Compacts of Free Association: Actions Needed to Improve Oversight and Accountability of U.S. Assistance to Micronesia and the Marshall Islands
Published: 2014-01-07T00:00:00

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. This testimony draws from GAO's September 2013 report on the use and accountability of these funds to review (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. Like the report, this testimony also provides information on infrastructure spending 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 those sectors, the U.S.-FSM and U.S.-RMI joint management and accountability committees capped budgets for personnel in those 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. As required by the committees, the FSM states completed plans to address annual decreases in compact funding; however, as of August 2013, the FSM National Government and the RMI had not submitted plans to address the annual decreases. Without such plans, the countries may not be able to sustain essential services in the education and health sectors.
Data reliability issues hindered GAO's assessment of each country's progress in the education and health sectors for fiscal years 2007 through 2011. Although both countries tracked annual indicators in these sectors during this period, GAO determined that many of these data were not sufficiently reliable for the purpose of measuring progress for the compacts as a whole over the time frame. In education, GAO found 3 of 14 indicators in the subsets of indicators it reviewed for both countries to be sufficiently reliable. GAO found a variety of education data reliability problems; for example, the four FSM states did not use common definitions for some indicators, resulting in inconsistent data for those indicators, and in the RMI some indicators lacked data from the outer islands. 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, and in the RMI, 1 health indicator was sufficiently reliable, 2 were not sufficiently reliable, and for 2 others, GAO had no basis to judge due to insufficient information. The joint management and accountability committees have raised concerns about the reliability of FSM's education and health data and RMI's health data and required each country to obtain an independent assessment and verification of these data; both countries have yet to meet that requirement. Without reliable data, the countries cannot assess progress toward their goals in the education and health sectors.
The single audit reports GAO reviewed indicated challenges to ensuring accountability of 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 a financial control commission in one FSM state, but Interior has not coordinated with other U.S. agencies about the risk status of the FSM and RMI and whether to designate either country as a high-risk grantee. 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, leaving 6 of 11 planned positions for compact oversight unfilled as of 2012 and 5 of 11 still unfilled as of 2013.
section_title: What GAO Recommends
paragraphs: GAO is not making new recommendations. In its September 2013 report, GAO recommended that, 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 the recommendations and identified actions taken, ongoing, and planned.

section_title: Letter
paragraphs: Thank you for this opportunity to discuss our recent work reviewing the  use and accountability of U.S. grant funds provided under the amended  Compacts of Free Association to the Federated States of Micronesia  (FSM) and the Republic of the Marshall Islands (RMI). The amended  compacts, approved by Congress in 2003, provide for a combined total of  $3.6 billion in U.S. grant funds for the FSM and RMI during fiscal years  2004 through 2023. The purpose of the 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. The amended compacts  provide sector grants, 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.
My remarks today are based on our September 2013 report, which was  issued at about the midpoint of the amended compacts’ 20-year grant  period. In our report, we examined (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. In  reporting on these objectives, our time frame was generally fiscal years  2007 through 2011, and we also included information on both countries’  infrastructure projects during that period. To perform this work, we  reviewed FSM and RMI single audits and subsets of FSM and RMI  performance indicators for the education and health sectors. We  observed the 2012 annual meetings, the 2013 midyear meetings, and the  2013 annual meetings of the U.S.-FSM Joint Economic Management  Committee (JEMCO) and the U.S.-RMI Joint Economic Management and  Financial Accountability Committee (JEMFAC); these joint management  and accountability committees allocate grants and provide oversight for  the amended compacts. We interviewed officials from the U.S.  Departments of the Interior (Interior), Health and Human Services,  Education, and State, the FSM National Government and state  governments, and RMI government. We also 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 work on which this testimony is based was conducted 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. The FSM is a federation of four states and has a  population of approximately 103,000 (as of 2010) scattered over many  small islands and atolls. The RMI comprises 29 constituent atolls and five  islands with a population of approximately 53,000 as of 2011. U.S.  relations with the FSM and the RMI began during World War II when the  United States ended Japanese occupation of the region. Beginning in  1947, the United States administered the region under a United Nations  trusteeship. 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. The United States, the  FSM, and the RMI entered into the original Compact of Free Association  in 1986, and from 1987 through 2003 the FSM and the RMI are estimated  to have received about $2.1 billion in compact financial assistance.
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. The amounts of the annual decrements are to be deposited  in trust funds established for the FSM and the RMI; the annual decrement  in grant funding is intended to steadily increase the trust funds so that  earnings from the trust can provide a source of annual revenue after the  GAO-13-675). In  grants end in 2023 (see fig. 2 on page 8 of the report,  addition to receiving compact sector grants, the FSM and the RMI are  eligible for a supplemental education grant each year. Separate from the  funding authorized and appropriated under the amended compacts’  enabling legislation, the countries also receive other grants and other  assistance from U.S. agencies.
The legislation and fiscal procedures agreements for the amended  compacts established oversight mechanisms and responsibilities for the  FSM, RMI, and the United States. To strengthen the management and  accountability and promote the effective use of compact funding, JEMCO  and JEMFAC were jointly established by the United States and,  respectively, the FSM and the RMI. Each five-member committee  comprises three representatives from the United States government and  two representatives from the corresponding country. 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.
