Compacts of Free Association: Micronesia and the Marshall Islands Continue to Face Challenges Measuring Progress and Ensuring Accountability
Published: 2013-09-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2003, the U.S. government approved amended Compacts of Free Association with the FSM and the RMI, providing for a total of $3.6 billion in assistance over 20 years. Given the countries' dependence on compact funding, GAO was asked to conduct a review of the use and accountability of these funds. This report addresses (1) the FSM's and RMI's use of compact funds in the education and health sectors; (2) the extent to which the FSM and RMI have made progress toward stated goals in education and health; and (3) the extent to which oversight activities by the FSM, RMI, and U.S. governments ensure accountability for compact funding. GAO also provided information on infrastructure spending and projects in the education and health sectors. GAO reviewed relevant documents and data, including single audit reports; interviewed officials from Interior, other U.S. agencies, and the FSM and RMI; assessed data reliability for subsets of both countries' education and health indicators; and visited compact-funded education and health facilities in both countries.
section_title: What GAO Found
paragraphs: In fiscal years 2007 through 2011, the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) spent at least half their compact sector funds in the education and health sectors. Because both countries spent significant amounts of compact funds on personnel in the education and health sectors, the U.S.-FSM and U.S.-RMI joint management and accountability committees capped budgets for personnel in these sectors at fiscal year 2011 levels due to concerns about the sustainability of sector budgets as compact funding continues to decline through fiscal year 2023. The FSM states completed plans to address annual decreases in compact funding; however, the FSM National Government and the RMI have not submitted plans to address these annual decreases as required. Without plans, the countries may not be able to sustain essential services in the education and health sectors in the future.
Data reliability issues hindered GAO's assessment of progress by the FSM and RMI in the education and health sectors for fiscal years 2007 through 2011 for the compacts as a whole. Between 2004 and 2006, both countries began tracking education and health indicators, establishing data collection systems, and collecting data for the majority of the indicators and have continued to track data on their indicators since that time. In education, GAO found 3 of 14 indicators in the subsets of indicators it reviewed for both countries to be sufficiently reliable and 1 also to be capable of demonstrating progress: the education level of teachers in the RMI. GAO found a variety of data reliability problems, such as some FSM states reporting data for both public and private schools while other states included only public schools in their data. In the health sector, GAO determined that data for all 5 of the subset of indicators it reviewed in the FSM were not sufficiently reliable to assess progress for the compacts as a whole, and in the RMI, 1 health indicator was sufficiently reliable and 2 were not sufficiently reliable; for 2 other RMI health indicators, GAO had no basis to judge. In much of their reporting on their education and health indicators, the FSM and RMI have noted data reliability problems and some actions they have taken to address the problems. The U.S.-FSM and U.S.-RMI joint management and accountability committees have also raised concerns about the reliability of FSM's education and health data and RMI's health data and required that each country obtain an independent assessment and verification of these data; both countries have yet to meet that requirement, and, as a result, neither country can determine its progress in these sectors.
The single audit reports GAO reviewed indicated challenges to ensuring accountability of compact and noncompact U.S. funds in the FSM and RMI. For example, the governments' single audits showed repeat findings and persistent problems in noncompliance with U.S. program requirements, such as accounting for equipment. The Department of the Interior (Interior) has taken steps regarding accountability of compact funds such as establishing the Chuuk Financial Control Commission, but Interior has not coordinated with other U.S. agencies about the risk status of the FSM and RMI. Furthermore, the FSM, RMI, and U.S. offices responsible for compact administration faced limitations hindering their ability to conduct compact oversight. For example, Interior's Office of Insular Affairs (OIA) experienced a staffing shortage that disproportionately affected compact grant oversight compared to other OIA activities, with 5 of 11 planned positions filled.
section_title: What GAO Recommends
paragraphs: Among other actions, Interior should (1) take all necessary steps to ensure the reliability of FSM and RMI indicators in education and health, (2) assess whether to designate each country as high risk, and (3) take actions to correct its disproportionate staffing shortage related to compact grant implementation and oversight. Interior generally agreed with GAO's recommendations and identified actions taken, ongoing, and planned.

section_title: Letter
paragraphs: In 2003, the U.S. government approved amended Compacts of Free  Association with the Federated States of Micronesia (FSM) and the  Republic of the Marshall Islands (RMI). These amended compacts  provide for a combined total of $3.6 billion in U.S. grant assistance for the  two countries over 20 years from fiscal year 2004 through fiscal year  2023. The first half of this 20-year grant period will be completed at the  end of September 2013. The amended compacts state that the purpose  of the grant funds is to assist the FSM and RMI governments in their  efforts to promote the economic self-sufficiency and budgetary self- reliance of their people. Under the compacts, U.S. grant funding  decreases annually in most years while, at the same time, contributions to  trust funds for the FSM and the RMI increase; earnings from the trust  funds are intended to provide an annual source of revenue after the  grants end in 2023.
In 2006, we reported that since enactment of the amended compacts in  2004, the FSM and the RMI had made efforts to meet the requirements  for implementation, performance measurement, and oversight. However,  both countries faced challenges in planning for sustainability, measuring  progress, and ensuring accountability. You requested that we conduct a  review of the use and accountability of amended compact funds in the  FSM and RMI since our prior report. In this report, we examine  1.  the FSM’s and RMI’s use of compact funds in the education and  2.  the extent to which the FSM and RMI have made progress toward  achieving their stated goals in education and health; and  3.  the extent to which oversight activities by the FSM, RMI, and the  United States ensure accountability for compact funding.
In addition, we provide information on the FSM and RMI infrastructure  sector grants in appendix II.
To examine the countries’ use of compact funds in the education and  health sectors, we reviewed available expenditure data in the FSM and  RMI single audits for fiscal years 2007 through 2011. To evaluate the  extent to which the FSM and RMI have made progress toward achieving  their stated goals in the education and health sectors, we reviewed  subsets of FSM and RMI performance indicators that were cited in (1) the  U.S. government’s 5-year reviews of the FSM and the RMI amended  compacts, (2) U.S.–FSM Joint Economic Management Committee  (JEMCO) and U.S.–RMI Joint Economic Management and Financial  Accountability Committee (JEMFAC) health- and education-related  resolutions, or (3) the United Nations Millennium Development Goals  performance measures. We then reviewed the data for the subsets of  indicators in the FSM and RMI annual reports for 2007 through 2011. To  examine oversight activities, we observed the 2012 annual meetings, the  2013 midyear meetings, and the 2013 annual meetings of the JEMCO  and the JEMFAC, which allocate grants and provide oversight for the  amended compacts. We also reviewed FSM and RMI single audits for  fiscal years 2006 through 2011. In addition, we interviewed officials from  the Departments of the Interior (Interior), Health and Human Services  (HHS), Education (Education), and State (State). We also interviewed  FSM national and state officials and RMI officials in the health, education,  and infrastructure sectors, and we directly observed selected compact- funded education and health facilities in Chuuk and Pohnpei states in the  FSM and Majuro and Kwajalein Atolls in the RMI. The observations we  made during our site visits to facilities such as hospitals, dispensaries,  and schools in the FSM and RMI are not generalizable. We determined  that the financial data examined in this report are sufficiently reliable for  our purposes. However, our reviews of performance data from both the  FSM and RMI and interviews with FSM and RMI officials revealed  important limitations in the data in the countries’ annual reports on  education and health indicators, and therefore we determined that many  of these data were not sufficiently reliable for the purpose of measuring  progress for the compacts as a whole over our time frame. For additional  details on our objectives, scope, and methodology, see appendix I.
We conducted this performance audit from August 2012 to September  2013 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.
subsections: section_title: Background
paragraphs: The FSM and the RMI are located in the Pacific Ocean just north of the  equator, about 3,000 miles southwest of Hawaii and about 2,500 miles  southeast of Japan (see fig. 1). The FSM is a federation of four  semiautonomous states and has a population of approximately 103,000  (as of 2010) scattered over many small islands and atolls. The FSM  states maintain considerable power, relative to the FSM National  Government, to allocate U.S. assistance and implement budgetary  policies. Chuuk, the largest state, has 47 percent of the FSM’s population,  followed by Pohnpei (35 percent), Yap (11 percent), and Kosrae (6  percent). By contrast, the RMI government is responsible for allocating  U.S. assistance in that country, though the RMI’s 29 constituent atolls and  five islands exercise local government authority. About three-quarters of  the RMI population of approximately 53,000 (as of 2011) live in Majuro,  the nation’s capital, and on Ebeye Island in the Kwajalein Atoll.
U.S. relations with the FSM and the RMI began during World War II,  when the United States ended Japanese occupation of the region. The  United States administered the region under a United Nations trusteeship  beginning in 1947. During the 1940s and 1950s the RMI was the site of  67 U.S. nuclear weapons tests. The four states of the FSM voted in a  1978 referendum to become an independent nation, while the RMI  established its 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.
subsections: section_title: Compact of Free Association: 1986 through 2003
paragraphs: The United States, the FSM, and the RMI entered into the original  Compact of Free Association in 1986 after lengthy negotiations. 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 self- sufficiency. The compact’s third goal was to be accomplished primarily  through U.S. direct financial assistance to the FSM and the RMI. From  1987 through 2003, the FSM and the RMI are estimated to have received  about $2.1 billion in compact financial assistance.
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.
section_title: Amended Compacts of Free Association: 2004 through 2023
paragraphs: In 2003, 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 provide for direct financial assistance to the FSM  and the RMI from 2004 to 2023, decreasing in most years (hereafter  referred to as the annual decrements). The amounts of the annual  decrements are to be deposited in the trust funds established under the  amended compacts for the two nations (see fig. 2). For more information  on compact assistance and trust fund contributions, see appendix III.
The amended compacts and associated fiscal procedures agreements  require that grant funding 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 the greatest priority. Within the core sector  grants, the RMI must also target grant funding to Ebeye and other  Marshallese communities within Kwajalein Atoll: $3.1 million annually for  2004 through 2013 and $5.1 million annually for 2014 through 2023  (hereafter referred to as Ebeye special needs funds).
In addition to receiving compact sector grants, the FSM and the RMI are  eligible for a supplemental education grant each year. The amended  compacts’ implementing legislation authorized annual appropriations of  about $12.2 million for the FSM and $6.1 million for the RMI beginning in  2005 to the U.S. Secretary of Education to supplement the education  grants awarded under the amended compacts. Under the fiscal  procedures agreements, permitted uses of the supplemental education  grant funds 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. Funding for the supplemental education grant is  appropriated annually to Education and transferred to Interior for  disbursement, with Interior responsible for ensuring that the use,  administration, and monitoring of supplemental education grant funds are  in accordance with a memorandum of agreement among Interior,  Education, HHS, and the Department of Labor (Labor), as well as with the  fiscal procedures agreements.
In addition to amended compact grants, the FSM and the RMI receive  other grants and assistance from U.S. agencies. For example, in fiscal  years 2007 through 2011, the FSM spent about $197 million and the RMI  spent about $46 million in noncompact grants from agencies including  Interior, Education, HHS, Labor, and the Department of Transportation.  See appendix IV for more information on noncompact grants awarded to  the FSM and the RMI.
The legislation and fiscal procedures agreements for the amended  compacts established oversight mechanisms and responsibilities for the  FSM, RMI, and the United States.
JEMCO and JEMFAC were jointly established by the United States and,  respectively, the FSM and the RMI to strengthen the management and  accountability and promote the effective use of compact funding. Each  five-member committee comprises three representatives from the United  States government and two representatives from the corresponding  country. The United States, the FSM, and the RMI are required to  provide the necessary staff support to their representatives on the  committee to enable the parties to monitor closely the use of assistance  under the compacts. 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.
In practice, JEMCO and JEMFAC allocate grants and attach terms and  conditions to grant awards through resolutions, which are discussed and  voted upon at their meetings.
From fiscal years 2004 through 2013, JEMCO and JEMFAC allocated  about $1.1 billion in sector grants to the FSM and RMI under the  amended compacts. In practice, JEMFAC has allocated Ebeye special  needs funds as a separate grant allocation, resulting in seven sectors.  For more detailed information on compact sector allocations, see  appendix V.
The FSM national and state governments and the RMI government are to  manage the sector and supplemental education grants and monitor day- to-day operations to ensure compliance with grant terms and conditions.  The governments are also required to track progress toward performance  goals and report quarterly to the United States. The FSM and the RMI  must annually report to the U.S. President on the use of U.S. grant  assistance and other U.S. assistance provided during the prior fiscal year,  and must also report on their progress in meeting program and economic  goals. Each country has established an agency dedicated to providing  compact oversight and ensuring compliance with regulations in the  amended compacts, grant award terms and conditions, and JEMCO and  JEMFAC resolutions.
The FSM and the RMI 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. 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.
Through its participation in the JEMCO and JEMFAC, the United States  can require that terms and conditions be attached to any and all annual  grant awards to improve program performance and fiscal accountability.  Interior’s Office of Insular Affairs (OIA) has responsibility for the  administration and oversight of the FSM and RMI compact sector and  supplemental education grants. In addition to headquarters staff, OIA  operates a Honolulu field office and has staff in the FSM and RMI to  conduct oversight. Under the fiscal procedures agreements governing  the amended compacts, OIA 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. OIA officials are also responsible for monitoring compliance  with grant terms and conditions. If problems are found in areas such as  the FSM and RMI monitoring of sector grants or a lack of compliance with  grant terms, the United States may impose special conditions or  restrictions, including requiring the acquisition of technical or  management assistance, requiring additional reporting and monitoring, or  requiring additional prior approvals. Additionally, the United States may  withhold grant funds if the countries breach the terms and conditions of  certain sections of the amended compacts or of the fiscal procedures  agreements, or fail to comply with the award conditions of a grant.
