Compact of Free Association: An Assessment of the Amended Compacts and Related Agreements
Published: 2003-07-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1986, the United States entered into a Compact of Free Association with the Pacific Island nations of the Federated States of Micronesia, or FSM, and the Republic of the Marshall Islands, or RMI. The Compact provided about $2.1 billion in U.S. funds, supplied by the Department of the Interior, over 17 years (1987-2003) to the FSM and the RMI. These funds were intended to advance economic development. In a past report, GAO found that this assistance did little to advance economic development in either country, and accountability over funding was limited. The Compact also established U.S. defense rights and obligations in the region and allowed for migration from both countries to the United States. The three parties recently renegotiated expiring economic assistance provisions of the Compact in order to provide an additional 20 years of assistance (2004-2023). In addition, the negotiations addressed defense and immigration issues. The House International Relations and Resources Committees requested that GAO report on Compact negotiations. This testimony discusses negotiated changes to the levels and structure of future assistance, including the potential cost to the U.S. government. Further, it reviews accountability, defense, and immigration changes brought about by the amended Compacts and related agreements.
section_title: What GAO Found
paragraphs: The amended Compacts of Free Association between the United States and the FSM and the RMI to renew expiring U.S. assistance could potentially cost the U.S. government about $6.6 billion in new authorizations from the Congress. Of this amount, $3.5 billion would cover payments over a 20-year period (2004-2023), while $3.1 billion represents payments for U.S. military access to Kwajalein Atoll in the RMI for the years 2024 through 2086. While the level of annual grant assistance to both countries would decrease each year, contributions to trust funds--meant to eventually replace grant funding--would increase annually by a comparable amount. Nevertheless, at an assumed annual 6 percent rate of return, earnings from the FSM trust fund would be unable to replace expiring grant assistance in 2024, while earnings from the RMI trust fund would encounter the same problem by 2040. The amended Compacts strengthen reporting and monitoring measures that could improve accountability over assistance, if diligently implemented. These measures include the following: assistance grants would be targeted to priority areas such as health and education; annual reporting and consultation requirements would be expanded; and funds could be withheld for noncompliance with grant terms and conditions. The successful implementation of the many new accountability provisions will require appropriate resources and sustained commitment from the United States, the FSM, and the RMI. Regarding defense, U.S. military access to Kwajalein Atoll in the RMI would be extended from 2016 through 2066, with an option to extend through 2086. Finally, Compact provisions addressing immigration have been strengthened. For example, FSM and RMI citizens entering the United States would need to carry a passport, and the U.S. Attorney General could, through regulations, specify the time and conditions of admission to the United States for these citizens.

section_title: Letter
paragraphs: I am pleased to be here today to testify on the Compact of Free  Association between the United States and the Pacific Island nations of  the Federated States of Micronesia, or the FSM, and the Republic of the  Marshall Islands, or the RMI. In 1986, the United States entered into this  Compact with the two countries after almost 40 years of administering the  islands under the United Nations Trust Territory of the Pacific Islands. The  Compact has provided U.S. assistance to the FSM and the RMI in the form  of direct funding as well as federal services and programs for almost 17  years. Further, the Compact establishes U.S. defense rights and obligations  in the region and allows for migration from both countries to the United  States. Provisions of the Compact that address economic assistance were  scheduled to expire in 2001; however, they can remain and have remained  in effect while the United States and each nation renegotiated the affected  provisions.
Today I will discuss our review of the amended Compacts and related  agreements that the United States signed with the FSM and the RMI in May  and April of 2003, respectively. (According to a Department of State  official, while the original Compact was one document that applied to both  the FSM and the RMI, the Compact that has been amended is now a  separate Compact with each nation.) Specifically, I will discuss changes to  levels and structure of future assistance, including the potential cost to the  U.S. government. Further, I will comment on changes in accountability  and other key issues addressed in the amended Compacts and related  agreements.
subsections: section_title: Background
paragraphs: The 1986 Compact of Free Association between the United States, the  FSM, and the RMI provided a framework for the United States to work  toward achieving its three main goals: (1) to secure self-government for  the FSM and the RMI, (2) to assist the FSM and the RMI in their efforts to  advance economic development and self-sufficiency, and (3) to ensure  certain national security rights for all of the parties. The first goal has been  met. The FSM and the RMI are independent nations and are members of  international organizations such as the United Nations.
