United States Government Accountability Office

GAO Report to Congressional Committees

COMPACTS OF FREE 

ASSOCIATION 

Trust Funds for 

Micronesia and the 

Marshall Islands May 

Not Provide 

Sustainable Income 

June 2007 

 

GAO-07-513 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2007

COMPACTS OF FREE ASSOCIATION

Trust Funds for Micronesia and the 

Marshall Islands May Not Provide 

Sustainable Income 

Highlights of GAO-07-513, a report to 

congressional committees 

In 2003, the U.S. government 

extended its economic assistance 

to the Federated States of 

Micronesia (FSM) and Republic 

of the Marshall Islands (RMI) 

through Amended Compacts of 

Free Association. From 2004 to 

2023, the United States will 

provide an estimated combined 

total of $3.6 billion, with annually 

decreasing grants as well as 

annually increasing contributions 

to trust funds for each country. 

The trust funds are to be invested 

and provide income for the FSM 

and RMI after the compact grants 

end. A trust fund committee for 

each country is to establish and 

oversee the funds. This report 

examines (1) the committees’

progress in establishing, 

investing, and reporting on the 

funds; (2) the sustainability of 

income from the trust funds; and 

(3) potential options to 

supplement or enhance the trust 

funds’ income. GAO reviewed 

trust fund–related documents and 

legislation; interviewed U.S., 

FSM, RMI, and industry officials 

and used a simulation model to 

project the trust funds’ income. 

What GAO Recommends

GAO recommends that the trust 

fund committees improve 

administrative and decisionmaking processes, ensure timely 

reporting, and obtain a full and 

independent evaluation of 

securitization’s potential benefits 

and risks. Interior, which chairs 

the committees, agreed with all of 

the recommendations. 

The FSM trust fund committee has established the fund by appointing a 

trustee, an auditor, an investment adviser, and money managers. As of 

the end of March 2007, the RMI committee had not appointed an auditor 

or a money manager. Investment of the funds began 22 months and 16 

months, respectively, after the FSM’s and RMI’s initial contributions, with 

the funds remaining in low-interest savings accounts until their 

investment. Contractual delays contributed to the time taken to establish 

and invest the funds, as did the committees’ processes for reaching 

consensus and obtaining administrative support; the committees have 

not yet taken steps to improve these processes. Although the committees 

are required to report annually on the trust funds, they did not publish 

reports for 2004 and were late in publishing the reports for 2005 and 

2006. Moreover, the published reports do not assess the trust funds’ 

potential effectiveness in helping the FSM and RMI achieve the compact 

goals of economic advancement and budgetary self-reliance. 

The FSM and RMI trust funds may not provide sustainable income after 

the compact grants end. Market volatility, as well as the investment 

strategies chosen, may lead to a wide range of trust fund balances in 

2023. There is increasing probability that in some years the trust funds 

will not reach the maximum disbursement level allowed—an amount 

equal to the inflation adjusted compact grants in 2023—or be unable to 

disburse any income. GAO’s analysis shows low probabilities of not 

reaching the maximum level allowed or disbursing no income in 2024 but 

higher probabilities of not reaching the maximum level allowed in 2050.

For instance, by 2050, with a conservative investment strategy, income 

from the FSM and RMI trust funds, respectively, is over 90 percent and 60 

percent likely to be less than the maximum level allowed and more than 

20 percent and 15 percent likely to allow for no disbursements. 

The trust funds’ income could be supplemented or enhanced through (1) 

greater tax revenue, (2) increasing remittances from growing emigration, 

(3) economic assistance from other sources, and, possibly, (4) 

securitization of the funds. However, limited development prospects 

constrain the countries’ ability to raise tax revenues to supplement the 

trust fund income. In addition, FSM and RMI emigrants’ inadequate 

education and vocational skills may limit their earning opportunities. 

Further, although the RMI trust fund received contributions from 

Taiwan, it is unclear whether the FSM trust fund will receive other 

contributions. Finally, although securitization—the issuing of bonds 

against future U.S. contributions—could increase the funds’ earning 

potential by raising their balances, it could also lead to lower balances 

and reduced income. The committees have not yet obtained an 

independent evaluation of securitization’s potential benefits and risks. 

www.gao.gov/cgi-bin/getrpt?GAO-07-513.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David Gootnick 

at (202) 512-3149 or gootnickd@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 6

Establishment of FSM Trust Fund Is Complete, but RMI Trust Fund 

Is Not Yet Fully Established 15 

FSM and RMI Trust Funds May Not Provide Sustainable Income 

after Compact Grants End 20 

Several Options Exist for Supplementing FSM and RMI Trust Fund 

Income 28

Conclusions 32

Recommendations for Executive Action 32 

Agency Comments and Our Evaluation 33 

Appendix I Objectives, Scope, and Methodology 36 

Appendix II Technical Notes on the Trust Fund Simulation Model 38 

Appendix III Disbursing All Income Compared to Disbursing Partial 

Income 48 

Appendix IV Key Events in the Establishment of the FSM and RMI 

Trust Funds 51 

Appendix V Comments from the Department of the Interior 53 

GAO Comment 56 

Appendix VI Comments from the Department of Health and Human 

Services 57 

GAO Comment 60 

Appendix VII Comments from the Department of State 62 

GAO Comments 65 

Page i GAO-07-513 Compact Trust Fund
Appendix VIII Comments from the Federated States of Micronesia 67 

Appendix IX Comments from the Republic of the Marshall Islands 69 

GAO Comments 72 

Appendix X GAO Contact and Staff Acknowledgments 73 

Tables 

Table 1: U.S. Assistance to the FSM and the RMI under Amended 

Compacts, Fiscal Years 2004-2023 7 

Table 2: Annual Compounded Real Returns and Standard 

Deviations for Large Company and International Stocks 

and for U.S. Treasury Bills (in percentage), 1970-2005 14 

Table 3: Possible Outcomes of Three Types of Investment 

Strategies, with Associated Real Returns and Standard 

Deviations 14

Table 4: Projected Trust Fund Balances in 2023 with and without 

Securitization, under Aggressive Investment Strategy 31 

Table 5: U.S. Scheduled Contributions to FSM and RMI Trust 

Funds, as Outlined in Amended Compacts 38 

Table 6: Taiwan’s Scheduled Contributions to RMI Trust Fund, as 

Outlined in Agreement with RMI Government 39 

Table 7: Real Returns Distribution Based on Historical Data from 

1970 to 2005 42 

Table 8: Cross-Correlation and Serial Correlation of Historical 

Annual Returns 43 

Table 9: Trial Values of the FSM Trust Fund Balances under 

Moderate Investment Strategy, Fiscal Years 2006-2023 44 

Table 10: Trial Values of the RMI Trust Fund Balance under 

Moderate Investment Strategy, Fiscal Years 2006-2023 46 

Figures 

Figure 1: Structure of FSM and RMI Trust Funds 10 

Figure 2: Inflation-Adjusted Annual Returns of International and 

Large Company Stocks, 1970-2005 13 

Page ii GAO-07-513 Compact Trust Fund
Figure 3: Timeline of Key Events in Establishment of FSM Trust 

Fund 16

Figure 4: Timeline of Key Events in Establishing the RMI Trust 

Fund 17

Figure 5: Projections of FSM Account Balance with Three Possible 

Investment Strategies 21 

Figure 6: Projections of RMI Account Balance with Three Possible 

Investment Strategies 22 

Figure 7: Probability of FSM Trust Fund Income Not Reaching the 

Maximum Disbursement Levels Allowed, Fiscal Years 

2024 - 2050 24 

Figure 8: Probability of No Disbursement from FSM Trust Fund, 

Fiscal Years 2024 - 2050 25 

Figure 9: Probability of RMI Trust Fund Income Not Reaching the 

Maximum Disbursement Levels Allowed, Fiscal Years 

2024 - 2050 26 

Figure 10: Probability of No Disbursement from RMI Trust Fund, 

Fiscal Years 2024 - 2050 27 

Figure 11: Probabilities That FSM Trust Fund Income Will Not 

Reach the Maximum Disbursement Level Allowed When 

Disbursing All Income vs. Disbursing Partial Income 49 

Figure 12: Probabilities That RMI Trust Fund Income Will Not 

Reach the Maximum Disbursement Level Allowed When 

Disbursing All Income vs. Disbursing Partial Income 50 

Figure 13: Key Events in the Establishment of the FSM Trust Fund 51 

Figure 14: Key Events in the Establishment of the RMI Trust Fund 52 

Abbreviations 

FSM Federated States of Micronesia 

HHS Department of Health and Human Services 

RMI Republic of Marshall Island 

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Page iii GAO-07-513 Compact Trust Fund
United States Government Accountability Office

Washington, DC 20548 

June 15, 2007 

Congressional Committees: 

From 1987 to 2003,1

 the United States provided about $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.2

 In 2003, the U.S. government extended its economic 

assistance to the FSM and the RMI governments through Amended 

Compacts of Free Association.3

 Under the amended compacts’ terms, the 

United States will provide an estimated combined total of $3.6 billion in 

economic assistance to the FSM and the RMI from 2004 to 2023,4

 to assist 

the FSM and the RMI governments in their efforts to promote the 

economic advancement and budgetary self-reliance of their people. This

assistance consists of annually decreasing grants targeted to certain 

development sectors and annually increasing contributions to a trust fund 

for each country, to which the FSM and the RMI are also to make initial 

contributions. The trust funds are to be invested, and after termination of 

annual U.S. grant assistance in 2023, annual disbursements of the 

investment earnings5

 are to provide an ongoing source of revenue to assist 

 1

In this report, all years cited are fiscal years (Oct. 1 - Sept. 30) unless otherwise noted. 

2

A key goal for this assistance was to advance the countries’ economic development and

budgetary self-reliance. In 2000, we reviewed the impact of compact funding and found that

U.S. assistance had resulted in little economic development for either the FSM or the RMI. 

See GAO, Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact 

on Economic Development, GAO/NSIAD-00-216 (Washington, D.C.: Sept. 22, 2000). 

3

Whereas the original compact (approved in Pub. L. No. 99-239, Jan. 14, 1986) was one

agreement among the U.S., FSM, and RMI governments, the amended compacts (approved 

in Pub. L. No. 108-188, Dec. 17, 2003) are separate agreements between the United States 

and each of the two countries. 

4

The $3.6 billion in assistance includes (a) compact grants; (b) trust fund contributions; (c) 

Kwajalein impact funding provided to the RMI government, which in turn compensates 

Kwajalein Atoll landowners, for U.S. access to the atoll for military-purposes; and (d) 

estimated values of compact-authorized federal services such as weather, aviation, and 

postal services, at around $200 million over the 20-year period. Services associated with the 

Federal Emergency Management Agency have been excluded. 

5

The annual disbursements may not exceed the amounts, adjusted for inflation, that each 

country receives as grant assistance in 2023. 

Page 1 GAO-07-513 Compact Trust Fund
the FSM and the RMI in achieving economic advancement and long-term 

budgetary self-reliance.

The amended compacts and subsidiary trust fund agreements6

 require the 

formation of a trust fund committee for each country. Each committee is 

responsible for establishing the trust funds by, among other things, hiring 

trustees, independent auditors, investment advisers and money managers. 

The trust fund committees’ responsibilities also include overseeing the 

funds’ operation, supervision, and management; the funds’ investment; and 

the conclusion of agreements with any other contributors to the funds.7

The trust fund agreements do not specify a time frame for establishing and 

investing the funds. Within 6 months after the end of each fiscal year, the 

committees are to provide annual reports to the governments on the trust 

funds’ activities, management, financial operations, and effectiveness at 

accomplishing the purposes of the funds. Each committee comprises 

representatives from the U.S. government, the country’s government, and 

any subsequent contributors; a representative from the Department of the 

Interior (Interior) serves as the chair of each committee. 

U.S. legislation approving the amended compacts requires that we report 

periodically to Congress on the status of compact implementation. In 2006, 

we provided two reports responding to this mandate.8

 This report provides 

additional information, examining (1) the trust fund committees’ progress 

 6

Agreement Between the Government of the United States of America and the 

Government of the Federated States of Micronesia Implementing Section 215 and Section 

216 of the Compact, as Amended Regarding a Trust Fund; Agreement Between the 

Government of the United States of America and the Government of the Republic of the

Marshall Islands Implementing Section 216 and Section 217 of the Compact, as

Amended Regarding a Trust Fund. 

7

Contributors other than the U.S., FSM, and RMI governments may include any 

government, international organization, financial institution, or other entity or person who

contributes grants, not loans, to the trust funds. 

8

GAO, Compacts of Free Association: Development Prospects Remain Limited for

Micronesia and Marshall Islands, GAO-06-590 (Washington, D.C.: June 2006); Compacts of 

Free Association: Micronesia and the Marshall Islands Face Challenges in Planning for 

Sustainability, Measuring Progress, and Ensuring 

Accountability, GAO-07-163 (Washington, D.C.: Dec. 15, 2006). For an initial review of trust 

fund implementation, see GAO, Compacts of Free Association: Implementation of New 

Funding and Accountability Requirements Is Well Under Way, but Planning Challenges

Remain, GAO-05-633 (Washington, D.C.: July 11, 2005). 

Page 2 GAO-07-513 Compact Trust Fund
in establishing,9

 investing, and reporting on the funds; (2) the sustainability 

of income from the trust funds after the compact grants end in 2023; and

(3) other potential sources of revenue to supplement or enhance trust fund 

income after 2023. 