As the U.S. agency with the largest grant awards to the FSM and the  RMI, Interior is designated as the cognizant audit agency for FSM and  RMI single audits and has several responsibilities, including providing technical advice to auditees and auditors and considering  grant extensions to the report submission date,  informing other affected federal agencies of any direct reporting of  irregularities or illegal acts, and  coordinating the federal response for audit findings that affect the  federal program of more than one agency.
Furthermore, all U.S. agencies providing noncompact grants to the FSM  and the RMI are responsible for administering those grants in accordance  with Office of Management and Budget (OMB) requirements and  agency regulations that include the Grants Management Common Rule.  Under the common rule, U.S. agencies may consider a grantee as “high  risk” if the grantee has a history of unsatisfactory performance, is not  financially stable, has a management system that does not meet required  standards, has not conformed to the terms and conditions of previous  awards, or is otherwise irresponsible. Single audits provide key  information about the adequacy of a grantee’s management system.  Federal agencies that designate a grantee as high risk may impose  special grant conditions.
section_title: FSM and RMI Spending Targeted Education and Health
paragraphs: In fiscal years 2007 through 2011, the FSM and RMI spent at least half of  their compact sector funds in the education and health sectors. Most of  the compact funds in these sectors paid for personnel costs and medical  supplies and equipment. Both countries spent significant amounts of  compact funds on personnel in the education and health sectors, which  resulted in JEMCO and JEMFAC resolutions aimed at capping the  budgetary levels for personnel in these sectors at fiscal year 2011 levels  because of concerns about the sustainability of sector budgets as  compact funding continues to decline through fiscal year 2023. While the  four FSM states completed plans in 2012 and 2013 to address the annual  decrements in compact sector funding through fiscal year 2023, the FSM  National Government and the RMI have not submitted plans to address  the decrements. As a result, the U.S. members of the JEMCO and  JEMFAC are considering withholding certain fiscal year 2014 compact  sector grant funds until the FSM National Government and RMI submit  their plans. At the annual JEMCO and JEMFAC meetings in August 2013,  fiscal year 2014 sector grant funds were not allocated to the FSM or the  RMI.
subsections: section_title: FSM Sector Expenditures
subsections: section_title: FSM Spent Most Compact Funds in Education and Health, and Personnel Costs Were the Largest Component
paragraphs: In fiscal years 2007 through 2011, the FSM spent about 67 percent, or  $158 million, of sector compact funds in the education and health  sectors. As seen in figure 3, of the total expenditures in all six compact  sectors, expenditures for education represented approximately 37 percent  and expenditures for health represented about 30 percent. Expenditures  in the other four sectors—infrastructure, environment, private sector  development, and public sector capacity building—together accounted for  about 33 percent of total compact expenditures during this period. In  addition to education sector compact funds, the FSM also spent about  $35.7 million in supplemental education grant funds to support education  initiatives. For information on FSM infrastructure sector compact  expenditures, see appendix II.
Compact funds in the FSM supported a significant portion of government  expenditures in the education and health sectors. Education sector  compact and supplemental education grant funds together constituted  about 85 percent of total education expenditures, and health sector  compact funds constituted about 66 percent of total health expenditures  in fiscal year 2011. Other noncompact U.S. grants represented an  additional 10 percent of the education expenditures and 25 percent of  health expenditures in fiscal year 2011.
With regard to the use of funds, in fiscal years 2009 through 2011, the  FSM spent about 61 percent of its education sector compact and  supplemental education grant funds to pay personnel, and about 41  percent of its health sector compact funds to pay personnel (see fig. 4).
The levels of expenditures in the FSM education and health sectors  dedicated to personnel concerned JEMCO because of the potential  effects on the sustainability of sector budgets as compact funding  continued to decline through fiscal year 2023 because of the annual  decrements. In September 2011, JEMCO resolved that it would not  approve fiscal year 2013 budgets for the education and health sectors  until the FSM demonstrated that budgetary levels for personnel expenses  reflected in education and health sector proposals did not exceed fiscal  year 2011 levels. According to OIA, the FSM complied with this  resolution in its fiscal year 2013 compact funding proposals.
In March 2013, the four FSM states had completed plans to address the  annual decreases, or decrements, in compact sector funding through  2023; however, the FSM National Government has not completed a plan  to address the fiscal challenges facing the government because of the  annual decrements. The states’ plans, completed in 2012 and early 2013,  detail the proposed expenditure cuts across sector budgets intended to  offset the annual decrements while preserving essential services in the  education and health sectors. Absent additional revenues, proposed cuts  are to be implemented in 2014, 2017, and 2020.
While U.S. JEMCO members expressed their satisfaction with the FSM  states’ plans, at the March 2013 JEMCO midyear meeting, they called for  the FSM National Government to create a plan addressing how it will  manage the fiscal challenges facing the government and how it will  support the states in managing annual decrements. An FSM official  explained that the FSM National Government did not create a plan  because it receives only a small portion of FSM compact funds. The  official said the FSM National Government was focused instead on  shifting its sector operating costs, such as for the College of Micronesia,  to the government’s own funds, freeing up compact funds for priorities in  the education and health sectors. The FSM official also noted the  government’s efforts to develop an operational plan by early 2014  outlining how the FSM government will address the budgetary and  economic challenges it faces through 2023 and beyond. In May 2013, the  three U.S. JEMCO members notified the FSM that the United States was  considering withholding select fiscal year 2014 compact sector funds from  the FSM National Government until it completes a plan detailing the  concrete commitments that will be made to complement and support the  states’ plans to address the annual decrements in compact sector  funding. Without this plan, the FSM may not be able to sustain essential  services in the education and health sectors in the absence of compact  funding. The FSM National Government responded in July 2013  indicating that to address the decrement it was considering, among other  things, tax reform, alternative energy initiatives, an annual funding set- aside, increased FSM trust fund contributions, and improved revenue  sharing with the states. In its comments on our draft report, the FSM  National Government mentioned the issue of revenue sharing between  the national and state governments, noting that the FSM leadership is  working together to arrive at a decision that will be beneficial to both  levels of government and at the same time facilitate greater effectiveness  in meeting the development objectives of the FSM. (See app. X for a copy  of the FSM’s comments.) At the annual JEMCO meeting in August 2013,  fiscal year 2014 sector grant funds were not allocated to the FSM.
section_title: RMI Sector Expenditures
subsections: section_title: RMI Spent Half of Compact Funds in Education and Health, and Personnel Costs Were the Largest Component
paragraphs: In fiscal years 2007 through 2011, the RMI spent about 50 percent, or  $89 million, of sector compact funds in the education and health sectors.  As shown in figure 5, of the total compact expenditures within the seven  compact sectors (including Ebeye special needs as a sector), education  represented approximately 31 percent and health represented  approximately 19 percent. Expenditures in the other five sectors— infrastructure, environment, private sector development, public sector  capacity building, and Ebeye special needs—together accounted for  about 50 percent of total compact expenditures during this period. In  addition to education sector compact funds, the RMI spent about $26.5  million of supplemental education grant funds and $11.9 million of Ebeye  special needs funds to support education initiatives. In addition to health  sector compact funds, the RMI spent about $3 million of Ebeye special  needs funds to support health initiatives. For information on RMI  infrastructure sector compact expenditures, see appendix II.
Compact funds in the RMI supported a significant portion of government  expenditures in the education and health sectors. Education sector  compact funds, supplemental education grants, and Ebeye special needs  education funds constituted about 62 percent of total education  expenditures in fiscal year 2011, while health sector compact funds and  Ebeye special needs health funds constituted about 33 percent of total  health expenditures. Other noncompact U.S. grants represented an  additional 6 percent of education expenditures and 17 percent of health  expenditures in fiscal year 2011.
In fiscal years 2007 through 2011, the RMI spent most education and  health compact funds on personnel: about 54 percent of the education  sector compact and supplemental education grant funds paid for  personnel, while about 64 percent of the health sector compact funds  paid for personnel (see fig. 6).
Due to interrelated concerns about the amount of funds dedicated to  personnel costs and the sustainability of sector budgets, JEMFAC  resolved in August 2011 that personnel-related expenses in the education  and health sector budgets for fiscal year 2012 could not exceed fiscal  year 2011 levels and directed that fiscal year 2012 compact funds made  available by this change should be budgeted for direct support of  education and health programs and services. According to OIA, the RMI  complied with this resolution.
The RMI has not updated its plan to address the annual decrements in  compact funding. In March 2011, the RMI submitted a draft medium- term budget and investment framework, which included a plan to address  the annual decrements and provided an overview of economic  performance, the country’s fiscal situation, and budget estimates.  However, U.S. JEMFAC members raised concerns that the framework did  not account for significant ongoing health sector operational costs, relied  on reform efforts, and assumed unlikely new revenues.
While the RMI provided a draft update to its framework in July 2013, the  government has not updated the plan for addressing the annual  decrements. The RMI budget submissions for fiscal years 2012 and 2013  did not reflect the RMI’s commitments outlined in the framework and  failed to address JEMFAC’s ongoing concerns regarding decrement  planning. An RMI official responded that the RMI government could not  provide the updated framework and annual decrement plan because of  obstacles it encountered in completing the 2011 audit and finalizing the  2011 census. In April 2013, the three U.S. JEMFAC members notified the  RMI that the United States was considering withholding fiscal year 2014  compact sector funds from the RMI until the RMI submits the framework  and an annual decrement plan. In July 2013, RMI officials submitted an  updated framework outlining anticipated revenues in the medium term,  but it lacked an annual decrement plan, as required. Without the annual  decrement plan, the RMI may not be able to sustain essential services in  the education and health sectors in the medium term. At the August 2013  JEMFAC meeting, the RMI submitted an updated medium-term budget  and investment framework dated August 2013 along with several budget  portfolio statements for fiscal year 2014 including statements for the  departments of health and education. The RMI government considers this  to be its decrement plan. However, the information was provided to the  U.S. members of the JEMFAC 3 days prior to the annual meeting, and  according to these members, they did not have sufficient time to review it  and determine whether or not it meets the requirements of the JEMFAC  resolution. At the annual JEMFAC meeting in August 2013, fiscal year  2014 sector grant funds were not allocated to the RMI.
section_title: Data Inconsistencies Hindered Our Assessment of FSM and RMI Progress in the Education and Health Sectors
paragraphs: Data reliability issues hindered our assessment of progress by the FSM  and RMI in both the education and health sectors for fiscal years 2007  through 2011. Between 2004 and 2006, both countries began tracking  education and health indicators, establishing data collection systems, and  collecting data for the majority of the indicators and have continued to  track data on their indicators since that time. (See app. VI for a list of all  FSM and RMI indicators in the education and health sectors.) While both  countries tracked annual indicators to measure progress in these sectors,  in reviewing subsets of these indicators we determined that data for eight  of the subset of nine education indicators we reviewed in the FSM and for  three of the subset of five education indicators we reviewed in the RMI  were not sufficiently reliable to assess progress for the compacts as a  whole—for a variety of reasons, some specific to individual indicators, but  primarily because of missing, incomplete, or inconsistent data. We found  one RMI education indicator to be both reliable and capable of  demonstrating progress: the education level of teachers in the RMI. The  other reliable RMI education indicator was student enrollment. We  determined that data for all five of the subset of FSM health indicators we  reviewed were not sufficiently reliable to assess progress for the  compacts as a whole. In the RMI, of the subset of five health indicators  we reviewed, we determined that one was sufficiently reliable and two  were not sufficiently reliable to assess progress; for the remaining two  indicators, we had no basis to judge the reliability of the data. In much of  their reporting on these indicators, the FSM and RMI have noted data  reliability problems and some actions they have taken to address the  problems. The compacts’ joint management and accountability  committees have also raised concerns about the reliability of the FSM’s  education and health data and the RMI’s health data and required that  each country obtain an independent assessment and verification of these  data; neither country has met that requirement.
subsections: section_title: Assessment of FSM Progress in Education
subsections: section_title: FSM Has Tracked Annual Indicators in Education since 2005, but We Found Problems with Data Reliability
paragraphs: In 2004, the FSM established 20 indicators to track progress toward its  overarching goals in education: to improve the educational system of  the country, including primary, secondary, and postsecondary education,  and to develop the country’s human and material resources necessary to  deliver these services. However, our review of a subset of 9 of the 20  FSM education indicators found problems with data reliability. Table 1  provides a summary of the data reliability determinations we made in  reviewing the subset of 9 education indicators. (For a complete list of the  indicators the FSM has tracked and reported since fiscal year 2005, see  app. VI.)
We determined that the data for number of schools by grade level were  sufficiently reliable to report on progress in the FSM education sector.  The number of schools by grade level, by itself, does not necessarily  demonstrate progress or lack thereof; however, it does provide useful  information about the changes in the states’ education systems. Both  Chuuk and Pohnpei, for example, have gone through a process resulting  in school closures, with or without consolidation of some schools, and the  numbers of schools by grade level reflect this. In Chuuk, the number of  schools declined from a total of 154 primary and secondary schools in  2007 to 85 schools in 2012, a 45 percent reduction. In Pohnpei, the  number of schools declined from a total of 41 primary and secondary  schools in 2007 to 34 schools in 2011, a 17 percent reduction.
