Page 1 GAO-07-514R Compact Use 

United States Government Accountability Office

Washington, DC 20548 

May 25, 2007 

Congressional Committees 

Subject: Compacts of Free Association: Micronesia’s and the Marshall Islands’ Use 

of Sector Grants

Supplementing our December 2006 report entitled Compacts of Free Association: 

Micronesia and the Marshall Islands Face Challenges in Planning for 

Sustainability, Measuring Progress, and Ensuring Accountability,

1

 this report 

provides information on the uses of economic assistance provided under the 

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

Republic of the Marshall Islands (RMI) from 2004 through 2006. 

From 1987 through 2003,2

 the United States provided $2.1 billion in economic 

assistance to the FSM3

 and the RMI through a Compact of Free Association. In 2003, 

the U.S. government approved amended compacts with the FSM and the RMI,4

providing a combined total of $3.6 billion for the two countries in 2004 through 2023.5

The amended compacts identify the 20 years of grant assistance as intended to assist 

the FSM and RMI governments in promoting the economic advancement and 

budgetary self-reliance of their people. Under the amended compacts, U.S. grant 

funding decreases annually,6

 paired with increasing contributions to trust funds for 

the FSM and the RMI; earnings from the trust funds are intended to provide a source 

of revenue when the grants expire in 2023. In addition, the annual grant funding is 

 

1

 GAO, 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). 

2

 In this report, all years cited are fiscal years (Oct. 1-Sept. 30) unless otherwise indicated. 3

 The FSM comprises four states: Chuuk, Kosrae, Pohnpei, and Yap. 

4

 Whereas the original compact was a single 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. 

5

 The $3.6 billion in assistance includes (1) compact grants; (2) trust fund contributions; (3) Kwajalein 

impact funding; (4) estimated values of compact-authorized federal services, such as weather, aviation, 

and postal services over the 20-year period; and (5) inflation adjustments. Services related to disaster 

relief have been excluded. 

6

 The decrement in grant funding is deposited into the FSM's and the RMI's trust funds. The RMI's 

annual decrement of $500,000 began in 2004, and the FSM's annual decrement of $800,000 began in 

2007. 
partially adjusted for inflation.7

 The amended compacts require the countries to target 

funding to six development sectors—education, health, the environment, public 

sector capacity building, private sector development, and infrastructure, with priority 

given to education and health. The amended compacts also provide for a 

supplemental education grant (SEG) for both countries.8

 The Department of the 

Interior's (Interior) Office of Insular Affairs (OIA) is responsible for administering 

and monitoring the grants. 

The amended compacts’ subsidiary fiscal procedures agreements9

 (FPA) require the 

FSM and RMI governments to monitor the day-to-day operations of sector grants and 

activities, submit periodic performance reports and financial statements, and ensure 

annual financial and compliance audits. In addition, the compacts and fiscal 

procedures agreements require the U.S. and FSM Joint Economic Management 

Committee (JEMCO) and the U.S. and RMI Joint Economic Management and 

Financial Accountability Committee (JEMFAC) to 

• meet at least once annually to evaluate the progress of the FSM and the RMI, 

respectively, in achieving the objectives specified in their development plans;10

 

• approve grant allocations; 

• review required annual reports; 

• identify problems encountered; and 

• recommend ways to increase the effectiveness of compact grant assistance.11

Moreover, the FSM and the RMI are required to conduct annual audits within the 

meaning of the Single Audit Act, as amended.12

 

 7

The amended compacts provide for a partial annual inflation adjustment of grant funding. Under the 

compacts' implementing legislation, the funding may be fully adjusted for inflation after 2014 under

certain U.S. inflation conditions. 8

 The amended compacts' implementing legislation authorized appropriations, beginning in 2005, to the 

Secretary of Education to supplement the compact grants for the education sector. Under the fiscal 

procedures agreements, SEG funds are to be used to support "direct educational services at the local 

school level focused on school readiness, early childhood education, primary and secondary 

education, vocational training, adult and family literacy, and the smooth transition of students from

high school to postsecondary educational pursuits or rewarding career endeavors." JEMCO and

JEMFAC are responsible for approving the SEG grants annually. 9

 These agreements contain detailed requirements concerning implementation of the amended

compacts' funding and accountability provisions. The U.S. fiscal procedures agreements with the FSM 

and the RMI are formally known as the "Agreement Concerning Procedures for the Implementation of

United States Economic Assistance Provided in the Compact of Free Association, as amended,

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

of Micronesia" and the "Agreement Concerning Procedures for the Implementation of United States

Economic Assistance Provided in the Compact, as amended, of Free Association Between the 

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

Islands." 10 The FSM’s development plan is called the Strategic Development Plan. The RMI’s development plan

consists of three documents: Vision 2018, Meto 2000, and its Medium Term Budget and Investment 

Framework. In addition, the annual portfolio submissions include strategic goals and indicators for

each of the sectors. We refer collectively to all of these RMI documents as the RMI’s development plan. 11 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). 12 The Single Audit Act, as amended, is codified in Chapter 75 of Title 31 of the United States Code. 

Page 2 GAO-07-514R Compact Use 
In our December 2006 report, we examined the FSM’s and RMI’s use of the compact 

funds, their efforts to assess progress toward their stated development and sector 

goals, and their monitoring of sector grants and accountability for the use of compact 

funds in 2004 through 2006.13 The report also examined Interior's administrative 

oversight of the assistance provided under the compacts. Regarding the FSM’s and 

RMI’s use of the compact grants, our December 2006 report observed that the 

countries’ governments allocated the largest amounts for education, infrastructure, 

and health, prioritizing health and education as required (see fig. 1). 

Figure 1: FSM and RMI Grant Allocations, Fiscal Years 2004 through 2006 

Our December 2006 report also noted that several factors affected the grants’ use.14 In 

the FSM, disagreement among the national and state governments regarding project 

implementation and fund management delayed infrastructure projects, and the 

government's inability to secure land leases hindered project implementation in 

Chuuk state. In the RMI, political disagreements between the government and 

 13 The amended compacts' implementing legislation instructs GAO to report, for the 3 years following 

the legislation’s enactment and every 5 years thereafter, on the FSM's and the RMI's use, and on the 

effectiveness of U.S. financial, program, and technical assistance as well as the effectiveness of 

administrative oversight by the United States. 14 The report included appendixes detailing the countries’ allocations in each sector and the terms, 

contained in fiscal procedures agreements, controlling the use of the grants.

Page 3 GAO-07-514R Compact Use
Kwajalein Atoll landowners over the management of compact fund distribution 

delayed the release of funds allocated for special needs on the island of Ebeye,15 and 

disagreements over land use prevented infrastructure projects in the Majuro and 

Kwajalein Atolls. Further, the report noted that neither country had planned its 

allocation and use of funds for long-term sustainability in view of the planned annual 

decrements and the partial inflation adjustments of grant funding. Finally, the report 

observed that the FSM’s distributions of its grant allocations among the national and 

state governments and the development sectors responded to a formula established 

in FSM law rather than to the states' varying populations and needs. To improve the 

countries’ administration, and planning for the use of the grants, we recommended 

that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular 

Affairs, as Chairman of JEMCO and JEMFAC, to work with the FSM and RMI 

governments to develop spending and investment plans that take into account the 

annual decrement in grant funding and the partial inflation adjustment. We also 

recommended that the Deputy Assistant Secretary for Insular Affairs should work 

with the FSM national and state governments to evaluate the impact of the FSM’s 

current allocation formula on the government’s ability to meet national goals and 

deliver services. 

To supplement our December 2006 report, enclosures II through VII of this 

correspondence provide additional information on the FSM's and RMI's use of 

compact funds for, respectively, each of the six development sectors in 2004 through 

2006. Enclosure I contains a description of the scope and methodology of this review. 

Each enclosure addresses the sector grant goals; the grant funding and uses of the 

funding allocated for the sector; and the challenges that have affected, or may affect, 

the use of the grant. A summary of the grants and their purposes follows. 

• Education. The FSM and RMI priorities for education sector grants under the 

amended compacts are to advance a quality basic education system. However, 

both countries face numerous challenges to improving their education sectors 

such as lack of qualified teachers, teacher and student absenteeism, and poor 

or inadequate classroom facilities. In addition, because a disagreement 

between U.S. agencies and the FSM and the RMI governments over some of 

the proposed uses of the SEG, these grants did not become available until late 

in 2005 and 2006. 

• Infrastructure. Both the FSM and the RMI have prioritized use of the 

infrastructure grant for education- and health-related projects, in accordance 

with their respective fiscal procedures agreement. However, as of November 

2006, only the RMI had used infrastructure funds to build several projects. The 

FSM had not yet built any projects and has more than $58 million in available 

funds, although it had made some progress in initiating projects. In the FSM, 

progress was hampered by undefined procurement processes and building 

standards, disagreement within the FSM about project management, 

unresolved land issues, inadequate long-term planning, lack of funding for 

maintenance, and lack of technical capacity. Similarly, in the RMI, unresolved 

 15 Numerous RMI residents were displaced within Kwajalein Atoll, the RMI’s second most populated

atoll, to provide space for U.S. missile testing. Many of these residents now reside on Ebeye Island. 

Page 4 GAO-07-514R Compact Use 
land issues and a lack of planning, technical capacity, stakeholder buy-in, and 

maintenance also present challenges. 

• Health. The FSM and RMI priorities for health sector grants under the 

amended compacts to improve the delivery of health care services. In both the 

FSM and the RMI, the health sector received the third largest sector grant. In 

the FSM, even with the focus on primary health care, only 10 percent of the 

states’ health care budgets targeted this goal. Additionally, there has been 

little progress made to improve the quality of care provided in hospitals in the 

four FSM states. In the RMI, funding has not followed strategic goals, and the 

RMI faces numerous challenges to health care service improvements including 

lack of technical capacity, increased prevalence of lifestyle disease, and 

unsustainable spending. 

• Public sector capacity building. Under the amended compacts, public sector 

capacity building (PSCB) grants are intended to support the efforts of the 

FSM’s and the RMI’s internal capacity to build effective, accountable, and 

transparent governments. According to grant conditions, PSCB funds can be 

used to hire experts to advise the FSM and RMI governments; train personnel; 

and develop, purchase, or upgrade various government systems. With OIA’s 

agreement, the FSM allocated over 88 percent of its PSCB funds to support the 

ongoing operations of the national and state governments, activities not 

supported by the compact, rather than to build new skills and expertise. The 

RMI accepted PSCB funds only in the past 2 years, to support the operations of 

its Public Auditor’s Office. Despite both countries’ extensive need of greater 

government capacity, PSCB has not been a priority in either country and it is 

difficult to determine what if any progress has occurred in this sector in either 

country. 

• Private sector development. FSM and the RMI private sector development 

grants are made available in part to attract foreign investment and increase 

indigenous business activity. Both countries allocated funds to their various 

offices, such as visitor bureaus, land offices, and development entities, in 

support of their goals. However, private sector development in both countries 

has been hampered by such factors as their remote geographic location, 

inadequate infrastructure, and poor business environments. 

• Environment. Environmental goals in the FSM and RMI include engaging in 

environmental infrastructure planning, design, construction, and operation. 

Grants for the two countries’ environment sectors were allocated to several 

offices to support activities such as environmental protection, marine 

conservation, solid waste management, and public education. However, 

several challenges have limited the achievement of both countries’ goals, 

including lack of enforcement and a lack of trained professionals. 

We provided a draft of this report to the Departments of Education, Health and 

Human Services, the Interior, and State. We also provided a draft of the report to the 

Federated States of Micronesia and the Republic of the Marshall Islands. We 

received technical comments from the Department of Education which we 

incorporated as appropriate. The Departments of State and Health and Human 

Page 5 GAO-07-514R Compact Use
Services had no comments. The Department of the Interior provided a letter 

indicating the report was clear and informative, and indicated it continues to 

implement the recommendations from our earlier report GAO-07-163 entitled 

Compacts of Free Association: Micronesia and the Marshall Islands Face 

Challenges in Planning for Sustainability, Measuring Progress, and Ensuring 

Accountability (see enclosure VIII). The FSM’s letter acknowledged, that our 

findings, in this report and GAO-07-163, provided useful and constructive criticism, 

and that they are committed to continued improvement (see enclosure IX). The RMI, 

in its general comments, raised concerns that we used reports from fiscal years 2004 

and 2005 as the basis for making assessments on program management, and that they 

had made changes, revisions, and refocused their efforts since fiscal year 2005, which 

our report did not take into account. Our field work was conducted in March 2006. 

At that time, only project reporting for the first quarter of fiscal year 2006 was 

available. We therefore chose not to include those reports in our scope. However, 

we will review the improved reporting during our next mandated review. The RMI 

also reiterated its position that the grants under the compact should be subject to full 

inflation in order to maintain service levels. The RMI also raised concerns about the 

SEG and how the legislation has been interpreted. Additionally, the RMI raised 

concerns about statements and opinions which we generally attributed to RMI 

officials in the education sector. To address these concerns, we have identified the 

position of the person making the statements in the text, such as the Minister of 

Education. We have modified this report to respond to these comments and other 

matters raised by the RMI (see enclosure XI). 

---------------------------------------------- 

We are sending copies of this report to interested congressional committees. We will 

also make copies available to others on request. In addition, the report will be 

available at no charge on GAO’s Web site at http://www.gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on the last 

page of this report. If you have any questions, please contact me at (202) 512-3149 or 

gootnickd@gao.gov. Key contributors to this report are listed in enclosure VIII. 

David Gootnick, Director 

International Affairs and Trade 

Page 6 GAO-07-514R Compact Use 
List of Committees 

The Honorable Jeff Bingaman 

Chairman 

The Honorable Pete V. Domenici 

Ranking Minority Member 

Committee on Energy and Natural Resources 

United States Senate 

The Honorable Joseph R. Biden, Jr. 

Chairman 

The Honorable Richard G. Lugar 

Ranking Minority Member 

Committee on Foreign Relations 

United States Senate 

The Honorable Nick J. Rahall, II 

Chairman 

The Honorable Don Young

Ranking Minority Member 

Committee on Natural Resources 

House of Representatives 

The Honorable Tom Lantos 

Chairman 

The Honorable Ileana Ros-Lehtinen 

Ranking Minority Member 

Committee on Foreign Affairs 

House of Representatives 

Page 7 GAO-07-514R Compact Use
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Enclosure I 

Scope and Methodology 

To identify the goals of the amended compacts, we reviewed the Compacts of Free 

Association and their subsidiary agreements between the United States and the two 

countries. To learn of the countries’ uses of the compact funds, we reviewed the 

Federated States of Micronesia’s (FSM) and the Republic of the Marshall Islands 

(RMI) planning and budget documents; the U.S., FSM, and RMI annual compact 

reports for 2004 and 2005; and briefing documents prepared by Interior's Office of 

Insular Affairs (OIA) in preparation for the annual bilateral meetings with the two 

countries. 

To determine the allocation of grant funding by sector, we reviewed all 2004, 2005, 

and 2006 grant agreements with both countries, obtained from OIA, including special 

terms and conditions included in these agreements. To compute education spending 

per student, we used FSM and RMI grant data and student population statistics. To 

calculate the variability in health spending per capita across the four FSM states, we 

used FSM grant data and population statistics. We did not calculate health spending 

per capita for the RMI due to a lack of data. We determined that these data were 

sufficiently reliable for the purposes of our report. 

To identify challenges that impact the use of compact funds, we discussed planning 

efforts with U.S., FSM, and RMI government officials and identified, through our own 

analysis, issues that affected planning, such as the FSM's use of its distribution 

formula. We reviewed relevant documents, such as FSM and RMI legislation, and we 

also reviewed documentation that the countries provided to the U.S. government. In 

March 2006, we traveled to the FSM (Chuuk, Kosrae, Pohnpei, and Yap). In addition, 

in Chuuk we visited the Islands of Fanapangas, Fefan, Polle, Toll, Tonoas, Duot, 

Uman, Ut, and Weno. We also traveled to the RMI, visiting Arno, Kwajalein, and 

Majuro Atolls. Our field work covered the locations with the largest population, 

although we also reviewed nearby sites serving rural communities. In both countries, 

we visited primary and secondary schools, colleges, hospitals, dispensaries, 

community health centers, farms, fisheries, post offices, weather stations, 

telecommunications offices, and airport facilities. Specifically, in the RMI we visited 

7 of 75 primary and 3 of 5 secondary public schools. In the FSM, we visited 18 out 

198 primary and 8 of 21 secondary public schools across the four states. We visited 

both of the RMI’s hospitals, in Majuro, and a health dispensary on Arno. In the FSM, 

we visited each states’ hospital as well as 16 dispensaries. In the Chuuk lagoon 

islands, we also visited dispensaries and schools. We did not select sites using 

probability sampling techniques and therefore cannot generalize to all possible sites. 

We discussed compact implementation with the FSM national and state governments, 

including the FSM’s Office of Compact Management, and with the RMI government, 

including the RMI’s Chief Secretary. 

We conducted our review from October 2005 through December 2006 in accordance 

with generally accepted government auditing standards. Information contained in this 

report was gathered primarily during our March 2006 field work, with some 

information updated through interviews with OIA staff or correspondence with FSM 

and RMI officials through November 2006.
Enclosure II 

Education 

The Federated States of Micronesia (FSM) and the Republic of the Marshall Islands 

(RMI) goals for education sector grants under the amended compacts are to support 

and improve the educational system of the countries with an emphasis on advancing 

a quality, basic education system. The JEMCO approved allocations for the FSM 

education sector amounting to $79 million, or 34 percent of compact funds; and the 

JEMFAC approved allocations for the RMI education sector amounting to $34.2 

million, or 33 percent of compact funds in 2004 through 2006.16 Both countries also 

received Supplemental Education Grant (SEG) funding,17 beginning in 2005, to 

support additional direct educational services. However, both countries face 

numerous challenges to improving their education sectors. In addition, because of 

multiple factors, including disagreement between U.S. agencies and the FSM and the 

RMI governments over some of the proposed uses of the SEG, funding for the SEG 

was almost 1 year late for both 2005 and 2006. 

