COMPACTS OF 

FREE ASSOCIATION

Actions Needed to 

Prepare for the 

Transition of 

Micronesia and the 

Marshall Islands to 

Trust Fund Income

Report to the Chairman, Committee on 

Energy and Natural Resources, U.S. 

Senate

May 2018

GAO-18-415

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-18-415, a report to the 

Chairman, Committee on Energy and Natural 

Resources, U.S. Senate

May 2018

COMPACTS OF FREE ASSOCIATION

Actions Needed to Prepare for the Transition of 

Micronesia and the Marshall Islands to Trust Fund 

Income

What GAO Found

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

Islands (RMI) continue to rely on U.S. grants and programs, including several 

that are scheduled to end in 2023. U.S. compact sector and supplemental 

education grants, both scheduled to end in 2023, support a third of the FSM’s

and a quarter of the RMI’s expenditures. Agreements providing U.S. aviation, 

disaster relief, postal, weather, and other programs and services are scheduled 

to end in 2024, but some agencies may provide programs and services similar to 

those in the agreements under other authorities. FSM and RMI eligibility for

some other U.S. grants and programs is expected to continue after 2023.

FSM and RMI Total Expenditures of Government Revenues, Fiscal Year 2016

Disbursements from the compact trust funds face risks that the trust fund 

committees have not addressed. GAO found that the trust funds are increasingly 

likely to provide no annual disbursements in some years and to not sustain their 

value. Potential strategies such as reduced trust fund disbursements or 

additional contributions from the countries or other sources could help address 

these risks. Changing the trust fund disbursement policies could also address 

these risks but may require revising the trust fund agreements with each country. 

However, the trust fund committees have not prepared distribution policies, 

required by the agreements, which could assist the countries in planning for the 

2023 transition to trust fund income. The committees also have not prepared the

required fiscal procedures for oversight of the disbursements or addressed 

differences between the timing of their annual determination of the disbursement 

amounts and the FSM’s and RMI’s annual budget cycles. 

The FSM and RMI did not implement planned budget reductions to address

decreasing compact grants owing to increased revenues from other sources that 

offset the grant decreases. Current FSM and RMI infrastructure plans address 

the 2023 transition, while health and education plans focus on strategic goals.

Both countries have established new compact planning committees to identify 

future challenges and develop plans for the 2023 transition to trust fund income. View GAO-18-415. For more information, 

contact David Gootnick at (202) 512-3149 or 

gootnickd@gao.gov.

Why GAO Did This Study

In 2003, the United States approved 

amended compacts of free association 

with the FSM and RMI, providing a 

total of $3.6 billion in economic 

assistance in fiscal years 2004 through 

2023 and access to several U.S. 

programs and services. Compact grant 

funding, overseen by the Department 

of the Interior, generally decreases

annually. However, the amount of the 

annual decrease in grants is added to 

the annual U.S. contributions to the

compact trust funds, managed by joint 

U.S.-FSM and U.S.-RMI trust fund 

committees. Trust fund earnings are 

intended to provide a source of income

after compact grants end in 2023, but

GAO and others have previously found 

that the trust funds may not provide 

sustainable income.

GAO was asked to examine 

preparations for the transition in 2023. 

This report examines (1) the use and 

role of U.S. funds and programs in 

FSM and RMI budgets, (2) projected 

trust fund disbursements and potential 

strategies to address risks to those 

disbursements, and (3) FSM and RMI 

plans to prepare for grant decreases

and the transition to trust fund income. 

GAO reviewed compact agreements, 

audit reports, and U.S. law; modeled 

trust fund performance under existing 

conditions and using potential 

strategies; and reviewed FSM and RMI 

plans. GAO visited each country and 

interviewed FSM, RMI, and U.S. 

officials.

What GAO Recommends

GAO recommends that Interior work 

with the compact trust fund committees 

to develop distribution policies and 

fiscal procedures for the funds and to 

address disbursement timing. Interior 

concurred with the recommendations.
Page i GAO-18-415 Compacts of Free Association

Letter 1

Background 4

The FSM and RMI Continue to Rely on U.S. Grants and Programs 

That End in 2023 19

Compact Trust Funds Face Continuing Risks That Trust Fund 

Committees Have Not Yet Addressed 23

FSM and RMI Decrement Plans Were Not Implemented Because 

of Increased Revenues, but Each Country Has Begun New 

Planning Efforts 37

Conclusions 42

Recommendations for Executive Action 43

Agency Comments and Our Evaluation 44

Appendix I Objectives, Scope, and Methodology 47

Appendix II U.S. Compact Sector Grants and Trust Fund Contributions, 2004 

through 2023 56

Appendix III Compact Grants Supporting Health and Education in the FSM 

and RMI 59

Appendix IV Status of U.S. Grants and Programs in the FSM and RMI After 

2023 62

Appendix V Compact Trust Fund Baseline Outcomes Calculated with Varying 

Return Assumptions 73

Appendix VI FSM and RMI Country Trust Funds 75

Appendix VII Potential Trust Fund Strategies and Model Results 77

Contents
Page ii GAO-18-415 Compacts of Free Association

Appendix VIII Status of Other Planned Actions in the FSM and RMI Decrement 

Management Plans 93

Appendix IX Comments from the Department of the Interior 96

Appendix X Comments from the U.S. Postal Service 98

Appendix XI Comments from the Federated States of Micronesia 100

Appendix XII Comments from the Republic of the Marshall Islands 113

Appendix XIII GAO Contact and Staff Acknowledgments 123

Tables

Table 1: FSM, FSM States, and RMI Estimated Population and 

Annual Gross Domestic Product (GDP) per Capita 6

Table 2: FSM National and State Government Expenditures of 

Compact Grants, Supplemental Education Grant (SEG), 

and Other U.S. Grants in Fiscal Year 2016 21

Table 3: FSM States’ Health and Education Expenditures of 

Compact Sector and Supplemental Education Grants 

(SEG), Fiscal Year 2016 59

Table 4: RMI Health and Education Expenditures of Compact 

Sector and Supplemental Education Grants (SEG) and 

Kwajalein-Related Grants, Fiscal Year 2016 60

Table 5: Status under Current Law of Compact Sector, KwajaleinRelated, and Audit Grants to the FSM and RMI after 

Fiscal Year 2023 63

Table 6: FSM and RMI Eligibility under Current Law after Fiscal 

Year 2023 for Programs Replaced by the Supplemental 

Education Grant (SEG) Provided in the Amended 

Compacts’ Implementing Legislation, Pub. L. No. 108-188 64
Page iii GAO-18-415 Compacts of Free Association

Table 7: Status under Current Law of Programs and Services 

Identified in U.S.-FSM and U.S.-RMI Amended Compacts’ 

Programs and Services Agreements after the Agreements 

End in Fiscal Year 2024 67

Table 8: Status under Current Law after Fiscal Year 2023 of 

Programs and Grants Provided in the U.S.-FSM and U.S.-

RMI Amended Compacts’ Implementing Legislation, Pub. 

L. No. 108-188 69

Table 9: FSM and RMI Eligibility under Current Law after Fiscal 

Year 2023 for Other U.S. Grants and Programs That Have 

Been Made Available 70

Table 10: FSM Compact Trust Fund Baseline Outcomes 

Calculated with Varying Return Assumptions 73

Table 11: RMI Compact Trust Fund Baseline Outcomes 

Calculated with Varying Return Assumptions 74

Table 12: Potential Strategies for Improving Outlook of FSM and 

RMI Compact Trust Funds 77

Table 13: Federated States of Micronesia (FSM) Compact Trust 

Fund Summary Table of Projected Average 

Disbursements, Likelihood of Zero Disbursements, and 

Likelihood of Maintaining Fund Balance under Baseline 

and Selected Potential Strategies 89

Table 14: Republic of the Marshall Islands (RMI) Compact Trust 

Fund Summary Table of Projected Average 

Disbursements, Likelihood of Zero Disbursements, and 

Likelihood of Maintaining Fund Balance under Baseline 

and Selected Potential Strategies 91

Table 15: RMI State-Owned Enterprise Subsidy Amounts, Fiscal 

Years 2014-2016 95

Figures

Figure 1: Location and Map of the Federated States of Micronesia 

and Republic of the Marshall Islands 5

Figure 2: Account Structure and Associated Rules for Federated 

States of Micronesia and Republic of the Marshall Islands 

Compact Trust Funds 15

Figure 3: Total Expenditures of Federated States of Micronesia 

(FSM) National and State Governments, by Revenue 

Source, Fiscal Year 2016 20

Figure 4: Total Expenditures of RMI Government, by Revenue 

Source, Fiscal Year 2016 22
Page iv GAO-18-415 Compacts of Free Association

Figure 5: Projected FSM Compact Trust Fund Average 

Disbursements, Likelihood of Zero Disbursements, and 

Likelihood of Maintaining Inflation-Adjusted Fiscal Year 

2023 Balance, Fiscal Years 2024-2063 27

Figure 6: Projected RMI Compact Trust Fund Average 

Disbursements, Likelihood of Zero Disbursements, and 

Likelihood of Maintaining Inflation-Adjusted Fiscal Year 

2023 Balance, Fiscal Years 2024-2063 29

Figure 7: FSM National Government’s Projected Budget Timeline 

Relative to Date When Compact Trust Fund 

Disbursement May Be Determined for Fiscal Year 2024 35

Figure 8: RMI National Government’s Projected Budget Timeline 

Relative to Date When Compact Trust Fund 

Disbursement May Be Determined for Fiscal Year 2024 36

Figure 9: U.S. Grants and Trust Fund Contributions to Be 

Provided to the FSM and RMI under the Amended 

Compacts, Prior to Partial Adjustments for Inflation, 

Fiscal Years 2004 through 2023 57

Figure 10: U.S. Grants and Trust Fund Contributions to Be 

Provided to the FSM and RMI under the Amended 

Compacts, After Partial Adjustments for Inflation, Fiscal 

Years 2004 through 2023 58

Figure 11: FSM Compact Trust Fund Projected Average 

Disbursement for Baseline Scenario and Selected 

Potential Strategies, Fiscal Years 2024-2063 83

Figure 12: FSM Compact Trust Fund Projected Likelihood of Zero 

Disbursements for Baseline Scenario and Selected 

Potential Strategies, Fiscal Years 2024-2063 84

Figure 13: Likelihood of FSM Compact Trust Fund Balance 

Exceeding or Equaling the Inflation-Adjusted Fiscal Year 

2023 Balance for Baseline Scenario and Selected 

Potential Strategies 85

Figure 14: RMI Compact Trust Fund Projected Average 

Disbursement for Baseline Scenario and Selected 

Potential Strategies, by Decade, Fiscal Years 2024-2063 86

Figure 15: RMI Compact Trust Fund Projected Likelihood of Zero

Disbursements for Baseline Scenario and Selected 

Potential Strategies, by Decade, Fiscal Years 2024-2063 87

Figure 16: Likelihood of RMI Compact Trust Fund Balance 

Exceeding or Equaling the Inflation-Adjusted Fiscal Year 

2023 Balance for Baseline Scenario and Selected 

Potential Strategies 88
Page v GAO-18-415 Compacts of Free Association

Abbreviations

DOT U.S. Department of Transportation

Education U.S. Department of Education

FAA Federal Aviation Administration

FEMA Federal Emergency Management Agency

FSM Federated States of Micronesia

GDP gross domestic product

Interior U.S. Department of the Interior

JEMFAC Joint Economic Management and Financial Accountability

Committee

JEMCO Joint Economic Management Committee

MAR moving adjustment rule

MUORA Military Use and Operating Rights Agreement

RMI Republic of the Marshall Islands

SAFER sustainability adjustment for enhanced reliability

SEG supplemental education grant

State U.S. Department of State

USAID U.S. Agency for International Development

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Page 1 GAO-18-415 Compacts of Free Association

441 G St. N.W.

Washington, DC 20548

May 17, 2018

The Honorable Lisa Murkowski

Chairman

Committee on Energy and Natural Resources

United States Senate

Dear Madam Chairman:

In 2003, the United States approved amended compacts of free 

association with the Federated States of Micronesia (FSM) and the 

Republic of the Marshall Islands (RMI) that provide for a total of $3.6 

billion in compact sector grants, trust fund contributions, and other grants, 

as well as access to several U.S. programs and services, in fiscal years 

2004 through 2023.1 This compact assistance is intended to assist the 

FSM and RMI governments in their efforts to promote the self-sufficiency 

and budgetary self-reliance of their people. Compact sector grants, 

managed by the U.S. Department of the Interior (Interior), generally 

decrease annually before their scheduled end in 2023. However, the 

amount of the annual decrease in compact sector grants (also referred to 

as the annual decrement) is added to the annual U.S. contributions to the 

compact trust fund established for the benefit of each country. Investment 

earnings from the compact trust funds are intended to provide an annual 

source of revenue after the compact sector grants are scheduled to end 

in 2023. In 2007, we reported that the compact trust funds may not 

provide sustainable income after the compact sector grants end.2 As

2023 approaches, questions remain as to whether the FSM and RMI will 

successfully transition to greater self-reliance when the 20 years of U.S. 

compact economic assistance end.

 1

Compact of Free Association Amendments Act of 2003 (Pub. L. No. 108-188). The $3.6 

billion in compact assistance includes compact sector grants, trust fund contributions, 

audit grants, Kwajalein impact payments and judicial training grants as well as grants 

provided to the RMI related to the nuclear-affected atolls of Rongelap and Enewetak. The 

total includes inflation adjustments for prior-year assistance and estimated inflation 

adjustments for future-year assistance but does not include the cost to the United States 

to provide programs and services through the compacts’ programs and services 

agreements in fiscal years 2004 through 2023.

2

GAO, Compacts of Free Association: Trust Funds for Micronesia and the Marshall 

Islands May Not Provide Sustainable Income, GAO-07-513 (Washington, D.C.: June 15, 

2007).

Letter
Page 2 GAO-18-415 Compacts of Free Association

You asked us to review issues related to the FSM’s and RMI’s transition 

from compact grant assistance to relying on income from the compact 

trust funds. This report examines (1) the use and role of U.S. funds and 

programs in the FSM and RMI budgets, (2) projected compact trust fund 

disbursements and potential strategies to address risks to those 

disbursements, and (3) FSM and RMI efforts to prepare for the scheduled 

decrements in compact grant funding and the transition to relying on 

compact trust fund income.

To examine the use and role of U.S. funds and programs in the FSM and 

RMI, we interviewed U.S. officials, and we also interviewed FSM and RMI 

officials during our site visits to each country in July and August 2017. In 

addition, we reviewed U.S. law; the FSM and RMI compact agreements 

and the associated military use and operating rights agreements 

(MUORA) and programs and services agreements; the FSM and RMI 

government and component unit single audit reports for fiscal years 2012 

through 2016; and U.S. Region IX reports for fiscal years 2015 and 

2016.3 To assess the reliability of federal program funding information, we 

reviewed the single audit reports and found that the auditors did not 

express any qualified or adverse opinions regarding the information the 

auditors used to prepare the audits’ Schedule of Expenditures of Federal

Awards listing the amount and use of federal grants. We therefore 

concluded that these data were sufficiently reliable for estimating the role 

of federal programs in the FSM and RMI budgets. To determine the legal 

status of U.S. grants, programs, and services after 2023, we analyzed 

U.S. law and requested review of our analysis from officials of U.S. 

agencies that provide grants, programs, or services in the FSM and RMI.4

Although we took multiple steps to validate our list of programs with the 

FSM and RMI and the relevant U.S. agencies, our analysis may not have 

captured all U.S. grants and programs provided in the FSM and RMI.

 3

Region IX Federal Regional Council, Outer Pacific Committee, FY 2016 Report on 

Federal Financial Assistance to the U.S. Pacific and Caribbean Islands (May 1, 2017), and 

FY 2015 Report on U.S. Federal Financial Assistance to the U.S. Affiliated Pacific Islands

(March 2016).

4

We consulted officials from the Departments of Agriculture, Commerce, Defense, 

Education, Energy, Health and Human Services, the Interior, Labor, State, and 

Transportation; the Federal Communications Commission; the Federal Deposit Insurance 

Corporation; the Federal Emergency Management Agency; the National Science 

Foundation; the U.S. Agency for International Development; and the U.S. Postal Service.
Page 3 GAO-18-415 Compacts of Free Association

To examine projected compact trust fund disbursements and actions to 

address risks, we reviewed previous studies of the compact trust funds, 

the U.S.-FSM and U.S.-RMI compact trust fund agreements and other 

governance and reporting documents, such as investment policy 

statements, presentations before the committees for each compact trust 

fund, audits, and annual reports. We also interviewed compact trust fund 

committee members and the funds’ administrator, investment advisers, 

and money managers.

• To project the compact trust funds’ average disbursements, likelihood 

of years with zero disbursement, and likelihood of maintaining value 

after fiscal year 2023, we built a Monte Carlo simulation model and 

performed 10,000 trial runs of projected returns and disbursements.5

We used the unaudited fiscal year 2017 year-end balances of the 

compact trust funds as the starting point for our projections. To 

assess the reliability of the unaudited balances, we reviewed the 

previous years’ audits and discussed with the trust funds’

administrator whether these audits had resulted in any significant 

change between the preliminary unaudited balances and the final 

audited balances. The March 2018 audited fund balances, released 

after we completed our analysis, were within $5 of the unaudited fund 

balances. We concluded that the unaudited balances were sufficiently 

reliable as a basis for our projections of future trust fund performance. 

To assess our net rate of return assumptions, we reviewed the trust 

fund money managers’ capital market assumptions and projections 

and tested varying rates of return and return distributions.

• To consider the effects of alternative trust fund strategies, we again 

performed the Monte Carlo analysis to determine the likely effects, 

relative to the baseline, of five potential strategies that used one of 

three approaches: (1) reducing annual compact trust fund 

disbursements, (2) making additional contributions, and (3) changing 

the disbursement policies, including strategies that would require 

changes to the trust fund agreements. To select these potential 

strategies, we reviewed previous studies of the compact trust funds 

and interviewed agency and trust fund officials.

To examine FSM and RMI preparations to address the compact grant 

decrements and the transition to trust fund support, we interviewed FSM 

 5

A Monte Carlo analysis is a problem-solving technique that approximates the probability 

of certain outcomes by performing multiple trial runs, called simulations, using random 

variables. The simulations capture the volatility of market returns and reflect that volatility 

in the projection of future earnings.
Page 4 GAO-18-415 Compacts of Free Association

and RMI officials and reviewed the FSM and RMI decrement 

management plans. We compared these plans to single audit reports, 

budgets, and actions to determine whether the plans were implemented. 

We also followed up with Interior and the FSM and RMI governments 

regarding the status of the plans and plan updates. To identify current 

planning documents for the key sectors of health, education, and 

infrastructure in the FSM and RMI as well as the status of current 

planning efforts, we obtained the plans from department heads in each 

key sector from the RMI and FSM national and state governments and 

confirmed our identification of the documents with FSM and RMI officials. 

We then reviewed these plans to determine whether the plans discussed 

budget changes to address the transition to relying on compact trust fund 

income after 2023. We also interviewed U.S., FSM, and RMI officials and 

reviewed documentation to identify and describe ongoing planning 

committees and working groups for the 2023 transition.

For more details of our objectives, scope, and methodology, see app. I.

We conducted this performance audit from March 2017 to May 2018 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

The FSM and the RMI are independent countries located about 3,000 

miles southwest of Hawaii (see fig. 1). Background
Page 5 GAO-18-415 Compacts of Free Association

Figure 1: Location and Map of the Federated States of Micronesia and Republic of the Marshall Islands

The FSM is a federation of four semiautonomous states—Chuuk, Kosrae, 

Pohnpei, and Yap—whose population and income vary widely. Chuuk, 

the largest state by population, has the lowest per capita gross domestic 

product (GDP). Overall, the FSM had a 2016 population of approximately 

102,000 and a GDP per capita of about $3,200. The RMI’s 2016 
Page 6 GAO-18-415 Compacts of Free Association

population was approximately 54,000 with a GDP per capita of about 

$3,600. The RMI’s most recent census, in 2011, found that approximately 

three-quarters of the population lived in Majuro, the nation’s capital, and 

on the island of Ebeye in the Kwajalein Atoll. Table 1 shows the FSM’s, 

FSM states’, and RMI’s estimated population and annual GDP per capita 

in fiscal year 2016.

Table 1: FSM, FSM States, and RMI Estimated Population and Annual Gross 

Domestic Product (GDP) per Capita

Jurisdiction 2016 Population

Fiscal year 2016 

GDP per capita 

(dollars)

Federated States of Micronesia (FSM) 102,453 3,220

FSM states

Chuuk 46,688 1,994

Kosrae 6,227 3,376

Pohnpei 37,893 4,313

Yap 11,645 4,495

Republic of the Marshall Islands (RMI) 54,153 3,592

Source: Graduate School USA, FSM FY2016 Economic Brief, (August 2017) and RMI FY2016 Economic Brief, (August 2017). |

GAO-18-415

The FSM states maintain considerable authority, relative to the FSM 

national government, to allocate U.S. assistance and implement 

budgetary policies. While the United States provides compact sector 

grants directly to the FSM national government, a large portion of these 

grants is passed through and provided to the four FSM states. The states 

also receive other U.S. program grants that have been passed through 

from the national government but may also receive grants directly from 

U.S. agencies.

Overall, FSM public sector revenue sources include U.S. compact and 

program grants; grants from other countries; taxation, including taxation 

of foreign corporations domiciled in the FSM; and Parties to the Nauru 

FSM and RMI 

Government Revenues

FSM
Page 7 GAO-18-415 Compacts of Free Association

Agreement fishing fees charged to vessels operating in its waters.6 In 

addition to maintaining departmental budgets, both the FSM national 

government and the FSM states have government-owned enterprises and 

component units, such as public utilities and port authorities, whose 

operations are supported by public funds. Some of these component units 

also receive U.S. compact sector grants or other U.S. grants passed 

through the FSM national or state governments or directly from U.S. 

agencies. According to Graduate School USA, the FSM’s public sector 

accounted for about 53 percent of all employment in the FSM in fiscal 

year 2016.7

The RMI government is responsible for allocating U.S. assistance in that 

country, though the RMI’s 24 local governments exercise local 

government authority. RMI public sector revenue sources include U.S. 

compact and program grants, grants from other countries, ship and 

corporate registry earnings,8 and Parties to the Nauru Agreement fishing 

fees. The RMI government also has state-owned enterprises and 

component units whose operations are supported by public funds. Some 

of these component units receive U.S. compact sector grants or other 

U.S. grants passed through the RMI government or directly from U.S. 

agencies. According to Graduate School USA, in fiscal year 2016, RMI’s 

public sector accounted for approximately 48 percent of all employment in 

the RMI.9 The U.S. Army Garrison–Kwajalein Atoll, located near Ebeye 

island, also provides a significant source of employment for Marshallese. 

In September 2017, U.S. Army Garrison-Kwajalein Atoll officials 

 6

The members of the Parties to the Nauru Agreement are the FSM, Kiribati, Nauru, Palau, 

Papua New Guinea, the RMI, the Solomon Islands, and Tuvalu. These same countries 

also agreed on a limited number of fishing days for the year, based on scientific advice 

about the status of the tuna stocks; fishing days are then allocated by country and sold to 

the highest bidder.

7

Graduate School USA, Federated States of Micronesia Fiscal Year 2016 Statistical 

Appendices (Honolulu, Hawaii: August 2017). Under contract to Interior, Graduate School 

USA has produced a series of annual economic reviews of the FSM and RMI. Graduate 

School USA is a private nonprofit educational institution, not affiliated with the federal 

government or any federal agency or department.

8

The ship registry charges a fee for private vessels to register as RMI flagged vessels. 

The RMI contracts with a private company, International Registries Inc., to manage its 

ship and corporate registry and receives funds as a result of this arrangement.

9

Graduate School USA, Republic of the Marshall Islands Fiscal Year 2016 Statistical 

Appendices (Honolulu, Hawaii: August 2017).

RMI
Page 8 GAO-18-415 Compacts of Free Association

estimated that approximately 1,100 Marshallese were employed at the 

garrison.10

U.S. relations with the FSM and the RMI began during World War II, 

when the United States ended Japanese occupation of the region. 

Beginning in 1947, the United States administered the region under a 

United Nations trusteeship.11 During the 1940s and 1950s, the RMI was 

the site of 67 U.S. nuclear weapons tests on or near Bikini and Enewetak 

Atolls. The four states of the FSM voted in a 1978 referendum to become 

an independent nation, while the RMI established a constitutional 

government and declared itself a republic in 1979. Under the trusteeship 

agreement, both newly formed nations remained subject to the authority 

of the United States until 1986.

In 1986, following a period of negotiations, the United States entered into 

a compact of free association with the FSM and the RMI that provided for 

economic assistance to the two countries, secured U.S. defense rights,12

 10U.S. Army Garrison-Kwajalein Atoll is home to the Ronald Reagan Ballistic Missile 

Defense Test Site and its approximately 1,300 U.S. personnel, including military 

personnel, Army civilians, contractor employees, and family members on Kwajalein and 

Roi-Namur islands. According to the Department of Defense, the department also pays 

$17,021 annually as a retainer fee for the use of Bigen Island, which is located outside 

Kwajalein Atoll. While the Department of Defense has not used Bigen Island recently, the 

department continues to pay the retainer fee to secure the site for potential future testing 

activities. 