We determined that 8 of the subset of 9 FSM education indicators we  reviewed could not be used to assess progress over time because of data  reliability issues summarized above in table 1. For example, we found  that the four FSM states did not use common definitions for some  indicators; consequently, the education indicator reports we reviewed do  not contain consistent data for these indicators and comparisons cannot  be made across states. As an example, Chuuk, Pohnpei, and the FSM  National Government each applied its own definition of dropout, creating  inconsistencies in the data for that indicator. Student enrollment data  provide another example: Chuuk and Kosrae included both public and  private schools in reporting student enrollment data, while Pohnpei and  Yap included only public schools. In addition to data reporting  inconsistencies, we found that data in FSM’s education indicators reports  sometimes were not complete. For example, in 2011, average daily  student attendance data for Chuuk were missing; for that same year,  Chuuk also lacked completion and graduation rate data for 8th and 12th  graders.
During January 2013 site visits in Chuuk, we visited 13 school sites  selected on the basis of available time and travel constraints. This  included 6 of 8 schools on the island of Weno and 7 schools on four  lagoon islands. In several cases, these were school sites we visited in  2006. In facilities we were able to visit both in 2006 and 2013, we noted  general improvements in the overall maintenance and condition; however,  staff we interviewed reported that a lack of chairs, desks, and textbooks  was a concern, especially in lagoon-island schools. In addition, we visited  the Chuuk Department of Education warehouse where we found  hundreds of cases of books and supplies that had not been shipped to  schools in the outer islands as intended, according to the warehouse  manager. An OIA education grant manager reported that the department  had recently purchased and distributed 4,000 chairs and the distribution  process had gone smoothly. However, as of May 2013, Chuuk did not  have a fully implemented purchasing plan, inventory management  system, or monitoring plan for textbooks, as required by JEMCO,  according to an OIA official.
In Pohnpei, we visited 8 schools (5 elementary and 3 high schools) of a  total of 34 public elementary and high schools on the main island of  Pohnpei, selected on the basis of available time and travel constraints.  The school buildings we visited were generally clean. From what we were  able to observe, they had electricity, functioning fans in the classrooms,  and functioning windows. We observed desks, chairs, and textbooks in  the classrooms. The newly built schools that we visited, which were  funded through public sector infrastructure grants, had water tanks and  new bathrooms with sinks and toilets that appeared to be operational.  From what we observed, these schools were generally maintained in  good condition. However, we also noted minor issues such as chipped  paint and broken classroom doors and locks in some facilities.
section_title: Assessment of FSM Progress in Health
subsections: section_title: FSM Has Tracked Annual Indicators in Health since 2004, but We Found Problems with Data Reliability
paragraphs: In 2004, the FSM began tracking data on 14 health indicators to measure  its progress toward improving diagnostic and treatment capacity and  ensuring the provision of services to geographically dispersed populations  (see app. VI for a complete list of the indicators). However, our review of  a subset of 5 of the 14 FSM health indicators found problems with data  reliability. We determined that none of these indicators could be used to  assess progress because of data reliability issues (see table 2).
We found inconsistencies in the data provided by the states compared  with data for the same indicators included in the FSM’s 14 annual health  indicators report. For example, FSM data on immunization cannot be  used due to issues with data in Chuuk. According to the FSM  immunization expert, the data for that indicator were unreliable prior to  2011 because in Chuuk there was no registry of immunization to allow the  computation of a coverage rate. In reviewing the Chuuk medical records,  the immunization expert found that (1) an individual child might have  three different immunization records in the system under three variations  of his or her name, and (2) there was not appropriate consideration as to  when a vaccination was medically valid and therefore should be counted.  For an immunization to be medically valid, for example, a series may  need to be given within certain time frames. The records that the expert  examined showed vaccinations being given too early in the sequence,  resulting in an incorrect dosage and invalidating the vaccination. Finally,  the expert noted that immunization program documentation was bad. We  also identified problems when reviewing how the FSM calculates the  percentage of days when all essential drugs are in stock. Specifically, we  identified problems with the source documents used in the calculations in  Chuuk and Pohnpei, calling into question the reliability of the data  presented in the health indicators report. The key documents from each  health care facility that are used to calculate the indicator are the  formulary (the list of the essential drugs) and each facility’s inventory  report. We attempted to verify the accuracy of the Chuuk hospital drug  inventory report and found that the report contained some incorrect  information. For example, the report listed 219 bottles of Amoxicillin 125  MG/5ML Suspension 150 ML, but the hospital’s storage room had none.  Since the inventory report is used in calculating the number reported for  the essential drugs indicator, incorrect information found in the report  raises questions about the validity and reliability of the information for this  indicator in the health indicators report.
In January 2013, we visited Chuuk’s only hospital, which we had  previously visited in 2006. We noted that the hospital was generally better  maintained than it had been on our prior visit. Moreover, officials told us  that it now has reliable and consistent electric power, which was not the  case in the past. Additionally, whereas previously Chuuk’s hospital had  only a small incinerator to burn medical waste, we observed two  functioning medical waste incinerators, which we were told operate on a  routine basis. In 2006, some of the selected medical equipment that we  observed was not working. In 2013, the selected equipment that we  observed, such as a digital X-ray machine and laboratory equipment, was  being used and reported as functional.
During our 2006 visit to Chuuk’s hospital, many of the on-hand drugs that  we spot checked were past their expiration days. On our 2013 visit to the  hospital, however, the majority of the on-hand drugs that we spot- checked were within their labeled expiration dates. We also spot-checked  drugs in two dispensaries on Chuuk Lagoon islands and found most of  the drugs we checked to be within their labeled expiration dates. We  cannot comment regarding on-hand drugs at the three other dispensaries  in Chuuk lagoon that we visited, as they were closed when we attempted  to visit them even though their schedules indicated that they were  supposed to be open.
During our 2006 visit to selected Pohnpei dispensaries, we also had  found that varying amounts of the drugs on hand that we spot checked  were past their expiration dates. On our recent visit to three of the four  dispensaries on the main island, however, most of the on-hand drugs that  we spot checked in selected dispensaries were within their expiration  dates or had an extended shelf life.
The three dispensary buildings we selected on Pohnpei in 2013 were all  open on the day we visited. In addition, health assistants were present at  the time of our visits. The buildings all generally appeared to be in an  acceptable condition and had electricity at the time of our visits. The three  selected dispensaries also reported some concerns, however. For  example, we found some equipment, such as scales and freezers that  were not functioning at the time of our visit. We also visited Pohnpei’s  only public hospital during our site visits. However major renovation work  was taking place on the day of our visit, which made it impossible to make  any observations about its normal functioning. (For information on  compact-funded infrastructure projects in the education and health  sectors, see app. II.)
section_title: Assessment of RMI Progress in Education
subsections: section_title: RMI Has Tracked Annual Indicators in Education since 2004, but We Found Problems with Data Reliability
paragraphs: The RMI has tracked 20 indicators selected by JEMFAC in 2004 for  monitoring progress in education and began reporting on them annually in  2005 in response to a JEMFAC resolution. The RMI’s overarching  education goals were to improve the educational system of the country,  including primary, secondary, and postsecondary education, and to  develop the country’s human and material resources necessary to deliver  these services. For a complete list of the indicators the RMI has tracked  and reported from 2007 through 2011, see appendix VI.
However, in our review of a subset of 5 of the 20 RMI education  indicators, we found problems with data reliability (see table 3).
We determined that the data for 2 indicators were sufficiently reliable to  assess progress in the RMI’s education sector: (1) total enrollment by  grade and gender and (2) number and percentage of teachers by  education level. Data we reviewed showed an improvement in the  qualifications of RMI teaching staff, with the percentage of teachers  having no degree, or a high school diploma, or a certificate decreasing  from 57 percent in school year 2006-2007 to 42 percent in school year  2011-2012. Over the same time frame, the number of teachers holding  associate’s, bachelor’s, or master’s degrees increased from 43 percent to  55 percent. OIA has advised the RMI Ministry of Education that all  uncertified teachers should be in a ministry-approved degree program to  be individually eligible for salary support from sector grant, supplemental  education grant, or Ebeye special needs funds, and that these teachers  should be certified by school year 2015.
We determined that data for 3 of the indicators could not be used to  assess education sector progress for the compact as a whole because of  data reliability problems. For example, we found that the RMI changed  the data source for some of the indicators it reported on during fiscal  years 2007 through 2011. In fiscal years 2007 through 2010, the RMI  reported Pacific Island Literacy Test data on student achievement for 4th  graders, whereas in fiscal year 2011 it reported the Marshall Islands  Standardized Test for 3rd, 6th and 8th graders, so year-to-year progress  cannot be assessed because different grades and different tests were  used.
In January 2013, we made site visits to 6 of 12 public educational facilities  in Majuro Atoll and 3 of 6 public educational facilities in Kwajalein Atoll,  selected on the basis of available time and travel constraints. The new  and renovated classrooms that we visited all had desks, chairs, and  chalkboards. Most of the fans and lighting that we observed were in  working order at the time of our visit, as were the new bathrooms.  However, many of the safety doors that we observed at our selected  schools were either off their hinges and moved to one side or propped  open with an object. Officials told us that this problem occurred because  the doors had not been properly installed.
When we visited the RMI in 2006, we were shown classrooms in the  Marshall Islands High School that had collapsed ceilings. We found no  such problems during our visit to this school in 2013. However, we did  find that several of the water tanks at the school were not connected to  any of the buildings. At another school that we visited, Laura  Elementary, classrooms in the new building had desks, chairs, and  electricity, but an old building that was still used lacked electricity. At  Delap Elementary, the classrooms also had electricity. On Ebeye, we  visited a school in Gugeegue that had consistent electricity, we were told.  We observed chairs, desks, and textbooks on our visit. However, we were  also shown one of the school buildings being used for classrooms though  it was considered unsafe by the RMI’s Project Management Unit. (For  information on compact-funded infrastructure projects in the education  and health sectors, see app. II.)
section_title: Assessment of RMI Progress in Health
subsections: section_title: RMI Has Tracked Annual Indicators in Health since 2007, but We Found Problems with Data Reliability
paragraphs: The RMI established 26 indicators to measure progress toward its goal of  improving primary health care in the RMI in 2006, and tracked them since  2007 (see app. VI for a list of the RMI’s health indicators), according to  the RMI’s Ministry of Health. We found that 1 of the subset of 5  indicators that we reviewed—tuberculosis prevalence rates—was  sufficiently reliable to assess progress in the health sector for fiscal years  2009 through 2011 (see table 4). While the number of tuberculosis  cases was 23 in fiscal year 2009, the number increased to 30 cases in  fiscal year 2010 and then fell slightly to 29 in fiscal year 2011.
However, we determined that 2 of the subset of 5 health indicators that  we reviewed were not sufficiently reliable because of various issues with  data collection and reporting. For example, we determined that data  reported for immunization coverage for 2-year-olds and the child mortality  rate were not reliable due to the timeliness and accuracy of reporting and  low coverage rates for data from the outer islands, all problems noted in  the Ministry of Health’s responses to our questions on data reliability. We  found that for 2 other health indicators we had no basis to judge their  reliability.
During January 2013, we visited both hospitals in the RMI, one located on  Majuro and the other on Ebeye island in the Kwajalein Atoll. We did not  attempt to visit any health clinics in other atolls due to logistic  considerations. During our 2006 visit to the Ebeye island hospital, we  were told that persistent problems with Ebeye’s power supply continued  to interrupt hospital services. In 2013, however, we were told that the  Ebeye island hospital had regular electricity, which we observed at the  time of our visit. This facility also appeared to be clean, and the selected  medical and laboratory equipment that we examined was functioning. On  our visit to the hospital in Majuro, we asked whether the dispensary  maintained a drug formulary—a list of the required drugs on hand. The  hospital in Majuro provided us with a copy of its formulary, which was  from 2007. The drugs and medical supplies that we spot-checked at the  hospital were within their labeled expiration dates. (For information on  compact-funded infrastructure projects in the education and health  sectors, see app. II.)
section_title: FSM, RMI, and Bilateral Oversight Committees Are Aware of Data Reliability Problems in Compact Indicator Reports and of the Effect on Their Ability to Evaluate Progress
paragraphs: Education. In the annual education indicators report that it submitted to  JEMCO from 2007 through 2011, the FSM identified problems with the  overall quality, and consistency, of the education data, as well as  problems with timeliness in reporting. Additionally, the reports noted the  need for training of the data managers and difficulties with the data  systems. In March 2012, JEMCO reaffirmed the need for reliable  education data to evaluate performance in a resolution that required  independent verification of performance indicators and data for the  education sector, which the FSM was to communicate in a report due to  OIA by July 1, 2013, prior to the August 2013 annual meeting. In April  2013, the FSM Department of Education (National Government)  addressed the JEMCO resolution by seeking proposals to conduct an  independent verification of its performance indicators and data quality.  The request for proposals stated that the project period was  approximately 2 months, ending July 30, 2013, but it did not state whether  a report on the results of the project would be prepared within that time  frame.
Health. The FSM reported on its 14 annual health indicators,  comprehensively by state and for the National Government, in a July  2012 report by the FSM national Department of Health and Social Affairs  covering fiscal years 2004 through 2011. The report noted limitations with  some of the data, for example, that not all infant deaths in the outer  islands were included in the infant mortality data. In response to the  report, JEMCO identified concerns regarding the reliability of data  reported for the health indicators. For example, JEMCO noted concerns  about the accuracy of the reported infant mortality rates as well as the  reported number of encounters for primary health care services offered in  community and dispensary settings, which the FSM tracked as a proxy  measure of improved community-based primary health care. In its 2012  resolution JEMCO reaffirmed the need for reliable and quantifiable health  data to evaluate performance and also required independent verification  of performance indicators and data for the health sector; it required the  FSM to submit a report on the health indicators by July 1, 2013. We  inquired about the status of the FSM’s effort to address the JEMCO  resolution to conduct an independent verification of the health data, and  the Department of Health and Social Affairs informed us that the FSM  asked for an extension of the July deadline. According to OIA, the FSM  did not budget sufficient funds for the assessment, and that is why the  FSM needed an extension.