To answer these objectives, we reviewed the amended compacts, the trust 

fund agreements and bank statements as well as documents related to 

establishing the funds. We also reviewed documents related to the 

implementation of the trust fund agreements. We interviewed officials 

from U.S. government agencies, including Interior, the Department of 

State (State), the Department of Labor (Labor), and the Department of 

Health and Human Services (HHS), as well as officials from the FSM and 

the RMI. We interviewed the RMI’s trustee and selected investment 

adviser. In addition, we built a Monte Carlo simulation model—based on 

the trust fund agreements, contributions to date, and historical returns of 

the market—to project the trust funds’ likely income levels, given market 

volatility as well as historical returns of various asset classes, including 

large company stocks, treasury bills, and international stocks from 1970 to

2005. (Actual trust fund income will depend on the investment strategies 

chosen for the funds, market trends, and investment performance.) We 

also analyzed the probability that the trust funds can maintain the 

maximum disbursement level allowed under the trust fund agreements.10

We conducted our work from July 2006 to March 2007 in accordance with 

generally accepted government auditing standards. (For more details of 

our objectives, scope, and methodology, see app. I.) 

Monte Carlo Simulation

Our methodology for projecting trust fund 

income is based on a technique known as the 

Monte Carlo simulation.This problem-solving 

technique approximates the probability of 

certain outcomes by performing multiple trial 

runs, called simulations, using random 

variables. The simulations capture the 

volatility of market returns and reflect that 

volatility in the projection of the future 

earnings of the trust funds. 

GAO has used the Monte Carlo simulation in 

past reports, and it has also been used by the 

Congressional Budget Office in Social 

Security projections. 

The FSM trust fund committee has fully established the country’s trust 

fund, but the RMI trust committee has not; further, investment of the funds 

was slow, and both committees missed the deadlines for submitting the 

required annual reports. The FSM committee has appointed a trustee, an 

independent auditor, an investment adviser, and money managers. As of 

March 2007, the RMI committee had not appointed an independent auditor 

Results in Brief 

 9

In this report, “establishing the funds” refers to the selection and hiring of the trustees,

independent auditors as well as the selection and hiring of any investment advisers and 

money managers. 

10According to U.S. officials, the trust fund income is intended to be one source of income,

and the amended compacts do not guarantee that the trust funds will provide the maximum 

disbursements allowed by the trust fund agreements. However, projections of the trust 

funds’ ability to disburse the maximum allowed amounts can indicate the likely level and 

sustainability of the funds’ income. 

Page 3 GAO-07-513 Compact Trust Fund
and—in part because the trustee and the investment adviser disagree over 

the assignment of custodial rights to the fund—had not appointed any 

money managers. Investment of the FSM and RMI trust funds began 22 

months and 16 months, respectively, after the countries’ initial

contributions, with the funds remaining in low-interest savings accounts 

until their investment. According to U.S. government officials, unexpected

contracting delays, as well as the trust fund committees’ processes for 

reaching consensus and obtaining administrative support, contributed to 

slowing the funds’ establishment. However, the committees have not taken 

steps to improve the processes. The committees did not meet the trust 

fund agreement requirements to submit and publish annual reports on the 

trust funds for 2004 and issued the reports for 2005 several months after 

the March 2006 deadline. Moreover, the reports do not assess the trust 

funds’ likely effectiveness in helping the FSM and the RMI achieve 

economic advancement and long-term budgetary self-reliance by providing 

a source of revenue to the FSM and RMI governments after 2023. 

Owing in part to market volatility, the FSM and the RMI trust funds may 

not provide sustainable income to the countries after annual compact 

grants end in 2023. Market volatility, in addition to the investment 

strategies chosen, may lead to a wide range of trust fund balances in 2023. 

For example, our analysis shows that the trust fund balance could range11

from $697 million to $1.3 billion for the FSM and from $439 million to $862 

million for the RMI under a conservative strategy, from $663 million to $2.2 

billion for the FSM and from $438 million to $1.4 billion for the RMI under 

an aggressive strategy. Moreover, we found increasing probability that 

income from the trust funds cannot sustain the maximum disbursement 

level allowed—an amount equal to the compact grant assistance in 2023, 

adjusted for inflation. Furthermore, the trust funds face increasing 

probability of providing no income at all in some years. For instance, our 

analysis shows low probabilities that the trust funds will not reach the 

maximum allowed disbursement levels immediately after the compact 

grants end. However, by 2050, with a conservative investment strategy, 

income from the FSM and RMI trust funds, respectively, is more than 90 

percent and 60 percent likely not to reach the maximum allowed 

 11The ranges referred to in this example are between the 10th and 90th percentile values 

from the results of our simulation model under different scenarios. Ten percent of the

range of possible trust balances lie below the 10th percentile; 90 percent of the range of 

possible balances lie below the 90th percentile. See appendixes I and II for more 

information. 

Page 4 GAO-07-513 Compact Trust Fund
disbursement levels and more than 20 percent and 15 percent likely to 

allow for no disbursements. 

The trust funds’ income could be supplemented or enhanced through (1) 

greater tax revenue through economic development; (2) increasing 

remittances from growing numbers of emigrants;12 (3) economic assistance 

from other sources; and (4) securitization of the funds.13 However, each of 

these scenarios has its limitations. 

• Greater tax revenue. Economic development could increase the FSM and

the RMI governments’ tax revenue. However, as we reported in 2006, the 

countries’ prospects for economic development and higher tax revenues 

remain limited. 

• Growing emigration and remittances. As compact grant assistance 

decreases, emigration from the FSM and RMI may rise, easing the 

governments’ cost of providing services to remaining residents and 

possibly leading to growing remittances from the emigrants. However, 

FSM and RMI emigrants have limited earning opportunities abroad, owing 

to inadequate education and vocational skills, and may therefore not remit 

significant amounts. 

• Assistance from other sources. The RMI trust fund received a 

commitment from Taiwan to contribute $40 million over 20 years to the 

RMI trust fund, which improved the RMI fund’s likely capacity for 

disbursements after 2023. However, except for Taiwan’s commitment to 

the RMI, there is no certainty of external trust fund contributions other 

than those from the United States. Further, although donors other than the 

United States have given the two countries economic assistance unrelated

to the trust funds, such assistance is not assured for the future. 

• Securitization. Although securitizing the trust funds—that is, issuing 

bonds against future U.S. contributions—could increase the funds’ earning

potential by raising their balances, it could also lead to lower balances and 

reduced income. According to Interior officials, the trust fund committees 

 12Remittances are personal funds that emigrants voluntarily send to residents in their home

countries. 

13With securitization, the trust funds would sell bonds to investors and the cash generated

through bond issuance would become the trust fund principal to be invested. Future

contributions to the trust fund would be used to pay bond holders instead of building the

funds. Securitization could help increase the principal of the trust fund more quickly than 

would annual contributions to the fund. 

Page 5 GAO-07-513 Compact Trust Fund
are reviewing this option but have not initiated an independent study to 

objectively evaluate its potential risks. 

In this report, we recommend that the Secretary of the Interior direct the

Deputy Assistant Secretary for Insular Affairs, as Chairman of the FSM and 

the RMI trust fund committees, to develop strategies for improving the 

committees’ decision-making and administrative processes; ensure timely 

reporting of trust fund activities, including assessment of the funds’ likely 

status as an ongoing source of revenue and their potential effectiveness in 

helping the FSM and the RMI achieve economic advancement and 

budgetary self-reliance; and obtain an independent evaluation of the 

potential benefits and risks of securitization. 

Interior, HHS, State, and the FSM and the RMI governments provided 

written comments regarding a draft of this report. Interior, HHS, and the 

RMI government agreed with our recommendation on developing 

strategies for improving the trust fund committees’ decision-making and 

administrative processes. Interior generally agreed with our 

recommendation on ensuring timely reporting of trust fund activities. 

However, HHS and State stated that our report reflected a fundamental 

misunderstanding of the outcome of the negotiation of the amended 

compacts and a misreading of the international agreements, which we 

strongly disagree. Our report clearly stated that the purpose of the trust 

funds is to provide an ongoing source of revenue. To further clarify this 

point, we modified our recommendation and added language specifying 

that there is no minimum disbursement required or guaranteed by the trust 

fund agreements. Interior, HHS, and the RMI government agreed with our 

recommendation on obtaining an independent evaluation of the potential

benefits and risks of securitization. The FSM government generally agreed 

with all of our recommendations. State did not provide any comment 

about our recommendations. 

The U.S. trust fund agreements with the FSM and the RMI state that the 

purpose of the trust funds is to contribute to the countries’ economic 

advancement and long-term budgetary self-reliance by providing an annual 

source of revenue after fiscal year 2023.14 Annual compact grants end in 

Background 

 14The trust fund income is intended to provide assistance in development sectors currently 

receiving grants under the amended compacts: education, health, infrastructure, private

sector development, the environment, and public sector capacity building, with priority

given to education and health. The income may also be used for other sectors mutually 

agreed to by the United States and the countries. 

Page 6 GAO-07-513 Compact Trust Fund
2023. Although the agreements state that the annual disbursements may 

not exceed the amounts that each country receives as grant assistance in 

2023, adjusted for inflation, they do not establish or guarantee a minimum 

disbursement level. 

Under the amended compacts, annual U.S. contributions to each of the 

countries’ trust funds increase by the same amounts as the annual grants

to the countries decrease; in addition, the contributions are partially 

adjusted for inflation. (See table 1.) However, the scheduled trust fund 

increments and grant decrements for the two countries differ: the grant 

decrement and trust fund increment for the FSM is $800,000 per year, and 

the grant decrement and trust fund increment for the RMI is $500,000 per

year. The timing of the first decrement for each country also differs: under 

the amended compacts, the decrement for the FSM began in 2007, but the 

decrement for the RMI began in 2005. As a result of these differences, final 

grants to the FSM will decline from the initial grants by a smaller total 

percentage than will grants to the RMI (18 percent versus 21 percent). 

Table 1: U.S. Assistance to the FSM and the RMI under Amended Compacts, Fiscal 

Years 2004-2023 

Trust Fund Contributions 

Dollars in millions 

Annual grants contribution Trust fund contribution 

Fiscal year FSM RMI FSM RMI

2004 $76.2 $35.2 $16.0 $7.0

2005 76.2 34.7 16.0 7.5

2006 76.2 34.2 16.0 8.0

2007 75.4 33.7 16.8 8.5

2008 74.6 33.2 17.6 9.0

2009 73.8 32.7 18.4 9.5

2010 73.0 32.2 19.2 10.0

2011 72.2 31.7 20.0 10.5

2012 71.4 31.2 20.8 11.0

2013 70.6 30.7 21.6 11.5

2014 69.8 32.2 22.4 12.0

2015 69.0 31.7 23.2 12.5

2016 68.2 31.2 24.0 13.0

2017 67.4 30.7 24.8 13.5

2018 66.6 30.2 25.6 14.0

Page 7 GAO-07-513 Compact Trust Fund
Dollars in millions 

Annual grants contribution Trust fund contribution 

Fiscal year FSM RMI FSM RMI

2019 65.8 29.7 26.4 14.5

2020 65.0 29.2 27.2 15.0

2021 64.2 28.7 28.0 15.5

2022 63.4 28.2 28.8 16.0

2023 62.6 27.7 29.6 16.5

Total $1,401.6 $629.0 $442.4 $235.0

Source: Compact of Free Association Amendments Act of 2003 (Pub. L. No. 108-188). 

Note: These dollar amounts will be adjusted each year for inflation by a percentage that equals twothirds 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. Both grant funding

and trust fund contributions can be fully adjusted for inflation after 2014 under certain U.S. inflation 

conditions. 

The U.S. contributions to the trust funds are conditioned on the FSM and 

the RMI making their own required contributions. The FSM was required 

to contribute at least $30 million before September 30, 2004; the FSM made 

this contribution on October 1, 2004, and the United States made its first 

contribution on October 5, 2004. The RMI was required to contribute at 

least $25 million on the day the amended compact went into effect or on 

October 1, 2003, whichever was later; $2.5 million before October 1, 2004;

and an additional $2.5 million before October 1, 2005. The RMI made its 

initial contribution on June 1, 2004, and the United States made its initial 

contribution on June 3, 2004. 

According to the U.S. trust fund agreements with the FSM and the RMI, 

contributions from other donors are permitted. In May 2005, Taiwan and 

the RMI reached an agreement that Taiwan will contribute a total of $40 

million to the RMI’s trust fund from 2004 to 2023.

As specified in the trust fund agreements, each country’s trust fund 

consists of three interrelated accounts, labeled “A,” “B,” and “C.”15

Trust Fund Structure 

 15A “D” account may be established to hold any contributions by the FSM and the RMI

governments of revenue or income from unanticipated sources. According to the trust fund

agreements, the D account must be a separate account, not mixed with the rest of the trust 

fund; it is not part of the corpus of the trust fund. As of March 2007, only the RMI had a D 

account, governed by the agreement between Taiwan and the RMI. Taiwan will contribute 

$10 million to the RMI’s D account in 5 years. 

Page 8 GAO-07-513 Compact Trust Fund
• The A account, which was to be created on the amended compacts’ 

effective date, forms the trust fund “corpus”16 and contains the country’s 

initial contributions as well as the annual U.S. contributions. It also holds 

any contributions from other donors, such as Taiwan’s to the RMI. The A 

account additionally consists of income from the trust fund’s investment. 

Through 2022, any annual investment income exceeding 6 percent of the 

fund will be deposited in the C account, up to a certain limit. After 2023, if

the income in the B account is less than the previous year’s distribution, 

and if the C account cannot cover the shortfall in the B account, the 

corpus shall not be accessed to compensate for the shortfall. 