The second goal of the Compact–advancing economic development and  self-sufficiency for both countries–was to be accomplished primarily  through U.S. direct financial payments (to be disbursed and monitored by  the U.S. Department of the Interior) to the FSM and the RMI. For 1987  through 2003, U.S. assistance to the FSM and the RMI to support economic  development is estimated, on the basis of Interior data, to be about $2.1  billion. Economic self-sufficiency has not been achieved. Although total  U.S. assistance (Compact direct funding as well as U.S. programs and  services) as a percentage of total government revenue has fallen in both  countries (particularly in the FSM), the two nations remain highly  dependent on U.S. funds. U.S. direct assistance has maintained standards  of living that are higher than could be achieved in the absence of U.S.  support. Further, the U.S., FSM, and RMI governments provided little  accountability over Compact expenditures.
The third goal of the Compact–securing national security rights for all  parties–has been achieved. The Compact obligates the United States to  defend the FSM and the RMI against an attack or the threat of attack in the  same way it would defend its own citizens. The Compact also provides the  United States with the right of “strategic denial,” the ability to prevent  access to the islands and their territorial waters by the military personnel  of other countries or the use of the islands for military purposes. In  addition, the Compact grants the United States a “defense veto.” Finally,  through a Compact-related agreement, the United States secured  continued access to military facilities on Kwajalein Atoll in the RMI  through 2016. In a previous report, we identified Kwajalein Atoll as the  key U.S. defense interest in the two countries. Of these rights, only the  defense veto is due to expire in 2003 if not renewed.
Another aspect of the special relationship between the FSM and the RMI  and the United States involves the unique immigration rights that the  Compact grants. Through the original Compact, citizens of both nations  are allowed to live and work in the United States as “nonimmigrants” and  can stay for long periods of time, with few restrictions. Further, the  Compact exempted FSM and RMI citizens from meeting U.S. passport,  visa, and labor certification requirements when entering the United States.  In recognition of the potential adverse impacts that Hawaii and nearby  U.S. commonwealths and territories could face as a result of an influx of  FSM and RMI citizens, the Congress authorized Compact impact payments  to address the financial impact of these nonimmigrants on Guam, Hawaii,  and the Commonwealth of the Northern Mariana Islands (CNMI). By 1998,  more than 13,000 FSM and RMI citizens had made use of the Compact  immigration provisions and were living in the three areas. The  governments of the three locations have provided the U.S. government  with annual Compact nonimmigrant impact estimates; for example, in  2000 the total estimated impact for the three areas was $58.2 million. In  that year, Guam received $7.58 million in impact funding, while the other  two areas received no funding.
In the fall of 1999, the United States and the two Pacific Island nations  began negotiating economic assistance and defense provisions of the  Compact that were due to expire. Immigration issues were also addressed.  According to the Department of State, the aims of the amended Compacts  are to (1) continue economic assistance to advance self-reliance, while  improving accountability and effectiveness; (2) continue the defense  relationship, including a 50-year lease extension (beyond 2016) of U.S.  military access to Kwajalein Atoll in the RMI; (3) strengthen immigration  provisions; and (4) provide assistance to lessen the impact of Micronesian  migration on Hawaii, Guam, and the CNMI.
section_title: Amended Compacts Would Alter Assistance Levels and Structure
paragraphs: Under the amended Compacts with the FSM and the RMI, new  congressional authorizations of approximately $3.5 billion in funding  would be required over the next 20 years, with a total possible  authorization through 2086 of $6.6 billion. Economic assistance would be  provided to the two countries for 20 years–from 2004 through 2023–with  all subsequent funding directed to the RMI for continued U.S. access to  military facilities in that country. Under the U.S. proposals, annual grant  amounts to each country would be reduced each year in order to  encourage budgetary self-reliance and transition the countries from  receiving annual U.S. grant funding to receiving annual trust fund earnings.  This decrease in grant funding, combined with FSM and RMI population  growth, would also result in falling per capita grant assistance over the  funding period–particularly for the RMI. If the trust funds established in  the amended Compacts earn a 6 percent rate of return, the FSM trust fund  would be insufficient to replace expiring annual grants. The RMI trust fund  would replace grants in fiscal year 2024 but would become insufficient for  this purpose by fiscal year 2040.
