieving these goals has been
                    slow, since (1) both countries'
                    school systems are staffed by a
                    substantial number of
                    underqualified teachers and (2)
                    both countries lack skilled support
                    personnel, such as audiologists,
                    diagnosticians, speech
                    pathologists, and physical
                    therapists. However, the countries
                    have better addressed their goal of
                    increasing parental involvement,
                    since both the FSM and the RMI have
                    active organizations for parents of
                    children with disabilities.

                    DOE's oversight has been indirect,
                    as the Washington, D.C.-based
                    program officer from the Office of
                    Special Education has never visited
                    the countries. However, that
                    official noted that DOE provides
                    technical assistance and staff
                    training to country special
                    education staff through meetings
                    and conferences held in the United
                    States. The official also said that
                    the office plans to make site
                    visits to both countries in October
                    2006 as part of DOE's review of all
                    education programs and, in 2007,
                    intends to again visit the
                    countries and meet with teachers in
                    schools. The office believes it
                    does monitor the Special Education
                    Programs in both countries, but
                    limited travel funds and the high
                    cost of travel to the FSM and the
                    RMI were noted as constraints on
                    oversight.

                    During the annual single audits of
                    federally funded programs in the
                    FSM and the RMI, both countries'
                    Special Education Programs were
                    found to have problems complying
                    with federal regulations, such as
                    not adequately documenting
                    procurement procedures and failing
                    to report financial status or track
                    property purchased with federal
                    funds; in addition, the FSM has not
                    submitted its audits in a timely
                    manner. For example, both the FSM's
                    and the RMI's 2004 single audits
                    documented problems with special
                    education program procurement.
                    Since the U.S. Special Education
                    Program Office has not been able to
                    visit each country because of
                    limited travel funds, its use of
                    the single audit is especially
                    critical. However, the FSM's late
                    submission of its single audits
                    hinders this effort.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 6: Department of Education Pell Grant Program

        Dollars in
         millions
    Purpose and  Pell Grants, from the Department of
                    Education (DOE), are intended to provide
    legislation  eligible, undergraduate students with
                    financial assistance for educational
                    expenses. The Higher Education Act of
                    1965, as amended (Pub. L. No. 89-329),
                    authorized the FSM's and the RMI's
                    participation.
                    U.S./FSM                                  U.S./RMI
    Funding      FY2004: $7.93                             FY2004: $2.15

                    FY2005: $8.20                             FY2005: $2.21

                    FY2006: $7.02^a                           FY2006: $1.55^a
    Use of funds For 2005, Pell Grants provided            For 2005, Pell
                    approximately 2,560 FSM students with     Grants provided
                    grant assistance to attend the College of approximately 820
                    Micronesia.                               RMI students with
                                                              grant assistant to
                    Furthermore, approximately1,200           attend the College
                    additional FSM residents received Pell    of the Marshall
                    Grants to attend colleges and             Islands.
                    universities in the United States. The
                    funding that these students received is   Furthermore,
                    not included in the funding listed above. approximately 260
                                                              additional RMI
                    College of Micronesia officials said that residents received
                    Pell Grants are a critical source of      Pell Grant
                    funds for their college--they represented assistance to
                    45 percent of the college's operating     attend colleges and
                    expenditures in 2005.                     universities in the
                                                              United States. The
                                                              funding that these
                                                              students received
                                                              is not included in
                                                              the funding listed
                                                              above.

                                                              College of Marshall
                                                              Island officials
                                                              said that Pell
                                                              Grants are a
                                                              critical source of
                                                              funds for their
                                                              college, providing
                                                              about 43 percent of
                                                              all federal award
                                                              expenditures at the
                                                              college for 2005.
    Program      The Pell Grant Program provides grants to
    observations eligible FSM and RMI students, and,
                    because of the low-income levels in the
                    two countries relative to the United
                    States, most students qualify for the
                    program. One major problem students from
                    both countries face is a lack of adequate
                    primary and secondary school training to
                    prepare them for college-level courses.
                    For example, a June 2005 briefing paper
                    by the RMI Ministry of Education,
                    cosponsored by the Asian Development
                    Bank, showed the vast majority of high
                    school graduates entering the College of
                    the Marshall Islands from 2002 to 2004
                    qualified only for remedial courses. In
                    math, very few students qualified for
                    credit courses, while over half of the
                    students did not even qualify for
                    remedial courses. FSM College of
                    Micronesia officials also stated that
                    because of the inferior primary and
                    secondary school preparation at most of
                    the schools on the islands, most students
                    do not pass the entrance exam to come to
                    the national campus. The Pell Grant
                    training officer said that students could
                    take up to 30 credits of classes of
                    remedial coursework and needed English as
                    a Second Language (ESL) classes under the
                    Pell Grant. However, students often use
                    up all of their remedial course allotment
                    and still need a significant amount of
                    ESL courses before they are even able to
                    begin taking the credit classes needed to
                    eventually attain a degree.

                    According to a DOE Institutional Review
                    Specialist, the U.S. Federal Student Aid
                    Office annually reviews the single audits
                    of the colleges in both countries and
                    issues a final audit determination letter
                    to each institution. The office had
                    advised the College of the Marshall
                    Islands in its letters to the institution
                    from 2000 through 2004 that repeat
                    findings or failure to resolve audit
                    findings may lead to an adverse
                    administrative action, which could
                    include the imposition of a fine or the
                    limitation, suspension, or termination of
                    the eligibility of the institution to
                    receive funds. However, according to a
                    DOE Institutional Review Specialist, the
                    number of audit findings and the number
                    of recurring findings had decreased
                    between 2000 and 2004 for the RMI, and
                    that the FSM had no findings in the 2002
                    and 2003 audit letters. Moreover, the
                    fiscal year 2005 single audits of the
                    College of Micronesia and the College of
                    the Marshall Islands gave unqualified
                    "clean" opinions on their financial
                    statements and listed no auditor
                    findings; the FSM had no questioned costs
                    and the RMI had about $239,000 in
                    unresolved questioned costs from the
                    previous year's audits.

    Sources: GAO analysis of documents and interviews with agency officials.

    ^aAs of August 2006. Schools have until October 2, 2006, with a few
    exceptions, to submit Pell Grant payments.

    Table 7: Department of Health and Human Services Maternal and Child Health
    Block Grants Program

        Dollars in
         millions
    Purpose and  The Maternal and Child
                    Health (MCH) Block Grants
    legislation  Program under the
                    Department of Health and
                    Human Services (HHS), was
                    authorized by Title V of
                    the 1935 Social Security
                    Act, as amended (49 Stat.
                    620). MCH was intended to
                    help states provide mothers
                    and children with access to
                    quality health services and
                    to reduce infant mortality
                    and the incidence of
                    preventable diseases. In
                    1981, MCH, along with
                    several other categorical
                    programs, was converted to
                    a block grant, which
                    allowed states to implement
                    the program with maximum
                    flexibility and minimum
                    reporting requirements.
                    U.S./FSM                    U.S./RMI
    Funding      FY2004: $0.56               FY2004: $0.25

                    FY2005: $0.56               FY2005: $0.25

                    FY2006: $0.53               FY2006: $0.24
    Use of funds The MCH program in the four The MCH program in the RMI is
                    FSM states provided         combined with the Children with
                    significant direct health   Special Health Care Needs
                    care and implementing       Program. These programs provided
                    services for the maternal   and coordinated the full spectrum
                    and infant population. In   of preventive and primary health
                    2004, the FSM MCH program   care services for mother,
                    reported providing services infants, children, and
                    to 61,091 eligible mothers  adolescents, both in hospital
                    and children, and fully     settings and health centers. In
                    immunizing nearly 43        2004, the program reported
                    percent of the 19- to       providing services to 33,208
                    35-month-old children. For  eligible mothers and children and
                    2006, the MCH program       fully immunizing almost 50
                    funded 36 positions: 14 in  percent of the 19- to 35-
                    Chuuk, 7 in Pohnpei, 7 in   month-old children. The RMI
                    Yap, 6 in Kosrae, and 2 in  reported that this percentage was
                    the FSM national            below its immunization goal of 90
                    government.                 percent due to several
                                                challenges, including the
                                                distance between islands, limited
                                                storage facilities for vaccines,
                                                and the lack of information and
                                                outreach about the program. The
                                                MCH/Children with Special Health
                                                Care Needs Programs funded 31
                                                positions, including 22 nurses, 7
                                                physical assistants, 1 medical
                                                director, and 1 OB-GYN
                                                specialist.
    Program      FSM and RMI program
    observations officials told us they were
                    unable to complete and were
                    given exemptions for
                    several of the MCH national
                    performance measurements,
                    which were required as part
                    of the annual reports,
                    because some of the
                    performance measurements
                    were beyond the level of
                    services provided in both
                    countries or were regarding
                    support programs, such as
                    Medicaid, that do not exist
                    in these countries. Other
                    services, such as metabolic
                    screening or hearing
                    impairment testing of
                    newborns, were not
                    available in both
                    countries.

                    The U.S. MCH State and
                    Community Health Director
                    stated that the national
                    performance measurements
                    are not "outcome measures"
                    set by HHS for the FSM and
                    the RMI; but that countries
                    under the MCH program
                    establish their own
                    objectives and report on
                    the results on the basis of
                    meeting their own
                    objectives. They are
                    required to conduct a
                    statewide or, in their
                    case, countrywide needs
                    assessments every 5 years
                    that identifies the needs
                    for preventive and primary
                    care services for pregnant
                    women, mothers, infants,
                    and children. According to
                    the Director, the countries
                    tailor their targets on the
                    basis of their own
                    conditions, not on HHS
                    standards.