Education. From fiscal years 2007 through 2011, the RMI reported data  on its annual indicators in its Ministry of Education annual portfolio budget  statements (hereafter, portfolios). The RMI Ministry of Education reported  that data on educational indicators are entered quarterly into its data  management system, and that schools generally provide their data before  the established deadlines. The RMI also provided us with copies of the  standard forms that it uses to collect data on educational indicators. The  RMI’s portfolios containing the indicator data did not explicitly identify  limitations associated with the overall data; however, the portfolios  included some notes describing limitations for a couple of indicators. For  example, one note indicated that student teacher ratios did not include  private schools. JEMFAC has not sought an independent review of RMI  education indicator data quality.
Health. The RMI Ministry of Health issued an annual health data report  for each year from 2007 through 2011. The RMI also noted in its 2011  annual health data report that immunization coverage data showed a  significant drop because of data entry problems, mainly in terms of  lateness in entering data and an inability to keep track of children moving  from one locality to another. The RMI Ministry of Health reported it uses a  number of different international databases to track its health indicator  progress such as WebIZ for immunizations and EpiAnywhere for  tuberculosis. The Ministry of Health reported that they have undertaken a  couple of different data assessments to improve data accuracy, as well as  made efforts to improve reporting from Ebeye and the outer islands.  Among the checks the Ministry of Health reported that it conducts to  ensure the accuracy of the tuberculosis rate indicator is comparing the  data entered into the database with results from lab tests, X-rays, and  clinical visits.
In 2009, JEMFAC noted that the RMI health data were unreliable  because of discrepancies related to outer island data and infant mortality  rates. Other outside reports also questioned how the Ministry of Health  handled other data on disease incidence, prevalence, and mortality. In  2010, JEMFAC required that the Ministry of Health initiate and complete  an assessment of the reliability of all its health data-management  practices by September 30, 2011. The ministry obtained technical  assistance from a United Nations Volunteer to address the requirement.  However, the volunteer technical expert only stayed 10 months, leaving in  July 2012, and the position was still vacant as of July 2013, according to  the Ministry of Health. The RMI had not provided JEMFAC with the  required report as of June 2013.
section_title: FSM and RMI Face Financial Accountability Challenges; Oversight Bodies Are Hindered by Limitations
paragraphs: The single audit reports we reviewed indicated challenges to ensuring  accountability of compact and noncompact U.S. funds in the FSM and  RMI. For example, these governments’ single audits showed repeat  findings and persistent problems in noncompliance with U.S. program  requirements, such as accounting for equipment. The United States has  taken steps regarding the accountability of compact funds, such as  establishing the Chuuk Financial Control Commission, but Interior has not  coordinated with other U.S. agencies regarding the risk status of the FSM  and the RMI for noncompact funds. Furthermore, the offices responsible  for compact administration in the FSM, RMI, and United States faced  limitations hindering their ability to conduct compact oversight. For  example, OIA experienced a staffing shortage that disproportionately  affected compact grant oversight compared to other OIA activities, with 5  of 11 planned positions filled in 2012.
subsections: section_title: Financial Accountability in the FSM Was Mixed
subsections: section_title: Single Audits Showed FSM National Government Faced Challenges, While Chuuk and Pohnpei Demonstrated Financial Accountability Improvement
paragraphs: In fiscal years 2006 through 2011, the FSM National Government single  audit reports indicated that the government faced financial accountability  challenges. However, the single audit reports for Chuuk and Pohnpei  state governments demonstrated improvement in financial accountability:  financial statement audit opinions improved and the number of material  weaknesses and significant deficiencies  declined. As an example of  the remaining challenges for the FSM National Government, its 2011  single audit report identified problems with the extent of noncompliance  with program requirements, such as preparing required quarterly reports.  These reports are important because OIA uses them for oversight of the  amended compact. Furthermore, the National Government’s 2011 single  audit report contained several repeat findings—problems noted in  previous audits that had not been corrected for several years. For a  detailed summary of our review of the FSM single audit reports, see  appendix VII.
The following briefly summarizes our analysis of the single audits for the  FSM National Government and the state governments of Chuuk and  Pohnpei.
Financial reporting: FSM National Government single audit reports  conveyed that the government was not able to account fully for its use  of compact or noncompact funds for fiscal years 2006 through 2008.  Chuuk’s single audit reports continued to identify financial  accountability weaknesses, primarily because Chuuk’s financial  statements did not contain information on its land leases in fiscal  years 2009 through 2011. For fiscal years 2006 through 2011,  Pohnpei received an unqualified opinion on its financial statements  included in its single audit reports. (For additional details, see app.  VII.)
Compliance with requirements of major federal programs: The FSM  National Government continued to be noncompliant with the terms  and conditions of major federal programs in fiscal year 2011 in each  of its three major programs. Furthermore, its fiscal year 2011 single  audit report included four material weaknesses and eight significant  deficiencies. The FSM National Government continued to have  findings that have not been corrected for several years. For example,  seven findings had recurred at least three times in the 4 years prior to  2011. In addition, the FSM National Government had consistently  lacked the ability to prevent disbursing funds in excess of available  funds in each year for the previous 2 years and lacked the ability to  accurately report financial information in each of the previous 4 years.  We believe recurring weaknesses in internal controls increase the risk  that assets are susceptible to misuse. In contrast, Chuuk’s fiscal year  2011 single audit report demonstrated improvement in compliance  with major federal programs. Whereas Chuuk previously had been  considered noncompliant in fiscal years 2006 through 2010, it was  considered materially compliant in fiscal year 2011. Pohnpei’s single  audit reports also demonstrated improvement, as the state  government was noncompliant with the requirements of federal  programs in fiscal years 2006 and 2007 but was considered materially  compliant in fiscal years 2008 through 2011. See appendix VII for  additional information.
Timeliness: The FSM National Government and Chuuk did not submit  their 2006 single audit reports on time due to a delay in the  reconciliation of accounting records. In fiscal years 2007 through  2011, however, the FSM National Government and Chuck submitted  their single audit reports on time. Pohnpei met the deadline for  submitting single audit reports during the entire period, fiscal years  2006 through 2011. (For additional details, see appendix VII.)
The FSM has a national audit office, the Office of the National Public  Auditor (ONPA), and Pohnpei has a Public Auditor. According to ONPA  officials, ONPA has a staff of 15 in Pohnpei and 5 in Chuuk. According  to state officials, the Pohnpei state government’s Office of the Public  Auditor (OPA) has a professional staff of 8. Both the ONPA and OPA  identified internal control weaknesses in their audits of the FSM National  Government and state government that could lead to waste, fraud, and  abuse. The following are examples from reports issued by the ONPA.
An audit report on the National Government’s payroll operating  controls for fiscal years 2010 through 2012 found overpayments to  employees including payments to active and terminated employees  and for hours worked but not authorized.
A report on the Chuuk State Department of Health Services found that  the department did not implement a procurement and inventory  control system ensuring the efficient use of funds and the timely  distribution of medications to recipients. This program was funded by  the amended compact health sector grant.
A report on the Chuuk Department of Education found that it failed to  provide many students with textbooks, to hold schools and students  accountable for lost books, and to ensure that classroom lessons  followed the approved state curriculum. This program was funded by  amended compact education sector grant.
In fiscal years 2008 through 2011, the Pohnpei state government’s OPA  also conducted audits that identified findings related to internal control  weaknesses potentially leading to waste, fraud, and abuse. For  example, its September 2008 audit report found weak internal controls in  the issuance of pharmaceutical and medical supplies from the Pohnpei  Central Medical Supply Unit and other sections of the Department of  Health Services. The amended compact was the primary source of  funding. The report noted the lack of assurance that recipients actually  received all items indicated in the receipts because there was not a  reliable audit trail for the issuance of pharmaceutical and medical  supplies.
section_title: RMI Faced Financial Accountability Challenges
subsections: section_title: Single Audits in the RMI Revealed Increased Financial Accountability Challenges
paragraphs: RMI single audit reports for fiscal years 2006 through 2011 demonstrated  an increase in material weaknesses in noncompliance with the  requirements of federal programs. For example, the 2006 single audit  report identified 4 material weaknesses in compliance with federal awards  and about $5.7 million in unresolved questioned costs. However, the  2011 single audit report identified 8 material weaknesses and about $7.4  million in unresolved questioned costs as of September 30, 2011. While  reports for fiscal years 2006 through 2010 were submitted on time, the  2011 single audit report was late. For a detailed summary of our review of  the RMI single audit reports, see appendix VII.
The following briefly summarizes our analysis of the RMI single audits.
Financial reporting: In fiscal years 2006 through 2011, the RMI  received an unqualified audit opinion on each of its annual financial  statements. (See app. VII for a list of the opinions on financial  statements in the RMI’s audit reports for fiscal years 2006 through  2011.)
Compliance with requirements of major federal programs:  The RMI  single audit reports indicated they were noncompliant with the  requirements of federal programs in fiscal years 2006 through 2011.  The fiscal year 2011 single audit report included eight findings that  were considered material weaknesses. Some findings were related to  compact grants and others to noncompact funding. Furthermore,  several of the weaknesses were not corrected over several years. For  example, seven of the eight material weaknesses reported in the  fiscal year 2011 single audit recurred at least once in the 2 prior years  and five had recurred in 3 out of the 4 previous years. For example,  each year for 4 years prior to fiscal year 2011, the RMI was not able  to provide supporting documentation for its expenses and an  adequate accounting for its fixed assets to meet the requirements in  the fiscal procedures agreement. Furthermore, we believe that  recurring weaknesses in internal controls increase the risk that assets  are susceptible to misuse. Also, the fiscal year 2011 RMI single audit  report demonstrated that the RMI did not comply with some of the  requirements of federal programs. For example, the RMI disbursed $1  million in compact sector grants to the Marshall Islands National  Telecommunications Authority without an audit. In addition, the  auditors reported that documentation supporting expenditures from  various ministries could not be located and resulted in questioned  costs totaling approximately $1.1 million; other questioned costs were  also identified for various reasons in the 2011 single audit. (For  additional details, see app. VII.)
Timeliness: For fiscal years 2006 through 2010, the RMI met the  single audit report submission deadline. In July 2012, the RMI  contacted OIA and requested an extension to file its 2011 single audit  by September 30, 2012. OIA granted the extension, stating no  adverse action would be taken if the single audit was completed and  received by OIA by September 30, 2012. However, RMI submitted its  fiscal year 2011 report in February 2013, 8 months late. According  to the RMI Ministry of Finance, the 2011 single audit report was late  because of staff turnover, computer system issues, and late  reconciliation of general ledger and bank accounts. As a result, the  2011 single audit was not received by the United States until 17  months after the end of the year in which the reported findings were  identified; OIA took no adverse action. (For additional details, see  app. VII.)
RMI Office of the Auditor General (OAG) officials also told us that  previous annual single audits reported fraud indicators (e.g., numerous  findings on noncompliance with procurement requirements) that were not  looked into by the RMI government in office at that time. The current  OAG indicated that if the RMI government at that time, including the then  OAG, had investigated the reported procurement issues, the recent fraud  cases in the Ministry of Health and Human Services and Ministry of  Finance might have been uncovered earlier. (For additional details, see  app. VII).
section_title: OIA Has Taken Some Steps to Improve FSM and RMI Financial Accountability
subsections: section_title: Compact Grants
paragraphs: Working through JEMCO and JEMFAC, OIA has led actions to improve  financial accountability of compact funds and has recommended further  actions.
The improvement in Chuuk audit reports was the result of cooperation  between the JEMCO and Chuuk state government. For example,  Chuuk’s fiscal year 2004 single audit report included 30 findings and  unresolved questioned costs totaling approximately $6.7 million. In  fiscal year 2005, the JEMCO established the Chuuk Financial Control  Commission (CFCC) to assist the Chuuk government in managing its  finances. Consequently, Chuuk’s fiscal year 2011 single audit report  identified 5 findings with no unresolved questioned costs. According to  a CFCC official, the CFCC has played an important role in restoring  and maintaining the integrity of compact sector grant expenditures.
The JEMFAC reported after its review of the RMI fiscal year 2011  single audit report that unresolved questioned costs had significantly  increased over the previous 4 years. At the JEMFAC midyear meeting  held on March14, 2013, discussion included the issue of the RMI’s  inability to comply with requirements regarding allowable costs, cash  management, equipment, and real property management, among  other issues, as well as the related unresolved questioned costs  reported in the 2011 single audit, which totaled over $5 million. The  RMI Secretary of Finance told OIA officials that the RMI had recently  taken positive steps to resolve outstanding questioned costs and to  strengthen the ministry’s internal controls; nevertheless, OIA  recommended that JEMFAC refrain from allocating unexpended grant  funds from fiscal year 2011 and fiscal year 2012 until the RMI  demonstrated that it had resolved all current questioned costs. At its  annual meeting in August 2013, JEMFAC did not allocate the  unexpended 2011 and 2012 funds.