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

17 Funding for the SEG is appropriated to the U.S. Department of Education (ED) account and 

transferred to an Interior account for disbursement, with Interior responsible for ensuring that the use, 

administration, and monitoring of SEG funds are in accordance with a memorandum of agreement 

among ED, the Department of Labor, Health and Human Services, and Interior, as well as with the 

fiscal procedures agreements. JEMCO and JEMFAC are responsible for approving the SEG grants 

annually. The SEGs are awarded in place of grants formerly awarded to the FSM and RMI under Part 

A of title I of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 6311 et seq.); title I of the 

Workforce Investment Act of 1998 (29 U.S.C. 2801 et seq.), other than subtitle C of that Act (29 U.S.C. 

2881 et seq.)(Job Corps); title II of the Workforce Investment Act of 1998 (20 U.S.C. 9201 et seq.; 

commonly known as the Adult Education and Family Literacy Act); title I of the Carl D. Perkins 

Vocational and Technical Education Act of 1998 (20 U.S.C. 2321 et seq.); the Head Start Act (42 U.S.C. 

9831 et seq.); and subpart 3 of Part A, and part C, of title IV of the Higher Education Act of 1965 (20 

U.S.C. 1070b et seq., 42U.S.C. 2751 et seq.), according to Pub. L. 108-188. 

Page 9 GAO-07-514R Compact Use
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Education Sector Grant Priorities and Terms

The goals for FSM’s and RMI’s education sector grants under the amended compact 

and subsidiary fiscal procedures agreements are to 

• improve the educational system of the countries, including primary, 

secondary, and post secondary education; and 

• develop the countries’ human and material resources necessary to perform 

these services. 

Emphasis is to be placed on advancing a quality basic education system by 

• increasing the achievement levels of students in the primary and secondary 

education system based on performance standards and assessments 

appropriate for the countries; 

• providing secondary and vocational training; 

• improving management and accountability within the educational system; 

• raising the level of staff quality, including teacher training; and 

• improving the relevance of education to the needs of the economy. 

According to the fiscal procedures agreements, the SEG grant is to be used in part to 

support additional direct educational services at the local school level, with emphasis 

on school readiness, early childhood education, primary and secondary education, 

vocational training, adult and family literacy, and the transition from high school to 

postsecondary education or career endeavors. SEG is not to be used for school 

construction, remodeling, general operational costs, or teacher salaries, except those 

salaries needed to carry out programs or activities supported by the SEG. 

In addition to being subject to the requirements in the amended compacts and fiscal 

procedures agreements, the FSM and RMI are subject to grant conditions imposed by 

the JEMCO and JEMFAC, respectively, and by OIA. (For sector grant terms and 

conditions specific to the FSM and the RMI, respectively, see GAO-07-163, app. VI and 

VII.) 

FSM Education Sector

Compact sector grants for the FSM education sector in 2004 through 2006 supported 

the operation of primary and secondary schools in addition to other education 

functions and activities. The 2005-2006 SEG primarily supported early childhood 
education in Chuuk and Pohnpei and education improvement programs in Yap and 

Kosrae. Although Chuuk receives the largest share of education funding, it has the 

lowest funding level on a per student basis. The FSM education sector faces many 

challenges in improving the quality of education. 

Funding for the FSM Education Sector 

In 2004 through 2006, JEMCO approved allocations totaling about $79 million to the 

FSM national and state governments for the education sector: approximately $26 

million (34 percent of all compact funds) in 2004; about $27 million (36 percent of all 

compact funds) in 2005; and about $26.1 million (33 percent of all compact funds) in 

2006. The largest allocations of compact funding each year went to Chuuk, the most 

populous state; the smallest allocations went to Kosrae, the least populous state (see 

table 1). 

Table 1: FSM Education Sector Grant Allocation, by FSM Government, Fiscal 

Years 2004 through 2006 

Grant 

recipient 2004 2005 2006

National 

government $4,324,122 $4,511,317 $4,159,081

Chuuk 8,140,265 8,804,369 9,432,618

Kosrae 1,883,853 2,070,432 2,412,498

Pohnpei 7,373,651 7,469,772 6,978,447

Yap 4,243,681 4,249,157 3,149,415

Total $25,965,572 $27,105,047 $26,132,059

Source: Compact grant award letters. 

The compact grant supported the operation of primary and secondary schools in 

addition to other education functions and activities. At the state level, compact grants 

mainly supported the operation of primary and secondary schools. Compact grants 

also paid for postsecondary scholarships and provided partial support to some 

private schools. Among national institutions supported by grant funding, the College 

of Micronesia–Federated States of Micronesia (COM-FSM) received $3 million in 

2004, $3.9 million in 2005, and $3.8 million in 2006. 

In addition to receiving compact sector funding, the FSM education sector received 

SEG from the United States—$12.1 million for 2005 and almost $12.1 for 2006. In 

Chuuk and Pohnpei, 2005 and 2006 SEG primarily supported early childhood 

education, while in Yap and Kosrae, the largest portion of the SEG went to education 

improvement programs. The SEG also supported vocational training, skills training, 

and staff development. In addition, the national government received some SEG 

funding for monitoring, coordination, technical assistance, scholarships, and 

research. The College of Micronesia received SEG funds for financial aid for students 

and for teacher training. Figure 2 shows SEG funding to the FSM states for 2005 and 

2006. 

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Page 12 GAO-07-514R Compact Use 

Figure 2: FSM State SEG Funding by Activity, Fiscal Years 2005 through 

2006 

Combined annual U.S. assistance from the education sector compact funds and the 

SEG averaged approximately $990 per student in primary and secondary schools. 

However, the level of funding per student varied widely by state: Chuuk received 

about $730 per student in U.S. assistance, while Yap received about $2,050 per 

student. Partly as a result of this discrepancy, Chuuk has a much higher student-toteacher ratio (19:1) than Yap (8:1).18

 

 18 According to the FSM, each state’s distinct geographic features also affect the student-to-teacher

ratio; for example, outer island schools tend to be smaller in size and have a lower student teacher

ratio. The funding disparity does not appear to have affected the reported quality of education. For 

example, the percentage of students who were deemed not proficient in math was the same in Yap and 

in Chuuk in 2005, and the percentage of teachers lacking at least an associate degree is similar in the 

two states. 
Table 2: Compact and SEG Public School Available Funding Per Student 

(K-12) by FSM Government, Fiscal Year 2005 

Chuuk Kosrae Pohnpei Yap

National 

government FSM

Compact $8,686,164 $2,070,432 $7,067,309 $4,203,177 $475,200 $22,502,282

SEG 4,216,090 1,305,546 3,352,563 2,393,183 548,932 11,816,314

Total $12,902,254 $3,375,978 $10,419,872 $6,596,360 $1,024,132 $34,318,596

Student 

number 17580 2532 11277 3212 n/a 34,601

Funding per 

student $734 $1,333 $924 $2,054 n/a $992

Source: Funding data are drawn from 2005 compact and SEG budgets and award letters. Student 

numbers are drawn from the FSM submission of 20 education indicators in 2005 to JEMCO.

Notes: To calculate the compact and SEG funding for public primary and secondary schools, we 

excluded the funding for nonpublic schools, postsecondary schools, and some COM funding.

Specifically we excluded 

• $118,205 to nonpublic schools in Chuuk; 

• $350,000 to postsecondary scholarships and $52,463 to public libraries in Pohnpei,; 

• $23,890 to St. Mary School and $22,090 to the Seventh-Day Adventist School in Yap; and

• $3,856,067 to the College of Micronesia operation funds, $267,046 to the college for financial aid,

and $180,050 to the FSM Fisheries and Maritime Institute.

These amounts do not include other U.S. federal program assistance for education in the FSM.

Challenges in the FSM Education Sector 

The challenges facing the FSM education sector include a lack of qualified teachers, a 

high level of teacher and student absenteeism, and poor conditions at facilities. 

• Lack of qualified teachers. The large number of unqualified teachers at all 

education levels in the FSM is a serious impediment to improving the 

quality of education in the country; addressing this challenge will require a 

long-term effort. According to the FSM’s 2006 submission to the JEMCO, 

nearly 40 percent of the teachers nationally have no postsecondary 

qualifications. The situation is particularly critical in Yap and Chuuk, where 

more than half of teachers do not possess a degree from a postsecondary 

institution. In 2004, the national government began requiring that all 

teachers be certified19 and making the possession of an associate’s degree 

one of the certification criteria. To help teachers achieve the required 

degrees, the FSM obtained a grant from the U.S. Department of Education 

(ED); however, the grant expires in 2007, and teacher training is far from 

complete. The FSM reported that as of August 2006, after 4 years of 

teacher training grants, 27 teachers (12 from Chuuk, 4 from Kosrae, 8 from 

Pohnpei, and 3 from Yap) had attained associate degrees with the 

assistance of the grants. However, more than 900 FSM teachers had no 

degrees and lacked certification. 

 19 To obtain the certification, teachers are required to pass a national test, have at least an associate (2-

year) degree, and demonstrate to classroom observers core teaching competencies. 

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• Absenteeism. Officials at many of the schools we visited reported 

absenteeism is a problem for both teachers and students. For example, a 

high school we visited in Pohnpei reported a 20 percent absentee rate for 

teachers in February 2006. In the event of a teacher’s absence, the schools 

attempt to combine classes rather than send students home. There is also 

a lack of accountability in the system regarding teachers’ performance, 

according to Kosrae’s Department of Education Director. In response, 

Kosrae tried to shift teachers from holding civil service positions to 

biannual contracts in order to make it easier to terminate nonperformers. 

The effort was met with resistance from the teachers, but Kosrae’s 

Education Department nonetheless hoped to put all teachers on contract. 

• Poor conditions. Deteriorating conditions at school facilities challenge 

efforts to strengthen FSM education. When we visited Kosrae High School, 

we found the bathrooms in deplorable condition and we were told that the 

female students avoided using them. In the Southern Nomoneas High 

School on Chuuk Lagoon Island, a damaged roof caused classes to be 

cancelled when it rained, because students sat on the floors of the 

classrooms in the absence of chairs and desks (see fig. 2). Chuuk schools 

were also negatively affected by an unreliable power supply due to the 

poor condition of the power system on Weno Island. As we reported in 

December 2006, the FSM had not undertaken any school facility repair 

projects using the infrastructure sector grant funds.20 However, education 

sector grant carry-over funds from 2004 were authorized by JEMCO to be 

used to repair schools and to purchase desks and chairs; only in Chuuk 

was this funding used. 

20 GAO-07-163. 
Figure 3: Poor Conditions of Classroom Facilities in the FSM 

RMI Education Sector

Compact sector grants for the RMI education sector in 2004 through 2006 supported 

the operation of primary and secondary schools in addition to other education 

functions and activities, such as the College of Marshall Islands. The 2005 and 2006 

SEG funding supported early childhood education, paid for textbooks and supplies at 

primary and secondary schools, and supported the National Vocational Training 

Institute, an alternative to the main-stream high schools. The RMI education sector 

faces many challenges in improving the quality of education. 

Funding for the RMI Education Sector 

In 2004 through 2006, JEMFAC approved grants for the RMI’s education sector that 

presented the second largest share of compact funding: in 2004, $10.7 million (31 

percent of compact funds); in 2005, $11.6 million (33 percent of compact funds); in 

2006, $11.9 million (34 percent of compact funds) (see table 3). The compact grant 

supported the Ministry of Education’s (MOE) operations. It also supported other 

education functions and activities, such as the College of the Marshall Islands and the 

National Scholarship Board.21

 

 21 The RMI education system comprises five agencies: (1) the Ministry of Education, (2) the College of 

the Marshall Islands, (3) the Scholarship Grant and Loan Board, (4) the National Training Council, and

(5) the Atoll Feeding Program. 

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Table 3: Compact Funding for the RMI Education Sector, by Agency, Fiscal 

Years 2004 through 2006 

Grant Recipient 2004 2005 2006

Ministry of Education $8,362,932 $9,597,911 10,174,046

National Scholarship Board 700,000 900,000 760,037

College of the Marshall 

Islands 2,036,626 700,000 1,000,000

National Training Council 186,000 0 0

Totala$11,285,558 $11,197,911 $11,934,083

Source: The RMI Education Budget Portfolio, 2004 through 2006. 

Note: The amounts shown represent compact funding budgeted by the RMI for each agency and differ 

slightly from the final awards for 2004 and 2005. 

a The total includes Kwajalein (Ebeye) Special Needs funding of $1.1 million in 2004 and $1.6 million in 

2005 as part of the education grant. The 2006 funding included Ebeye Special Needs funding: $1 

million for the education sector and $100,000 for the scholarship board. 

In addition to receiving compact sector funding, the RMI education sector received 

SEG funding: $6.1 million for 2005, and approximately $5.9 million for 2006 from the 

United States. The SEG was used primarily to support early childhood education, as 

well as functions at other education levels, such as primary and secondary schools 

(see fig. 4). The SEG was also used to support a wide range of additional activities, 

including purchasing textbooks and supplies, hiring World Teach/Dartmouth teachers 

and substitute teachers,22 and funding the National Training Council and the National 

Vocational Training Institute, which is an alternative to mainstream high school. We 

calculate that in 2005, compact funding and the SEG provided, on average, 

approximately $1,300 a year for each of the RMI’s public school students 

(kindergarten through 12th grade).23

 

22 To enable regular teachers to attend training, the RMI used SEG funding to support World Teach and 

Dartmouth volunteer teachers ($217,936 in 2005) and to hire substitute teachers ($132,000). 

23 This amount includes SEG funding but does not include other U.S. federal programs. We also 

excluded from this calculation, compact funding for the College of the Marshall Islands and the 

National Scholarship Board as well as SEG funding for the National Training Council, the National 

Scholarship Board, and adult education from this calculation. Because the budget does not give 

information on the amount of U.S. assistance to private schools, this number may overstate the level of 

funding to public school students. 
Figure 4: RMI Distribution of Supplemental Education Grant, Fiscal Years 

2005 through 2006 

Note: Amounts shown represent combined 2005 and 2006 SEG. 

Challenges in the RMI Education Sector 

Challenges facing the RMI education sector include a lack of qualified teachers, 

teacher and student absenteeism, high dropout rates, the accreditation problems at 

the College of Marshall Islands, and poor classroom facilities. Some of these 

challenges, such as lack of qualified teachers, are significant and will take a long time 

to address. 

• Lack of qualified teachers. Lack of qualified teachers presents an obstacle to 

progress in the education sector. The RMI Ministry of Education is conducting 

several ongoing efforts to improve teacher quality, including the Teacher 

Quality Education program, with the goal of ensuring that all teachers have 

associate’s degrees by 2008. However, a ministry official in charge of 

professional development stated that this time frame may be unrealistic 

because some teachers will have to take remedial courses, on a part time 

basis, before they can enroll in courses for a degree. One teacher told us that 

although he had taken summer classes towards his degree for the past 3 years, 

earning the degree may require another 10 years of summer classes. A further 

problem with the teacher training program is that some teachers do not attend 

classes although they are paid to do so, according to one official from the 

Asian Development Bank. The ministry official in charge of professional 

development told us that the ministry had recently initiated a policy of docking 

teachers’ pay if they did not enroll in or attend classes. 

• Absenteeism. At the schools we visited, officials told us that absenteeism was 

a serious problem for both students and teachers. Personnel actions are rarely 

taken when teachers do not appear for work, according to an official at the 

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MOE. The difficulty in taking action stems, in part, from the RMI’s public 

service employment practices, according to the Minister of Education. 

Because teachers in the RMI are hired by the Public Service Commission, to 

initiate a personnel action, the ministry must document the case and turn it 

over to the commission for adjudication. The ministry does not have the 

authority to impose penalties, and the commission often does not take the 

personnel actions suggested by the ministry, according to ministry officials. 

• High dropout rates. According to the RMI Ministry of Education, the dropout 

rate in 2005 was 23 percent at the primary school level (grades 1-8) and 38 

percent for boys and 37 percent for girls at the secondary school level (grades 

9-12). The ministry estimated that less than 25 percent24 of the students now 

enrolled in first grade will complete high school. 

• Accreditation problems. The College of the Marshall Islands has experienced 

accreditation problems since 2003. According to the President of the college, 

the accreditation committee indicated that the college’s physical infrastructure 

was one of the most serious obstacles to accreditation and that the committee 

would require evidence that the facilities would be substantially upgraded 

before it would change the college’s “show cause” status.25 Through a 

memorandum of understanding signed by the RMI President and the cabinet 

and agreed to by OIA, from 2006 through 2010, the college will receive $5 

million per year from the infrastructure grant. However, this initiative will 

significantly reduce the funding available under the infrastructure sector grant 

to build and renovate primary and secondary schools. 

• Inadequate classroom facilities. Despite the use of compact infrastructure 

funds to build new classrooms at six schools, many RMI schools remain in 

poor condition. For example, classrooms at the Marshall Islands High School 

are unsafe because ceilings have collapsed (see fig. 5), while schools on Ebeye 

have no reliable electricity because of rolling blackouts on the island. Access 

to secondary education is also limited by the lack of available classroom 

space; students take an entrance test to enter public secondary schools 

because of limited capacity at the schools.26 We calculated, based on data from 

24 According to the RMI’s response to our draft report, the 25 percent figure was out dated. The new 

estimate is 50 percent of the students enrolling in first grade will complete high school. The 25 percent 

figure, however, was reported in the Ministry of Education’s Portfolio document for 2005-2006. 