11The region, designated the Trust Territory of the Pacific Islands, included the island 

groups that later became the FSM, the RMI, the Republic of Palau, and the 

Commonwealth of the Northern Mariana Islands. The Department of the Navy began civil 

administration of the trust territory on July 18, 1947; this responsibility was transferred to 

Interior in July 1951.

12The military use and operating rights agreements (MUORAs) with each country under 

the amended compacts provide the United States with special and substantial access to, 

and control of, defense sites in each country. There are no U.S. defense sites in the FSM. 

See GAO, Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in Two 

Micronesian Nations, GAO-02-119 (Washington, D.C.: Jan. 22, 2002).

Compact of Free 

Association (1986–2003)
Page 9 GAO-18-415 Compacts of Free Association

and allowed FSM and RMI citizens to migrate to the United States.13 The 

compact provided a framework for the United States and the two 

countries to work toward achieving the following three main goals: (1) 

establish self-government for the FSM and the RMI, (2) ensure certain 

national security rights for all of the parties, and (3) assist the FSM and 

the RMI in their efforts to advance economic development and selfsufficiency. The compact’s third goal was to be accomplished primarily 

through U.S. direct financial assistance to the FSM and the RMI.

Under the original compact, the FSM and the RMI used funds for general 

government operations; capital projects, such as building roads and 

investing in businesses; debt payments; and targeted sectors, such as 

energy and communications. The FSM concentrated much of its spending 

on government operations at both national and state levels, while the RMI 

emphasized capital spending. While the original compact set out specific 

obligations for reporting and consultations regarding the use of compact 

funds, the FSM, RMI, and U.S. governments provided little accountability 

over compact expenditures and did not ensure that funds were spent 

effectively or efficiently.14

 13Citizens of the Republic of Palau also received such migration rights through their 

separate Compact of Free Association in 1994. Section 141 of the FSM and RMI 

compacts, as amended, permits eligible citizens of the FSM and RMI to enter, reside, and 

work indefinitely in the United States, including its territories, without regard to the 

Immigration and Nationality Act’s visa and labor certification requirements. The amended 

compacts’ implementing legislation, Pub. L. No. 108-188, appropriated $30 million 

annually for 20 years to help defray affected U.S. jurisdictions’ costs for migrant services 

(compact impact). The amended compacts’ implementing legislation defined the affected 

jurisdictions as Guam, Hawaii, the Commonwealth of the Northern Mariana Islands, and 

American Samoa. Interior allocates the $30 million as impact grants in proportion to the 

population of compact migrants enumerated as required every 5 years. The most recent 

enumeration, conducted by the U.S. Census Bureau, was in 2013 and the next 

enumeration is ongoing, with results expected in December 2018. In 2016, Interior 

reported that the U.S. Census Bureau, using 2010-2014 data, estimated that 

approximately 41,380 citizens from the FSM, RMI and Palau were living in the 50 states. 

According to a Census enumeration derived from the 2010 Census, an additional 19,830 

were living in Guam and the Commonwealth of the Northern Mariana Islands. We have 

previously reported on compact migration to U.S. areas; see Compacts of Free 

Association: Improvements Needed to Assess and Address Growing Migration, 

GAO-12-64 (Washington, D.C.: Nov. 14, 2011).

14See GAO, Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little 

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

2000). We reported that FSM and RMI compact funds spent on general government 

operations maintained high government wages and a high level of public sector 

employment, discouraging private sector growth, and that compact funds used to create 

and improve infrastructure likewise did not contribute to significant economic growth.
Page 10 GAO-18-415 Compacts of Free Association

In 2003, following a period of negotiations, the United States approved 

separate amended compacts with the FSM and the RMI that went into 

effect on June 25, 2004, and May 1, 2004, respectively.

The amended compacts’ implementing legislation authorized and 

appropriated direct financial assistance to the FSM and the RMI in fiscal 

years 2004 through 2023, with the base amounts decreasing in most 

years. The annual decrements in assistance are added to the amounts 

deposited in the trust funds established under the amended compacts for 

the two nations.15 Earnings from the compact trust funds are intended to 

provide an annual source of revenue after the scheduled end of compact 

sector grants at the end of fiscal year 2023. Both the compact sector 

grants and trust fund contributions are partially adjusted for inflation each 

fiscal year.16 Appendix II provides additional information on the base and 

inflation-adjusted amounts of U.S. compact sector grants and trust fund 

contributions in fiscal years 2004 through 2023.17

The amended compacts and associated fiscal procedures agreements 

require that compact sector grants support the countries in six core 

sectors—education, health, infrastructure, environment, private sector 

development, and public sector capacity building—with the education and 

health sectors having priority. These grants are described in section 

211(a) of each compact and are referred to as compact sector grants or 

 15The grant decrement and trust fund increment for the FSM is $800,000 per year; the 

decrement for the FSM began in 2007. The grant decrement and trust fund increment for 

the RMI is $500,000 per year; the decrement for the RMI began in 2005. As a result of 

these differences, final grants to the FSM will decrease from the initial grants by a smaller 

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

16The contributions are partially adjusted for inflation by the percentage that equals twothirds of the percentage change in the U.S. gross domestic product implicit price deflator, 

or 5 percent, whichever is less in any 1 year, using the beginning of 2004 as a base.

17The U.S. contributions to the trust funds were conditioned on the FSM and the RMI 

making their own required contributions. The FSM was required to contribute at least $30 

million before September 30, 2004; the FSM made this contribution on October 1, 2004, 

and the United States made its first contribution on October 5, 2004. The RMI was 

required to contribute at least $25 million on the day the amended compact went into 

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

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

on June 1, 2004, and the United States made its initial contribution on June 3, 2004.

Amended Compacts of 

Free Association (2004–

Present)

Compact Grants and Trust 

Fund Contributions
Page 11 GAO-18-415 Compacts of Free Association

211(a) grants.18 Section 211(b) of the RMI compact further states that the 

RMI must target a specified amount of grants to Ebeye and other 

Marshallese communities within Kwajalein Atoll.19 The RMI MUORA 

states that the Kwajalein-related funds provided to the RMI in the 

compacts shall be provided through fiscal year 2023 “and thereafter for as 

long as this agreement remains in effect.”20

The amended compacts and their subsidiary trust fund agreements 

provided that each trust fund is to be managed by a compact trust fund 

committee.21 Each compact trust fund committee includes representatives 

from both the United States and the respective country, but the United 

States is required by the terms of the trust fund agreements to hold the 

majority of votes on each committee. The Director of Interior’s Office of 

Insular Affairs serves as the chair of each committee. Trust fund 

committee responsibilities include overseeing fund operation, supervision, 

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

concluding agreements with any other contributors and other 

organizations. As part of this oversight, the committees are to establish 

an investment and distribution policy. The committees are also to 

determine fiscal procedures to be used in implementing the trust fund 

 18Both compacts also provide annual grants to fund the cost of required annual audits. 

The amount provided is not adjusted for inflation and is equal to the lesser of (1) one half 

of the cost of the annual audit or (2) $500,000.

19In addition, RMI compact section 212 provides a partially inflation-adjusted $15 million 

annually starting in 2004, rising to $18 million in 2014, and partially inflation adjusted 

thereafter, for U.S. military use and operating rights. The RMI government uses the 

section 212 funds to compensate landowners on the Kwajalein Atoll.

20Compact of Free Association Military Use and Operating Rights: Agreement between 

the United States and the Marshall Islands, Signed at Majuro April 30, 2003, with Agreed 

Minutes and Annexes and Related Agreement Effected by Exchange of Letters, March 23, 

2004. The agreement extends until 2066, and the United States may renew it for an 

additional 20 years to 2086. The United States may terminate the RMI MUORA after 2023 

with 7 years advance notice. If termination occurs prior to 2053, the United States is 

required to make a termination payment equivalent to 1 or more years of annual grant 

assistance.

21The amended compacts’ implementing legislation required the trust funds to be 

established as nonprofit corporations incorporated under the laws of the District of 

Columbia.

Compact Trust Fund 

Management and 

Implementation
Page 12 GAO-18-415 Compacts of Free Association

agreements based on the fiscal procedures used for compact grant 

administration unless otherwise agreed by the parties to the agreement.22

The trust fund agreements between the United States and the FSM and 

the RMI allow for the agreements to be amended in writing at any time, 

with mutual consent of the governments. However, the U.S. legislation 

implementing the amended compacts requires that any amendment, 

change, or termination of all or any part of the compact trust fund 

agreements shall not enter into force until incorporated into an act of 

Congress.

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

appoint a trustee and an independent auditor.23 Each committee has 

retained an Executive Administrator to manage the daily operations of the 

trust fund. In addition, the committee has the authority to appoint 1 or 

more investment advisers and may enter into a separate agreement with 

1 or more money managers. The investment policy statement for each 

fund guides the fund’s investment strategy and portfolio.24

The compact trust fund agreements state that no funds, other than 

specified trust fund administrative expenses, may be distributed from the 

compact trust fund prior to October 1, 2023. From fiscal year 2024 

onward, the maximum allowed disbursement from each compact trust 

fund is the amount of the fiscal year 2023 annual grant assistance, as 

defined by the trust fund agreement, with full adjustment for inflation.25

 22The committees are also responsible for publishing annual reports on the trust funds 

within 6 months after the end of each fiscal year that describe the activities and 

management of the funds and contain audited account information and required audit 

reports. The reports are also to assess the effectiveness of the funds in contributing to the 

economic advancement and long-term budgetary self-reliance of the FSM and RMI and 

may include recommendations to improve the funds’ effectiveness.

23According to U.S. officials, in practice, the trust fund committees have used custodians 

instead of trustees, with some of the responsibilities envisioned for the trustee role given 

instead to the fund administrator or retained by the committees.

24Each compact trust fund maintains a portfolio of assets, such as bonds, stocks, or other 

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

conservative investment strategy usually carries a lower level of volatility but also brings 

lower expected returns over time; a more aggressive investment strategy seeks higher 

returns but is likely to have higher volatility, with returns on the investment varying more 

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

their return and risk levels.

25Full inflation is defined as the full percent change in the United States GDP implicit price 

deflator in the applicable fiscal year compared to the immediate preceding fiscal year.

Compact Trust Fund Structure
Page 13 GAO-18-415 Compacts of Free Association

In addition, the trust fund committees may approve additional amounts for 

special needs.

26 The RMI compact trust fund agreement excludes from 

the calculation of the allowed disbursement the amount of the Kwajaleinrelated assistance defined in section 211(b) of the RMI compact. 

Although the compact trust fund agreements state the maximum 

allowable disbursement level, they do not establish or guarantee a 

minimum disbursement level.

Each country’s compact trust fund consists of three interrelated accounts: 

the “A” account, the “B” account, and the “C” account.

• The A account is the trust fund’s corpus and contains the initial, and 

any additional, U.S. and FSM or RMI contributions; contributions from 

other countries; and investment earnings. No funds, other than 

specified trust fund administrative expenses, may be disbursed from 

the A account.

• The B account is the trust fund’s disbursement account and becomes 

active in fiscal year 2023. All income earned in 2023 will be deposited 

in the B account for possible disbursement in 2024. Each subsequent 

year’s investment income will similarly be deposited into the B 

account for possible disbursement the following year. If there is no 

investment income, no funds will be deposited in the B account for 

possible disbursement the following year.

• The C account is the trust fund’s buffer account. Through 2022, any 

annual income exceeding 6 percent of the fund balance is deposited 

in the C account. From 2023 onward, if annual income from the A 

account is less than the previous year’s disbursement, adjusted for 

inflation, the C account may be tapped to address the shortfall. After 

2023, any funds in the B account in excess of the amount approved 

for disbursement the following fiscal year are to be used to replenish 

the C account as needed, up to the maximum size of the account. The 

size of the C account is capped at three times the amount of the 

estimated annual grant assistance in 2023, including estimated 

inflation. If there are no funds in the C account, and no prior year 

investment income in the B account, no funds will be available for 

disbursement to the countries the following year.

 26Special needs are defined as projects that the government of the FSM or RMI deems 

necessary as a supplement to that portion of an annual budget to be financed by the 

compact trust funds, so long as the projects are for the purposes of Section 211 of the 

compact, as amended.
Page 14 GAO-18-415 Compacts of Free Association

Figure 2 shows the compact trust fund account structure and associated 

rules.
Page 15 GAO-18-415 Compacts of Free Association

Figure 2: Account Structure and Associated Rules for Federated States of Micronesia and Republic of the Marshall Islands 

Compact Trust Funds
Page 16 GAO-18-415 Compacts of Free Association

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

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

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

million to the RMI’s compact trust fund A account between 2004 and 

2023.27 A “D” account may also be established to hold any contributions

by the FSM and the RMI governments of revenue or income from 

unanticipated sources. According to the trust fund agreements, the D 

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

fund. Only the RMI has a D account, governed in part by an agreement 

between Taiwan and the RMI.

The amended compacts’ implementing legislation and their subsidiary 

fiscal procedures agreements established committees to oversee 

compact grants to each country—the Joint Economic Management 

Committee (JEMCO) for the FSM and the Joint Economic Management 

and Financial Accountability Committee (JEMFAC) for the RMI. Each fivemember committee comprises three representatives from the U.S. 

government and two representatives from the corresponding country, with 

the Director of Interior’s Office of Insular Affairs serving as the chair.

JEMCO’s and JEMFAC’s designated roles and responsibilities include the 

following:

• reviewing the budget and development plans from each of the 

governments;

• approving grant allocations and performance objectives;

• attaching terms and conditions to any or all annual grant awards to 

improve program performance and fiscal accountability;

• evaluating progress, management problems, and any shifts in 

priorities in each sector; and

• reviewing audits called for in the compacts.

JEMCO and JEMFAC can require that terms and conditions be attached 

to any and all annual compact sector grant awards to improve program 

 27As a result of its contributions, and approval by the trust fund committee, Taiwan has a 

representative on the RMI compact trust fund committee. When Taiwan’s representative 

was added to the committee, U.S. representation was increased by one to ensure a 

continued U.S. majority on the committee. According to U.S. officials, the RMI and Taiwan 

have discussed increasing Taiwan’s contribution to $3 million per year until 2023 and 

providing additional contributions after that time. However, according to RMI officials, 

these discussions have not been finalized.

Compact Accountability, 

Management Structures, and 

Reporting
Page 17 GAO-18-415 Compacts of Free Association

performance and fiscal accountability. Under the fiscal procedures 

agreements governing the amended compacts, the Office of Insular 

Affairs is responsible for using financial reports to monitor each country’s 

budget and fiscal performance and for using performance reports 

submitted by the countries to evaluate sector grant performance. The 

FSM and the RMI also must adhere to specific fiscal control and 

accounting procedures and are required to submit annual audit reports, 

within the meaning of the Single Audit Act as amended.28

The FSM and RMI compacts require each country to develop multiyear 

plans that are strategic in nature and continuously reviewed and updated 

through the annual budget process and that address the assistance for 

the defined sectors. In 2013, we recommended that Interior, as Chair of 

JEMCO and JEMFAC, ensure that the FSM and the RMI complete plans 

to address the impact of declining compact sector grants (in this report, 

decrement management plans).29 In November 2013, the FSM finalized 

its decrement management plan for fiscal years 2014 through 2023; the 

plan indicated that a similar planning process is to be repeated in 3-year 

intervals.30 In September 2014, the RMI finalized its decrement 

management plan for fiscal years 2015 through 2023; the plan similarly 

stated that a comprehensive planning process to address the ongoing 

decrement may proceed on a 3-year update schedule.31 Each decrement 

management plan includes commitments for budget reductions in the 

national governments and, in the FSM, the state governments, as well as 

plans to undertake actions such as tax reform.

 28Pub. L. No. 98-502 as amended and codified at 31 U.S.C. § 7501 et seq. Single audits 

are focused on recipients’ internal controls over financial reporting and compliance with 

laws and regulations governing U.S. federal awardees and provide key information about 

the federal grantee’s financial management and reporting. According to the act, single 

audit reports are due to the Federal Audit Clearinghouse within 9 months after the end of 

the audited period. The threshold for requiring single audit reports is expenditure of federal 

award money greater than $750,000 in any given year.

29GAO, Compacts of Free Association: Micronesia and the Marshall Islands Continue to 

Face Challenges Measuring Progress and Ensuring Accountability, GAO-13-675 

(Washington, D.C.: Sept. 20, 2013).

30Government of the Federated States of Micronesia, FSM-Wide Long-Term Fiscal 

Framework, FY2014-FY2023 (November 2013).

31Republic of the Marshall Islands, Decrement Management Plan, FY2015-FY2023 (Sept. 

3, 2014).
Page 18 GAO-18-415 Compacts of Free Association

The amended compacts’ implementing legislation incorporates by 

reference related agreements extending programs and services to the 

FSM and RMI. The programs and services agreement with each country 

identifies the following programs and services as being available to each 

country: U.S. postal services, weather services, civil aviation, disaster 

preparedness and response, and telecommunications.32 Each programs 

and services agreement extends for 20 years from the compact’s entry 

into force. Therefore, the agreement with the FSM ends on June 24, 

2024, and the agreement with the RMI ends on April 30, 2024.

The amended compacts’ implementing legislation (Pub. L. No. 108-188) 

and other U.S. legislation authorize other U.S. grants, programs, and 

services for the FSM and RMI. Pub. L. No. 108-188 authorized an annual 

supplemental education grant (SEG) for the FSM and RMI in fiscal years 

2005 through 2023, to be awarded in place of grants formerly awarded to 

the countries under several U.S. education, health, and labor programs. 

The FSM and RMI are not eligible for the programs replaced by the SEG 

during these years.33 Unlike the compact sector grants, the amended 

compacts’ implementing legislation authorized the SEG but did not 

appropriate funds for it. Funding for the SEG is appropriated annually to 

the U.S. Department of Education (Education) and transferred to Interior 

for disbursement. Other provisions of the amended compacts’

implementing legislation, as well as other U.S. law, make the FSM and 

RMI eligible for a number of additional programs. Other federal 

departments are responsible for the administration and oversight of their 

respective programs in the FSM and RMI.

 32The FSM programs and services agreement additionally makes the services of the 

Federal Deposit Insurance Corporation available in the FSM to provide deposit insurance 

for the Bank of the Federated States of Micronesia.

33The amended compacts’ implementing legislation authorized annual appropriations of 

about $12.2 million for the FSM and $6.1 million for the RMI, adjusted for inflation, 

beginning in 2005. Permitted uses of the SEG include, among other things, support 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 postsecondary 

educational pursuits or rewarding career endeavors. In fiscal year 2017, $16.7 million was 

appropriated to the Secretary of Education for the SEG: $11.1 million for the FSM and 

$5.6 million for the RMI. In each country, this amount is lower than the authorized SEG 

amount and is also lower than the authorized amount after inflation adjustments.

Programs and Services 

Provided in Compact-Related 

Agreements

Programs Authorized by U.S. 

Legislation
Page 19 GAO-18-415 Compacts of Free Association

Compact sector grants and the SEG, each of which end in 2023, continue 

to support a substantial portion of government expenditures in the FSM 

and RMI. In the FSM, compact sector grants and the SEG support about 

one-third of all government expenditures. The four FSM states rely on 

these grants to a greater extent than the FSM national government does. 

In the RMI, compact sector grants and the SEG support about onequarter of all government expenditures. The end of the compacts’

programs and services agreements in 2024 would also require the FSM 

and RMI to bear additional costs to provide services currently provided by 

the United States as part of the Agreements. Appendix IV provides a 

detailed summary of programs and services we identified that have been 

provided through the amended compacts, the amended compacts’

implementing legislation, compact-related agreements, and other 

provisions of U.S. law, as well as their status in the FSM and RMI after 

2023.34

The FSM national and state governments overall continue to rely on U.S. 

support for program expenditures. Compact sector grants, the SEG, and 

other U.S. grants supported almost half of FSM national and state 

government expenditures in fiscal year 2016.35 Compact sector and 

supplemental education grants that end in 2023 supported approximately 

one-third of total FSM national and state government expenditures in 

fiscal year 2016, while other U.S. grants supported an additional 15 

percent of total FSM government expenditures (see fig. 3).

 34Throughout this report, we present conclusions about the status of grants and programs 

under current U.S. law. Changes to the relevant laws prior to 2023 could change the 

eligibility status of the FSM and RMI. The availability of some grants and programs in the 

future is subject to the availability of appropriations provided for that purpose.

35FSM national government and state government component unit utilities also used 

compact sector grants to support their expenditures in fiscal years 2012 through 2016. 

Compact sector grants supported approximately 10 percent of the Chuuk Public Utility 

Corporation’s $6.2 million in average annual operating expenditures and approximately 80 

percent of its $15.9 million in total capital improvements expenditures. Utilities in the other 

three FSM states used compact sector grants to a lesser extent.

The FSM and RMI 

Continue to Rely on 

U.S. Grants and 

Programs That End in 

2023

U.S. Compact Grants and 

Other Grants Continue to 

Provide Substantial 

Support to the FSM and 

RMI Budgets

U.S. Grants Scheduled to End 

in 2023 Support About OneThird of Total FSM 

Government Expenditures
Page 20 GAO-18-415 Compacts of Free Association

Figure 3: Total Expenditures of Federated States of Micronesia (FSM) National and 

State Governments, by Revenue Source, Fiscal Year 2016

Notes: The percentages shown do not include government component units, such as public utilities 

and port authorities. While the supplemental education grant ends in 2023, the FSM would be eligible 

for some of the programs that the supplemental education grant replaced after 2023. A small number 

of other U.S. grants also end in 2023. See GAO-18-415, app. IV for a discussion of grants and 

programs that do and do not end in 2023.

Compact sector and supplemental education grants that end in 2023 

support a larger proportion of FSM state governments’ expenditures than 

of the FSM national government’s expenditures. In fiscal year 2016, 

compact sector grants and the SEG supported 8 percent of national 

government expenditures but supported 50 percent or more of each 

state’s government expenditures. Among the FSM states, Chuuk—both 

the largest state and the state with the lowest per capita income in the 

FSM—has the highest percentage of its expenditures supported by U.S. 

grants. (See table 2 for a summary of FSM national and state government 

expenditures supported by compact sector grants and the SEG, and by 

other U.S. grants.) Compact sector grants and the SEG support an even 

higher proportion of FSM states’ health and education expenditures. See 

app. III for a summary of the role of compact funds in the FSM health and 

education sectors.

FSM States Rely on U.S. 

Grants Scheduled to End in 

2023 to a Greater Extent than 

the National Government
Page 21 GAO-18-415 Compacts of Free Association

Table 2: FSM National and State Government Expenditures of Compact Grants, Supplemental Education Grant (SEG), and 

Other U.S. Grants in Fiscal Year 2016

Dollars in millions

Expenditures of compact 

sector grants and SEGa Expenditures of other 

U.S. grants

Total expenditures of 

compact sector, SEG, 

and other U.S. grants

Total 

government 

expenditures 

(dollars)

Amount 

(dollars)

Percentage of 

total 

government 

expenditures

Amount 

(dollars)

Percentage of

total 

government 

expenditures

Amount 

(dollars)

Percentage 

of total 

government 

expenditures

FSM national 

government 103.6 8.1 8 21.0 20 29.1 28

FSM states

Chuuk 37.3 26.6 71 2.0 5 28.6 76

Kosrae 14.0 6.9 49 1.7 12 8.6 61

Pohnpei 33.0 16.5 50 3.0 9 19.5 59

Yap 20.1 10.3 51 2.5 12 12.8 63

Total 208.0 68.4 33 30.2 15 98.6 48

Source: GAO analysis of FSM national government and state fiscal year 2016 single audit reports. | GAO-18-415

a

The amounts and percentages shown do not include FSM national and state government component 

units, such as public utilities and port authorities.

The RMI continues to rely on U.S. support for program expenditures. 

Compact sector and supplemental education grants that end in 2023 

supported approximately 25 percent of the RMI’s $123.5 million in 

government expenditures in fiscal year 2016, while other U.S. grants 

supported an additional 8 percent.36 Compact Kwajalein-related grants 

that do not end in 2023 supported an additional 3 percent (see fig. 4). 

Compact sector grants and the SEG support an even higher proportion of 

RMI health and education expenditures. See app. III for a summary of the 

role of compact funds in the RMI health and education sectors.

 36RMI government component unit utilities also used compact sector grants to support 

their expenditures in fiscal years 2012 through 2016. Compact sector grants provided 

more than half of the average $909,000 in total revenues of the Majuro Atoll Waste 

Corporation, which provides sanitation services, and 13 percent of the Majuro Water and 

Sewer Company’s annual average of $1.6 million in revenues and capital contributions. 

Kwajalein-related compact grants supported approximately 20 percent of the $8.6 million 

in annual average expenditures of Kwajalein Atoll Joint Utilities Resources, the utility 

provider for Ebeye.