                    Hospital officials in the
                    FSM and the RMI believed
                    that the MCH program
                    complemented existing
                    health services. The Kosrae
                    Health Director said that
                    the state was highly
                    dependent on MCH funding
                    due to a lack of support
                    from the state's general
                    fund since 2004. The Yap
                    Director of Health Services
                    said that MCH funds help
                    support primary health care
                    services. In Chuuk, MCH
                    funding was used to support
                    outreach services to the
                    outlying villages by
                    funding public health
                    nurses. The RMI MCH
                    coordinator said that
                    although the immunization
                    rates in the RMI appear
                    low, there were no
                    incidents of children dying
                    from the diseases for which
                    they were immunized, and he
                    believed the MCH program
                    was overall doing a good
                    job.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 8: U.S. Department of Agriculture Rural Housing Service Housing Loan
    Program

        Dollars in
         millions
    Purpose and  The U.S. Department of Agriculture's
                    (USDA) Rural Development Housing
    legislation  programs has provided direct housing
                    loans and grants for single-family
                    dwellings, among other services. The
                    housing programs were authorized
                    under the Housing Act of 1949, as
                    amended (63 Stat. 413).

                    oSection 502 of the Housing Act of
                    1949, as amended, allowed loans to
                    low-income borrowers to buy, build,
                    rehabilitate, improve, or relocate
                    modest eligible dwellings for use by
                    the borrower as a permanent
                    residence.

                    oSection 504 allowed loans and
                    grants to very low-income homeowners
                    to make general improvements to
                    their homes as long as the dwelling
                    remained modest and was not used for
                    commercial purposes.
                    U.S./FSM                             U.S./RMI
    Funding      FY2004: $2.12 (grant and loans)      FY2004: $2.03 (grants
                                                         and loans)
                    FY2005: $2.92 (grants and loans)
                                                         FY2005: $2.27 (grants
                    FY2006: $2.13 (grants and loans)     and loans)

                                                         FY2006: $1.32 (grants
                                                         and loans)
    Use of funds USDA maintains a local development   In 2005, 211 loans and
                    office in each FSM state. Two        grants were approved in
                    hundred ninety-nine loans and grants the RMI, at a value of
                    were approved totaling $2,916,457 in $2,272,020. According to
                    2005. Kosrae, the state with the     the Western Pacific Area
                    smallest population, approved the    Director, while USDA has
                    greatest number of loans and grants  not opened an office in
                    (146), totaling $1,497,458, or 51    Ebeye, the RMI
                    percent of the total loan amount     government established
                    available in the FSM. The Kosrae     one there in 2001 with
                    Rural Development Manager explained  the intent of expanding
                    that the office did not have the     USDA's housing program
                    same type of problems, such as       to the island's eligible
                    securing title to the property, that residents. He stated
                    other states had, and that their     that the office is
                    delinquency rate was very low.       staffed with RMI
                    Chuuk, the state with the largest    government employees who
                    population, funded the smallest      are trained in USDA's
                    number of loans (52), totaling       housing programs and
                    $299,544, or 10 percent of the total supervised by the USDA
                    loan amount available in the FSM, in manager in Majuro. He
                    2005. A USDA loan official stated    also stated that the
                    that this disparity was due to Chuuk office initially
                    residents having a difficult time    administered the section
                    obtaining title to their land, which 504 program, but there
                    is a requirement for new home        is also potential to
                    construction loans.                  administer the section
                                                         502 construction housing
                                                         program.
    Program      Previously, we pointed out that the
    observations applicable Department of Housing and
                    Urban Development income limits may
                    not target the neediest residents
                    based on the basis of income levels
                    and family size of FSM and RMI
                    applicants (see [64]GAO-02-70 ). The
                    income of FSM or RMI applicants has
                    to be "low" or "very low" as
                    determined by the Housing and Urban
                    Development's Adjusted Income Limits
                    for Western Pacific Islands.
                    Moreover, according to a USDA Rural
                    Development official, USDA is
                    required by law to follow these
                    criteria. The office managers that
                    we interviewed did not see a problem
                    in using the Western Pacific
                    eligibility levels for FSM
                    residents, and one manager estimated
                    90 percent of residents would
                    qualify for the very low-income
                    threshold due to the large family
                    sizes and low-income levels of the
                    applicants.

                    At the time of our previous report,
                    the amended compacts between the FSM
                    and the RMI and the United States
                    were not a certainty, and there were
                    concerns about the ability of
                    borrowers to repay their loans if
                    there were a future reduction in
                    U.S. economic assistance. The
                    amended compact only ensures direct
                    U.S. grants funding until 2023, and
                    many of these long-term loans will
                    be active beyond that date. However,
                    USDA was not required to consider
                    the effects that a future reduction
                    in U.S. economic assistance could
                    have on the ability of its borrowers
                    to repay their loans.

                    Our prior report also found that
                    USDA Rural Development Housing
                    Program accountability was
                    insufficient and ineffective, and
                    that the Hawaii State Office failed
                    to exercise adequate oversight in
                    the FSM and the RMI. According to
                    USDA Rural Development,
                    accountability has improved through
                    the following actions: (1) the State
                    Internal Reviews for the FSM's four
                    states and the RMI between 2001 and
                    2004 were conducted in accordance
                    with agency regulations and
                    guidelines, and all significant
                    weaknesses were appropriately
                    addressed and (2) the personnel
                    involved with prior significant
                    irregularities with the housing
                    program in Pohnpei were terminated.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 9: U.S. Department of Agriculture Rural Utilities Services
    Telecommunications Loan Program

    Purpose and  The Rural Electrification Act of
                    1936, as amended (49 Stat. 1363),
    legislation  authorized the U.S. Department of
                    Agriculture (USDA) to make loans for
                    furnishing and improving telephone
                    service in rural areas. The loans
                    were intended to be used to furnish,
                    improve, expand, construct, and
                    operate telephone facilities or
                    systems in rural areas. The amended
                    compacts implementing legislation
                    authorized programs to be made
                    available to the FSM and the RMI.
                    USDA Rural Development Utilities
                    Programs, which is the successor to
                    the Rural Electrification
                    Administration, made a 35-year term
                    loan to the Federated State of
                    Micronesia Telecommunications
                    Corporation (FSMTC) and 35-year and
                    17-year term loans to the Marshall
                    Islands National Telecommunications
                    Authority (MINTA).
                    U.S./FSM                              U.S./RMI
    Funding      According to a USDA Rural Development According to a USDA
                    official in 1987, a USDA Rural        Rural Development
                    Development Utilities loan was        official in 1987, the
                    approved to FSMTC for $41 million.    Utilities loan was
                    The loan's terms were 35 years at 5   approved to the MINTA
                    percent interest with principle       for $18.8 million. The
                    payments beginning in 1990. The       loan's terms were 35
                    official also stated that the FSMTC   years at 5 percent
                    has been making monthly payments      interest beginning in
                    toward the completion of the loan and 1990 and in 1993, a
                    is scheduled to pay it off by 2022.   second RUS loan was
                                                          approved in the amount
                                                          of $4.0 million. The
                                                          terms of the second
                                                          loan were 17 years at 5
                                                          percent interest with
                                                          principle payments
                                                          beginning in 1996. In
                                                          addition, the official
                                                          stated that the MINTA
                                                          has been making monthly
                                                          payments toward the
                                                          completion of the loans
                                                          and is scheduled to pay
                                                          off the loans in 2022
                                                          and 2010, respectively.
    Use of funds Our previous review found that the    Our previous review
                    USDA loan increased telephone and     found that the USDA
                    communications availability to homes  loan increased
                    and businesses. In 1987, the FSMTC    telephone and
                    had 1,300 subscribers, while in 1993  communications
                    the number of subscribers increased   availability to homes
                    to 6,000 and to more than 9,870       and businesses. In
                    throughout the FSM states in 2001.    1987, the company had
                    The FSMTC's 2005 audit report         653 subscribers. The
                    identified a little over 10,000       MINTA's 2005 audit
                    customers of landline telephone       report indicated it
                    service and approximately 17,380      provided landline
                    mobile service customers.             telephone service to
                                                          5,804 customers, 911
                                                          cellular customers, and
                                                          807 Internet users. The
                                                          MINTA noted that this
                                                          was a decrease in
                                                          cellular subscribers
                                                          from 1,198 and Internet
                                                          users from 878 in 2004
                                                          because their system on
                                                          Ebeye was not
                                                          operational from
                                                          January to May 2005.
    Program      Both the FSMTC and the MINTA provided
    observations access to telephone service to an
                    increasing portion of their
                    respective national populations.
                    According to World Bank Data, FSM
                    telephone subscribers have increased
                    from 16 out of every 1,000 customers
                    in 1987 to 226 per 1,000 customers in
                    2004. Of the 226 subscribers, mobile
                    telephone customers were 117 per
                    1,000 and landline customers were
                    109. RMI subscribers also grew, from
                    11 per 1,000 people in 1990 to 86 per
                    1,000 customers in 2003. Of the 86
                    subscribers, mobile telephone
                    customers were 10 per 1000 and
                    landline were 76.

                    According to officials from the FSM
                    and RMI telecommunication agencies,
                    both entities have been repaying
                    their loans on a regular monthly
                    basis to the USDA Rural Development
                    Utilities Programs. At the time of
                    our previous report, the amended
                    compacts between the FSM and the RMI
                    and the United States were not a
                    certainty, and there were concerns
                    about the ability of borrowers to
                    repay their loans if there were a
                    future reduction in U.S. economic
                    assistance (see [65]GAO-02-70 ).
                    While the FSM and RMI governments
                    have assumed responsibility for the
                    secured loans if the borrowers are
                    unable to pay, the dependence of the
                    governments on U.S. funds may put
                    such repayment at risk. However, USDA
                    was not required to consider the
                    effect a future reduction in U.S.
                    economic assistance could have on the
                    ability of its borrowers to repay
                    their loans.

