Municipal government exists at the village level. Municipal leaders are most often village chiefs, though some are elected officials. Municipal governments have taxing authority and are able to regulate the operation of local businesses. It is important to note that the FSM's system of government recognizes a role for traditional leaders and customs. The councils play an important role in government, particularly in the selection of candidates for political office.
Councils also have the right to review and veto any legislation affecting traditions and customs.
The other FSM state constitutions also give similar recognition to traditional leaders. Legislators tend to vote for the interests of their state which has at times created much acrimony in the Congress. In 1991, Bailey Olter was elected President and after long and rigorous congressional confirmation hearings, swore in the last six of his cabinet officials in mid-1992. The FSM's primary source of income is the United States, through budgetary grants and aid made available by the Compact of Free Association. Other sources of income have been aid from Japan, Australia, New Zealand, and the People's Republic of China.