U.S. Grants Scheduled to End 

in 2023 Support About One 

Quarter of RMI Government 

Expenditures
Page 22 GAO-18-415 Compacts of Free Association

Figure 4: Total Expenditures of RMI Government, by Revenue Source, Fiscal Year 

2016

Notes: The percentages shown do not include government component units, such as public utilities 

and port authorities, and do not include the $18 million annually, partially inflation adjusted, provided 

to the RMI government that the RMI government uses to compensate Kwajalein Atoll landowners for 

U.S. access to the atoll. While the supplemental education grant ends in 2023, the RMI would be 

eligible for some of the programs that the supplemental education grant replaced after 2023. A small 

number of other U.S. grants also end in 2023. See GAO-18-415, app. IV for a discussion of grants 

and programs that do and do not end in 2023.

FSM and RMI budgets would be affected if the countries were to assume 

responsibility for providing some additional programs and services 

currently provided by the United States.37 Current U.S. law enables U.S. 

agencies to continue providing some programs and services now 

provided under the agreements after they end in 2024. However, under 

current law, some programs and services provided in the programs and 

services agreements will end and would require the FSM and RMI to bear 

additional costs. See appendix IV for a summary of the status of 

programs and services provided under the programs and services 

agreements after the agreements end.

 37For example, absent the programs and services agreement, the FSM and RMI would 

have to bear costs associated with the transportation of mail to and from each country—a 

service currently provided by the U.S. Postal Service—and the Federal Aviation 

Administration would seek reimbursement for the technical assistance that is currently 

provided under the agreement.

End of the Programs and 

Services Agreements 

Would Also Affect FSM 

and RMI Budgets
Page 23 GAO-18-415 Compacts of Free Association

Previous studies of the FSM and RMI compact trust funds, including a 

review we conducted in 2007, found that after fiscal year 2023 the funds 

are unlikely to provide maximum annual disbursements, may provide no 

disbursements at all in some years, and are unlikely to sustain the funds’

fiscal year 2023 value. Our updated projections for the compact trust 

funds show similar outlooks. Several potential strategies could improve 

the compact trust funds’ outlook; some of these strategies could be 

implemented under the current trust fund agreements, while other 

strategies may require changing the trust fund agreements. The compact 

trust fund committees have not yet prepared distribution policies, required 

by the trust fund agreements, that could assist the countries in planning 

for the transition to trust fund income. In addition, the committees have 

not established fiscal procedures for oversight of compact trust fund 

disbursements as required by the trust fund agreements. Further, the 

trust fund committees have not yet addressed a potential misalignment 

between the timing of their annual calculation of the amounts available to 

disburse and the FSM’s and RMI’s budget timelines, potentially 

complicating each country’s planning and management.

Previous studies of the compact trust funds have found that some yearly 

disbursements from the funds after 2023 are likely to fall short of the 

inflation-adjusted amount of annual grant assistance in 2023 and that the 

funds may provide no disbursement at all in some years. Our 2007 

analysis of the compact trust funds projected a wide range of potential 

balances and found that the funds’ capacity to provide the maximum 

allowable disbursement would likely decrease over time.38 In addition, our 

analysis showed an increasing likelihood that the trust funds would 

exhaust the C account and be unable to provide any disbursements in the 

latter years of our projection.39 Other analyses have similarly found risks 

of low or zero disbursements and risks to sustainability.

 38The existing compact trust fund agreements set the maximum disbursement as the 

inflation-adjusted amount of annual grant assistance, as defined by the trust fund 

agreement, in fiscal year 2023. The relevant trust fund committee may also approve 

additional amounts for special needs. Special needs are defined as projects that the 

government of the RMI or of the FSM deems necessary as a supplement to that portion of 

an annual budget to be financed by the compact trust funds, so long as the projects are 

for the purposes stated in section 211 of the compact, as amended.

39GAO-07-513.

Compact Trust Funds 

Face Continuing 

Risks That Trust Fund 

Committees Have Not 

Yet Addressed

Previous Studies of 

Compact Trust Funds

Found Increasing Risks to 

Disbursements and 

Sustainability under 

Current Rules
Page 24 GAO-18-415 Compacts of Free Association

• Graduate School USA has prepared an annual series of economic 

reports on each country, including analyses of their compact trust 

funds.40

• In 2015, an Asian Development Bank report separately analyzed the 

trust funds.41

• The International Monetary Fund projected the status of the trust 

funds as part of its biennial FSM and RMI consultations.42

Our updated projections for the FSM and RMI compact trust funds after 

2023 indicate a continued likelihood that, given their balance at the end of 

fiscal year 201743 and current compact trust fund rules—the baseline 

scenario—the funds will be

• unable to provide maximum disbursements (equal to the inflationadjusted amount of annual grant assistance in 2023) in some years;44

• unable to provide any disbursement at all in some years, with the 

likelihood of zero disbursement in a given year increasing over time; 

and

 40Graduate School USA’s most recent annual economic reports are FSM FY2016 

Economic Brief and RMI FY2016 Economic Brief, both published in August 2017. Reports 

in prior years provided greater detail and analysis of the compact trust funds, including 

potential strategies for improving their outlooks. For example, see Graduate School USA, 

Federated States of Micronesia Fiscal Year 2015 Economic Review, October 2016; and 

Republic of the Marshall Islands Fiscal Year 2015 Economic Review (October 2016).

41Asian Development Bank, Trust Funds and Fiscal Risks in the North Pacific: Analysis of 

Trust Fund Rules and Sustainability in the Marshall Islands and the Federated States of 

Micronesia (Manila, Philippines: 2015).

42The most recent such reports are International Monetary Fund, Federated States of 

Micronesia: Staff Report for the 2017 Article IV Consultation (Washington, D.C.: Aug. 4, 

2017); and Republic of the Marshall Islands: Staff Report for the 2016 Article IV 

Consultation (Washington, D.C.: Jul. 7, 2016).

43As of September 30, 2017, the FSM compact trust fund had an unaudited balance of 

$565 million and the RMI compact trust fund had an unaudited balance of $357 million.

44The relevant trust fund committee may also approve additional funds for special needs, 

as defined in the compact trust fund agreement. We did not estimate or project the 

amount of funds approved for disbursements as special needs as part of our analysis. 

Disbursing additional funds for special needs will, in subsequent years, decrease the 

likelihood of maintaining maximum disbursements, increase the likelihood of zero 

disbursements, and decrease the likelihood that the fund maintains its inflation-adjusted 

value.

Updated Projections Show 

Continuing Risks to 

Compact Trust Fund 

Disbursements and 

Sustainability
Page 25 GAO-18-415 Compacts of Free Association

• unable to maintain the inflation-adjusted value of the compact trust 

fund after fiscal year 2023.45

The compact trust funds’ C account—designed as a buffer to protect 

disbursements from the B account in years when the funds do not earn 

enough to fund the disbursement—could be exhausted by a series of 

years with low or negative annual returns. Since current rules do not allow 

disbursements from the compact trust fund corpus (the A account), 

exhaustion of the C account would result in zero disbursement in years 

when fund returns are zero or negative.46 Thus, there may be no funds 

available to disburse even if the funds’ A accounts have a balance. As a 

result of low or zero disbursements, the countries could face economic 

and fiscal shocks and significant challenges in planning programs and 

budgets.

Our model projects that, given the baseline scenario and a 6 percent net 

return, the FSM compact trust fund will experience declining 

disbursements relative to the maximum allowable disbursements; an 

increasing chance of zero disbursements; and a declining likelihood of 

maintaining its 2023 balance. See appendix I for a full description of our 

methodology and appendix V for the baseline results with alternative net 

returns.47

• Projected disbursements. We project that the FSM compact trust 

fund will, on average, be able to provide disbursements equal to 82 

percent of the maximum allowable disbursement—the inflation-

 45Our median projection of the compact trust funds’ balance in fiscal year 2024 before any 

disbursements is $1.02 billion for the FSM compact trust fund and $644 million for the RMI 

compact trust fund.

46Because, like the A account, the C account can earn investment income, reductions in 

the C account would reduce both the value of the trust fund and the potential amount of 

future trust fund earnings.

47We selected the 6 percent projected net rate of return on the basis of our review of the 

capital market assumptions and projections used by the money managers for the compact 

trust funds as well as historical market rates of return. The model approximates a 

projection based on our set of assumptions and may differ with varying conditions. In 

addition to projecting the compact trust fund disbursements and balance on the basis of a 

6 percent net return, we estimated the trust fund baseline on the basis of alternative return 

assumptions of 5 percent, 7 percent, and 8 percent. These varying assumptions also 

show a likelihood that available compact trust fund disbursements will not reach an 

amount equivalent to maximum disbursements permitted by the compact trust fund 

agreement, continuing risk of zero disbursements, and decreasing likelihood that the fund 

will maintain or exceed its inflation-adjusted balance in fiscal year 2023. 

FSM Compact Trust Fund 

Projections
Page 26 GAO-18-415 Compacts of Free Association

adjusted amount of 2023 annual grant assistance—in its first decade 

of disbursements. The likely average disbursement falls to 49 percent 

of the maximum in the next decade and falls further in subsequent 

decades. In addition, the amount available for disbursement may 

fluctuate substantially from year to year. Depending on the compact 

trust fund’s performance in the previous year, disbursements may be 

higher or lower than the average amount if the balance in the C 

account is not sufficient to provide additional disbursements.

• Likelihood of providing zero disbursement. We project a 41 

percent likelihood that the FSM compact trust fund will be unable to 

disburse any funds in 1 or more years during the first decade of trust 

fund disbursements. This likelihood increases over time, rising to 92 

percent in fiscal years 2054 through 2063.

• Likelihood of maintaining inflation-adjusted 2023 balance. We 

project a 13 percent likelihood that the FSM compact trust fund will 

maintain or exceed its inflation-adjusted fiscal year 2023 value in 

fiscal year 2033. This likelihood decreases in later years.

Figure 5 shows our projections of the FSM compact trust fund’s average 

disbursements as a percentage of maximum disbursement, the likelihood 

of 1 or more years of zero disbursement, and the likelihood of the fund’s 

maintaining its inflation-adjusted fiscal year 2023 balance given the 

baseline scenario and a 6 percent net return.
Page 27 GAO-18-415 Compacts of Free Association

Figure 5: Projected FSM Compact Trust Fund Average Disbursements, Likelihood of Zero Disbursements, and Likelihood of 

Maintaining Inflation-Adjusted Fiscal Year 2023 Balance, Fiscal Years 2024-2063

Notes: The projections shown are based on the current trust fund rules and the compact trust fund’s 

unaudited balance at the end of fiscal year 2017. We assumed that the trust fund’s annual net return 

will have a normal distribution with a mean of 6 percent and a standard deviation of 13 percent.

We calculated the average disbursement as a percentage of the maximum allowable disbursement 

by averaging, over each 10-year period and over 10,000 simulated cases, the ratio of simulated 

disbursement to the maximum inflation-adjusted allowable disbursement in the given period.

We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero 

disbursement in each of the given periods over 10,000 simulated cases.

We calculated the likelihood that the fund balance will maintain its inflation-adjusted fiscal year 2023 

value by simulating 10,000 cases and counting those in which the simulated balance does not equal 

or exceed the projected inflation-adjusted 2023 balance.

The FSM also maintains its own trust fund separate from the compact 

trust fund (see app. VI for additional information). We did not 

independently project the FSM Trust Fund’s future balance or potential 

disbursements after 2023.

Our model projects that, given the baseline scenario and a 6 percent net 

return, the RMI compact trust fund will experience declining 

disbursements relative to the maximum allowable disbursements; an 

RMI Compact Trust Fund 

Projections
Page 28 GAO-18-415 Compacts of Free Association

increasing chance of zero disbursements; and a declining likelihood of 

sustaining its 2023 balance.

• Projected disbursements. We project that the RMI compact trust 

fund will, on average, be able to provide disbursements nearly equal 

to the inflation-adjusted amount of 2023 annual grant assistance as 

defined by the trust fund agreement—the maximum allowable—in its 

first decade of disbursements. However, the projected disbursements 

as a percentage of the maximum disbursements decline by about 10 

percentage points in each subsequent decade. In addition, the 

amount available to disburse may fluctuate substantially from year to 

year. Depending on the compact trust fund’s performance in the 

previous year, disbursements may be higher or lower than the 

average amount if the balance in the C account is not sufficient to 

provide additional disbursements.

• Likelihood of providing zero disbursement. We project a 15 

percent likelihood that the RMI compact trust fund will be unable to 

disburse any funds in 1 or more years during the first decade of trust 

fund disbursements. This likelihood increases over time, rising to 56 

percent in fiscal years 2054 through 2063.

• Likelihood of maintaining inflation-adjusted 2023 balance. We 

project a 41 percent likelihood that the RMI compact trust fund will 

maintain or exceed its inflation-adjusted fiscal year 2023 value in 

fiscal year 2033. This likelihood decreases in later years.

Figure 6 shows our projections of the RMI compact trust fund’s average 

disbursements as a percentage of maximum disbursement, its likelihood 

of 1 or more years of zero disbursement, and its likelihood of maintaining 

its inflation-adjusted fiscal year 2023 balance given the baseline scenario 

and a 6 percent net return.
Page 29 GAO-18-415 Compacts of Free Association

Figure 6: Projected RMI Compact Trust Fund Average Disbursements, Likelihood of Zero Disbursements, and Likelihood of 

Maintaining Inflation-Adjusted Fiscal Year 2023 Balance, Fiscal Years 2024-2063

Notes: The projections shown are based on the current trust fund rules and the compact trust fund’s 

unaudited balance at the end of fiscal year 2017. We assumed that the trust fund’s annual net return 

will have a normal distribution with a mean of 6 percent and a standard deviation of 13 percent.

We calculated the average disbursement as a percentage of the maximum allowable disbursement 

by averaging, over each 10-year period and over 10,000 simulated cases, the ratio of simulated 

disbursement to the maximum inflation-adjusted allowable disbursement in the given period.

We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero 

disbursement in each of the given periods over 10,000 simulated cases.

We calculated the likelihood that the fund balance will maintain its inflation-adjusted fiscal year 2023 

value by simulating 10,000 cases and counting those in which the simulated balance does not equal 

or exceed the projected inflation-adjusted 2023 balance.

The RMI also maintains its own D account separate from the compact 

trust fund (see app. VI for additional information). We did not 

independently project the D account balance or potential disbursements 

from the D account after 2023.
Page 30 GAO-18-415 Compacts of Free Association

We conducted a series of simulations to determine the likely effects of 

potential strategies for improving the outlook of the FSM and RMI 

compact trust funds. Prior studies by Graduate School USA, the Asian 

Development Bank, and the International Monetary Fund examined the 

effects of three general approaches for improving the trust funds’

outlooks: (1) reducing planned disbursements from the funds, (2) making 

additional contributions to the funds, and (3) changing the compact trust 

fund disbursement policies.48 These prior studies included strategies that 

would require changing the trust fund agreements to permit 

disbursements from the A account. To isolate the impact of individual 

changes on compact trust fund balance and disbursements, we 

developed and analyzed five potential strategies based on the 

approaches examined in the prior studies.49

1. Annual disbursements are reduced below the maximum allowable 

disbursement.

2. Additional annual contributions are made to the trust fund in fiscal 

years 2018 through 2023.

3. The trust fund agreement disbursement policies are modified to limit 

the annual disbursement to a fixed percentage of the fund’s moving 

average balance over the previous 3 years, up to the maximum 

disbursement amount defined by the current trust fund agreement.50

4. The trust fund agreement disbursement policies are modified to 

reduce the amount of the annual disbursement if the compact trust 

 48Each study did not examine every strategy. In practice, these strategies could be 

implemented in combination. For example, the compact trust funds could both receive 

additional contributions and have reduced disbursements.

49The amounts of disbursement reductions and additional contributions varied among the 

strategies examined in prior studies. We analyzed different amounts of disbursement 

reductions and trust fund contributions. See appendix VII for results of our analyses. 

50A moving average balance is continually recomputed as new data become available. 

For example, the moving average balance at the end of fiscal year 2024 would average 

the balances at the end of fiscal years 2022, 2023, and 2024. The following year, the 

moving average balance would average the balances at the end of fiscal years 2023, 

2024, and 2025, and so on.

Reducing Disbursements, 

Making Additional 

Contributions, and 

Changing Disbursement 

Policies Would Each Affect 

the Outlook of the 

Compact Trust Funds
Page 31 GAO-18-415 Compacts of Free Association

fund’s moving average balance over the previous 5 years is lower 

than a primary target amount.51

5. The trust fund agreement disbursement policies are modified to set 

the target disbursement as 2.1 percent of the compact trust fund’s 

balance in fiscal year 2024.52 The disbursement amount is further 

decreased if the fund’s moving average balance over the previous 5 

years is lower than the primary target balance.53

 51This strategy is based on the Moving Adjustment Rule (MAR), developed by Graduate 

School USA. We developed this strategy using the technical description of the moving 

adjustment rule in Graduate School USA's fiscal year 2014 Economic Review reports. 

Graduate School USA has continued to revise its model and, in April 2018, issued a 

compact trust fund analysis that uses 3-year moving averages instead of 5-year moving 

averages. See Graduate School USA, Compact Trust Funds in the Freely Associated 

States: Mechanics and Stochastic Projections (Honolulu, Hawaii; April 2018). The primary 

target is defined by Graduate School USA and refers to a conservative benchmark for the 

value of the compact trust fund that is required to yield the target disbursement at a given 

rate of return. In Graduate School USA’s analysis, the primary target is determined by 

dividing the target disbursement (the maximum allowable disbursement) by the 5 percent 

historical average long-run real geometric return of a portfolio with a chosen asset 

allocation. In our analysis, we used a long-run real geometric return of 3.2 percent derived 

from our assumed nominal arithmetic net return of 6 percent. In both our analysis and 

Graduate School USA’s 2014 analysis, disbursements are reduced by 5 percent if the 5-

year moving average fund balance is below the primary target and increased by 2 percent 

if the ratio of the five-year moving average fund balance divided by the primary target to 

last year’s distribution divided by the target distribution is greater than 1.

52This strategy is based on the Sustainability Adjustment for Enhanced Reliability 

(SAFER) model, developed by Graduate School USA. According to Graduate School 

USA, the Sustainability Adjustment for Enhanced Reliability is a method that optimizes for 

a chosen asset allocation’s risk and return characteristics. In both Graduate School USA’s 

analysis and our analysis, the initial target disbursement is determined by multiplying the 

compact trust fund balance in fiscal year 2023 by the long-run real geometric return 

divided by a constant number (called the sustainability adjustor). For our analysis, we 

calculated the initial target disbursement percentage on the basis of a 3.2 percent long-run 

real geometric return and a sustainability adjustor of 1.5. The target disbursement 

percentage would be higher if the long-run real geometric return were higher and would be 

lower if the long-run real geometric return were lower. We developed this strategy using 

the technical description of the sustainability adjustment for enhanced reliability in 

Graduate School USA's fiscal year 2014 Economic Review reports. Graduate School USA 

has continued to revise its model and, in April 2018, while our report was out for comment, 

issued an updated review that uses 3-year moving averages instead of 5-year moving 

averages and a 1.67 sustainability adjustor instead of 1.5. See Graduate School USA, 

Compact Trust Funds in the Freely Associated States: Mechanics and Stochastic 

Projections (Honolulu, Hawaii: April 2018).

53The primary target balance is determined by dividing the initial target disbursement (2.1 

percent of the compact trust fund on the basis of a 6 percent net return) by the long-run 

real geometric return on the compact trust fund (3.2 percent on the basis of a 6 percent 

nominal arithmetic net return).
Page 32 GAO-18-415 Compacts of Free Association

Implementing either of the first two potential strategies would not require 

any changes to disbursement provisions in the existing trust fund 

agreement, but implementing any of the remaining three strategies may 

require such changes. In strategies 3, 4, and 5, we analyzed strategies 

that would permit disbursement from the A account. Disbursing from the 

A account would require changing the compact trust fund agreements. 

The agreements can be amended in writing at any time, with mutual 

consent of the governments. However, the U.S. legislation implementing 

the amended compacts requires that any amendment, change, or 

termination of all or any part of the compact trust fund agreements shall 

not enter into force until incorporated into an act of Congress.

All of the potential strategies we analyzed would reduce or eliminate the 

risk of the compact trust funds experiencing years of zero disbursement. 

However, all of the potential strategies would require the countries to 

exchange a near-term reduction in resources for more predictable and 

sustainable disbursements in the longer term. Appendix VII presents the 

detailed results of our analysis.

Under the compact trust fund agreements, each trust fund committee 

must develop a distribution policy, with the intent that compact trust fund 

disbursements will provide an annual source of revenue to the FSM and 

RMI after fiscal year 2023.54 The trust fund committees could use 

distribution policies to address risks to each fund’s sustainability.55 For 

 54A distribution is defined as the transfer of funds from the compact trust fund to the 

government of the FSM or the RMI. This report refers to such transfers as disbursements.

55In addition, Standards for Internal Control in the Federal Government states that 

management should identify, analyze, and respond to risks related to achieving defined 

objectives; risk identification methods may include forecasting, strategic planning, and 

consideration of deficiencies identified through audits and other assessments. See GAO, 

Standards for Internal Control in the Federal Government, GAO-14-704G (September 

2014).

Compact Trust Fund 

Committees Have Not 

Addressed Issues Related 

to Distribution Policies, 

Fiscal Procedures, and 

Disbursement Timing

Trust Fund Committees Have 

Not Developed Distribution 

Policies Required by the 

Compact Trust Fund 

Agreements
Page 33 GAO-18-415 Compacts of Free Association

example, the committees have the discretion to disburse an amount 

below the established maximum. Our analysis of potential strategies for 

improving the funds’ outlook shows that reducing the size of 

disbursements would improve each compact trust fund’s long-term 

sustainability. According to interviews with, and documents provided by, 

the trust funds’ administrator, the committees reviewed presentations in 

2016, 2017, and early 2018 from the authors of previous studies and fund 

managers regarding the likely status of the trust funds after 2023 and 

have also reviewed options for addressing risks to the trust funds’

disbursements and sustainability, including changes to disbursement 

provisions in the compact trust fund agreements. However, as of January 

2018, according to the trust funds’ administrator, neither committee had 

developed a distribution policy. Without a distribution policy that provides 

information about the size of expected disbursements, the FSM and RMI 

are hampered in their current and ongoing efforts to plan for the potential 

reduction in U.S. compact assistance after 2023.

The compact trust fund committees have not yet established fiscal 

procedures for compact trust fund disbursements after fiscal year 2023. 

Each trust fund agreement requires the respective committee to 

determine the fiscal procedures to be used in implementing the trust fund 

agreement. The committees are to base their procedures on the compact 

fiscal procedures agreements, which define the membership and duties of 

the JEMCO and JEMFAC and single audit report requirements, among 

other things, unless the parties to the trust fund agreement agree to adopt 

different fiscal procedures.56 No compact trust fund disbursements are to 

be made unless the committee has established such trust fund fiscal 

procedures.

U.S., FSM, and RMI officials are aware of the need to determine the fiscal 

procedures that will govern oversight of compact trust fund 

disbursements. Issues related to future oversight of compact trust fund 

disbursements have been raised for discussion with U.S. representatives 

 56The compact fiscal procedures agreements extend, unless terminated by mutual 

consent, for as long as the United States provides (1) compact sector grants; (2) grants 

provided under section 105(f)(1)(B) of the amended compacts’ implementing legislation 

(which includes the SEG); (3) federal programs and services; or (4) in the case of the RMI, 

any additional grant assistance, services, or programs. According to U.S. State 

Department officials, because sector grant funds provided before the end of fiscal year 

2023 will likely continue to be used after that date, the JEMCO and JEMFAC will likely 

continue to exist for a period of time to oversee the use of the previously provided grants.

Trust Fund Committees Have 

Not Established Fiscal 

Procedures Required by 

Compact Trust Fund 

Agreements
Page 34 GAO-18-415 Compacts of Free Association

on JEMCO and JEMFAC.57 However, according to an RMI representative 

on the compact trust fund committee, that committee has not discussed 

fiscal procedures for the compact trust fund disbursements. In addition, 

FSM officials noted that they were unsure whether the JEMCO or the 

compact trust fund committees would approve specific projects.58 Without 

fiscal procedures in place, the trust fund committees will not be able to 

provide disbursements and the United States, the FSM, and the RMI will 

lack clear guidance to ensure oversight for trust fund disbursements.

The timing of the trust fund committees’ calculation of the amounts 

available for annual disbursement to the FSM and the RMI does not align 

with the countries’ budget and planning timelines.59 The amounts 

available for disbursement in a given fiscal year cannot be determined 

until each fund’s returns have been determined at the end of the prior 

year. Further, if the disbursement amounts are calculated from audited 

fund returns as determined by annual audits required by the trust fund 

agreements, the amounts may not be determined until as late as March 

31, 6 months into the fiscal year for which the disbursement is to be 

provided.60 However, both the FSM and the RMI government budget 

 57In April 2017, a presentation by Graduate School USA to the committees’ U.S. 

representatives discussed a range of oversight issues and options related to the FSM’s 

and RMI’s transition from reliance on compact grants to reliance on compact trust fund 

disbursements after fiscal year 2023. This presentation discussed whether the compact 

trust fund disbursements could be considered U.S. grant assistance subject to the fiscal 

procedures agreement or not considered U.S. grant assistance and therefore not 

allocated by JEMCO and JEMFAC or subject to their oversight. State officials stated that, 

whatever the division of responsibilities between JEMCO and JEMFAC and the trust fund 

committees, the trust fund committees will not be the sole oversight entity for the use of 

trust fund disbursements. According to the officials, State does not believe it would be

appropriate for the trust fund committees, as private, not-for-profit entities, to conduct 

oversight of the use of funds provided to sovereign governments.