• The B account, which is to be created at the start of fiscal year 2023, will 

be used to disburse income after the compact grants end. All annual 

investment income earned in 2023 will be deposited in the B account for 

possible disbursement in 2024. Thereafter, the B account will consist of 

the prior year’s investment income in the A account. The annual 

disbursement from the B account may equal, but not exceed, the inflationadjusted grant assistance in 2023 plus any additional amounts for special 

needs agreed to by the trust fund committee. Any amount exceeding the 

annual disbursement will be transferred back to the A account or—if the C 

account contains less than three times the estimated equivalent of 2023 

grant assistance, including estimated inflation—transferred to the C 

account to bring it to the maximum level allowed. 

• The C account, which was to be created at the same time as the A account, 

is designed as a buffer against low or negative annual investment returns 

after 2023. During the period before disbursements begin, any annual

income on the fund exceeding 6 percent will be deposited in the C 

account; however, the C account cannot exceed three times the estimated

grant assistance in 2023, including estimated inflation. After 2023, if annual 

income from the A account falls below the previous year’s distribution, 

adjusted for inflation, the C account can be drawn down to address any 

shortfall in the B account. 

 16According to the trust fund agreements, “corpus” means a collection of bonds, stocks, or

other holdings that form the principal of the trust fund. It also includes all accumulated 

income that has been reinvested and is not available for distribution.

Page 9 GAO-07-513 Compact Trust Fund
Figure 1: Structure of FSM and RMI Trust Funds

FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20 FY22 FY23

Oct. 1, 2022

A Account

B Account

C Account

Income in excess

of 6 percent 

transferred to 

C account

Beginning FY24, annual 

disbursement may be 

paid from the trust funds

to the governments

Transfer 

from C if 

income 

from 

A account 

falls short 

of previous

year’s

distribution

Transfer to 

C if excess

funds are 

needed to 

bring C 

account to 

maximum 

allowed 

level

Excess of 3 times

inflation-adjusted 

FY23 grant 

assistance to

A account

Consists of:

(1) contributions from the original parties and subsequent contributors

(2) income from investments

(3) transfers from the B account and C account

• For FY24 and after, consists of prior year’s

income from investment of funds in A account, 

and disburses income to the governments

FY04 – FY23 From FY24 forward

Source: GAO.

• C account cannot be greater than 3 times

 of inflation-adjusted FY23 grant assistance

• Excess of 3 times inflation-adjusted

 FY23 grant assistance

All previous year’s

A account earned 

income is deposited 

in B account for 

possible 

disbursement

Transfer back to A if B account exceeds

inflation-adjusted grant assistance in FY23

unless such excess funds are needed to 

bring C account to maximum allowed level

• The A account and the C account shall be established on the effective date of the amended compact

• The B account shall be created on October 1, 2022

Trust Fund Governance The trust funds, incorporated in the District of Columbia as nonprofit 

corporations, are governed by the FSM and the RMI trust fund 

Page 10 GAO-07-513 Compact Trust Fund
committees, with the United States holding the majority of votes and the 

Deputy Assistant Secretary of the Interior, Office of Insular Affairs, serving 

as the chair of each committee.17 The committees’ responsibilities18 include 

establishing the funds as well as overseeing their operation, supervision, 

and management; investing and distributing the fund’s resources; and 

concluding agreements with any other contributors and other 

organizations. 

According to the trust fund agreements, each trust fund committee is to 

appoint a trustee and an independent auditor. In addition, the committee 

has the authority to appoint one or more investment advisers and may 

enter into a separate agreement with one or more money managers. 

• The trustee19 is to have the entire care and custody of all assets 

comprising the trust fund. The trustee’s duties and powers include 

collecting money due to the fund, disbursing income in accordance with 

the trust fund agreement, and maintaining records of all financial 

transactions related to the fund. 

• The independent auditor is to audit the trust fund from its establishment 

through 2023 at appropriate intervals and annually after 2023.

• The investment adviser is responsible for recommending one or more 

money managers who will invest the assets of the fund to produce a 

diversified portfolio, take direction from the trust fund committee 

regarding investments, and oversee day-to-day investments by the money

manager. 

 17Except for where stated otherwise in the agreement, trust fund committee decisions are

made by a majority vote. The FSM trust fund committee has five voting members: three 

from the United States (Interior, State, and HHS) and two from the FSM. The RMI trust 

fund committee has seven voting members: four from the United States (Interior, State, 

HHS, and Labor); two from the RMI; and one from the other contributor, Taiwan. 

18Each agreement states that either the U.S. government, in consultation with the FSM or 

the RMI government, or the trust fund committee, if it is operational when the amended 

compact takes effect, is responsible for establishing the trust fund. (In this case, 

“establishing the trust fund” refers to the incorporation of the fund rather than to the

selecting and hiring of the trustee, auditor, investment adviser, and money manager, as the 

phrase is otherwise defined in this report.) 

19The trust fund agreements states that the trustee shall (a) be selected from among trust 

institutions organized in the United States, (b) have a net worth in excess of $100 million, 

(c) have at least 10 years experience as a custodian of financial assets, and (d) have 

experience in managing trust funds of at least $500 million. 

Page 11 GAO-07-513 Compact Trust Fund
• The money manager is to invest the funds in particular investment 

vehicles or categories. 

The trust fund agreements do not specify a time period for selecting these 

entities. 

In addition, the committees are responsible for publishing annual reports 

on the trust funds and submitting the reports to the governments of United 

States and the FSM or the RMI within 6 months after the end of each fiscal 

year—that is, by the end of the following March. These reports are to 

describe the activities and management of the funds, including the 

operation of the A, B, and C accounts, and to contain audited account 

information and the audit reports. The reports are also to assess the 

effectiveness of the funds in contributing to the economic advancement 

and long-term budgetary self-reliance of the FSM and RMI. The reports 

may include recommendations to improve the effectiveness of the funds.20

Because the level of income that the trust funds will generate depends on 

investment returns, it is subject to market volatility. Historically, the stock 

market has experienced fluctuations. For example, from 1970 to 2005, 

annual inflation-adjusted returns of U.S. large-company stocks ranged 

from negative 34 percent to positive 34 percent, and annual real returns 

from international stocks ranged from negative 31 percent to positive 68 

percent (see fig. 2). With positive returns, the trust funds will earn 

investment income, and with negative returns, the value of the trust funds 

will fall. 

Investment Returns and 

Volatility 

 20In addition, Pub. L. No. 108-188 requires the President to report annually to Congress

regarding the FSM and the RMI, including information on non-U.S. contributions to the 

trust funds and, if appropriate, making recommendations to Congress to adjust the 

inflation rate or to adjust contributions to the trust funds based on non-U.S. contributions. 

Page 12 GAO-07-513 Compact Trust Fund
Figure 2: Inflation-Adjusted Annual Returns of International and Large Company Stocks, 1970-2005 

1970 1975 1980 1985 1990 1995 2000 2005

Source: GAO analysis based on IBBOTSON 2006 Yearbook.

-40

-30

-20

-10

0

10

10

30

40

50

60

70

80

90

100

International stocks

Large company stocks

Percentage

Year

Note: The returns were published in Stocks, Bonds, Bills and Inflation (SBBI) 2006 Yearbook,

Ibbotson Associates, Chicago, Illinois. The inflation-adjusted returns are the geometric difference 

between the nominal return and the inflation rate. Our calculation is based on returns in calendar 

years (Jan. 1 – Dec. 31). 

The annual compounded real returns21 of large company stocks and 

international stocks from 1970 to 2005 were around 6 percent (see table 2), 

with standard deviations22 of approximately three times the return for the 

large company stocks and more than three times the return for the 

 21To calculate the compounded real returns, we used the annual total nominal returns 

published in IBBOTSON Associates 2006 Yearbook and constructed the inflation adjusted 

returns, which is a geometric difference between the nominal return and the inflation rate. 

We then constructed the real and nominal return indexes with year end 1969 = $1.00 to 

calculate the annual compounded returns. 

22Standard deviation is a statistical measure of how widely spread the distribution is from 

its mean. It is obtained by calculating the square root of the average of the squares of 

deviations around the mean of a set of data. 

Page 13 GAO-07-513 Compact Trust Fund
international stocks. U.S. treasury bills have the least volatility and the 

lowest returns, around 1 percent. 

Table 2: Annual Compounded Real Returns and Standard Deviations for Large 

Company and International Stocks and for U.S. Treasury Bills (in percentage), 1970-

2005 

Large company 

stocks

International 

stocks 

U.S. Treasury 

bills

Compounded real 

returns 

6.12 6.18 1.27

Standard deviation 17.09 22.05 2.50

Source: GAO analysis of data from IBBOTSON Associates 2006 Year Book. 

Note: Percentages shown are based on returns in calendar years (Jan. 1 – Dec. 31). 

Investment strategies vary in their levels of returns and volatility. A more 

conservative investment strategy usually carries a lower level of volatility 

but also brings lower levels of expected returns over time; a more 

aggressive investment strategy seeks higher returns but is likely to have

higher volatility, with returns on the investment varying more widely year 

to year. By varying the weight of each investment asset, investors can vary 

their return and risk levels. With the approach of 2024, when 

disbursements from the trust funds will begin, the portfolio can be 

adjusted to take on less risk. To illustrate possible outcomes of the trust 

funds’ investment returns, table 3 shows potential returns for three types

of investment strategies—conservative, moderate, and aggressive—based 

on historical annual compounded returns and volatility on large company 

stocks, international stocks, and treasury bills in 1970 to 2005. 

Table 3: Possible Outcomes of Three Types of Investment Strategies, with Associated Real Returns and Standard Deviations

Strategy 

Large company 

stocks 

International

 stocks Treasury bills Return 

Standard

deviation

Conservative 

(Lower expected return/lower volatility) 40% 20% 40% 4.19% 10.48%

Moderate 

(Medium expected return/medium volatility) 40 40 20 5.17 14.18

Aggressive

(Higher expected return/higher volatility) 50 50 0 6.15 17.53

Source: GAO analysis of data from IBBOTSON Associates 2006 Year Book. 

Note: Percentages shown are based on returns in calendar years (Jan. 1 – Dec. 31). 

Page 14 GAO-07-513 Compact Trust Fund
Establishment of FSM 

Trust Fund Is 

Complete, but RMI 

Trust Fund Is Not Yet 

Fully Established 

The FSM trust fund committee has appointed a trustee, an independent 

auditor, an investment adviser, and money managers; investment of the 

FSM trust fund began 22 months after the country’s contribution. The RMI 

trust fund committee has appointed a trustee and an investment adviser, 

but as of March 2007, it had not yet appointed an auditor— in part because 

of disagreement between the trustee and investment adviser over the 

assigning of custodial rights—nor had it appointed a money manager. 

Investment of the RMI’s trust fund began 16 months after the country’s 

initial contribution. Unexpected delays related to contractual problems 

and trust fund committee processes contributed to the time that elapsed 

between the countries’ initial contributions and the investment of the 

funds. Moreover, the period of time that the funds remained in low-interest 

accounts before their investment may have reduced potential investment 

earnings, particularly for the FSM. The committees did not meet the trust 

fund agreements’ requirements to submit and publish annual reports on 

the funds for 2004 and were late in publishing the 2005 and 2006 reports. 

Moreover, the reports did not assess the trust funds’ potential status as an 

ongoing source of revenue or effectiveness in helping the FSM and the 

RMI achieve economic advancement and long-term budgetary selfreliance. 

Trust Fund Committees 

Have Taken Steps to 

Establish and Invest the 

Funds 

The FSM trust fund committee has appointed a trustee, an independent 

auditor, an investment adviser, and money managers. The RMI trust fund 

committee has not officially appointed an auditor or a money manager. 

Investment of the funds began in August 2006 and September 2005, 

respectively.

• FSM. The FSM trust fund committee hired a trustee, an auditor, an 

investment adviser, and a money manager 24, 33, 16, and 21 months, 

respectively, after the amended compact went into effect. Investment of 

the FSM trust fund, according to its adopted investment policy, did not 

begin until August 2006, nearly 2 years after the FSM’s initial contribution 

to the trust fund. Figure 3 provides a timeline of key events in setting up 

the FSM trust fund. (For details about this timeline, see app. IV). 

Page 15 GAO-07-513 Compact Trust Fund
Figure 3: Timeline of Key Events in Establishment of FSM Trust Fund

Source: GAO.

2004 2005 2006

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

• June 25: Amended compact went into effect.

• August 17: Trust fund incorporated as a nonprofit corporation.

• October 1: FSM made initial contribution to the trust fund.

• October 5: U.S. made initial contribution to the trust fund.

• June 22: Trust fund signed 

agreement with trustee.

• August 10: Money was

moved out of money 

market account to be 

invested according to 

investment policy.

• March 23: Trust fund committee approved 

investment policy. Trust fund committee selected 

money manager for the initial investment.

Note: The years shown are calendar years (Jan. 1 – Dec. 31). 

• RMI. The RMI trust fund committee hired its current trustee and 

investment adviser in August 2005, 16 months after the amended compact 

went into effect. However, as of March 2007, the committee had not yet 

hired an independent auditor. In addition, owing to a disagreement 

between the trustee and the adviser over the assigning of custodial rights,

the committee had not yet hired money managers to actively invest the 

funds according to the proposed investment strategy.23 The trust fund 

agreements state that the trustee shall have the entire care and custody of

all assets comprising the fund, however, the investment adviser has 

requested “subcustody” to allow it to better monitor the money managers’ 

adherence to the investment strategy. The RMI trustee has not agreed to

this arrangement, stating in a letter to the trust fund committee chairman 

that the trust fund agreement does not allow such an arrangement without 

legislation to amend the trust fund agreement. U.S. officials told us that 

they had been searching for a resolution of this dispute. Although the RMI 

made its first contribution of $25 million in June 2004, a month after the 

trust fund agreement went into effect, the country did not make its second

contribution until February 2005—almost 5 months after the deadline—

 23The adviser has not billed the committee as of March 2007. 