subsections: section_title: Amended Compacts Could Cost the U.S. Government $6.6 Billion
paragraphs: Under the amended Compacts with the FSM and the RMI, new  congressional authorizations of approximately $6.6 billion could be  required for U.S. payments from fiscal years 2004 to 2086, of which $3.5  billion would be required for the first 20 years of the Compacts   (see table 1). The share of new authorizations to the FSM would be about  $2.3 billion and would end after fiscal year 2023. The share of new  authorizations to the RMI would be about $1.2 billion for the first 20 years,  with about $300 million related to extending U.S. military access to  Kwajalein Atoll through 2023. Further funding of $3.1 billion for the  remainder of the period corresponds to extended grants to Kwajalein and  payments related to U.S. military use of land at Kwajalein Atoll. The cost  of this $6.6 billion new authorization, expressed in fiscal year 2004 U.S.  dollars, would be $3.8 billion.
This new authorized funding would be provided to each country in the  form of (1) annual grant funds targeted to priority areas (such as health,  education, and infrastructure); (2) contributions to a trust fund for each  country such that trust fund earnings would become available to the FSM  and the RMI in fiscal year 2024 to replace expiring annual grants; (3)  payments the U.S. government makes to the RMI government that the RMI  transfers to Kwajalein landowners to compensate them for the U.S. use of  their lands for defense sites; and (4) an extension of federal services that  have been provided under the original Compact but are due to expire in  fiscal year 2003.
section_title: Amended Compacts Would Reduce U.S. Grant Support Annually
paragraphs: Under the U.S. proposals, annual grant amounts to each country would be  reduced each year in order to encourage budgetary self-reliance and  transition the countries from receiving annual U.S. grant funding to  receiving annual trust fund earnings. Thus, the amended Compacts  increase annual U.S. contributions to the trust funds each year by the  grant reduction amount. This decrease in grant funding, combined with  FSM and RMI population growth, would also result in falling per capita  grant assistance over the funding period–particularly for the RMI (see fig.  1). Using published U.S. Census population growth rate projections for the  two countries, the real value of grants per capita to the FSM would begin  at an estimated $687 in fiscal year 2004 and would further decrease over  the course of the Compact to $476 in fiscal year 2023. The real value of  grants per capita to the RMI would begin at an estimated $627 in fiscal  year 2004 and would further decrease to an estimated $303 in fiscal year  2023. The reduction in real per capita funding over the next 20 years is a  continuation of the decreasing amount of available grant funds (in real  terms) that the FSM and the RMI had during the 17 years of prior Compact  assistance.
The decline in annual grant assistance could impact FSM and RMI  government budget and service provision, employment prospects,  migration, and the overall gross domestic product (GDP) outlook, though  the immediate effect is likely to differ between the two countries. For  example, the FSM is likely to experience fiscal pressures in 2004, when the  value of Compact grant assistance drops in real terms by 8 percent relative  to the 2001 level (a reduction equal to 3 percent of GDP). For the RMI,  however, the proposed level of Compact grant assistance in 2004 would  actually be 8 percent higher in real terms than the 2001 level (an increase  equal to 3 percent of GDP). According to the RMI, this increase would  likely be allocated largely to the infrastructure investment budget and  would provide a substantial stimulus to the economy in the first years of  the new Compact.
section_title: Trust Funds May Be Insufficient to Replace Expiring Grants
paragraphs: The amended Compacts were designed to build trust funds that, beginning  in fiscal year 2024, yield annual earnings to replace grant assistance that  ends in 2023. Both the FSM and the RMI are required to provide an initial  contribution to their respective trust funds of $30 million. In designing the  trust funds, the Department of State assumed that the trust fund would  earn a 6 percent rate of return. The amended Compacts do not address  whether trust fund earnings should be sufficient to cover expiring federal  services, but they do create a structure that sets aside earnings above 6  percent, should they occur, that could act as a buffer against years with  low or negative trust fund returns. Importantly, whether the estimated  value of the proposed trust funds would be sufficient to replace grants or  create a buffer account would depend on the rate of return that is  realized.