58According to FSM officials, they expect that the FSM’s formula for distributing compact 

grants within the FSM will also apply to compact trust fund disbursements and no changes 

to the formula are being discussed. However, FSM representatives also noted that the 

FSM law establishing the distribution of the grants refers only to grants; therefore, the law 

would have to be amended to refer to trust fund disbursements.

59According to a representative of Graduate School USA, which has studied the compact 

trust fund in prior years, predictions of the fund balance before the end of the fiscal year 

are not reliable. The representative said that the compact trust funds’ rates of return as of 

the end of July—that is, 2 months before the end of the fiscal year—are not a reliable 

predictor of their rate of return at the end of the fiscal year.

60According to the trust funds’ administrator, there has never been a significant difference 

between the preliminary, unaudited compact trust fund balances at the end of the fiscal 

year and the final, audited balances.

Trust Fund Committees Have 

Not Addressed Issues Related 

to Disbursement Timing
Page 35 GAO-18-415 Compacts of Free Association

cycles are completed before the annual amounts available for 

disbursement will be known. As a result, the FSM and RMI would have to 

budget without knowing the amount to be disbursed, complicating their 

annual budget and planning processes. See figures 7 and 8 for the FSM 

and RMI budget timelines for fiscal year 2024, based on their current 

budget calendars, relative to the dates when the compact trust fund 

disbursement amounts will be determined on the basis of the funds’

unaudited end-of-fiscal-year balances and of their audited balances. 

Standards for Internal Control in the Federal Government—which is 

applicable to the U.S. government but can be adopted as a best practice 

by nongovernmental entities—states that management should use quality 

information to achieve the entity’s objectives.61 For example, as part of 

using quality information, the entity obtains relevant data from reliable 

internal and external sources in a timely manner based on the identified 

information requirements.

Figure 7: FSM National Government’s Projected Budget Timeline Relative to Date 

When Compact Trust Fund Disbursement May Be Determined for Fiscal Year 2024

Notes: Dates shown for fiscal year 2024 are projected on the basis of selected dates in the FSM 

national government’s budget calendar for fiscal year 2018. Not all steps in the calendar are shown.

The national government’s budget timeline is shown for illustrative purposes. According to FSM 

national government officials, the budget timeline for each of the four FSM states differs from the 

 61GAO-14-704G.
Page 36 GAO-18-415 Compacts of Free Association

national government’s and the other states’ timelines, and all of the states’ timelines start and finish 

earlier than the national government’s timeline.

Figure 8: RMI National Government’s Projected Budget Timeline Relative to Date 

When Compact Trust Fund Disbursement May Be Determined for Fiscal Year 2024

Note: Dates shown for fiscal year 2024 are projected on the basis of selected dates in the RMI 

government’s current budget calendar. Not all steps in the calendar are shown.

Given the FSM’s and RMI’s current budget processes, the FSM and RMI 

will not have accurate and timely information on the amounts that will be 

available for annual disbursements for each fiscal year. The FSM 

Secretary of Finance and Administration, a member of the compact trust 

fund committee, indicated that she is aware of the discrepancy between 

the timing of the trust fund disbursement calculations and dates in the 

FSM’s budget and planning cycle and stated that the FSM would raise the 

issue of this discrepancy as part of its planning for the transition to relying 

on compact trust fund disbursements. One of the RMI’s representatives 

on the compact trust fund committee stated that the timing of the 

disbursement calculations was a challenge and would complicate RMI 

planning and management. Each trust fund committee received a briefing 

in 2016 from the trust funds’ administrator that discussed issues 

associated with the timing of the disbursement calculations. However, as 

of January 2018, the committees had not determined how they would 

address this issue.
Page 37 GAO-18-415 Compacts of Free Association

The FSM and RMI did not implement planned budget reductions to 

address decreasing compact sector grants because of increasing 

revenue from other sources. FSM officials stated that they did not 

implement their plan’s planned budgetary reductions due to increasing 

revenues for the state and national governments. The RMI also did not 

implement budget reductions but used increased revenue, particularly 

from fishing fees, to offset the decrement in compact sector grants. FSM 

and RMI strategic plans in the key sectors of education and health focus 

on strategic goals and priorities rather than addressing the effect of the 

2023 transition on health and education budgets. However, FSM and RMI 

infrastructure plans discuss funding requirements and potential alternative 

funding sources. The FSM, the RMI, and the United States have each 

established bodies to plan to address issues related to the 2023 transition 

to trust fund income.

The FSM has not implemented budget reductions scheduled in its 

decrement management plan, the FSM-Wide Long-Term Fiscal 

Framework (Long-Term Fiscal Framework).62 The FSM’s plan included a 

firm commitment for a 6 percent reduction in real terms in FSM state 

expenditures in fiscal year 2014. Two additional 6 percent expenditure 

reductions were planned for fiscal years 2017 and 2020, but these were 

contingent reductions that would not be implemented if the FSM states 

received offsetting revenue to address the reductions. According to FSM 

national government officials, revenue increases, including growth in 

revenue from fishing fees, have enabled the FSM to avoid implementing 

the 2017 contingent 6 percent expenditure reductions, and the further 

reductions in fiscal year 2020 are not likely to be implemented. FSM 

officials cited multiple reasons for not implementing the planned 

reductions:

• Increasing revenue to the state and national governments. The 

FSM’s Long-Term Fiscal Framework included a plan to increase the 

 62Federated States of Micronesia, FSM-Wide Long-Term Fiscal Framework, FY 2014-FY 

2023.

FSM and RMI 

Decrement Plans 

Were Not 

Implemented 

Because of Increased 

Revenues, but Each 

Country Has Begun 

New Planning Efforts

Previous Decrement 

Management Plans Were 

Not Implemented Because 

of Growth in Revenues

FSM Long-Term Fiscal 

Framework
Page 38 GAO-18-415 Compacts of Free Association

proportion of compact sector grant funding distributed among the FSM 

states and reduce the proportion retained by the national government. 

This change in the FSM’s internal compact grant distribution formula 

reduced the amount of the decrement in compact sector grants 

received by the states that would have otherwise occurred. The FSM 

national government’s revenue from fishing fees has increased rapidly 

in recent years, allowing it to use this revenue in place of compact 

sector grants.63

• Effect of inflation adjustments on compact sector grants.

According to FSM officials, because of inflation adjustments, the 

nominal value of the compact sector grants has not significantly 

declined. As a result, the FSM government questions the need for 

expenditure reductions.64

In addition to scheduling budget reductions, the FSM’s Long-Term Fiscal 

Framework included plans to implement unified tax reform measures, 

which also have not been implemented. However, plans to reduce the 

national government’s share of compact sector grants and to use 

surpluses to mitigate the effect of fiscal reforms were implemented. (See 

app. VIII for a summary of the FSM’s planned actions and their 

implementation.) As of January 2018, the FSM had not updated the LongTerm Fiscal Framework but had included information updates in its 

annual budget submittal.

The RMI government has not implemented budget reductions scheduled 

in its decrement management plan.65 The RMI’s decrement management 

plan divided proposed budgetary reductions into three periods: fiscal 

years 2016 through 2017, fiscal years 2018 through 2020, and fiscal 

years 2021 through 2023. Only the reductions in the first period were to 

be considered binding, with adjustments in the later periods subject to 

 63The FSM national government receives and controls fishing fee revenue. The 

government’s revenue from Parties to the Nauru Agreement fishing fees increased from 

$17.7 million in fiscal year 2010 to $63.4 million in fiscal year 2016. The FSM national 

government had a budget surplus in fiscal years 2012 through 2016 as a result of the 

increased fees. In fiscal year 2016 the FSM overall had a surplus of approximately $24 

million (7 percent of GDP). The national government had a fiscal surplus of $26.6 million, 

while all four states had deficits that together totaled approximately $2.5 million.

64While the nominal value of compact sector grants has not declined in recent years, the 

partial inflation adjustment and declining amount of the base grant result in a decline in 

resources in real terms.

65Republic of the Marshall Islands, Decrement Management Plan, FY 2015-FY 2023

(Sept. 3, 2014).

RMI Decrement Management 

Plan
Page 39 GAO-18-415 Compacts of Free Association

review during the next 3-year planning cycle. According to RMI 

government officials, significant growth in fishing fee revenue and growth 

in ship registry and income tax revenue has minimized the initially 

anticipated impact of the compact decrements, thereby reducing the need 

to implement expenditure reductions.66 RMI officials noted that it expected 

to continue to use its own revenue in place of compact funds in fiscal 

years 2019 through 2023.

In addition to scheduling the budget reductions, the RMI decrement 

management plan includes plans to implement new taxes, program 

fishing fees into the annual budget, reduce subsidies to state-owned 

enterprises, and reduce compensation to Majuro landowners for the use 

of their land for utilities. The RMI has programmed a portion of its fishing 

fee surplus into the annual budget in each fiscal year from 2015 to 2017 

but has not implemented other planned actions. (See app. VIII for a 

summary of planned actions and their implementation.) As of January 

2018, the RMI government had not updated its plan and did not intend to 

do so, according to RMI officials. However, the officials stated that the 

government has incorporated elements of the plan, particularly its 

expenditure analysis, into the RMI’s medium term budget and investment 

framework, a planning and budgeting document submitted to JEMFAC in 

August 2017. In comments on a draft of this report, the RMI stated that it 

is developing a long-term fiscal framework in addition to the medium term 

budget and investment framework. According to the RMI, the long-term 

fiscal framework will have a 10-year outlook through 2028 and take into 

account compact decrements and anticipated resources from the 

compact trust fund and other sources.

FSM national and state infrastructure plans provide specific budgetary 

information to address the fiscal year 2023 transition from compact sector 

 66Fishing fees received as a result of the Parties to the Nauru Agreement have increased 

rapidly in recent years, from $2.0 million in fiscal year 2010 to $26.3 million in fiscal year 

2016. The RMI had a fiscal surplus in each fiscal year from 2014 to 2016, with the 2016 

surplus rising to approximately $8 million (4 percent of GDP).

FSM and RMI Have 

Developed Plans for

Health, Education, and 

Infrastructure

FSM Sector Plans
Page 40 GAO-18-415 Compacts of Free Association

grants to trust fund income, such as funding requirements and sources of 

funding for planned infrastructure projects in fiscal years 2016 through 

2025. The FSM national and state health and education plans generally 

focus on the national and state health and education departments’

strategic goals and priorities rather than discussing budget changes or 

new revenue generation strategies to address the possibility of reduced 

resources after 2023.67

In addition to preparing sector strategic development plans, the FSM 

national and state governments issued the 2023 Action Plan in 2014, 

designed to address fiscal and economic challenges before and after 

compact sector grant funding ends in fiscal year 2023.68 In contrast to the 

FSM Long-Term Fiscal Framework, which committed to specific 

expenditure reductions and government actions prior to fiscal year 2023, 

the 2023 Action Plan includes an economic growth strategy that seeks to 

boost private sector development. The plan addresses economic growth 

strategies and improved performance in key economic sectors such as 

tourism, agriculture, and fisheries and identifies the need for the FSM 

national and state governments to limit expenditure growth in the medium 

and long terms.

The RMI’s infrastructure plan addresses the scheduled cessation of 

compact sector grant assistance in fiscal year 2023 through a review of 

potential future budgets, while the RMI’s education and health plans 

outline strategic goals and priorities. Similar to the FSM’s infrastructure 

plans, the RMI National Infrastructure Plan reviews budget information to 

address the fiscal year 2023 transition, such as planned infrastructure 

investments and potential alternative funding sources for fiscal years 

2017 through 2026.69 The RMI’s national education and health plans 

primarily focus on goals and objectives to address key challenge areas in 

health and education over the next few fiscal years and do not discuss 

specific budget changes for the transition in 2023.

 67A plan for Yap’s education sector is not available.

68Government of the Federated States of Micronesia, 2023 Planning Committee, 2023 

Action Plan (Palikir, Pohnpei: November 2014).

69In comments on a draft of this report, the RMI stated that it is also developing a 

comprehensive infrastructure development and maintenance plan that will integrate 

compact and noncompact infrastructure resources, programs, and projects over a 10-year 

span up to 2028.

RMI Sector Plans
Page 41 GAO-18-415 Compacts of Free Association

Both the FSM and the RMI have formed planning committees and 

charged them with planning for the fiscal year 2023 transition from 

compact sector grants to compact trust fund income. In addition, the U.S. 

Department of State (State) has organized a U.S. interagency planning 

group to help coordinate U.S. policy related to the transition.

In 2016, the FSM national government established a Joint Compact 

Review and Planning Committee to coordinate FSM planning for the 

transition from compact sector grants to trust fund income in 2023. The 

committee is mandated to, among other things, set goals in anticipation of 

the end of compact grants, develop strategies and alternatives, identify 

financial assistance sources, analyze economic information, and provide 

periodic reports to the FSM Congress. The committee first met in May 

2017. In September 2017, the committee hired an Executive Director, 

who in turn hired an economist and Executive Secretary prior to the 

committee’s February 2018 meeting. As of January 2018, according to 

FSM officials, the committee had not produced any publicly available 

products but had collected information from various FSM government 

agencies.

According to the RMI Office of Compact Implementation, the RMI 

established the Compact Review Commission in late 2016 to plan for the 

fiscal year 2023 transition from compact sector grants to trust fund 

income. According to the Office of Compact Implementation, the 

commission is mandated to review the compact and make 

recommendations to the cabinet regarding priorities to be addressed for 

the fiscal year 2023 transition. Specific priorities may include the status of 

federal programs that will expire in fiscal year 2023, the adequacy of the 

compact trust fund to provide needed revenue, and other issues relevant 

to the cessation of compact grant assistance. In January 2018, the RMI 

Presidential Cabinet appointed a Compact Review Commission 

Coordinating Committee, consisting of the RMI Ambassador to the United 

States, the Director of the RMI Office of Compact Implementation, the 

Secretary of Finance, a private sector representative, and a legal adviser, 

and directed it to coordinate the commission’s meetings, actions, and 

reporting.

State began holding regular meetings of the Interagency Working Group 

on the Freely Associated States in February 2017 to provide guidance 

and oversight for policy concerning the Compacts of Free Association and 

to coordinate U.S. policy in light of the fiscal year 2023 transition. The 

FSM, RMI, and U.S. 

Planning Groups Have 

Been Formed to Prepare 

for Transition to Trust 

Fund Income

FSM Joint Compact Review 

and Planning Committee

RMI Compact Review 

Commission

Ongoing U.S. Interagency 

Working Group
Page 42 GAO-18-415 Compacts of Free Association

group met monthly through the rest of 2017, except in November. The 

monthly meetings have focused individually on the FSM and RMI, as well 

as addressed cross-cutting issues such as donor coordination.70 For 

example, in March and July 2017, the group’s monthly meetings focused 

on the FSM and included participation by the U.S. Ambassador and the 

FSM Ambassador, respectively. Similarly, in April and June 2017, the 

group’s monthly meetings focused on the RMI and included participation 

by the U.S. and RMI ambassadors, respectively. According to State 

officials, the meetings will continue indefinitely on a monthly basis.71

The U.S. compacts of free association with the FSM and the RMI 

provided a framework for the United States and the two countries to work 

toward, among other things, the goal of assisting the FSM and the RMI in 

their efforts to achieve economic development and self-sufficiency. The 

end of U.S. compact sector grants in fiscal year 2023 and the beginning 

of disbursements from the compact trust funds in fiscal year 2024 will 

mark a key transition in these ongoing efforts, and the FSM and RMI are 

currently preparing plans for addressing issues associated with the 

transition to compact trust fund income. The countries’ transition to relying 

on income from the compact trust funds will likely require significant

budgetary choices. However, lacking the trust fund distribution policies 

required under the trust fund agreements, the FSM and RMI are 

hampered in their efforts to plan for the potential reduction in U.S. 

compact assistance after 2023. In addition, without the required fiscal 

procedures governing trust fund actions after 2023, the trust fund 

committees will be unable to make disbursements and the United States, 

the FSM, and the RMI will not have assurance of necessary oversight of 

trust fund disbursements. Finally, without alignment between the timing of 

the trust fund committees’ annual calculation of the amounts available for 

disbursement and the countries’ annual budget cycles, the FSM and RMI 

 70The Interagency Working Group has held meetings focused on Palau in addition to 

those focusing on the FSM and RMI.

71U.S. participants in the group have included representatives from the U.S. Departments 

of Agriculture, Commerce, Defense, Education, Energy, Homeland Security, Health and 

Human Services, Housing and Urban Development, the Interior, State, Transportation, the 

Treasury, and Veterans Affairs; the Environmental Protection Agency; the Federal Deposit 

Insurance Corporation; the National Science Foundation; the Office of Management and 

Budget; the Peace Corps; USAID; the U.S. Postal Service; and the U.S. Trade 

Representative.

Conclusions
Page 43 GAO-18-415 Compacts of Free Association

will have to plan their budgets for each fiscal year without knowing the 

amount of the disbursements from the compact trust funds.

We are making the following six recommendations to Interior:

The Secretary of the Interior should ensure that the Director of the Office 

of Insular Affairs, as Chairman of the FSM compact trust fund committee, 

works with other members of the committee to develop a distribution 

policy for the FSM compact trust fund, as required by the compact trust 

fund agreement, that takes into account potential strategies that could 

address risks to the fund’s ability to provide a source of income after fiscal 

year 2023. (Recommendation 1)

The Secretary of the Interior should ensure that the Director of the Office 

of Insular Affairs, as Chairman of the FSM compact trust fund committee 

and of the FSM Joint Economic Management Committee, works with 

other members of the committees to develop the fiscal procedures 

required by the compact trust fund agreement. (Recommendation 2)

The Secretary of the Interior should ensure that the Director of the Office 

of Insular Affairs, as Chairman of the FSM compact trust fund committee, 

works with other members of the committee to address the timing of the 

calculation of compact trust fund disbursements. (Recommendation 3)

The Secretary of the Interior should ensure that the Director of the Office 

of Insular Affairs, as Chairman of the RMI compact trust fund committee, 

works with other members of the committee to develop a distribution 

policy for the RMI compact trust fund, as required by the compact trust 

fund agreement, that takes into account potential strategies that could 

address risks to the fund’s ability to provide a source of income after fiscal 

year 2023. (Recommendation 4)

The Secretary of the Interior should ensure that the Director of the Office 

of Insular Affairs, as Chairman of the RMI compact trust fund committee 

and of the RMI Joint Economic Management and Financial Accountability 

Committee, works with other members of the committees to develop the 

fiscal procedures required by the compact trust fund agreement. 

(Recommendation 5)

The Secretary of the Interior should ensure that the Director of the Office 

of Insular Affairs, as Chairman of the RMI compact trust fund committee, 

Recommendations for 

Executive Action
Page 44 GAO-18-415 Compacts of Free Association

works with other members of the committee to address the timing of the 

calculation of compact trust fund disbursements. (Recommendation 6)

We provided a draft of this report to the Departments of Agriculture, 

Commerce, Defense, Education, Energy, Health and Human Services, 

the Interior, Labor, State, the Treasury, and Transportation; the Federal 

Communications Commission; the Federal Deposit Insurance 

Corporation; the Federal Emergency Management Agency; the National 

Science Foundation; USAID; and the U.S. Postal Service, as well as to 

the FSM and RMI. We also provided copies of the draft to the 

administrator of each compact trust fund and to Graduate School USA for 

their technical review. The Department of the Interior, the U.S. Postal 

Service, and the FSM and RMI provided official comments, which are 

reproduced in appendixes IX through XII with, where relevant, our

responses. The Departments of Agriculture, Education, Health and 

Human Services, Labor, State, and Transportation; the Federal Deposit 

Insurance Corporation; USAID; the RMI; the trust funds’ administrator, 

and Graduate School USA provided technical comments, which we 

incorporated as appropriate.

The following summarizes the official comments from Interior, the U.S. 

Postal Service, the FSM, and the RMI, and our responses.

• Interior concurred with our recommendations and stated that 

discussions to address them are ongoing within the trust fund 

committees. In addition, Interior stated that a working group 

comprising staff from Interior’s Office of Insular Affairs and the 

Department of State’s Office of Australia, New Zealand and Pacific 

Island Affairs will present recommended actions related to our 

recommendations to the trust fund committees in 2018.

• The U.S. Postal Service stated that, in general, the report includes 

helpful information on the compact obligations regarding postal 

services provided to the FSM and RMI. However, the U.S. Postal 

Service also provided additional information on the reimbursement 

shortfall for its services since 2002 in the freely associated states. The 

U.S. Postal Service stated that it recommends that, upon expiration of 

the programs and services agreements, the FSM and RMI be treated 

as international postal origin and destination points.

• The FSM concurred with our recommendations to Interior. In addition, 

the FSM stated that the programs and services provided by U.S. 

agencies were essential to the FSM and should continue to the 

Agency Comments 

and Our Evaluation
Page 45 GAO-18-415 Compacts of Free Association

greatest extent possible after 2023. The FSM would like to work with 

U.S. officials to ensure timely approval of continuing these programs 

and services. The FSM also noted that we had reported the potential 

for the FSM compact trust fund to not provide disbursements sufficient 

to cover the estimated value of expiring federal services in 2002, prior 

to the signing of the amended compact.72 Further, the FSM provided 

additional information regarding its Long-Term Fiscal Framework and 

summarized ongoing public sector and tax reform efforts and its own 

contributions to the FSM Trust Fund.

• The RMI concurred with our recommendations to Interior and 

provided additional comments regarding the recommendations. The 

RMI asserted that, absent accountability issues, the maximum annual 

disbursement amount should be disbursed from the compact trust 

fund. However, as our report notes, the compact trust fund 

agreements state the maximum allowable disbursement level and do 

not establish or guarantee a minimum disbursement level. The RMI 

also stated that it would prefer that future accountability procedures 

be based on a new agreement rather than a reshaping of the current 

fiscal procedures agreement. In addition, the RMI raised the issue of 

compensation under the tax and trade provision of the original 

compact as well as the effect of delays in investing the RMI compact 

trust fund on its current value. We discuss the tax and trade 

provisions in Appendix VII of our report. The RMI also recommended 

that amendments to the trust fund agreement should not require 

action by the U.S. Congress. As our report notes, the U.S. legislation 

implementing the amended compacts requires that any amendment, 

change, or termination of all or any part of the compact trust fund 

agreements shall not enter into force until incorporated into an act of 

Congress. Finally, the RMI noted that programs and services provided 

through the amended compacts' implementing legislation (Pub. L. No. 

108-188) and the compact programs and services agreement were 

essential and that the RMI could not replace them by using its own 

resources.

We are sending copies of this report to the appropriate congressional 

committees and to the Departments of Agriculture, Commerce, Defense, 

Education, Energy, Health and Human Services, the Interior, Labor, 

State, the Treasury, and Transportation; the Federal Communications 

 72See GAO, Compacts of Free Association: An Assessment of Current U.S. Proposals to 

Extend Assistance, GAO-02-857T (Washington, D.C.: July 17, 2002).
Page 46 GAO-18-415 Compacts of Free Association

Commission; the Federal Deposit Insurance Corporation; the Federal 

Emergency Management Agency; the National Science Foundation; 

USAID; and the U.S. Postal Service, as well as the President of the FSM

and the President of the RMI. In addition, the report will be available at no 

charge on GAO’s website at http://www.gao.gov.

If you or your staff have questions about this report, please contact me at 

(202) 512-3149 or gootnickd@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix XIII.

Sincerely yours,

David Gootnick

Director, International Affairs and Trade
Appendix I: Objectives, Scope, and 

Methodology

Page 47 GAO-18-415 Compacts of Free Association

We were asked to review issues related to the Federated States of 

Micronesia’s (FSM) and Republic of the Marshall Islands (RMI) transition 

from compact grant assistance to relying on income from the compact 

trust funds. This report examines (1) the use and role of federal funds and 

programs in the FSM and RMI budgets, (2) projected compact trust fund 

disbursements and potential strategies to address risks to those 

disbursements, and (3) FSM and RMI efforts to prepare for the scheduled 

decrements in compact grant funding and the transition to relying on 

compact trust fund income.