                    Both countries' telecommunication
                    companies were subject to feasibility
                    studies as a loan requirement, and
                    both studies showed that the projects
                    were financially viable. Each company
                    was subject to loan fund and
                    accounting reviews during
                    construction. The FSMTC's 2005 single
                    audit was an unqualified "clean" on
                    financial statements and had no
                    reportable findings. The MINTA 2005
                    annual report, which also included
                    the independent auditor's report,
                    gave an unqualified "clean" opinion
                    on the financial statements with no
                    reportable findings.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 10: U.S. Department of Agriculture Rural Utilities Services
    Electrical Loan Program

    Purpose and  USDA Rural Development
                    Utilities Programs
    legislation  electrical loans,
                    authorized under the Rural
                    Electrification Act of
                    1936, as amended, (49 Stat.
                    1363), were intended to
                    furnish and improve
                    electrical service in rural
                    areas and finance the
                    construction of electric
                    distribution, transmission,
                    and generation facilities.
                    The amended compacts
                    implementing legislation
                    authorized loans to be made
                    available to the FSM and
                    the RMI. USDA Rural
                    Development Utilities
                    Programs is the successor
                    to the Rural
                    Electrification
                    Administration.
                    U.S./FSM                    U.S./RMI
    Funding      Loan application is pending According to an USDA Rural
                    from one of the four        Development official, the
                    utility companies in the    Marshall Energy Company received
                    FSM.                        a loan for about $12.0 million in
                                                1997. The official stated that
                                                the loan term was 20 years at 6.9
                                                percent interest.
    Use of funds The Pohnpei Utilities       The Marshall Energy Company
                    Corporation filed its       commissioned its 12.8 megawatt
                    original loan application   generating station in December
                    in 1999 with USDA Rural     1999. This plant, the island's
                    Development for $10.6       second, was built to relieve the
                    million. Because of         old power plant's five
                    problems in obtaining title generators, all of which operated
                    to the property where the   at peak hours with no backup.
                    new power plant was to be   Demand for electrical power has
                    built, no action was taken  increased in the RMI and the
                    on the loan application.    number of new businesses seeking
                    According to a Pohnpei      power increased by 34 percent
                    Utilities Corporation       between 1997 and 1999, and the
                    official, the state of      number of private users increased
                    Pohnpei legislature acted   by 11 percent during the same
                    to give the Ponhpei         period. According to agency
                    Utilities title to the      officials the Marshall Energy
                    property in 2004 and a      Company had to make three
                    revised loan application    separate price increases in 2005
                    for $18 million was filed   to help recoup the rising cost of
                    with the USDA Rural         oil used to operate its
                    Development in July 2005.   generators. The officials also
                    USDA Rural Development      stated that after each increase,
                    requested additional        use went down and company's
                    information on a number of  revenue did not match its
                    engineering, legal, and     expectations. The officials
                    financial issues and is     believe future government and
                    awaiting a response from    business users will be more
                    the Pohnpei Utilities       stable consumers of energy, once
                    Corporation before any      the schools and other
                    further action is taken.    infrastructure projects are
                                                completed on Majuro.
    Program      Our prior report detailed
    observations that both power companies
                    were subject to engineering
                    and financial feasibility
                    study requirements (see
                    [66]GAO-02-70 ). While
                    feasibility studies showed
                    that the FSM project was
                    necessary and financially
                    viable, the loan
                    application from the
                    Pohnpei Utilities
                    Corporation, which was
                    first submitted in 1999
                    according to a USDA Rural
                    Development official, has
                    not been approved as of
                    September 2006, because of
                    the problems previously
                    mentioned. In addition, the
                    Pohnpei Utilities
                    Corporation has been slow
                    in responding to RUS
                    requests for additional
                    information related to the
                    loan.

                    At the time of our previous
                    report, the amended
                    compacts between the FSM
                    and the RMI and the United
                    States were not a
                    certainty, and there were
                    concerns about the ability
                    of borrowers to repay their
                    loans if there were a
                    future reduction in U.S.
                    economic assistance. While
                    the FSM and RMI governments
                    have assumed responsibility
                    for these secured loans if
                    the borrowers are unable to
                    pay, the dependence of the
                    governments on U.S. funds
                    may put such repayment at
                    risk. The amended compact
                    only ensures direct U.S.
                    grants funding until 2023,
                    and the Pohnpei Utilities
                    Corporation loan, if it is
                    funded, may still be active
                    past this date.

                    The USDA Rural Development
                    official stated that the
                    Marshall Energy Company was
                    that delinquent on payments
                    to USDA for about 30 days,
                    and that they are now
                    current with all loan
                    repayments. The RMI 2005
                    single audit stated that
                    the Marshall Energy Company
                    was not in compliance with
                    certain loan coverage ratio
                    requirements, and the Rural
                    Development official
                    confirmed that the Marshall
                    Energy Company has not met
                    these requirements for the
                    last few years.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 11: Federal Emergency Management Agency Program/U.S. Agency for
    International Development

        Dollars in
         millions
    Purpose and  The Federal Emergency Management Agency
    legislation  (FEMA) assistance is intended to help
                    states and localities respond to, plan
                    for, recover from, and mitigate
                    disasters. Under the original compact,
                    disaster assistance services and programs
                    were to be made available to the FSM and
                    the RMI in the same manner as assistance
                    was made available to a U.S. state. Under
                    the amended compacts, the programs and
                    services of FEMA are also extended to the
                    FSM and the RMI to the same extent that
                    programs and services were available in
                    2003, but only until December 16, 2008.
                    The FSM, the RMI, and the United States
                    agreed in the amended compacts
                    supplemental agreements to seek to reach
                    agreement for alternate assistance
                    arrangements involving a significant role
                    for the U.S. Agency for International
                    Development (USAID). If an agreement is
                    not reached by December 16, 2008, all
                    emergency and disaster preparedness,
                    response, and recovery assistance will be
                    provided to the FSM and the RMI by USAID.
                    After this date, USAID will be
                    responsible for the provision of
                    emergency and disaster relief assistance
                    in accordance with its statutory
                    authorities, regulations, and policies.
                    According to a FEMA official, funding for
                    USAID disaster assistance activities in
                    the FSM and the RMI will be funded from
                    FEMA's Disaster Relief Fund.  For the FSM
                    and the RMI to secure disaster assistance
                    from the United States, either currently
                    or under the new arrangement, the FSM or
                    the RMI can request that the President of
                    the United States make an emergency or
                    major disaster declaration. If the
                    President declares an emergency or major
                    disaster, the Department of Homeland
                    Security (DHS), FEMA, and USAID will
                    jointly (1) assess the damage caused by
                    the emergency or disaster and (2) prepare
                    a reconstruction plan that includes an
                    estimate of the total amount of federal
                    resources that are needed for
                    reconstruction.
                    U.S./FSM                                  U.S./RMI
    Funding      FEMA FY2004: $12.36                       FEMA FY2004: $0.05

                    FEMA FY2005: $10.16                       DHS FY2005: $0.05

                    DHS FY2005: $0.05                         DHS FY2006: $0.05

                    DHS FY2006: $0.05
    Use of funds Since 2004, FEMA has provided about $22.5 In 2004, FEMA
                    million in disaster assistance to Yap in  funded the RMI with
                    the FSM for recovery assistance when the  $50,000 a year for
                    island was heavily damaged by Typhoon     disaster
                    Sudal in April 2004. The FSM also         preparedness.
                    received $50,000 a year from FEMA for     Starting in 2005
                    disaster preparedness in 2004. Starting   and continuing
                    in 2005 and continuing through 2006, this through 2006, this
                    funding will be from the DHS Emergency    funding will be
                    Management Performance Grants Program.    from the DHS
                                                              Emergency
                                                              Management
                                                              Performance Grants
                                                              Program.
    Program      Previously, we found that the FSM and the
    observations RMI did not appear to be developing the
                    capability for their states and
                    localities to respond to, plan for,
                    recover from, and mitigate disasters (see
                    [67]GAO-02-70 ). In our 2006 interviews
                    with local agency officials, we learned
                    the following:

                    oThe FSM National Disaster Coordinating
                    Officer stated that some projects on the
                    outer islands were difficult to complete
                    because of the distance and lack of
                    proper equipment. In Chuuk, FEMA funds
                    from the 2002 typhoons are still being
                    spent to repair buildings and to build
                    seawalls.

                    oThe Director of the RMI's Natural
                    Disaster Management Office said the RMI
                    has been more responsive in utilizing
                    disaster preparedness funds in recent
                    years, although no FEMA funds were
                    provided when a recent fire damaged the
                    Majuro hospital. Instead, the RMI
                    received support from USAID's Office of
                    Foreign Disaster Assistance and the
                    Department of Defense through their U.S.
                    Army Kwajalein Atoll site.

                    Although both the FSM and the RMI
                    disaster officers said that they had
                    completed the 2004 reports that they
                    submitted to FEMA, they were not able to
                    locate or provide copies of the reports.
                    The FSM Office of Public Auditor recently
                    completed a review of files related to
                    FEMA funds provided to the FSM to assist
                    and recover from three typhoons--damaging
                    Chuuk, Chata'an, in July 2002; Pongsona
                    in January 2003; and Lupit in December
                    2003--and found internal control
                    weaknesses in the disbursement of FEMA
                    funds. These weaknesses could lead to
                    misuse of FEMA funds. In addition, more
                    than 18 percent of the vouchers the
                    auditors requested (22 out of 115) could
                    not be found. These vouchers accounted
                    for over 40 percent of the sampled funds
                    and represented about $444,000 of the
                    $1,088,000 selected for review. The
                    auditors made four recommendations for
                    improving internal control procedures,
                    which the FSM agreed to correct.