Page 16 GAO-07-513 Compact Trust Fund
when it contributed $1.5 million, which was $1 million less than required.24

The RMI government explained that it faced various financial challenges in

2005, including the cost of upgrading infrastructure at the College of the 

Marshall Islands.25 The committee transferred the RMI trust fund from lowinterest bank accounts and began to invest it at the end of September 2005, 

16 months after the initial contribution to the trust fund. In May 2005,

Taiwan contributed $1 million to help fulfill RMI’s second contribution 

requirement, and in October 2005, the RMI made the final contribution of 

$2.5 million. Figure 4 provides a timeline of key events in setting up the 

RMI trust fund. (For details of the timeline of key events, see app. III.) 

Figure 4: Timeline of Key Events in Establishing the RMI Trust Fund

Source: GAO.

2004 2005 2006

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

• May 1: Amended compact went into effect.

• April 28: Trust fund incorporated as a nonprofit corporation.

• June 1: RMI made initial contribution to the trust fund.

• June 3: U.S. made initial contribution to the trust fund.

• February 16: Trust fund committee selected investment advisor and trustee.

• September 30: Money was moved out of money market account to be invested.

• August 19: Trust fund committee signed contract with investment advisor and approved 

investment policy.

• August 30: Trust fund committee signed contract with trustee. 

Note: The years shown are calendar years (Jan. 1 – Dec. 31). 

Several Factors Slowed 

Establishment of the 

Funds 

Unexpected contractual delays, as well as the trust fund committees’ 

decision-making and administrative processes, slowed the committees’ 

establishment of the funds. 

• Contractual delays. Unexpected contractual delays slowed the FSM and 

the RMI trust fund committees’ establishment of the funds. For example, 

according to an Interior official, the trustee chosen by the FSM trust fund 

committee provided the wrong template for its contract with the 

 24The amended compacts required the RMI to contribute at least $25 million on the

effective date of the trust fund agreement or in October 2003, whichever was later; $2.5 

million prior to October 1, 2004; and $2.5 million prior to October 1, 2005.

25The College of the Marshall Islands has experienced accreditation problems since 2003. 

According to the President of the college, the accreditation committee requires evidence 

that the college’s physical infrastructure will be substantially upgraded. The RMI 

government had to find funding for the needed improvements and now has a plan for

improving the college’s infrastructure. 

Page 17 GAO-07-513 Compact Trust Fund
committee, with the result that finalizing the contract took extra time. 

Also, a disagreement over fees between the RMI trust fund committee and 

its initially selected trustee led the committee to select another trustee, 

delaying the RMI’s contracting with a trustee. 

• Trust fund committee processes. Delays related to certain trust fund 

committee processes also contributed to the time required to establish the

funds. The U.S. members make it a practice to convene to reach consensus 

before attending full committee meetings. However, according to an 

Interior official, difficulty in convening all U.S. members has often delayed 

full committee meetings for months. Also, Interior noted that the trust 

fund committees’ reliance on U.S. government staff for administrative 

support slowed committee processes. U.S. government employees have 

undertaken administrative functions for the trust funds in addition to their 

other duties. Interior, which has provided administrative support for the 

trust funds, has advocated that the trust funds hire their own support 

staff;26 however, State has argued that after the trust funds are fully 

established, such positions would not be needed and would result in 

unnecessary costs. Some trust fund committee officials acknowledged that 

the committee processes have slowed the funds’ establishment. However, 

the committees have not developed strategies to improve the consensus 

process and have not reached agreement about whether they should hire 

outside administrative assistance to improve committee performance. 

Although the trust fund agreements do not set a time frame for investing 

the funds, the months when the funds remained in low-interest accounts 

prior to investment may have reduced their potential investment earnings. 

However, the reduction in potential earnings was significant only for the 

FSM trust fund. 

Timing of Trust Fund 

Investment Reduced 

Potential Earnings 

• FSM. For several months before the FSM trust fund was invested, stock 

market returns were notably higher than the interest that the fund earned 

in the low-interest savings account. From October 2005 through August 

2006, the FSM trust fund—with an October 2005 balance of approximately 

$80 million—earned about 3 percent interest, compared with potential 

stock market earnings of about 15 percent. The difference between the 

fund’s actual and potential monthly rates of return was about nine-tenths 

of a percentage point, amounting to approximately $720,000 per month, 

 26Interior believes that an administrative support position is allowed under the trust fund

agreements and its cost can be covered by the trust funds. 

Page 18 GAO-07-513 Compact Trust Fund
taking into account stock market investment fees. After the FSM’s Office 

of the Public Auditor issued a report evaluating the trust fund committee’s 

compliance with the administrative requirements of the trust fund 

agreement,27 the FSM government expressed concerns over the reduced

income resulting from the fund’s remaining in the savings account. 

• RMI. For the months before the investment of the RMI trust fund’s 

approximately $49 million in October 2005, the fund earned a return of 

approximately 3 percent, compared with a stock market return of about 4 

percent. Given the small difference in returns, as well as the fees that the 

fund would have paid if invested in the stock market, the reduction in the 

RMI trust fund’s potential income was small. We estimate that the delay in 

the RMI’s final contribution to the fund reduced its earnings by 

approximately $51,000.28

Neither trust fund committee provided an annual report to the U.S. and 

FSM or RMI governments as required in the first year after the compacts 

took effect, and both committees were late in submitting the second year’s

reports.29 According to the trust fund agreements, the committees are to 

prepare a report for each fiscal year and submit it to both the U.S. and the 

FSM or RMI governments by the end of the following March. However, 

neither committee submitted a report for fiscal year 2004, instead 

submitting one report for both 2004 and 2005. Additionally, the FSM and 

the RMI committees submitted these reports several months after the 

March 2006 deadline, in July 2006 and August 2006, respectively. 

Moreover, the reports do not project the likely status of the trust funds as 

an ongoing source of revenue or assess the funds’ potential effectiveness 

Trust Fund Committees 

Did Not Publish Annual 

Reports as Required 

 27FSM Office of the Public Auditor, Inspection of the Compact Trust Fund: Period

Covering August 2004 until May 2006 (Pohnpei, FSM, 2006). 

28To estimate the RMI’s income loss from late contributions, we calculated (a) the lost 

interest income on $25 million between May 2004, the contribution deadline, and June 

2004, when the RMI made its first contribution; (b)the lost interest income on $2.5 million 

between October 2004, when the RMI was supposed to make its second contribution, and

February 2005, when it made a partial contribution; and (c) the lost interest income on $1

million between February 2005, when the RMI contributed $1.5 million for its second 

contribution, to May 2005, when the RMI contributed the remaining $1 million. We used the 

actual interest rate the RMI trust fund earned during the period. 

29The International Monetary Fund (IMF) has called for disclosing publicly the objectives

and performance of the trust fund in line with the IMF guidelines for a transparent

framework to ensure accountability and clarity of the trust fund management activities and 

results. See International Monetary Fund, RMI: Selected Issues and Statistical Appendix, 

IMF Country Report No. 06197 (Washington, D.C.: March 2006). 

Page 19 GAO-07-513 Compact Trust Fund
in helping the countries achieve economic advancement and budgetary 

self-reliance.30 Because the trust fund income will be a main source of U.S. 

assistance to the FSM and the RMI after the amended compact grants end, 

its level has implications for the economic policies of both countries. For 

example, if trust fund income is expected to be inadequate to replace the 

expiring grants, the countries will have a greater need to develop other 

sources of revenue to help fund government operations. 

The FSM and the RMI trust fund income will likely not reach the maximum 

allowed disbursement levels after the compact grants end in 2023, with the 

probability of not reaching the maximum allowed level increasing over 

time.31 Variable market returns, as well as the investment strategy chosen, 

could lead to a wide range of potential trust fund balances in 2023. 

Moreover, market volatility could contribute to not reaching the maximum 

level allowed, including the possibility of no disbursements in some 

years.32

Given historical market returns and volatility, the trust funds’ likely 

balances in 2023 fall into a wide range, with a more aggressive strategy

leading to higher expected balances but also a wider range of possible 

FSM and RMI Trust 

Funds May Not 

Provide Sustainable 

Income after Compact 

Grants End 

Market Volatility Could 

Lead to Wide Range of 

Trust Fund Balances in 

2023 

 30This information could be included in the President’s annual reports to Congress required

by Pub. L. No. 108-188. The legislation does not require that information such as 

projections of trust fund balances be included in the reports. However, its inclusion would

provide additional insight regarding the FSM’s and RMI’s progress in formulating economic 

policies to achieve economic advancement and budgetary self-reliance, to which the trust 

funds are intended to contribute by providing a source of revenue to the FSM and the RMI 

after 2023. The level of the trust fund income is directly related to its effectiveness in 

helping the countries achieve self-reliance: the higher the trust fund income, the more 

likely the countries will be self-reliant.

31The probability that disbursements will not reach the maximum disbursement level 

allowed depends on the actual approved disbursement levels. For example, if the trust fund 

committees do not disburse all earned income and instead reinvest part of the income, the

probability of disbursements not reaching the maximum disbursement level allowed will 

differ from the probabilities presented below. (For a comparison of the probabilities of 

disbursements not reaching the maximum disbursement level allowed with and without full 

disbursement, see app. III.) 

32In addition to market volatility, the amount of contributions to the trust funds plays an 

important role in determining whether the trust funds are able to provide sustainable 

income. Additional contributions to the funds improve the prospect of sustainability. For 

information on how Taiwan’s contributions enhanced trust fund sustainability, see section

on Economic Assistance from Other Donors.

Page 20 GAO-07-513 Compact Trust Fund
balances (see fig. 5 and 6). For example, under our projected conservative 

strategy, in 2023, the FSM trust fund balance could range from $697 million 

(10th percentile) to $1.3 billion (90th percentile) with a median of $959 

million; the RMI trust fund could range from $439 million (10th percentile) 

to $862 million (90th percentile) with a median of $612 million. Under our 

projected aggressive strategy, the FSM trust fund balance could range 

from $664 million (10th percentile) to $2.2 billion (90th percentile) with a 

median of $1.2 billion; the RMI trust fund balance could range from $438 

million (10th percentile) to $1.4 billion (90th percentile) with a median of

$778 million. 

Figure 5: Projections of FSM Account Balance with Three Possible Investment Strategies 

2023

201

2014

2015

2016

2017

2018

2019

2020

2021

2022

3

2006

2007

2008

2009

2010

2011

2012

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2023

201

2014

2015

2016

2017

2018

2019

2020

2021

2022

3

2006

2007

2008

2009

2010

2011

2012

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2023

201

2014

2015

2016

2017

2018

2019

2020

2021

2022

3

2006

2007

2008

2009

2010

2011

2012

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Year Year Year

U.S. dollars (in billions)

Conservative strategy Moderate strategy Aggressive strategy

U.S. dollars (in billions) U.S. dollars (in billions)

10th percentile

Median

90th percentile

10th percentile

Median

90th percentile

$0.697

0.959

1.313

$0.710

1.108

1.724

$0.664

1.182

2.179

Source: GAO.

Trust fund balance in 2023 Trust fund balance in 2023 Trust fund balance in 2023

Page 21 GAO-07-513 Compact Trust Fund
Figure 6: Projections of RMI Account Balance with Three Possible Investment Strategies 

2023

201

2014

2015

2016

2017

2018

2019

2020

2021

2022

3

2006

2007

2008

2009

2010

2011

2012

2023

201

2014

2015

2016

2017

2018

2019

2020

2021

2022

3

2006

2007

2008

2009

2010

2011

2012

2023

201

2014

2015

2016

2017

2018

2019

2020

2021

2022

3

2006

2007

2008

2009

2010

2011

2012

Year Year Year

U.S. dollars (in billions) U.S. dollars (in billions) U.S. dollars (in billions)

10th percentile

Median

90th percentile

Source: GAO.

Conservative strategy Moderate strategy Aggressive strategy

10th percentile

Median

90th percentile

$0.439

0.612

0.862

$0.439

0.676

1.103

$0.438

0.778

1.401

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Trust fund balance in 2023 Trust fund balance in 2023 Trust fund balance in 2023

Page 22 GAO-07-513 Compact Trust Fund
The FSM and the RMI trust funds may be unable to disburse the maximum 

level of income allowed in the trust fund agreements33 or any income at all

in some years.34 Although each trust fund has a separate account to absorb 

some market volatility, our analysis shows there are some probabilities 

that income will not reach the maximum disbursement level allowed or 

that no income will be disbursed in some years, with the likelihood 

increasing with time. 

Under the conservative, moderate, and aggressive investment strategies 

that we projected, the FSM trust fund’s annual income will probably not 

reach the maximum disbursement allowed, with the probability increasing 

with time. For example, our analysis shows more than 50 percent 

probability that the trust fund’s income will not reach the maximum 

disbursement level allowed after 2031 under the conservative investment

strategy, with the probability over 90 percent by 2050 (see fig. 7). 

Trust Funds May Not 

Provide Sustainable 

Income after Compact 

Grants End 

FSM Trust Fund Income 

 33The trust fund agreements specify that in 2024 and thereafter, the FSM and the RMI trust 

fund committees may disburse amounts up to the annual grant assistance in 2023, fully 

adjusted for inflation, provided that funds are available in the B account to reach such

level. In 2025 and thereafter, the disbursements may also include any additional approved

amounts for special needs. 

