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 ****************************************************************** ** This file contains an ASCII representation of the text of a ** ** GAO Product. ** ** ** ** No attempt has been made to display graphic images, although ** ** figure captions are reproduced. Tables are included, but ** ** may not resemble those in the printed version. ** ** ** ** Please see the PDF (Portable Document Format) file, when ** ** available, for a complete electronic file of the printed ** ** document's contents. ** ** ** ****************************************************************** 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 *** End of document. ***