Testimony 

Before the Subcommittee on Asia and the 

Pacific, Committee on International 

Relations, House of Representatives 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 1:30 p.m. EDT 

Wednesday, 

June 18, 2003 

COMPACT OF FREE 

ASSOCIATION 

An Assessment of the 

Amended Compacts and 

Related Agreements 

Statement of Susan S. Westin, Managing Director 

International Affairs and Trade 

GAO-03-890T 
The amended Compacts of Free Association between the United States and 

the FSM and the RMI to renew expiring U.S. assistance could potentially 

cost the U.S. government about $6.6 billion in new authorizations from the 

Congress. Of this amount, $3.5 billion would cover payments over a 20-year 

period (2004-2023), while $3.1 billion represents payments for U.S. military 

access to Kwajalein Atoll in the RMI for the years 2024 through 2086. While 

the level of annual grant assistance to both countries would decrease each 

year, contributions to trust funds – meant to eventually replace grant funding 

– would increase annually by a comparable amount. Nevertheless, at an 

assumed annual 6 percent rate of return, earnings from the FSM trust fund 

would be unable to replace expiring grant assistance in 2024, while earnings 

from the RMI trust fund would encounter the same problem by 2040. 

The amended Compacts strengthen reporting and monitoring measures that 

could improve accountability over assistance, if diligently implemented. 

These measures include the following: assistance grants would be targeted 

to priority areas such as health and education; annual reporting and 

consultation requirements would be expanded; and funds could be withheld 

for noncompliance with grant terms and conditions. The successful 

implementation of the many new accountability provisions will require 

appropriate resources and sustained commitment from the United States, 

the FSM, and the RMI. 

Regarding defense, U.S. military access to Kwajalein Atoll in the RMI would 

be extended from 2016 through 2066, with an option to extend through 2086. 

Finally, Compact provisions addressing immigration have been 

strengthened. For example, FSM and RMI citizens entering the United States 

would need to carry a passport, and the U.S. Attorney General could, 

through regulations, specify the time and conditions of admission to the 

United States for these citizens. 

Estimated New U.S. Authorizations for the FSM and the RMI, Fiscal Years 2004-2086 

(U.S. dollars in millions) 

FSM RMI Total 

Fiscal years 2004-2023 $2,296 $1,204 $3,500

Fiscal years 2024-2086 Not applicable 3,081 3,081

Fiscal years 2004-2086, total 

possible new U.S. 

authorizations for the FSM 

and the RMI $2,296 $4,285 $6,581

Source: GAO estimate based on the amended Compacts. 

Note: These figures are adjusted for inflation. In 2004 U.S. dollars, the total cost would be $3.8 

billion.

In 1986, the United States entered 

into a Compact of Free Association 

with the Pacific Island nations of 

the Federated States of Micronesia, 

or FSM, and the Republic of the 

Marshall Islands, or RMI. The 

Compact provided about $2.1 

billion in U.S. funds, supplied by 

the Department of the Interior, 

over 17 years (1987-2003) to the 

FSM and the RMI. These funds 

were intended to advance 

economic development. In a past 

report, GAO found that this 

assistance did little to advance 

economic development in either 

country, and accountability over 

funding was limited. The Compact 

also established U.S. defense rights 

and obligations in the region and 

allowed for migration from both 

countries to the United States. 

The three parties recently 

renegotiated expiring economic 

assistance provisions of the 

Compact in order to provide an 

additional 20 years of assistance 

(2004-2023). In addition, the 

negotiations addressed defense and 

immigration issues. The House 

International Relations and 

Resources Committees requested 

that GAO report on Compact 

negotiations. 

This testimony discusses 

negotiated changes to the levels 

and structure of future assistance, 

including the potential cost to the 

U.S. government. Further, it 

reviews accountability, defense, 

and immigration changes brought 

about by the amended Compacts 

and related agreements. 

www.gao.gov/cgi-bin/getrpt?GAO-03-890T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Susan S. 

Westin at (202) 512-4148 or 

WestinS@gao.gov. 

Highlights of GAO-03-890T, a testimony 

before the House Committee on 

International Relations, Subcommittee on 

Asia and the Pacific 

June 18, 2003 

COMPACT OF FREE ASSOCIATION 

An Assessment of the Amended 

Compacts and Related Agreements 
Page 1 GAO-03-890T Compact of Free Association 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to testify on the Compact of Free 

Association between the United States and the Pacific Island nations of 

the Federated States of Micronesia, or the FSM, and the Republic of the 

Marshall Islands, or the RMI.1 In 1986, the United States entered into this 

compact with the two countries after almost 40 years of administering the 

islands under the United Nations Trust Territory of the Pacific Islands. The 

Compact has provided U.S. assistance to the FSM and the RMI in the form 

of direct funding as well as federal services and programs for almost 17 

years. Further, the Compact establishes U.S. defense rights and obligations 

in the region and allows for migration from both countries to the United 

States. Provisions of the Compact that address economic assistance were 

scheduled to expire in 2001; however, they can remain and have remained 

in effect while the United States and each nation renegotiated the affected 

provisions.2

Today I will discuss our review of the amended Compacts and related 

agreements that the United States signed with the FSM and the RMI in 

April and May of 2003, respectively. (According to a Department of State 

official, while the original Compact was one document that applied to both 

the FSM and the RMI, the Compact that has been amended is now a 

separate Compact with each nation.) Specifically, I will discuss changes to 

levels and structure of future assistance, including the potential cost to the 

U.S. government. Further, I will comment on changes in accountability 

and other key issues addressed in the amended Compacts and related 

agreements. Our testimony is based on our reports on the Compact 

published over the past several years as well as our assessment of the 

amended Compacts that was requested by Chairman Leach and Ranking 

Minority Member Faleomavaega, Subcommittee on Asia and the Pacific, 

House Committee on International Relations; Ranking Minority Member 

Lantos, House Committee on International Relations; Ranking Minority 

Member Rahall, House Committee on Resources; and Congressman 

Bereuter. 

 1

The FSM had a population of about 107,000 in 2000, while the RMI had a population of 

50,840 in 1999, according to each country’s most recent census. 