25 According to the Western Association of Schools and Colleges Accreditation Handbook, an order to 

“Show Cause” is a decision by the Commission to terminate the accreditation of the institution 

within a maximum period of 1 year of the date of the order, unless the institution can show 

cause why this action should not take effect. Such an order is typically issued when an institution, 

having been placed on warning or probation for 1 year, has been found not to have made sufficient 

progress to come into compliance with Commission standards. The institution has the burden of 

proof to demonstrate why its candidacy or accreditation should not be terminated. The institution 

must demonstrate that it has responded satisfactorily to Commission concerns, that it has come into 

compliance with all Commission standards, and will likely be able to sustain its compliance. 

26 According to the RMI, in response to our draft report, the RMI noted that progress has been made on 

new construction at the Marshall Islands High School, and classes are moving into the new buildings.
the 1999 RMI census, that less than 60 percent of the school-age population 

was actually enrolled in 9-12.27 The principal of Ebeye High School told us the 

school would not have enough classrooms for the new school year and that 

they were converting an old warehouse into classroom space. 

Figure 5: Poor Classroom Facilities in the RMI

 

27 On the basis of the 1999 Census, the RMI had a population of approximately 6,000 who would reach 

secondary school age (grade 9 to grade 12) by 2005. The enrollment in the RMI public and private 

secondary schools combined for the 2005-2006 school year was 3,414. 

Page 19 GAO-07-514R Compact Use
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FSM and RMI Supplemental Education Grants

For 2005 and 2006, SEGs were awarded near the end of the fiscal year, whereas 

compact sector grants were awarded at the start of each fiscal year. Although the 

SEG was approved in December 2003, the implementation of SEG has been slowed 

by several factors, including (1) the length of time it took the Departments of the 

Interior (DOI), Education (ED), Health and Human Services (HHS), and Labor (DOL) 

to develop a memorandum of agreement on a framework for the use and monitoring 

of the SEG; (2) the FSM’s and RMI’s late submissions of SEG plans, combined with a 

lengthy approval process involving the four U.S. agencies; and (3) disagreements 

among the parties about the appropriate use of SEG grant funds. The FSM and the 

RMI have expressed concern because the grant has not received an adjustment for 

inflation, as was established for compact grants, and because it was subject to a 

rescission in 2005 and 2006. 

• Lengthy agreement process. After the amended compact was enacted, 

Interior, ED, HHS, and DOL—the four U.S. agencies involved with the federal 

programs incorporated into SEG—took 19 months to develop a memorandum 

of agreement (MOA) providing a framework for the use and monitoring of the 

SEG.28 The MOA specifies that ED and HHS are required to review the 

countries’ SEG plans and provide feedback to Interior. The process is 

dependent on the annual appropriation from the U.S. Congress. ED seeks 

funding in its appropriation and transfers the funds to Interior, and after the 

plans are approved, Interior disburses the funds. According to an HHS official, 

problems with coordination and planning for the transition of funding from the 

various federal programs to the SEG complicated the agreement process. 

However, officials from ED pointed out that the length of time it took to 

develop the memorandum was due to the complexity of the task, which 

marked a “complete paradigm shift” in the way funds were provided to the 

FSM and RMI, including transferring oversight from the U.S. agencies to the 

FSM and RMI governments. Owing partly to the fact that the memorandum of 

agreement was not concluded until July 2005, 10 months into the fiscal year, 

the 2005 SEG was not awarded to the FSM and RMI until October and August 

2005, respectively. As a result of the delay, both countries used their own 

revenue to fund early childhood education during the transition period and 

were later reimbursed. 

• Late submission and lengthy review of SEG plans. The required reviews and 

revisions of the SEG plans also slowed SEG funding. In 2005, the FSM and RMI 

submitted their plans near the beginning of the fiscal year. Partly owing to 

extensive revisions, the funding was not awarded until nearly 1 year later. In 

2006, the FSM and the RMI did not submit their plans until well into the fiscal 

year. An OIA official stated that the agencies had verbally agreed to a 30-day 

review period; however, in SEG’s first 2 years of implementation, the reviews 

took longer than 30 days. 

 

28 The agreement was required by the amended compacts’ enabling legislation P.L. 108-188. 
• Disagreement over SEG uses. Disagreements between the U.S. government 

and the FSM and RMI governments about the planned uses of the SEG 

contributed to slowing the SEG’s implementation. Because a U.S. review found 

the planned use of funds inappropriate, the U.S. government required revisions 

to the plans. For example, according to the U.S. ED, because the FSM’s and 

the RMI’s SEG plans for 2006 contained many uses not allowed under the 

fiscal procedures agreement accompanying the compacts, ED and DOI 

questioned several of the FSM’s and RMI’s proposed SEG activities.29 The RMI 

has expressed its disagreement and frustration over the U.S. interpretation of 

the appropriate use of SEG funding, stating that the compact does not state 

that SEG funds are to be used for “supplemental programs” but rather to 

supplement programs. For example, U.S. agencies expressed concern over the 

sustainability of the RMI’s early childhood education (ECE) program. 

According to the agencies, SEG funds are not appropriated to replace the 

federal programs under which the RMI previously received funding and the 

ECE program should be supported by the education sector grant. In that way, 

if the SEG funds were not available in a given year, the ECE program would 

still be operational, albeit perhaps with reduced activities. The RMI responded 

that the SEG was designed to replace Head Start and that the new program 

meets the unique geographic and cultural needs of the RMI. The RMI insists 

that funding of early childhood education through the SEG will continue. 

According to ED officials, the two countries, particularly the FSM, did not 

understand what activities the SEG funding could support. 

Both the FSM and the RMI have raised concerns that the U.S. appropriation for the 

SEG in 2006 was smaller than the amount anticipated by the countries and OIA 

officials. The country and OIA officials had anticipated that the 2006 SEG grant would 

be increased by the inflation adjustment authorized by the legislation creating the 

SEG. However, ED’s 2006 appropriation, the source of SEG funding, was not 

available until December 30, 2005, and the amount appropriated for the FSM and RMI 

combined was $182,190 less than the previous year’s SEG grant.30 The lower level of 

funding reflected no inflation adjustment, 31and a general rescission imposed on all 

executive branch agencies in 2006. ED officials informed us due to a tight budget 

environment, the department’s 2006 budget only requested increases for those 

programs that could demonstrate effectiveness in achieving their objectives or those 

of the highest priority. Officials in both the FSM and the RMI voiced confusion and 

frustration over the delay and reduced funding. At JEMCO and JEMFAC meetings 

held in August 2006, some U.S. officials argued that the inflation adjustment should 

be viewed as a compact obligation and that the ED should ask for the inflation 

adjustment in its budget. The ED official present responded that because of budget 

constraints, including an inflation adjustment, in the department’s 2006 budget was 

 29 The FPA does not allow the SEGs to be used for school construction or remodeling, general 

operational costs, or teacher salaries, except for the salaries of the teaching professionals who carry 

out activities supported by the SEG. 30 The 2005 SEG was $18,183,360 and the 2006 SEG was $18,001,170.

31 The provision authorizing the SEG in the amended compacts’ implementing legislation authorizes an

annual appropriation to the Secretary of Education that is adjusted for inflation (partial) through 2023.

The MOA states Education “shall seek the annual appropriation of funds for the SEGs, including

adjustments for inflation, as described in Section 105(f)(1)(B)(iii) of Pub. L. No. 108-188.”

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impracticable but that inflation adjustment might be considered for future ED 

budgets. 
ENCLOSURE III 

Infrastructure 

Both the Federated States of Micronesia (FSM) and the Republic of the Marshall 

Islands (RMI) have prioritized education- and health-related infrastructure projects in 

accordance with their respective fiscal procedures agreement. However, as of 

November 2006, only the RMI has used infrastructure funds to build several projects. 

The FSM has not yet built any projects and has more than $58 million in available 

funds, although it has made some progress in initiating projects. Progress is 

hampered by land constraints and other issues in both countries. 

Infrastructure Sector Grant Priorities and Terms

The amended compacts provide for grants to assist the FSM and the RMI 

governments in their efforts to provide adequate public infrastructure. The highest 

priority for infrastructure funding is to be given to primary and secondary education 

capital projects and projects that directly affect health and safety, including water 

and wastewater projects, solid waste disposal projects, and health care facilities. 

Secondary priority is to be given to economic-development-related projects, such as 

airport and seaport improvements, roads, sea walls, and energy development. 

Infrastructure grant terms include the amended compacts’ requirement that 5 percent 

of the annual grant be set aside, with an equal contribution from the FSM and RMI, to 

establish an Infrastructure Maintenance Fund (IMF) in each nation. Further, the 

amended compacts’ enabling legislation indicates that it is the sense of Congress that 

both countries should invest at least 30 percent of total annual sector grants in

infrastructure.32 Additionally, the amended compacts’ subsidiary fiscal procedures 

agreements require that prior to a draw down of infrastructure assistance both 

countries provide the U.S. government with (1) evidence of title, leasehold 

agreement, or other legal authority for the use of land upon which a capital 

improvement project is to be constructed, (2) a detailed project budget for each 

capital development project, and (3) a scope of work that describes the work to be 

performed and schedule from planning through construction. The fiscal procedures 

agreements also require that both countries implement infrastructure development 

plans (IDP).33 In addition, the FSM and RMI are subject to grant conditions imposed 

by the JEMCO and JEMFAC, respectively, and by OIA. (For sector grant terms and 

conditions specific to the FSM and the RMI, respectively, see GAO-07-163, app. VI and 

VII). 

FSM Infrastructure Sector

In 2004 through 2006,34 the FSM received more than $58 million in amended compact 

grants for infrastructure development. However, owing to delays in meeting fiscal 

 32 The RMI amended compact required it to allocate between 30 and 50 percent of its annual grant 

assistance to infrastructure. 33 The RMI’s plan is called an infrastructure development and maintenance plan (IDMP) while the

FSM’s is called an infrastructure development plan (IDP). In addition, while the fiscal procedures 

agreements for both countries require costs to be included in these plans, only the agreement with the 

FSM requires the IDP to include an implementation schedule. 34In this report, all years cited are fiscal years (Oct. 1-Sept. 30) unless otherwise indicated. 

Page 23 GAO-07-514R Compact Use
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procedures agreement requirements and grant terms and conditions, the grant was 

not used to build any new projects during this period. FSM’s infrastructure 

development faces numerous challenges, such as a lack of defined procurement 

processes and building standards, the need to resolve infrastructure management 

issues, lack of stakeholder agreement, and land constraints. Further, accountability 

issues have been raised by the DOI Inspector General concerning the FSM’s 

infrastructure management. 

Funding for FSM Infrastructure Sector 

In 2004 through 2006, JEMCO allocated more than $58 million in compact funds, 

approximately 26 percent, to infrastructure development in the FSM. Approximately 

$17 million was allocated in 2004,35 $17 million in 2005, and $24 million in 2006 for 

public infrastructure improvements and maintenance. In addition, in 2004 through 

2006, the U.S. Federal Aviation Administration (FAA) provided the FSM nearly $24 

million for airport improvement projects in the four states. Of the $58 million 

allocated for infrastructure from compact funds in 2004 through 2006, the FSM had 

obligated $48 million (83 percent) as of October 2006.36 These funds were intended for 

administration, infrastructure maintenance, U.S. FAA airport improvement projects’ 

matching fund requirements, and various infrastructure projects in all four states. 

A number of infrastructure sector-related activities were initiated in the FSM in 2005 

and 2006, although no compact-funded construction projects had been completed by 

October 2006. In May 2005, the FSM national government signed a contract with a 

professional architectural and engineering design firm to undertake project 

engineering, management, and administration of the FSM’s project management unit 

(PMU).37 The PMU’s responsibilities include (1) certifying projects, or determining 

that the scope and budget of a project are reasonable and justifiable, and (2) ensuring 

that projects will be designed to a professionally acceptable standard and that the 

project budget properly reflects such a standard. The PMU has certified projects in 

all four FSM states as being consistent with the priorities listed in the FSM’s IDP. As 

of November 2006, the PMU had certified 21 projects; of these, 14 projects, with a 

total estimated value of $42 million, had been approved by OIA. (Table 4 shows the 

certified FSM projects.) Pending projects in the FSM include schools, wastewater 

treatment plants, power and water distribution systems, and road and airport 

improvements. 

35 At the time that funding was allocated in August 2004, JEMCO had not concurred with FSM’s 

Infrastructure Development Plan. The concurrence came on March 11, 2005, during a special JEMCO 

meeting but only insofar as the plan involved the use of compact infrastructure sector funds for 

projects within the priorities established in the Fiscal Procedures Agreement. 36Unobligated funds remain available for use in subsequent years. 

37 As a condition for spending infrastructure funds, JEMCO required that the national government 

ensure that the projects be professionally managed. The FSM contracted with an architectural and 

engineering consulting firm based in Honolulu, Hawaii. Further, OIA required the FSM to create a 

centralized PMU within the national government in accordance with the FSM’s IDP, which stated the 

need for a centralized PMU. Additionally, OIA requires the FSM to seek its approval for individual 

infrastructure projects. 
Table 4: FSM Certified and Approved Infrastructure Projects as of June 2006 

Date 

certified by 

PMU 

Date 

approved 

by OIA Project name State 

9/19/2005 11/17/2006

FSM Matching Fund Share for FAA Airport 

Improvement Projects FSM 

12/20/2005 1/23/2006 Lelu Elementary School Kosrae 

12/20/2005 1/23/2006 Utwe Elementary School Kosrae 

1/17/2006 2/2/2006 Tafunsak Elementary School Kosrae

1/6/2006 

2/3/2006 Weno Wastewater Collection & Treatment 

Facility Chuuk 

1/17/2006 2/2/2006 Pohnpei Water Drilling Pohnpei 

2/14/2006 3/13/2006 Malem/Utwe Distribution System Upgrade Kosrae 

3/8/2006 5/12/2006 Madolenihmw High School Pohnpei 

3/8/2006 5/12/2006 Kolonia Elementary School Pohnpei 

3/8/2006 5/12/2006 Early Childhood Education Center Yap 

4/11/2006 6/1/2006 Yap State Hospital Renovation Yap 

4/28/2006 6/1/2006 Weno Island Emergency Power Provision Chuuk 

4/28/2006 6/1/2006 Nanpil Hydroelectric Power Plant Rehabilitation Pohnpei 

6/1/2006 6/1/2006 Weno Road and Drainage Upgrade (Phase I) Chuuk 

Source: FSM PMU and OIA.

Note: The table does not include PMU data on estimated project costs, because none of the projects 

shown have been advertised for bidding.

Challenges in the FSM Infrastructure Sector 

The FSM faces a number of challenges that have hindered its initiation of compactfunded infrastructure projects and that, if not corrected, may affect project 

implementation. These challenges consist of (1) a lack of defined procurement 

processes and uniform standards, (2) disagreement about project management and 

implementation, (3) persistence of unresolved land issues, (4) inadequate long-term 

planning, (5) lack of funding for maintenance, and (6) lack of technical capacity, and 

(7) weaknesses in accountability for infrastructure sector grant funds. 

• Undefined procurement processes and building standards. Delays in

establishing defined processes for procuring design and construction 

services and implementing uniform building standards has hampered FSM 

infrastructure construction and, according to an OIA official, may result in 

the procurement of less than optimal design and construction services and 

materials. The fiscal procedures agreement permits the FSM to use its own 

procedures for procurement, provided it meets the standards enumerated 

in the fiscal procedures agreement. However, the FSM did not pass a 

procurement law until June 2006, and according to an OIA official, interim 

procurement regulations implemented at that time had not been finalized 

as of November 2006. Additionally, the national government lacks a 

uniform building code, and as a result, each state applies disparate 

standards that do not conform to any international code, according to an 

OIA official. 

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• Disagreement about project management and implementation.

Disagreement between the FSM national and state governments and within 

the national government about the management of infrastructure projects 

has also hindered project implementation. According to state officials, the 

national government has not defined the states’ role in administering 

infrastructure projects. Further, according to an OIA official, FSM state 

officials refuse to recognize the PMU as the central infrastructure authority 

because they do not want to lose control of their own infrastructure 

projects. One state official indicated that the FSM states were not 

consulted during the selection of the PMU managing firm, and the governor 

of one state refused to even meet with the PMU manager. In addition, state 

officials expressed displeasure over the national government’s delay in 

implementing infrastructure projects, attributing it to centralized decision 

making. 

• Unresolved land issues. The FSM faces long-term challenges obtaining the 

clear title or long-term leasehold agreement required by the fiscal 

procedures agreement. Land in Chuuk is predominantly owned by a family 

or clan, and tradition requires the approval of all senior members of the 

clan before land can be sold. In Weno, Chuuk’s state capital, only about 1 

percent of the land is owned by the government, and much of that is in 

dispute, according to a 1998 study by a land consultancy and valuation firm 

funded by the Asian Development Bank.38 In addition, problems with land 

valuation in Chuuk have further complicated matters. The same study 

found that sales of comparable land in Weno ranged from $5 per square 

meter to $1,704 per square meter, although the study recognized that the 

higher prices may have been influenced by the availability of compact 

funds.39 Moreover, conflicts over land ownership have affected the ability 

of the Chuuk state government to provide adequate health and education 

services. For example, we visited a high school on the island of Tonoas in 

the Chuuk lagoon where classroom buildings had been closed by the 

landowner because the Chuuk state government had not paid the rent.40

 

(See fig. 6.) 