                    Under the amended compacts, there is a
                    disaster assistance emergency fund
                    established with each government, whereby
                    the United States contributes $200,000
                    each year. However, the U.S. funding
                    comes out of the amended compact funding
                    and not from FEMA. According to the
                    Emergency Management and Performance
                    Grants Program Manager, the FSM and RMI
                    will continue to have access to DHS grant
                    program funding for disaster preparedness
                    even after the transition of the
                    responsibility for disaster emergency and
                    relief assistance goes to USAID.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 12: U.S. Postal Service Program

    Dollars in millions
    Purpose and         Under the amended compacts with
                           the FSM and the RMI, the services
    legislation         and programs of the U.S. Postal
                           Service (USPS) are made available
                           to the two countries as provided
                           for in the Federal Programs and
                           Services Agreements accompanying
                           the amended compacts. In these
                           supplemental agreements, USPS
                           agreed to maintain a reasonable
                           and cost-effective level of
                           service for sending mail to and
                           from the United States and mail
                           offices of the FSM and the RMI.
                           In addition, under these
                           agreements, USPS no longer
                           provides payment for services
                           upon delivery (commonly called
                           Cash on Delivery). According to a
                           USPS official pursuant to the
                           agreements, USPS also negotiated
                           later with the countries to end
                           Special Services, such as
                           Guaranteed Express Mail and
                           Insured Mail. This official
                           stated that U.S. postal Money
                           Order Service was also terminated
                           on August 31, 2006. Finally,
                           under the amended compacts
                           supplemental agreements, the FSM
                           and the RMI agreed that USPS
                           could establish special
                           cost-related international rates
                           or standard international rates
                           and classifications for mail to
                           the FSM and the RMI that would be
                           phased in over a 5-year period,
                           beginning no sooner than 2006.
                           According to this official, the
                           change became effective with the
                           U.S. postal rate increase of
                           January 8, 2006.
                           U.S./FSM                          U.S./RMI
    Funding             According to USPS officials, the
                           cost of providing transportation,
                           administration, and technical
                           assistance are supposed to be
                           reimbursed by the Department of
                           the Interior (DOI). However, USPS
                           reported that under the original
                           compact, they were not reimbursed
                           their full costs. Under the
                           supplemental agreement to the
                           amended compact, which allows
                           USPS transition to international
                           rates to the FSM and the RMI over
                           a phased-in period, USPS expects
                           that the amount of their subsidy
                           for this service will decline.

                           USPS was unable to separate out
                           the costs of providing services
                           to the FSM, RMI, and Republic of
                           Palau, but provided the following
                           combined totals:

                           FY2004: Total costs - $3.13
                           Reimbursed by DOI: $2.26 Unpaid
                           balance: $0.87

                           FY2005: Total costs - $2.53
                           Reimbursed by DOI: $2.43 Unpaid
                           balance: $0.10^a
    Use of funds        USPS transports mail and parcels  USPS transports mail
                           to and from the FSM and provides  and parcels to and
                           equipment, material, supplies,    from the RMI and
                           and technical assistance to the   gives equipment,
                           country. During 2005, the FSM     material, supplies,
                           received approximately 519,000    and technical
                           pounds of mail and sent out       assistance to the
                           approximately 151,000 pounds.     country. During
                                                             2005, the RMI
                                                             received
                                                             approximately
                                                             385,000 pounds of
                                                             mail and sent out
                                                             approximately 73,000
                                                             pounds.
    Program             USPS provides assistance and
    observations        services in accordance with the
                           amended compact, including mail
                           transportation and technical
                           assistance. As permitted in the
                           amended compacts supplemental
                           agreements between both countries
                           and the United States, beginning
                           in January 2006, USPS began to
                           phase in new international rates.
                           According to USPS officials,
                           while this has resulted in
                           increased costs to the countries
                           for mail sent to the FSM and the
                           RMI, they believe this will
                           increase its revenue and thus
                           offset some of the cost that DOI
                           does not reimburse. The change in
                           postal rates has created
                           controversy in the Marshall
                           Islands, with government and
                           business leaders asking that a
                           rate hike be reconsidered. There
                           has not been a similar request
                           from the FSM. RMI per-capita
                           in-bound mail volume is almost 44
                           percent greater than the
                           per-capital FSM in-bound mail
                           volume.

                           USPS officials reported that
                           prior to the termination of
                           Special Services, such as Express
                           Mail Guarantee, Cash on Delivery,
                           and insurance, USPS had paid out
                           thousands of dollars yearly in
                           claims to customers.

                           Before postal Money Order Service
                           was terminated in August 2006,
                           USPS reported that it had
                           tightened control on all money
                           order transactions from the FSM
                           and the RMI. A finance manager in
                           USPS's Honolulu office reviewed
                           the countries' transaction
                           reports and reported any
                           irregularities to the U.S. Postal
                           Inspection Service. In the past 2
                           years, USPS reported one incident
                           of money order irregularities
                           that occurred in January 2006 in
                           the RMI. In this instance, USPS
                           fully collected all money due to
                           the agency, and the employees
                           involved were terminated.

    Sources: GAO analysis of documents and interviews with agency officials.

    ^aThe unpaid balances do not carry over from year to year but reflect
    those annual costs for which USPS was not reimbursed by DOI.

    Table 13: Federal Aviation Administration Program

        Dollars in
         millions
    Purpose and  The Vision 100 - Century of Aviation
                    Reauthorization Act (Pub. L.
    legislation  No.108-176) made sponsors of airports
                    in the FSM and the RMI eligible for
                    grants from the Airport Improvement
                    Program discretionary fund and the
                    Small Airport Fund for 2004 through
                    2007. The access to these funds is
                    new. Under the original compact, the
                    Federal Aviation Administration (FAA)
                    did not provide direct funds to the
                    RMI and the FSM but was required to
                    provide aviation safety services in
                    the countries. Under the amended
                    compacts' supplemental agreements, the
                    United States again agreed to provide
                    aviation safety services to (1) foster
                    safe and efficient air travel to the
                    two countries and (2) facilitate the
                    establishment of aviation safety
                    authorities and aviation safety
                    statutory and regulatory regimes in
                    the FSM, and provide advice and
                    guidance to aviation safety statutory
                    and regulatory regimes and aviation
                    safety authorities of the RMI.
                    U.S./FSM                               U.S./RMI
    Funding      FY2004: $9.45                          FY2004: $1.50

                    FY2005: $3.35                          FY2005: $11.00

                    FY2006: $11.05                         FY2006: $13.50
    Use of funds The FSM submitted applications to use  According to a RMI
                    airport improvement funds in Chuuk,    Port Authority
                    Kosrae, Ponhpei, and Yap. Construction official, the RMI
                    within the four states was delayed due project is well under
                    to the length of time required to      way, but construction
                    develop and approve the FSM            has been slow because
                    application, which included all four   of the need to keep
                    projects, and to the difficulty for    their single runway
                    the FAA of coordinating four separate  operational. Repair
                    state airport projects with staggered  work thus has been
                    construction dates.                    shifted to evening
                                                           hours when there are
                    The first work will be done in Yap,    no scheduled flights.
                    with Pohnpei, Chuuk, and Kosrae to
                    follow. Work on the Yap airport, which The rehabilitation of
                    suffered typhoon damages, started in   the runway at the
                    January 2006 and is expected to be     Majuro airport started
                    completed by January 2007. A           in September 2005 and
                    short-term repair to the Pohnpei       was scheduled to be
                    runway was completed in August 2006,   completed by September
                    and the permanent repair is scheduled  2006.
                    to start in 2007. Bids for Aircraft
                    Rescue and Fire Fighting building      The FAA also provided
                    plans for each of the states were      various workshops,
                    expected in November 2006.             such as Airport
                                                           Emergency Operations
                    The FAA also provided workshops, such  Training, to the
                    as Airport Emergency Operations        personnel of the
                    Training, to the personnel of each     Majuro airport.
                    airport.
    Program      The FAA appears to be working
    observations effectively with the RMI and FSM
                    governments in implementing the
                    Airport Improvement Program. Although
                    officials in each country noted
                    various delays and problems with the
                    implementation of the projects, they
                    have acknowledged that they would not
                    have been able to fund these needed
                    repairs on their own.

                    The FAA is also addressing safety and
                    security issues. For example, the FAA
                    deployed a special inspection team in
                    October 2005 to investigate safety and
                    security concerns raised in a cable
                    from the FSM U.S. Embassy. The
                    inspection report addressed the issues
                    raised in the cable and concluded that
                    the equipment, facility, and personnel
                    in place at the time of the inspection
                    provided for safe airport operations
                    and that the completion of the Airport
                    Improvement Program projects at the
                    Yap airport will bring them into full
                    compliance with current FAA standards.

    Sources: GAO analysis of documents and interviews with agency officials.