2

Other Compact provisions are also due to expire in late 2003 if not renegotiated and 

approved. These include (1) certain defense provisions, such as the requirement that the 

FSM and the RMI refrain from actions that the United States determines are incompatible 

with U.S. defense obligations (the defense veto), and (2) federal services listed in the 

Compact. 
Page 2 GAO-03-890T Compact of Free Association 

The amended Compacts of Free Association with the FSM and the RMI to 

renew expiring assistance would require about $3.5 billion in funding over 

the next 20 years with a total possible authorization through 2086 of $6.6 

billion from the U.S. Congress.3 The amended Compacts would provide 

decreasing levels of annual assistance over a 20-year term (2004-2023) in 

order to encourage budgetary self-reliance. Simultaneously, the Compacts 

would require building up a trust fund (with contributions that would 

increase annually) for each country to generate annual earnings that 

would replace the grants that end in 2023. Per capita grant assistance 

would fall over the 20-year period, particularly for the RMI. At an assumed 

trust fund rate of return (6 percent), in 2024 the RMI trust fund would 

cover expiring grant assistance, while the FSM trust fund would be 

insufficient to replace grants. By the year 2040, however, RMI trust fund 

returns also would be unable to replace grant funding. 

The amended Compacts include many strengthened reporting and 

monitoring measures that could improve accountability if diligently 

implemented. The amended Compacts and related agreements have 

addressed most of the recommendations that we have made in past 

reports regarding assistance accountability. For example, assistance 

would be provided through grants targeted to priority areas, such as health 

and education, and with specific terms and conditions attached. Annual 

reporting and consultation requirements would be expanded, and funds 

could be withheld for noncompliance with Compact terms and conditions. 

The successful implementation of the many new accountability provisions 

will require a sustained commitment and appropriate resources from the 

United States, the FSM, and the RMI. 

The amended Compacts address other key issues. One key change to 

Compact defense provisions would occur – U.S. military access to 

Kwajalein Atoll in the RMI could be extended from 2016 to 2086. This 

extension would cost $3.4 billion of the total possible authorization of $6.6 

billion. Amended Compact provisions addressing one additional key area – 

immigration – have been strengthened by adding new restrictions and 

 3

Although the amended Compacts have been signed by the U.S., FSM, and RMI 

governments, they have not been approved by the legislature of any country. Therefore, in 

our testimony we describe the amended Compacts’ requirements and potential impact in a 

conditional manner in recognition that the Compacts have not yet been enacted. The total 

possible cost to renew expiring assistance in fiscal year 2004 U.S. dollars would be $3.8 

billion on the basis of the Congressional Budget Office forecasted inflation rate (see 

appendix). 

Summary 
Page 3 GAO-03-890T Compact of Free Association 

expressly applying the provisions of the Immigration and Nationality Act 

of 1952 (INA), as amended (P.L. 82-414), to Compact migrants. FSM and 

RMI citizens entering the United States would need to carry a passport, 

and regulations could be promulgated that would impose time limits and 

other conditions on a Compact migrant’s admission to the United States. 

In 1986, the United States and the FSM and the RMI entered into the 

Compact of Free Association. This Compact represented a new phase of 

the unique and special relationship that has existed between the United 

States and these island areas since World War II. It also represented a 

continuation of U.S. rights and obligations first embodied in a U.N. 

trusteeship agreement that made the United States the Administering 

Authority of the Trust Territory of the Pacific Islands.4

 The Compact 

provided a framework for the United States to work toward achieving its 

three main goals: (1) to secure self-government for the FSM and the RMI, 

(2) to assist the FSM and the RMI in their efforts to advance economic 

development and self-sufficiency, and (3) to ensure certain national 

security rights for all of the parties. The first goal has been met. The FSM 

and the RMI are independent nations and are members of international 

organizations such as the United Nations. 

The second goal of the Compact – advancing economic development and 

self-sufficiency for both countries – was to be accomplished primarily 

through U.S. direct financial payments (to be disbursed and monitored by 

the U.S. Department of the Interior) to the FSM and the RMI. For the 15-

year period covering 1987 through 2001, funding was provided at levels 

that decreased every 5 years. For 2002 and 2003, while negotiations to 

renew expiring Compact provisions were ongoing, funding levels 

increased to equal an average of the funding provided during the previous 

15 years. Thus, funds available to the two governments were “bumped-up” 

 4

From 1947 to 1986, the United States administered this region under a trusteeship 

agreement that obligated it to foster the development of political institutions and move the 

Trust Territory toward self-government and promote economic, social, and educational 

advancement. In addition, the agreement allowed the United States to establish military 

bases and station forces in the Trust Territory and close off areas for security reasons as 

part of its rights. In addition to the islands of the FSM and the RMI, the Trust Territory 

included Palau and the Northern Mariana Islands. 

Background 
Page 4 GAO-03-890T Compact of Free Association 

during the last 2 years of assistance.5 For 1987 through 2003, U.S. 

assistance to the FSM and the RMI to support economic development is 

estimated on the basis of Interior data, to be about $2.1 billion.6

 We have 

found that many Compact-funded projects in the FSM and the RMI 

experienced problems because of poor planning and management, 

inadequate construction and maintenance, or misuse of funds. Further the 

U.S., FSM, and RMI governments provided little accountability over 

Compact expenditures and have not ensured that funds were spent 

effectively or efficiently. 

Economic self-sufficiency has not been achieved. Although total U.S. 

assistance (Compact direct funding as well as U.S. programs and services) 

as a percentage of total government revenue has fallen in both countries 

(particularly in the FSM), the two nations remain highly dependent on U.S. 

funds. U.S. direct assistance has maintained standards of living that are 

higher than could be achieved in the absence of U.S. support. In addition, 

U.S. programs have been extended to the FSM and the RMI to provide a 

wide range of critical services, such as health care, education, 

telecommunications, and job training, but in most cases local conditions 

have impaired the programs’ effectiveness.7

The third goal of the Compact – securing national security rights for all 

parties – has been achieved. At the time that the Compact was negotiated, 

the United States was concerned about the use of the islands of the FSM 

 5

The FSM received additional U.S. grant assistance of about $17.5 million in fiscal year 2002 

and about $18 million in fiscal year 2003. The RMI received additional U.S. grant assistance 

of about $3.1 million in fiscal year 2002 and $3.3 million in fiscal year 2003 (excluding 

increased payments related to Kwajalein land use). 