38 Neil K. Darroch, Land Consultancy & Valuation – Government Leased Land Chuuk State, a special 

report requested by the Asian Development Bank on behalf of the FSM, August 1998. 

39 JEMCO first addressed this issue in 2004, resolving that no use of compact funds for payments 

toward preexisting land purchase arrangements or leases would be allowed. JEMCO further expressed 

its concern regarding issues related to the purchase or lease of land including problems with 

determining fair market value, obtaining clear title, and avoiding real or apparent conflicts of interest 

However, the FSM fiscal procedures agreement does not prohibit the purchase of real property with 

amended compact funds and, in fact, establishes terms for its titling, use, and disposition. OIA 

indicated in May 2006 that if fair land values are established and land-ownership issues are clarified, 

compact funds may be considered for land purchase in the FSM. 

40 This issue was raised at the March 2006 mid-term JEMCO meeting, where an FSM JEMCO member 

indicated that the school closure situation had been resolved by using the “renovated” dormitories as 

temporary classrooms until the land dispute is mediated. JEMCO members accepted this explanation. 

However, we observed no evidence of “renovation” of the dormitories as indicated by the FSM official. 
Figure 6: Southern Nomoneas High School, Tonoas Island, Chuuk State 

• Inadequate long-term planning. The FSM has not adequately planned for 

its long-term infrastructure needs, according to OIA. In 2002, the FSM 

contracted with a U.S. firm to develop a 15-year infrastructure plan, which 

estimated that meeting FSM’s total infrastructure needs would require over 

$2 billion dollars. According to an OIA official, the plan employed a 

“cookie-cutter” approach to development, met with no concurrence from 

the FSM states, and was not adopted by the FSM Congress. Nonetheless, 

the national government’s IDP contains portions of this plan. Moreover, the 

IDP, which includes synopses of 11 different infrastructure sectors, 

contains long lists of projects and estimated costs but does not provide 

explanations or support for the individual projects or prioritize them as 

JEMCO requires. According to an OIA official, the FSM’s IDP is not based 

on any type of assessment of the needs of specific areas in the FSM, and no 

such assessment has been performed. 

In addition, as of November 2006, the FSM had not undertaken a costbenefit analysis to reconcile conflicting approaches to infrastructure 

design. Some FSM officials have expressed concern that the PMU’s design 

standards are too high and costly and that this may ultimately limit the 

number of projects they can build. For example, according to an OIA 

official, the PMU estimated that a standard-design school building would 

cost $1.2 million, whereas the Pohnpei government had constructed school 

buildings of a similar size for $275,000. However, the OIA official added 

that the Pohnpei-designed school buildings did not meet any type of 

recognized standards, lacking sufficient bathrooms, fire exits, and 

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wheelchair access, and that the PMU design represented a higher material 

and construction standard. OIA also noted that the Pohnpei school building 

was a shell, with no fencing, sewer systems, walkways, furniture, fixtures, 

or equipment, while the PMU design is intended to be a turn-key project.41

 

• Lack of maintenance funding. Although OIA set aside 5 percent of the 

infrastructure sector allocations in 2004 through 2006 for an FSM 

infrastructure maintenance fund, per the amended compact, the FSM had 

not provided the required matching amount as of November 2006. 

• Lack of technical capacity. The FSM lacked the technical capacity locally 

to manage its own PMU. According to OIA, the FSM national Department 

of Transportation, Communication, and Infrastructure, which houses the 

PMU, does not have the capacity to monitor and oversee the PMU 

consulting firm’s activities. The FSM has taken a step to acquire this 

capacity by employing an experienced contracting officer’s representative 

in November 2006.42 However, it is not certain that the FSM national 

government will have the technical capacity locally to ensure quality 

control should the contracting officer’s representative cease employment. 

• Weaknesses in accountability. Interior’s IG and the U.S. Army Corps of 

Engineers identified several accountability problems related to the FSM’s 

implementation of its infrastructure sector grant. In its July 2006 review,43

the IG concluded that its findings raised concerns about the FSM’s ability 

to manage the compact infrastructure grant effectively. Specifically, the IG 

found that the FSM national government (1) failed to properly plan for the 

timely construction of needed health and education infrastructure projects, 

(2) entered into a less than beneficial contract for the establishment of an 

FSM national PMU, and (3) implemented project management regulations 

containing a conflict of interest. The IG suggested the suspension of all 

infrastructure sector funding to the FSM and termination of the FSM’s 

contract with the PMU managing firm. In addition, OIA requested the Army 

Corps of Engineers to review the FSM’s contract with the PMU managing 

firm. The Corps’ November 2005 review identified items in the contract 

that were not in the FSM government’s best interest, including an openended scope of work and apparent conflict of interest in the compensation 

structure. 

41 “Turn-key” means that projects completed will be fully furnished, fully equipped with fixtures and 

equipment, and ready to move in upon completion. 

42 A contracting officer’s representative serves as a liaison between the government and the contractor 

to monitor the contractor’s performance. 

43 Department of Interior, Office of Inspector General, Memorandum: Compact Infrastructure Grant 

Poor Planning and Questionable Contracting (FSM) (Washington, D.C.: July 31, 2006). 
RMI Infrastructure Sector

The RMI’s infrastructure sector has received the largest amount of total available RMI 

compact sector funding since the beginning of the amended compact, and the 

government has met amended compact and fiscal procedures agreement 

requirements for prioritizing infrastructure spending on education and health 

projects. Between 2004 and July 2006, nine new construction projects and 17 

maintenance projects in the RMI were completed or, as of October 2006, were near 

completion. However, the RMI faces some challenges in moving forward with future 

infrastructure projects, including land constraints and a lack of planning, technical 

capacity, stakeholder buy-in, and maintenance. Further, accountability issues exist in 

the RMI’s management structure. 

Funding for the RMI Infrastructure Sector 

In 2004 through 2006, JEMFAC allocated $41.7 million to infrastructure development 

in the RMI. The allocations averaged 40 percent of the total sector grant for the past 3 

years, consistent with the amended compact requirement that between 30 percent 

and 50 percent of U.S. annual compact grant assistance be directed toward 

infrastructure development. In addition, of the total amount allocated to the RMI for 

infrastructure since 2004, JEMFAC allocated $2 million for infrastructure 

development on Kwajalein Atoll, consistent with the amended compact requirement. 

In addition, in 2004 through 2006, the FAA provided $26.1 million to the RMI for 

airport improvement projects.44 As of July 2006, the RMI had obligated 

approximately $15.5 million (37 percent) of its infrastructure sector grant allocation, 

for new construction and maintenance projects, since 2004. The RMI has focused 77 

percent of infrastructure development and maintenance funding over the past 3 years 

on primary and secondary education. 

A number of infrastructure-related activities were initiated or completed in the RMI 

in 2004 through 2006. The RMI, with the assistance of a professional engineering and 

architectural consulting firm, developed a 20-year infrastructure development 

maintenance plan (IDMP), listing prioritized projects, by conducting an extensive 

assessment of the RMI education and health infrastructure. In 2004, the RMI hired the 

same consulting firm to manage its Project Management Unit45 and to design and 

oversee individual infrastructure projects. As of November 2006, nine new 

construction projects and 17 maintenance projects in the RMI had been completed or 

were ongoing (table 5 lists these projects). During our visit to Majuro in March 2006, 

we found that there was evidence of a leasehold agreement46 for the projects under 

way at the time, in accordance with fiscal procedures agreement requirements.47

 

 44 The FAA grants are intended to provide 95 percent of project funding, with a 5 percent local 

contribution requirement. The RMI has used compact funds, with OIA’s approval, to meet this 

matching requirement. 45 The RMI contracted with a New Zealand-based architectural and engineering consulting firm. This 

was also the same firm that prepared the RMI’s IDMP. 46 The RMI government has no public land and instead must lease all land used for public purposes. 47 The standard lease agreement for Majuro and Ebeye is for 25-years,with an option to renew for an 

additional 25 years. 

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Table 5: Status of RMI Infrastructure Projects as of August 2006

New construction projects 

Project name (project 

phase or year) 

Contract 

value

Description Percentage 

completed 

Rita Elementary School 

(phase I) $1,028,255 Two 4-classroom blocks 100%

Laura High School (phase I) 567,673 One 4-classroom block 100

Laura High School (phase II, 

stage I) 145,234 

Preparation for the second 

half of conversions of 

former garment factory 99

Marshall Islands High 

School (phase I) 1,180,316 One 8-classroom block 99

Northern Islands High 

School (phase I) 872,277 

Administration building 

and dormitory 99

Jaluit High School (phase I) 2,752,000 

Two 8-classroom blocks 

and a dormitory 90

Rita Elementary School 

(phase II) 1,400,294 

Two additional classroom 

blocks 47

Marshall Islands High 

School (phase II) 4,396,047 

Three 8-classroom blocks 

and one 4-classroom block 17

Rairok Elementary School 

(phase I) 512,853 

Building structure and 

roofing repairs 12

Total new construction $12,854,949 

Maintenance projects 

Ailuk Elementary School $59,000 

Education maintenance 

project 100%

Ebeye Hospital (year 1) 307,502 

Mechanical, electrical, and 

air conditioning 

maintenance and 

architectural repairs 100

Education III 220,185 

Elementary school 

maintenance on Jaluit and 

Arno atolls 100

Health Center I 198,354 

Health center maintenance 

on Southern atolls and Arno 

(8 centers in total) 100

Health Center II 203,587 

Health center maintenance 

on the eastern atolls 100

Laura Elementary School 157,815 8 classrooms and library 100

Majuro Hospital 179,925 

Painting, flooring, wall 

repairs, seating, isolation 

ward toilets, doors, and 

shelving repairs 100

Majuro Hospital Emergency 

repairs 180,000 

Rebuilding of corridors, 

morgue, laundry, and 

storage rooms 100
Majuro Middle School 

toilets 28,586 

Toilet repairs and 

renovations 100

Marshall Islands High 

School gymnasium 65,594 

Floor and wall repairs, and 

toilet construction 100

Marshall Islands High 

School painting and fence 

repairs 99,679

Painting of two buildings 

and fencing of staff quarters 100

Marshall Islands High 

School toilets 22,622 

Toilet repairs and 

renovations 100

Jaluit High School kitchen 77,885 

Kitchen finishes repairs, 

new cooking equipment, 

and dining room flooring 100

Education I 130,796 

Elementary school 

maintenance on Majuro 100

Education IV (phase I) 168,388 

MIHS classroom ceilings 

renovations and electrical 

work 93

Education IV (phase III) 179,400 

MIHS classroom 

renovations: windows, 

floors, and painting 56

Ebeye Hospital (year 2) 307,572 

Mechanical, electrical, and 

air conditioning 

maintenance and 

architectural repairs 42

Total maintenance $2,596,987 

Total new construction 

and maintenance $15,451,936 

Source: RMI Infrastructure Development and Maintenance Program Quarterly Performance 

Monitoring Report for the third quarter of 2006.

The PMU has taken steps to ensure cost efficiency. To reduce design costs, the PMU 

developed a standard design for all new school buildings (see fig. 7). The PMU’s

design also contains features to reduce the cost of long-term maintenance. For 

example, the design minimized the use of steel reinforcements, which eventually rust 

in the corrosive ocean environment, by using fiberglass bars instead (see fig. 8). The 

cost per square foot of new construction ranged between $175 to $218.48 In addition, 

the PMU has rehabilitated existing structures, such as an abandoned garment factory 

and grocery store, to house classroom facilities. According to an OIA official, RMI’s 

PMU contractor is doing a good job and, at 15 percent for overhead and profit, is 

appropriately compensated for the quality of services and design. 

 48 Total costs also include the cost of furniture, fixtures, equipment and service connections, 

landscaping, paths, entrances, and fences. 

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Figure 7: Newly Constructed School in the RMI 

Figure 8: Corroded Rebar 

Challenges in the RMI Infrastructure Sector 

Several challenges have limited the RMI’s implementation of infrastructure projects 

or could affect its future efforts. These challenges include a lack of competition for 

construction contracts, an absence of stakeholder cooperation, unresolved land 
constraints, lack of assessment of funding decisions, inadequate facilities 

maintenance, and lack of technical capacity. 

• Lack of competition. A very limited number of construction firms in the RMI 

have the resources to meet bonding and scope of work requirements for the 

infrastructure projects, resulting in a lack of competition for infrastructure 

construction contracts. Further, in August 2004, the DOI Inspector General 

found that PMU advertising practices at the time lacked sufficient breadth to 

ensure maximum open and free competition. According to an OIA official, few 

firms outside the RMI have responded to its requests for bids because projects 

have been marketed individually. According to the PMU manager, grouping 

projects to increase the size of the total contract would likely attract the bids 

of more regional and international firms. 

• Absence of stakeholder engagement. Implementation of infrastructure projects 

in the RMI has been limited by client ministries’ lack of engagement in the 

projects. According to the PMU manager, the Ministry of Education has not 

conducted the long-term planning for school infrastructure required by the 

PMU. Further, according to an RMI official, the Ministry of Education has not 

worked diligently to resolve constraints, such as land issues affecting 

education-related infrastructure projects. Another RMI official reported that 

the Ministry of Public Works remained disengaged from infrastructure projects 

even though the PMU is housed in the Ministry of Public Work’s office. 

Further, the PMU manager told us that he had difficulty obtaining support and 

concurrence from upper management of the RMI government, which often 

created delays in the initiation or completion of projects. 

• Unresolved land use issues. Land use issues have hampered the construction

of infrastructure projects in the RMI and will likely continue to do so.49 The 

projects that have been completed or are near completion were built on land 

for which the government of the RMI had long-term leasehold interest, and the 

design of these initial projects was influenced by the availability of land with 

secured leases. For example, because of boundary disputes with landowners 

at Rita Elementary School, new school buildings had to be constructed inside 

the existing school yard; at Laura High School, new facilities had to be 

constructed on another site some distance from the original facilities, 

effectively splitting the campus in two locations and, according to the 

principal, resulting in suboptimal school management. Other projects have 

been delayed by difficulty in securing long-term leases for land with disputed 

titles. For example, as a result of ongoing land disputes between the RMI 

government and the landowners, the PMU developed three different designs 

for Uliga Elementary School in Majuro. As of November 2006, this issue 

remained unresolved, requiring the school to continue running split sessions to 

accommodate all students. In addition, the construction of Kwajalein Atoll 

 49 Land disputes are a common problem in the RMI because of traditional land ownership practices and 

the limited amount of land—only about 70 square miles. In the RMI, the paramount chiefs (iroij) 

possess certain rights over each land parcel that is held in tandem with the rights of the land manager

(alab) and the people living on the land (drijerbal). Any leasehold agreement requires the signatures of

all three groups of stakeholders, according to a nonprofit research organization based in the FSM. 

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High School has been delayed because of the inability of the RMI government 

to secure a lease on a site large enough to accommodate new facilities to meet 

needs. Although the RMI government could exercise eminent domain to secure 

land for public infrastructure use, a high-ranking RMI official told us that the 

government was not considering using this option. 

• Lack of assessment. The RMI has not assessed the effects of certain 

infrastructure funding decisions on current and future projects or the 

sustainability of current expenditure levels. The RMI, with OIA’s consent, 

dedicated $25 million in future infrastructure sector grants ($5 million dollars 

a year for the next 5 years) to the College of the Marshall Islands for facility 

improvements, to avoid accreditation penalties from the Western Association 

of Schools and Colleges. According to OIA, the RMI has not assessed how this 

funding shift will affect primary and secondary education priority projects in 

the RMI. In addition, according to OIA, the RMI government has not assessed 

the sustainability of its current rate of infrastructure expenditures. Further, 

the RMI government has not assessed the trade-offs of the PMU’s current 

designs that increase longevity and reduce maintenance by using expensive, 

brand-name products—as compared to designs that would construct more 

buildings with less costly materials.50 The PMU emphasized that its products 

are of high quality and built to last. However, according to a Ministry of Health 

official, the PMU contractor’s current design for health dispensary facilities 

was far too costly and the dispensaries could be built for half the expense.

• Inadequate maintenance. Inattention to, and insufficient funding for, 

infrastructure maintenance and security could limit the sustainability of the 

projects that the RMI completes. Although the government has established a 

separate account and contributed the requisite matching 5 percent from local 

revenues to establish the infrastructure fund, as required by the fiscal 

procedures agreement, it is not ensuring adequate maintenance. For example, 

we visited schools in the RMI that had been renovated in 2004 and 2005 with 

amended compact infrastructure sector funds where sections of ceilings were 

missing and bathrooms were in disrepair or vandalized. Moreover, officials 

from OIA and RMI indicated that the amount set aside for the maintenance 

fund—5 percent from the United States and 5 percent from the RMI—is not 

sufficient for the maintenance needed. In addition, although the PMU 

managing firm has developed 20-year maintenance plans for each of the new 

infrastructure projects, the RMI has not used the maintenance fund for these 

new projects. According to OIA, RMI officials agree on the advisability of a 

maintenance contract for each infrastructure project but have not allocated 

funding for this purpose. 

• Lack of technical capacity. Unless it replaces its current PMU manager (with 

professionals) after the contract with the firm expires, the RMI may lack the 

technical capacity to manage the PMU. The contract for the consulting firm 

that manages the RMI’s PMU expired in October 2006 but was extended until 

50 Contracts and bid documents allowed builders to substitute products of equivalent or higher quality 

from other sources, including U.S. materials. However, for some products there are no alternatives. 
September 2007 to complete ongoing projects. As of November 2006, the RMI 

government decided that newly initiated projects would be managed on a case 

by case basis. However, according to OIA, the RMI currently does not have 

sufficient technical capacity to manage the PMU, although the PMU contractor 

provided training to selected Ministry of Public Works staff as part of its 

contract requirement. 