    Table 14: National Weather Service Program

        Dollars in
         millions
    Purpose and  The National Weather Service (NWS)
                    provides weather forecasts and
    legislation  warnings for the United States and
                    its territories, adjacent waters,
                    and ocean areas for the protection
                    of life and property and the
                    enhancement of the national
                    economy. The FSM and the RMI
                    weather offices provide warnings,
                    observations, and adaptive local
                    forecasts as well as provide
                    inputs to Guam's weather service
                    for its daily Western Pacific area
                    forecasts. Under the amended
                    compacts with the FSM and the RMI,
                    the services and programs of the
                    NWS are made available to the two
                    countries as provided for in the
                    Federal Programs and Services
                    Agreements accompanying the
                    amended compacts.
                    U.S./FSM                           U.S./RMI
    Funding      FY2004: $0.92                      FY2004: $0.34

                    FY2005: $1.05                      FY2005: $0.46

                    FY2006: $1.02^a                    FY2006: $0.37^a
    Use of funds The FSM weather service offices    The RMI weather service
                    are located in Chuuk, Pohnpei, and office provides weather
                    Yap, and a weather reporting       forecasts and data to RMI
                    station is located in Kosrae.      citizens. According to a
                    These facilities provide weather   NWS official, the office
                    forecasts, limited observations,   is fully staffed by RMI
                    and data to FSM citizens.          citizens. He said that the
                    According to a NWS official, these office receives funding on
                    offices are fully staffed by FSM   a cost-reimbursable basis,
                    citizens. The official said that   and technical assistance,
                    the offices receive funding on a   advice, and training
                    cost-reimbursable basis, and       through the U.S. NWS. The
                    technical assistance, advice, and  official also stated that
                    training through the U.S. NWS. The according to NWS
                    official also stated that          evaluations, the weather
                    according to NWS evaluations, the  service office's staff is
                    three weather service offices'     as capable and as well
                    staff are as capable and as well   trained as comparable
                    trained as comparable U.S.-based   U.S.-based weather service
                    weather service offices.           offices.

                    According to a NWS official, the   According to a NWS
                    NWS is funding a new Weather       official, the NWS paid an
                    Forecast Office in Pohnpei         additional $1.98 million
                    estimated at $2.8 million. The     for a new Weather Forecast
                    project is expected to begin in    Office in Majuro. The
                    2007.                              majority of these funds
                                                       were obligated in 2006.
    Program      The program provides the FSM with  The program provides the
    observations the facilities, equipment,         RMI with the facilities,
                    technical assistance, and          equipment, technical
                    resources needed to operate        assistance, and resources
                    weather services.                  needed to operate weather
                                                       services.
                    The NWS Pacific Region Director
                    stated that an example of the      The NWS Pacific Region
                    program's effectiveness was        Director stated that
                    demonstrated in Yap in relation to outreach and training
                    Typhoon Sudal, which struck on     performed on a continuing
                    April 8-9, 2004. As a result of    basis by both local office
                    weather service outreach and       personnel and NWS
                    education in Yap, the local        personnel from Guam
                    communities responded to early     provide the basis for
                    warnings of Typhoon Sudal, one of  community readiness and
                    the strongest storms ever to       response.
                    strike Yap, and were well prepared
                    when it struck. Yap residents
                    suffered no deaths or serious
                    injuries from the storm.

    Sources: GAO analysis of documents and interviews with agency officials.

    ^aAs of August 2006.

    Appendix III

    U.S. Funds to Be Provided to the RMI Related to Kwajalein Atoll, 2004
    through 2023

    Table 15: U.S. Funds to Be Provided to the RMI Related to Kwajalein Atoll
    under the Terms of the Amended Compact, 2004 through 2023

    Dollars in millions
        Compact reference  2004-2013 2014^a-2023              Purpose
    Section 211(b)(1)^b      $3.1        $5.1  To address the special needs of
                                                  the community at Ebeye and
                                                  other Marshallese communities
                                                  within Kwajalein Atoll.^c
    Section 211(b)(2)^b       1.9         1.9  To address the special needs of
                                                  the community at Ebeye and
                                                  other Marshallese communities
                                                  within Kwajalein Atoll, with
                                                  emphasis on the Kwajalein
                                                  landowners.^d
    Section 211(b)(3)^b       0.2         0.2  To support increased
                                                  participation of the RMI
                                                  Environmental Protection
                                                  Authority in the U.S. Army
                                                  Kwajalein Atoll Environmental
                                                  Standards Survey, and to
                                                  promote the RMI government's
                                                  capacity for independent
                                                  analysis of the survey's
                                                  findings and conclusions.^e
    Section 212 -            15.0        18.0  Funds are provided to the RMI
    Kwajalein Impact                           government to compensate for
    and Use                                    any impacts of the U.S.
                                                  military on the atoll. The RMI
                                                  government uses the funds to
                                                  compensate Kwajalein Atoll
                                                  landowners for U.S. access to
                                                  the atoll.

    Source: Amended RMI compact, Pub. L. No. 108-188.

    Note: The funds shown in this table are subject to inflation adjustment,
    as provided under section 218 of the compact. Furthermore, the "Agreement
    Regarding the Military Use and Operating Rights of the Government of the
    United States in the Republic of the Marshall Islands Concluded Pursuant
    to sections 321 and 323 of the Compact of Free Association, as Amended"
    states that the funds referenced in the table shall be provided through
    fiscal year 2023, "and thereafter for as long as this agreement remains in
    effect."

    ^aBeginning in 2014, the amount of total funding provided to the RMI will
    increase by $5 million. Of this amount, $3 million is to be allocated to
    "Kwajalein Impact and Use" (sec. 212), while an additional $2 million is
    to be added to annual grants to address the special needs of Kwajalein
    Atoll (sec. 211(b)(1)).

    ^bFunds for this use are made available under section 211(a) that provides
    grant assistance for education, health care, the environment, public
    sector capacity building, and private sector development.

    ^cWithin its allocation of funds for the education, health, and
    infrastructure sector grants, the RMI designated funds for Kwajalein Atoll
    in 2004 and 2005.

    ^dThese funds represent a continuation of funds that had gone to the
    Kwajalein Atoll Development Authority under the original compact.

    ^eWithin its allocation of funds for the environment sector grant, the RMI
    designated funds for Kwajalein Atoll in 2004 and 2005.

    Appendix IV

    FSM and RMI Sector Grants, 2004 through 2006

    Table 16 lists the compact sector grant allocation to the five FSM
    governments in 2004 through 2006. Table 17 lists the compact sector grant
    allocation of the RMI, including the Kwajalein funding, in 2004 through
    2006.

    Table 16: Sector Grant Allocations to the Five FSM Governments, 2004
    through 2006

        Section        2004                2005                2006
    grant/recipient      Sector Percentage           Sector Percentage       Sector Percentage
                          grant   of total            grant   of total        grant   of total
                         amount     sector           amount     sector       amount     sector
                                     grant                       grant                   grant
    Education
    FSM national     $4,324,122        17%       $4,511,317        17%   $4,159,081        16%
    government
    Chuuk             8,140,265         31        8,804,369         32    9,432,618         36
    Kosrae            1,883,853          7        2,070,432          8    2,412,498          9
    Ponhpei           7,373,651         28        7,469,772         28    6,978,447         27
    Yap               4,243,681         16        4,249,157         16    3,149,415         12
    Subtotal        $25,965,572       100%      $27,105,047       100%  $26,132,059       100%
    Environment
    FSM national        $79,477         4%         $111,421         5%           $0         --
    government
    Chuuk               378,394         19          502,499         21      798,428        37%
    Kosrae              302,523         15          296,592         12      335,240         16
    Ponhpei             666,944         33          688,181         29      665,807         31
    Yap                 595,854         29          791,258         33      337,977         16
    Subtotal         $2,023,192       100%       $2,389,951       100%   $2,137,452       100%
    Health
    FSM national       $553,613         4%         $763,235         4%     $764,383         5%
    government
    Chuuk             4,691,707         30        5,595,636         32    6,292,745         38
    Kosrae            1,326,663          9        1,674,212         10    1,763,553         11
    Ponhpei           5,989,461         39        6,200,560         36    4,898,393         30
    Yap               2,881,672         19        3,197,090         18    2,675,865         16
    Subtotal        $15,443,116       100%      $17,430,733       100%  $16,394,939       100%
    Infrastructure  $17,119,155       100%      $17,249,121       100%  $24,335,717       100%
    Subtotal        $17,119,155       100%      $17,249,121       100%  $24,335,717       100%
    Private sector
    FSM national       $513,091        14%               $0         --           $0         --
    government
    Chuuk             1,338,874         35        1,403,876        35%    1,498,616        37%
    Kosrae              795,261         21          988,025         24      606,029         15
    Ponhpei             525,423         14          657,602         16      887,817         22
    Yap                 613,470         16          989,407         24    1,046,701         26
    Subtotal         $3,786,119       100%       $4,038,910       100%   $4,039,163       100%
    Public sector
    capacity
    building
    FSM national     $4,287,697        37%         $608,028         8%           $0         --
    government
    Chuuk             2,853,813         24        3,001,410         39    2,724,099        44%
    Kosrae            1,013,866          9        1,113,866         14    1,346,976         22
    Ponhpei           1,676,163         14        1,542,488         20      759,254         12
    Yap               1,831,307         16        1,520,446         20    1,345,585         22
    Subtotal        $11,662,846       100%       $7,786,238       100%   $6,175,914       100%
    Total           $76,000,000         --      $76,000,000         --  $79,215,244         --

    Source: GAO analysis of FSM 2004 through 2006 sector grant agreements.