6

The cost of prior assistance in fiscal year 2004 U.S. dollars was $2.6 billion. This estimate 

does not include payments for Compact authorized federal services or U.S. military use of 

Kwajalein Atoll land, nor does it include investment development funds provided under 

section 111 of Public Law 99-239. Additionally, the Compact served as the vehicle to reach 

a full settlement of all compensation claims related to U.S. nuclear tests conducted on 

Marshallese atolls between 1946 and 1958. In a Compact-related agreement, the U.S. 

government agreed to provide $150 million to create a trust fund. While the Compact and 

its related agreements represented the full settlement of all nuclear claims, it provided the 

RMI with the right to submit a petition of “changed circumstance” to the U.S. Congress 

requesting additional compensation. The RMI government submitted such a petition in 

September 2000, which the U.S. executive branch is still reviewing. 

7

For more information on U.S. programs and services provided to the FSM and the RMI, see 

U.S. General Accounting Office, Foreign Assistance: Effectiveness and Accountability 

Problems Common in U.S. Programs to Assist Two Micronesian Nations, GAO-02-70

(Washington, D.C.: Jan. 22, 2002). 
Page 5 GAO-03-890T Compact of Free Association 

and the RMI as “springboards for aggression” against the United States, as 

they had been used in World War II, and the Cold War incarnation of this 

threat – the Soviet Union. The Compact and its related agreements 

established several key defense rights for all three countries. The Compact 

obligates the United States to defend the FSM and the RMI against an 

attack or the threat of attack in the same way it would defend its own 

citizens. The Compact also provides the United States with the right of 

“strategic denial,” the ability to prevent access to the islands and their 

territorial waters by the military personnel of other countries or the use of 

the islands for military purposes. In addition, the Compact grants the 

United States a “defense veto” over actions by the FSM or the RMI 

governments that the United States determines are incompatible with its 

authority and responsibility for security and defense matters in these 

countries. Finally, through a Compact-related agreement, the United States 

secured continued access to military facilities on Kwajalein Atoll in the 

RMI through 2016.8

 In a previous report, we identified Kwajalein Atoll as 

the key U.S. defense interest in the two countries.9

 Of these rights, only the 

defense veto is due to expire in 2003 if not renegotiated. 

Another aspect of the special relationship between the FSM and the RMI 

and the United States involves the unique immigration rights that the 

Compact grants. Through the original Compact, citizens of both nations 

are allowed to live and work in the United States as “nonimmigrants” and 

can stay for long periods of time, with few restrictions.10 Further, the 

Compact exempted FSM and RMI citizens from meeting U.S. passport, 

visa, and labor certification requirements when entering the United States. 

In recognition of the potential adverse impacts that Hawaii and nearby 

U.S. commonwealths and territories could face as a result of an influx of 

FSM and RMI citizens, the Congress authorized Compact impact payments 

to address the financial impact of these nonimmigrants on Guam, Hawaii, 

 8

U.S. access to Kwajalein Atoll is established through the U.S.-RMI Military Use and 

Operating Rights Agreement (MUORA). Funding provided for U.S. military access to 

Kwajalein for the years 1987 to 2003 is estimated, on the basis of Interior data, to be $64 

million for development assistance and $144 million for the RMI government to 

compensate landowners for U.S. use of their lands. 

9

See U.S. General Accounting Office, Foreign Relations: Kwajalein Atoll Is the Key U.S. 

Defense Interest in Two Micronesian Nations, GAO-02-119 (Washington, D.C.: Jan. 22, 

2002). 

10Typically, nonimmigrants include those individuals who are in the United States 

temporarily as visitors, students, or workers. 
Page 6 GAO-03-890T Compact of Free Association 

and the Commonwealth of the Northern Mariana Islands (CNMI).11 By 

1998, more than 13,000 FSM and RMI citizens had made use of the 

Compact immigration provisions and were living in the three areas. The 

governments of the three locations have provided the U.S. government 

with annual Compact nonimmigrant impact estimates; for example, in 

2000 the total estimated impact for the three areas was $58.2 million. In 

that year, Guam received $7.58 million in impact funding, while the other 

two areas received no funding.12

In the fall of 1999, the United States and the two Pacific Island nations 

began negotiating economic assistance and defense provisions of the 

Compact that were due to expire. Immigration issues were also addressed. 

According to the State Department, the aims of the amended Compacts are 

to (1) continue economic assistance to advance self-reliance, while 

improving accountability and effectiveness; (2) continue the defense 

relationship, including a 50-year lease extension (beyond 2016) of U.S. 

military access to Kwajalein Atoll in the RMI; (3) strengthen immigration 

provisions; and (4) provide assistance to lessen the impact of Micronesian 

migration on Hawaii, Guam, and the CNMI. 

Under the amended Compacts with the FSM and the RMI, new 

congressional authorizations of approximately $3.5 billion in funding 

would be required over the next 20 years, with a total possible 

authorization through 2086 of $6.6 billion. Economic assistance would be 

provided to the two countries for 20 years – from 2004 through 2023 – with 

all subsequent funding directed to the RMI for continued U.S. access to 

military facilities in that country. Under the U.S. proposals, annual grant 

amounts to each country would be reduced each year in order to 

encourage budgetary self-reliance and transition the countries from 

receiving annual U.S. grant funding to receiving annual trust fund earnings. 

Annual grant assistance to the FSM would fall from a real value of $76 

million in fiscal year 2004 to a real value of $55 million in fiscal year 2023. 

Annual grant assistance to the RMI would fall from a real value of $35 

million to a real value of $24 million over the same period. This decrease in 

 11Payments were also authorized for American Samoa, but impact compensation has not 

been sought. 

12See U.S. General Accounting Office, Foreign Relations: Migration From Micronesian 

Nations Has Had Significant Impact on Guam, Hawaii, and the Commonwealth of the 

Northern Mariana Islands, GAO-02-40 (Washington, D.C.: Oct. 5, 2001). 