Although OIA has authority to impose special conditions or restrictions for  unsatisfactory performance or failure to comply with grant terms, OIA  officials have preferred to work through the JEMCO and JEMFAC  committees rather than take unilateral action. While no official “high risk”  designation exists in the amended compacts or fiscal procedures  agreements, the fiscal procedures agreements’ provisions governing  grants administration allow the same special conditions to be applied to  amended compact grants that exist for other high-risk grantees receiving  federal assistance. OIA officials told us that they treat the amended  compact funds as high risk and provide special conditions through the  JEMCO and JEMFAC resolutions, such as requiring the acquisition of  technical or management assistance, requiring additional reporting and  monitoring, or withholding funds.
Regarding financial accountability of noncompact grants, OIA has not  coordinated the federal response to audit findings that affect programs of  more than one agency. Nor have OIA or other federal agencies  designated the FSM or the RMI as high-risk grantees, which would allow  those agencies to impose special conditions on their grants such as  requiring additional reporting and monitoring.
Single audit reports show compliance problems for compact and  noncompact grants. For example, the 2011 FSM National  Government single audit reported that for one special education grant,  the FSM, unable to draw down funds from the grant account because  the period of funds availability had closed, improperly reimbursed  itself from a different grant account that was still open. The same  single audit also reported that the FSM National Government  submitted financial reports for Transportation’s Airport Improvement  Project grant that did not agree with underlying financial records.  According to OIA officials, Interior has not coordinated the response of  federal agencies to these audit findings because of its focus on its  responsibility for oversight of the amended compact funding.
According to Interior officials, while Interior and other U.S. agencies  may designate the FSM and the RMI as high-risk grantees for  noncompact grants if the grantee has a history of performance  problems, as of June 2013, no agencies have done so, potentially  because of the lack of coordination between OIA and other grantors.  Education officials noted that the department looks to see if there are  systemic problems when designating a grant recipient as high risk but  they have not formally assessed this status for the FSM or RMI. HHS  officials believe the department’s noncompact funds are at risk, but  HHS has not conducted a systematic review of FSM and RMI audit  results or considered whether the grantees should be considered high  risk. OIA officials told us they have not undertaken a formal analysis  to determine whether Interior noncompact funds should have a high- risk designation and have not held formal discussions with other  grantor agencies (e.g., with Education, Transportation, or other  grantors) regarding this issue.
section_title: Staffing Constraints Hindered Oversight Offices in Fulfilling Their Oversight Responsibilities
subsections: section_title: FSM Compact Management Unit’s Oversight Limited by Staffing Constraints and Lack of Authority
paragraphs: FSM officials stated in January 2013 that staff constraints in the Office of  Statistics, Budget and Economic Management, Overseas Development  Assistance, and Compact Management’s (SBOC) Division of Compact  Management limit the division’s ability to conduct oversight. The Division  of Compact Management is responsible for, among other things, day-to- day communications with JEMCO and the U.S. government and oversight  of compact implementation, including coordination with recipients of  compact grants to ensure effective and efficient use of compact funds.  FSM officials told us that the division is currently staffed by three staff  members who provide compact oversight for the FSM National  Government and the four states across six sectors. However, FSM  officials told us that they need additional staff so they can conduct more  oversight activities.
In addition to the staffing shortage, FSM officials told us that the Division  of Compact Management is hampered by its lack of authority to ensure  that the National Government and the four states comply with compact  requirements. For example, while the National Government and any  subgrantees, including the four states, are required by the compact’s  fiscal procedures agreements to provide quarterly reports with data and  information on progress toward sector performance indicators, the  Division of Compact Management does not have the authority to enforce  this requirement if the National Government and states do not comply. In  this case, FSM officials will sometimes request that the Department of  Finance withhold quarterly allotments of compact funds until an entity  submits the required information or, if necessary, identify issues for OIA  to address.
According to RMI officials, staff constraints in the Office of Compact  Implementation (OCI) limit the office’s ability to conduct oversight and  enforce compact requirements across multiple sectors and operations in  numerous atolls. OCI has responsibility for all issues related to the  compact and is also responsible for preparation and follow-up for all  JEMFAC meetings, responses to GAO reports, and preparations for any  congressional hearings on compact-related matters. RMI officials told us  that the office is currently staffed by two people—a director and a foreign  service officer—who run the office with three divisions. RMI officials also  stated they depended on officials from other government agencies to help  them fulfill their responsibilities. For example, OCI uses the legal advisor  of the Ministry of Foreign Affairs to assist with compact issues since the  OCI’s Division of Compact Legal Affairs has not filled its legal position.
Additionally, OCI officials told us they are hampered by their lack of  authority to require that the RMI ministries implementing projects funded  by sector grants comply with compact requirements. For example, OCI  works through the Ministry of Foreign Affairs or the Office of the Chief  Secretary when other RMI ministries or offices have not submitted  compact-related reports. RMI officials said the government has not  resolved the question of who within the RMI government has the authority  to withhold funds to ensure compliance. According to RMI comments on  our draft report, the Office of the Chief Secretary does not have authority  to withhold funds from ministries or offices to compel them to comply with  compact requirements (see app. XI).
From fiscal years 2011 through 2013, OIA experienced staff constraints,  particularly in the Honolulu field office and in the FSM, that limited its  ability to carry out its compact oversight responsibilities. In 2010, OIA  created a plan that provided detailed staffing projections across OIA for  fiscal years 2010 through 2014. To ensure effective oversight for the  amended compacts, OIA projected a need for 8 staff in the Honolulu field  office, 2 field staff in the FSM, and 1 field staff in the RMI for fiscal years  2011 through 2013, a total of 11 staff. (See app. VIII for the plan’s  detailed staffing projections.) However, in 2011 and 2012, OIA had a total  of 5 staff for compact oversight: 4 staff in its Honolulu field office and 1  field staff in the RMI. In March 2013, OIA filled 1 of the 2 projected FSM  field staff positions.
The OIA 2010 workforce plan projected the need for 50 staff for all of its  divisions in fiscal years 2010 through 2014; it projected that existing  resources would allow OIA to fund a total of 43 staff during this period.  However, actual staffing levels were less than 43 in 2011 and 2012.  Though compact oversight staff would represent 22 percent of total  projected staff in the plan, compact oversight staff represented 12 percent  and 14 percent, respectively, of actual OIA total staff in fiscal years 2011  and 2012. As a result, OIA’s staffing shortage disproportionately affected  compact grant oversight compared to other OIA activities. See table 5.
According to OIA officials, the following three factors contributed to the  staffing shortages affecting compact oversight in fiscal years 2011 and  2012.
Budget constraints and uncertainties: OIA officials said budget  constraints and uncertainties prevented the office from hiring staff and  filling vacant positions as outlined in the workforce plan. OIA noted  that the plan assumed sufficient budgetary resources, and with  enacted budgets in fiscal years 2010 through 2013, OIA could not hire  additional staff. OIA officials also cited budget uncertainties for fiscal  years 2012 and 2013 as a factor that kept them from filling the second  education grants specialist position.
OIA priorities: OIA management did not fill compact-related vacancies  because of other priorities, such as filling headquarters-based  positions before filling field positions. For example, an OIA official said  that OIA management held back some available funding in hopes of  staffing a Guam field office.
Lack of qualified candidates: OIA officials also noted that in 2011 OIA  posted the vacancy for the second education grants specialist position  in Honolulu but did not receive sufficiently qualified candidates, which  prevented the office from hiring.
Staffing shortages, particularly those in the Honolulu field office, have  negatively affected OIA’s compact oversight in the FSM and the RMI.  While oversight activities, site visits, and required meetings occurred, OIA  noted the following oversight gaps:  In a 2010 report, Interior’s Office of the Inspector General reported  that OIA’s compact oversight was hindered by the lack of an FSM field  representative to support oversight efforts, despite the fact that the  FSM received about $100 million in grant funds, more than any other  insular area. Additionally, the report questioned whether OIA was  effectively utilizing existing staff in the Honolulu field office.
One OIA official said that the Honolulu field office’s staffing shortage  hinder OIA’s ability to scrutinize financial reports and provide  feedback to both countries. This official also stated that without a  second person working on education sector compact assistance, OIA  cannot thoroughly analyze education budgets, which results in high- level recommendations to the JEMCO and JEMFAC rather than  specific recommendations that address issues such as the potential  misuse of funds. Noting that the RMI experienced an increase in  unquestioned costs over a period of 3 years, the OIA official stated  that if the Honolulu office had a second education grants specialist,  OIA could identify these issues earlier and support the OIA audit  liaison in following up on issues identified in the single audits.
section_title: Conclusions
paragraphs: At the midpoint of the 20-year amended compact assistance term, the  FSM and RMI face critical challenges in compact implementation. During  the first 10 years, the FSM and the RMI spent most of their funds for  education and health, sectors prioritized in the compact agreements.  However, because of data reliability issues, neither country can  demonstrate whether it has made progress toward its goals in these  sectors. Now, with 10 years of amended compact sector funding left, both  countries must quickly plan for reduced grant resources and resolve the  accountability issues that have plagued them to date so that they can fully  utilize the funds and time left to achieve their goals.
Both countries must complete plans that address annual decrements in  compact funding and determine new revenue sources that will replace  compact grant assistance in 2023. Despite multiple JEMCO and JEMFAC  resolutions calling for the countries to produce these plans, the FSM  National Government has yet to develop a plan that shows how it will  address budgetary and economic challenges through 2023 and support  the states in adjusting to the annual decrements, while the RMI  government has yet to develop a plan that demonstrates how it will adjust  to the annual decrements. In the absence of these plans, JEMCO and  JEMFAC will face challenges ensuring that annual grant assistance for  both countries is allocated in a sustainable manner.
Ongoing problems with data reliability exist for both countries. Without  reliable data, the countries cannot assess progress toward their goals in  the education and health sectors and cannot effectively use results data  for setting priorities and allocating resources aimed at improving  performance. The lack of reliable data also hampers the ability of JEMCO  and JEMFAC to oversee compact expenditures and assess the countries’  progress toward all its goals in the education and health sectors.
The FSM’s and RMI’s single audits continue to identify long-standing and  recurring findings, which if addressed could allow both countries to more  effectively use U.S. resources and diminish potential losses that arise  from fraud, waste, and abuse. Given these recurring audit findings, both  compact and noncompact U.S. funds are at risk. Interventions by JEMCO  were effective in Chuuk in bringing improved financial accountability;  however, similar JEMCO and JEMFAC interventions have not been  undertaken for the FSM National Government or the RMI. Furthermore,  U.S. grants provided separately from the amended compact by multiple  agencies are at risk. Although OIA has a lead role regarding audit  matters, it has not formally coordinated with other U.S. agencies to  address audit findings, nor has it assessed whether its own noncompact  grants should be classified as high risk. Moreover, other federal agencies  whose grants may be at risk have not routinely considered designating  either country as a high-risk grantee. Such consideration could enable  U.S. agencies to enforce conditions and restrictions on noncompact grant  funds they provide, thus improving the oversight and management of the  funds.
Finally, although the majority of grants administered by OIA are amended  compact grants, OIA’s amended compact oversight function was  disproportionally affected by staffing shortages. While budget constraints  prevented OIA from hiring the total number of staff it needed to conduct  oversight for all of its grants, decisions to staff other OIA divisions rather  than hire compact oversight staff affected OIA’s ability to ensure compact  funds were efficiently and effectively used.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of the Interior take the following five  actions:  In order to improve the ability of the U.S. agencies participating in the  JEMCO and JEMFAC committees to conduct required oversight of  compact funds, direct the Director of Insular Affairs, as Chairman of JEMCO, to  coordinate with other JEMCO-member U.S. agencies to have JEMCO  take all necessary steps, or, as the administrator of compact grants, to  directly take all necessary steps, to ensure that the FSM (1)  completes satisfactory plans to address annual decrements in  compact funds, (2) produces reliable indicator data used to track  progress in education and health, and (3) addresses all single audit  findings in a timely manner; and direct the Director of Insular Affairs, as Chairman of the JEMFAC, to  coordinate with other JEMFAC-member U.S. agencies to have  JEMFAC take all necessary steps, or, as the administrator of compact  grants, to directly take all necessary steps, to ensure that the RMI (1)  completes satisfactory plans to address annual decrements in  compact funds, (2) produces reliable indicator data used to track  progress in education and health, and (3) addresses all single audit  findings in a timely manner.
In order to improve financial accountability of noncompact U.S. grant  assistance provided to the FSM and the RMI,  consult with other grantor agencies to determine whether the FSM  National Government or any FSM states meet the criteria to be  designated as a high-risk grant recipient for noncompact funds, or  whether other steps should be taken to improve accountability; and  consult with other grantor agencies to determine whether the RMI  meets the criteria to be designated as a high-risk grant recipient for  noncompact funds, or whether other steps should be taken to improve  accountability.
In order to ensure that Interior is providing appropriate resources for  oversight and monitoring of the FSM and RMI compacts,  take actions to correct the disproportionate staffing shortage related to  compact grant implementation and oversight.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report for comment to Interior, Education,  HHS, and State and also to the FSM National Government and the  government of the RMI. Interior, the FSM National Government, and the  government of the RMI provided formal written comments on the draft  report, which are reprinted in appendixes IX, X, and XI, respectively, and  which we summarize below. Education and HHS had no comments on  the draft report. In an e-mail received August 13, 2013, from State’s GAO  Liaison, State indicated that our report will inform its continuing work,  mainly through its involvement in the JEMCO and JEMFAC. For example,  State noted, the U.S. members of the JEMCO are currently taking steps  to address decrement planning and improve the production of reliable  indicator data in the compact priority sectors of health and education in  the FSM. Similarly, the U.S. members of the JEMFAC continue to work  with the RMI on its decrement plan.