34Our analysis shows that to maintain the maximum disbursement levels allowed for 10

years without risk, the FSM and the RMI trust funds need to earn compounded real returns 

of around 13 percent and 9 percent through 2023, respectively. However, these percentages 

are considerably higher than the stock market’s compounded real returns from 1970 to 

2005 of around 6 percent for both international stocks and U.S. large company stocks. If 

the trust funds are not in risk free treasury bonds and earn higher returns after 2023, the

required returns for the funds before 2023 will be lower; however, the trust funds will be 

subject to market volatilities. 

Page 23 GAO-07-513 Compact Trust Fund
Figure 7: Probability of FSM Trust Fund Income Not Reaching the Maximum Disbursement Levels Allowed, Fiscal Years 2024

- 2050 

0

20

40

60

80

100

2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

Conservative

Moderate

Aggressive

Percentage

Year

Source: GAO.

Moreover, our analysis shows an increasing probability that market 

volatility could prevent the FSM trust fund from making any 

disbursements in some years, although a separate account—the C 

account—was set up to absorb some market volatility. As shows, under 

the conservative investment strategy, the probability of no disbursements 

grows from 0 percent in 2024 to over 20 percent in 2050 (see fig. 8). 

Page 24 GAO-07-513 Compact Trust Fund
Figure 8: Probability of No Disbursement from FSM Trust Fund, Fiscal Years 2024 - 2050 

0

5

10

15

20

25

2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

Conservative

Moderate

Aggressive

Percentage

Year

Source: GAO.

Note: The chart depicts results from 1,000 trial runs. The change from one year to the next may not 

always be monotonic, but the general time trend is clear. As the number of trial runs increase, the 

time trend becomes smoother.

Our analysis shows a wide range of probable disbursements from the FSM 

trust fund. For example, under the moderate investment strategy, 10 years 

after the trust fund starts to disburse income, we find a 57 percent 

probability that the trust fund will disburse the maximum level of income 

allowed, which is estimated at $97 million for 2034; a 11 percent 

probability that the trust fund will disburse no income; and a 33 percent 

probability that the trust fund will disburse some income, between $0 and 

$97 million.

Under the three potential investment strategies, income from the RMI trust 

fund is likely not to reach the maximum allowed disbursement, with the 

probability increasing over time. For example, our analysis shows a more 

than 20 percent probability that the trust fund’s income will not reach the 

maximum allowed disbursement after 2031 under the conservative 

strategy, with the probability over 60 percent by 2050 (see fig. 9). 

RMI Trust Fund Income 

Page 25 GAO-07-513 Compact Trust Fund
Figure 9: Probability of RMI Trust Fund Income Not Reaching the Maximum Disbursement Levels Allowed, Fiscal Years 2024 - 

2050 

0

20

40

60

80

100

2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

Conservative

Moderate

Aggressive

Percentage

Year

Source: GAO.

Note: This analysis includes Taiwan’s contribution to the A account.

Additionally, our analysis shows an increasing probability that the RMI’s 

trust fund could yield no disbursements in some years, despite the 

existence of the C account to absorb some market volatility. As figure 10 

shows, under the conservative investment strategy, the probability of no 

disbursements rises from 0 percent in 2024 to more than 15 percent in 

2050 (see fig. 10). 

Page 26 GAO-07-513 Compact Trust Fund
Figure 10: Probability of No Disbursement from RMI Trust Fund, Fiscal Years 2024 - 2050 

2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

0

5

10

15

20

25

Conservative

Moderate

Aggressive

Percentage

Year

Source: GAO.

Notes: This analysis includes Taiwan’s contribution to the A account. 

The chart depicts results from 1,000 trial runs. The change from one year to the next may not always 

be monotonic, but the general time trend is clear. As the number of trial runs increase, the time trend 

becomes smoother. 

Our analysis shows a wide range of probable disbursements from the RMI 

trust fund. For example, under the moderate investment strategy, 10 years 

after the trust fund starts to disburse income, we find an 84 percent 

probability that the trust fund will disburse the maximum level of income 

allowed, which is estimated at $43 million for 2034; a 4 percent probability 

that the trust fund will disburse no income; and a 12 percent probability 

that the trust fund will disburse some income, between $0 and $43 million.

Page 27 GAO-07-513 Compact Trust Fund
The FSM and the RMI trust funds’ income could be supplemented or 

enhanced by (1) greater tax revenue through economic development in the

two countries, (2) increased remittances from growing numbers of 

emigrants, (3) economic assistance from other donors, and (4) 

securitization of the funds.35 However, each possible scenario has 

limitations. In particular, although securitization could lead to higher trust 

fund balances in 2023, it also has the potential to lower investment 

income, reducing the balances. 

Economic development in the FSM and the RMI could increase the 

countries’ tax revenue, helping to supplement the income from the trust 

funds. However, as we reported in 2006, the countries’ development 

prospects remain limited—despite U.S. compact assistance since 1987,

aimed at promoting economic advancement and budgetary self-reliance—

and as a result, greater tax revenue may not be feasible.36Both countries’ 

economies depend on public sector expenditure, funded largely by 

external assistance; in 2005, public sector expenditures—about two thirds 

of which were funded by grants—were about 60 percent of the gross 

domestic product. Further, both governments’ budgets face growing wage 

expenditures, heightening the negative fiscal impacts they will face as 

compact grants decline. In both countries, the growth of key industries 

faces multiple constraints. Further, as we also reported in 2006, the FSM 

and the RMI have not undertaken many reforms needed for economic 

development. 

Growing emigration from the FSM and the RMI could help reduce the 

countries’ reliance on the trust fund income: as the countries’ populations

decline, the governments’ need for trust fund income to provide services 

would also decline. FSM and RMI residents can relocate to the United 

States relatively easily owing to rights granted under the original compact

Several Options Exist 

for Supplementing 

FSM and RMI Trust 

Fund Income 

Greater Tax Revenue 

through Economic 

Development 

Growing Emigration and 

Remittances 

 35Through securitization, the trust fund sells bonds to investors, and the cash generated

through bond issuance will become the trust fund principal to be invested. Future 

contributions to the trust fund will be used to pay bond holders before being available as 

income to the trust fund. Securitization helps build up the principal of the trust fund right 

away rather than slowly by annual contributions to the fund. 

36GAO-06-590. 

Page 28 GAO-07-513 Compact Trust Fund
and extended by the amended compacts.37Many FSM and RMI citizens 

have chosen to exercise these rights: RMI data suggest that as of 2005, 

about 15,000 Marshallese had migrated to the United States, and FSM data 

suggest that almost twice as many Micronesians live overseas. In both 

countries, the likely effects of decreasing levels of per capita grant 

assistance may cause emigration to increase. 

• FSM. If the FSM population maintains its 2004 level,38 real per capita grant 

assistance in 2023, the last year of compact grants, will be about 73 

percent of assistance in 2004, the first year of compact grants. 

Furthermore, even with the aggressive investment strategy we projected, 

the trust fund income is likely to be lower than the compact grant, 

continuing the declining trend in government resources. As a result, FSM 

living standards, including the availability of social services, will likely be 

reduced, potentially leading to further emigration. 

• RMI. Per capita grant assistance in the last year of compact grants will be 

about 70 percent of assistance in the first year if the RMI population 

maintains its 2004 level. Given the aggressive investment strategy, per 

capita trust fund income in 2024 and thereafter may equal per capita grant 

assistance in 2023. However, if trust fund income is unreliable, as our 

analysis shows likely, RMI living standards, including the availability of

social services, will probably be affected, possibly leading to increased 

emigration. 

If increasing numbers of FSM and RMI residents choose to emigrate in the 

coming years as annual compact grants decrease, remittances from 

growing numbers of emigrants could supplement residents’ income and, if 

taxed, could provide revenue to the FSM and the RMI governments. 

However, it is not certain that remittances would grow significantly or lead

to increased government revenues. Although FSM and RMI emigrants 

could provide increasing monetary support to their home nations, 

inadequate education and vocational skills may limit their earning 

opportunities. As we reported in 2006, the 2003 U.S. census of FSM and 

RMI migrants in Hawaii, Guam, and the Commonwealth of the Northern 

 37Under the original compacts, citizens from the FSM and the RMI had the right to live and 

work in the United States as “nonimmigrants” and to stay for long periods of time. 

Although the amended compacts strengthened immigration provisions, these rights were 

generally extended for citizens as defined under the amended compacts. 

38Owing to emigration, growth of the FSM population has slowed from about 2 percent in

the early 1990s to virtually zero since 1995. 

Page 29 GAO-07-513 Compact Trust Fund
Mariana Islands shows that almost half of them live below the poverty line.

However, some economic experts emphasize that with an upgrading of 

skills, the FSM’s and the RMI’s free access and strong historical links to 

the U.S. economy create potential for the two nations to expand 

remittance income.39

Economic assistance, including contributions to the FSM and the RMI 

trust funds, from external sources other than the United States could 

lessen the countries’ reliance on trust fund income. For example, our 

analysis shows that Taiwan’s contribution of $40 million to the RMI’s trust 

fund reduced by nearly 10 percent the probability that the trust fund not 

reaching the maximum disbursement level allowed in 2050. However, it is 

not certain whether the FSM trust fund will receive any such contributions 

or whether the RMI trust fund will receive any further contributions. 

Further, although both countries have previously received other economic 

assistance from donors besides the United States—for example, from the 

Asian Development Bank, Australia, and Japan—assistance in the future is

not assured. 

Securitization of the trust funds—that is, issuing bonds against future U.S. 

contributions to the funds—has the potential to increase the funds’ 

balances. The benefit from securitization would mainly derive from 

arbitrage, or potential differences in returns on investment and returns on 

the bonds issued to investors: the greater the differential, the greater the 

benefit from securitization. 

However, although securitization of the trust funds carries potential 

benefits, our analysis shows that its introduction could subject the funds 

to greater risk. Because the full trust fund amounts would be invested 

after securitization, loss from securitization in the early years could lead to

smaller investment income and trust fund balances in later years. Our 

analysis shows that securitization could result in a wider range of possible 

trust fund balances at the amended compacts’ expiration (see table 4). For 

example, under the possible aggressive investment strategy, securitization

Economic Assistance from 

Other Donors 

Trust Fund Securitization 

 39Experts also suggest that in addition to increasing income from emigrant remittances, 

returning emigrants may bring back newly acquired skills and capital that could support 

growth in the home economy. See GAO-06-590; also see Francis X. Hezel, Is That the Best 

You Can Do? A Tale of Two Micronesian Economies (Honolulu: East-West Center, Pacific 

Islands Policy, 2006). 

Page 30 GAO-07-513 Compact Trust Fund
could result in an FSM trust fund balance of $579 million (10th percentile) 

to approximately $2.7 billion (90th percentile), with a median of $1.3 

billion; without securitization, the trust fund balance could range from 

$664 million (10th percentile) to approximately $2.2 billion (90th 

percentile), with a median balance of about $1.2 billion.40 Securitization 

could result in a similarly wider range of balances and larger median 

balance for the RMI trust fund. 

Table 4: Projected Trust Fund Balances in 2023 with and without Securitization,

under Aggressive Investment Strategy 

Dollars in millions 

FSM RMI

Trust fund

balance

distribution 

statistics 

With 

securitization

Without 

securitization

With 

securitization

Without 

securitization

10th percentile $579 $664 $390 $438

Median 1,314 1,182 845 778

90th percentile 2,700 2,179 1,688 1,401

Standard 

deviation 912 647 590 422

Source: GAO.

According to officials of the FSM and the RMI trust fund committees, the 

committees are considering securitizing the funds but disagree over 

whether this option should be pursued. Some members believe that 

securitization could bring great financial benefits, as a company that 

performs securitization has asserted in presentations to the committees; 

other members are concerned about potential risks. Others raise concerns

of whether the trust funds could pursue securitization under the current 

amended compacts and trust fund agreements or whether amendments to 

these agreements would be required. The committees have not initiated an 

independent analysis to assist in their decisions. 

 40Under different investment strategies, the range of possible fund balances will be 

different. However, securitization will still lead to a wider range of possible fund balances. 

Securitization can lead to a higher expected balance when the investment returns are 

higher than the rate the funds pay to its bond holders. 

Page 31 GAO-07-513 Compact Trust Fund
Since the enactment of the amended compacts with the FSM and the RMI, 

the trust fund committees have taken important steps to establish the 

funds. However, the committees’ decision-making and administrative 

processes slowed the funds’ establishment and investment, leading to

lower potential investment earnings for the FSM. Until the committees 

develop strategies to improve these processes, their ability to take timely

actions regarding the funds will likely be impeded. In addition, the 

committees’ tardiness in publishing the required annual reports limited the 

public availability of information regarding the trust funds’ establishment 

and the committees’ oversight. Further, the reports do not assess the 

potential status of the funds as an ongoing source of revenue after the 

compact grants end. Given the likely effects of market volatility on the 

funds’ investment earnings, such assessments are needed to help the 

countries develop other strategies for achieving the compact goals of 

economic advancement and long-term budgetary self reliance. Both 

countries have several options to supplement trust fund income after 2023, 

but these options have limitations and are not assured of success. 

Although the trust fund committees are considering one of these options—

securitization—to increase the funds’ balances, they have not yet initiated 

an independent analysis of securitization’s potential benefits and risks, 

including the possibility that securitization could lead to lower trust fund 

balances in 2023. 

To enhance the FSM and the RMI trust fund committees’ oversight of the 

trust funds, we recommend that the Secretary of the Interior direct the 

Deputy Assistant Secretary for Insular Affairs, as Chairman of the 

committees, to work with other U.S. agencies on the committees to 

undertake the follow three actions:

Conclusions 

Recommendations for 

Executive Action 

• develop strategies to improve the timeliness of the committees’ decisionmaking and administrative processes;

• ensure the committees’ timely reporting of trust fund activities, including 

assessing the funds’ likely status as a source of revenue and effectiveness 

in helping the countries achieve economic self-sufficiency and long-term 

budgetary self-reliance; and 

• obtain a full and independent evaluation of the potential benefits and risks 

of using securitization to increase the trust fund balances.