    Table 17: RMI Sector Grants, Including Kwajalein Funding, 2004 through
    2006

                      2004                2005                2006
    Sector grant        Sector Percentage           Sector Percentage       Sector Percentage
                         grant   of total            grant   of total        grant   of total
                        amount     sector           amount     sector       amount     sector
                                    grant                       grant                   grant
    Education       $9,648,932        90%       $9,541,921        86%  $10,834,083        91%
    Kwajalein        1,100,000         10        1,600,000         14    1,100,000          9
    funding
    Subtotal       $10,748,932       100%      $11,141,921       100%  $11,934,083       100%
    Environment       $200,000        50%         $202,360        50%     $202,480        50%
    Kwajalein          200,000         50          202,360         50      205,520         50
    funding
    Subtotal          $400,000       100%         $404,720       100%     $408,000       100%
    Health          $5,894,448        85%       $5,564,197        79%   $5,597,181        84%
    Kwajalein        1,000,000         15        1,500,000         21    1,085,560         16
    funding
    Subtotal        $6,894,448       100%       $7,064,197       100%   $6,682,741       100%
    Infrastructure $13,700,000        93%      $13,485,745       100%  $12,495,679        93%
    Kwajalein        1,000,000          7                0       --**    1,000,000          7
    funding
    Subtotal       $14,700,000       100%      $13,485,745       100%  $13,495,679       100%
    Private sector    $356,620       100%         $361,943     100%**     $361,943        10%
    Subtotal          $356,620       100%         $361,943       100%     $361,943       100%
                      2004                2005                2006
    Sector grant        Sector Percentage           Sector Percentage       Sector Percentage
                         grant   of total            grant   of total        grant   of total
                        amount     sector           amount     sector       amount     sector
                                    grant                       grant                   grant
    Public sector           $0         --         $103,512       100%     $103,154       100%
    capacity
    building
    Subtotal                $0         --         $103,514       100%     $103,514       100%
    Special Needs   $1,900,000       100%       $1,992,420       100%   $1,882,440       100%
    (Ebeye)
    Subtotal        $1,900,000       100%       $1,992,420       100%   $1,882,440       100%
    Total          $33,100,000         --      $32,562,040         --  $32,985,960         --

    Source: GAO analysis of RMI 2004 through 2006 sector grant agreements

    Appendix V

    Single Audit Reports for the FSM and the RMI, 2001 through 2005

    The FSM national government and the individual states in most cases did
    not submit their required single audit reports on time for 2001 through
    2005, while the RMI has generally improved the timeliness of its single
    audits, with its last three reports submitted by the established
    deadlines. In nearly all cases, auditors rendered qualified audit opinions
    on both the financial reporting and compliance with requirements of major
    federal programs for those single audit reports that were submitted.
    Furthermore, internal control weaknesses have persisted in both countries
    since we last reported on single audits in October 2003.^1 In March 2006,
    JEMCO threatened to take action, such as withholding funds, designating
    the FSM as a high-risk grantee, or conditionally approving sector grants
    for 2007, if the FSM and its states did not submit their 2005 single
    audits by July 1, 2006.^2

    Single Audits Were Not Timely, but Timeliness Improved

    The FSM and the RMI are required to submit audit reports each year to
    comply with compact and fiscal procedures agreement requirements. The
    submitted audits are to be conducted within the meaning of the Single
    Audit Act,^3 as amended. Single audits are a key control for the oversight
    and monitoring of the FSM and RMI governments' use of U.S. awards, and are
    due to the Federal Audit Clearinghouse^4 9 months after the end of the
    audited period.^5 All single audit reports include the auditor's opinion
    on the audited financial statements and a report on the internal controls
    related to financial reporting. The single audit reports also include the
    auditor's opinion on compliance with requirements of major federal
    programs and a report on internal controls related to compliance with
    laws, regulations, and the provisions of contracts or grant agreements.
    The FSM national government and the individual states in most cases did
    not submit their single audit reports^6 on time for 2001 through 2005,
    while the RMI has generally improved the timeliness of its single audits,
    with its last three reports submitted by the established deadlines. Table
    18 shows the timeliness of reports for the FSM and the RMI.

    Table 18: Single Audit Act Report Submissions, 2001 through 2005

                  Number of months single
                 audits were received past
                   deadline, by country
        Fiscal                          RMI FSM national Chuuk Kosrae Pohnpei Yap
    year-end                               government
    2001                              15           27    12     26      26  19
    2002                               3           26    38     11      11  12
    2003                               0           25    24     21      19  18
    2004                               0           14    13     12       7   9
    2005                               0            2     1      0       0   0

    Sources: GAO analysis of OMB Circular A-133, auditors' reports, and
    Federal Audit Clearinghouse submission dates.

    Note: The deadline is 9 months after the close of entity's fiscal year.
    The date received is based on the most recent date that the required
    Single Audit form is received by the Federal Audit Clearinghouse.

    The lack of timeliness of the single audit reports for 2001 through 2005,
    especially for the FSM and its four states, has meant that U.S. agencies
    have limited knowledge of the territorial governments' accountability over
    U.S. funds received. In addition, the governments' inability to prepare
    financial statements and have them audited within 9 months of the fiscal
    year-end suggests weaknesses in the underlying financial systems and
    processes needed to produce financial information to efficiently and
    effectively manage the day-to-day operations of government.

    Nearly All Audit Opinions on Financial Reporting Were Qualified and
    Contained Material Weaknesses and Reportable Conditions

    Among the 30 audit reports on financial reporting submitted by the FSM
    national and its state governments and the RMI for 2001 through 2005, 26
    reports received qualified opinions.^7 In 2005, Pohnpei received an
    unqualified^8 ("clean") audit opinion on their financial statements. In
    2004 and 2005, Chuuk received a disclaimed^9 opinion on its financial
    statement, and Yap received a qualified/adverse^10 opinion on its 2004
    financial statement. Table 19 shows the type of financial statement audit
    opinions for the FSM and the RMI from 2001 through 2005.

    Table 19: Financial Statement Audit Opinions for the RMI and the FSM, 2001
    through 2005

             Type of
             opinion
    Year RMI       FSM national    Chuuk      Kosrae    Pohnpei     Yap
                      government
    2001 Qualified Qualified       Qualified  Qualified Qualified   Qualified
    2002 Qualified Qualified       Qualified  Qualified Qualified   Qualified
    2003 Qualified Qualified       Qualified  Qualified Qualified   Qualified
    2004 Qualified Qualified       Disclaimed Qualified Qualified   Qualified/
                                                                       Adverse
    2005 Qualified Qualified       Disclaimed Qualified Unqualified Qualified
                                                           "clean"

    Sources: Forms SF-FACs and single audit reports in the Federal Audit
    Clearinghouse database.

    All of the audit opinions of the FSM national government's financial
    statements from 2001 through 2005 were qualified. The opinions were
    qualified because of the lack of supporting evidence and restrictions on
    the scope of the audit. For example, the auditors qualified their opinion
    on the financial statements in the 2005 FSM report due to the following
    matters:

    oTheir inability to determine (1) the propriety of cash and cash
    equivalents, receivables, advances, and amounts due to the FSM state
    governments for the governmental activities and the general fund; (2)
    receivables and amounts due to the FSM state governments for the U.S.
    Federal Grants Fund and the aggregate remaining fund information; and (3)
    cash and cash equivalents and receivables for the Asian Development Bank
    Loan Fund, and their effect on the determination of revenues and
    expenditures/expenses for government activities and the remaining
    aggregate remaining fund information.

    oThe lack of audited financial statements of the National Fisheries
    Corporation; Micronesia Longline Fishing Company; Yap Fishing Corporation;
    Yap Fresh Tuna Inc.; Chuuk Fresh Tuna, Inc.; and Kosrae Sea Venture, Inc.

    In addition, all of the audit opinions of the RMIs' financial statements
    during the 2001 through 2005 period were qualified. For example, as of
    2005, the auditors still could not determine the following:

    othe propriety of governmental activities' capital assets,

    onet assets invested in capital assets, and

    othe net of related debt and depreciation expenses.

    The auditors also were unable to obtain audited financial statements for
    the following RMI component units:^11

    oMinistry of Education Head Start Program;

    oAir Marshall Islands, Inc.;

    oKwajalein Atoll Joint Utilities Resources, Inc.; and

    oMarshall Islands Development Bank.

    The single audits also identified material weaknesses and reportable
    conditions related to the 2005 financial statements reports, totaling 57
    for the FSM and 2 for the RMI (see table 20). These findings indicated a
    lack of sound internal control over financial reporting, which is needed
    to (1) adequately safeguard assets; (2) ensure that transactions are
    properly recorded; and (3) prevent or detect fraud, waste, and abuse. For
    example, in the 2005 FSM single audit report, material weaknesses included
    (1) the lack of documentation to support the amounts and disposition of
    fixed assets, (2) the lack of reconciliation of U.S. program receivables,
    (3) the lack of monitoring of receivable billing and collecting, and (4)
    unreimbursed U.S. expenditures. In the RMI 2005 single audit, the auditors
    found material weaknesses that included the use of unaudited financial
    statements from several component units and the lack of fixed asset
    inventory.

    Table 20: Numbers of FSM and RMI Material Weaknesses and Reportable
    Conditions in Internal Control over Financial Statement Reporting
    Identified in Single Audit Reports, 2005

         Internal control over   RMI   FSM FSM national Chuuk Kosrae Pohnpei Yap
          financial reporting                government
                                     total
    Material weaknesses         2    20            7    11      2       0   0
    Reportable conditions       0    37           15     2     10       5   5
    Total                       2    57           22    13     12       5   5

    Sources: Single audit reports for 2005 from the FSM national government
    and four states and the RMI.

    Note: Material weaknesses are a subset of reportable conditions, but such
    weaknesses are considered more serious. To compute the number of
    reportable conditions that were not material weaknesses shown in this
    table, we subtracted the number of material weaknesses from the total
    findings.

    We found that 14 of the 57 findings previously mentioned from the 2005 FSM
    single audit report on financial reporting were recurring problems from
    the previous year or had been reported for several consecutive years.
    Likewise, the 2 findings from the 2005 RMI single audit report were
    recurring problems reported for several consecutive years. The FSM has
    developed corrective action plans to address about 91 percent of the
    financial statement findings in the 2005 single audits, and the RMI has
    developed plans for both of its financial statement reportable findings.
    For example, the FSM said that it would make efforts to reconcile
    intergovernmental balances and discuss this issue with all four states in
    2006, and the RMI said that it would hire a consultant qualified to
    conduct the valuation of fixed assets.