Amended Compacts 

Would Alter 

Assistance Levels and 

Structure 
Page 7 GAO-03-890T Compact of Free Association 

grant funding, combined with FSM and RMI population growth, would also 

result in falling per capita grant assistance over the funding period – 

particularly for the RMI. If the trust funds established in the amended 

Compacts earn a 6 percent rate of return, the FSM trust fund would be 

insufficient to replace expiring annual grants. The RMI trust fund would 

replace grants in fiscal year 2024 but would become insufficient for this 

purpose by fiscal year 2040. 

Under the amended Compacts with the FSM and the RMI, new 

congressional authorizations of approximately $6.6 billion could be 

required for U.S. payments from fiscal years 2004 to 2086, of which $3.5 

billion would be required for the first 20 years of the Compacts (see table 

1). The share of new authorizations to the FSM would be about $2.3 billion 

and would end after fiscal year 2023. The share of new authorizations to 

the RMI would be about $1.2 billion for the first 20 years, with about $300 

million related to extending U.S. military access to Kwajalein Atoll through 

2023. Further funding of $3.1 billion for the remainder of the period 

corresponds to extended grants to Kwajalein and payments related to U.S. 

military use of land at Kwajalein Atoll.13 The cost of this $6.6 billion new 

authorization, expressed in fiscal year 2004 U.S. dollars, would be $3.8 

billion (see the appendix for a breakout of estimated new U.S. 

authorizations to the FSM and the RMI in fiscal year 2004 U.S. dollars). 

This new authorized funding would be provided to each country in the 

form of 

• annual grant funds targeted to priority areas (such as health, education, 

and infrastructure), audit assistance, and disaster assistance; 

• contributions to a trust fund for each country such that trust fund earnings 

would become available to the FSM and the RMI in fiscal year 2024 to 

replace expiring annual grants; 

• payments the U.S. government makes to the RMI government that the RMI 

transfers to Kwajalein landowners to compensate them for the U.S. use of 

their lands for defense sites; and 

 13U.S. access to Kwajalein Atoll in the RMI has already been secured through 2016 through 

a Compact-related agreement. The U.S. proposal to the RMI extends this funding to 2066, 

with an additional 20-year optional lease at that point. 

Amended Compacts Could 

Cost the U.S. Government 

$6.6 Billion 
Page 8 GAO-03-890T Compact of Free Association 

• an extension of federal services that have been provided under the original 

Compact but are due to expire in fiscal year 2003. 

Table 1: Estimated New U.S. Authorizations for the FSM and the RMI, Fiscal Years 

2004-2086 (U.S. dollars in millions) 

 FSM RMI Total

Fiscal years 2004-2023 

Grants for priority areas $1,612 $701a$2,313

Trust fund contributions 517 276 793

Payments for U.S. military use of Kwajalein 

Atoll landb

Not applicable 191 191

Compact-authorized federal servicesc 167 37 204

New U.S. authorization for 2004-2023 $2,296 $1,204 $3,500

Fiscal years 2024-2086 

Grants to Kwajalein Not applicable $948a $948

Payments for U.S. military use of Kwajalein 

Atoll land 

Not applicable 2,133 2,133

Possible New U.S. authorization for 2024-2086 Not applicable $3,081 $3,081

Fiscal years 2004-2086, total new U.S. 

authorizations for the FSM and the RMI $2,296 $4,285 $6,581

Source: GAO estimate based on the amended Compacts. Under the amended Compacts, U.S. payments are adjusted for inflation at 

two-thirds of the percentage change in the U.S. gross domestic product implicit price deflator. 

Note: Numbers may not sum due to rounding. 

a

The 1986 U.S.-RMI Military Use and Operating Rights Agreement (MUORA) grants the United States 

access to certain portions of Kwajalein Atoll and provides $24.7 million of funding for development 

and impact on Kwajalein from 2004 to 2016. Approximately $112 million of the new proposed U.S. 

grant assistance of $701 million is for increasing this funding to Kwajalein from 2004 to 2016 and for 

continuation of the increased level of funding through 2066 and possibly to 2086 if the agreement is 

extended. 

b

As part of the 1986 MUORA, the RMI government has also allocated $162 million of U.S. funding 

from 2004 to 2016 under this agreement to landowners via a traditional distribution system to 

compensate them for the U.S. use of their lands for defense sites. The U.S. proposal increases these 

payments from 2004 to 2016 and continues the increased level of payments through 2066 and 

possibly to 2086 if the agreement is extended. 

c

Federal services authorized in the Compact include weather, aviation, and postal services. Services 

associated with the Federal Emergency Management Agency have been excluded. An estimate of 

assistance from the U.S. Agency for International Development’s Office of Disaster Assistance has 

not been included. 

In addition to the new authorized funding, the U.S. government has further 

expenditures related to the FSM and the RMI. These include (1) the cost of 
Page 9 GAO-03-890T Compact of Free Association 

U.S. program assistance, estimated at around $1 billion14 to the two 

countries for the next 20 years; (2) payments previously authorized of 

about $187 million for U.S. military access to Kwajalein Atoll in the RMI 

through 2016; and (3) oversight and administration by the Department of 

the Interior, estimated at a cost of around $42 million over the 20-year 

period. Combining these three sources of U.S. funding ($1.2 billion) with 

new authorizations ($6.6 billion), the total U.S. cost for all Compactrelated payments related to the FSM and the RMI would amount to about 

$7.8 billion, including estimated inflation. 

Under the U.S. proposals, annual grant amounts to each country would be 

reduced each year in order to encourage budgetary self-reliance and 

transition the countries from receiving annual U.S. grant funding to 

receiving annual trust fund earnings. Thus, the amended Compacts 

increase annual U.S. contributions to the trust funds each year by the 

grant reduction amount (see figs. 1 and 2). Annual grant assistance to the 

FSM would fall from a real value of $76 million in fiscal year 2004 to a real 

value of $55 million in fiscal year 2023.15 Annual grant assistance to the 

RMI would fall from a real value of $35 million to a real value of $24 

million over the same period. 