• Accountability weaknesses. Several accountability problems regarding its 

PMU—inadequate oversight, impaired independence, and noncompetitive 

procurement—may have affected the RMI government’s implementation of 

infrastructure projects. 

o Inadequate oversight. According to RMI officials and the PMU manager, 

the RMI conducted little oversight of the PMU. Except for the RMI 

Contract Review Board, which is responsible for managing the bidding 

process for each infrastructure project, no mechanisms exist to oversee the 

PMU managing firm’s work or ensure that the PMU has adequate support 

to complete its work.

o Impaired independence. The PMU’s independence was impaired by the 

absence of a “firewall” between project management and design 

engineering, both of which were conducted by the PMU managing firm. 

According to an OIA official, this created the potential for a disincentive to 

identify problems in design. 

o Noncompetitive procurement. In a review of the RMI’s progress in 

implementing amended compact requirements, the DOI IG found that the 

RMI government did not meet fiscal procedures agreement procurement 

requirements when it hired the PMU contractor. The agreement allows for 

noncompetitive, sole-source procurement under certain circumstances.51

The DOI IG determined that none of these circumstances existed to justify 

the RMI government’s decision to award the contract for PMU 

management on a sole-sourced, noncompetitive basis. OIA concurred with 

this finding and agreed to monitor the RMI’s compliance with fiscal 

procedures agreement procurement requirements. 

 51 The fiscal procedures agreement allows for noncompetitive, sole-source procurement when the 

award of a contract is infeasible under either procedures for small purchase, sealed bids, or 

competitive proposals and when one of the following circumstances applies: (1) the item is available 

only from a single source, (2) a public exigency or emergency will not permit a delay resulting from 

competitive solicitation, and (3) competition is determined to be inadequate after the solicitation of a

number of sources. 

Page 35 GAO-07-514R Compact Use
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Enclosure IV 

Health 

The Federated States of Micronesia (FSM) and the Republic of the Marshall Islands 

(RMI) priorities for health sector grants under the amended compacts are to improve 

the delivery of health care services, and both countries are subject to several grant 

conditions. The FSM health sector received the third largest FSM sector grant, and 

limited progress has been made to improve secondary health care. The RMI health 

sector also received the third largest amount of RMI sector grant funding, although 

funding has not always followed the goals laid out in the country’s development 

plans, and the RMI faces numerous challenges to health care service improvements. 

Health Sector Grant Priorities and Terms

The goals for the FSM’s and RMI’s health sector grants under the amended compact 

are to support and improve the delivery of preventative, curative, and environmental 

care and develop the human, financial, and material resources necessary to provide 

these services. The fiscal procedures agreements for both countries emphasize the 

establishment of sustainable funding mechanisms for (1) operating community-based 

systems with emphasis on prevention, primary care, mental health, and substance 

abuse prevention and (2) operating hospitals to provide secondary care at 

appropriate levels and reduce medical referrals abroad. 

In addition to being subject to the requirements in the amended compacts and the 

fiscal procedures agreements, the FSM and the RMI are subject to grant terms 

imposed by the JEMCO and JEMFAC, respectively, and by OIA. (For sector grant 

terms and conditions specific to the FSM and the RMI, respectively, see GAO-07-163, 

app. VI and VII). Some grant conditions that appeared in the annual health sector 

grants for both countries include 

• streamlining and refining performance measures, baseline data, and annual 

performance targets; 

• conducting comprehensive evaluations of primary health care systems; and 

• using carryover funding for technical assistance in performance budgeting and 

measurement and for health-related infrastructure expenditures such as 

facility upgrades, renovation and repair, and fixed equipment and other capital 

assets. 

Furthermore, because of deficiencies found in the Chuuk state health dispensary 

program in the FSM, such as a lack of drugs, medical supplies, and equipment, and 

weak supervisory controls, JEMCO required the FSM national government and Chuuk 

state to develop a plan with specific actions and deadlines to address those 

deficiencies. 
FSM Health Sector 

In 2004 through 2006,52 the FSM’s health sector received the third largest FSM 

compact sector grant allocation, averaging 21 percent of the country’s total compact 

funding since 2004. However, allocations varied considerably across the five FSM 

governments. Limited progress was made in improving health care services provided 

at each of the four FSM state hospitals, an activity the FSM identified in its 

development plan as a priority, owing to a variety of challenges. Although primary 

health care is identified as a priority in the FSM’s development plan, the states’ health 

care budgets did not reflect this priority. Notably, Chuuk’s health care system was in 

the poorest condition and had the greatest need for resources.

Funding for the FSM Health Sector 

In 2004 through 2006, JEMCO approved health sector allocations of more than $49 

million (21 percent) of the FSM’s total compact funding (see table 6).53

Table 6: FSM Health Sector Grant Allocations, Fiscal Years 2004-2006

Grant recipient 2004 2005 2006

FSM National Government $553,613 $763,235 $764,383 

Chuuk 4,691,707 5,595,636 6,292,745

Kosrae 1,326,663 1,674,212 1,763,553

Pohnpei 5,989,461 6,200,560 4,898,393

Yap 2,881,672 3,197,090 2,675,865

Total $15,443,116 $17,430,733 $16,394,939 

Source: FSM health sector grant agreements, 2004 through 2006. 

 

FSM health sector grant obligations primarily supported ongoing operations. 

Compact funding was used for salary adjustments for some categories of health 

professionals and minor repairs. In addition, hospitals used compact funding to 

purchase supply inventories, alleviating chronic shortages of drugs and other 

supplies, and to hire staff to expand in-and out-patient service capacity. 

The FSM distributed compact health sector funds unequally on a per capita basis 

among the four states, resulting in variability in the quality of care provided in the 

states (see GAO-07-163 for further analysis). Per capita allocations for health 

reflected the disparity of compact funding allocation among the states (see fig. 9) 

with Chuuk being lower than the other states. By 2006 the gaps between state funds 

per capita was reduced as Chuuk expanded its health sector grant and Pohnpei and 

Yap reduced their grants. Still, in 2006 Chuuk received 40 percent of compact health 

sector funding available to the four FSM states but had approximately 50 percent of 

the population. In addition, Yap still received more than twice as much compact 

 52In this report, all years cited are fiscal years (Oct. 1-Sept. 30) unless otherwise indicated. 53 In addition, HHS federal grants, including Maternal and Child Health, Immunization, and Family 

Planning augmented compact funding to support prevention and other public health services. (See 

GAO-07-16, app. II for U.S. federal programs provided in the FSM.) Other revenue sources included a 

basic social services loan from the Asian Development Bank, targeted foreign assistance, health 

insurance reimbursement, and nominal service fees. 

Page 37 GAO-07-514R Compact Use
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health sector funding per person than Chuuk. Moreover, on the basis of our visits to 

FSM state hospitals and primary care facilities, Chuuk state’s health care system was 

in the poorest condition and had the greatest need for resources. In addition, the 

FSM national government received 5 percent of the FSM’s total health sector 

allocations, for health planning, donor coordination, and providing technical and 

training assistance for the FSM’s health care sector. 

Figure 9: FSM Per Capita Distribution of Health Sector Funds, Fiscal Years 

2004 through 2006 

Challenges in the FSM Health Sector 

Challenges that have limited, or may limit, the FSM’s ability to reach its compact 

goals include inadequate resources at state hospitals and limited primary health care. 

Further, Chuuk represents the most significant primary health care challenge. 

Limited Resources at State Hospitals 

We found that limited progress has been made to improve the quality of care 

provided in hospitals in the four FSM states since the amended compact took effect. 

In March 2006, we visited the state-run hospitals in Chuuk, Kosrae, Pohnpei, and Yap 

and found inadequate or nonexistent maintenance in FSM hospitals and limited 

availability of drugs and supplies.54 According to the FSM’s development plan, in 

 54 These findings were similar to our observations from 2000 (GAO-NSIAD-00-216).
order “to provide efficient, best-practice secondary and tertiary care, it is necessary 

that the state hospitals 

• be well designed and maintained; 

• have medical, nursing, professional laboratory and x-ray technicians and 

support staff who are appropriately trained in procedures and guidelines to 

enable quality control; and 

• include a working, equipped laboratory, functional x-ray equipment, and a 

full-service pharmacy.” 

Three of the four hospitals we visited were in need of maintenance. In the Chuuk 

state hospital, we found broken windows, dirty toilets, and broken equipment 

throughout the facility (see fig. 10 for photos). In addition, in 2005 the DOI Inspector 

General found that the Chuuk state hospital had unsanitary waste disposal practices, 

including the presence of biomedical waste such as used syringes located a few feet 

from the hospital’s kitchen window.55 In Kosrae and Pohnpei, we found a general lack 

of maintenance, though considerably better than in Chuuk. In the Pohnpei state 

hospital, there were ceiling tiles and floor tiles missing, while in the Kosrae state 

hospital, the corners of the floors were visibly corroded. We found the Yap state 

hospital to be the best maintained of the four FSM state hospitals. 

 55 When we visited the Chuuk state hospital in March 2006, we found that the Chuuk Department of 

Health had rectified this situation.

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Figure 10: Broken Equipment at Chuuk State Hospital, FSM

Moreover, the FSM state hospitals lacked some or all of the following: (1) sufficient 

personnel; (2) well-equipped laboratories; (3) functional equipment; and (4) 

adequately stocked pharmacies. Officials at all four hospitals cited a shortage of 

nurses and other staff. Nursing staff in Chuuk and Yap described the frustrations of 

feeling underpaid and working in consistently understaffed conditions, and said these 

conditions greatly affected the quality of patient care. Additionally, laboratories and 

radiology units lacked supplies and equipment. Only Yap state hospital had a 

laboratory in full working order. All the FSM states’ laboratories lacked supplies of 

reagents, necessary for conducting blood tests and other lab work. Some of the 

laboratory, radiology, and operating room equipment in all the hospitals was often 

outdated or broken. In addition, with the exception of Yap, the hospitals lacked the 

technical ability to maintain and repair equipment. All the FSM state hospitals had 

pharmacies with depleted stocks or varying amounts of expired drugs. 
According to an OIA official, the quality of service and organizational enhancements 

over the medium and long term continue to depend on the safety and adequacy of the 

health sector’s physical infrastructure. Facility repair, renovation, and construction 

are needed. As of August 2006, only Yap had prioritized health-related infrastructure 

projects for compact infrastructure grant use, and the hospital’s renovation has been 

approved by OIA. 

Limited Primary Health Care 

Despite the FSM’s strategic goal to improve primary health care services, historically 

only 10 percent of the health care budgets, on average, in each of the four states have 

targeted this goal. According to an OIA official, most funding for primary health care 

services in the FSM comes from HHS. Weaknesses in the primary health care system 

have led to increased costs and strain on hospitals. The primary health care system in 

the FSM states includes the dispensary/health center system and the public health 

personnel responsible for delivering primary, preventive, and public health services 

throughout the islands. A field mobile public health team from the public health 

division at each state Department of Health is supposed to provide public health 

services to municipalities and communities using the dispensaries and health 

assistants. These teams are to visit dispensaries on a regular schedule, but have 

seldom done so in the last few years because of funding constraints, poor 

management and supervision, and lack of supplies. The FSM reported that the 

secondary health care system receives approximately 70 percent of all patients that 

could have been handled at the primary health care level or who received improper, 

insufficient, or inadequate primary health care services at the dispensaries due to the 

lack of drugs, medical supplies, and equipment. All states except Kosrae showed 

evidence of cutting primary health care drugs, services, or both in order to increase 

support for hospital services. The resulting increase in inpatient and outpatient 

utilization at hospitals increased costs and overcrowding, according to the FSM’s 

development plan. 

The FSM national government and some states are taking steps to improve primary 

care by assessing need and establishing community health centers. Recognizing the 

disproportionate level of care provided at hospital-based outpatient clinics and 

emergency rooms, JEMCO required that the FSM conduct an assessment of its 

primary health care systems (for other grant conditions see GAO-07-163). The FSM 

carried out this assessment in 2005, resulting in the targeting of certain areas for 

improvement, including service delivery, procurement, and management practices. 

Yap Department of Health Services initiated a community-based project to bring 

primary health care services closer to the people. The initiative involved construction 

and operation of community health centers in all four districts of Yap’s main island. 

The local community donated the land and the facility and the Department of Health 

Services runs the centers. Each center is staffed with a physician and a nurse who are 

selected by the local community. Pohnpei State has implemented a similar program, 

and has established a Community Health Center in Kolonia. These programs have 

received HHS Community Health grants. 

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Chuuk Health Care Challenges 

The FSM faces the most significant primary health care challenges in Chuuk state. 

JEMCO twice applied special grant conditions to Chuuk’s share of the FSM’s annual 

health sector allocation and required Chuuk to develop a plan with specific actions 

and deadlines to address deficiencies, including 

• many nonfunctioning dispensaries; 

• severe problems in maintaining adequate drug and supply stocks; 

• inconsistent drug and medical supply restocking practices and poor 

inventory control; 

• antiquated or nonexistent medical equipment; 

• weak supervisory controls; 

• poor to no regulation or regular inspection of dispensary facilities, 

especially those in private homes; and 

• continued payment of wages to health assistants who fail to fulfill their job 

responsibilities (“ghost employees”). 

The Chuuk Department of Health Services established a Dispensary Reform Plan, per 

JEMCO’s requirement, and met the reporting deadline.56 As of June 2006, the 

department had taken measures to discipline or remove from the payroll nine 

employees who were not fulfilling their duties, but many challenges remain to be 

resolved, including 

• providing adequate medical supplies and drugs to functioning dispensaries; 

• eliminating all nonfunctioning dispensaries from the books and consolidating 

dispensaries where appropriate; 

• training staff; 

• renovating facilities; and 

• establishing appropriate supervisory mechanisms. 

In Chuuk, we visited 16 dispensaries in the lagoon islands, where conditions included 

(1) an absent health assistant; (2) lack of medical and pharmaceutical supplies and 

equipment, such as working blood pressure cuffs, scales, and glucometers used for 

measuring blood sugar levels in diabetics; (3) lack of maintenance of facilities; and 

(4) lack of supervision, regulation, and monitoring. In addition, land constraints 

continue to affect the department’s ability to provide adequate health services to 

communities. For example, we visited one newly constructed dispensary funded by 

Federal Emergency Management Agency funds on Tonoas Island in the Chuuk 

Lagoon that remained closed because of a dispute with the landowner over rent 

payments. 

RMI Health Sector

 

56 The deadline was May 15, 2005. 
The RMI received more than $20 million in amended compact health sector funding 

from 2004 through 2006, comprising approximately one-third of the country’s total 

revenue available for health services. Compact funding has supported both basic 

operations and improvements in capacity at Majuro and Ebeye hospitals and the 

RMI’s primary care network. Despite improvements, the RMI faces several challenges 

regarding health care service, such as a lack of qualified personnel. 

Funding for the RMI Health Sector

In 2004 through 2006, JEMFAC approved allocations of more than $20 million (21 

percent) of amended compact funding, for the RMI health sector. In addition, to meet 

the amended compact’s requirement that a portion of health sector funds go 

specifically for special needs on Kwajalein Atoll,57 health services in the atoll have 

received an average of $1.2 million annually in special health care funding since 2004 

(see table 7). Through July 2006, the RMI had targeted an additional $4.9 million in 

infrastructure sector grant funding for equipment purchases for Majuro and Ebeye 

hospitals, facilities maintenance, and community health center renovation. 

Table 7: RMI Health Sector Grant Funding, Fiscal Years 2004 through 2006 

Funding 2004 2005 2006 

Cumulative 

total

Health sector grant $ 5,894,448 $5,564,197 

 

$5,597,181 $17,055,826 

Kwajalein Atoll health

services 1,000,000 1,500,000 

 

1,085,560 3,585,560 

Annual total $6,894,448 $7,064,197 

 

$6,682,741 $20,641,386 

Source: GAO analysis of RMI health sector grant agreements for 2004-2006. 

Compact funding was augmented by HHS federal grants, including Maternal and 

Child Health, Immunizations, and Tuberculosis, that have supported prevention and 

other public health services. (See GAO-07-163, app. II, for U.S. federal programs 

provided in the RMI.) Amended compact and other U.S. program assistance 

constituted over half of the RMI’s health care budget for 2004 through 2006 (see fig. 

11). 

 57 Kwajalein Atoll is the second most populated atoll in the RMI, where many residents were displaced

within the atoll to provide space for U.S. missile testing. Many of these residents now reside on Ebeye 

Island. 

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Page 44 GAO-07-514R Compact Use 

Figure 11: Sources of RMI Health Care Funding, Fiscal Years 2004-2006 

Since 2004, compact funds have supported the RMI Ministry of Health’s basic 

operations and improvements to secondary and primary health services. Compact 

funds have been used to maintain basic health care operations, paying salaries and 

recurring expenses such as utilities, rent, and supplies. Compact funds also 

supported needed improvements in capacity at Majuro and Ebeye hospitals, such as 

hiring of new key personnel including a radiologist, and the purchase of capital 

equipment including an ambulance, a nurse call system, new beds, and computers. 