    All Audit Opinions on Compliance with Requirements of Major Federal
    Programs Were Qualified and Contained Material Weaknesses and Reportable
    Conditions

    In addition to the auditor's report on financial statement findings, the
    auditors also provide a report on the countries' compliance with
    requirements of major federal programs. All 30 of the audit reports on
    such compliance submitted by the FSM national and its state governments
    and the RMI for 2001 through 2005 received qualified opinions. Moreover,
    in the 2005 single audit reports of compliance with requirements of major
    federal programs, auditors reported 45 material weaknesses and reportable
    conditions findings for the FSM and 11 for the RMI (see table 21). For
    example:

    oIn the FSM, findings that were material weaknesses included (1) the lack
    of internal controls over cash management requirements and (2) no
    reconciliation of U.S. grants receivable per Catalog of Federal Domestic
    Assistance number or by program number.

    oIn the RMI, findings that were material weaknesses included (1) a lack of
    inventory of fixed assets and (2) the lack of audit reports from
    subrecipient component units.

    Table 21: Numbers of FSM and RMI Material Weaknesses and Reportable
    Conditions in Internal Control over Compliance with Requirements of Major
    Federal Programs Identified in Single Audit Reports, 2005

         Internal control over    RMI   FSM FSM national Chuuk Kosrae Pohnpei Yap
        compliance with federal       total   government
                 awards
    Material weaknesses          6    22            2     9     11       0   0
    Reportable conditions        5    23           18     0      0       2   3
    Total                       11    45           20     9     11       2   3

    Sources: Single audit reports for 2005 from the FSM national government
    and four states and the RMI.

    Note: Material weaknesses are a subset of reportable conditions, but such
    weaknesses are considered more serious. To compute the number of
    reportable conditions that were not material weaknesses shown in this
    table, we subtracted the number of material weaknesses from the total
    findings.

    We found that only 4 of the 45 findings from the 2005 FSM single audit
    report, and only 2 of the 11 findings from the 2005 RMI single audit
    report, were recurring problems from the previous year or had recurred for
    several consecutive years. For the RMI, this was a significant shift from
    2002, when 8 of the 11 findings were recurring problems from the previous
    year or had recurred for several consecutive years. The FSM has developed
    corrective action plans to address about 60 percent of the 2005 single
    audit's reportable findings on compliance with requirements of major
    federal programs, and the RMI has developed plans for all its reportable
    findings on such compliance. For example, the FSM said that on October 1,
    2005, a new procedure was implemented to properly monitor the drawdown of
    U.S. funds and to properly reimburse the states on time, and the RMI said
    that it would hire a consultant to assist component units in rectifying
    their accounting books and records.

    High-Risk Designations and Other Sanctions Threatened by OIA as Late
    Reports and Other Problems Persist

    According to OMB Circular A-133, if a grantee fails to complete its single
    audit reports, U.S. agencies may impose sanctions such as, but not limited
    to, (1) withholding a percentage of federal U.S. awards until single
    audits are completed satisfactorily, (2) withholding or disallowing
    overhead costs, (3) suspending U.S. federal awards until the single audit
    is conducted, or (4) terminating the U.S. federal award. At the special
    March 2006 JEMCO meeting, the OIA Budget Director noted that single audits
    were the most important indicator of financial stability provided by a
    grantee to a grantor. He emphasized that OIA was particularly concerned
    about the lack of FSM single audits and notified FSM JEMCO participants
    that OIA intended to "apply a remedy" for single audit noncompliance
    beginning October 1, 2006, that would include the possibility of
    withholding cash payments. OIA also may take necessary steps to have the
    FSM designated as a "high-risk" grantee. Finally, OIA recommended to JEMCO
    in the March 2006 meeting that if audits were not completed by July 1,
    2006, that it only conditionally approve sector grants for 2007 so that
    funds may only be released to entities in compliance with single audit
    requirements. This warning appeared to have an impact on most of the FSM
    states, because Kosrae, Pohnpei, and Yap completed their 2005 reports on
    time.

    Other U.S. agencies have not designated the FSM as high risk in the past,
    even though they can assign a grantee as high risk if the grantee has a
    history of unsatisfactory performance, is not financially stable, has an
    inadequate management system, has not conformed to the terms and
    conditions of previous awards, or is otherwise irresponsible. Federal
    agencies that designate a grantee as high risk may impose special terms

    and conditions.^12 Currently, none of the U.S. agencies providing funds to
    the FSM and the RMI have designated either country as a high-risk grantee,
    although this may be a possibility if the single audits are not completed
    within the deadlines requested by Interior. Officials from the Department
    of Education told us that, because most of the direct grant funding to the
    FSM has been subsumed by the Special Education Grant, which is
    administered by Interior, Education now has an even smaller share of the
    U.S. funds in the FSM, and therefore Interior would be in the best
    position to invoke a high-risk designation if warranted for a particular
    grant. Nevertheless, Education officials did take into account the lack of
    single audit performance when administering program funds and, in the case
    of funds for special education, had imposed additional reporting
    requirements.

    Tables 22 and 23 show the total numbers of material weaknesses and
    reportable conditions identified in single audit reports for the FSM and
    the RMI in 2001 through 2005.

    Table 22: Numbers of Material Weaknesses and Reportable Conditions
    Identified in Single Audit Reports for FSM National Government and States,
    2001 through 2005

                       Reportable            Reportable
                        findings              findings
                           on                    on
                        internal              internal
                        control               control
                          over                  over
                       financial             compliance
                       reporting                with
                                              federal
                                               awards
    Year Location     Material Reportable      Total    Material Reportable Total
                       weaknesses conditions             weaknesses conditions
                                        only                              only
    2001 FSM                 5         10         15           1          1     2
            national
            government
            Chuuk               2         16         18           2          6     8
            Kosrae             15          1         16           1          4     5
            Pohnpei            10          2         12           2          0     2
            Yap                 1          7          8           1         13    14
            Total              33         36         69           7         24    31
    2002 FSM                11          1         12           2          0     2
            national
            government
            Chuuk               5         15         20           2          6     8
            Kosrae              6          9         15           5          0     5
            Pohnpei             8          7         15           5          1     6
    Year Location     Material Reportable      Total    Material Reportable Total
                       weaknesses conditions             weaknesses conditions
                                        only                              only
            Yap                 1          6          7           1         14    15
            Total              31         38         69          15         21    36
    2003 FSM                 6          2          8           3          1     4
            national
            government
            Chuuk               2          8         10           7          0     7
            Kosrae              3          4          7           2          0     2
            Pohnpei             1          6          7           0          3     3
            Yap                 1          7          8           1          5     6
            Total              13         27         40          13          9    22
    2004 FSM                 9         16         25           2         14    16
            national
            government
            Chuuk              17          2         19          12          0    12
            Kosrae              0          9          9           9          0     9
            Pohnpei             0          7          7           0          5     5
            Yap                 1          6          7           0          5     5
            Total              27         40         67          23         24    47
    2005 FSM                 7         15         22           2         18    20
            national
            government
            Chuuk              11          2         13           9          0     9
            Kosrae              2         10         12          11          0    11
            Pohnpei             0          5          5           0          2     2
            Yap                 0          5          5           0          3     3
            Total              20         37         57          22         23    45

    Sources: Single audit reports for 2001 through 2005 from the FSM national
    government and four states.

    Note: Material weaknesses are a subset of reportable conditions, but such
    weaknesses are considered more serious. To compute the number of
    reportable conditions that were not material weaknesses shown in this
    table, we subtracted the number of material weaknesses from the total
    findings.

    Table 23: Numbers of RMI Material Weaknesses and Reportable Conditions
    Identified in Single Audit Reports, 2001 through 2005

             Reportable                Reportable
            findings on               findings on
              internal              internal control
            control over            over compliance
             financial                with federal
             reporting                   awards
    Year     Material Reportable            Total    Material Reportable Total
              weaknesses conditions                   weaknesses conditions
                               only                                    only
    2001            7          3               10           8          0     8
    2002            9          8               17          10          1    11
    2003            7          8               15           9          8    17
    2004            2          1                3           6          3     9
    2005            2          0                2           6          5    11

    Sources: Single audit reports for 2001 through 2005 from the RMI.

    Note: Material weaknesses are a subset of reportable conditions, but such
    weaknesses are considered more serious. To compute the number of
    reportable conditions that were not material weaknesses shown in this
    table, we subtracted the number of material weaknesses from the total
    findings.

    Appendix VI

    FSM Compliance with Special Sector Grant Terms and Conditions

    Sources: FSM sector grant agreements for 2004 through 2006 and OIA
    compliance updates.

    Appendix VII

    RMI Compliance with Special Sector Grant Terms and Conditions

    Sources: RMI sector grant agreements for 2004 through 2006 and OIA
    compliance updates.

    Appendix VIII

    Comments from the Department of the Interior

    Appendix IX

    Comments from the Federated States of Micronesia

    The following are GAO's comments on the Federated States of Micronesia's
    letter dated December 4, 2006.

    GAO Comments

    1.As we noted in both our June 2006 report^1 and this report, the FSM's
    efforts to address the decrement to date have not yielded the financial
    changes, including significant tax reforms, required to address the
    decrement. Therefore, we reiterate our position that the FSM needs to
    develop a plan to address the decrement. If the FSM fails to address the
    decrement, the federal and states' budgets will likely be reduced, making
    it difficult to maintain current personnel levels.

    2.We recognize that the FSM established its 70:30 formula according to its
    stated goal of providing for certain needs common to each state,
    regardless of population size, such as the need for airports and seaports.
    However, the differences in per-capita funding resulting from use of the
    formula may have contributed to disparate conditions among the FSM states,
    especially in health and education, that cannot be ignored. These
    differences have also been identified by a Department of Health and Human
    Services official and in the FSM's own development plans as well as in a
    study by the Asian Development Bank. We believe that the formula's impact
    on each state's performance and development should be continuously
    evaluated and the allocation of funds revised as necessary. As we observe
    in this report, such an assessment requires the full development of the
    mechanism for measuring sector grant performance and collecting complete
    baseline data.