 14In addition to Compact authorized federal services, numerous U.S. federal agencies 

extend specific programs offered in the United States, such as Pell grants and Head Start, 

to the FSM and the RMI in areas such as education and health. The level of this program 

assistance has varied over time as certain programs have been eliminated and other 

programs have been introduced. Currently, the U.S. Congress is reviewing a number of 

education programs to the FSM and the RMI, and the level of continued program assistance 

is uncertain. 

15Although new authorization figures are provided in current dollars so that total costs to 

the U.S. government can be identified, this display of economic assistance is provided in 

fiscal year 2004 constant dollars for comparative purposes to show the impact of changes 

in government funding on the economy and population. 

Amended Compacts Would 

Reduce U.S. Grant Support 

Annually 
Page 10 GAO-03-890T Compact of Free Association 

Figure 1: Estimated New U.S. Authorizations for Economic Assistance to the FSM 

by Type of Funding, Fiscal Years 2004-2023 (fiscal year 2004 U.S. dollars, in 

millions) 

Note: This analysis excludes program assistance. 
Page 11 GAO-03-890T Compact of Free Association 

Figure 2: Estimated New U.S. Authorizations for Economic Assistance to the RMI by 

Type of Funding, Fiscal Years 2004-2023 (fiscal year 2004 U.S. dollars, in millions) 

Note: This analysis excludes program assistance and payments for U.S. military use of Kwajalein 

Atoll land. 

This decrease in grant funding, combined with FSM and RMI population 

growth, would also result in falling per capita grant assistance over the 

funding period – particularly for the RMI (see fig. 3).16 Using U.S. Census 

population growth rate projections for the two countries, the real value of 

grants per capita to the FSM would begin at an estimated $687 in fiscal 

year 2004 and would further decrease over the course of the compact to 

$476 in fiscal year 2023. The real value of grants per capita to the RMI 

would begin at an estimated $627 in fiscal year 2004 and would further 

decrease to an estimated $303 in fiscal year 2023. The reduction in real per 

capita funding over the next 20 years is a continuation of the decreasing 

amount of available grant funds (in real terms) that the FSM and the RMI 

had during the 17 years of prior Compact assistance. 

 16The migration impact of the amended Compacts is difficult to determine, but if migration 

slows as a result of the amended Compacts or other economic and demographic 

influences, then our per capita estimates would be overstated. 
Page 12 GAO-03-890T Compact of Free Association 

Figure 3: Estimated FSM and RMI per Capita Grant Assistance for Fiscal Years 1987-2023 (fiscal year 2004 U.S. dollars) 

Note: This analysis includes only Compact funds available to governments. Therefore, the analysis 

excludes investment development funds provided under section 111 of Public Law 99-239, trust fund 

contributions, federal programs and services, audit assistance, and MUORA-related lease payments 

that the RMI government transfers to Kwajalein landowners. U.S. Census population historical and 

projected population growth rates are used in conjunction with the most recent country Census data. 

U.S. Census projections are subject to revision. 

The decline in annual grant assistance could impact FSM and RMI 

government budget and service provision, employment prospects, 

migration, and the overall gross domestic product (GDP) outlook, though 

the effect is likely to differ between the two countries. For example, the 

FSM is likely to experience fiscal pressures in 2004, when the value of 

Compact grant assistance drops in real terms by 8 percent relative to the 

2001 level (a reduction equal to 3 percent of GDP).17 For the RMI, however, 

 17The level of grant assistance in 2001 was converted into fiscal year 2004 dollars for 

comparison purposes. 
Page 13 GAO-03-890T Compact of Free Association 

the proposed level of Compact grant assistance in 2004 would actually be 

8 percent higher in real terms than the 2001 level (an increase equal to 3 

percent of GDP). According to the RMI, this increase would likely be 

allocated largely to the infrastructure investment budget and would 

provide a substantial stimulus to the economy in the first years of the new 

Compact. 

Challenges to achieving economic self-sustainability in the long run remain 

significant for both countries. First, education and health indicators show 

the need to improve basic services in these areas, as the nations face 

challenges with regard to literacy rates, high birth rates, and access to safe 

water. Second, private sector employment is largely made up of services 

and distribution activities that support the public sector such that 

employment prospects are uncertain, given declining U.S. assistance. 

Third, private sector growth, which would rely on expanded exports and a 

growing tourism industry, is limited by constraining factors common to 

small island economies, such as limited domestic markets, a narrow 

resource base, and a lack of infrastructure.18 Fourth, socioeconomic 

activities, infrastructure, and population may be vulnerable to the impacts 

of climate change because the two countries could experience coastal 

inundation, more frequent droughts and floods, and increases in tropical 

cyclone intensities that could damage transport infrastructure.19

Given the challenges for achieving economic self-sustainability, the 

amended Compacts were designed to build trust funds that, beginning in 

fiscal year 2024, yield annual earnings to replace grant assistance that ends 

in 2023. Both the FSM and the RMI are required to provide an initial 

contribution to their respective trust funds of $30 million. In designing the 

trust funds, the State Department assumed that the trust fund would earn 

 18Potential sources of private sector growth include export earnings from three sectors: 

commercial agriculture, fisheries, and tourism. 

19The Intergovernmental Panel on Climate Change predicts that rising sea levels over the 

next 50 years will result in land loss for areas in the RMI and the FSM that will disrupt 

virtually all economic and social sectors. The sea level rises could trigger significant 

migration because resettlement within national boundaries, or abandonment of some atolls 

altogether, may be the only viable option, with substantial costs for resettlement. For 

example, in the RMI the average elevation on Majuro is 2.2 meters. In Kwajalein Atoll, 

Ebeye’s average elevation is 2.2 meters, and the maximum elevation is 2.5 meters. 