The three countries are required to provide the necessary staff support to  their representatives on JEMCO and JEMFAC to enable the parties to  monitor closely the use of assistance under the compacts. 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.  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. The Director of OIA serves as Chairman  of both JEMCO and JEMFAC.
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 a key control for the oversight and monitoring of the FSM and RMI  governments’ use of U.S. awards. 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. All U.S.  agencies providing noncompact grants to the FSM and the RMI are  responsible for administering those grants in accordance with Office of   and agency regulations  Management and Budget (OMB) requirementsthat 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.
section_title: FSM and RMI Prioritized Education and Health Sectors in Spending Compact Funds
paragraphs: In fiscal years 2007 through 2011, the FSM spent about two-thirds and  the RMI spent about half of their total compact sector funds in the  education and health sectors—$158 million for the FSM and $89 million  for the RMI. (For a breakdown of sector compact expenditures and  supplemental education grant expenditures for both countries during this  period, see pages 14 to 21 of the report, GAO-13-675).
In the FSM in fiscal year 2011, education sector compact and  supplemental education grant funds together amounted to about 85  percent of total education expenditures, and health sector compact funds  were about 66 percent of total health expenditures. Compact funds in  the RMI also 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 the RMI’s total education  expenditures in fiscal year 2011, while health sector compact funds and  Ebeye special needs health funds accounted for about 33 percent of the  RMI’s total health expenditures.
We only reported specific expenditures for the FSM for fiscal years 2009 through 2011  because specific expenditure data for the FSM National Government and Chuuk were not  presented in their single audits for fiscal years 2007 and 2008. the health sector compact funds for personnel. Concerned about the  sustainability of sector budgets as compact funding declines through  fiscal year 2023 due to the annual decrements, JEMCO and JEMFAC  passed resolutions in 2011, capping budgetary levels for personnel in the  education and health sectors of both countries at fiscal year 2011 levels.
JEMCO and JEMFAC actions regarding annual decrement plans.  JEMCO and JEMFAC resolutions in fiscal years 2009 and 2010 required  the FSM National Government and state governments and the RMI  government to complete plans that would address the annual decrements  in compact funding and identify new revenue sources to replace compact  grant assistance in 2023. By the March 2013 JEMCO and JEMFAC  midyear meetings, the four FSM states had completed plans to address  the annual decrements in compact sector funding through 2023; however,  the FSM National Government and RMI government had not completed  their plans. Also, in fiscal year 2013, U.S. members of the JEMCO and  JEMFAC announced that the United States would consider withholding  certain fiscal year 2014 compact sector grant funds until the FSM  National Government and RMI submitted their plans for addressing the  annual decrements. Without such plans, the countries may not be able to  sustain essential services in the education and health sectors.
At the annual JEMCO and JEMFAC meetings in August 2013, the  committees withheld annual sector funds from the FSM National  Government and RMI government because they failed to provide the  required plans to address the annual decrements. In September 2013,  however, JEMCO allocated sector grant funds to the four FSM states,  which provided the required plans, but continued withholding funds from  the FSM National Government because it failed to meet the requirements  of the JEMCO resolution requiring the plan. In October 2013, JEMFAC  provided sector grant funds to the RMI with the stipulation that no sector  funds would be approved in fiscal year 2015 unless the RMI fulfilled the  terms of the JEMFAC resolution requiring a decrement plan. In  November 2013, the FSM National Government provided OIA with a plan  detailing the National Government’s long-term fiscal framework, which  includes a burden-sharing commitment to the four FSM states to help  address the decrement. Among the actions the National Government has  taken to address the decrement is a new law modifying the annual  compact distribution formula, reducing its share of compact sector grants  from 10 percent to 5 percent; the goal in providing an additional 5  percent in compact grant funds to the states is to ensure that priority  education and health service needs are not compromised as the annual  compact allocations decrease. The U.S. members of JEMCO have yet to  determine whether the long-term fiscal framework plan from the FSM  National Government meets the decrement plan requirements.
Reported FSM and RMI infrastructure spending. In the FSM, in fiscal  years 2004 through 2013, approximately $229 million in compact funds  were allocated to infrastructure, and of that about $106 million has been  expended, according to OIA. Delays in establishing JEMCO-approved  priorities and unresolved land titling issues affected the construction and  maintenance of some health and education facilities in the FSM. During  fiscal years 2007 through 2012, the FSM completed 6 education-related  projects on a JEMCO-approved list of 19 priority projects, and other  projects are under way. From 2004 through 2013, approximately $106  million in compact funds were allocated to infrastructure in the RMI, and  the RMI expended about $95 million dollars on infrastructure projects,  including infrastructure maintenance, 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.
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. Although both countries tracked annual indicators in these  sectors to measure progress during this period, we encountered data  reliability issues in the subsets of indicators we examined.