With these additions, Ministry officials expected improvements in diagnostic and 

treatment capacity. The RMI also supported its primary care network of 54 

community health centers using amended compact funding to purchase new radios 

for the outer island health care centers and dispensaries, to provide training to health 

assistants who staff the health centers, and to make facility improvements.58

Funding for primary health care in the RMI has increased from 24 percent of the 

Ministry’s total budget since 2004 to 30 percent in 2006, reflecting an increased focus 

on providing preventative and public health services. The RMI’s development plan 

states that primary health care is one of the country’s top health goals. In addition, 

primary health care is the focus of the Ministry of Health’s strategic mission and is 

viewed as the principal means to improve health status. In 2004 and 2005, hospitalbased outlays outpaced expenditures for public health, prevention, and outer island 

primary care services. The 2006 budget, however, shows the first noticeable shift of 

budgeting priorities toward primary care. These changes, if sustained over time, will 

 58 In addition, a new Majuro hospital annex, funded by the government of Japan, was opened in 

January 2006. The new annex houses administration; laboratories; and public health, dental, and 

outpatient services. RMI and OIA officials told us that the new annex has improved health care 

services. 
enable the Ministry to improve the delivery of primary health care services, according 

to OIA. 

The findings of a comprehensive assessment of the dispensary system conducted by 

the RMI, which the JEMFAC required in 2005, noted the need to increase emphasis on 

primary health care. The assessment documents various problems caused by 

insufficient funding to the primary health care system including transportation and 

communication problems and shortfalls in staffing, equipment, pharmaceuticals, 

supplies, and facility maintenance. These problems were commonplace before the 

amended compact period began, and continue to exist. Only 45 of the RMI’s 62 health 

centers and dispensaries were open in 2004. Some of these facilities were closed due 

to personnel shortages, while other facilities were non functional because of serious 

renovation and refurbishment needs. However, the Ministry of Health has since 

trained additional health assistants and completed some needed maintenance using 

infrastructure sector grant funding. In 2005, the RMI’s Ministry of Health reported 

that there were 58 functioning health centers. 

Despite improvements to the Majuro and Ebeye hospital facilities, further health care 

improvements are needed. According to a former HHS Representative to the Pacific 

Islands, the new Majuro hospital annex is “a bee hive of activity that is clean and has 

a working laboratory.” However, even with the addition of the new annex, the 

existing hospital facilities need improvement. A building assessment in the RMI’s 

IDMP indicated the existing Majuro hospital was in “very poor structural condition.” 

Moreover, in September 2005, a fire destroyed a section of the hospital that housed 

the supply room. The loss was not insured. In addition to structural damage to the 

hospital, RMI officials estimated the loss of uninsured drugs and medical supplies at 

nearly $1 million. Though emergency repairs were made to the existing facility and 

the U.S. government donated drugs, the damage led the RMI government to prioritize 

the replacement of complete wings of the hospital in its compact infrastructure grant 

to begin in 2007. The need for equipment and furniture purchases and additional 

personnel will likely stall the Ministry’s ability to redirect funding to prevention and 

primary care in the near future. 

The new Ebeye hospital, completed in 2002, opened without dedicated maintenance 

funds.59 In January 2005 the RMI government signed a comprehensive maintenance 

contract with a U.S. firm for both hospitals, using infrastructure sector grant funding. 

During our visit in March 2006, the Ebeye hospital was clean and well-maintained; 

however, severe condensation problems with the hospital’s air conditioning system 

created potential structural problems. Furthermore, persistent problems with 

Ebeye’s power supply interrupted hospital services. While Ebeye hospital is equipped 

with emergency generators, the hospital relies on the local utility for its primary 

energy needs. 

 59 The Department of the Interior funded the initial construction of the hospital, which began in 1994.

However, because of cost overruns, that funding source was depleted considerably before the project’s 

completion. Subsequently, the RMI government secured a loan from the Asian Development Bank to 

complete the project.

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Challenges in the RMI Health Sector 

The RMI faces a number of challenges to continued improvement in the delivery of 

health care services, including a lack of technical capacity, increasing prevalence of 

lifestyle diseases, and unsustainable spending. 

• Lack of technical capacity. The RMI still lacks the capacity to diagnose 

and treat certain diseases and trauma. For example, the number of cases 

sent off-island for medical referral increased by 27 percent between 2004 

and 2005.60 Moreover, Ministry of Health officials reported a persistent lack 

of qualified medical, nursing, and ancillary staff in the RMI. Officials 

indicated that this persistent shortage has affected the Ministry’s ability to 

diagnose and provide care to patients and increased its reliance on foreign 

labor. For example, the Ministry purchased expensive capital equipment 

with compact funds, such as a CT scan machine in 2005. However, the 

machine has not been used for almost 1 year due to the lack of technical 

expertise necessary to operate it, according to a Ministry official. 

• Increasing prevalence of lifestyle diseases. Despite some improvements in 

health management, lifestyle diseases continue to create challenges for the 

RMI’s health care. The incidence of diabetes, hypertension, sexually 

transmitted diseases such as HIV, and other conditions are on an upward 

trend. 

• Unsustainable spending. The impact of annual decreases in the amount of 

compact grant funding available and the pace of infrastructure 

development on health sector funding warrant close attention. In addition, 

while the fiscal procedures agreement calls for the establishment of 

sustainable funding mechanisms, user fees comprised only 2 percent of the 

Ministry of Health’s revenues in 2004 through 2006. User fees are charged 

at the government hospitals on Majuro and Ebeye and are $5 for outpatient 

services per visit and $5 for in-patient services per day including food, 

medicines, and other care provided to the patient. The RMI’s development 

plan noted that user fees could be substantially increased by selective 

increases in charges without creating hardship to patients. According to an 

OIA official, if health revenues do not keep pace with operating and 

infrastructure costs, the Ministry’s ability to improve health services and 

programs may falter.

60 In the Ministry of Health’s Annual Report for 2005, this increase was also attributed to the lifting of 

previously implemented off-island medical referral restrictions. Despite this increase, the RMI reduced 

its expenses from $5.5 million in 2000 to $1.5 million in 2005 by sending more patients to hospitals in 

the Philippines, where medical care costs are significantly less than the cost of medical care in the 

United States. 
 ENCLOSURE V 

Public Sector Capacity Building 

Under the amended compacts, public sector capacity building (PSCB) grants are 

intended to support the efforts of the Federated States of Micronesia (FSM’s) and the 

Republic of the Marshall Islands (RMI’s) internal capacity to build effective, 

accountable, and transparent governments. According to grant conditions, PSCB 

funds can be used to hire experts to advise the FSM and RMI governments; train 

personnel; and develop, purchase, or upgrade various government systems. With 

JEMCO’s agreement, the FSM allocated over 88 percent of its PSCB funds to support 

the ongoing operations of the national and state governments, activities not 

supported by the compact, rather than to build new skills and expertise. The RMI has 

only accepted PSCB funds in the past 2 years, to support the operations of its Public 

Auditor’s Office. Despite both countries’ extensive need of greater government 

capacity, PSCB has not been a priority in either country and it is difficult to 

determine what if any progress has occurred in this sector in either country. 

Public Sector Capacity Building Grant Priorities and Terms

According to the compact, PSCB funds are made available to support the efforts of 

the FSM’s and the RMI’s to build effective, accountable, and transparent national and 

local government and other public sector institutions and systems. PSCB priorities 

established in each compact’s fiscal procedures agreements are (1) financial 

management, (2) improving economic planning, (3) auditing, (4) law enforcement, 

(5) immigration controls, (6) the judiciary, and (7) compilation and analysis of

appropriate statistical indicators. In a June 2003 memorandum outlining 

implementation issues, OIA described permissible—that is, conforming—uses of the 

FSM PSCB grant, including 

• hiring teams of international experts to provide economic planning advice to 

the government, and to help develop local expertise; 

• training to upgrade the knowledge and skills of staff that perform priority 

functions, including training for law enforcement and fire fighting; 

• purchasing or upgrading of financial management systems and various 

electronic systems and data-bases for law enforcement, immigration, and 

customs; and 

• developing statistics useful for economic planning. 

The memorandum indicated that the FSM PSCB grant was not intended to fund 

existing basic operations, including salaries for permanent positions—OIA 

considered these activities to not conform with the grant’s purpose. Additionally, 

clarifying the grant’s application to specified priorities, the memorandum stated that 

the purpose of the grant is not to cover the full operating costs needed to maintain 

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entities, such as law enforcement and auditing bodies in “as is” condition, but to 

enhance and strengthen certain critical functions. 

In addition to being subject to the requirements of the amended compacts and fiscal 

procedures agreements, the FSM and RMI are subject to grant conditions imposed by 

the JEMCO and JEMFAC, respectively, and by OIA. (For sector grant terms and 

conditions specific to the FSM and the RMI, respectively, see GAO-07-163, app. VI and 

VII.) 

FSM Public Sector Capacity Building

For 2004 through 2006,61grants for FSM public sector capacity building amounted to 

11 percent of total compact funds. With the permission of JEMCO, the FSM used the 

majority of these funds for activities that did not conform to the grants purposes and 

that supported the public sector. The primary challenge affecting the use of the funds 

is the FSM’s lack of planning to end its use of the grant for activities that do not 

conform to the grant’s purpose. 

 Funding for FSM Public Sector Capacity Building 

 

JEMCO approved allocations of more than $25 million for FSM public sector capacity 

building in 2004 through 2006 (see table 8 for grant allocations to the national and 

state governments). 

Table 8: Public Sector Capacity Building Allocations to FSM Governments, 

Fiscal Years 2004 through 2006 

FSM government 2004 2005 2006 

National $4,287,697 $ 608,028 $0 

Chuuk 2,853,813 3,001,410 2,724,099 

Kosrae 1,013,866 1,113,866 1,346,976 

Pohnpei 1,676,163 1,542,488 759,254 

Yap 1,831,307 1,520,466 1,345,585 

Total $11,662,846 $7,786,238 $6,175,914 

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

In 2004, OIA agreed to allow the FSM to use the PSCB grant for basic government 

operations rather than for functions supporting the sector objectives identified in the 

compact and fiscal procedures agreement. According to a senior OIA official, the 

FSM needed to fund basic government operations to enable its use of other sector 

funds. In allowing nonconforming uses of the grant, OIA required the FSM national 

and state governments to reduce, over a 5-year period, the amounts allocated for 

nonconforming purposes and to provide a schedule of their planned reductions. As 

 

61In this report, all years cited are fiscal years (Oct. 1-Sept. 30) unless otherwise indicated. 
table 9 shows, the FSM national and state governments’ scheduled reductions of 

allocations of the PSCB for nonconforming purposes exceed the reductions required 

by OIA. 

Table 9: Reductions Scheduled by FSM Governments and Required by OIA 

for Nonconforming Use of Public Sector Capacity Building Grant, Fiscal 

Years 2005 through 2009 

(Dollars in millions) 

2005 2006 2007 2008 2009

Scheduled reductions 

FSM national government $6.31 $5.89 $4.23 $2.12 $0

Chuuk 2.74 2.65 1.77 0.88 0

Kosrae 0.91 0.91 0.91 0.46 0

Pohnpei 1.31 0.99 0.66 0.33 0

Yap 1.35 1.35 0.90 0.45 0

Total scheduled reductions $12.62 $11.79 $8.47 $4.24 $0

Total required reductions $8.49 $6.37 $4.25 $2.12 $0

Source: FSM Strategic Development Plan, 2004 through 2023. 

According to OIA, in 2004 through 2006, the FSM allocated approximately 88 percent 

of the PSCB funds for nonconforming purposes, such as supporting ongoing 

operations of the national and state offices of public safety and finance and the 

states’ attorneys general, rather than for conforming purposes such as training local 

officials in financial management and hiring outside experts on economic planning. 

The other 12 percent of PSCB funds—approximately $3 million—was allocated to 

support the basic operations of FSM states’ public auditors’ offices and for 

accounting contracts in 2004 through 2006. Although the funds were allocated for 

salaries in these offices62 rather than, for example, for training, OIA considered the 

use of funds by these offices to be appropriate. 

Although the FSM obligated most of the allocated PSCB funds for nonconforming 

purposes, a small amount—about $2 million—of the allocation for 2004 and 2005 was 

not obligated (see table 10). JEMCO directed that the FSM use the unobligated funds 

to support the PSCB grant’s goals. Accordingly, the FSM obligated these funds for 

activities such as hiring accounting advisors for some states and their component 

units and advisors for budget and procurement offices; building capacity in 

performance reporting; and undertaking an economic monitoring and capacity 

building project. 

 62 The FSM’s national audit office did not use PSCB funds to pay salaries, according to OIA.

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Table 10: FSM Unobligated Public Sector Capacity Building Funds, Fiscal 

Years 2004 and 2005 

FSM 2004 2005

National $293,771 $112,666

Chuuk 221,819 106,371

Kosrae 16,129 46,155

Pohnpei 200,476 120,204

Yap 604,739 303,004

Total $1,336,934 $688,400

Source: Office of Insular Affairs. 

The FSM also received approximately $3.9 million in technical assistance from DOI in 

2004 and 2005,63some of which it used for activities that conform to the PSCB grant’s 

goals. For example, the FSM received technical assistance funds to conduct public 

auditor training and develop its financial reporting activities. 

 Challenges in FSM Public Sector Capacity Building 

The FSM’s efforts to build public sector capacity are challenged by a lack of planning 

for the replacement of grant funding with local monies to support activities deemed 

nonconforming by OIA. 

According to OIA, the FSM national and state governments have not yet developed 

plans for replacing the funding currently used to support “nonconforming activities” 

with local revenues instead of the public sector capacity-building grant. In reviewing 

the states’ budgets it is clear that offices such as the Attorney General, Treasury, and 

Administration and Finance will all be affected. For example, in 2006, 100 percent of 

Chuuk’s public safety operations, including the police and fire departments, and more 

than 95 percent of Kosrae’s Attorney General’s Department, including its divisions of 

law and public safety, were funded with public sector capacity building grant funds. 

RMI Public Sector Capacity Building

The RMI received a total of $207,000 in 2005 and 2006 for public sector capacity 

building. Since 2005, the RMI has used the public sector capacity building grant funds 

to support one office, using technical assistance grants to support other capacity 

building needs. 

Funding for RMI Public Sector Capacity Building 

In 2005 and 2006, JEMFAC allocated approximately $103,514 annually for RMI public 

sector capacity building; the RMI did not request or receive any public sector 

capacity building funds in 2004. The RMI’s Chief Secretary informed us in March 

 

63 Funding for technical assistance includes Operations and Maintenance Improvement Grant funds. 
2006 that beginning in 2007, the RMI would not request any funds for public sector 

capacity building. 

The RMI used the allocated funds to support the RMI Auditor General’s office. The 

government also sought and received approximately $3.2 million in OIA technical 

assistance grants,64some of which supported public sector capacity building activities. 

For example, the RMI was awarded more than $500,000 in technical assistance to 

help develop performance-based budgeting and $160,000 to hire a financial 

management information systems project manager in 2004 and 2005. The RMI also 

received a grant totaling $111,400 for training public auditors. 

Challenges in RMI Public Sector Capacity Building 

Public sector capacity challenges remain in the RMI, although the government did not 

seek the PSCB grant for 2007. Examples of the challenges faced include, as we noted 

in our December 2006 report,65 the RMI government’s limited monitoring of sector 

grants, in part because of a lack of capacity in the Chief Secretary’s office and in most 

ministries that receive compact funds. According to the RMI’s Chief Secretary, the 

government does not have a plan to address the challenges the RMI faces in public 

sector capacity building. 

 

In response to our draft report, the RMI government indicated that it has many other 

sources of funding to support public sector capacity building that reduce the need to 

allocate compact funding to this sector. Even with these other sources of funding, 

including bilateral donors and regional and multilateral organizations, the RMI still 

believes that capacity building funds should be available from the U.S. government 

outside the annual sector grant allocations. However, the compact identifies public 

sector capacity building as one of the sectors in which the annual grant assistance 

should be used. While other sources of funding may be available to assist the RMI 

with public sector capacity building, as noted above, funding from these other 

sources is not assured. 

 64 Funding for technical assistance includes Operations and Maintenance Improvement Grant funds. 65 GAO-07-163. 

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ENCLOSURE VI 

Private Sector Development 

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

Republic of the Marshall Islands (RMI), private sector development grants are made 

available in part to attract foreign investment and increase indigenous business 

activity. Both countries allocated funds to their various offices such as visitor 

bureaus, land offices, and development entities. However, various factors hamper 

private sector development in both countries, including their remote geographic 

location, inadequate infrastructure, and poor business environments. 

Private Sector Development Priorities and Terms

The compacts and the fiscal procedures agreements with the FSM and the RMI name 

numerous goals for private sector development: attracting new foreign investment, 

increasing indigenous business activity by vitalizing the commercial environment, 

ensuring fair and equitable application of the law, promoting adherence to core labor 

standards, and maintaining progress toward the privatization of state-owned and 

partially state-owned enterprises, as well as engaging in other reforms. Specifically, 

the fiscal procedures agreements identify the following private sector development 

priorities: 

• advance the private development of fisheries, tourism, and agriculture; 

• employ new telecommunications technologies; 

• analyze and develop new systems, laws, regulations, and policies to foster 

private sector development; and 

• facilitate investment by potential private investors and develop business 

and entrepreneurial skills. 

The FSM’s strategic development plans have broad goals, including (1) creating a 

sound economic policy environment to support outward-oriented private-sector-led 

growth; (2) improving the competitiveness of the factors of production in the FSM to 

promote private sector development; (3) improving the environment for direct 

investment and expanding entrepreneurial and business development support 

services; (4) reducing the direct role of government in the economy; and (5) providing 

efficient and cost-effective economic infrastructure to support competitive private 

sector development. 