Interior generally concurred with all five of our recommendations and  briefly discussed each. With regard to our recommendations for actions  involving JEMCO and JEMFAC, Interior noted examples of how it and  other U.S. members of JEMCO and JEMFAC have worked to make  improvements in the three areas mentioned in the recommendations:  decrement plans, reliable indicator data to track progress in education  and health, and addressing single audit findings. Interior also discussed  our recommendations to determine, in consultation with grantor agencies,  whether steps should be taken to improve accountability of noncompact  funds to the FSM and RMI, including application of the high-risk  designation for grant recipients. Interior noted that it cannot direct other  agencies to take action with regard to any grant-specific issues and  stated it was unaware of any precedent for federal agencies to jointly  designate a grantee as high risk; however, Interior said it would discuss  this approach with other federal agencies.
Although Interior also concurred with our final recommendation, to take  actions to correct the disproportionate staffing shortage related to  compact grant implementation and oversight, Interior’s response indicates  that it considers corrective action to be contingent on its receiving funding  for new positions through the annual budget process. However, the intent  of our recommendation is to have Interior work with its actual funding  levels, whatever they may be, to correct what we observed to be a  misalignment in how it allocates its staff. We found that compact grants  account for the majority of grant funds that OIA administers and that  OIA’s staffing shortage has disproportionately affected compact grant  oversight compared with other OIA activities. We believe it is feasible for  OIA to address this imbalance regardless of whether it receives funding  for new positions. Appendix IX presents a copy of the letter from Interior.  Interior also provided technical comments that we incorporated in the  report where appropriate.
In its written comments on our draft report, the FSM National Government  focused on three areas of our reporting: (1) decrement planning, (2) data  reliability issues for education and health indicators, and (3) financial  accountability over compact and U.S. federal program funds. The FSM  agreed on the importance of these three issues to the successful  implementation of the amended compact. The FSM identified activities  under way to plan for the decrement, such as the 2023 Planning  Committee’s efforts to identify ways to intensify private sector growth.  Regarding data reliability, the FSM cited implementation of a contract to  assess the national education system’s ability to produce valid and  reliable data and efforts under way to review the quality of health  indicators with government staff. The FSM remarked on what it  characterized as the heavy emphasis in our report of the possibility of  achieving increased accountability over noncompact grant funds through  a “high-risk” designation, but noted that it was assured because the  process involved in a “high-risk” designation is not an arbitrary one. As  some of the FSM’s comments related to topics discussed at the August  22, 2013, JEMCO annual meeting, which we attended, we have updated  our report to reflect information presented at that meeting. Appendix X  presents a copy of the letter from the FSM National Government.
The government of the RMI also provided written comments on our draft  report. The RMI believes it submitted adequate plans regarding the  medium-term budget and investment framework and the decrement, while  at the same time noting the usefulness of the decrement plan as a policy  guide and planning tool, rather than as a mechanism for making line-item  budgetary decisions. Regarding data reliability, the RMI generally agreed  with our findings of data reliability problems in both the education and  health sectors. The RMI agreed that there were limitations to their  education data for certain indicators, and reported that they faced  challenges in data collection due to the number of schools that were  spread out over a large ocean area, and the deficient state of their  transportation and communication systems. In the health sector, the RMI  pointed out that it has 52 health centers spread throughout 29 atolls,  making it difficult to collect data in a timely manner, and that it also lacks  personnel dedicated solely to collecting and entering health indicator  data. The RMI, however, noted that its Ministry of Health is seeking  external assistance to improve health data. In response to our  recommendation that—in order to improve financial accountability of  noncompact U.S. grant assistance provided to the RMI—the Secretary of  the Interior should consult with other agencies to determine whether the  RMI meets the criteria to be designated as a high-risk grant recipient for  noncompact funds, or whether other steps should be taken to improve  accountability, the RMI noted that internal controls are now in place to  detect and deter fraud, waste, and noncompliance with the fiscal  procedures agreement or other U.S. federal regulations. For that reason,  the RMI Ministry of Finance does not believe that any special conditions  or restrictions for unsatisfactory performance or failure to comply with  grant terms are warranted. As some of the RMI’s comments related to  topics discussed at the August 20, 2013, JEMFAC meeting, which we  attended, we have updated our report to reflect information presented at  that meeting. See appendix XI for a detailed presentation of comments  from the RMI and our responses to them.
At both the annual JEMCO and JEMFAC meetings in August 2013,  resolutions were passed in response to our recommendations related to  decrement planning, data reliability, and addressing single audit findings.  The resolutions approve the use of prior year unobligated funding to  address one or more of the following three areas: (1) completing  satisfactory plans to address annual decrements in compact funds, (2)  producing reliable indicator data used to track progress in education and  health, and (3) addressing all single audit findings in a timely manner.
In addition to providing copies of this report to your offices, we will send  copies to interested congressional committees. We will also provide  copies of this report to the Secretaries of the Interior, Education, HHS,  and State, as well as to the President of the Federated States of  Micronesia and the President of the Republic of the Marshall Islands. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made major contributions to  this report are listed in appendix XII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines, for fiscal years 2007 through 2011, (1) the  Federated States of Micronesia’s (FSM) and the Republic of the Marshall  Islands’ (RMI) use of compact funds in the education and health sectors;  (2) the extent to which the FSM and RMI have made progress toward  achieving their stated goals in education and health; and (3) the extent to  which oversight activities by the FSM, RMI, and the United States ensure  accountability for compact funding. In addition we provide information on  the FSM and the RMI infrastructure sector grants.
To determine how the FSM and RMI used amended compact funds in the  education and health sectors, we analyzed the single audits for the FSM  National Government and the state governments of Chuuk and Pohnpei  and for the RMI government for fiscal years 2007 through 2011. The  single audits provide information on total education and health sector  compact fund expenditures as well as total supplemental education grant  expenditures in both countries and Ebeye special needs expenditures in  the RMI. The single audits also provide details on specific expenditures  within each of these sectors, such as personnel costs and medical  supplies. However, data on specific expenditures for fiscal year 2007 and  fiscal year 2008 were not available for the FSM National Government or  the state of Chuuk; hence, we reported on specific sector expenditures for  the FSM National Government, Chuuk, and Pohnpei for fiscal years 2009  through 2011 only. We were able, however, to provide specific  expenditure data for the RMI for fiscal years 2007 through 2011. We  report on the specific expenditures that constitute at least the top 80  percent of expenditures in the education and health sectors, as well as for  supplemental education grant expenditures for both countries. Any  remaining expenditure categories are aggregated under an “Other  expenditures” category. Within the single audits, we also analyzed the  total expenditures within the education and health sectors for the FSM  National Government, Chuuk, Pohnpei, and the RMI government to  determine the portion of sector expenditures supported by compact and  noncompact U.S. funds. We determined that these data were sufficiently  reliable for the purposes of our report.
To evaluate the extent to which the FSM and RMI made progress toward  achieving their stated goals in the education and health sectors from  fiscal years 2007 through 2011, we identified the indicators the FSM and  RMI developed to track progress in those sectors. In assessing FSM  progress, we used data from Chuuk and Pohnpei since these two states  represent 82 percent of the FSM population. As each country had  numerous indicators, we selected a subset of the health and education  indicators in both countries to review. We used the U.S. 5-year reviews of  the FSM and RMI; Joint Economic Management Committee (JEMCO)  and Joint Economic Management and Financial Accountability Committee  (JEMFAC) health and education related resolutions from 2007 through  2012; and the Millennium Development Goals (MDG) performance  measures as criteria to determine the subset of measures. We selected  these criteria for the following reasons: the U.S. 5-year reviews and the  JEMCO and JEMFAC resolutions identified indicators that reflected  country-specific concerns, while the MDG reflected global standards  because they were developed by international health and education  experts and agreed upon by almost all developing countries. An indicator  was selected to be part of the subset if it was included in two of the three  sources listed above for the FSM, and listed in all three sources for the  RMI. We also consulted with officials at the U.S. Departments of  Education (Education) and Health and Human Services (HHS) regarding  our proposed methodology. We then reviewed FSM and RMI annual  reports tracking these indicators for 2007 through 2011. To determine  whether the data presented in the annual health and education indicator  reports were sufficiently reliable to measure progress in the compacts as  a whole, and in selected states, we reviewed the reports themselves,  reviewed JEMCO and JEMFAC resolutions related to health and  education data, and interviewed FSM and RMI officials responsible for  collecting and providing the data during our site visits in January 2013. In  the FSM and RMI, we also attempted to replicate the reported data in  some of the education and health reports. Additionally, we sent each  country a series of specific follow-up questions related to the subset of  indicators to learn more about each country’s data collection and  verification activities, as well as to try to clarify discrepancies in the data  we identified. In some instances, the responses we obtained did not  provide sufficient information for us to determine that the data were  reliable; in those instances we classified the indicators as “no basis to  judge.” We reported on the reliability of these indicators in the report.
To identify the extent to which the FSM and RMI governments conducted  monitoring and oversight activities, we reviewed the amended compacts  and fiscal procedures agreements to identify specific monitoring  responsibilities. We also reviewed the U.S. briefing documents, as well as  the minutes and resolutions, when available, related to the JEMCO and  JEMFAC meetings. We further reviewed FSM and RMI documents—such  as portfolios, quarterly performance reports, and annual reports, for fiscal  years 2007-2011 as available—submitted by the FSM and RMI  governments to the U.S. government to confirm compliance with  accountability reporting requirements. We discussed the lack of required  annual reporting with Department of the Interior (Interior) Office of Insular  Affairs (OIA) officials. We obtained the single audit reports for the years  2006 through 2011 from the FSM Office of the National Auditor’s website  and the RMI’s Office of the Auditor General. These reports included  audits for the FSM National Government and the state governments of  Chuuk and Pohnpei, and for the RMI government. In total, 24 single audit  reports covered 6 years, a period that we considered sufficient for  identifying common or persistent compliance and financial management  problems involving U.S. funds (amended compact and other noncompact  funds). We determined the timeliness of submission of the single audit  reports by the insular area governments using the Federal Audit  Clearinghouse’s (FAC) “Form Date,” which is the most recent date that  the required SF-SAC data collection form was received by the FAC. We  did note that the “Form Date” is updated if a revised SF-SAC for that  same fiscal year is subsequently filed. Our review of the contents of the  single audit reports identified the auditors’ opinions on the financial  statements, matters cited by the auditors in their qualified opinions, the  numbers of material weaknesses and reportable conditions reported by  the auditors, and the status of corrective actions. We did not  independently assess the quality of the audits or the reliability of the audit  finding information. We analyzed the audit findings to determine if they  had recurred in successive single audits and were still occurring in their  most recent audit and categorized the auditor’s opinions on the financial  statements and the Schedules of Expenditures of Federal Awards.
To determine oversight activities conducted by the OIA Honolulu office,  we reviewed senior management statements regarding the purpose and  function of this office and job descriptions for OIA staff. To identify the  staffing levels for the Honolulu office we reviewed Interior’s 2010  workforce plan and obtained current staffing levels from OIA, as well as  reviewed Interior congressional budget submissions for 2013 and 2014  for actual staffing levels in 2011 and 2012. We discussed this information  with OIA officials to ensure that the data were sufficiently reliable for our  use.
To provide information on the FSM and RMI infrastructure sector grants,  we analyzed the single audits for the FSM National Government and the  state governments of Chuuk and Pohnpei and for the RMI government for  fiscal years 2007 through 2011. The single audits provide information on  total infrastructure sector compact fund expenditures and provide details  on specific expenditures within the infrastructure sector, such as  contractual services. However, data on specific expenditures for fiscal  year 2007 and fiscal year 2008 were not available for the FSM National  Government or the state of Chuuk; hence, we reported on specific sector  expenditures for the FSM National Government, Chuuk, and Pohnpei for  fiscal years 2009 through 2011 only. We were able, however, to provide  specific expenditure data for the RMI for fiscal years 2007 through 2011.  We report on the specific expenditures that constitute at least the top 80  percent of expenditures in the infrastructure sector. Any remaining  expenditure categories are aggregated under an “Other expenditures”  category. We determined that these data were sufficiently reliable for the  purposes of our report. We also reviewed the infrastructure development  and infrastructure maintenance plans for the FSM and RMI, interviewed  officials in the FSM and RMI project management units, and reviewed  progress reports submitted by the FSM and RMI. We reviewed JEMCO  and JEMFAC minutes and resolutions related to the infrastructure sector  and discussed the status of the infrastructure development plans and  projects with OIA’s infrastructure grant manager. Additionally, we visited a  variety of ongoing completed projects in the FSM and RMI supporting the  health and education sectors in January 2013.