Page 32 GAO-07-513 Compact Trust Fund
We received written comments from Interior, HHS, and State as well as 

from the FSM and RMI governments (see app. V through IX for detailed 

presentations of, and our responses to, these comments). We also received 

technical comments from State, which we incorporated in our report as 

appropriate. We did not receive any comment from Labor. 

Interior, HHS, and the RMI government concurred with our first 

recommendation. Interior also generally concurred with our second 

recommendation. However, HHS and State stated that our report reflected

a fundamental misunderstanding of the outcome of the negotiation of the 

amended compacts and a misreading of the international agreements, 

which we strongly disagree. Our report clearly stated that the purpose of 

the trust funds is to provide an ongoing source of revenue. To further 

clarify this point, we modified our recommendation and added language 

specifying that there is no minimum disbursement required or guaranteed

by the trust fund agreements. We believe that careful analysis of the trust 

funds each year will help establish realistic expectations of the trust funds 

and provide information to the trust fund committees as they make 

investment decisions and to FSM and RMI government leaders as they set 

economic policies and undertake long-term fiscal planning. Interior, HHS, 

and the RMI government agreed with our third recommendation. The RMI 

noted that it would like the trust fund contributions to be fully adjusted for 

inflation. The FSM government in general agreed with all of our 

recommendations. 

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 Health and Human Services, the 

Interior, Labor 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. 

Agency Comments 

and Our Evaluation 

Page 33 GAO-07-513 Compact Trust Fund
If you or your staff have any questions regarding this report, please 

contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our 

offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. GAO staff who made major contributions to this 

report are listed in appendix X. 

David Gootnick 

Director, International Affairs and Trade 

Page 34 GAO-07-513 Compact Trust Fund
List of Congressional Committees

The Honorable Jeff Bingaman 

Chairman 

The Honorable Pete V. Domenici 

Ranking Member 

Committee on Energy and Natural Resources 

United States Senate 

The Honorable Joseph R. Biden, Jr. 

Chairman 

The Honorable Richard G. Lugar 

Ranking Member 

Committee on Foreign Relations 

United States Senate 

The Honorable Nick J. Rahall, II 

Chairman 

The Honorable Don Young 

Ranking Member 

Committee on Natural Resources 

House of Representatives 

The Honorable Tom Lantos 

Chairman 

The Honorable Ileana Ros-Lehtinen

Ranking Member 

Committee on Foreign Affairs 

House of Representatives 

Page 35 GAO-07-513 Compact Trust Fund
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

In this report on the trust funds established under the U.S. government’s 

amended compacts with the Federated States of Micronesia (FSM) and the 

Republic of the Marshall Islands (RMI), we examine (1) the trust fund 

committees’ progress in establishing, investing, and reporting on the funds; 

(2) the sustainability of income from the trust funds after the compact 

grants end in 2023; and (3) other potential sources of revenue to 

supplement or enhance trust fund income after 2023. 

To review the trust fund committees’ progress in establishing, investing, 

and reporting on the funds, we reviewed the amended compacts, trust 

fund agreements; annual trust fund reports for 2004 and 2005 by the trust 

fund committee, trust fund bank statements, and documents related to the 

request for proposals to set up the trust funds. We interviewed officials 

from the Departments of the Interior, Health and Human Services, Labor, 

and State. We also interviewed relevant RMI and FSM officials and 

representatives from companies involved in setting up, investing, and 

managing the trust funds. 

To project the trust fund income level after the U.S. annual compact grants 

end, we obtained historical returns of various asset classes, including large 

company stocks, international stocks, and U.S. treasury bills, from 1970 to 

2005 and built a projection model based on the historical returns, 

contributions to the trust fund, and rules governing the disbursement from 

the trust fund as outlined in the trust fund agreements. We used the 

inflation projection by the Congressional Budget Office to adjust the 

contribution and grant levels (see app. II for a detailed discussion on the 

key inputs to the projection model). We used a solver function in our 

projection model to find the minimum level of return between 2007 and 

2023 required, so that the trust fund income equals the 2023 grant level 

plus full inflation for at least the first 10 years after trust fund 

disbursements begin. For this calculation, we assumed the trust funds will 

be put into U.S. treasury bonds after 2023. To assess the impact of market 

volatility on the trust fund income, we used the Monte Carlo simulation 

with computer-generated random draws from a predefined distribution, 

based on the historical returns and volatilities of the various asset classes. 

Each random draw produces a possible outcome of the variables we are

interested in, such as the balance of the trust fund and the level of 

disbursement in a particular year; 1,000 random draws generates 1,000 

possible outcomes. We studied the distribution of the outcomes to 

determine, for instance, the probability that the trust funds’ annual 

disbursements will be below the maximum allowed disbursement levels.

Probabilistic projection of the trust funds’ income is an improvement over 

Page 36 GAO-07-513 Compact Trust Fund
Appendix I: Objectives, Scope, and 

Methodology 

the methodology based on constant returns because investment returns 

are volatile.

To examine other potential sources of revenue to supplement the trust 

fund income, we reviewed studies on the economic conditions in the FSM 

and the RMI. We also reviewed studies examining emigration of the FSM 

and RMI citizens. To examine the potential benefit and risks of 

securitization, we modified the simulation model and compared the trust 

funds’ balance in 2023 with and without securitization. We assumed the 

bond issued by the trust fund pays an annual return of 5.5 percent.1

To ensure the soundness of our projection, we obtained and incorporated

technical comments on the simulation assumptions and methodology from

Interior and the investment adviser of the FSM trust fund. 

We conducted our review from July 2006 to March 2007 in accordance 

with generally accepted government auditing standards. We requested 

written comments on a draft of this report from the Departments of the 

Interior, Health and Human Services, and State 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 appendix V through IX. In addition, we 

considered all technical comments and made changes to the report, as 

appropriate.

 1

This number is based on our conversation with an industry expert. 

Page 37 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

The key inputs that we used to simulate the trust fund income after 2023 

include (1) the trust funds’ balances at the beginning of the projection, (2) 

contributions to the trust funds, (3) inflation adjustment to the 

contributions, (4) different accounts of the trust funds and the rules 

governing the inter-account transfers, (5) the simulation equation; (6) 

distribution of returns for the Monte Carlo simulation, and (7) Monte Carlo 

simulation results. 

1. Trust fund balance at the beginning of the projection 

As of September 30, 2006, the FSM trust fund had a balance of $86.53 

million and the RMI trust fund had a balance of $63.14 million. 

2. Contributions to the trust fund 

Table 5 shows scheduled contributions to the FSM and the RMI trust funds 

by the United States, as outlined in the amended compacts. Table 5 shows 

scheduled contributions to the RMI trust fund by Taiwan, as outlined in its

agreement with the RMI. 

Table 5: U.S. Scheduled Contributions to FSM and RMI Trust Funds, as Outlined in

Amended Compacts 

Dollars in millions 

U.S. contribution 

Fiscal year FSM trust fund RMI trust fund

2004 $16 $7

2005 16 7.5

2006 16 8

2007 16.8 8.5

2008 17.6 9

2009 18.4 9.5

2010 19.2 10

2011 20 10.5

2012 20.8 11

2013 21.6 11.5

2014 22.4 12

2015 23.2 12.5

2016 24 13

2017 24.8 13.5

2018 25.6 14

Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

Page 38 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

Dollars in millions 

U.S. contribution 

Fiscal year FSM trust fund RMI trust fund

2019 26.4 14.5

2020 27.2 15

2021 28 15.5

2022 28.8 16

2023 29.6 16.5

Source: Public Law 108-188. 

Table 6: Taiwan’s Scheduled Contributions to RMI Trust Fund, as Outlined in

Agreement with RMI Government

Dollar in millions 

Fiscal year Contribution to A account Contribution to D account

2004 $1.00 $3.00

2005 0.75 1.75

2006 0.75 1.75

2007 0.75 1.75

2008 0.75 1.75

2009 2.40 0.00

2010 2.40 0.00

2011 2.40 0.00

2012 2.40 0.00

2013 2.40 0.00

2014 2.40 0.00

2015 2.40 0.00

2016 2.40 0.00

2017 2.40 0.00

2018 2.40 0.00

2019 2.40 0.00

2020 2.40 0.00

2021 2.40 0.00

2022 2.40 0.00

2023 2.40 0.00

Source: Subsequent Contributor Accession Agreement between The Trust Fund Committee Established by the Government of the 

United States of America, and the Government of the Republic of the Marshall Islands Implementing Section 216 and Section 217 of 

the Compact, as Amended and Taiwan. 

Note: Our projection included Taiwan’s contribution to the A account, but not the D account because

it is a separate account from the rest of the trust fund. 

Page 39 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

3. Inflation adjustment 

The compact grants and the U.S. trust fund contributions are adjusted for 

inflation by a percentage that equals the lesser, in any year, of two-thirds 

of the percentage change in the U.S. gross domestic product implicit price 

deflator or 5 percent, using the beginning of 2004 as a base. Both grant 

funding and trust fund contributions can be fully adjusted for inflation 

after 2014 under certain U.S. inflation conditions. 

4. Trust fund accounts and transfer rules 

The trust fund agreements allow for several types of transfers among the 

A, B, and C accounts that we used in our projections. 

Before 2023:

• From A to C. At the end of each year before disbursement starts in 2024, 

income exceeding 6 percent of the corpus shall be deposited in the C 

account. The C account cannot exceed three times the estimated 

equivalent of the fiscal year 2023 grant level, adjusted for inflation. 

• From C to A. Any amount in the C account exceeding three times the 

estimated equivalent of the fiscal year 2023 grant level, adjusted for 

inflation, shall return to the A account. 

Beginning in 2023: 

• From A to B. During 2023 and each subsequent year, all investment 

income will be transferred from the A account to the B account for 

possible disbursement in the following year. 

• From B to A or C. If the B account balance exceeds the annual grant 

assistance level in 2023 plus full inflation, the excess will be transferred to 

the A account. However, if the C account falls short of the specified level

(three times the estimated equivalent of the 2023 grant level, inflation 

adjusted), any excess in the B account will be transferred to the C account 

to make up the shortfall.

• From C to disbursement or A account. If the B account falls short of the 

previous year’s disbursement, inflation adjusted, the C account can be

drawn on to cover the shortfall. (The trust fund corpus may not be 

accessed for this purpose.) Any amount in the C account exceeding three 

times the estimated equivalent of the fiscal year 2023 grant level, adjusted 

for inflation, shall return to the A account. 

Page 40 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

In our projection, we assume that the trust funds will disburse the 

maximum allowed amount if it is available. However, the trust fund 

committees may disburse less than the maximum amount allowed and 

reinvest some income. For a discussion of how partial disbursement can 

affect the probability of trust fund income not reaching the maximum 

disbursement level allowed (see app. III). 

5. Simulation equation

For the Monte Carlo simulation of trust fund balances, we used the 

equation W_t+1= (W_t + C_t - AW_t)* (1+r_t)*(1-F_t), where 

W_t+1 = value of the fund at the beginning of year t+1 

W_t = value of the fund at the beginning of year t 

C_t = contribution to the fund at the beginning of year t 

r_t = the annual return in year t 

AW_t = the annual withdrawal in year t 

F_t = the fees as a percentage of account value the trust fund pays to 

its trustee, investment adviser, money managers, and lawyers, etc. (We 

assume the fees to be 1 percent of the account value.) 

6. Distribution of returns for Monte Carlo simulation 

The returns on the trust fund will be randomly drawn from a custom 

distribution, which is based on historical real returns of the various asset 

classes and the proportion of the asset in the investment strategy. The 

distributions for international stocks, large company stocks, and U.S. 

treasury bills are illustrated in table 7. 

Page 41 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

Table 7: Real Returns Distribution Based on Historical Data from 1970 to 2005 

International stocks Large company stocks U.S. treasury bills 

Range Probability Range Probability Range Probability

-30.61% -27.61% 2.86% -34.47% -23.91% 2.86% -3.74% -2.59% 2.86%

-27.61 -22.41 2.86 -23.91 -21.56 2.86 -2.59 -1.99 2.86

-22.41 -21.11 2.86 -21.56 -13.23 2.86 -1.99 -1.72 2.86

-21.11 -17.62 2.86 -13.23 -13.07 2.86 -1.72 -1.70 2.86

-17.62 -16.78 2.86 -13.07 -12.71 2.86 -1.70 -1.55 2.86

-16.78 -15.17 2.86 -12.71 -12.09 2.86 -1.55 -1.13 2.86

-15.17 -14.33 2.86 -12.09 -8.75 2.86 -1.13 -1.03 2.86

-14.33 -9.15 2.86 -8.75 -2.27 2.86 -1.03 -0.84 2.86

-9.15 -6.29 2.86 -2.27 -1.40 2.86 -0.84 -0.71 2.86

-6.29 -4.55 2.86 -1.40 -1.32 2.86 -0.71 -0.43 2.86

-4.55 -1.02 2.86 -1.32 0.79 2.86 -0.43 0.15 2.86

-1.02 0.35 2.86 0.79 1.44 2.86 0.15 0.26 2.86

0.35 2.94 2.86 1.44 2.23 2.86 0.26 0.42 2.86

2.94 3.76 2.86 2.23 4.53 2.86 0.42 0.59 2.86

3.76 5.25 2.86 4.53 4.64 2.86 0.59 0.98 2.86

5.25 5.88 2.86 4.64 7.05 2.86 0.98 1.00 2.86

5.88 8.79 2.86 7.05 7.37 2.86 1.00 1.02 2.86

8.79 9.15 2.86 7.37 10.59 2.86 1.02 1.20 2.86

9.15 10.25 2.86 10.59 11.87 2.86 1.20 1.60 2.86

10.25 10.70 2.86 11.87 15.06 2.86 1.60 1.83 2.86

10.70 11.85 2.86 15.06 16.89 2.86 1.83 1.85 2.86

11.85 16.89 2.86 16.89 17.15 2.86 1.85 1.95 2.86

16.89 18.42 2.86 17.15 17.81 2.86 1.95 2.25 2.86

18.42 19.65 2.86 17.81 17.88 2.86 2.25 2.42 2.86

19.65 20.05 2.86 17.88 18.03 2.86 2.42 2.46 2.86

20.05 23.15 2.86 18.03 18.16 2.86 2.46 2.98 2.86

23.15 23.18 2.86 18.16 19.12 2.86 2.98 3.20 2.86

23.18 23.98 2.86 19.12 25.65 2.86 3.20 3.50 2.86

23.98 26.94 2.86 25.65 26.33 2.86 3.50 3.55 2.86

26.94 28.12 2.86 26.33 26.54 2.86 3.55 3.81 2.86

28.12 29.38 2.86 26.54 26.67 2.86 3.81 4.82 2.86

29.38 33.06 2.86 26.67 27.36 2.86 4.82 4.97 2.86

33.06 36.60 2.86 27.36 28.21 2.86 4.97 5.30 2.86

36.60 51.03 2.86 28.21 31.13 2.86 5.30 5.68 2.86

Page 42 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

International stocks Large company stocks U.S. treasury bills 

Range Probability Range Probability Range Probability

51.03 68.04 2.86 31.13 34.03 2.86 5.68 6.42 2.86

Source: GAO.