The RMI’s development plans have broad goals such as increasing trade and 

investment and small business and enterprise development, as well as promoting 

private sector development through agriculture and tourism. These goals are 

articulated in RMI’s annual performance plans. 

In addition to being subject to the requirements of the amended compacts and fiscal 

procedures agreements, the FSM and RMI are subject to grant conditions imposed by 
the JEMCO and JEMFAC, respectively, and by OIA (for sector grant terms and 

conditions specific to the FSM and the RMI, respectively, see GAO-07-163, app. VI and 

VII). 

FSM Private Sector Development

The private sector grant to the FSM, totaling about $12 million in 2004 through 

2006,66supported numerous offices. A variety of challenges hamper private sector 

development in the FSM. 

Funding for FSM Private Sector Development 

JEMCO allocated $10.2 million for FSM private sector grant development in fiscal 

years 2004 through 2006. Table 11 shows the allocations to the national and state 

governments in those years. 

Table 11: FSM Private Sector Grant Allocations, Fiscal Years 2004 through 

2006 

FSM government 2004 2005 2006 

FSM national government $513,091 $0 $0 

Chuuk 

1,338,874 1,403,876 1,498,616 

Kosrae 795,261 988,025 606,029

Pohnpei 525,423 657,602 887,817

Yap 613,470 989,407 1,046,701

Total $3,786,119 $4,038,910 $4,039,163 

Source: FSM private sector grant agreements, 2004 through 2006. 

The FSM national and state governments used these funds to support 40 different 

offices, including visitor bureaus, land management offices, marine and agriculture 

departments, and economic development and foreign investment activities. OIA 

questioned the performance of many of these entities and indicated that in 2007, 

grant funding would only be allocated on a project basis. 

Challenges in FSM Private Sector Development 

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

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As we reported in June 2006,67 challenges facing the FSM’s development of its private 

sector include the country’s remote geographic location, inadequate infrastructure, 

and poor business environment. Officials at the IMF and the Asian Development 

Bank informed us that legislative actions implemented by the FSM to improve the 

business environment, including bankruptcy and mortgage laws, are insufficient to 

stimulate investment and improve tax income. According to these officials, these 

reforms must be accompanied by reforms in taxes, land ownership, foreign 

investment regulations, and public sector management. Although FSM has taken 

steps in some of these areas, its progress has been slow. For example, the FSM has 

agreed on the elements of tax reform but has no plan for implementation. 

RMI Private Sector Development

Several offices in the RMI are supported with private sector development funds. 

However, the RMI government faces a variety of challenges to private sector 

development. 

Funding for RMI Private Sector Development 

JEMFAC allocated $1.1 million of amended compact funds for RMI private sector 

development in 2004 through 2006: $356,620 in 2004, $361,943 in 2005, and $361,943 in 

2006. The RMI government used the allocated funds to support the Marshall Islands 

Visitors Authority, the Small Business Development Center, the Departments of 

Resources and Development, and the Land Registration Authority.68 According to the 

RMI Chief Secretary, the RMI government will not request amended compact funds 

for private sector development in 2007. 

Challenges in RMI Private Sector Development 

Several challenges confront the RMI’s efforts to achieve its private sector 

development goal of attracting new foreign investment and increasing local business 

activity. As we recently reported,69 the RMI’s private sector, like the FSM’s, is 

hampered by its remote geographic location, inadequate infrastructure, and poor 

business environment. RMI officials reported that several legislative actions aimed at 

improving the business environment, such as bankruptcy and mortgage laws, were 

implemented in 2004 though 2006. According to RMI private sector representatives as 

well as various U.S., IMF, ADB, and country reports, enabling the business 

environment in the RMI requires substantial reforms in taxes, land ownership, and 

foreign investment regulations as well as a reduction in public sector competition 

with the private sector. However, progress on key policy reforms needed to stimulate 

investment has been slow. For example, although discussions on tax reform have 

 

67 GAO’s Compacts of Free Association: Development Prospects Remain Limited for Micronesia and 

Marshall Islands, GAO-05-66 (Washington, D.C.; June 27, 2006) 68 The Land Registration Authority stopped receiving compact funding in 2006. 69 GAO-05-633. 
begun in the RMI, these discussions have not yet produced agreement on changes to 

the government’s tax structure. 

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ENCLOSURE VII 

Environment 

Environmental goals in the Federated States of Micronesia (FSM) and the Republic of 

the Marshall Islands (RMI) include engaging in environmental infrastructure 

planning, design, construction, and operation. Grants for the two countries’ 

environment sectors were allocated to several offices to support activities such as 

environmental protection, marine conservation, solid waste management, and public 

education. However, several challenges have limited the achievement of both 

countries’ goals, including lack of enforcement and a lack of trained professionals. 

Environment Sector Grant Priorities and Terms

Under the amended compacts, the environment grants for the FSM and RMI are 

aimed in part at engaging in environmental infrastructure planning, design, 

construction, and operation. The fiscal procedures agreements between the United 

States and the two countries identify the following environment sector grant goals: 

• establishment and management of conservation areas; 

• environmental infrastructure planning, design, construction, and operation; 

and 

• involving the citizens of the respective countries in the process of conserving 

their country’s natural resources. 

The FSM’s strategic development plan contains nine goals for the environment that 

closely mirror the priorities in the fiscal procedures agreement, such as managing and 

protecting natural resources including protecting, conserving, and sustainably 

managing the FSM's marine, freshwater, and terrestrial ecosystems; and improving 

environmental awareness and education and increasing the involvement of the 

citizenry of the FSM in conserving their country's natural resources. 

The RMI’s annual development plan’s priorities are to (1) increase the effectiveness 

of environmental protection and environmental programs in the RMI and (2) increase 

environmental education and awareness through effective management of 

information and human resources. The RMI is also focused on increasing 

environmental programs on the Kwajalein Atoll. 

The FSM and RMI are subject to special terms and conditions imposed by JEMCO 

and JEMFAC. Grant conditions in the FSM and RMI included establishing 

performance measures and providing baseline data in 2004 and 2005. (For sector 

grant terms and conditions specific to the FSM and the RMI, respectively, see GAO07-163, app. VI and VII).70 

 

70 See GAO-07-163, appendixes VI and VII for details of the grant conditions and their status. 
FSM Environment Sector

The FSM has used environment sector grants to support various environmental 

activities and offices throughout the FSM’s various states. However, several factors 

have challenged the FSM’s ability to achieve its environment sector goals. 

Funding for the FSM Environment Sector 

JEMCO allocated a total of approximately $6.6 million in amended compact grants for 

the FSM’s environment sector in 2004-2006.71 Table 12 shows the annual grants to the 

FSM national and state governments. 

Table 12: Environment Sector Grants to FSM National and State 

Governments, Fiscal Years 2004 through 2006 

FSM government 2004 2005 2006 

National $ 79,477 $ 111,421 $ 0 

Chuuk 378,394 502,499 798,428

Kosrae 302,523 296,592 355,240

Pohnpei 666,944 688,181 665,807

Yap 595,854 791,258 337,977

Total $2,023,192 $2,389,951 $2,137,452 

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

The grants supported 21 offices in the FSM’s national government and four states, 

including offices responsible for environmental protection, marine conservation, 

forestry, historic preservation, public works, and solid waste management. 

Challenges in the FSM Environment Sector 

The FSM has faced several challenges that have constrained its ability to achieve its 

environment sector goals. These challenges include limited enforcement of 

environmental regulations, a lack of trained professionals, and constrained funding. 

• Limited enforcement. Enforcement of environmental regulations in the FSM 

has been limited. Environmental Protection Authorities (EPA) throughout the 

FSM have issued or threatened the imposition of citations, fines, and cease 

and desist orders in response to violations such as insufficient toilet facilities 

and lack of running water in schools, and faulty septic tank systems and raw 

sewage discharge, but enforcement of these penalties has been limited by the 

authorities’ unwillingness to pursue the violators or because the judiciary has 

been unwilling, or was too overburdened with other cases, to prosecute them. 

 71In this report, all years cited are fiscal years (Oct. 1-Sept. 30) unless otherwise indicated. 

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An EPA official in Yap indicated that the Attorney General’s office has not 

supported the EPA’s attempts to prosecute environmental cases, in part 

because the Attorney General’s office represents both the EPA and, often, 

those entities the EPA is trying to prosecute, such as the Department of Public 

Works. In Pohnpei, an EPA official noted that the courts were often 

“overloaded” and were unable to hear their cases. Furthermore, the official 

noted that although fines were levied, none were collected. Failure to collect 

fines is a problem in other states as well, and, according to an EPA official in 

Pohnpei, the lack of enforcement creates an impression that violating EPA 

regulations or failing to pay fines carries no consequences. 

• Lack of expertise. A lack of environmental and technical expertise throughout 

the FSM affects the states’ ability to ensure environmental activities’ 

compliance with regulations. For example, in Pohnpei, the state wanted to 

build a new land fill and waste water site yet lacked the expertise to evaluate 

plans for such a site, according to an OIA official. In September 2005, Yap’s 

EPA cited a community for building septic tank systems that did not meet 

general design requirements. The noncompliant septic systems used by 

residents were leaking, overflowing, and discharging sewage waste into the 

surrounding environment. Yap’s Public Works department agreed to build 

three new facilities in the community, but as of April 2006, the facilities had 

not been built; according to the Yap EPA, the Public Works department 

claimed that it lacked the design capabilities to build them. Also in Yap, the 

EPA’s Executive Director acknowledged his lack of environmental expertise, 

stating that he had tried to hire someone with the appropriate technical skills 

for the position of executive director but had not found a qualified applicant. 

• Funding constraints. Funding constraints have also hindered FSM attempts 

to meet environment sector goals. In Yap, the Public Works department 

attributed its failure to construct the new septic systems in part to a lack of 

financial resources. Other entities whose activities have environmental 

consequences have also reported funding constraints. For example, according 

to the Chuuk Public Utility Corporation, it has lacked sufficient funding to 

adequately maintain Chuuk’s sewage system, leading to broken equipment and 

consequent sewage overflows in the streets, according to Interior’s Inspector 

General. Likewise, according to Pohnpei’s EPA, the Pohnpei public utility has 

not had the resources to repair its sewer system.72 Chuuk reported that 

because of limited funds, it lacks manpower and staff capacity to protect the 

reef from contamination and marine life from illegal fishing practices. 

72 The Asian Development Bank is supplying a loan partially targeted at building a new sewage 

treatment plant and repairing the existing collection system in Pohnpei; the project is scheduled to 

begin in 2008, according to a Pohnpei EPA official. 
RMI Environment Sector

The RMI has used environment sector grants to support its environmental protection 

authority. However, several challenges have impeded the RMI’s achievement of its 

environmental goals. 

Funding for the RMI Environment Sector 

JEMFAC approved allocations of about $1.2 million for RMI environment sector 

grants in 2004 through 2006: $400,000 in 2004, $408,000 in 2005, and $408,000 in 2006. 

The portion of the RMI EPA’s budget supplied by compact funding grew from 42 

percent in 2004 to 77 percent in 2006, because of decreased funding from other 

sources. 

The RMI used the environment sector grants for, among other things, water quality 

testing, land and solid waste management, and public education. 

Challenges in the RMI Environment Sector 

Factors challenging the RMI’s efforts to achieve its environment sector goals have 

included limited enforcement, inadequate numbers of trained professionals, and 

insufficient funding. Additionally, officials from the RMI EPA noted that their 

environmental impact assessment process is not effective and their regulations are 

outdated or inappropriate. 

• Limited enforcement. Although the RMI EPA has issued citations, fines, and 

cease-and-desist orders for violations of environmental regulations, its 

assessments of penalties and enforcement of regulations were limited. For 

example, the EPA’s General Manager said that although fines were levied for 

violations such as illegal landfills, the fines have not been collected because 

the violators lack the financial resources to pay them. Furthermore, according 

to the EPA’s General Manager, although the EPA referred to the RMI Attorney 

General several cases involving RMI ministry violations of environmental 

regulations, none of the cases were prosecuted. 

• Lack of expertise. The RMI EPA lacks the environmental expertise needed to 

develop, protect, and enforce environmental regulations. For example, only 2 

of the EPA’s 20 staff members have bachelor’s degrees in environmental 

science. According to an EPA official, EPA applicants are often hired on the 

basis of their social connections rather than their expertise. 

• Resource constraints. Funding and personnel constraints also affect the RMI’s 

ability to carry out its environmental protection responsibilities. According to 

an EPA official, the office’s work in the lagoon is planned on a weekly basis 

according to fuel affordability and boat operability. For the month of January 

Page 59 GAO-07-514R Compact Use
Page 60 GAO-07-514R Compact Use 

2006, the official said, the EPA was unable to sample water quality in the 

lagoon or to monitor fishing boats dumping solid waste, because the EPA’s 

boat was under repair. EPA’s General Manager also indicated that a lack of 

financial and personnel resources for Ebeye, the RMI’s second largest 

population center, has limited environmental protection activities on the 

island. 
Enclosure VIII 

Comments from the Department of Interior 

Page 61 GAO-07-514R Compact Use
Page 62 GAO-07-514R Compact Use 

Enclosure IX 

Comments from the Federated States of Micronesia
Page 63 GAO-07-514R Compact Use
Page 64 GAO-07-514R Compact Use 

Enclosure X 

Comments from the Republic of the Marshall Islands 

Note: GAO Comments supplementing those in the report text appear at the end of 

this enclosure. 
Government of the Republic of the Marshall Islands 

Comments on the GAO Report (GAO-07-154R) 

"Compacts of Free Association: Micronesia and the Marshall Islands' Use of 

Compact Grants"

The following comments are based on a review of the draft document. The Republic of 

the Marshall Islands (RMI) would hope that the changes stated and observations made 

are clarified and reflected in the final report.1

General Comments:

It is important to note that the GAO report is based on review of FY 2004 portfolios and 

FY 2004 quarterly and annual reports and FY 2005 quarterly reports. It should be 

emphasized that RMI was just beginning performance based budgeting (PBB) and 

reporting, and much information was still being collected, reviewed, redesigned and 

reformatted at the time of the review. Many changes, revisions and refocusing have 

occurred since FY 2005 and the GAO report takes no account of this. 

Furthermore the GAO did not look at management capacity and changes in attitudes and 

understanding regarding planning and reporting, but instead focused only on areas in the 

reports (statistics) that were missing or inconsistent. It should be noted that there has 

been improvement in this area, especially in the last year, with some new staff and 

greater understanding and use of the new formats. 

The report mentions the lack of planning for decrement management. However, the 

RMI’s view is that this situation is made worse by the lack of full inflation adjustment that 

was requested during the Compact negotiations. RMI’s position continues to be that 

grants under the Compact, as amended, should be subject to full inflation adjustment to 

help maintain service levels. That said, the Government manages the decrement 

through its Medium-Term Budget and Investment Framework by trying to restrict 

expenditures within nominal levels, while recognizing that over time this will place 

pressure on services. 

The Government understands the need to strengthen the taxation system to provide 

growing revenues increases to offset the impact of the annual decrement. While 

changes to the tax structure have been limited, tax administration has improved 

significantly with improved tax auditing and better compliance leading to tangible 

revenue increases.

The RMI notes that the report contains many unattributed references to unsubstantiated 

opinions of officials and individuals in the RMI Government, the US Government and 

other organizations. In one paragraph alone (See: “Lack of qualified teachers”, page 21-

22), there are four references to unspecified persons voicing individual opinions. Such 

opinions should be attributed to the specific people or position, supported by specific 

evidence or confirmed by a second source before inclusion in the report. If the 

Government is answerable to individual opinions then those individuals should be 

required to stand by their comments. 

 

1

 Page references may vary slightly from the GAO report. 

See comment 1.

See comment 2.

Now on pp. 17-18. 

Page 65 GAO-07-514R Compact Use
Page 66 GAO-07-514R Compact Use 

Comments on Education:

The Supplemental Education Grant (SEG):

A significant portion of the report discusses the Supplemental Education Grant. RMI 

wishes to make three general points regarding the SEG. 

1) Acceptable uses of the SEG: The GAO cites specific language from the fiscal 

procedures agreement, which states that these funds are meant for "direct educational

services at the local school level focused on school readiness, early childhood

education, primary and secondary education, vocational training, adult and family 

literacy, and the smooth transition of students from high school to post-secondary

educational pursuits or rewarding career endeavors." In the discussion of the SEG, 

GAO notes that there is disagreement between the RMI and some federal agencies

about the definition of “supplemental” and, therefore, what types of programs are eligible

to be funded with this assistance.

The Government would request that GAO include a reference to the specific Compact 

legislation (Section 105, (f), 1, B, iii), which states that the funds are to “supplement

grants under Section 211 (a)(1)” of the Compact. By any logical interpretation, this

means that the grants can be used, unless otherwise specified, for any program

allowable under the Compact education sector grant, whether it is to supplement an

existing program, launch (and entirely fund) a new program, or fund any other allowable 

expenditure under the Compact. The language does not state that the grant is meant to 

provide for “supplemental programs” or even to “supplement programs.” Thus, 

according to the specific language in the legislation, and the fiscal procedures

agreement, the definition of “supplemental” is irrelevant. The only consideration for 

eligibility of program should be whether it meets the specific requirements set out in the 

fiscal procedures agreement and adheres to the original language of the Compact.