To identify the use and role of federal funds and programs, we reviewed 

relevant documents and interviewed knowledgeable U.S., FSM, and RMI 

officials during our site visits to the RMI in July 2017 and in the FSM in 

July and August 2017. We reviewed U.S. law; the amended compacts 

and associated programs and services agreements and military use and 

operating rights agreements with each country; each country’s 

government and component unit single audit reports for fiscal years 2012 

through 2016; and U.S. Region IX reports for fiscal years 2015 and 

2016.1 We analyzed expenditure and funding data in FSM and RMI single 

audit reports, including their Schedule of Expenditures of Federal Awards, 

to identify the sources of funds expended by the FSM national and state 

governments, the RMI national government, and their component units 

and calculated federal funds as a percentage of each entity’s total 

resources.2 We reviewed the single audit reports and found that the 

auditors did not express any qualified or adverse opinions regarding the 

information they used to prepare the audits’ Schedule of Expenditures of 

Federal Awards, which lists the amount and use of federal grants. We 

concluded that these data are sufficiently reliable for estimating the role of 

federal programs in the FSM and RMI budgets.

 1

Region IX Federal Regional Council, Outer Pacific Committee, FY 2016 Report on 

Federal Financial Assistance to the U.S. Pacific and Caribbean Islands (May 1, 2017); and 

FY 2015 Report on U.S. Federal Financial Assistance to the U.S. Affiliated Pacific Islands

(March 2016).

2

The threshold for requiring single audit reports is expenditure of $750,000 or more in 

federal funds in any given year. All FSM states and the FSM and RMI national 

governments expended above the threshold amount in each year of our analysis. If a 

component unit expended an amount below the threshold, we may not have captured 

those federal funds in our analysis.

Appendix I: Objectives, Scope, and 

Methodology

Federal Funds and 

Programs
Appendix I: Objectives, Scope, and 

Methodology

Page 48 GAO-18-415 Compacts of Free Association

To identify the FSM and RMI national government component units and 

FSM state government component units, we reviewed the websites of, 

and audit reports from, the FSM Office of the National Public Auditor and 

the RMI Office of the Auditor-General and confirmed the list of component 

units we identified with FSM and RMI officials. We also discussed the 

uses of federal funds in the countries with FSM national and state 

government officials, RMI government officials, and FSM and RMI 

component unit representatives during our site visits to the countries. Our 

portrayal of the role of federal funds in the government and component 

unit budgets does not capture the value of any noncash goods and 

services that do not appear in the single audit reports. In addition, it does 

not capture benefits that some programs provide to individuals, such as 

U.S. Department of Agriculture rural housing loans and Federal Deposit 

Insurance Corporation insurance that benefits depositors at the Bank of 

the Federated States of Micronesia.

To determine the legal status of U.S. programs, services, and grants after 

fiscal year 2023, we analyzed the amended compacts, the compactrelated agreements, and U.S. law governing the programs, services, and 

grants that we identified to determine whether, under current law, they 

would still be available to the FSM and RMI after the end of that fiscal 

year. For the programs and services agreement with each country, we 

reviewed the status of programs and services when the agreements end 

in fiscal year 2024. Our legal analysis included programs, services, and 

grants that we identified from the compacts, the amended compacts’

implementing legislation, the military use and operating rights 

agreements, and the programs and services agreements. We also 

included in our legal analysis the programs (1) that we identified through 

the single audit reports and Region IX reports and (2) that were not 

already identified through our review of the compacts, the amended 

compacts’ implementing legislation, and the compact-related agreements; 

and (3) that the single audit reports showed as having expenditures 

above $200,000 in any year in fiscal years 2012 through 2016 or the 

Region IX reports identified as providing more than $200,000 in federal 

funding in fiscal years 2015 or 2016. We prepared an initial list of federal 

programs based on our review. We then provided our list of programs to 

the FSM, the RMI, and the U.S. Departments of State and the Interior for 

their review and updated the list on the basis of information they provided.

We prepared a preliminary analysis of the post-2023 status of the 

programs and funding sources we identified and asked officials of the 

relevant U.S. agencies to review and comment on the accuracy of the list. 

As part of this analysis, we contacted officials from the Departments of 
Appendix I: Objectives, Scope, and 

Methodology

Page 49 GAO-18-415 Compacts of Free Association

Agriculture, Commerce, Defense, Education, Energy, Health and Human 

Services, the Interior, Labor, State, and Transportation; the Federal 

Communications Commission; the Federal Deposit Insurance 

Corporation; the Federal Emergency Management Agency; the National 

Science Foundation; the U.S. Agency for International Development; and 

the U.S. Postal Service. We incorporated into our analysis the comments 

that these officials provided, and we again asked for their review of our 

analysis before we completed our draft report. Our conclusions are based 

on a review of current law. Therefore, any changes in the applicable law 

subsequent to our report but before 2023 may affect the FSM’s and RMI’s 

eligibility for U.S. programs and funding. In addition, the availability of

programs depends on appropriations made for that purpose. Although we 

took multiple steps to validate our list of programs with the FSM and RMI 

and the relevant U.S. agencies, our analysis may not have captured all 

U.S. grants and programs provided in the FSM and RMI.

To examine projected compact trust fund disbursements and actions to 

address risks, we reviewed previous studies of the compact trust funds;3

the U.S.-FSM and U.S.-RMI compact trust fund agreements; and other 

governance and reporting documents such as investment policy 

statements, presentations to the compact trust fund committees, audits, 

and annual reports. We also interviewed FSM and RMI officials, compact 

trust fund committee members, authors of the previous studies, and the 

funds’ administrator, investment advisers and money managers.

 3

We reviewed the following previous studies: GAO, Compacts of Free Association: Trust 

Funds for Micronesia and the Marshall Islands May Not Provide Sustainable Income, 

GAO-07-513 (Washington, D.C.: June 15, 2007); Graduate School USA, Compact Trust 

Funds in the Freely Associated States: Mechanics and Stochastic Projections (Honolulu, 

Hawaii: April 2018); Graduate School USA, FSM FY2016 Economic Brief (Honolulu, 

Hawaii: August 2017); Graduate School USA, RMI FY2016 Economic Brief (Honolulu, 

Hawaii: August 2017); Graduate School USA, Federated States of Micronesia Fiscal Year 

2015 Economic Review (Honolulu, Hawaii: October 2016); Graduate School USA, 

Republic of the Marshall Islands Fiscal Year 2015 Economic Review (Honolulu, Hawaii:

October 2016); Graduate School USA, Federated States of Micronesia Fiscal Year 2014 

Economic Review (Honolulu, Hawaii: September 2015); Graduate School USA, Republic 

of the Marshall Islands Fiscal Year 2014 Economic Review (Honolulu, Hawaii: September 

2015); Asian Development Bank, Trust Funds and Fiscal Risks in the North Pacific: 

Analysis of Trust Fund Rules and Sustainability in the Marshall Islands and the Federated 

States of Micronesia (Manila, Philippines: 2015); International Monetary Fund, Federated 

States of Micronesia: Staff Report for the 2017 Article IV Consultation (Washington, D.C.: 

Aug. 4, 2017); and International Monetary Fund, Republic of the Marshall Islands: Staff 

Report for the 2016 Article IV Consultation (Washington, D.C.: Jul. 7, 2016).

Compact Trust Funds
Appendix I: Objectives, Scope, and 

Methodology

Page 50 GAO-18-415 Compacts of Free Association

To project the compact trust funds’ likely income at their current value and 

under current trust fund rules (i.e., the baseline scenario), we built a 

Monte Carlo simulation model and performed 10,000 trial runs of 

projected returns and disbursements over a four-decade time period, 

using random values for key variables.4

We used the following key assumptions in our compact trust fund 

analysis:

• Compact trust fund balance. We used the unaudited FSM and RMI 

fiscal year 2017 year-end compact trust fund balances.

• C account balance. We estimated the C account balance on the 

basis of the unaudited FSM and RMI fiscal year 2017 year-end 

balances.

To assess the reliability of the unaudited balances, we reviewed the 

previous years’ audits and confirmed with the trust funds’ Administrator 

that previous years’ audits had not resulted in any significant differences 

between the preliminary balances and the final audited balances. We 

concluded that the unaudited balances were sufficiently reliable as a 

basis for our projections of future trust fund performance. The March 

2018 audited fund balances, released after we completed our analysis, 

were within $5 of the unaudited fund balances.

• Amount of future compact trust fund contributions. We based the 

amounts of future annual U.S. contributions to both trust funds on the 

inflation-adjusted amounts estimated in the U.S. Department of the 

Interior’s (Interior) Office of Insular Affairs’ Budget Justifications and 

Performance Information, Fiscal Year 2018. For the RMI, we assumed 

that Taiwan would continue to contribute $2.4 million per year to the 

RMI’s A account each year through 2023 in keeping with Taiwan’s 

May 2005 agreement with the RMI.

• Estimated annual grant assistance for fiscal year 2023. We based 

our estimates of fiscal year 2023 assistance on the inflation-adjusted 

amounts estimated by the Office of Insular Affairs.5 The office 

 4

A Monte Carlo analysis is a problem-solving technique that approximates the probability 

of certain outcomes by performing multiple trial runs, or simulations, using random 

variables. The simulations capture the volatility of market returns and reflect that volatility 

in the projection of future earnings.

5

Department of the Interior, Office of Insular Affairs, Budget Justifications and 

Performance Information, Fiscal Year 2018.
Appendix I: Objectives, Scope, and 

Methodology

Page 51 GAO-18-415 Compacts of Free Association

estimated that the FSM would receive $82 million in annual grant 

assistance in fiscal year 2023 and that the RMI would receive $36 

million, including Kwajalein-related assistance. In keeping with the 

RMI compact trust fund agreement, we excluded from our analysis 

grants provided to the RMI under compact section 211(b) for 

Kwajalein-related assistance, resulting in an estimated $27 million in 

grant assistance to the RMI under compact section 211 in fiscal year 

2023. The actual amount of annual grant assistance in fiscal year 

2023 will depend on actual inflation rates in the years preceding 2023. 

Different assumptions about the inflation rates will result in different 

estimates of the amount of fiscal year 2023 annual grant assistance.6

• Net rate of return. In the baseline scenario, we present our results 

based on a 6 percent rate of return after fees are deducted. To select 

and assess the reasonability of this projected net rate of return, we 

reviewed the capital market assumptions and projections used by the 

money managers for the compact trust funds as well as historical 

market rates of return. However, because projecting the funds’ longterm performance using the current portfolio and economic 

assumptions has limitations, we also conducted our analyses using 

different nominal values for the net returns—5 percent, 7 percent, and 

8 percent—in each case using a standard deviation of 13 percent.7

These results are presented in appendix V. We assumed a normal 

distribution, but we tested the same baseline analyses with a tdistribution and found that a t-distribution did not substantially affect 

the results.

 6

The Department of the Interior, Office of Insular Affairs, Budget Justifications and 

Performance Information, Fiscal Year 2019 includes a reduced estimate of future inflation, 

resulting in estimated fiscal year 2023 annual grant assistance of $81.6 million in the FSM 

and $26.7 million in the RMI. The fiscal year 2017 compact trust fund financial statements

estimated that fiscal year 2023 grant assistance will be $79.7 million in the FSM and $26.1 

million in the RMI. In August 2017, Graduate School USA’s FSM FY2016 Economic Brief

and RMI FY2016 Economic Brief estimated fiscal year 2023 annual grant assistance to be 

$81 million in the FSM and $26.5 million in the RMI. 

7

This standard deviation is an average of the standard deviations for the FSM and RMI 

compact trust funds expected by the compact trust fund money managers. Although we 

believe using a standard deviation based on those in the fund managers’ capital market 

assumptions is reasonable, using a single standard deviation based on the current 

portfolio and economic assumptions has limitations when projecting the long-term 

performance of the funds. Trade-offs between risk and return may affect the expected 

standard deviation for varying rates of return. However, finance research papers we 

reviewed that examined data on previous market returns did not find a consistent pattern 

for the direction of the change, finding both positive and negative relationships between 

risk and return. 
Appendix I: Objectives, Scope, and 

Methodology

Page 52 GAO-18-415 Compacts of Free Association

• Inflation rate after fiscal year 2023. We applied the 2 percent longterm inflation rate projected by the Congressional Budget Office.

To further analyze actions that could address risks to the compact trust 

funds, we modeled alternative strategies for managing the funds that 

were analyzed by previous studies of the compact trust funds. We 

identified previous studies through a literature search and by interviewing 

cognizant agency and trust fund officials. On the basis of this review, we 

developed five potential strategies that are representative of the 

approaches identified in previous studies. These five strategies are 

examples of many possible strategies, including varying amounts of 

disbursement reductions, additional contributions, and methods of 

calculating annual disbursements. We are not recommending any specific 

strategy. To provide additional information about potential outcomes, we 

also analyzed another four strategies that assumed a lower amount of 

additional trust fund contributions, lower disbursement reductions, or a 

lower percentage of the compact trust fund balance that could be 

withdrawn (see app. VII). To help ensure that we had appropriately 

reproduced the methods used in previous studies, we shared our 

preliminary results for strategy 4, which modeled the Moving Adjustment 

Rule, and strategy 5, which modeled the Sustainability Adjustment for 

Enhanced Reliability (SAFER), with the Graduate School USA 

representatives who had initially prepared these potential strategies.8 We 

analyzed each strategy separately to isolate the impact of individual 

changes in the strategy on compact trust fund balance and 

disbursements. However, in practice, these individual changes could 

occur in combination with each other. We again performed the Monte 

Carlo analysis, using the same key assumptions as in the baseline 

scenario, to determine the likely effects, relative to the baseline, of five 

potential strategies representing three approaches: (1) reducing annual 

compact trust fund disbursements; (2) making additional contributions; (3) 

and changing the disbursement policies, including strategies that would 

require changing the trust fund agreements to permit disbursements from 

the A account. We present the results of this analysis with a 6 percent net 

return, a standard deviation of 13 percent, and a normal distribution and 

 8

We based strategies 4 and 5 on the technical description of MAR and SAFER in 

Graduate School USA's fiscal year 2014 trust fund report. Graduate School USA has 

continued to revise its model and, in April 2018, issued an updated review that uses 3-

year moving averages instead of 5-year moving averages. See Graduate School USA, 

Compact Trust Funds in the Freely Associated States: Mechanics and Stochastic 

Projections (Honolulu, Hawaii: April 2018).
Appendix I: Objectives, Scope, and 

Methodology

Page 53 GAO-18-415 Compacts of Free Association

tested the results with 5 percent, 7 percent, and 8 percent net returns 

(see app. VII for further details).

To summarize and compare our simulation results for the baseline and 

alternate scenarios, we analyzed the average disbursements in nominal 

dollars, the average disbursements in comparison with maximum 

disbursements,9 the likelihood of 1 or more years with zero disbursement, 

and the likelihood that the trust funds will maintain their inflation-adjusted 

value after fiscal year 2023.

• We calculated the average disbursement in the given time periods by 

averaging simulated disbursements over 10-year periods (averaging 

first over 10 years and then over 10,000 simulated cases).

• We calculated the average disbursement as a percentage of the 

maximum allowable disbursement by averaging the ratio of each 

simulated disbursement to the maximum inflation-adjusted allowable 

disbursement in the given period (averaging first over 10 years and 

then over 10,000 simulated cases).

• We calculated the likelihood of zero disbursement by counting cases 

with 1 or more years of zero disbursement among the 10,000 

simulated cases in each 10-year period.

• We calculated the likelihood that the fund balance will maintain its 

inflation-adjusted fiscal year 2023 value by counting simulation cases 

where the simulated balance exceeds or equals its projected inflationadjusted 2023 balance in the given year.

We report the disbursement results averaged by decade for the first 40 

years of compact trust fund disbursements—fiscal years 2024 through 

2033, fiscal years 2034 through 2043, fiscal years 2044 through 2053, 

and fiscal years 2054 through 2063—to summarize the overall trend in 

disbursements. However, depending on market volatility, disbursements 

during these decades are likely to fluctuate from year to year. While the 

projected per-decade averages can show long-term trends in the funds’

disbursements and sustainability and provide a comparison of the likely 

 9

In addition the trust fund committees may approve additional amounts for special needs. 

Special needs are defined as projects that the government of the FSM or RMI deems 

necessary as a supplement to that portion of an annual budget to be financed by the 

compact trust funds, so long as the projects are for the purposes of Section 211 of the 

compact, as amended. We did not include the amount of funds approved for 

disbursements as special needs in the estimated disbursement in our analysis due to the 

uncertainty in the amount of special needs each year.
Appendix I: Objectives, Scope, and 

Methodology

Page 54 GAO-18-415 Compacts of Free Association

effects of the potential strategies we analyzed, the projected averages do 

not provide information about the volatility of changes in annual 

disbursement. We compare the compact trust funds’ projected value with 

the projected inflation-adjusted fiscal year 2023 value through 2063 in 10-

year increments beginning in fiscal years 2033.

To document the status of the FSM Trust Fund and the RMI’s D account 

and their potential use to supplement FSM and RMI resources after 2023, 

we reviewed information about the FSM laws establishing the FSM Trust 

Fund, FSM economic reports, and the RMI-Taiwan agreement regarding 

the D account. We also interviewed FSM and RMI officials. We did not 

independently verify the FSM’s projections of the future size of, and 

disbursements from, its trust fund. The information on foreign law or on 

foreign government operations in this report is not the product of our 

original analysis, but is derived from interviews and secondary sources.

To examine FSM and RMI efforts to prepare for the scheduled compact 

grant decrements, we reviewed each country’s decrement management 

plans to determine the FSM’s and RMI’s planned budget reductions and 

other actions. We then reviewed the FSM’s and RMI’s single audit reports 

and budget documents and interviewed FSM and RMI officials to 

determine whether the planned reductions had been implemented. We 

compared the planned actions to current legislation, single audit reports, 

or recent reports that discussed the status of FSM and RMI economic and 

financial reforms. In addition, we interviewed Interior, FSM, and RMI 

officials to determine whether FSM and RMI decrement management 

plans had been revisited or updated, why the plans were or were not 

adhered to, and whether the countries planned any future updates to the 

plans. We also conducted interviews with U.S. officials from the 

Department of State, a representative of Graduate School USA, and 

representatives of the World Bank and the International Monetary Fund 

regarding each country’s previous and current planning efforts.

To assess whether the FSM and RMI strategic plans for the key sectors 

of health, education, and infrastructure addressed the 2023 transition 

from compact grants and other U.S. assistance to compact trust fund 

income, we first obtained the relevant plans from department heads in 

each key sector of the FSM and RMI national governments and FSM 

state governments and confirmed our identification of the documents with 

FSM and RMI officials. We reviewed the plans to determine whether they 

included any discussion of budget projections, economic or financial 

reforms, alternative funding sources or other revenue generation 

FSM and RMI Plans
Appendix I: Objectives, Scope, and 

Methodology

Page 55 GAO-18-415 Compacts of Free Association

strategies, and expenditure cuts or saving strategies for periods before 

and after fiscal year 2023. We also reviewed the FSM’s 2023 Action Plan

and the RMI’s updated Medium Term Budget and Investment Framework 

to determine whether these documents discussed budget changes to 

address the 2023 transition.

Through our interviews with U.S., FSM, and RMI officials, we also learned 

about other ongoing planning efforts to address the 2023 transition: the 

U.S. Interagency Working Group on the Freely Associated States, the 

FSM Joint Compact Review and Planning Committee, and the RMI 

Compact Review Commission. Following our interviews, we reviewed and 

summarized documentation related to the working group’s purpose, 

meetings, and membership. We also contacted FSM and RMI committee 

members and officials to obtain additional information on the mandate, 

membership, and status of the FSM and RMI committees. The 

information contained in this report on foreign law or on foreign 

government operations is not the product of our original analysis, but is 

derived from interviews and secondary sources.

We conducted this performance audit from March 2017 to May 2018 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: U.S. Compact Sector Grants and 

Trust Fund Contributions, 2004 through 2023

Page 56 GAO-18-415 Compacts of Free Association

The amended compacts’ implementing legislation authorized and 

appropriated direct financial assistance to the FSM and the RMI in fiscal 

years 2004 through 2023, and provided for partial inflation adjustment of 

the base amount of compact sector grants and trust fund contributions 

each year. The base amount is partially inflation-adjusted by the 

percentage that equals two-thirds of the percentage change in the U.S. 

gross domestic product implicit price deflator, or 5 percent, whichever is 

less in any 1 year, using the beginning of 2004 as a base. As the base 

amount of compact sector grants decreases, the trust fund contributions 

generally increase by an equivalent amount. Figure 9 shows the amount 

of compact sector grants and trust fund contributions each fiscal year 

from 2004 through 2023.

Appendix II: U.S. Compact Sector Grants 

and Trust Fund Contributions, 2004 through 

2023
Appendix II: U.S. Compact Sector Grants and 

Trust Fund Contributions, 2004 through 2023

Page 57 GAO-18-415 Compacts of Free Association

Figure 9: U.S. Grants and Trust Fund Contributions to Be Provided to the FSM and 

RMI under the Amended Compacts, Prior to Partial Adjustments for Inflation, Fiscal 

Years 2004 through 2023

Notes: Sections 211 and 216 of the FSM amended compact and sections 211 and 217 of the RMI 

amended compact detail grants to the FSM and the RMI, while Sections 215 and 216 of the U.S.–

FSM compact and sections 216 and 217 of the U.S.–RMI compact detail contributions to the FSM 

and RMI trust funds. The increase in RMI grants from fiscal year 2013 to 2014 is due to a $2 million 

increase in payments to be made available for addressing the special needs of the community at 

Ebeye and other Marshallese communities within the Kwajalein Atoll.

The cumulative inflation adjustment largely offsets the amount of the 

decrement, resulting in a relatively steady nominal amount of compact 

sector grants after inflation adjustments (see fig. 10). However, because 

the inflation adjustment is not equal to full inflation, the value of compact 

sector grants continues to decline in real terms.
Appendix II: U.S. Compact Sector Grants and 

Trust Fund Contributions, 2004 through 2023

Page 58 GAO-18-415 Compacts of Free Association

Figure 10: U.S. Grants and Trust Fund Contributions to Be Provided to the FSM and 

RMI under the Amended Compacts, After Partial Adjustments for Inflation, Fiscal 

Years 2004 through 2023

Notes: Sections 211 and 216 of the amended FSM compact and sections 211 and 217 of the 

amended RMI compact detail grants to the FSM and the RMI, while Sections 215 and 216 of the 

U.S.–FSM compact and sections 216 and 217 of the U.S.–RMI compact detail contributions to the 

FSM and RMI trust funds. As agreed in the amended compacts, the dollar amounts shown are 

adjusted each fiscal year for inflation by the percentage that equals two-thirds of the percentage 

change in the U.S. gross domestic product implicit price deflator, or 5 percent, whichever is less in 

any one year, using the beginning of 2004 as a base. Amounts shown for fiscal years 2004 through 

2016 are actual amounts; amounts for 2017 through 2023 are projected by the U.S. Department of 

the Interior. The increase in RMI grants from fiscal year 2013 to 2014 is due to a $2 million increase 

in payments to be made available for addressing the special needs of the community at Ebeye and 

other Marshallese communities within the Kwajalein Atoll.
Appendix III: Compact Grants Supporting 

Health and Education in the FSM and RMI

Page 59 GAO-18-415 Compacts of Free Association

U.S. grants that end in 2023 play a significant role in the budgets of the 

FSM states and the RMI in the health and education sectors. The 

colleges of both countries have also relied on compact sector grants but 

rely even more on Pell grants to support their operation.

FSM states rely on U.S. grants scheduled to end in 2023 for the majority 

of their health and education expenditures. In fiscal year 2016, compact 

sector grants and the SEG supported 60 percent or more of health 

expenditures and 82 percent or more of state education expenditures. 

Table 3 shows the states’ health and education expenditures of compact 

sector grants and the supplemental education grant (SEG) in fiscal year 

2016. In fiscal years 2012 through 2016, compact sector grants and the 

SEG supported 56 to 99 percent of FSM states’ health expenditures and 

82 to 100 percent of FSM states’ education expenditures.

Table 3: FSM States’ Health and Education Expenditures of Compact Sector and 

Supplemental Education Grants (SEG), Fiscal Year 2016

Dollars in millions

Source: GAO analysis of FSM states’ fiscal year 2016 single audit reports. | GAO-18-415

a

The SEG was used only in the education sector. The amounts and percentages shown for the 

education sector do not include the College of Micronesia–FSM.

U.S. compact sector, supplemental education, and other grants also 

supported approximately 76 percent of the average $21 million in annual 

expenditures of the College of Micronesia–FSM, an FSM government 

component unit, in fiscal years 2012 through 2016. Compact sector 

Appendix III: Compact Grants Supporting 

Health and Education in the FSM and RMI

FSM

Expenditures of compact sector 

grants and SEGa

Sector and state

Total 

expenditures 

(dollars)

Amount 

(dollars)

Percentage of

total

expenditures

Health

Chuuk 10.9 9.5 87

Kosrae 3.5 2.1 60

Pohnpei 8.3 5.8 70

Yap 5.6 3.5 62

Education

Chuuk 15.5 14.6 95

Kosrae 4.4 3.7 82

Pohnpei 10.9 9.8 89

Yap 6.1 5.5 90
Appendix III: Compact Grants Supporting 

Health and Education in the FSM and RMI

Page 60 GAO-18-415 Compacts of Free Association

grants and the SEG, each of which end in 2023, supported approximately 

15 percent of the college’s annual expenditures. Pell grants, which 

provide support for education expenses for qualifying students, supported 

more than half of the college’s annual expenditures. College officials told 

us that the college would be unable to operate without Pell grants. 