Cross-correlation and serial correlation are built into the Monte Carlo 

random draws to capture the co-movement of the asset classes and over 

time. (See table 8.) 

Table 8: Cross-Correlation and Serial Correlation of Historical Annual Returns 

International Large company U.S. treasury bills

International 1

Large company 0.59 1 

Treasury bills -0.12 0.05 1

Serial correlation 0.15 0.04 0.81

Source: GAO.

7. Monte Carlo simulation results 

Each year’s return is randomly selected from the return distribution of 

each asset class. The simulation is run 1,000 times, yielding 1,000 possible

outcomes and providing a distribution of annual investment income, 

account balance, and disbursements. (Table 9 and table 10 show the first 

20 trial values from the simulation of the FSM and RMI trust fund account

balance.) 

Page 43 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

 Table 9: First 20 of the 1,000 Trial Values of the FSM Trust Fund Balances under Moderate Investment Strategy, Fiscal Years 

2006-2023 

Dollars in millions 

Trial values 2006 2007 2008 2009 2010 2011 2012 2013

1 $86.5 $133.3 $170.7 $192.8 $196.5 $167.5 $198.7 $236.5

2 86.5 107.5 154.0 194.2 251.4 328.3 332.6 323.1

3 86.5 93.51 138.4 176.0 230.4 267.3 290.0 312.7

4 86.5 129.6 181.4 188.3 210.6 202.1 250.6 295.4

5 86.5 121.5 134.4 148.5 182.6 275.5 386.8 474.9

6 86.5 128.8 124.2 124.4 151.0 155.3 216.6 253.4

7 86.5 122.6 140.2 192.4 202.7 225.3 327.1 358.3

8 86.5 109.1 112.7 174.9 250.4 247.4 256.1 346.3

9 86.5 103.5 140.3 174.8 205.3 256.2 269.1 333.7

10 86.5 99.03 136.1 141.6 173.8 223.9 276.3 337.7

11 86.5 109.5 180.9 214.1 248.7 228.9 330.3 368.2

12 86.5 97.02 129.3 167.2 233.5 274.1 365.2 433.8

13 86.5 91.73 112.9 157.1 204.7 253.1 327.4 388.0

14 86.5 92.69 137.1 147.5 208.1 200.7 256.6 296.7

15 86.5 99.15 107.0 114.7 139.2 207.4 265.7 359.9

16 86.5 98.08 134.3 164.1 160.8 192.9 241.0 347.1

17 86.5 108.0 147.3 195.2 246.9 358.8 464.1 461.7

18 86.5 122.4 150.2 187.1 226.1 346.9 413.8 371.4

19 86.5 116.2 138.9 202.0 218.2 268.0 300.9 270.6

20 86.5 147.8 222.5 293.7 304.0 376.2 362.8 399.9

10th percentile 86.5 94.23 112.2 135.2 157.6 182.2 210.6 236.9

median 86.5 111.6 139.2 171.5 206.3 244.1 288.9 331

90th percentile 86.5 128.3 169.3 213.8 261.4 323.8 387 455.5

Page 44 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

$262.6 $291.6 $301.1 $288.9 $299.4 $282.1 $318.14 $349.58 $409.71 $545.09

337.4 331.8 431.0 497.9 497.0 501.3 520.58 597.5 697.86 907.24

426.2 496.6 522.3 517.4 695.7 842.4 724.48 807.41 1,150.4 1,223.6

402.8 552.2 719.4 937.4 1,000.8 1,029.0 1,267.4 1,357.3 1,771.1 1708

598.9 688.9 932.0 980.7 937.1 1,056.0 1,203.1 1,326.2 1,420.6 1,660.3

349.2 412.0 471.1 569.9 606.2 614.3 768.84 926.91 907.27 932.03

402.5 539.4 679.3 722.9 860.3 1,182.9 1,153.4 1,243.7 1,180.5 1212.3

308.2 314.7 419.3 485.5 540.9 553.9 606.9 772.66 728.88 895.66

447.0 513.0 523.3 619.4 614.1 692.9 758.54 811.66 808.01 943.09

495.8 606.1 621.7 858.4 848.1 925.2 1,137.5 1,022.2 1,182.5 1507.2

392.6 543.5 710.9 782 711.2 783.0 860.09 769.16 651.13 782.25

472.3 436.6 484.6 541.4 530.7 655.9 705.5 806.55 1,164.4 1057.9

503.8 432.6 504.2 581 535.0 687.2 772.5 987.18 1,038.2 1353.6

382.2 443.1 471.2 600.2 764.5 819.6 803.22 925.79 865.13 959.52

456.8 523.4 579.3 560.2 616.3 776.9 1003 1,112.8 1,211.2 1177.6

417.3 449.1 424.7 398.9 361.4 484.6 593.15 689.94 817.63 858.45

471.0 546.3 621.2 704 907.6 1,083.6 888.67 1,021.2 1,308.6 1,589.2

489.0 519.9 677.1 752.7 901.5 1,151.8 1,072.1 1,535.1 1,668.8 1,970.0

291.6 333.6 435.3 526.8 567.9 716.84 889.64 1,169.8 1,402.7 1,489.3

569.8 752.8 931.8 1,149.0 1,467.0 1,466.6 1,727.6 2,193.6 2,290.8 2,525.2

269.1 305.4 342.6 389.3 437.95 473.23 530.46 592.95 651.05 709.73

379.3 433.7 501.8 563.4 643.53 717.1 798.43 910.03 1018.1 1107.9

531.5 623.3 717.3 824.9 940.75 1079.6 1205.9 1351.4 1513.2 1723.9

Source: GAO.

Page 45 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

Table 10: First 20 of the 1,000 Trial Values of the RMI Trust Fund Balance under Moderate Investment Strategy, Fiscal Years 

2006-2023 

Dollars in millions 

Trial values 2006 2007 2008 2009 2010 2011 2012 2013

1 $63.1 $83.4 $101.8 $143.4 $153.2 $191.4 $214.8 $280.8

2 63.1 91.8 123.5 134.3 178.3 201.3 253.5 327.6

3 63.1 73.4 93.8 114.0 159.7 190.5 194.0 242.6

4 63.1 78.0 78.5 102.0 114.0 144.3 126.4 125.9

5 63.1 77.9 89.0 106.7 131.3 178.0 211.1 261.9

6 63.1 79.5 96.9 98.0 100.0 120.5 128.1 157.6

7 63.1 77.9 118.9 131.5 125.8 160.8 214.1 243.7

8 63.1 69.5 93.7 119.8 134.1 175.2 205.5 231.0

9 63.1 73.7 96.9 126.2 147.7 179.7 196.2 216.4

10 63.1 63.4 80.0 103.8 113.0 140.9 151.4 193.0

11 63.1 75.7 86.6 136.6 163.2 172.0 204.4 237.7

12 63.1 84.7 106.7 146.8 197.8 251.4 232.1 289.0

13 63.1 80.0 98.7 110.2 111.1 140.1 207.6 220.5

14 63.1 69.0 82.1 78.4 74.6 86.8 102.5 134.0

15 63.1 66.1 87.3 78.4 93.0 99.7 98.3 116.4

16 63.1 73.3 96.7 96.8 132.5 132.5 123.1 116.1

17 63.1 75.7 90.1 114.7 115.6 155.0 204.3 268.1

18 63.1 59.1 63.2 71.1 93.5 111.4 146.6 139.7

19 63.1 90.7 110.1 119.9 160.1 167.6 242.4 301.3

20 63.1 77.8 93.2 120.6 147.2 221.6 287.5 330.3

10th percentile 63.1 65.5 76.7 89.1 103.7 119.7 137.6 156.3

median 63.1 78.5 95.5 114.9 137.3 161.6 185.5 214.3

90th percentile 63.1 89.4 114.7 145.7 177.1 212.8 252.6 299.7

Page 46 GAO-07-513 Compact Trust Fund
Appendix II: Technical Notes on the Trust 

Fund Simulation Model 

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

$335.2 $369.3 $354.1 $401.7 $501.7 $568.5 $651.7 $604.2 $607.6 $579.2

456.9 632.5 688.6 919.0 1,034.5 1,054.9 1,209.7 1,123.2 1,043.1 1102.8

232.4 232.5 282.0 283.3 357.4 420.5 511.7 596.8 585.8 548.2

156.1 145.7 213.3 278.4 283.4 366.5 340.7 314.0 345.2 819.4

295.3 321.9 383.0 434.9 477.3 567.8 625.5 649.9 727.3 565.8

196.6 169.7 175.4 250.3 323.5 401.3 370.2 469.6 508.9 979.4

227.1 286.1 320.2 389.6 389.3 434.6 426.6 499.5 601.1 1,080.5

315.0 375.9 433.4 504.2 564.2 617.8 528.1 683.9 752.1 786.8

282.5 325.2 378.0 403.0 426.9 464.8 469.6 465.6 555.9 647.2

252.5 317.3 278.8 344.6 429.7 469.7 455.9 570.9 732.0 1,436.0

213.0 271.5 275.0 360.5 344.3 479.8 648.8 746.2 814.2 494.1

351.3 314.2 313.6 355.0 386.6 436.3 626.0 659.0 785.0 582.3

252.1 322.8 337.7 386.8 343.2 332.6 373.1 387.2 417.3 662.6

150.9 170.7 216.6 287.2 342.5 380.5 447.7 479.6 489.5 701.3

118.6 158.1 164.0 185.0 175.8 240.3 272.7 343.2 415.4 841.7

170.9 215.8 270.7 354.6 451.1 471.3 471.3 554.4 506.4 602.2

263.9 343.5 418.3 445.8 547.0 685.5 812.2 831.6 843.2 751.8

149.1 204.0 266.5 282.8 242.7 307.0 302.8 410.9 496.1 936.0

274.8 290.9 366.2 365.8 496.8 538.5 588.7 518.9 510.3 437.1

360.1 397.7 335.6 432.7 404.9 398.8 409.4 468.7 532.8 521.0

176.9 197.7 218.9 246.9 272.0 299.8 337.3 367.8 400.4 439.2

247.1 280.5 315.2 357.7 402.3 451.1 495.4 556.3 611.9 676.5

345.3 397.6 456.9 522.4 597.4 654.4 743.1 831.6 919.5 1,103.0

Source: GAO.

Page 47 GAO-07-513 Compact Trust Fund
Appendix III: Disbursing All Income Appendix III: Disbursing All Income Compared to Disbursing Partial Income 

Compared to Disbursing Partial Income 

The U.S. trust fund agreements with the FSM and the RMI state that the 

trust fund committees may disburse an amount up to the inflation-adjusted 

grant assistance in fiscal year 2023. However, if the trust fund committees 

disburse less than the maximum allowed levels and reinvest part of the 

trust fund income, this will change the probability that the funds’ income 

will not reach the maximum allowed disbursement levels.1

Figures 11 and 12, respectively, compare the probabilities, under our 

projected moderate investment strategy, of the FSM and the RMI trust 

fund income’s not reaching the maximum disbursement level allowed 

when all income is disbursed versus when partial income is disbursed.2

During the earlier years, the probability that income will not reach the 

maximum disbursement level allowed is generally greater when only 

partial income is disbursed. However, the probability that income will not 

reach the maximum disbursement level allowed is lower in later years, 

because the benefit of the reinvested trust fund income helps protect the 

trust fund principal against inflation. 

 1

According to 2005 study by the Asian Development Bank, a trust fund established with 

similar objectives for another Pacific island country, Tuvalu, reinvests trust fund income to

maintain the fund’s real value. The Tuvalu trust fund was established through a multilateral 

international agreement among Tuvalu, New Zealand, the United Kingdom, and Australia. 

See Benjamin Graham, Trust Funds in the Pacific, Their Roles and Future Manila,

Philippines: Asian Development, 2005. 

2

There are many different ways to disburse investment income partially. For example, the

trust fund can disburse only income above inflation; the trust fund can reinvest to keep the 

corpus at a certain level before it starts to disburse any income. In this analysis, partial 

disbursement means disbursing income above inflation. 