To address all objectives, we held interviews with officials from Interior  (Washington, D.C.; Honolulu, Hawaii; and the RMI) and the Department  of State (Washington, D.C.; the FSM; and the RMI). We also interviewed  officials from the HHS (Washington, D.C., and San Francisco, California)  and Education (Washington, D.C.). We traveled to the FSM (Chuuk and  Pohnpei) and the RMI (Kwajalein and Majuro Atolls) in January 2013. In  addition, in Chuuk state, we visited the islands of Fefen, Parem, Tonoas,  Udot, and Weno. In both countries we visited selected primary and  secondary schools, hospitals, and dispensaries. Our site selections were  judgmental because of the number of facilities on the islands, logistics,  and the time at our disposal. The facilities we visited exhibited a mix of  factors, such as facility type (elementary and secondary schools), age  (older and newer facilities), renovation status (those which had been  renovated and those that had not), and logistical needs. Where possible,  we selected facilities that we had visited in 2006 in order to draw  comparisons, to the degree possible. During our site visits we made  observations and performed spot checks. We used our 2006 report to  help select aspects to observe—such as cleanliness, electrical power,  and desks—and drug expiry dates to spot-check. These site visits were  not designed to yield generalizable conclusions but rather to illustrate  relevant conditions in the education and health sectors, including whether  there was functioning equipment, in both countries. We discussed  compact implementation with FSM (national, Chuuk, and Pohnpei  governments, as applicable) and RMI officials from the attorney general,  education, finance, foreign affairs, health, auditor general, public works,  and public service commission offices. Furthermore, we met with the  RMI’s Office of Compact Implementation and Chief Secretary and the  FSM’s Office of Statistics, Budget and Economic Management, Overseas  Development Assistance, and Compact Management. In Kwajalein Atoll,  we met Ebeye health and education officials to discuss compact  implementation issues. We also observed the 2012 annual meetings, the  2013 midyear meetings, and the 2013 annual meetings of the JEMCO  and the JEMFAC. We contacted Interior’s Inspector General’s Office in  Washington, D.C., to discuss ongoing investigations in the FSM and RMI;  however, we received no response to our inquiries.
We conducted this performance audit from August 2012 to September  2013 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.
section_title: Appendix II: FSM and RMI Infrastructure Projects Related to Education and Health Sectors, Fiscal Years 2007–2011
subsections: section_title: FSM Infrastructure Projects
subsections: section_title: FSM Infrastructure Sector Compact Expenditures
paragraphs: In the infrastructure sector, the FSM spent the majority of sector compact  funds, 74 percent, on contractual services, which include repairing and  maintaining facilities such as schools (see fig. 7).
The FSM tracks progress in the infrastructure sector by the completion of  projects. The FSM established an infrastructure development plan in  2004 and infrastructure maintenance funds by 2009. As we reported in  2007, the infrastructure development plan proved to be problematic  because it included synopses of 11 different infrastructure sectors,  contained long lists of projects, and though its estimated costs were  prepared by professional engineers, it did not provide explanations or  support for individual projects or prioritize them as the Joint Economic  Management Committee (JEMCO) required. Furthermore, the plan was  not based on any type of assessment of the needs of specific areas in the  FSM, did not meet with concurrence from the FSM states, and was not  adopted by the FSM Congress.
In fiscal year 2010, the FSM submitted an official list of priority  infrastructure projects; JEMCO had already approved partial funding for  13 projects on the list at its September 2009 annual meeting. Of the 19  priority-one projects, 4 were school buildings and classrooms in Pohnpei  and 2 were school buildings in Yap; the remaining 13 were health-care  facilities or projects directly affecting public health and safety, including  water and wastewater projects and a detention center. The Office of  Insular Affairs (OIA) has used the FSM’s 2010 list of 19 priority-one  projects as the basis for funding infrastructure projects in the FSM. As of  June 2013, the FSM National Government and state governments had  not issued a revised infrastructure development plan, according to OIA.
FSM infrastructure is overseen by a Program Management Unit (PMU)  whose responsibilities include (1) certifying infrastructure projects, or  determining that the scope and budget are reasonable and justifiable, and  (2) ensuring that the projects will be designed to a professionally  acceptable standard and that the project budgets properly reflect the  costs of such as standard. The PMU also certifies that projects in all four  FSM states are consistent with the priorities listed in the FSM’s  infrastructure development plan. The PMU is to provide quarterly reports  on construction activities to OIA. The reports generally include information  related to the phase of a project, such as whether or not professional  engineers and design services are being sought; the type of project  (classroom, dispensaries, etc); the type of predesign document; whether  or not a request for fee proposal was issued; and whether task orders  were issued. PMU reports also include comments on such details as  whether the estimated cost is higher than budgeted for, and whether land  title documents were provided.
The FSM’s PMU has not consistently provided quarterly progress reports  on construction activities to OIA. According to OIA, significant delays,  deficiencies, and project cost overruns have not been brought to OIA’s  attention in a timely manner as required by the amended compact’s fiscal  procedures agreement. OIA believes that the PMU’s inability to ensure  professional effectiveness on a continual basis through the services of an  experienced Contracting Officer is hindering implementation of compact- funded infrastructure projects throughout the FSM.
In 2006, the FSM’s PMU hired a Contracting Officer on behalf of the FSM  National Government to execute project planning, design, and  construction of projects throughout the FSM. Since 2006, the PMU has  had a succession of Contracting Officers, eight in all. In a 2011 resolution,  JEMCO stated that it would not consider approval of any new  infrastructure project proposals until the PMU hired a professional  Contracting Officer. In December 2012, the PMU’s Contracting Officer  quit, claiming “constant interference from the FSM PMU Program  Manager and a corrupted decision-making environment within the PMU  controlled by the PMU Program Manager.” A new Contracting Officer was  hired in February 2013.
section_title: FSM Progress in Building Schools Has Been Mixed, and Use of Maintenance Funds Is an Issue
paragraphs: During fiscal years 2007 through 2012, the FSM completed 6 education- related projects on the September 2009 JEMCO-approved list of 19  priority projects, and other projects are under way. A major factor in  determining OIA’s approval of a project has been whether the  government holds clear title to the land.
Chuuk. Land title disputes have been common in Chuuk, and as a  result of this continuing problem, no new schools were built in Chuuk  using infrastructure funds in fiscal years 2004 through 2011. However,  according to OIA’s infrastructure grant manager, because of the poor  condition of schools in Chuuk, OIA permitted some school buildings to  be renovated with infrastructure maintenance funds or carryover  education sector grant funds, and these projects were not on the FSM  list of priority infrastructure projects. According to Chuuk’s Planning  and Statistics Office, six school projects have been completed on  Weno and islands within the Chuuk lagoon using money from Chuuk’s  infrastructure maintenance fund. According to the Chuuk State:  School Facility Repair and Construction Master Plan, as of May 31,  2012, 51 primary schools and 5 secondary schools needed  renovation, new construction, or both.
Pohnpei. Land title issues have been less of a problem here, and 6  school projects were completed. Since 2009, classrooms were built at  four elementary schools (a single project on the priority list), and  buildings and classrooms were constructed at two high schools on the  priority list. Designs for two College of Micronesia facilities were  started but not completed for the Pohnpei State Campus, a vocational  center and a learning resources center, according to OIA.
section_title: FSM Progress in Building and Maintaining Health Facilities Has Been Limited
paragraphs: In the FSM, difficulty and delays in establishing JEMCO-approved  priorities and unresolved land titling issues affected the construction and  maintenance of health facilities. Dispensaries in Chuuk were on the OIA- approved list of FSM priority projects in fiscal year 2009, but these  projects have not begun as of April 2013. Eight other projects with public  health and safety aspects such as waterlines and sewers were also on  the priority infrastructure project list; the majority of them are in Pohnpei.
In addition to approving the priority projects, JEMCO also approved  funding for the repair of Pohnpei State Hospital’s roof and ceiling. The  U.S. Army Humanitarian Assistance-FSM (HAFSM) Team completed the  renovation project in 2013. HAFSM replaced the roof and undertook  extensive internal repairs, including installing new dry wall and plumbing,  as well as doing interior painting throughout the hospital. Repairs did not  include the electrical system or air conditioning. Chuuk State Hospital was  on the list of projects JEMCO approved in 2009 that got included in the  2010 list of 19 priority-one projects; however, it was not until June 2012  that the Chuuk state government’s Infrastructure Planning and  Implementation Committee finalized its revised infrastructure priorities in  a plan that included a new hospital estimated to cost about $50 million  dollars. The Chuuk plan also called for replacing 68 dispensaries in the  outer islands using a common dispensary model estimated to cost  $150,000 each. OIA had not received a plan from the national  government to replace the dispensaries, as of June 2013.
section_title: RMI Infrastructure Projects
subsections: section_title: RMI Infrastructure Sector Compact Expenditures
paragraphs: In the infrastructure sector, the RMI spent the majority of compact sector  funds, 65 percent, on capital outlay, which includes construction project  and maintenance contracts payments for facilities such as schools and  hospitals (see fig. 8).
The RMI tracks progress in the infrastructure sector by the completion of  projects. The RMI expended $86.5 million dollars on infrastructure  projects including infrastructure maintenance, from fiscal years 2004  through 2011, according to OIA. The RMI stated it has constructed or  renovated over 200 classroom facilities in the education sector and 45  projects in the health sector and has also conducted essential  maintenance at its two hospitals.
During fiscal years 2007 through 2011, the RMI’s Project Management  Unit was generally consistent in reporting monthly to the Office of Insular  Affairs (OIA) on the status of construction activities, according to OIA. The  reports included the project number and name as well as a brief  description of the project. These reports also included categories such as  the contract value, amount certified to date, estimated final cost,  percentage completed, and completion date, and other details such  project status—completed, on hold, or on-going for example.
In August 2012, allegations were raised by an RMI official regarding the  Project Management Unit’s use of substandard materials and bid rigging.  OIA proposed a review by an independent engineering firm in response to  the allegations. OIA recommended to the Joint Economic Management  and Fiscal Accountability Committee (JEMFAC) at its March 2013  meeting that additional allocations of compact infrastructure funds to the  RMI be withheld until the review was completed and the results submitted  to JEMFAC. The RMI negotiated a contract with an independent  professional engineering firm to undertake an assessment of the Project  Management Unit’s procedures, contract administration, and inspection  process; the review is expected to commence in August 2013, according  to OIA.
section_title: RMI Completed School and Health Facilities
paragraphs: The school buildings and dispensaries constructed throughout the RMI  were built using standard designs prepared by a professional engineering  firm. The College of the Marshall Islands Master Plan, initiated in 2007  with capital projects worth over $25 million, was almost completed when  we visited in January 2013. Future infrastructure projects include the  redevelopment plan for the hospital in Majuro. Various designs for the  hospital project, which was estimated to cost between $50 million and  $70 million, have been discussed for over 5 years. The key unresolved  issue is the size of the new facility, which was still being discussed as of  June 2013.
The RMI has recently begun to focus on preventive maintenance of  infrastructure facilities. For example, in its fiscal year 2013 budget  statement for infrastructure, the RMI noted that an adequate level of  maintenance resources was critical for the longevity of the new College of  the Marshall Islands campus, and RMI proposed allocating $280,000 for  this purpose.
section_title: Appendix III: FSM and RMI Grant Assistance and Trust Fund Contributions under the Amended Compacts, Fiscal Years 2004–2023
subsections: section_title: Fiscal year 2004
paragraphs: These dollar amounts shall be 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. Grant funding can  be fully adjusted for inflation after 2014, under certain U.S. inflation conditions.
The increase in RMI grant assistance 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.
section_title: Appendix IV: FSM and RMI Expenditures of U.S. Noncompact and Compact-Related Grant Funds, Fiscal Years 2007–2011
section_title: Appendix V: Amended Compact Grant Allocations and Supplemental Education Grant Awards, Fiscal Years 2004–2013
paragraphs: From fiscal years 2004 through 2013, the U.S.–FSM Joint Economic  Management Committee (JEMCO) and the U.S.–RMI Joint Economic  Management and Financial Accountability Committee (JEMFAC)  allocated about $1.1 billion in sector grants to the countries under the  amended compacts. Additionally, about $142 million in supplemental  education grant funds were provided to the countries during this period.  Figures 9 and 10 show the distribution of allocations by sector for fiscal  years 2004 through 2013 and tables 8 and 9 provide each country’s  allocation amounts, by sector, for this period.
As shown in figures 11 and 12, the education, health, and infrastructure  sectors in both countries received the most funding during this period,  consistent with provisions in the amended compacts legislation indicating  that these sectors were priorities.
section_title: Appendix VI: Education and Health Indicators for the FSM and the RMI, Fiscal Years 2007–2011
paragraphs: Tables 10 and 11 list the education and health indicators that the  Federated States of Micronesia (FSM) tracked during fiscal years 2007  through 2011. Tables 12 and 13 list the education and health indicators  that the Republic of the Marshall Islands (RMI) tracked during the same  period.
section_title: Appendix VII: Single Audit Reports for the FSM and the RMI, Fiscal Years 2006–2011
paragraphs: The National Government of the Federated States of Micronesia (FSM)  and the individual FSM states (Chuuk and Pohnpei) submitted their  required single audit reports on time for 5 of the 6 fiscal years from 2006  through 2011. Similarly, the Republic of the Marshall Islands (RMI)  submitted its single audit reports on time during those years except for  fiscal year 2011. Half of the financial statement audit opinions for the FSM  and all for the RMI were unqualified for fiscal years 2006 through 2011.  However, 17 of 18 financial statement audits for those years from the  FSM and all 6 from the RMI found material weaknesses and significant  deficiencies resulting in the entities receiving qualified audit opinions with  regard to internal controls over financial reporting. In most of the single  audit reports submitted by both countries for those years, auditors also  rendered qualified audit opinions on compliance with requirements of  major federal programs. In addition, our review of the single audit reports  found that internal control weaknesses have persisted in both countries  since we last reported on their single audits in December 2006. As a  result of persistent weaknesses in RMI’s single audit reports, in March  2013, the Department of the Interior’s Office of Insular Affairs (OIA)  recommended to the U.S.–RMI Joint Economic Management and  Financial Accountability Committee (JEMFAC) that it refrain from  allocating unexpended grant funds from fiscal year 2011 and fiscal year  2012 until the RMI demonstrated that it had resolved all current  questioned costs.
subsections: section_title: Single Audits Are Key Control for Oversight and Monitoring
paragraphs: The amended compacts and their respective fiscal procedures  agreements require the FSM and RMI to submit reports each year on  audits conducted within the meaning of the Single Audit Act, as  amended. Single audits generally cover the entire organization and focus  on recipients’ internal controls over financial reporting and compliance  with laws and regulations governing federal awards. A single audit report  includes the following:  the auditor’s opinion (or disclaimer of opinion, as appropriate)  regarding whether the financial statements are presented fairly in all  material respects in conformity with generally accepted accounting  principles, and a report on internal controls related to financial  statements;  the entity’s audited financial statements;  the schedule of expenditures of federal awards and the auditor’s  opinion on whether the schedule is reported fairly in relation to the  financial statements as a whole;  the auditor’s opinion (or disclaimer of opinion) regarding whether the  auditee complied with the laws, regulations, and provisions of  contracts and grant agreements (such as the compact), which could  have a direct and material effect on each major federal program, and  a report on findings on internal controls related to federal programs; a summary of findings and any questioned costs for the federal  program; and  corrective action plans for findings identified for the current year as  well as unresolved findings from prior fiscal years.