According to officials from the U.S. Department of Education, the college

will remain eligible after 2023 to receive Pell grants that benefit its 

students as long as such grants are available to institutions and students 

in the United States (see app. IV).

The RMI relies on U.S. grants scheduled to end in 2023 for health and 

education expenditures. In fiscal year 2016, compact sector and 

supplemental education grants scheduled to end in 2023 supported 

approximately 25 percent of RMI health expenditures and approximately 

59 percent of RMI education expenditures (see table 4). Kwajalein-related 

grants increased these percentages to 32 percent for health and 66 

percent for education. In total, in fiscal years 2012 through 2016, compact 

sector grants and the SEG supported approximately 58 percent of RMI 

education expenditures and 29 percent of health expenditures. During 

this period, the percentage of education expenditures supported by 

compact sector and supplemental education grants scheduled to end in 

2023 remained relatively steady and the percentage of health 

expenditures decreased slightly.

Table 4: RMI Health and Education Expenditures of Compact Sector and Supplemental Education Grants (SEG) and 

Kwajalein-Related Grants, Fiscal Year 2016

Dollars in millions

Expenditures of compact 

sector grants and SEGa Expenditures of Kwajaleinrelated grants

Total expenditures of 

compact sector, SEG, and 

Kwajalein-related grantsa

Sector

Total 

government 

expenditures 

(dollars)

Amount 

(dollars)

Percentage

of total 

expenditures 

Amount

(dollars)

Percentage 

of total 

expenditures 

Amount 

(dollars)

Percentage 

of total 

expenditures 

Health 29.5 7.4 25 2.0 7 9.4 32

Education 28.9 17.1 59 2.1 7 19.2 66

Source: GAO analysis of RMI fiscal year 2016 single audit reports. | GAO-18-415

a

The SEG was used only in the education sector. Health total is from the RMI Ministry of Health and 

Environment. The amounts and percentages shown for the education sector do not include the 

College of the Marshall Islands.

U.S. compact sector, supplemental education, and other grants also 

supported approximately half of the average $11.9 million in annual 

RMI
Appendix III: Compact Grants Supporting 

Health and Education in the FSM and RMI

Page 61 GAO-18-415 Compacts of Free Association

expenditures of the College of the Marshall Islands, an RMI government 

component unit, in fiscal years 2012 through 2016. Compact sector 

grants and the SEG, each of which end in 2023, supported approximately 

8 percent of the college’s annual expenditures. Pell grants supported 

about 39 percent of the college’s expenditures. According to officials from 

the U.S. Department of Education, the college will remain eligible after 

2023 to receive Pell grants that benefit its students, as long as such 

grants are available to institutions and students in the United States (see 

app. IV). Also in fiscal years 2012 through 2016, compact sector and 

supplemental education grants scheduled to end in 2023 supported about 

half of the expenditures of the RMI government component unit, the 

Marshall Islands Scholarship, Grant, and Loan Board, which provides 

financial assistance for educational and training opportunities. Kwajaleinrelated compact grants that do not end in 2023 supported an additional 

13 percent of the board’s expenditures.
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 62 GAO-18-415 Compacts of Free Association

The amended compacts, compact-related agreements, the amended 

compacts’ implementing legislation, and other U.S. laws provide grants or 

eligibility for U.S. programs and services for the FSM and RMI. The 

amended compacts provided compact sector, Kwajalein-related, and 

audit grants. Under current law, compact sector and audit grants are each 

scheduled to end in 2023, but the RMI military use and operating rights 

agreement (MUORA) extended the time frame of Kwajalein-related 

compact grants for as long as the agreement is in effect. The amended 

compacts’ implementing legislation provided additional grants, including 

authorizing a supplemental education grant (SEG), and identified several 

specific U.S. programs as available to the FSM and RMI. Under current 

law, the additional grants end in 2023 but the statutory authorizations for 

some programs identified in Pub. L. No. 108-188 provide for the 

continued eligibility of the FSM and RMI to receive benefits under the 

programs. However, after fiscal year 2023, the FSM and RMI will no 

longer be eligible under current U.S. law for some programs that the SEG 

replaced. The compact-related programs and services agreements with 

each country identify additional programs and services that the United 

States makes available to the FSM and RMI. While these agreements will 

end in 2024, under current law, some U.S. agencies may continue to 

provide programs and services similar to those provided in the agreement 

under other authorities. Based on the status of current law, the FSM’s and 

RMI’s eligibility for other programs we identified that have been provided 

under other current U.S. laws will not change after fiscal year 2023.

Under current law, compact sector grants provided to the FSM and the 

RMI under their compact sections 211(a) are scheduled to end in 2023. 

However, the RMI is scheduled to continue to receive $7.2 million, 

partially inflation adjusted, related to the U.S. military base in Kwajalein 

Atoll and provided under section 211(b) of its compact. Under the terms 

of the RMI MUORA, the United States agreed to provide these Kwajaleinrelated grants for as long as the MUORA is in effect. The MUORA 

continues until 2066 and may be extended at the discretion of the United 

States until 2086.1 The amended RMI compact provides for $18 million, 

partially inflation adjusted, in annual payments to the RMI government to 

compensate for impacts from the U.S. Army Garrison–Kwajalein Atoll. 

These payments will continue for as long as the MUORA is in effect. 

 1

The United States may terminate the RMI MUORA after 2023 with 7 years advance 

notice. If termination occurs prior to 2053, the United States is required to make a 

termination payment equivalent to 1 or more years of annual grant assistance.

Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Compact Sector and Audit 

Grants End in 2023, but 

Kwajalein-Related Grants 

for the RMI Will Continue
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 63 GAO-18-415 Compacts of Free Association

Annual compact grants of up to $500,000 (not inflation adjusted) to each 

country to pay for required annual audits of compact grants are scheduled 

to end in 2023. See table 5 for a summary of compact sector, Kwajaleinrelated, and audit grants.

Table 5: Status under Current Law of Compact Sector, Kwajalein-Related, and Audit Grants to the FSM and RMI after Fiscal 

Year 2023

Country 

receiving 

assistance

Compact grant name 

and reference Description

Status under current 

law as of end of fiscal 

year 2023a

FSM and RMI § 211(a) Compact 

Sector Grants

Economic assistance directed to specific sectors, with a focus 

on Health and Education. The base amount of the grants 

declines yearly in fiscal years 2004 through 2023.b

In 2004, FSM grants totaled $76.2 million. Grants will decline, 

before partial inflation adjustment, to $62.6 million in 2023.

In 2004, RMI grants totaled $35.2 million. Grants will decline, 

before partial inflation adjustment, to $27.7 million in 2023.

Grants will end.

RMI RMI compact § 

211(b)(1) Ebeye 

Special Needs 

$5.1 million annually, partially inflation adjusted, to address the 

special needs of the community at Ebeye and other 

Marshallese communities within Kwajalein Atoll.c

Grants will continue as 

long as the MUORA is in 

effect.

RMI RMI compact § 

211(b)(2) Ebeye 

Special Needs 

$1.9 million annually, partially inflation adjusted, to address the 

special needs of the community at Ebeye and other 

Marshallese communities within Kwajalein Atoll with emphasis 

on the Kwajalein landowners.

Grants will continue as 

long as the MUORA is in 

effect.

RMI RMI compact § 

211(b)(3) Kwajalein 

Environmental Grants

$200,000 annually, partially inflation adjusted, to support 

increased participation of the RMI Environmental Protection 

Authority in the U.S. Army Kwajalein Atoll Environmental 

Standards Survey and to promote the RMI government’s 

capacity for independent analysis of the survey’s findings and 

conclusions.

Grants will continue as 

long as the MUORA is in 

effect.

RMI RMI compact § 212 –

Kwajalein Impact and 

Use

$18 million annually, partially inflation adjusted, provided to the 

RMI government to compensate for any impacts of the U.S. 

military on the atoll.d

Payments will continue 

as long as the MUORA 

is in effect.

FSM and RMI Audit grants provided 

in FSM compact § 

212(b) and RMI 

compact § 213(b)

Annual grant assistance, not adjusted for inflation, equal to the 

lesser of (1) one half of the cost of the annual audit or (2) 

$500,000.e

Grants will end.

Source: GAO analysis of the Compacts of Free Association with the Federated States of Micronesia (FSM) and Republic of the Marshall Islands (RMI). | GAO-18-415

a

Status is based on current law.

b

The U.S. Department of the Interior (Interior) estimates that, with partial inflation adjustments, 

compact sector grants in fiscal year 2023 will total approximately $82.0 million for the FSM and 

approximately $36.3 million for the RMI, including 211(a) and 211(b) funds.

c

Ebeye Special Needs grants to the RMI under §211(b)(1) provided $3.1 million annually in fiscal 

years 2004 through 2013 and $5.1 million annually thereafter.

d

Interior estimates that, with partial inflation adjustments, the payment to the RMI for Kwajalein impact 

and use in fiscal year 2023 will be approximately $23.6 million.

e

In each year through fiscal year 2018 the amount provided through audit grants to the FSM and the 

RMI has been the maximum of $500,000.
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 64 GAO-18-415 Compacts of Free Association

The supplemental education grant (SEG) authorized by the amended 

compacts’ implementing legislation is scheduled to end in fiscal year 2023 

and, under current law, FSM and RMI eligibility for most programs that 

the SEG replaced will not resume after fiscal year 2023. Absent changes 

to current law, the FSM and RMI will not be eligible after fiscal year 2023 

for the following programs that the SEG replaced during fiscal years 2005 

through 2023: U.S. elementary and secondary education grant programs, 

adult education and literacy programs, career and technical education 

programs, job training programs, and Head Start early education 

programs. However, under other provisions of current law, qualifying 

individuals in the FSM and RMI will be eligible after fiscal year 2023 for 

undergraduate education grants and work-study programs that the SEG 

replaced. See table 6.

Table 6: FSM and RMI Eligibility under Current Law after Fiscal Year 2023 for Programs Replaced by the Supplemental 

Education Grant (SEG) Provided in the Amended Compacts’ Implementing Legislation, Pub. L. No. 108-188

Program description

Eligibility under current law as of end of fiscal year 

2023a

Department of Education:

Supplemental Education Grant (SEG)

Authorization of appropriations of $12.23 million for the Federated 

States of Micronesia (FSM) and $6.1 million to the Republic of the 

Marshall Islands (RMI), adjusted for inflation for each of fiscal years 

2005 through 2023 in lieu of eligibility for the various education, 

health, and labor programs listed below.b

SEG ends.

Eligibility varies for programs replaced by the SEG after 

2023.

See below for FSM and RMI eligibility for programs 

replaced by the SEG.

Programs replaced by the SEG during fiscal years 2005-2023

Department of Education:

Part A of title I of the Elementary and Secondary Education Act of 

1965 (Improving Basic Programs Operated by Local Educational 

Agencies).

Not eligible

Department of Education:

Title I of the Carl D. Perkins Vocational and Technical Education 

Act of 1998

(Career and Technical Education).

Not eligible

Department of Education:

Subpart 3 of part A of title IV of the Higher Education Act of 1965 

(Federal Supplemental Educational Opportunity Grants).

Eligible

Department of Education:

Part C of title IV of the Higher Education Act of 1965 (Federal 

Work-Study Programs)

Eligible

FSM and RMI are No 

Longer Eligible for Many 

Programs Replaced by the 

Supplemental Education 

Grant
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 65 GAO-18-415 Compacts of Free Association

Program description

Eligibility under current law as of end of fiscal year 

2023a

Department of Education:

Title II of the Workforce Investment Act of 1998.c

(Adult Education and Literacy programs.)

Not eligible

Department of Health and Human Services:

Head Start Act (early childhood education, health, and nutrition 

services for low-income children and their families.)

Not eligible

Department of Labor:

Title I of the Workforce Investment Act of 1998.c

(Statewide and local workforce investment systems, Job Corps, 

and various national programs such as Native American, migrant, 

and veterans programs.)

Not eligible

Source: GAO analysis of Pub. L. No. 108-188 and the U.S. Code. | GAO-18-415

a

Eligibility is based on current law. The availability of grants and programs in the future is subject to 

the availability of appropriations provided for that purpose.

b

In fiscal year 2017, $16.7 million was appropriated to the Secretary of Education for the SEG: $11.1 

million for the FSM and $5.6 million for the RMI. In each country, this amount is lower than the 

authorized SEG amount and is also lower than the authorized amount after inflation adjustments.

c

The Workforce Investment Act of 1998 was repealed and replaced by the Workforce Innovation and 

Opportunity Act (Pub. L. 113-128), which does not include eligibility for the FSM and RMI.

Although the programs and services agreements with the FSM and RMI 

will end in fiscal year 2024, current U.S. law enables U.S. agencies to 

continue providing some programs and services now provided under the 

agreements. No current provisions of U.S. law will enable the Federal 

Emergency Management Agency (FEMA) to provide disaster response 

funding or enable the Federal Deposit Insurance Corporation to provide 

deposit insurance or the U.S. Postal Service to provide services to the 

FSM and RMI after the agreements end. However, the National Weather 

Service, the U.S. Department of Transportation’s (DOT) Federal Aviation 

Administration (FAA), and the U.S. Agency for International Development 

(USAID) could, under other legal authorities, provide services similar to 

those they now provide under the programs and services agreements.

• National Weather Service. The programs and services agreements 

authorize the National Weather Service to fund the operations of 

weather stations in the FSM and RMI, which it can continue to fund 

after the end of the Agreements under other authorities, according to 

Department of Commerce officials.

• Federal Aviation Administration. The programs and services 

agreements authorize DOT’s FAA to provide technical assistance in 

the FSM and RMI, which it can continue to provide after the end of the 

Agreements under other provisions of current U.S. law. However, 

Some Programs and 

Services in the Programs 

and Services Agreement 

Will End, while Others 

May Continue under Other 

Authorities
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 66 GAO-18-415 Compacts of Free Association

DOT officials stated that FAA would require new bilateral agreements 

with the FSM and the RMI in order for the countries to continue to 

receive the civil aviation safety services that FAA currently provides 

under the programs and services agreements. The FAA would also 

seek reimbursement for any technical assistance it provides to the 

FSM and RMI. With regard to the civil aviation economic services of 

the programs and services agreements, DOT officials stated that, 

while the FSM and RMI could voluntarily decide to allow U.S. air 

carriers to continue operations in the FSM and RMI, new bilateral 

agreements would be needed to assure that result.2

• U.S. Agency for International Development. Following a U.S. 

presidential disaster declaration, FEMA provides the funding for 

disaster relief and reconstruction, which is programmed through 

USAID.3 Under current law, FEMA funds will no longer be available 

for this purpose once the agreements end; however, USAID will be 

able to provide foreign disaster assistance funding to the FSM and 

RMI under the same terms as it provides this assistance to other 

countries. After the programs and services agreements end, FEMA 

will be able to support disaster relief efforts only if USAID or the 

countries request it to do so on a reimbursable basis.

In addition, according to State and Interior officials, telecommunicationsrelated services that the two agencies provide to the FSM and RMI under 

the programs and services agreements will continue as long as the FSM 

and RMI provide appropriate authorization for such services. Table 7 

shows the status after fiscal year 2024 of programs and services currently 

provided to the FSM and the RMI under the agreements.

 2

An FAA official in the Office of the Airports noted that three FSM and RMI airports 

(Majuro, Kwajalein, and Yap) are also extended operations sites that provide emergency 

diversionary landing sites. U.S. Aviation regulations require flight paths to be within a 

certain range of an airport in case of emergency. Therefore, without the emergency 

diversionary landing sites at FSM and RMI airports, planes transiting the Pacific would 

have to fly different and longer routes, increasing airline operating costs, according to 

DOT.

3

In recent years USAID has programmed FEMA-provided funds for disaster response and 

reconstruction in the FSM states of Chuuk and Yap to meet immediate humanitarian 

needs and facilitate recovery from the impact of Typhoon Maysak in March and April 2015 

and for disaster assistance in the RMI in response to a prolonged drought conditions in 

2015-2016.
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 67 GAO-18-415 Compacts of Free Association

Table 7: Status under Current Law of Programs and Services Identified in U.S.-FSM and U.S.-RMI Amended Compacts’

Programs and Services Agreements after the Agreements End in Fiscal Year 2024

Country 

receiving 

assistance U.S. agency

Program or 

service Description

Status under current law after 

programs and services agreements 

enda

Federated States 

of Micronesia 

(FSM) and 

Republic of the 

Marshall Islands 

(RMI)

Department of 

Commerce National 

Weather Service

Weather services 

and related 

programs

The National Weather 

Service provides funding for 

the operation of weather 

stations in Majuro, RMI and 

in Pohnpei, Chuuk, and Yap 

states in the FSM.

According to Department of Commerce 

officials, the Secretary of Commerce 

may continue funding if the Secretary 

determines that maintaining service at 

these locations is essential to proper 

execution of Commerce Department 

duties.

FSM Federal Deposit 

Insurance 

Corporation

Federal deposit 

insurance

The Federal Deposit 

Insurance Corporation 

insures the Bank of the 

FSM.

According to Federal Deposit Insurance 

Corporation officials, the corporation will 

not have authority to insure a foreignchartered institution in the FSM.

FSM and RMI Federal Emergency 

Management Agency 

(FEMA) and U.S. 

Agency for 

International 

Development 

(USAID)

Disaster services 

and related 

programs 

FEMA provides disasterrelated preparedness grants 

and provides USAID with 

funds to support disaster 

relief and reconstruction 

following a U.S. Presidential 

disaster declaration. The 

disaster response itself is 

implemented by USAID.

According to FEMA officials, FEMA will 

not have the authority to provide 

assistance directly to the FSM and RMI 

or to provide funding to USAID for such 

purposes.

FSM and RMI will remain eligible to 

receive assistance from USAID on the 

same terms as other foreign countries 

pursuant to the Foreign Assistance Act.

FSM and RMI Postal Service Postal services 

and related 

programs

The Postal Service provides 

transportation of mail to and 

from each country, includes 

each country in the U.S. zip 

code system, and has 

committed to assist each 

country with the acquisition 

of membership in 

international postal unions, 

upon request.b

According to U.S. Postal Service 

officials, the continuation of service will 

depend upon the ability of the FSM and 

RMI to secure membership in the 

Universal Postal Union. If they do not 

become members of the Universal 

Postal Union, then the Postal Service 

will need to negotiate beneficial bilateral 

arrangements with the countries.

FSM and RMI Department of State 

and Department of 

the Interior

Telecommunicati

ons services and 

related programs.

Frequency spectrum 

management within the FSM 

and RMI and the operation 

of tele-communication 

services of the Government 

of the United States 

necessary to fulfill its 

obligations under the 

amended compacts.

According to State and Interior officials, 

services may continue if the FSM or the 

RMI provides appropriate authorization 

to the United States to provide such 

services.

FSM and RMI Department of 

Transportation (DOT) 

Federal Aviation 

Administration (FAA)

Civil aviation 

safety services 

and related 

programs

FAA provides assistance 

with airport navigational and 

safety services.

According to FAA officials, similar 

assistance may be provided under 

various FAA authorities, but FAA would 

be required to seek reimbursement for 

these services.
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 68 GAO-18-415 Compacts of Free Association

Country 

receiving 

assistance U.S. agency

Program or 

service Description

Status under current law after 

programs and services agreements 

enda

FSM and RMI DOT FAA Civil aviation 

economic 

services and 

related programs

Permits FSM and RMI 

airlines to operate between 

U.S. destinations.

Provides technical 

assistance to the FSM with 

regulation of air service.

FSM and RMI airlines will no longer be 

permitted to operate between U.S. 

destinations. According to DOT, FSM, 

and RMI officials, no FSM or RMI air 

carriers provide service to U.S. 

destinations.

According to FAA officials, technical 

assistance may be provided under 

various FAA authorities, but FAA would 

be required to seek reimbursement for 

these services.

Source: GAO analysis of the compact programs and services agreements, the U.S. Code, and discussions with agency officials. | GAO-18-415

a

Status is based on current law. The availability of grants and programs in the future is subject to the 

availability of appropriations provided for that purpose.

b

At present, according to the U.S. Postal Service, the United States has received no request for 

assistance in acquiring membership in international postal unions from either country. The 

Department of the Interior has provided an average of $2.5 million to reimburse the costs of the U.S. 

Postal Service to provide services to the FSM and RMI, but, according to the Postal Service, the 

reimbursement by the department has not covered its costs in each year that it has provided services. 

In fiscal years 2015 and 2016, according to the U.S. Postal Service, the annual reimbursement 

shortfall experienced by the U.S. Postal Service averaged $8.7 million per year. Appendix X provides 

more information from the U.S. Postal Service regarding the amount of the reimbursement shortfall.

Additional grants provided to the FSM and the RMI under the amended 

compacts’ implementing legislation will end in fiscal year 2023, but the 

countries’ eligibility for programs now provided under that legislation will 

generally continue under current U.S. law. Grants provided under the 

amended compacts’ implementing legislation for (1) judicial training in the 

FSM and the RMI, and (2) agricultural and planting programs on the 

RMI’s nuclear-affected Enewetak Atoll are scheduled to end. However, 

under current U.S. law, legal authorities permitting the operation of other 

programs would remain available to the FSM and RMI after fiscal year 

2023. Eligibility under these legal authorities continues either because the 

amended compacts’ implementing legislation does not specify an ending 

date or because other provisions in current U.S. law make the FSM and 

RMI eligible for the program.

Programs provided in the amended compacts’ implementing legislation 

include U.S. Department of Agriculture Rural Utilities Service grant and 

loan programs; U.S. Department of Education Pell grants for higher 

education and grants under Part B of the Individuals with Disabilities 

Education Act for children with disabilities; programs for nuclear-affected 

areas in the RMI; and additional programs provided by the Departments 

of Commerce and Labor as well as law enforcement assistance provided

Programs Identified in the 

Amended Compacts’

Implementing Legislation 

Generally Continue after 

Fiscal Year 2023
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 69 GAO-18-415 Compacts of Free Association

by the U.S. Postal Service. See table 8 for a summary of the programs 

identified in the amended compacts’ implementing legislation and their 

status as of the end of fiscal year 2023.

Table 8: Status under Current Law after Fiscal Year 2023 of Programs and Grants Provided in the U.S.-FSM and U.S.-RMI 

Amended Compacts’ Implementing Legislation, Pub. L. No. 108-188

Country 

receiving 

assistance U.S. agency Program or grant Description

Status under current 

law as of end of 

fiscal year 2023a

Federated States 

of Micronesia 

(FSM) and 

Republic of the 

Marshall Islands 

(RMI)

Department of 

Agriculture 

Rural Utilities 

Service grants and 

loans

The Rural Utilities Service provides financing 

and grants to support infrastructure 

development such as electricity, 

telecommunications, and water and wastewater 

systems.

Eligibility will continue.

FSM and RMI Department of 

Commerce

Economic 

programs and 

services

Programs and Services of the Department of 

Commerce Economic Development 

Administration and relating to tourism and to 

marine resource development.

Eligibility will continue.

FSM and RMI Department of 

Education

Pell grants Grants for postsecondary education expenses 

to qualifying students based on financial need.

Eligibility will continue.

FSM and RMI Department of 

Education

Special education 

grants

Individuals with Disabilities Education Act 

grants to local school systems for the education 

of children with disabilities.

Eligibility will continue.

RMI Department of 

Energy

Radiological Health 

Care Program

Medical care and logistical support thereto for 

the remaining members of the population 

exposed to radiation by U.S. nuclear testing.

Program will continue.

RMI Department of 

Energy

Runit Island 

Environment 

Monitoring

Monitoring at least every four years of the 

containment structure and groundwater of Runit 

island in the nuclear-affected Enewetak atoll.

Program will continue.

FSM and RMI Department of the 

Interior 

Judicial training 

grants

$300,000 annually, partially adjusted for 

inflation, for each fiscal year from 2004 through 

2023 for the training of judges and officials of 

the judiciary.

Grants will end unless 

Congress authorizes 

and appropriates 

additional funds.

RMI Department of the 

Interior 

Planting and 

Agricultural 

Maintenance 

Program on 

Enewetak

$1.3 million, partially adjusted for inflation, for 

each fiscal year from 2004 through 2023 to 

restore vegetation on Enewetak, a nuclearaffected atoll.

Program will end 

unless Congress 

authorizes and 

appropriates 

additional funds.

RMI Department of the 

Interior

Four Atoll Health 

Care

Health care for nuclear-affected areas. Program will continue.

FSM and RMI Department of 

Labor

Job Corpsb The programs and services of the Department 

of Labor under subtitle C of title I of the 

Workforce Investment Act of 1998 (29 U.S.C. 

2881 et seq.; relating to Job Corps).c

Eligibility will continue.
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 70 GAO-18-415 Compacts of Free Association

Country 

receiving 

assistance U.S. agency Program or grant Description

Status under current 

law as of end of 

fiscal year 2023a

FSM and RMI Postal Service Law enforcement 

assistance

Technical and training assistance, including 

training and equipment for postal inspection of 

illicit drugs and other contraband.