Trust Funds May Be 

Insufficient to Replace 

Expiring Grants 
Page 14 GAO-03-890T Compact of Free Association 

a 6 percent rate of return.20 The amended Compacts do not address 

whether trust fund earnings should be sufficient to cover expiring federal 

services, but they do create a structure that sets aside earnings above 6 

percent, should they occur, that could act as a buffer against years with 

low or negative trust fund returns. Importantly, whether the estimated 

value of the proposed trust funds would be sufficient to replace grants or 

create a buffer account would depend on the rate of return that is realized 

(see table 2). 21

• If the trust funds earn a 6 percent rate of return, then the FSM trust fund 

would yield a return of $57 million in fiscal year 2023, an amount 

insufficient to replace expiring grants by an estimated value of $27 million. 

The RMI trust fund would yield a return of $33 million in fiscal year 2023, 

an estimated $5 million above the amount required to replace grants in 

fiscal year 2024. Nevertheless, the RMI trust fund would become 

insufficient for replacing grant funding by fiscal year 2040. 

• If the trust funds are comprised of both stocks (60 percent of the 

portfolio) and long-term government bonds (40 percent of the portfolio) 

such that the forecasted average return is around 7.9 percent, then both 

trust funds would yield returns sufficient to replace expiring grants and to 

create a buffer account. However, while the RMI trust fund should 

continue to grow in perpetuity, the FSM trust fund would eventually 

deplete the buffer account and fail to replace grant funding by fiscal year 

2048. 

 20The State Department chose a 6 percent return in order to reflect a conservative 

investment strategy. This rate of return can be compared with the current average 

forecasted return for long-term U.S. government bonds of 5.8 percent by the Congressional 

Budget Office. 

21This analysis does not take into account volatile or negative returns. The sufficiency of 

either the FSM or the RMI trust fund to replace grants has not been tested under conditions 

of market volatility. 
Page 15 GAO-03-890T Compact of Free Association 

Table 2: Estimated Performance for the FSM and the RMI Trust Funds under 

Alternative Rates of Return (U.S. dollars in millions) 

Fund earns State Dept. 

assumed return 

(6%) 

Fund earns return from 

60% stocks and 40% longterm government bonds 

(7.9%) 

FSM RMI FSM RMI

Projected value of trust fund at 

the end of FY 2023 $1,013 $575 $1,255 $717

Projected value of FY 2023 

trust fund return 57 33 92 53

Surplus of FY 2023 trust fund 

return over FY 2024 required 

grant funding -27 5 8 25

Year when trust fund return is 

unable to replace grant 

funding FY 2024 FY 2040 FY 2048 a 

Source: GAO estimate based on amended Compacts adjusted for expected inflation. 

Note: The historic average real rate of return from the U.S. stock market has been 7 percent. 

Assuming a trust fund based on 60 percent stocks, which at a forecasted inflation rate of 2.2 percent 

would earn a 9.2 percent return, and 40 percent long-term U.S. government bonds, which would earn 

the forecasted nominal rate of return of 5.8 percent, a nominal rate of return of 7.9 percent could be 

achieved for the trust fund. The estimated value of the trust funds includes monies accrued in the 

buffer accounts and reflect the initial contribution made by the FSM and the RMI to their respective 

trust funds. 

a

The RMI trust fund under this scenario continues to grow in perpetuity. However, this analysis 

assumes a steady real rate of return and does not account for volatility in returns. 

I will now discuss provisions in the amended Compacts designed to 

provide improved accountability over, and effectiveness of, U.S. 

assistance. This is an area where we have offered several 

recommendations in past years, as we have found accountability over past 

assistance to be lacking. As I discuss key proposed accountability 

measures, I will note where appropriate whether our previous 

recommendations have been addressed. In sum, most of our 

recommendations regarding future Compact assistance have been 

addressed with the introduction of strengthened accountability measures 

in the signed amended Compacts and related agreements. I must 

emphasize, however, that the extent to which these provisions will 

ultimately provide increased accountability over, and effectiveness of, 

future U.S. assistance will depend upon how diligently the provisions are 

implemented and monitored by all governments. 

Amended Compacts 

Have Strengthened 

Accountability Over 

U.S. Assistance 
Page 16 GAO-03-890T Compact of Free Association 

The following summary describes key accountability measures included in 

the amended Compacts and related agreements: 

• The amended Compacts would require that grants be targeted to priority 

areas such as health, education, the environment, and public 

infrastructure.22 In both countries, 5 percent of the amount dedicated to 

infrastructure, combined with a matching amount from the island 

governments, would be placed in an infrastructure maintenance fund. We 

recommended in a September 2000 report that the U.S. government should 

negotiate provisions that would provide future Compact funding through 

grants targeted to priority areas and that funding should be set aside for 

infrastructure maintenance.23

• Compact-related agreements with both countries (the so-called “fiscal 

procedures agreements”) would establish a joint economic management 

committee for the FSM and the RMI that would meet at least once 

annually. The duties of the committees would include (1) reviewing 

planning documents and evaluating island government progress to foster 

economic advancement and budgetary self-reliance; (2) consulting with 

program and service providers and other bilateral and multilateral 

partners to coordinate or monitor the use of development assistance; (3) 

reviewing audits; (4) reviewing performance outcomes in relation to the 

previous year’s grant funding level, terms, and conditions; and (5) 

reviewing and approving grant allocations (which would be binding) and 

performance objectives for the upcoming year. In our previously cited 

2000 report, we recommended that the U.S. government negotiate an 

expanded agenda for future annual consultations. Further, the fiscal 

procedures agreements would give the United States control over the 

annual review process: The United States would appoint three government 

members to each committee, including the chairman, while the FSM or the 

RMI would appoint two government members. 

• Grant conditions normally applicable to U.S. state and local governments 

would apply to each grant. General terms and conditions for the grants 

would include conformance to plans, strategies, budgets, project 

 22Public infrastructure projects would be focused in the areas of education, health, and 

safety. Progress reports for each project would be required, and funding would be provided 

on a reimbursable basis. For the RMI, not less than 30 percent or more than 50 percent of 

the annual grant assistance would be available for public infrastructure projects. 

