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 [email protected]. 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
[email protected].

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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