Program will continue.

Source: GAO analysis of Pub. L. No. 108-188, the U.S. Code, and discussions with agency officials. | GAO-18-415

a

Status is based on current law. The availability of grants and programs in the future is subject to the 

availability of appropriations provided for that purpose.

b

According to the U.S. Department of Labor, there are currently no Job Corps activities in either the 

FSM or the RMI.

c

The Workforce Investment Act of 1998 was repealed and replaced by the Workforce Innovation and 

Opportunity Act (Pub. L. 113-128).

In addition to being eligible for the programs provided through the 

compact, its associated agreements, and the amended compacts’

implementing legislation, the FSM and RMI are also eligible for a number 

of programs under other provisions of current U.S. law. The FSM and 

RMI have each received funds from the U.S. Department of Agriculture 

for forestry and rural housing programs, multiple Health and Human 

Services public health program grants, Interior technical assistance and 

historic preservation programs, and the DOT FAA airport improvement 

program, among others. Under current U.S. law, the legal authorities 

permitting the provision of these programs in the FSM and RMI would not 

necessarily change after 2023. Table 9 shows the FSM’s and RMI’s 

eligibility for these additional grants and programs under current law after 

fiscal year 2023.

Table 9: FSM and RMI Eligibility under Current Law after Fiscal Year 2023 for Other U.S. Grants and Programs That Have Been 

Made Available

Country 

receiving 

assistance U.S. agency

Type of grant or 

program Description

Status under current law 

as of end of fiscal year 

2023a

Federated States 

of Micronesia 

(FSM) and 

Republic of the 

Marshall Islands 

(RMI)

Department of 

Agriculture 

Forestry Service 

programs 

Assistance with forestry planning, 

forest stewardship and preservation, 

and wildfire prevention and 

suppression.

Eligibility will continue.

FSM and RMI, 

but currently 

active only in 

RMI

Department of 

Agriculture

Mutual Self-Help 

Technical Assistance 

Grant

Assistance to lower-income families 

in rural areas in building their own 

homes. Funding is provided to an 

entity that must give technical 

assistance.

Eligibility will continue, 

according to Department of 

Agriculture officials.

Programs Identified in 

Other Legislation 

Generally Continue after 

Fiscal Year 2023
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 71 GAO-18-415 Compacts of Free Association

Country 

receiving 

assistance U.S. agency

Type of grant or 

program Description

Status under current law 

as of end of fiscal year 

2023a

FSM and RMI, 

but currently 

active only in 

RMI

Department of 

Agriculture

Section 502 Single 

Family Housing Loan 

and Guaranteed Loan 

Programs

Assistance to low-income applicants 

to obtain decent, safe and sanitary 

housing in eligible rural areas.

Eligibility will continue.

FSM and RMI Department of 

Agriculture 

Section 504 Housing 

Repair & 

Rehabilitation Loans 

and Grants

Assistance to very low-income 

applicants 62 years or older to 

remove health and safety hazards 

or repair their homes when they are 

located in rural areas with 

populations of 20,000 or less.

Eligibility will continue.

FSM and RMI Department of 

Education

TRIO Talent Search 

and TRIO Upward 

Bound 

Outreach and student services 

programs designed to identify and 

provide services for individuals from 

disadvantaged backgrounds such 

as low-income individuals, firstgeneration college students, and 

individuals with disabilities.

Eligibility will continue as 

long as the FSM or RMI 

institution receiving the grant 

remains an approved 

institution as defined in 20 

U.S.C. § 1002(a)(2).

RMI Department of Energy Environmental 

Monitoring Program

Periodic monitoring of the four 

nuclear-affected atolls—Bikini, 

Enewetak, Rongelap and Utrik

Program will continue.

FSM and RMI Department of Health 

and Human Services

Multiple programs 

authorized by the 

Public Health 

Services Act

Public health, medical, and disease 

control and prevention grants.

Eligibility will continue 

according to Health and 

Human Services officials.

FSM and RMI Department of the 

Interior

Historic Preservation 

Grants in Aid

Historic preservation and 

community projects focused on 

heritage preservation.

Eligibility will continue.

FSM and RMI Department of the 

Interior

Technical assistance 

grants

Grants for short-term, noncapital 

projects. Priorities include 

accountability; financial 

management; economic 

development; training and 

education; energy; life; safety and 

health issues, among others.

Eligibility will continue to the 

extent such assistance may 

be provided to States, 

territories or units of local 

government.

FSM and RMI National Science 

Foundation grants 

Grants to improve 

science, technology, 

engineering, and math 

education 

Currently: Advancing Informal 

Science Learning/Geo-literacy 

Education in Micronesia and 

Advanced Technological 

Education/Partnership for Advanced 

Marine and Environmental Science 

Training for Pacific Islanders.

Eligibility will continue.

FSM and RMI Department of State Grants to combat 

trafficking in persons

Current project focuses on raising 

awareness of trafficking in persons; 

boosting law enforcement capacity, 

and establishment of national 

referral mechanisms for the 

protection of victims of trafficking.

Eligibility will continue. 
Appendix IV: Status of U.S. Grants and 

Programs in the FSM and RMI After 2023

Page 72 GAO-18-415 Compacts of Free Association

Country 

receiving 

assistance U.S. agency

Type of grant or 

program Description

Status under current law 

as of end of fiscal year 

2023a

RMI Department of State Humanitarian 

demining

Clearance of explosive remnants of 

war on inhabited areas of Wotje 

Island, Wotje Atoll, Jaluit Island, and 

Jaluit Atoll.

Eligibility will continue.

FSM and RMI Department of 

Transportation

Airport Improvement 

Programb Grants to public agencies for the planning and development of publicuse airports.

Eligibility will continue.

FSM and RMI USAID Pacific-American 

Climate Fund 

Grants to civil society organizations 

to build funding and management 

capacity for programs to respond to 

climate change challenges.

This program will end before 

2023, but eligibility for 

similar programs will 

continue, according to 

USAID officials.

Source: GAO analysis of Pub. L. No. 108-188 and the U.S. Code; and discussions with agency officials. | GAO-18-415

a

Status is based on current law. The availability of grants and programs in the future is subject to the 

availability of appropriations provided for that purpose.

b

Airport Improvement Program grant authority expires September 30, 2018.
Appendix V: Compact Trust Fund Baseline 

Outcomes Calculated with Varying Return 

Assumptions

Page 73 GAO-18-415 Compacts of Free Association

In order to the test the sensitivity of our compact trust fund projections to 

assumptions about the future rate of return, we also performed our Monte 

Carlo analysis using alternate rates of return. We projected the compact 

trust fund disbursements and balance under current compact trust fund 

rules on the basis of a 6 percent net return and also estimated the trust 

fund on the basis of 5 percent, 7 percent, and 8 percent net returns. 

Higher rates of return would improve the outlook for each compact trust 

fund. However, even with higher rates of return, our analysis shows a 

high likelihood that available compact trust fund disbursements will not 

reach an amount equivalent to maximum disbursements permitted by the 

compact trust fund agreement (i.e., the inflation-adjusted amount of fiscal 

year 2023 annual grant assistance, as defined by the trust fund 

agreements), a continuing risk of zero disbursements, and a decreasing 

likelihood that the fund will maintain or exceed its inflation-adjusted 

balance in fiscal year 2023. See tables 10 and 11 for our projections of 

FSM and RMI compact trust fund disbursements, likelihood of 1 or more 

years with zero disbursement, and likelihood of maintaining or exceeding 

its inflation-adjusted fiscal year 2023 value.

Table 10: FSM Compact Trust Fund Baseline Outcomes Calculated with Varying Return Assumptions

Projected average 

compact trust fund 

disbursement (dollars in 

millions)

Projected average 

compact trust fund 

disbursement as a 

percentage of maximum 

disbursement

Percentage likelihood of 1 

or more years with zero 

disbursement in the given 

10-year period

Percentage likelihood 

of trust fund balance 

maintaining or 

exceeding inflationadjusted fiscal year 

2023 value

Mean net 

rate of 

return

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY33 FY43 FY53 FY63

5 percent 70 44 33 26 77 40 25 16 52 87 94 96 8 3 2 1

6 percent 75 54 44 36 82 49 33 22 41 78 88 92 13 7 5 4

7 percent 79 66 58 52 87 59 43 32 32 67 79 85 19 13 10 9

8 percent 83 77 74 72 91 69 54 43 22 53 66 73 28 22 19 18

Legend: FY = fiscal year

Source: GAO analysis of compact trust fund documents. | GAO-18-415

Notes: We used the compact trust fund’s unaudited balance at the end of fiscal year 2017 as the 

starting balance. We assumed that the trust fund’s annual return will have a normal distribution with a 

standard deviation of 13 percent.

We calculated the average disbursement in the given time periods by averaging 10-year period 

simulated disbursements (averaging first over 10 years and then over 10,000 simulated cases).

We calculated the average disbursement as a percentage of the maximum allowable disbursement 

by averaging the ratio of simulated disbursement to the maximum inflation-adjusted allowable 

disbursement in the given time period (averaging first over 10 years and then over 10,000 simulated 

cases).

Appendix V: Compact Trust Fund Baseline 

Outcomes Calculated with Varying Return 

Assumptions
Appendix V: Compact Trust Fund Baseline 

Outcomes Calculated with Varying Return 

Assumptions

Page 74 GAO-18-415 Compacts of Free Association

We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero 

disbursement among the 10,000 simulated cases in each given time period.

We calculated the likelihood of the fund balance maintaining its inflation-adjusted fiscal year 2023 

value by simulating 10,000 cases and counting those in which the simulated balance does not equal 

or exceed the projected inflation-adjusted 2023 balance.

Table 11: RMI Compact Trust Fund Baseline Outcomes Calculated with Varying Return Assumptions

Projected average 

compact trust fund 

disbursement (dollars in 

millions)

Projected average 

compact trust fund 

disbursement as a 

percentage of maximum 

disbursement

Percentage likelihood of 1 

or more years with zero 

disbursement in the given 

10-year period

Percentage likelihood 

of trust fund balance 

maintaining or 

exceeding inflationadjusted fiscal year 

2023 value

Mean net 

rate of 

return

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY33 FY43 FY53 FY63

5 percent 28 28 28 26 93 78 62 48 21 47 63 73 30 22 18 15

6 percent 28 31 33 34 95 85 74 63 15 34 47 56 41 35 31 29

7 percent 29 33 38 42 97 91 84 77 10 22 31 38 52 49 48 47

8 percent 29 35 41 47 98 95 91 87 7 14 19 23 62 64 65 66

Legend: FY = fiscal year

Source: GAO analysis of compact trust fund documents. | GAO-18-415

Notes: We used the compact trust fund’s unaudited balance at the end of fiscal year 2017 as the 

starting balance. We assumed that the trust fund’s annual return will have a normal distribution with a 

standard deviation of 13 percent.

We calculated the average disbursement in the given time periods by averaging 10-year period 

simulated disbursements (averaging first over 10 years and then over 10,000 simulated cases).

We calculated the average disbursement as a percentage of the maximum allowable disbursement 

by averaging the ratio of simulated disbursement to the maximum inflation-adjusted allowable 

disbursement in the given time period (averaging first over 10 years and then over 10,000 simulated 

cases).

We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero 

disbursement among the 10,000 simulated cases in each given time period.

We calculated the likelihood of the fund balance maintaining its inflation-adjusted fiscal year 2023 

value by simulating 10,000 cases and counting those in which the simulated balance does not equal 

or exceed the projected inflation-adjusted 2023 balance.
Appendix VI: FSM and RMI Country Trust 

Funds

Page 75 GAO-18-415 Compacts of Free Association

The FSM and RMI each maintain their own country trust funds separate 

from the compact trust funds. These country trust funds are also available 

to provide a source of revenue after compact grants end at the end of 

fiscal year 2023. We did not independently project the future balance or 

potential disbursements from the FSM Trust Fund after 2023.

The FSM maintains its own trust fund, separate from the compact trust 

fund, which can provide additional resources after fiscal year 2023 to 

offset a reduction in resources relative to those made available as of 

fiscal year 2023. The FSM Trust Fund, established in 1999, has grown 

rapidly in recent years. In fiscal years 2012 through 2017, the FSM 

appropriated a total of $73.3 million for contributions to its trust fund.1 In 

addition, in 2015, the FSM changed its tax law to allocate 20 percent of 

revenue collected by the states to state subaccounts within the FSM Trust 

Fund. Along with investment gains, these appropriations and 

contributions of tax revenue have increased the FSM Trust Fund’s 

balance from $8 million at the end of fiscal year 2011 to $115 million as of 

the end of fiscal year 2017.2 As of 2017, the FSM proposed to continue 

adding $10 million annually from national government surpluses into its 

trust fund, with the aim of achieving a balance of $250 million by fiscal 

year 2023 and $10 million in annual disbursements. However, as of early 

2018, according to FSM officials, the FSM planned to add $15 million per 

year to the FSM Trust Fund and projected that the fund would have a 

balance of $275 million by the end of fiscal year 2023. However, like the 

compact trust fund, the full balance of the FSM Trust Fund is not available 

for disbursement. Under current FSM law, funds in the FSM Trust Fund 

may not be withdrawn until fiscal year 2024. In addition, according to FSM 

officials, the FSM can withdraw only the fund’s earnings and cannot 

withdraw the inflation-adjusted value of the FSM Trust Fund corpus.

The RMI also maintains its own trust fund—the compact trust fund’s D 

account. Although managed alongside the compact trust fund, the D 

account is not subject to the same disbursement provisions as the 

 1

The FSM has not made additional contributions to its compact trust fund.

2

In comments on a draft of this report, the FSM stated that $1 million sourced from 

Chinese grants was deposited into the FSM Trust Fund in fiscal years 2008 and 2010.

Appendix VI: FSM and RMI Country Trust 

Funds

FSM Trust Fund

RMI D Account
Appendix VI: FSM and RMI Country Trust 

Funds

Page 76 GAO-18-415 Compacts of Free Association

compact trust fund’s A, B, and C accounts.3 Instead, disbursements from 

the D account are subject to the provisions of the agreement between 

Taiwan and the RMI under which Taiwan contributed the $10 million that 

the RMI used to establish the D account. According to the terms of this 

agreement, the RMI may withdraw income after consultation with Taiwan 

but may not withdraw funds from the D account’s $10 million corpus. At 

the end of fiscal year 2017, the D account had a balance of $15.1 million, 

with $5.1 million potentially available for use by the RMI.

 3

The RMI provided a total of $2.85 million in voluntary contributions to the compact trust 

fund’s A account in fiscal years 2015 and 2016.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 77 GAO-18-415 Compacts of Free Association

We conducted a series of simulations to determine the likely effects of 

potential strategies for improving the outlook of the FSM and RMI 

compact trust funds. Prior studies by Graduate School USA, the Asian 

Development Bank, and the International Monetary Fund examined the 

effects of three general approaches for improving the trust funds’

outlooks: (1) reducing planned disbursements from the funds, (2) making 

additional contributions to the funds, and (3) changing the compact trust 

fund disbursement policies.1 To isolate the impact of individual changes 

on the compact trust fund balance and disbursements, we developed and 

analyzed five potential strategies based on those examined in the 

previous studies. Reduced disbursements and additional contributions 

could occur without changes to the trust fund agreement, but changes to 

the disbursement policies may require changing the agreements. In 

strategies 3, 4, and, 5, we analyzed strategies that would permit 

disbursement from the A account. Disbursing from the A account would 

require changing the compact trust fund agreements. Table 12 shows the 

5 potential strategies we analyzed.

Table 12: Potential Strategies for Improving Outlook of FSM and RMI Compact Trust Funds

General approach Potential strategy

No changes to the compact trust fund agreements

Reduced annual trust fund 

disbursements

1. Annual disbursement is reduced to 30 percent below the maximum disbursement.

Additional trust fund 

contributions

2. Trust fund receives additional annual contributions equal to 5 percent of the country’s FY 2016 

GDP in fiscal years 2018 through 2023.

May require changes to the compact trust fund agreements

Changed disbursement policies 

(permitting disbursement from 

the A account)

3. Annual disbursements are limited to 5 percent of the 3-year moving average balance of the 

compact trust fund or maximum allowable disbursements, whichever is lower.

4. Target disbursement is set as the maximum allowable disbursement. The disbursement 

amount is decreased if the 5-year moving average balance of the compact trust fund does not 

meet the target compact trust fund balance.a

5. Target disbursement is set as 2.1 percentb of the compact trust fund balance. The 

disbursement amount is further decreased if the 5-year moving average balance of the 

compact trust fund does not meet the target compact trust fund balance. The disbursement 

amount can grow above the maximum allowed disbursement under the compact agreement if 

the fund balance is sufficiently high.c

Legend: FSM = Federated States of Micronesia, RMI = Republic of the Marshall Islands

Source: GAO review of Graduate School USA, Asian Development Bank, and International Monetary Fund reports. | GAO-18-415

 1

Each study did not examine every strategy. In practice, these strategies could be 

implemented in combination. For example, the compact trust funds could both receive 

additional contributions and have reduced disbursements.

Appendix VII: Potential Trust Fund Strategies 

and Model Results
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 78 GAO-18-415 Compacts of Free Association

a

Based on Graduate School USA’s Moving Adjustment Rule (MAR).

b

We calculated the target disbursement percentage on the basis of a 6 percent net return. The target 

disbursement percentage would be higher if the net rate of return were higher and would be lower if 

the net rate of return were lower.

c

Based on Graduate School USA’s Sustainability Adjustment for Enhanced Reliability (SAFER).

We analyzed two potential strategies that could be implemented without 

changes to the trust fund agreements: reductions in the amount of 

disbursements and additional contributions to the trust funds.

Strategy 1: Annual disbursements are reduced below the maximum 

allowable disbursement. We analyzed the likely effects of reducing 

disbursements to an amount 30 percent below the maximum 

disbursement, relative to the baseline scenario, for both the FSM and the 

RMI compact trust funds.

• For the FSM, the average size of the disbursements would be lower in 

the first 10 years of our projection, fiscal years 2024 through 2033, but 

greater in later years. For the RMI, the average disbursement size 

would remain lower than the disbursement amounts we projected 

using the baseline scenario. Disbursement amounts would remain 

volatile from year to year if the balance in the C account is not 

sufficient to provide additional disbursements.

• For both countries, the risk of zero disbursements would be reduced, 

but not eliminated, in each decade.

• For both countries, the likelihood that the funds would maintain or 

exceed their inflation-adjusted fiscal year 2023 value after fiscal year 

2023 would be higher in each decade.

Reductions in annual disbursements could be effected by the compact 

trust fund committees at their discretion, without changes to the compact 

trust fund agreements. However, reductions in annual disbursements 

below the maximum amount would require each country to permanently 

adjust to having fewer resources for their budgets and economies than 

the compact grants provided.

Strategy 2: Additional annual contributions are made to the trust 

fund in fiscal years 2018 through 2023. We analyzed the likely effects 

of additional contributions equivalent to 5 percent of each country’s fiscal 

year 2016 GDP, relative to the baseline scenarios, for both the FSM and 

the RMI compact trust funds.

Potential Strategies That 

Would Not Require Changes to 

the Compact Trust Fund 

Agreement
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 79 GAO-18-415 Compacts of Free Association

• The average size of the disbursements would be greater. 

Disbursement amounts would remain volatile from year to year if the 

balance in the C account is not sufficient to provide additional 

disbursements.

• The risk of zero disbursements would be reduced but not eliminated.

• The likelihood that the funds would maintain or exceed their inflationadjusted fiscal year 2023 value after fiscal year 2023 would be higher.

Additional contributions to the FSM or RMI trust funds could be accepted 

at the discretion of compact trust fund committees, without changes to the 

compact trust agreements. However, unless the compact trust fund 

committees could identify other donors for these contributions, the 

countries would have to choose to reprogram existing revenues from 

other uses into compact trust fund contributions.2 The addition of funds 

from other donors would have no negative impact on the trust funds’

outlook if other conditions remained unchanged.

We analyzed three additional potential strategies that would involve 

calculating annual disbursements as a percentage of the FSM and RMI 

compact trust funds’ balance and which would permit disbursement from 

the A account. Disbursing from the A account would require changing the 

compact trust fund agreements, necessitating negotiation and agreement 

between the United States and each country and statutory enactment by 

the U.S. Congress. In strategy 3, disbursements are calculated as a fixed 

percentage of the funds’ moving average balance over the previous 3 

years. In strategies 4 and 5, disbursements are calculated on the basis of 

the funds’ moving average balance over the previous 5 years as well as 

the committees’ determination of the target size for the funds’ balance or 

disbursements. All three potential strategies would require the FSM and 

 2

The amended compacts’ implementing legislation includes provisions for potential 

additional contributions to the RMI compact trust fund in compensation for the effect of 

changes to the tax and trade provisions of the original compact. The Compact of Free 

Association Act of 1985 (Pub. L. 99-239) provided for potential compensation to the RMI 

of up to $20 million, with the possibility for $40 million more, if the government of the RMI 

could demonstrate adverse impacts on its finances and economy as a result of unilateral 

changes the U.S. Congress made to the tax and trade provisions in Title II of the original 

compact. Section 108(b) of the amended compacts’ implementing legislation also included 

this provision. In 2009, an interagency group convened by the Department of State 

concluded that the RMI had reasonably demonstrated net adverse impacts. Per the terms 

of the amended compact, the $20 million would be deposited into the compact trust fund. 

In 2010, the department notified Congress of the interagency group findings. However, 

according to the Department of the Interior, funds have not been appropriated to make 

such a payment.

Potential Strategies That 

Would Permit Disbursement 

from the A Account
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 80 GAO-18-415 Compacts of Free Association

the RMI to exchange a reduction in resources for more predictable 

disbursements in the longer term.

Strategy 3: The annual disbursement is set as a fixed percentage of 

the fund’s moving average balance over the previous 3 years, up to 

the maximum disbursement amount defined by the current trust 

fund agreement.3 We analyzed the likely effects of limiting annual 

disbursements to 5 percent of the moving average balance over the 

previous 3 years, relative to the baseline scenario for the FSM and the 

RMI compact trust funds.

• In earlier years, average disbursements from the compact trust funds 

would be smaller than those in the baseline scenario; in later years, 

average disbursements would exceed those in the baseline scenario. 

For the FSM, the average disbursement would start to exceed that in 

the baseline scenario in the second decade after disbursements begin 

(fiscal years 2034-2043). For the RMI, the average disbursement 

would start to exceed that in the baseline scenario in the fourth 

decade after disbursements begin (fiscal years 2054-2063). 

Disbursement amounts would be less volatile from year to year than 

the volatility that could be experienced in the baseline scenario when 

the balance in the C account is not sufficient to provide additional 

disbursements.

• The risk of zero disbursements would be eliminated.

• The likelihood that the funds would maintain or exceed their inflationadjusted fiscal year 2023 value after that year would be higher than in 

the baseline scenario.

Strategy 4: The amount of the annual disbursement is reduced if the 

compact trust fund’s moving average balance over the previous 5 

 3

The existing compact trust fund agreements set the maximum disbursement as the 

inflation-adjusted amount of annual grant assistance, as defined by the trust fund 

agreement, in fiscal year 2023. The trust fund committees may also approve additional 

amounts for special needs agreed to by the trust fund committees. We did not estimate or 

project amounts approved for disbursements as special needs as part of our analysis.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 81 GAO-18-415 Compacts of Free Association

years is lower than a primary target amount.4 We analyzed the likely 

effects of implementing this strategy, relative to the baseline scenario for 

the FSM and the RMI compact trust funds.

• In the FSM, the average disbursement would be lower than that in the 

baseline scenario in earlier years but higher than that in the baseline 

scenario in the fourth decade after disbursements begin (i.e., fiscal 

years 2054-2063). In the RMI, the average disbursement would be 

lower than that in the baseline scenario in earlier years but would 

equal that in the baseline scenario in the fourth decade after 

disbursements begin (i.e., fiscal years 2054-2063). Disbursement 

amounts would be less volatile from year to year than the volatility that 

could be experienced in the baseline scenario when the balance in 

the C account is not sufficient to provide additional disbursements.

• The risk of zero disbursements would be greatly reduced but not 

eliminated. In the FSM, the risk would be 55 percentage points lower 

than in the baseline scenario in the fourth decade after disbursements 

begin (i.e., fiscal years 2054-2063). In the RMI, the risk would be less 

than 5 percent in each decade.

• The likelihood that the funds would maintain or exceed their inflationadjusted fiscal year 2023 value after that year would be higher than in 

the baseline scenario.