23See U.S. General Accounting Office, Foreign Assistance: U.S. Funds to Two Micronesian 

Nations Had Little Impact on Economic Development, GAO/NSIAD-00-216 (Washington, 

D.C.: Sept. 22, 2000) for a review of the first 12 years of direct Compact assistance. 
Page 17 GAO-03-890T Compact of Free Association 

specifications, architectural and engineering specifications, and 

performance standards. Other special conditions or restrictions could be 

attached to grants as necessary. Specific post-award requirements address 

financial administration by establishing, for example, (1) improved 

financial reporting, accounting records, internal controls, and budget 

controls; (2) appropriate use of real property and equipment; and (3) 

competitive and well-documented procurement. In our 2000 report, we 

recommended that future assistance be provided with grants that had 

specific requirements. 

• The United States could withhold payments if either country fails to 

comply with grant terms and conditions. The withholding amount would 

be proportional to the breach of the term or condition. In addition, funds 

could be withheld if the FSM or RMI governments do not cooperate in U.S. 

investigations regarding whether Compact funds have been used for 

purposes other than those set forth in the amended Compacts. In our 2000 

report, we recommended that withholding of funds be allowed. 

• The fiscal procedures agreements would require numerous reporting 

requirements for the two countries. For example, each country must 

prepare strategic planning documents that are updated regularly, annual 

budgets that propose sector expenditures and performance measures, 

annual reports to the U.S. President regarding the use of assistance, 

quarterly and annual financial reports, and quarterly grant performance 

reports. In our 2000 report, we recommended that expanded reporting 

requirements be negotiated. 

• The amended Compacts’ trust fund management agreements would grant 

the U.S. government control over trust fund management: The United 

States would appoint three members, including the chairman, to a 

committee to administer the trust funds, while the FSM or the RMI would 

appoint two members. After the initial 20 years, the trust fund committee 

would remain the same, unless otherwise agreed by the original parties. 

We have reported that well-designed trust funds can provide a sustainable 

source of assistance and reduce long-term aid dependence.24

The fiscal procedures agreements would require the joint economic 

management committees to consult with program providers in order to 

coordinate future U.S. assistance. However, we have seen no evidence 

 24See U.S. General Accounting Office, Foreign Assistance: Lessons Learned From Donors’ 

Experiences in the Pacific Region, GAO-01-808 (Washington, D.C.: Aug. 17, 2001). 
Page 18 GAO-03-890T Compact of Free Association 

demonstrating that an overall assessment of the appropriateness, 

effectiveness, and oversight of U.S. programs, as we recommended, has 

been conducted.25

The successful implementation of the many new accountability provisions 

will require a sustained commitment by the three governments to fulfill 

their new roles and responsibility. Appropriate resources from the United 

States, the FSM, and the RMI represent one form of this commitment. 

While the amended Compacts do not address staffing issues, officials from 

Interior’s Office of Insular Affairs have informed us that their office 

intends to post six staff in a new Honolulu office. According to an Interior 

official, these staff will consist of a health grant specialist, an education 

grant specialist, an accountant, an economist, an auditor, and an office 

assistant. Interior can also contract with the Army Corps of Engineers for 

engineering assistance when necessary. Honolulu-based staff may spend 

about half of their time in the FSM and the RMI. Further, an Interior 

official noted that his office has brought one new staff on board in 

Washington, D.C., and intends to post one person to work in the RMI (one 

staff is already resident in the FSM). We have not conducted an 

assessment of Interior’s staffing plan and rationale and cannot comment 

on the adequacy of the plan or whether it represents sufficient resources 

in the right location. 

The most significant defense-related change in the amended Compacts is 

the extension of U.S. military access to Kwajalein Atoll in the RMI. While 

the U.S. government had already secured access to Kwajalein until 2016 

through the 1986 MUORA, the newly revised MUORA would grant the 

United States access until 2066, with an option to extend for an additional 

20 years to 2086. According to a Department of Defense (DOD) official, 

recent DOD assessments have envisioned that access to Kwajalein would 

be needed well beyond 2016. He stated that DOD has not undertaken any 

further review of the topic, and none is currently planned. This official 

 25This recommendation was included in GAO-02-70. 

Amended Compacts 

Address Other Key 

Areas 

U.S. Military Access to 

Kwajalein Atoll Could Be 

Extended Until 2086 
Page 19 GAO-03-890T Compact of Free Association 

also stated that, given the high priority accorded to missile defense 

programs and to enhancing space operations and capabilities by the 

current administration, and the inability to project the likely improvement 

in key technologies beyond 2023, the need to extend the MUORA beyond 

2016 is persuasive. He also emphasized that the U.S. government has 

flexibility in that it can end its use of Kwajalein Atoll any time after 2023 

by giving advance notice of 7 years and making a termination payment. 

We have estimated that the total cost of this extension would be $3.4 

billion (to cover years 2017 through 2086). 26 The majority of this funding 

($2.3 billion) would be provided by the RMI government to Kwajalein Atoll 

landowners, while the remainder ($1.1 billion) would be used for 

development and impact on Kwajalein Atoll. According to a State 

Department official, there are approximately 80 landowners. Four 

landowners receive one-third of the annual payment, which is based on 

acreage owned. This landowner funding (along with all other Kwajaleinrelated funds) through 2023 would not be provided by DOD but would 

instead continue as an Interior appropriation. Departmental responsibility 

for authorization and appropriation for Kwajalein-related funding beyond 

2023 has not been determined according to the State Department. The 

Kwajalein Atoll landowners have not yet agreed to sign an amended landuse agreement with the RMI government to extend U.S. access to 

Kwajalein beyond 2016 at the funding levels established in the amended 

Compact. 

A few expiring provisions would be extended indefinitely in the amended 

Compacts. The “defense veto” – the ability of the United States to veto 

actions by the FSM or the RMI governments that the United States 

determines are incompatible with U.S. authority and responsibility for 

security and defense matters in the two countries – has been extended. In 

addition, the ability of FSM and RMI citizens to volunteer to serve in the 

U.S. military would be extended. According to a DOD official, this is a 

beneficial provision since it, for example, gives the United States access to 

persons with specialized knowledge and understanding of Pacific cultures 

while also providing career opportunities for FSM and RMI citizens.27

 26Our figure of $3.4 billion is adjusted for inflation. 