Page 48 GAO-07-513 Compact Trust Fund
Appendix III: Disbursing All Income

Compared to Disbursing Partial Income 

Figure 11: Probabilities That FSM Trust Fund Income Will Not Reach the Maximum 

Disbursement Level Allowed When Disbursing All Income vs. Disbursing Partial 

Income 

0

10

20

30

40

50

60

70

80

2024 2027 2030 2033 2036 2039 2042 2045 2048 2050

Disbursing some income

Disbursing all income

Percentage

Year

Source: GAO.

Page 49 GAO-07-513 Compact Trust Fund
Appendix III: Disbursing All Income

Compared to Disbursing Partial Income 

Figure 12: Probabilities That RMI Trust Fund Income Will Not Reach the Maximum 

Disbursement Level Allowed When Disbursing All Income vs. Disbursing Partial 

Income 

2024 2027 2030 2033 2036 2039 2042 2045 2048 2050

0

5

10

15

20

25

30

35

40

45

Disbursing some income

Disbursing all income

Percentage

Year

Source: GAO.

Page 50 GAO-07-513 Compact Trust Fund
Appendix IV: K

of the FSM and 

ey Events in the Establishment 

RMI Trust Funds 

Page 51 GAO-07-513

Appendix IV: Key Events in the 

Establishment of the FSM and RMI Trust 

Funds 

Figure 13: Key Events in the Establishment of the FSM Trust Fund 

Source: GAO.

2004 2005 2006

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

• April 26: Interior sent out request for information to identify interested firms.

• June 25: Amended compact went into effect.

• August 17: Trust fund incorporated as a nonprofit corporation.

• October 1: FSM made initial contribution to the trust fund.

• October 5: U.S. made initial contribution to the trust fund.

• May 2 : Trust fund committee approved the firm selected by FSM to issue the RFP.

• July 13: The firm submitted evaluation of responses to RFPs for investment advisor and 

made recommendations.

• June 22: Trust fund signed

 agreement with the trustee.

• August 10: Money was

moved out of money 

market account to be 

invested according to 

investment policy.

• March 23: Trust fund committee approved

 investment policy.

 Trust fund committee selected money manager for the initial investment.

• October 13: Interior approved technical assistance grant to FSM to hire expertise that will 

develop a request for proposal (RFP) for hiring of investment advisor and trustee.

• December 12: The firm submitted evaluation of responses to 

RFPs for trustees and made recommendations.

• October 13: Trust fund signed “engagement letter” with investment advisor.

Compact Trust Fund
Appendix IV: Key Events in the Establishment 

of the FSM and RMI Trust Funds 

Figure 14: Key Events in the Establishment of the RMI Trust Fund 

Source: GAO.

2004 2005 2006

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

Jan.

Feb.

Mar.

Apr.

May

June

July

Au

Dec.

g.

Sept.

Oct.

Nov.

• April 26: Interior sent out Request for Information to identify interested firms.

• April 28: Trust Fund Incorporated as a nonprofit corporation.

• May 1: Amended compact went into effect.

• June 1: RMI made initial contribution to the trust fund.

• June 3: U.S. made initial contribution to the trust fund.

• September 30: Trust Fund Committee approved the firm selected by RMI to issue the RFP.

• February 1: The firm submitted evaluation of responses to RFPs for investment advisor and trustees and made 

 recommendations.

• February 16: Trust fund committee selected investment advisor and trustee.

• September 30: Money was moved out of money market account.

• July 23: Interior approved technical assistance grant to RMI to hire expertise that will 

develop a request for proposal (RFP) for hiring of investment advisor and trustee.

• August 19: Trust fund committee signed contract with investment advisor and 

approved investment policy.

• August 30: Trust fund committee signed contract with trustee. 

Note: The years shown are calendar years (Jan. 1 – Dec. 31). 

Page 52 GAO-07-513 Compact Trust Fund
Appendix V: Comments from the Department Appendix V of the Interior : Comments from the Department 

of the Interior 

Note: GAO comment 

supplementing those in 

the report text appears at 

the end of this appendix. 

Page 53 GAO-07-513 Compact Trust Fund
Appendix V: Comments from the Department 

of the Interior 

See comment 1. 

Page 54 GAO-07-513 Compact Trust Fund
Appendix V: Comments from the Department 

of the Interior 

Page 55 GAO-07-513 Compact Trust Fund
Appendix V: Comments from the Department 

of the Interior 

Following is GAO’s comment on the Department of the Interior’s letter, 

dated May 11, 2007. 

1. We added clarification that no minimum disbursement from the trust 

funds is required or guaranteed. However, the trust fund agreements 

establish the 2023 level of compact grants, fully adjusted for inflation, 

as the maximum amount of annual income available for disbursement. 

Therefore, we believe it is appropriate to undertake a projection of the 

likely disbursements against that benchmark. 

We modified our second recommendation to emphasize that the 

reports should assess the status of trust fund performance and likely 

disbursements. We believe that careful analysis of the trust funds each 

year will help establish realistic expectations. Such analysis will also 

inform the trust fund committees as they make investment decisions 

and FSM and RMI leaders as they set economic policies and undertake 

long-term fiscal planning. 

GAO Comment 

Page 56 GAO-07-513 Compact Trust Fund
Appendix VI: Comments from the Department Appendix VI: Comments from the of Health and Human Services 

Department of Health and Human Services 

Note: GAO comment 

supplementing those in 

the report text appears at 

the end of this appendix. 

Page 57 GAO-07-513 Compact Trust Fund
Appendix VI: Comments from the Department 

of Health and Human Services 

Page 58 GAO-07-513 Compact Trust Fund
Appendix VI: Comments from the Department 

of Health and Human Services 

See comment 1. 

Page 59 GAO-07-513 Compact Trust Fund
Appendix VI: Comments from the Department 

of Health and Human Services 

Following is GAO’s comment on the Department of Health and Human 

Services’ letter, dated May 16, 2007. 

1. We strongly disagree with HHS’ assertion that our report reflects a 

fundamental misunderstanding of the outcome of the negotiation of 

the amended compacts. We clearly stated the purpose of the trust 

funds is to provide an ongoing source of revenue for the FSM and the 

RMI. Furthermore, we added clarification that no minimum 

disbursement from the trust funds is required or guaranteed. However, 

the trust fund agreements establish the 2023 level of compact grants, 

fully adjusted for inflation, as the maximum amount of annual income 

available for disbursement. Therefore, we believe it is appropriate to 

undertake a projection of the likely disbursements against that 

benchmark. 

We modified our second recommendation to emphasize that the 

reports should assess the status of trust fund performance and likely 

disbursements rather than the adequacy of the funds to ensure we do 

not imply any required level of minimum income. We believe that 

careful analysis of the trust funds each year will help establish realistic 

expectations. Such analysis will also provide information to the trust 

fund committees as they make investment decisions and to FSM and 

RMI leaders as they set economic policies and undertake long-term 

fiscal planning. 

HHS noted that “so long as the trust funds are a source of annual 

revenue at all, they have met their agreed and stated purpose.” For the 

trust fund committees to be assured of achieving such a purpose, the 

trust funds would have to be invested in low-risk, low-yield 

government bonds after 2023. This would ensure that the trust funds 

will provide some level of disbursement to the FSM and the RMI. The 

income from the funds will not reach the maximum level of 

disbursement allowed and will diminish in real value over time. Our 

analysis shows that right after the grants expire, the funds will be able

to disburse about 50 percent and 68 percent of the 2023 grant levels for 

GAO Comment 

Page 60 GAO-07-513 Compact Trust Fund
Appendix VI: Comments from the Department 

of Health and Human Services 

the FSM and the RMI respectively with the ratios getting smaller over 

time.1

 

 1

We used the estimated median account balance in 2023 under the most aggressive strategy 

as a starting point for investment in government bonds. 

Page 61 GAO-07-513 Compact Trust Fund
Appendix VII: Comments from the Appendix VII: Comments from the Department of State 

Department of State 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

Page 62 GAO-07-513 Compact Trust Fund
Appendix VII: Comments from the 

Department of State 

See comment 1. 

See comment 2. 

Page 63 GAO-07-513 Compact Trust Fund
Appendix VII: Comments from the 

Department of State 

See comment 3. 

See comment 4. 

Page 64 GAO-07-513 Compact Trust Fund
Appendix VII: Comments from the 

Department of State 

Following are GAO’s comments on the Department of State’s letter, dated 

May 15, 2007. 

1. We strongly disagree with State’s assertion that our reading of the trust 

fund agreements is not justified by the terms of the agreements and is 

not consistent with the negations that lead to the agreements. We 

clearly stated the purpose of the trust funds is to provide an ongoing 

source of revenue for the FSM and the RMI. Furthermore, we added 

clarification that no minimum disbursement from the trust funds is 

required or guaranteed. However, the trust fund agreements establish 

the 2023 level of compact grants, fully adjusted for inflation, as the 

maximum amount of annual income available for disbursement. 

Therefore, we believe it is appropriate to undertake a projection of the 

likely disbursements against that benchmark. 

We modified our second recommendation to emphasize that the 

reports should assess the status of trust fund performance and likely 

disbursements rather than the adequacy of the funds to ensure we do 

not imply any required level of minimum income. We believe that 

careful analysis of the trust funds each year will help establish realistic 

expectations. Such analysis will also provide information to the trust 

fund committees as they make investment decisions and to FSM and 

RMI leaders as they set economic policies and undertake long-term 

fiscal planning. 

GAO Comments 

2. State commented that “so long as the trust funds are a source of 

annual revenue at all, they have met their agreed and stated purpose.” 

For the trust fund committees to be assured of achieving such a 

purpose, the trust funds would have to be invested in low-risk, lowyield government bonds after 2023. This would ensure that the trust 

funds will provide some level of disbursement to the FSM and the RMI. 

The income from the funds will not reach the maximum level of 

disbursement allowed and will diminish in real value over time. Our 

analysis shows that right after the grants expire, the funds will be able

to disburse about 50 percent and 68 percent of the 2023 grant levels for 

the FSM and the RMI respectively with the ratios getting smaller over 

time.1

 1

We used the estimated median account balance in 2023 under the most aggressive strategy 

as a starting point for investment in government bonds. 

Page 65 GAO-07-513 Compact Trust Fund
Appendix VII: Comments from the 

Department of State 

3. We disagree with State’s characterizing our assessment of the trust 

funds’ likely capacity to provide revenue to the governments of the 

FSM and the RMI as “likely to build up unwarranted expectations.” On 

the contrary, we believe that careful analysis of the funds’ probable 

income will help build realistic expectations and provide invaluable 

inputs for policymakers in formulating economic policies and longterm plans. It is to this end that we recommend that the trust fund 

committees assess the funds’ status as an ongoing source of revenue 

and effectiveness in helping the countries achieve economic selfsufficiency and long-term budgetary self-reliance. 

4. State suggested a fifth strategy for enhancing the trust funds’ income 

would e for the countries to allow the fund to grow further by 

refraining from requesting the withdrawal of the full allowable amount 

each year. We analyzed the option of not disbursing the maximum 

allowed income (see app. III). We compared the likelihood of not 

reaching the maximum level allowed when all income is disbursed 

versus when some income is reinvested. Our analysis shows while the 

benefit of the reinvested trust fund income helps improve the prospect 

of the trust funds in later years, the disbursement in earlier years will 

be lower. 

Page 66 GAO-07-513 Compact Trust Fund
Appendix VIII: Comments from the Federated Appendix VIII: Comments from the States of Micronesia 

Federated States of Micronesia 

Page 67 GAO-07-513 Compact Trust Fund
Appendix VIII: Comments from the Federated 

States of Micronesia 

Page 68 GAO-07-513 Compact Trust Fund
Appendix IX: Comments from the Republic of Appendix IX: Comments from the Republic of the Marshall Islands 

the Marshall Islands 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

Page 69 GAO-07-513 Compact Trust Fund
Appendix IX: Comments from the Republic of 

the Marshall Islands 

See comment 1. 

See comment 2. 

Page 70 GAO-07-513 Compact Trust Fund
Appendix IX: Comments from the Republic of 

the Marshall Islands 

Page 71 GAO-07-513 Compact Trust Fund
Appendix IX: Comments from the Republic of 

the Marshall Islands 

Following are GAO’s comments on the Republic of the Marshall Islands’ 

letter, dated May 18, 2007. 

1. Our analysis was based on the current contribution structure. Under 

certain U.S. inflation conditions, contributions to the trust fund can be

fully adjusted for inflation after 2014.

GAO Comments 

2. Although the trust fund will have little or no impact on the RMI’s 

economy until disbursements from the fund begin, we believe that 

careful analysis of the fund’s likely income will help build realistic 

expectations and provide invaluable information for policymakers in 

formulating economic policies and long-term plans. It is to this end that 

we recommend that the RMI trust fund committee assess the fund’s 

status as an ongoing source of revenue and effectiveness in helping the

country achieve economic self-sufficiency and long-term budgetary 

self-reliance. 

Page 72 GAO-07-513 Compact Trust Fund
Appendix X: 

A

GAO Contact and Staff 

cknowledgments 

Page 73 GAO-07-513

Appendix X: GAO Contact and Staff 

Acknowledgments 

GAO Contact David Gootnick, (202) 512-3149 or gootnickd@gao.gov

In addition to the individual above, Emil Friberg (Assistant Director) and 

Ming Chen made key contributions to this report. Muriel Brown, Lawrance 

Evans, Etana Finkler, Reid Lowe, Thomas McCool, Mary Moutsos, and 

Wilda Wong provided technical assistance. 

Compact Trust Fund

Staff 

Acknowledgments 

(320439) 
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