If the trust funds earn a 6 percent rate of return, then the FSM trust fund  would yield a return of $57 million in fiscal year 2023, an amount  insufficient to replace expiring grants by an estimated value of $27 million.
The RMI trust fund would yield a return of $33 million in fiscal year 2023,  an estimated $5 million above the amount required to replace grants in  fiscal year 2024. Nevertheless, the RMI trust fund would become  insufficient for replacing grant funding by fiscal year 2040.
If the trust funds are comprised of both stocks (60 percent of the  portfolio) and long-term government bonds (40 percent of the portfolio)  such that the forecasted average return is around 7.9 percent, then both  trust funds would yield returns sufficient to replace expiring grants and to  create a buffer account. However, while the RMI trust fund should  continue to grow in perpetuity, the FSM trust fund would eventually  deplete the buffer account and fail to replace grant funding by fiscal year  2048.
section_title: Amended Compacts Have Strengthened Accountability Over U.S. Assistance
paragraphs: I will now discuss provisions in the amended Compacts designed to  provide improved accountability over, and effectiveness of, U.S.  assistance. This is an area where we have offered several  recommendations in past years, as we have found accountability over past  assistance to be lacking. In sum, most of our recommendations regarding  future Compact assistance have been addressed with the introduction of  strengthened accountability measures in the signed amended Compacts  and related agreements. I must emphasize, however, that the extent to  which these provisions will ultimately provide increased accountability  over, and effectiveness of, future U.S. assistance will depend upon how  diligently the provisions are implemented and monitored by all  governments.
The following summary describes key accountability measures included in  the amended Compacts and related agreements:    The amended Compacts would require that grants be targeted to priority  areas such as health, education, the environment, and public  infrastructure. In both countries, 5 percent of the amount dedicated to  infrastructure, combined with a matching amount from the island  governments, would be placed in an infrastructure maintenance fund.
Compact-related agreements with both countries (the so-called “fiscal  procedures agreements”) would establish a joint economic management  committee for the FSM and the RMI that would meet at least once  annually. The duties of the committees would include (1) reviewing  planning documents and evaluating island government progress to foster  economic advancement and budgetary self-reliance; (2) consulting with  program and service providers and other bilateral and multilateral  partners to coordinate or monitor the use of development assistance; (3)  reviewing audits; (4) reviewing performance outcomes in relation to the  previous year’s grant funding level, terms, and conditions; and (5)  reviewing and approving grant allocations (which would be binding) and  performance objectives for the upcoming year. Further, the fiscal  procedures agreements would give the United States control over the  annual review process: The United States would appoint three government  members to each committee, including the chairman, while the FSM or the  RMI would appoint two government members.
Grant conditions normally applicable to U.S. state and local governments  would apply to each grant. General terms and conditions for the grants  would include conformance to plans, strategies, budgets, project  specifications, architectural and engineering specifications, and  performance standards. Other special conditions or restrictions could be  attached to grants as necessary.
The United States could withhold payments if either country fails to  comply with grant terms and conditions. In addition, funds could be  withheld if the FSM or RMI governments do not cooperate in U.S.  investigations regarding whether Compact funds have been used for  purposes other than those set forth in the amended Compacts.
The fiscal procedures agreements would require numerous reporting  requirements for the two countries. For example, each country must  prepare strategic planning documents that are updated regularly, annual  budgets that propose sector expenditures and performance measures,  annual reports to the U.S. President regarding the use of assistance,  quarterly and annual financial reports, and quarterly grant performance  reports.
The amended Compacts’ trust fund management agreements would grant  the U.S. government control over trust fund management: The United  States would appoint three members, including the chairman, to a  committee to administer the trust funds, while the FSM or the RMI would  appoint two members. After the initial 20 years, the trust fund committee  would remain the same, unless otherwise agreed by the original parties.
The fiscal procedures agreements would require the joint economic  management committees to consult with program providers in order to  coordinate future U.S. assistance. However, we have seen no evidence  demonstrating that an overall assessment of the appropriateness,  effectiveness, and oversight of U.S. programs has been conducted, as we  recommended.