27In the amended Compacts, DOD’s civic action teams have been eliminated. Both 

countries would now have access to humanitarian assistance programs that would 

emphasize health, education, and infrastructure projects that DOD would carry out. 
Page 20 GAO-03-890T Compact of Free Association 

While the original Compact’s immigration provisions are not expiring, the 

State Department targeted them as requiring changes. The amended 

Compacts would strengthen the immigration provisions of the Compact by 

adding new restrictions and expressly applying the provisions of the INA 

to Compact nonimmigrants.28 There are several new immigration 

provisions in the amended Compacts that differ from those contained in 

the original Compact (see table 3). 

 28As noted in the Background section, FSM and RMI citizens who enter the United States 

are legally classified as “nonimmigrants” – that is, individuals who are in the United States 

temporarily as visitors, students, or workers. 

Amended Compacts 

Would Strengthen 

Immigration 

Provisions 
Page 21 GAO-03-890T Compact of Free Association 

Table 3: Key Immigration Issues: A Comparison of the Original and Amended Compacts 

Issue Original Compact Amended Compacts 

Passports Compact nonimmigrants do not need a passport 

to be admitted to the United States. 

Compact nonimmigrants would need a valid 

passport in order to be admitted into the 

United States. 

Entry into the United States for 

naturalized FSM and RMI citizens 

Naturalized FSM and RMI citizens are eligible to 

apply for admission to the United States 5 years 

after they are naturalized, so long as they were a 

resident of the FSM or the RMI during that time. 

Naturalized citizens would only be 

admissible if they are immediate relatives of 

a citizen of the FSM or the RMI or if they 

were naturalized before April 30, 2003.a

Entry into the United States for the 

purpose of adoption 

A child who came to the United States for the 

purpose of adoption is not expressly prohibited 

from seeking admission into the United States 

under the Compact. However, the United States 

government has maintained that such children 

are not admissible under the Compact, but, 

rather, that they had to seek admission under 

general immigration requirements for adopted 

children. 

A child who is coming to the United States 

for the purpose of adoption would not be 

admissible under the amended Compacts. 

Instead, these children would have to apply 

for admission to the United States under the 

general immigration requirements for 

adopted children. This provision would apply 

to any child who applied for admission to the 

United States on or after March 1, 2003. 

Conditions on admission to the 

United States and its territories or 

possessions for Compact 

nonimmigrants 

The United States has the authority to establish 

limitations, either in statutes or regulations, on a 

Compact nonimmigrant’s right to establish 

habitual residence in a territory or possession of 

the United States.b

The Attorney General would have the 

authority to issue regulations that specify the 

time and conditions of a Compact 

nonimmigrant’s admission into the United 

States.c

Source: GAO legal analysis of the original and amended Compacts. 

Note: In addition, any of the authorities in the amended Compacts that the United States may 

exercise could also be exercised by the governments of the U.S. territories or possessions where the 

INA does not apply (i.e., the CNMI and American Samoa), so long as the exercise of such authority is 

lawful under the laws of that territory or possession. 

a

Such naturalized citizens would also have to meet additional requirements, including residency 

requirements, unless they are an immediate relative of a citizen of the FSM or the RMI who is serving 

in the U.S. military. 

b

The United States promulgated regulations in September 2000 regarding the rights and limitations of 

habitual residents in the territories and possessions of the United States. These regulations applied to 

Compact nonimmigrants in Guam, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands. 

They did not apply to Compact nonimmigrants residing in the 50 states, the District of Columbia, 

American Samoa, or the CNMI. 

c

The INA would now expressly apply to any Compact migrant who seeks admission or is admitted to 

the United States. As such, in addition to the Attorney General’s authority to promulgate regulations, 

any grounds of inadmissibility or deportability under the INA would now apply to Compact migrants 

except where the amended Compacts specify otherwise. Some modifications, however, were made 

to the INA provision, section 237(a)(5), allowing for deportation on the basis of an alien becoming a 

public charge. 
Page 22 GAO-03-890T Compact of Free Association 

In addition, the implementing legislation for the amended Compacts would 

provide $15 million annually for U.S. locations that experience costs 

associated with Compact nonimmigrants. This amount would not be 

adjusted for inflation, would be in effect for fiscal years 2004 through 2023, 

and would total $300 million. Allocation of these funds between locations 

such as Hawaii, Guam, and the CNMI would be based on the number of 

nonimmigrants in each location. 

Mr. Chairman and Members of the Subcommittee, this completes my 

prepared statement. I would be happy to respond to any questions you or 

other Members of the Subcommittee may have at this time. 

For future contacts regarding this testimony, please call Susan S. Westin 

or Emil Friberg, Jr., at (202) 512-4128. Individuals making key 

contributions to this testimony included Leslie Holen, Kendall Schaefer, 

Mary Moutsos, and Rona Mendelsohn. 

Contacts and 

Acknowledgments 
Page 23 GAO-03-890T Compact of Free Association 

The estimated value of new congressional authorizations to the FSM and 

the RMI would be approximately $3.8 billion from fiscal years 2004 to 2086 

measured in fiscal year 2004 dollars (see table 4). 

Table 4: Estimated New U.S. Authorizations for the FSM and the RMI, Fiscal Years 

2004-2086 (Fiscal Year 2004 U.S. Dollars in Millions) 

 FSM RMI Total

Fiscal years 2004-2023 

Grants for priority areas $1,323 $572 $1,895

Trust fund contributions 411 218 628

Payments for U.S. military use of Kwajalein 

Atoll land 

Not applicable 144 144

Compact-authorized federal services 135 30 165

New U.S. authorization for 2004-2023 $1,868 $963 $2,832

Fiscal years 2024-2086 

Grants to Kwajalein Not applicable $306 $306

Payments for U.S. military use of Kwajalein 

Atoll land 

Not applicable 688 688

New U.S. authorization for 2024-2086 Not applicable $993 $993

Fiscal years 2004-2086, total new U.S. 

authorizations for the FSM and the RMI $1,868 $1,956 $3,825

Source: GAO estimate based on the amended Compacts. 

Note: Numbers may not sum due to rounding. 

Appendix: Estimated New U.S. 

Authorizations to the FSM and the RMI in 

Fiscal Year 2004 U.S. Dollars 

(320096) 
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