Single audits are a key control for the oversight and monitoring of the  FSM and RMI governments’ use of U.S. awards, and the resulting audit  reports are due at the Federal Audit Clearinghouse—which includes an  automated public database of single audit information on the Internet—9  months after the end of the audited period. For the FSM and RMI, that is  by July 1 each year. All single audit reports include the auditor’s opinion  on the audited financial statements and a report on the internal controls  related to financial reporting.
section_title: Timeliness of Submission: Both Countries Submitted Their Single Audit Reports on Time for 5 of the 6 Years Reviewed
paragraphs: The FSM National Government and Chuuk state submitted their single  audit reports late for fiscal year 2006 but submitted them on time for fiscal  years 2007 through 2011. The RMI submitted its single audit report on  time for fiscal years 2006 through 2010 but submitted its report late for  fiscal year 2011. Table 14 shows the timeliness of reports for the FSM  and the RMI.
section_title: In 2011, FSM, except for Chuuk State, and RMI Received Unqualified Opinions on Their Financial Statements
paragraphs: Among the 24 audit reports submitted by the FSM national and two state  governments and by the RMI for fiscal years 2006 through 2011, 15  reports received unqualified opinions. For fiscal years 2006 through 2008,  the FSM National Government received qualified opinions on their  financial statements. However, the FSM National Government improved  its financial management reporting and received an unqualified (“clean”)  audit opinion on its financial statements for fiscal years 2009 through  2011. In 2006, Chuuk received a disclaimer of opinion, which is given  when the auditor determines that the audit cannot be completed in  accordance with generally accepted auditing standards and therefore an  opinion cannot be expressed on the financial statements. For fiscal years  2007 through 2011, Chuuk received qualified opinions on its financial  statements. Chuuk’s 2011 financial statement audit opinion was qualified  because the financial statements did not report a liability for land leases  and related claims payable in the governmental activities and general  fund or the expenditure for the current period reflecting the change in that  liability. Table 15 shows the type of financial statement audit opinions for  the FSM and the RMI for fiscal years 2006 through 2011.
section_title: All RMI and FSM Audits Found Material Weaknesses, or Significant Deficiencies, or Both, Relating to Internal Control over Financial Reporting and Compliance with Federal Programs
paragraphs: For fiscal years 2006 through 2011, 17 of 18 financial statement audits  from the FSM National Government and the two FSM states and all 6  from the RMI found material weaknesses, significant deficiencies, or  both in internal control over (1) financial reporting and (2) compliance with  the requirements of major federal awards. (For a detailed count of these  reportable findings, see table 16 for the FSM and table 17 for the RMI.)
section_title: Internal Control over Financial Reporting
paragraphs: The single audit reports for fiscal year 2011, the most recent year for  which reports were available during our review, identified a combined  total of 13 material weaknesses and significant deficiencies which relate  to the FSM’s fiscal year 2011 financial statements, and a total of 11 for  the RMI’s statements (see tables 16 and 17, respectively). These findings  indicated a lack of effective internal controls over collection of travel  advances and the lack of ability to adequately safeguard assets; to  ensure that transactions are properly recorded; and to prevent or detect  fraud, waste, and abuse. For example, the material weaknesses reported  in FSM’s fiscal year 2011 single audit report included (1) the lack of timely  reconciliation of the Holding Bank Account, (2) the lack of adequate  monitoring of collection of travel advances, (3) the lack of timely and  accurate reconciliation of general ledger accounts, and (4) the lack of  adequate reconciliation of and accounting for fixed assets. In RMI’s  fiscal year 2011 single audit report, the auditors found material  weaknesses that included (1) the lack of documentation to determine  whether certain costs were allowable, (2) lack of inventory of fixed assets,  (3) lack of general ledger account reconciliation, and (4) lack of internal  controls over bank wire transfers.
We found that 6 of the 7 material weaknesses in internal control over  financial reporting contained in the FSM’s fiscal year 2011 single audit  report were recurring problems from the previous year or had been  reported for several years. Below are two examples:
General ledger account reconciliations were not performed in a timely  manner or accurately. The lack of timely and accurate account  reconciliations may affect accurate reporting and timely submission of  the single audit report.
Fixed-asset records were not periodically reconciled and timely  recorded. Likewise, 8 of the 11 material weakness findings in the  RMI’s fiscal year 2011 single audit report were recurring problems  from the previous year or had been reported for several years,  including these examples:
Fixed assets records were not being periodically reconciled and  recorded in a timely manner.
Procurement requirements were not followed, such as the lack of the  required three price quotations for an expenditure.
The FSM and RMI have developed corrective action plans to address  financial statement findings in the 2011 single audit.
section_title: Compliance with Requirements of Federal Awards
paragraphs: In addition to the auditor’s report on financial statement findings, FSM and  RMI auditors issuing an entity’s single audit reports also issue an opinion  on the entity’s compliance with requirements of major federal programs.  Of the 24 single audit reports submitted by the FSM national and state  governments and the RMI for fiscal years 2006 through 2011, 19 received  qualified opinions regarding compliance with requirements of major  federal programs. The remaining six received unqualified opinions;  Pohnpei received 4 of the 6 unqualified opinions.
In the 2011 single audit reports on compliance with requirements of major  federal programs, auditors reported 14 material weaknesses and  significant deficiencies for the FSM and 8 for the RMI (see tables 16 and  17, respectively). For example, in the FSM, the reported material  weaknesses included (1) the lack of internal controls over compliance  with cash management requirements, (2) lack of funds control to prevent  disbursements in excess of available funds, and (3) lack of controls over  property accountability. In the RMI, findings that were material  weaknesses included (1) a lack of fixed assets inventory control, (2) the  lack of internal controls over compliance with cash management  requirements, (3) the lack of internal controls over procurement, and (4)  the lack of adequate documentation of cost allowability.
We found that 13 of the 14 findings from the 2011 FSM and state  governments’ single audit reports, and 7 of the 8 findings from the 2011  RMI single audit report, were recurring problems from the previous year  or had recurred for several years. In contrast, for the FSM only 5 of the  41 findings from the 2005 single audit reports and, for the RMI, only 5 of  the 13 findings from the 2005 single audit report were recurring problems  from the previous year or had recurred for several years. The FSM and  RMI 2011 single audit reports stated that the FSM and RMI have  developed corrective action plans to address all the 2011 single audit  reports’ findings on compliance with requirements of major federal  programs.
As the count of single audit findings in table 17 demonstrate, material  weaknesses related to internal controls have increased over the last 3  years. As we have previously reported, weaknesses in internal controls  may lead to fraud, waste, and abuse. Since late 2010, 22 cases  involving collusion among three employees of the RMI Ministry of  Finance, three employees of the RMI Ministry of Health, and three local  businesses are being prosecuted in the RMI. These 22 cases involve a  total of approximately $550,000 in compact funding. According to an OIA  official, this fraud was not uncovered through an audit; rather, it was  detected when the leader of the group of government workers involved in  the fraud tried to pick up a vendor payment from the RMI Ministry of  Finance, raising suspicions and leading to an investigation. According to  an OIA official, in 2012, two former RMI government workers were  charged with 25 counts of theft related to 20 checks from the government  valued at $350,000. They received fines and 5-year prison sentences.  According to an RMI official, the investigation is ongoing, and the RMI  Office of the Auditor General (OAG) has collaborated with the RMI  Attorney General since the start of the investigation. Furthermore, the  OAG has taken its own action to better detect fraud by creating a new  investigation unit within the OAG to conduct investigations of suspected  fraudulent activities and created a confidential fraud hotline where RMI  citizens can contact the OAG to report instances of fraud, waste, and  abuse for further investigation.
According to an RMI official, over the past 5 years, the RMI Auditor  General has focused on financial and compliance audits, including the  single audits of RMI government agencies. The OAG also conducted its  own audits of component units for fiscal years 2006 through 2011.  According to the RMI Auditor General, because of insufficient staff, the  OAG performed only 1 performance audit over the past several years,  and additional staff would be needed to enable the office to address the  demand for fraud investigations. Recognizing the magnitude of potential  fraud, OIA authorized a Technical Assistance grant of $110,500 in 2012  to recruit a Certified Fraud Examiner for RMI. According to a RMI OAG  official, as of June 2013, the RMI had not filled this position.
section_title: Appendix VIII: Office of Insular Affairs (OIA) Staffing Projections for Compact Oversight, Fiscal Years 2010–2013
section_title: Appendix IX: Comments from the U.S. Department of the Interior
section_title: Appendix X: Comments from the Federated States of Micronesia National Government
section_title: Appendix XI: Comments from the Government of the Republic of the Marshall Islands
subsections: section_title: GAO Comments
paragraphs: problem might have occurred during our visit. We noted this  information on page 33. We have not verified this information.   9.  In its comments, the RMI noted that Delap Elementary School  currently has no problem with water. It noted though that during the  dryer months water catchment tanks are low or have no water, and  that Majuro Water and Sewer Company rations water. The reference  to the lack of water at Delap Elementary school was deleted from the  final report.  10. In its comments regarding our observation that a school building was  being used on Ebeye though it was considered unsafe, the RMI noted  that the building has been abandoned and that a new three-classroom  building has been constructed at Kwajalein Atoll High School. We  noted this information on page 33. We have not verified this  information.  11. In its comments, the RMI noted that the Office of the Chief Secretary  did not have the authority to withhold funds, but if it had the authority  to do so, it would do so as a last resort. We amended the text on page  51 of the report to reflect this information.  12. In its comments, the RMI stated that it feels a reference to intent of  the RMI trust fund to provide an annual source of revenue post-2023  should cite our 2007 trust fund report. We added the footnote citing  our prior trust fund report, as suggested.
section_title: Appendix XII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the person named above, Emil Friberg (Assistant Director),  Christina Bruff, Julie Hirshen, and Jeffrey Isaacs were key contributors to  this report. Ashley Alley, David Dayton, Martin De Alteriis, and Etana  Finkler provided technical assistance.
section_title: Related GAO Products
paragraphs: Compacts of Free Association: Improvements Needed to Assess and  Address Growing Migration. GAO-12-64. Washington, D.C.: November  14, 2011.
Compacts of Free Association: Micronesia Faces Challenges to  Achieving Compact Goals. GAO-08-859T, Washington, D.C.: June 10,  2008.
Compacts of Free Association: Implementation Activities Have  Progressed, but the Marshall Islands Faces Challenges to Achieving  Long-Term Compact Goals. GAO-07-1258T. Washington, D.C.:  September 25, 2007.
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.
Compacts of Free Association: Micronesia’s and the Marshall Islands’  Use of Sector Grants. GAO-07-514R. Washington, D.C.: May 25, 2007.
Compacts of Free Association: Micronesia and the Marshall Islands Face  Challenges in Planning for Sustainability, Measuring Progress, and  Ensuring Accountability. GAO-07-163. Washington, D.C.: December 15,  2006.
Compacts of Free Association: Development Prospects Remain Limited  for Micronesia and the Marshall Islands. GAO-06-590. Washington, D.C.:  June 27, 2006.
Compacts of Free Association: Implementation of New Funding and  Accountability Requirements Is Well Underway, but Planning Challenges  Remain. GAO-05-633. Washington, D.C.: July 11, 2005.
Compact of Free Association: Single Audits Demonstrate Accountability  Problems over Compact Funds. GAO-04-7. Washington, D.C.: October 7,  2003.
Compact of Free Association: An Assessment of Amended Compacts  and Related Agreements. GAO-03-890T. Washington, D.C.: June 18,  2003.
Compact of Free Association: An Assessment of Current U.S. Proposals  to Extend Assistance. GAO-02-857T. Washington, D.C.: July 17, 2002.
Foreign Assistance: Effectiveness and Accountability Problems Common  in U.S. Programs to Assist Two Micronesian Nations. GAO-02-70.  Washington, D.C.: January 22, 2002.
Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in Two  Micronesian Nations. GAO-02-119. Washington, D.C.: January 22, 2002.
Compact of Free Association: Negotiations Should Address Aid  Effectiveness and Accountability and Migrants’ Impact on U.S. Areas.  GAO-02-270T. Washington, D.C.: December 6, 2001.
Foreign Relations: Migration From Micronesian Nations Has Had  Significant Impact on Guam, Hawaii, and the Commonwealth of the  Northern Mariana Islands. GAO-02-40. Washington, D.C.: October 5,  2001.