The successful implementation of the many new accountability provisions  will require a sustained commitment by the three governments to fulfill  their new roles and responsibilities. Appropriate resources from the  United States, the FSM, and the RMI represent one form of this  commitment. While the amended Compacts do not address staffing issues,  officials from Interior’s Office of Insular Affairs have informed us that  their office intends to post six staff in a new Honolulu office. Further, an  Interior official noted that his office has brought one new staff on board in  Washington, D.C., and intends to post one person to work in the RMI (one  staff is already resident in the FSM). We have not conducted an  assessment of Interior’s staffing plan and rationale and cannot comment  on the adequacy of the plan or whether it represents sufficient resources  in the right location.
section_title: Amended Compacts Address Other Key Areas
subsections: section_title: U.S. Military Access to Kwajalein Atoll Could Be Extended Until 2086
paragraphs: The most significant defense-related change in the amended Compacts is  the extension of U.S. military access to Kwajalein Atoll in the RMI. While  the U.S. government had already secured access to Kwajalein until 2016  through the 1986 MUORA, the newly revised MUORA would grant the  United States access until 2066, with an option to extend for an additional  20 years to 2086. According to a Department of Defense (DOD) official,  recent DOD assessments have envisioned that access to Kwajalein would  be needed well beyond 2016. He stated that DOD has not undertaken any  further review of the topic, and none is currently planned. This official  also stated that, given the high priority accorded to missile defense  programs and to enhancing space operations and capabilities by the  current administration, and the inability to project the likely improvement  in key technologies beyond 2023, the need to extend the MUORA beyond  2016 is persuasive. He also emphasized that the U.S. government has  flexibility in that it can end its use of Kwajalein Atoll any time after 2023  by giving advance notice of 7 years and making a termination payment.
We have estimated that the total cost of this extension would be $3.4  billion (to cover years 2017 through 2086). The majority of this funding  ($2.3 billion) would be provided by the RMI government to Kwajalein Atoll  landowners, while the remainder ($1.1 billion) would be used for  development and impact on Kwajalein Atoll. According to a State  Department official, there are approximately 80 landowners. Four  landowners receive one-third of the annual payment, which is based on  acreage owned. This landowner funding (along with all other Kwajalein- related funds) through 2023 would not be provided by DOD but would  instead continue as an Interior appropriation. Departmental responsibility  for authorization and appropriation for Kwajalein-related funding beyond  2023 has not been determined according to the Department of State. Of  note, the Kwajalein Atoll landowners have not yet agreed to sign an  amended land-use agreement with the RMI government to extend U.S.  access to Kwajalein beyond 2016 at the funding levels established in the  amended Compact.
section_title: Amended Compacts Would Strengthen Immigration Provisions
paragraphs: While the original Compact’s immigration provisions are not expiring, the  Department of State targeted them as requiring changes. The amended  Compacts would strengthen the immigration provisions of the Compact by  adding new restrictions and expressly applying the provisions of the  Immigration and Nationality Act of 1952, as amended (P.L. 82-414) to  Compact nonimmigrants. There are several new immigration provisions  in the amended Compacts that differ from those contained in the original  Compact. For example, Compact nonimmigrants would now be required  to carry a valid passport in order to be admitted into the United States.  Further, children coming to the United States for the purpose of adoption  would not be admissible under the amended Compacts. Instead, these  children would have to apply for admission to the United States under the  general immigration requirements for adopted children. In addition, the  Attorney General would have the authority to issue regulations that  specify the time and conditions of a Compact nonimmigrant’s admission  into the United States (under the original Compact, regulations could be  promulgated to establish limitations on Compact nonimmigrants in U.S.  territories or possessions).
In addition, the implementing legislation for the amended Compacts would  provide $15 million annually for U.S. locations that experience costs  associated with Compact nonimmigrants. This amount would not be  adjusted for inflation, would be in effect for fiscal years 2004 through 2023,  and would total $300 million. Allocation of these funds between locations  such as Hawaii, Guam, and the CNMI would be based on the number of  qualified nonimmigrants in each location.
Mr. Chairman and Members of the Committee, this completes my prepared  statement. I would be happy to respond to any questions you or other  Members of the Committee may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: For future contacts regarding this testimony, please call Susan S. Westin  or Emil Friberg, Jr., at (202) 512-4128. Individuals making key  contributions to this testimony included Leslie Holen, Kendall Schaefer,  Mary Moutsos, and Rona Mendelsohn.
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