Further, the spirit of the agreement clearly suggests that the RMI use the funds to

replace the U.S. programs such as Head Start and Workforce Investment Act that were

“cashed out.” With the efficiency gains due to not having to operate under the 

sometimes-restrictive conditions of the specific grants (that are meant for implementation

of programs in the U.S. context), the RMI has been able to expand early childhood

education for less money than was used for the Head Start program. Other programs

are performing more efficiently as well, meaning that additional funds are available for 

textbook purchases, staff development, school feeding programs and other initiatives

crucial to the long-term development of the RMI. Still, the continued misinterpretation of 

the Compact language by U.S. agencies hinders the effectiveness of the Supplemental

Education Grant. 

The Government intends to work with the federal agencies to develop a shared 

understanding, based on the language of the law, of the allowable uses of these funds. 

Without a shared understanding, this will continue to hinder effective and efficient use of 

this grant assistance. 

2) Inflation adjustment for the SEG: The GAO makes note that the SEG has not yet 

been adjusted for inflation. Failure to do so, coupled with the overall reduction of the 

grant, has hindered effective and efficient use of this grant assistance. The Government

2
would request that GAO make note of the authorizing language in the Compact, which

specifically states that the grant authorization is annually adjusted for 2/3 of U.S. inflation

and further note that in its annual budget request, the Department of Education has not

requested this adjustment. As seen in Table 1, the appropriation is now more than 7%

below the authorization, and RMI is highly concerned that the value of the SEG has 

declined so sharply after only three years. The cost of textbooks, personnel, equipment,

and other items funded by SEG rises with inflation. It is the RMI’s position that the

Department of Education (DOE) requests the full authorization, with inflation adjustment,

for FY2008 and beyond. The Government recommends that GAO include a discussion

of how the failure to adjust the SEG for inflation adversely affects delivery of services 

under the grant. GAO should also include a brief examination of whether DOE requests

the full amount of authorized inflation adjustments for other programs.

Table 1: SEG Authorization vs. Appropriation

Year Inflation 2/3 Inflation SEG Authorization SEG Appropriation

2005 3.29% 2.19% $6,100,000 $6,100,000

2006 3.24% 2.16% $6,233,793 $5,941,769

2007 $6,368,443 $5,990,490

As an example of the tangible problems, this loss in value is causing, the approximately 

$400,000 that would have been available had the SEG been fully funded in FY 2007,

could have been used to provide textbooks in one subject area for five grade levels.

3) Delays in Grant Approval: GAO is correct in pointing out that in the previous two fiscal 

years SEG has been significantly delayed. RMI wishes to elaborate on some of the

difficulties that arise because the grant is subject to the annual U.S. appropriation

process. The submission and approval process does not begin until the U.S. Congress

approves the annual spending bill. As we have seen this year, this means that RMI 

cannot submit its initial SEG proposal until the fiscal year is half over. This difficulty

should be noted where the report states, on page 21, that the RMI did not submit its plan

until well into the fiscal year. In practice, this has resulted in a situation where the SEG

basically runs one fiscal year behind our regular budget. The delays are largely beyond

the control of the RMI and it is recommended that the US Government do all in its power 

to streamline the SEG appropriation process and ensure that the letter and the spirit of 

the SEG agreement be fulfilled.

Below we include specific comments on passages from the GAO report, with 

clarifications, factual corrections and questions about some of the findings.

Absenteeism:

Page 21 - Absenteeism, as the report notes, is a major problem that MOE is working to 

address. The Ministry has been granted the authority to suspend teachers by PSC, and

in the last year, has acted on at least five cases. MOE still lacks the authority to

terminate teachers who are chronically absent. 

3

Page 67 GAO-07-514R Compact Use
Page 68 GAO-07-514R Compact Use 

High dropout rates: 

Page 21 – “According to the RMI Ministry of Education, the dropout rate in 2005 was 23

percent at the primary school level (grades 1-8) and 38 percent for boys and 37 percent

for girls at the secondary school level (grade 9-12). The ministry estimated that less

than 25 percent of the students now enrolled in first grade will complete high school."

The last sentence is not accurate since this figure is based on recorded completion rates 

for students who enrolled in first grade 12 years ago. The estimate was of historical

performance, not a projection of future performance. Additionally, because the grade 1-

8 completion rate has been understated, the overall completion rate for grades 1 to 12

has been understated. Previously, Ministry of Education (MOE) divided the number of 

students completing grade 8 by the number of students enrolling in grade 1 eight years 

earlier. Due to the high number of students who repeat grade 1, this overestimates the

dropout rate. Using this methodology to calculate the dropouts between grade 1 and 2 

would result in a nearly 25% dropout rate, but this is simply not true. MOE has

examined the progress of a sample of grade 1 students and found that the high number 

of repeaters artificially inflates the dropout rate. Additionally, due to progress in early

childhood enrollment, student retention, and expansion of the secondary school system,

the MOE estimates the completion rate will be significantly higher for students enrolling

in first grade today. Conservatively, MOE estimates that 50% of students who enroll in 

grade 1 today will complete high school, based on 95% enrollment in kindergarten, a

90% completion rate of 8th grade, a 95% transition rate to secondary school programs,

and a 65% completion rate for secondary school.

Inadequate classroom facilities:

Page 22 - “Despite the use of compact infrastructure funds to build new classrooms at 6 

schools, many RMI schools remain in poor condition. For example, classrooms at the

Marshall Islands High School are unsafe because ceilings have collapsed (see fig. 5), 

while schools on Ebeye have no reliable electricity owing to rolling blackouts on the

island. Access to secondary education is also limited by the lack of available classroom 

space; students take an entrance test to enter public secondary schools because of 

limited capacity at the schools. We calculated, based on data from the 1999 RMI census

that current enrollment is only about 40 percent of the secondary school-aged

population. The principal of Ebeye High School told us the school would not have

enough classrooms for the new school year and that they were converting an old

warehouse into classroom space." 

In footnote 25 to this section, the report states: “We estimated RMI’s 2005 secondary

school-aged population at 8,583; however, the enrollment in RMI public and private

secondary schools combined for that same period was only 3,414.” 

First, RMI would request that GAO clarify the second sentence of this passage. In 

reading this section, it should be clear that only a few classrooms at the time of the 

team’s visit were in a state of disrepair where parts of the ceiling were loose. 

Additionally, the RMI wishes to update GAO on progress made with new construction at 

Marshall Islands High School (MIHS). Currently, classes are moving out of the old 

buildings into new ones, remedying the situation. Although these buildings had not been 

constructed at the time of the team’s visit, RMI would request that GAO note that plans 

4

See comment 3,

footnote 24. 

Now on p. 18. 

See comment 4,

new footnote 26. 

Now on p. 18. 
for remedying the situation existed at the time of its visit, perhaps with a footnote noting

that the new buildings are now being utilized.

Second, RMI requests clarification of the calculation of the secondary school-aged 

population included in the footnote. According to the report, based on calculations from

the 1999 census the secondary school age population at the time of the report was

approximately 8,583. RMI disputes this figure. The 1999 census says that there were 

7,413 10-14 year olds, or about 1,480 per year cohort. Using this figure as a basis for a 

four-year secondary school population yields an estimate of just under 6,000 students.

The most accurate estimate would calculate the number of 8-11 year olds at the time of

the 1999 census, which MOE calculates to be 5,616. This estimate assumes that two 

years of the secondary school population in 2006 is made up of individuals who were 8

and 9 at the time of the 1999 census, and the other two years of the population is made

up of individuals who were 10 and 11 at the time of the census. 

If the GAO population estimate is referring to a larger age-range, the report should 

clearly state this, but RMI believes that the appropriate way to estimate school aged

population is to assume one year per grade level. If MOE calculations are correct, this

would yield a 61% enrollment rate for secondary schools.

Finally, MOE wishes to clarify that the “warehouse” discussed in the final sentence was

actually an old classroom building from the previous school. Upon renovation, it has 

served the school well as a classroom building. 

Comments on Infrastructure:

Absence of stakeholder engagement:

Page 37 – During 2006 the PMU carried out extensive handover training to MoPW

personnel resulting in 3 staff members being transferred to the PMU. The training ranged

from project identification to contract formulation and construction in the maintenance 

sector (upper management RMI Government). A series of meetings has been held with 

key government officials, award procedures have been revised and information is now 

more forthcoming as the various departments become more familiar with the procedures

associated with the Compact. 

Unresolved land issues

Page 38 – “as a result of ongoing land disputes between the RMI government and the 

landowners, the PMU developed three different designs for Uliga Elementary School in 

Majuro. As of November 2006, this issue remained unresolved, requiring the school to 

continue running split sessions to accommodate all students.”

The RMI Environmental Protection Authority (EPA) closed down Uliga Elementary 

School and the students have been temporarily housed, with the assistance of the PMU. 

A Consortium has been established to reclaim land upon which the new Uliga

Elementary School will be built. The project is currently in the EIA stage. Split schedules

are no longer in use, and all UES students receive a full day of instruction. The school is 

now located on the campus of one of the local private schools until the construction of a

new facility. Plans are moving forward to begin this large construction effort.

5

See comment 5,

footnote 27. 

Now on p. 19. 

Page 69 GAO-07-514R Compact Use
Page 70 GAO-07-514R Compact Use 

Page 38 – “the construction of Kwajalein Atoll High School has been delayed because of 

the inability of the RMI Government to secure a lease”

Funding for Kwajalein Atoll High School has been reprogrammed to cover shortfalls in 

other projects on sites with leases. 

Lack of Assessment:

Page 38 - The Government’s infrastructure allocation for the College of the Marshall

Islands (CMI) was encouraged by OIA as mentioned in the report. However, it seems

somewhat contradictory for OIA to then criticize the RMI for not assessing the impact this 

will have on primary and secondary education. It also needs to be borne in mind that the

$5 million per year allocation for CMI over five years is subject to the CMI having

projects ready for implementation. The allocation is not a blind allocation of funds to CMI 

for the College to then allocate to projects as it sees fit. 

Page 38 – “RMI government has not assessed the sustainability of its current rate of 

infrastructure expenditures”. This is unclear, unless it refers to the lack of maintenance 

money being set aside to maintain new buildings. 

Page 38 – “the RMI government has not assessed the trade offs of the PMU’s current 

designs that increase longevity and reduce maintenance by using expensive, brand

name products”. There is a long history in the Marshall Islands of poor construction of

public facilities using inferior materials and inadequate supervision. Combined with lack 

of adequate maintenance and the harsh environment, this has led to the need to

Government having to replace buildings earlier than anticipated. The Government does

not want a repeat of this. It has assessed that better quality construction, with better 

materials, is the best way to ensure the value for money from infrastructure funds. This

assessment was mindful of relative life spans of infrastructure that would result from the

use of differing quality materials. 

Lack of technical capacity:

Page 39 – Under the RMI agreement with the PMU, it has trained MoPW staff in the

formulation and execution of maintenance contracts. The Government concedes that 

there is a need to provide more locally trained engineers and architects. The 

Government scholarships program is trying to address this need to develop the capacity

to implement the RMI’s capital building program. 

Accountability Weaknesses 

Page 40 – “Noncompetitive procurement” – After the completion of the infrastructure

assessment for the entire stock of infrastructure for education and health and after the 

completion of the first batch of Project Development Plans (PDP) for the schools, the 

infrastructure projects were already running behind schedule, six months after the 

Compact, as Amended, came into force. All offices and agencies working with BECA

were more than pleased with the quality and quantity of work being produced and there

was a need to make sure that projects moved forward. In addition DOI/OIA was also

pleased with the quality of work and was also concerned about the potential delays in

6

See comment 6.

Now on p. 34. 
starting projects. In order to maintain momentum and reduce delays in construction, it 

was decided that using the sole sourcing provisions of the Fiscal Procedures Agreement 

was in the best interest of the RMI. 

Comments on Health:

Having 54 health centers, let alone 45, scattered over an ocean area of 700,000 square

miles of ocean is a realistic challenge. Transportation and communication problems will

continue, even within an atoll. In 2004, 45 of the health centers mentioned here were

operational, and not just open as stated here. The health centers that were closed were

part of the Ministry’s assessment to provide added responsibilities to health assistants to 

manage two health centers, especially those health centers and communities that are in

close proximity to one another and with population of less than 50, and construct new

ones. There were communities with no health center infrastructure, but the health

assistants continue to provide primary care from their own homes. Currently 54 health

centers are in operation.

Page 51 – Majuro/Ebeye hospital facilities

Such comments on the Majuro hospital annex do not truly reflect how much the health

facilities are appreciated and utilized, and how important a ‘working laboratory’ is to

diagnosing illness. It must be noted that the Majuro Hospital laboratory is currently

developing its capabilities for histology and cytology as a referral lab. The RMI’s goal to

target prevention and primary health care will not be interrupted in the future and the

MOH has already taken the initial step to review its organizational structure to reorganize

to focus even more on prevention and primary health care at all levels of care.

Page 52-53 - Challenges in the RMI Health Sector 

Increasing prevalence of lifestyle diseases: Like any developing country, changes in 

lifestyles affect the increase in both non-communicable and communicable diseases.

Increasing people’s understanding of health issues remains a challenge. MOH is taking

steps to address these problems by, among other things: (i) the establishment of the

Diabetes Wellness Center in collaboration with the Canvasback Incorporated; (ii) 

development of the Non-Communicable Disease Strategic Plan which includes physical

activities, nutrition, food safety/production; and (iii) development of the RMI National HIV

Strategic Plan.

Unsustainable spending: The user fees for outpatient clinics and inpatient services are

not the only sources of revenue for the MOH. An $8 fee is charged for physical 

examinations of food handlers and taxi drivers every six months and for students.

Although fees are also charged at the Laura Health Center at a lower fee, other than 

delivery charge of the same $5, the revenues generated from the Laura Health Center 

and outer islands health centers are still minimal. The MOH also has access to the

Health Fund, which is levied as a deduction from wages and salaries. This revenue 

sources provided $6.2 million to the Ministry in FY 2005. 

7

Page 71 GAO-07-514R Compact Use
Page 72 GAO-07-514R Compact Use 

Comments on Public Sector Capacity Building

Page 58-59: The report is implicitly critical of the Government for not allocating any funds 

to addressing Public Sector Capacity Building. However, this is a deliberate policy of the 

Government in focusing its Compact sectoral grants in the education and health sectors,

the Government’s two top priorities. The view is the capacity building is best addressed, 

in the long term, through the education system rather than direct interventions in specific

areas of the public sector. That said, the Government is considering assigning funds to

this sector in order to support the implementation of Performance Based Budgeting

(PBB), which in effect it has been done in the past with unspent carry over funds. 

The Government has many other sources of funding to support public sector capacity

building that reduces the need to allocate funding to this sector. The fact that funds are

not allocated to this sector out of Compact sectoral grants does not necessarily mean

the Government places a low priority on this area. There are other sources of funding

from bilateral donors, regional and multilateral organizations to address these capacity

building needs and these are often approached before consideration is given to 

reallocating funds from the other priority sectors. Despite this, capacity building funds 

should be available from the US Government outside of the sectoral grant allocation.

Comments on the Environment Sector 

Page 69 - Limited Enforcement: The report singled out lack of enforcement of the

regulations as one of the issues to overcome at the Environmental Sector, however this

responsibility falls on not just Environmental Protection Authority but also the Attorney 

General’s Office, Local Council, etc.

8

See comment 7.

Now on pp. 50-51. 
The following are GAO’s comments on the Republic of the Marshall Islands letter 

dated May 4, 2007. 

1. GAO conducted its field work in March 2006. At that time, only project 

reporting for the first quarter of fiscal year 2006 was available. We therefore 

chose not to include those reports in our scope. However, we will review the 

improved reporting during our next mandated review. 

2. GAO’s practice is to not specifically identify individuals by name. However, 

regarding the specific section, “Lack of Qualified Teachers” the RMI identified 

as an example of having unsubstantiated opinions, we have included the 

position titles of those individuals who provided us with information, including 

the Minister of Education, whom we believe to be an authoritative voice on the 

matters regarding RMI’s educational system. 

3. The RMI contends that about 50 percent of the students enrolling in first grade 

today will graduate high school, instead of the 25 percent we reported, which 

was in the Ministry of Education’s 2005-2006 Portfolio document. The RMI told

us that the 25 percent figure in the 2005-2006 Portfolio document was outdated 

and inaccurate. 

4. Per the RMI’s request we added a footnote indicating that the new buildings 

are now being utilized. However, we did corroborate this fact and therefore 

attribute the statement to the government of the RMI. 

5. GAO’s initial estimate of 8,583 was based on secondary schools including 

grades 7 through 12 (a 6 year period), whereas the RMI estimate based it’s 

figure on secondary schools including only grades 9 through 12 (a 4 year 

period). To reconcile the difference in timeframes, GAO’s new figure of 

approximately 6,000 students is based on the same 4 year period used by the 

RMI. 

6. Concerns about the lack of an assessment by the RMI of its current rate of 

infrastructure expenditures were raised by OIA. The concerns relate to the 

overall sustainability of infrastructure as well as the lack of money being set 

aside for maintenance. 

7. The compact identifies public sector capacity building as one of the sectors in 

which the annual grant assistance should be used. The RMI’s continued 

reliance on external sources of funding to support public sector capacity 

building leaves it vulnerable to the decisions of donors and regional and 

multilateral organizations. 

Page 73 GAO-07-514R Compact Use
Page 74 GAO-07-514R Compact Use 

Enclosure XI 

GAO Contact and Staff Acknowledgments 

GAO Contact 

David Gootnick (202) 512-3149 

Staff Acknowledgments 

In addition to the person named above, Emil Friberg (Assistant Director), Ming Chen, 

Tracy Guerrero, and Julie Hirshen were key contributors to this correspondence. Joe 

Carney, Etana Finkler, Reid Lowe, and Mary Moutsos provided technical assistance. 

(320466)
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