    3.We testified three times in 2003, before the House and the Senate,
    regarding our assessment of the new arrangements and requirements of the
    amended compacts.^2

    Appendix X

    Comments from the Republic of the Marshall Islands

    The following are GAO's comments on the Republic of the Marshall Islands'
    letter dated December 4, 2006.

    GAO Comments

    1.Throughout the report, we differentiate between the FSM and the RMI when
    discussing findings specific to each country. For example, when addressing
    land issues that have delayed projects in the countries, we discuss the
    issues and projects in each country separately. However, when findings
    were the same for both countries, we discussed the findings jointly. For
    example, we discuss planning for the decrement jointly because both the
    FSM and the RMI face the same issue.

    2.The RMI projects that the annual inflation adjustment will allow the
    nominal value of annual grants to increase.^1 However, using the
    Congressional Budget Office's projections on the GDP Implicit Price
    Deflator, we found that for most years, the nominal value of the grants
    for the RMI declines each year from the previous years.^2 We believe that
    the RMI response does not capture the true impact of the decrement and the
    urgent need for sector grant planning to take it into account.

    The combined impact of the decrement and partial inflation creates
    difficult challenges. First, absent full adjustment of the grants for
    inflation, the grants' real value declines, leading to reduced sector
    resources and creating challenges in recruiting and retaining agency
    staff.

    oRMI government agencies will not be able to maintain the current levels
    of imported resources when the real value of grants decline. Imported
    items needed for the education and health sectors, such as textbooks and
    pharmaceuticals, are subject to rising external prices. Likewise,
    increasing costs of imported building supplies may reduce the purchasing
    power of the infrastructure grant.

    oIn the RMI, personnel expenses are the largest area of government
    expenditures. Recruiting and retaining staff will be difficult if salaries
    are not fully adjusted for inflation. Furthermore, because RMI citizens
    can move to the United States to work, and many have done so, finding
    qualified personnel may become more difficult. A recent assessment of
    Marshallese emigration concluded that about one quarter of Marshallese now
    live abroad.^3

    Second, although the RMI states in its letter that it expects import
    duties to increase with external inflation, the inflation increase will
    not fully compensate for the decrements without aggressive growth in
    import duties.

    Appendix XI

    GAO Contact and Staff Acknowledgments

    GAO Contact

    David Gootnick, 202 512-3149

    Staff Acknowledgments

    In addition to the individual named above, Emil Friberg, Assistant
    Director; Julie Hirshen; Ming Chen; Tracy Guerrero; Emmy Rhine; and Eddie
    Uyekawa made key contributions to this report. Joe Carney, Etana Finkler,
    Mary Moutsos, and Reid Lowe provided technical assistance.

    Related GAO Products

    Compacts of Free Association: Development Prospects Remain Limited for
    Micronesia and the Marshall Islands. [68]GAO-06-590 . Washington, D.C.:
    June 27, 2006.

    Compacts of Free Association: Implementation of New Funding and
    Accountability Requirements Is Well Underway, but Planning Challenges
    Remain. [69]GAO-05-633 . Washington, D.C.: July 11, 2005.

    Compact of Free Association: Single Audits Demonstrate Accountability
    Problems over Compact Funds. [70]GAO-04-7 . Washington, D.C.: October 7,
    2003.

    Compact of Free Association: An Assessment of Amended Compacts and Related
    Agreements. [71]GAO-03-890T . Washington, D.C.: June 18, 2003.

    Foreign Assistance: Effectiveness and Accountability Problems Common in
    U.S. Programs to Assist Two Micronesian Nations. [72]GAO-02-70 .
    Washington, D.C.: January 22, 2002.

    Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in Two
    Micronesian Nations. [73]GAO-02-119 . Washington, D.C.: January 22, 2002.

    Foreign Relations: Migration From Micronesian Nations Has Had Significant
    Impact on Guam, Hawaii, and the Commonwealth of the Northern Mariana
    Islands. [74]GAO-02-04 . Washington, D.C.: October 5, 2001.

    Foreign Assistance: Lessons Learned From Donors' Experiences in the
    Pacific Region. [75]GAO-01-808 . Washington, D.C.: August 17, 2001.

    Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little
    Impact on Economic Development. [76]GAO/NSIAD-00-216 . Washington, D.C.:
    September 22, 2000.

    Foreign Relations: Better Accountability Needed Over U.S. Assistance to
    Micronesia and the Marshall Islands. [77]GAO/RCED-00-67 . Washington,
    D.C.: May 31, 2000.

    (320368)

    www.gao.gov/cgi-bin/getrpt?GAO-07-163 .

    To view the full product, including the scope
    and methodology, click on the link above.

    For more information, contact David Gootnick at (202) 512-3149 or
    gootnickd@gao.gov.

    Highlights of [79]GAO-07-163 , a report to congressional committees

    December 2006

    COMPACTS OF FREE ASSOCIATION

    Micronesia and the Marshall Islands Face Challenges in Planning for
    Sustainability, Measuring Progress, and Ensuring Accountability

    In 2003, the United States signed Compacts of Free Association with the
    Federated States of Micronesia (FSM) and the Republic of the Marshall
    Islands (RMI), amending a 1986 compact with the countries. The amended
    compacts provide the countries with a combined total of $3.6 billion from
    2004 to 2023, with the annual grants declining gradually. The assistance,
    targeting six sectors, is aimed at assisting the countries' efforts to
    promote economic advancement and budgetary self-reliance. The Department
    of the Interior (Interior) administers and oversees the assistance.
    Complying with a legislative requirement, GAO examined, for fiscal years
    2004 through 2006, (1) the FSM's and the RMI's use of compact funds,

    (2) their efforts to assess progress toward development goals,

    (3) their monitoring of sector grants and accountability for compact
    funds, and (4) Interior's administrative oversight of the assistance. GAO
    visited the FSM and the RMI; reviewed reports; and interviewed officials
    from the FSM, RMI, and U.S. governments.

    [80]What GAO Recommends

    GAO recommends, among other things, that Interior work with the FSM and
    the RMI to establish plans to minimize the impact of declining assistance
    and to fully develop a reliable mechanism for measuring progress toward
    compact goals. Interior agreed with all of the recommendations.

    For 2004 through 2006,compact assistance to the FSM and the RMI was
    allocated largely to the education, infrastructure, and health sectors,
    but various factors limited the countries' use of compact funds.
    Deterrents to the FSM's use of infrastructure funds included constraints
    on land use and disagreement on project implementation processes. Land use
    issues also hindered the RMI's use of infrastructure funds. In addition,
    the FSM's distribution of the grants among its four states resulted in
    significant differences in per-student education and per-capita health
    funding. Neither country has planned for long-term sustainability of the
    grant programs, taking into account the annual decreases in grant funding.

    To assess progress toward development goals, the FSM and the RMI
    established goals and objectives for each sector and are collecting
    performance data for education and health. However, a lack of complete and
    reliable baseline data prevents the countries from gauging progress in
    these sectors. Also, both countries' required quarterly performance
    reports contained incomplete and unreliable information, limiting the
    reports' utility for tracking progress. The countries' ability to measure
    progress is further challenged by a lack of technical capacity to collect,
    assemble, and analyze baseline and performance data.

    Although the FSM and the RMI are required to monitor day-to-day sector
    grant operations, their ability to meet this requirement for 2004 through
    2006 was limited. According to officials in the respective governments,
    the responsible offices have insufficient staff, budgets, and time to
    monitor grant operations. In addition, both countries' single audit
    reports for 2004 and 2005 indicated weaknesses in their ability to account
    for the use of compact funds. For instance, the FSM's audit report for
    2005 contained 57 findings of material weaknesses and reportable
    conditions in the national and state governments' financial statements for
    sector grants, and the RMI's report contained 2 such findings.
    Furthermore, both countries' single audit reports indicated noncompliance
    with requirements of major federal programs. For example, the FSM's audit
    report for 2005 contained 45 findings of noncompliance, while the RMI's
    audit report contained 11 findings.

    Interior's Office of Insular Affairs (OIA) has conducted administrative
    oversight of the sector grants by monitoring the countries' sector grant
    performance and spending, assessing their compliance with sector grant
    conditions, and monitoring the audit process. In response to shortcomings
    that it identified, OIA took several actions, such as withholding or
    suspending grant funding and ensuring the provision of technical
    assistance. However, OIA's oversight has been limited by the need to deal
    with challenges facing the FSM, such as its difficulty in preparing
    budgets, as well as by its own staffing challenges.

    References

    Visible links

      64. http://www.gao.gov/cgi-bin/getrpt?GAO-02-70
      65. http://www.gao.gov/cgi-bin/getrpt?GAO-02-70
      66. http://www.gao.gov/cgi-bin/getrpt?GAO-02-70
      67. http://www.gao.gov/cgi-bin/getrpt?GAO-02-70
      68. http://www.gao.gov/cgi-bin/getrpt?GAO-06-590
      69. http://www.gao.gov/cgi-bin/getrpt?GAO-05-633
      70. http://www.gao.gov/cgi-bin/getrpt?GAO-04-7
      71. http://www.gao.gov/cgi-bin/getrpt?GAO-03-890T
      72. http://www.gao.gov/cgi-bin/getrpt?GAO-02-70
      73. http://www.gao.gov/cgi-bin/getrpt?GAO-02-119
      74. http://www.gao.gov/cgi-bin/getrpt?GAO-02-04
      75. http://www.gao.gov/cgi-bin/getrpt?GAO-01-808
      76. http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-00-216
      77. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-00-67
      79. http://www.gao.gov/cgi-bin/getrpt?GAO-07-163
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