 4

This strategy is based on the Moving Adjustment Rule, developed by Graduate School 

USA. The primary target is defined by Graduate School USA and refers to a conservative 

benchmark for the value of the compact trust fund that is required to yield the target 

disbursement at a given rate of return. We developed this strategy using the technical 

description of the moving adjustment rule in the Graduate School USA's fiscal year 2014 

Economic Review reports. Graduate School USA has continued to revise its model and, in 

April 2018, issued a compact trust fund analysis that uses 3-year moving averages 

instead of 5-year moving averages. See Graduate School USA, Compact Trust Funds in 

the Freely Associated States: Mechanics and Stochastic Projections (Honolulu, Hawaii: 

April 2018). The primary target is defined by Graduate School USA and refers to a 

conservative benchmark for the value of the compact trust fund that is required to yield the 

target disbursement at a given rate of return. In Graduate School USA’s analysis, the 

primary target is determined by dividing the target disbursement (the maximum allowable 

disbursement) by the 5 percent historical average long-run real geometric return of a 

portfolio with a chosen asset allocation. In our analysis, we used a long-run real geometric 

return of 3.2 percent derived from our assumed nominal arithmetic net return of 6 percent. 

In both analyses, disbursements are reduced by 5 percent if the 5-year moving average 

fund balance is below the primary target and increased by 2 percent if the ratio of the 5-

year moving average fund balance divided by the primary target to last year’s distribution 

divided by the target distribution is greater than 1.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 82 GAO-18-415 Compacts of Free Association

Strategy 5: The target disbursement is set as 2.1 percent of the 

compact trust fund’s balance in fiscal year 2024.5 The disbursement 

amount is further decreased if the fund’s moving average balance 

over the previous 5 years is lower than the primary target balance.6

Our analysis projected the following effects of implementing this strategy 

relative to the baseline scenario for the FSM and the RMI compact trust 

funds:

• For both countries, the average disbursement would be smaller than 

that in the baseline scenario in the first 3 decades after disbursements 

begin (i.e., fiscal years 2024-2053) but would exceed that in the 

baseline scenario in the fourth decade. Disbursement amounts would 

be less volatile from year to year than the volatility that could be 

experienced in the baseline scenario between 2024 and 2063 when 

the balance in the C account is not sufficient to provide additional 

disbursements.

• The risk of zero disbursements would be almost eliminated.7

• The likelihood that the funds would maintain or exceed their inflationadjusted fiscal year 2023 value would be much higher.

 5

This strategy is based on the Sustainability Adjustment for Enhanced Reliability (SAFER) 

model, developed by Graduate School USA. According to Graduate School USA, the 

sustainability adjustment for enhanced reliability is a method that optimizes for a chosen 

asset allocation’s risk and return characteristics. In both the Graduate School USA 

analysis and our analysis, the initial target disbursement is determined by multiplying the 

compact trust fund balance in fiscal year 2023 by the long-run real geometric return 

divided by a constant number (called the sustainability adjustor). For our analysis, we 

calculated the initial target disbursement percentage on the basis of a 3.2 percent long-run 

real geometric return and a sustainability adjustor of 1.5. The target disbursement 

percentage would be higher if the long-run real geometric return were higher and would be 

lower if the long-run real geometric return were lower. We developed this strategy using 

the technical description of the sustainability adjustment for enhanced reliability in 

Graduate School USA's fiscal year 2014 Economic Review reports. Graduate School USA 

has continued to revise its model and, in April 2018, issued an updated review that uses 

3-year moving averages instead of 5-year moving averages and a 1.67 sustainability 

adjustor instead of 1.5. See Graduate School USA, Compact Trust Funds in the Freely 

Associated States: Mechanics and Stochastic Projections (Honolulu, Hawaii: April 2018).

6

The primary target balance is determined by dividing the initial target disbursement (2.1 

percent of the compact trust fund on the basis of a 6 percent net return) by the long-run 

inflation-adjusted average geometric return on the compact trust fund (3.2 percent on the 

basis of a 6 percent nominal arithmetic net return).

7

Our analysis for strategy 5 projects a small—0.1 percent or less—likelihood of 1 or more 

years with zero disbursement in the third and fourth decades of trust fund disbursements 

for each country. 
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 83 GAO-18-415 Compacts of Free Association

Figures 11 through 16 compare projected compact trust fund

disbursements and fund balances in the baseline scenario with projected 

disbursements and fund balances for the five selected potential strategies 

for improving the trust funds’ outlook.

Figure 11: FSM Compact Trust Fund Projected Average Disbursement for Baseline Scenario and Selected Potential 

Strategies, Fiscal Years 2024-2063

Note: We assumed that the trust fund’s annual return will have a normal distribution and a 6 percent 

nominal return net of fees, with a standard deviation of 13 percent, for the baseline scenario and the 

potential strategies.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 84 GAO-18-415 Compacts of Free Association

Figure 12: FSM Compact Trust Fund Projected Likelihood of Zero Disbursements for Baseline Scenario and Selected 

Potential Strategies, Fiscal Years 2024-2063

Note: We assumed that the trust fund’s annual return will have a normal distribution and a 6 percent 

nominal return net of fees, with a standard deviation of 13 percent, for the baseline scenario and the 

potential strategies.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 85 GAO-18-415 Compacts of Free Association

Figure 13: Likelihood of FSM Compact Trust Fund Balance Exceeding or Equaling the Inflation-Adjusted Fiscal Year 2023 

Balance for Baseline Scenario and Selected Potential Strategies

Note: We assumed that the trust fund’s annual return will have a normal distribution and a 6 percent 

nominal return net of fees, with a standard deviation of 13 percent, for the baseline scenario and the 

potential strategies.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 86 GAO-18-415 Compacts of Free Association

Figure 14: RMI Compact Trust Fund Projected Average Disbursement for Baseline Scenario and Selected Potential Strategies, 

by Decade, Fiscal Years 2024-2063

Note: We assumed that the trust fund’s annual return will have a normal distribution and a 6 percent 

nominal return net of fees, with a standard deviation of 13 percent, for the baseline scenario and the 

potential strategies.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 87 GAO-18-415 Compacts of Free Association

Figure 15: RMI Compact Trust Fund Projected Likelihood of Zero Disbursements for Baseline Scenario and Selected Potential 

Strategies, by Decade, Fiscal Years 2024-2063

Note: We assumed that the trust fund’s annual return will have a normal distribution and a 6 percent 

nominal return net of fees, with a standard deviation of 13 percent, for the baseline scenario and the 

potential strategies.
Appendix VII: Potential Trust Fund Strategies 

and Model Results

Page 88 GAO-18-415 Compacts of Free Association

Figure 16: Likelihood of RMI Compact Trust Fund Balance Exceeding or Equaling the Inflation-Adjusted Fiscal Year 2023 

Balance for Baseline Scenario and Selected Potential Strategies

Note: We assumed that the trust fund’s annual return will have a normal distribution and a 6 percent 

nominal return net of fees, with a standard deviation of 13 percent, for the baseline scenario and the 

potential strategies.

The amounts of disbursement reductions and additional contributions 

varied among the strategies examined in prior studies. To provide 

additional information about potential trust fund outcomes, we analyzed 

another four examples of the selected strategies that assumed a lower 

amount of additional trust fund contributions, lower disbursement 

reductions, or a lower percentage of the compact trust fund balance that 

could be withdrawn. Tables 13 and 14 show the results for all 9 analyses.
Appendix VII: Potential Trust Fund Strategies and Model Results

Page 89 GAO-18-415 Compacts of Free Association

Table 13: Federated States of Micronesia (FSM) Compact Trust Fund Summary Table of Projected Average Disbursements, Likelihood of Zero Disbursements, and 

Likelihood of Maintaining Fund Balance under Baseline and Selected Potential Strategies

Projected average compact 

trust fund disbursement 

(dollars in millions)

Projected average compact 

trust fund disbursement as a 

percentage of maximum 

disbursement

Percentage likelihood of 1 or 

more years with zero 

disbursement in a given 10-year 

period

Percentage likelihood of 

trust fund balance 

maintaining or exceeding 

inflation-adjusted fiscal 

year 2023 value

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY33 FY43 FY53 FY63

Baseline 75 54 44 36 82 49 33 22 41 78 88 92 13 7 5 4

Potential strategy

Reduced annual trust fund disbursements, no change to compact trust fund agreement

Decreasing target 

disbursement to 15% below 

maximum disbursement

69 56 48 41 76 50 35 25 27 66 80 87 19 12 9 7

Decreasing target 

disbursement to 30% below 

maximum disbursement

60 56 51 46 66 51 37 28 14 48 67 76 28 20 16 14

Additional trust fund contributions, no change to compact trust fund agreement

Additional contributions 

equal to 2% of gross 

domestic product ($6.6 

million) in each year from 

fiscal year 2018 to 2023

76 58 48 40 84 53 36 24 38 75 87 91 15 8 6 5

Additional contributions 

equal to 5% of gross 

domestic product ($16.5 

million) in each year from 

fiscal year 2018 to 2023

78 63 53 45 86 57 39 27 35 71 84 89 18 10 7 6
Appendix VII: Potential Trust Fund Strategies and Model Results

Page 90 GAO-18-415 Compacts of Free Association

Projected average compact 

trust fund disbursement 

(dollars in millions)

Projected average compact 

trust fund disbursement as a 

percentage of maximum 

disbursement

Percentage likelihood of 1 or 

more years with zero 

disbursement in a given 10-year 

period

Percentage likelihood of 

trust fund balance 

maintaining or exceeding 

inflation-adjusted fiscal 

year 2023 value

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY33 FY43 FY53 FY63

Changed disbursement policies (disbursing from the A account)

Disbursements equal to 3% 

of the 3-year moving 

average of the compact trust 

fund balance 34 46 59 74 37 41 43 45 0 0 0 0 57 55 54 54

Disbursements equal to 4% 

of the 3-year moving 

average of the compact trust 

fund balance 44 52 61 72 48 47 45 43 0 0 0 0 46 41 38 36

Disbursements equal to 5% 

of the 3-year moving 

average of the compact trust 

fund balance 52 56 60 65 57 50 44 40 0 0 0 0 37 30 24 21

Moving Adjustment Rule 

(MAR) 62 45 38 40 68 41 28 24 1 17 30 37 28 27 28 28

Sustainability Adjustment for 

Enhanced Reliability 

(SAFER) 23 30 41 58 25 27 30 35 0 0 0 0 65 67 69 70

Legend: FY = fiscal year

Source: GAO analysis of compact trust fund documents. | GAO-18-415

Notes: We used the compact trust fund’s unaudited balance at the end of fiscal year 2017 as the starting balance. We 

assumed that the trust fund’s annual return will have a normal distribution and a 6 percent nominal return net of fees, with a 

standard deviation of 13 percent.

We calculated the average disbursement in the given time periods by averaging 10-year period simulated disbursements 

(averaging first over 10 years and then over 10,000 simulated cases).

We calculated the average disbursement as a percentage of the maximum allowable disbursement by averaging the ratio of 

simulated disbursement to the maximum inflation-adjusted allowable disbursement in the given time period (averaging first over

10 years and then over 10,000 simulated cases).
Appendix VII: Potential Trust Fund Strategies and Model Results

Page 91 GAO-18-415 Compacts of Free Association

We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero disbursement among the 

10,000 simulated cases in each given time period.

We calculated the likelihood of the fund balance maintaining its inflation-adjusted fiscal year 2023 value by simulating 10,000 

cases and counting those in which the simulated balance does not equal or exceed the projected inflation-adjusted 2023 

balance

Table 14: Republic of the Marshall Islands (RMI) Compact Trust Fund Summary Table of Projected Average Disbursements, Likelihood of Zero Disbursements, and 

Likelihood of Maintaining Fund Balance under Baseline and Selected Potential Strategies

Projected average compact 

trust fund disbursement 

(dollars in millions)

Projected average compact 

trust fund disbursement as a 

percentage of maximum 

disbursement

Percentage likelihood of 1

or more years with zero 

disbursement in a given 10-

year period

Percentage likelihood of 

trust fund balance 

maintaining or exceeding 

inflation-adjusted fiscal 

year 2023 value

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY33 FY43 FY53 FY63

Baseline 28 31 33 34 95 85 74 63 15 34 47 56 41 35 31 29

Potential strategy

Reduced annual trust fund disbursements, no change to compact trust fund agreement

Decreasing target disbursement to 

15% below maximum disbursement 25 28 31 34 83 77 70 62 8 22 32 43 47 43 41 39

Decreasing target disbursement to 

30% below maximum disbursement 21 24 28 31 69 67 63 58 3 11 19 28 54 52 50 49

Additional trust fund contributions, no change to compact trust fund agreement

Additional contributions equal to 2% of 

gross domestic product ($3.9 million) 

in each year from fiscal year 2018 to 

2023 29 32 34 36 96 87 77 66 14 31 43 54 42 37 34 32

Additional contributions equal to 5% of 

gross domestic product ($9.7 million) 

in each year from fiscal year 2018 to 

2023 29 32 36 38 96 88 80 70 13 28 39 48 46 41 38 36
Appendix VII: Potential Trust Fund Strategies and Model Results

Page 92 GAO-18-415 Compacts of Free Association

Projected average compact 

trust fund disbursement 

(dollars in millions)

Projected average compact 

trust fund disbursement as a 

percentage of maximum 

disbursement

Percentage likelihood of 1

or more years with zero 

disbursement in a given 10-

year period

Percentage likelihood of 

trust fund balance 

maintaining or exceeding 

inflation-adjusted fiscal 

year 2023 value

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY24-

FY33

FY34-

FY43

FY44-

FY53

FY54-

FY63

FY33 FY43 FY53 FY63

Changed disbursement policies (disbursing from the A account)

Disbursements equal to 3% of the 3-

year moving average of the compact 

trust fund balance 21 26 31 38 70 70 70 69 0 0 0 0 57 57 57 58

Disbursements equal to 4% of the 3-

year moving average of the compact 

trust fund balance 25 28 32 37 83 76 72 68 0 0 0 0 48 45 44 42

Disbursements equal to 5% of the 3-

year moving average of the compact 

trust fund balance 27 29 32 36 90 80 73 66 0 0 0 0 44 39 36 33

Moving Adjustment Rule (MAR) 23 25 29 34 76 68 64 63 0 1 2 4 51 52 52 54

Sustainability Adjustment for 

Enhanced Reliability (SAFER) 14 19 26 37 47 51 57 67 0 0 0 0 64 67 69 71

Legend: FY = fiscal year

Source: GAO analysis of compact trust fund documents. | GAO-18-415

Notes: We used the compact trust fund’s unaudited balance at the end of fiscal year 2017 as the starting balance. We 

assumed that the trust fund’s annual return will have a normal distribution and a 6 percent nominal return net of fees, with a 

standard deviation of 13 percent.

We calculated the average disbursement in the given time periods by averaging 10-year period simulated disbursements 

(averaging first over 10 years and then over 10,000 simulated cases).

We calculated the average disbursement as a percentage of the maximum allowable disbursement by averaging the ratio of 

simulated disbursement to the maximum inflation-adjusted allowable disbursement in the given time period (averaging first over

10 years and then over 10,000 simulated cases).

We calculated the likelihood of zero disbursement by counting cases with 1 or more years of zero disbursement among the 

10,000 simulated cases in each given time period.

We calculated the likelihood of the fund balance maintaining its inflation-adjusted fiscal year 2023 value by simulating 10,000 

cases and counting those in which the simulated balance does not equal or exceed the projected inflation-adjusted 2023 

balance.
Appendix VIII: Status of Other Planned Actions 

in the FSM and RMI Decrement Management 

Plans

Page 93 GAO-18-415 Compacts of Free Association

In addition to planning budget reductions in the FSM Long-Term Fiscal 

Framework (its decrement management plan) and the RMI Decrement 

Management Plan, the FSM and RMI planned other actions such as tax 

reforms and subsidy reductions to address the scheduled decrement in 

compact sector grants. The FSM implemented two of three planned 

actions and the RMI implemented one of four planned actions. The FSM 

did not implement unified tax reform measures but implemented a change 

in the formula for sharing compact sector grants with the FSM states and 

using planned surpluses to mitigate the effects of fiscal reforms. The RMI 

did not implement planned new taxes, reductions in subsidies to stateowned enterprises, or reductions in payments to Majuro landowners for 

the use of their land for utilities. The RMI did program a portion of its 

fishing fee surplus into the annual budget.

As of January 2018, the FSM national government had implemented two 

of three actions that the FSM Long-Term Fiscal Framework indicated the 

FSM would take in addition to budget reductions.

1. Implementing unified tax reform measures

• Not implemented. The FSM Long-Term Fiscal Framework states 

that substantial effort and progress has been made towards 

comprehensive tax and revenue reform and that the FSM national 

and state governments anticipated that the Long-Term Fiscal 

Framework process would provide further impetus towards tax 

reform. However, according to FSM officials, two FSM states 

(Pohnpei and Yap) did not approve the Unified Revenue Act. 

According to FSM officials, the FSM is currently considering other 

models for tax reform and plans to revisit the issue in the future.

2. Reducing the national government’s share of compact grants and 

reallocating it to the FSM states

• Implemented. According to the Long-Term Fiscal Framework, 

FSM Public Law 18-12 reduced the national government’s share 

of fiscal year 2014 compact grants from 10 percent to 5 percent, 

with the amount of the reduction passed along to the FSM states. 

In May 2014, FSM Public Law 18-57 further reduced the national 

government’s share of compact grants to 0 percent and increased 

the amount of compact grants allocated to the state governments, 

according to the FSM.

Appendix VIII: Status of Other Planned 

Actions in the FSM and RMI Decrement 

Management Plans

FSM
Appendix VIII: Status of Other Planned Actions 

in the FSM and RMI Decrement Management 

Plans

Page 94 GAO-18-415 Compacts of Free Association

3. Using planned surpluses for actions such as possible contributions to 

activities that mitigate the effects of fiscal reforms, the FSM’s compact 

trust fund, retiring debt, or reform costs.

• Implemented. The FSM national government has made additional 

trust fund contributions but, according to FSM officials, has made 

a policy decision to make these contributions to the FSM Trust 

Fund instead of the compact trust fund.

As of January 2018, the RMI national government had implemented one 

of four other actions that its decrement management plan indicated it 

would take.

1. Implementing a value-added tax and net profits tax in 2017

• Not implemented. Officials from the RMI Economic Policy, 

Planning, and Statistics Office and Ministry of Foreign Affairs 

confirmed that tax reform has not been implemented due to 

political challenges. However, a tax task force has been 

established to revisit tax revenue reforms.

2. Programming 80 percent of unallocated Marshall Islands Marine 

Resources Authority fishing fee surplus into the annual budget in 

fiscal year 2015 and using the remaining 20 percent to develop the 

fishing industry.

• Implemented. The RMI programmed a portion of its fishing fees 

into the annual budget in fiscal years 2015 through 2017—$15.8 

million in fiscal year 2015, $26.3 million in fiscal year 2016, and 

$40 million in fiscal year 2017. Although fishing fees were 

programmed into the budget, according to RMI’s Office of 

Compact Implementation, the formula allocating 80 percent of 

fishing fee revenue into the annual budget and the remaining 20 

percent to develop the fishing industry is part of proposed RMI 

legislation but has not become law.

3. Reducing state-owned enterprise subsidies by 10 percent in fiscal 

years 2016 and 2018.

• Not implemented. The RMI national government did not reduce 

the total amount of state-owned enterprise subsidies by 10 

percent in fiscal years 2016 as committed in the 2014 decrement 

management plan. Audit reports for state-owned enterprises in 

fiscal years 2015 and 2016 indicate that, while the RMI reduced 

subsidy amounts for some state-owned enterprises, other subsidy 

RMI
Appendix VIII: Status of Other Planned Actions 

in the FSM and RMI Decrement Management 

Plans

Page 95 GAO-18-415 Compacts of Free Association

amounts increased and overall subsidies were higher in both fiscal 

years 2015 and 2016 than in fiscal year 2014.1 See table 15.

Table 15: RMI State-Owned Enterprise Subsidy Amounts, Fiscal Years 2014-2016

Fiscal year Total subsidy amounts

Difference from fiscal 

year 2014

2014 $9,176,149 –

2015 $15,299,863 $6,123,714

2016 $13,022,163 $3,846,014

Legend: – = not applicable

Source: GAO analysis of RMI state-owned enterprise audit reports, fiscal years 2014-2016. | GAO-18-415

4. Reducing government transfers to Majuro landowners to compensate 

for the government’s use of their land for utilities by 20 percent in 

fiscal years 2016, 2018, and 2021.

• Not implemented. The RMI national government has not reduced 

government transfers to Majuro landowners to compensate for the 

government’s use of their land for utilities due to political 

challenges, according to RMI officials. RMI Ministry of Finance 

officials stated that, as of January 2018, there had been no 

reductions in government transfers to Majuro landowners. 

According to RMI government officials, the total rent payment bill 

has in fact increased as utilities in Majuro have expanded.

 1

As of March 2018, audit reports for fiscal years 2017 and 2018 were not yet available.
Appendix IX: Comments from the Department 

of the Interior

Page 96 GAO-18-415 Compacts of Free Association

Appendix IX: Comments from the 

Department of the Interior
Appendix IX: Comments from the Department 

of the Interior

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Appendix X: Comments from the U.S. Postal 

Service

Page 98 GAO-18-415 Compacts of Free Association

Appendix X: Comments from the U.S. Postal 

Service

Now on page 68.
Appendix X: Comments from the U.S. Postal 

Service

Page 99 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 100 GAO-18-415 Compacts of Free Association

Appendix XI: Comments from the Federated 

States of Micronesia

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix.
Appendix XI: Comments from the Federated 

States of Micronesia

Page 101 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 102 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 103 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 104 GAO-18-415 Compacts of Free Association

See comment 1.
Appendix XI: Comments from the Federated 

States of Micronesia

Page 105 GAO-18-415 Compacts of Free Association

Now on page 34.
Appendix XI: Comments from the Federated 

States of Micronesia

Page 106 GAO-18-415 Compacts of Free Association

See comment 2.

See comment 3.
Appendix XI: Comments from the Federated 

States of Micronesia

Page 107 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 108 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 109 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 110 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 111 GAO-18-415 Compacts of Free Association
Appendix XI: Comments from the Federated 

States of Micronesia

Page 112 GAO-18-415 Compacts of Free Association

GAO’s comments on the Federated States of Micronesia letter dated April 

23, 2018. 

1. The FSM refers to our testimony in 2002 regarding the potential for 

the FSM compact trust fund to not provide funds sufficient to cover the 

estimated value of expiring federal services as early as 2002.1

2. The FSM includes a graphic showing the effect of the partial inflation 

adjustments and the decrement in the compact sector grants. We 

include a similar portrayal of this analysis in figure 10 in this report.

3. The FSM states that the amount of the decrement in compact sector 

grants that is used for annual contributions to the FSM compact trust 

fund should be recorded as an FSM contribution to the fund. 

However, Section 215 of the FSM compact refers to the annually 

decreasing amounts provided to the compact trust fund as set forth in 

Section 216 of the FSM compact as United States contributions to the 

compact trust fund.

 1

GAO-02-857T 

GAO Comments
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 113 GAO-18-415 Compacts of Free Association

Appendix XII: Comments from the Republic 

of the Marshall Islands

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix.
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 114 GAO-18-415 Compacts of Free Association

Now on page 43.
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 115 GAO-18-415 Compacts of Free Association

See comment 1.

Now on page 27.
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 116 GAO-18-415 Compacts of Free Association

Now on pages 33-34.
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 117 GAO-18-415 Compacts of Free Association

Now on pages 34-36.
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 118 GAO-18-415 Compacts of Free Association
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 119 GAO-18-415 Compacts of Free Association

See comment 2.
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 120 GAO-18-415 Compacts of Free Association

See comment 3.
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 121 GAO-18-415 Compacts of Free Association
Appendix XII: Comments from the Republic of 

the Marshall Islands

Page 122 GAO-18-415 Compacts of Free Associa

GAO’s comments on the Republic of the Marshall Islands letter dated 

April 23, 2018. 

1. The RMI states that, absent accountability issues, the maximum 

annual disbursement amount should be disbursed from the compact 

trust fund. However, as our report notes, although the compact trust 

fund agreements state the maximum allowable disbursement level, 

they do not establish or guarantee a minimum disbursement level.

2. The RMI states that the 2-year delay in investing the compact trust 

fund will result in a compounded total loss of $33.6 million by the end 

of fiscal year 2023. Our 2007 analysis of the trust funds included 

information about the delays in establishing the trust funds.1 We did 

not update our 2007 analysis of the loss in income due to the delay in 

investing the compact trust fund for this report.

3. The RMI notes that the amended compacts' implementing legislation 

extended several important federal programs. Appendix IV of this 

report presents our conclusions, based on our analysis of current law, 

that the RMI will remain eligible as of the end of fiscal year 2023 for 

special education programs and for some programs replaced by the 

supplemental education grant.

 1

GAO-07-513, pp. 15-20

GAO Comments
Appendix XIII: GAO Contact and Staff 

Acknowledgments

Page 123 GAO-18-415 Compacts of Free Association

David Gootnick, (202) 512-3149 or gootnickd@gao.gov

In addition to the contact named above, Emil Friberg (Assistant Director), 

Ming Chen, Neil Doherty, Mark Dowling, Reid Lowe, Moon Parks, 

Shaundra Patterson, and Michael Simon made key contributions to this 

report. Justin Fisher, Jeff Isaacs, Julie Hirshen, Risto Laboski, Courtney 

LaFountain, and Jeffery Malcolm provided technical assistance.

Appendix XIII: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(101901)
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