We determined that eight of the subset of nine FSM education indicators  we reviewed could not be used to assess progress over time because of  such issues as incomplete data and inconsistent definitions and data  collection. For example, we found that the four FSM states did not use  common definitions for some indicators; consequently, the education  indicator reports we reviewed did not contain consistent data for these  indicators and comparisons could not be made across states. In the RMI,  we determined that data for three of the subset of five education  indicators we reviewed could not be used to assess education sector  progress for the compact as a whole because of issues such as lack of  data from the country’s outer islands, inconsistencies in reported data for  some years, and revisions to data with no explanation.
For all five of the subset of FSM health indicators we reviewed, we  determined that the data were not sufficiently reliable to assess progress  for the compacts as a whole. For example, for the indicator that all  essential drugs were to be available 80 percent of days, 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. In the RMI, of the subset of five health  indicators we reviewed, we determined one was sufficiently reliable and  two were not sufficiently reliable to assess progress because of various  issues with data collection and reporting. For example, we determined  that data for immunization coverage for 2-year-olds and the child mortality  rate were not sufficiently reliable due to the timeliness and accuracy of  reporting and low coverage rates for data from the outer islands. For the  remaining two FSM health indicators we examined, we had no basis to  judge the reliability of the data.
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 them. JEMCO and JEMFAC 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. 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 their goals in  the education and health sectors.
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. In the FSM, although the single audit reports for Chuuk and Pohnpei  state governments demonstrated improvement in financial accountability,  the FSM National Government single audit reports indicated that the  government faced financial accountability challenges. For example, the  FSM National Government’s 2011 single audit report contained several  repeat findings—problems noted in previous audits that had not been  corrected for several years—and identified problems with the extent of  noncompliance with program requirements, such as preparing required  quarterly reports. RMI single audit reports for fiscal years 2006 through  2011 demonstrated an increase in material weaknesses in  noncompliance with the requirements of federal programs. Some findings  were related to compact grants and others to noncompact funding.  Furthermore, several of the weaknesses were not corrected over several  years.
To improve financial accountability, OIA led actions that resulted in the  creation of the Chuuk Financial Control Commission, but OIA has not  coordinated with other U.S. agencies regarding the risk status of the FSM  and the RMI for noncompact funds. 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.
We also found that the offices responsible for compact administration in  the FSM, RMI, and United States faced limitations hindering their ability to  conduct compact oversight. FSM officials told us that they need additional  staff to be able to conduct more oversight activities and also noted 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. According to RMI officials, staff constraints in the  Office of Compact Implementation limit its ability to conduct oversight and  enforce compact requirements across multiple sectors and operations in  numerous atolls. Additionally, this office 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.  Finally, we found that OIA experienced a staffing shortage that  disproportionately affected compact grant oversight compared to other  OIA activities, with 6 of 11 planned positions unfilled in 2012 and 5 of 11  unfilled in 2013 (for details, see pages 51-53 of the report, GAO-13-675).  Although the majority of grants administered by OIA are amended  compact grants, OIA’s amended compact oversight function was  disproportionally affected by staffing shortages, which affected its ability  to ensure compact funds were efficiently and effectively used.
section_title: Interior’s Implementation of Recommendations Could Improve Oversight and Accountability of U.S. Assistance to FSM and RMI
paragraphs: In our September 2013 report, we directed five recommendations to  Interior to improve oversight and financial accountability of U.S. compact  and noncompact funds allocated to the FSM and RMI.
Improving oversight through JEMCO and JEMFAC. We recommended  that Interior take all necessary steps to improve the ability of JEMCO and  JEMFAC to ensure that the FSM and RMI (1) complete satisfactory plans  to address annual decrements in compact funds, (2) produce reliable  indicator data used to track progress in education and health, and (3)  address all single audit findings in a timely manner. Our  recommendations suggested the Director of Insular Affairs could  accomplish the accountability improvements by coordinating with other  member U.S. agencies of both oversight committees to have the  committees take all necessary steps, or by taking all necessary steps  directly, acting in his capacity as administrator of compact grants. In its  written response to a draft of our report, 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. At  both their annual meetings in August 2013, JEMCO and JEMFAC passed  resolutions in response to the recommendations in our draft report related  to decrement planning, data reliability, and addressing single audit  findings.
Consulting with other agencies about possible high-risk  designation. In order to improve financial accountability of noncompact  U.S. grant assistance provided to the FSM and the RMI, we  recommended that Interior consult with other grantor agencies to  determine whether the FSM National Government, any FSM state  government, or the RMI government 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 its written response to a draft of our report, 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.
Correcting the staffing shortage related to compacts oversight. To  ensure that Interior is providing appropriate resources for oversight and  monitoring of the FSM and RMI compacts, we recommended that the  Secretary of the Interior take actions to correct the disproportionate  staffing shortage related to compact grant implementation and oversight.
Interior concurred with this recommendation, as it did with the others.  However, Interior’s written response to this recommendation indicated  that it considers corrective action to be contingent on its receiving funding  for new positions through the annual budget process. The intent of our  recommendation is to have Interior work within its actual funding levels,  whatever they may be, to correct what we observed to be a misalignment  in how it allocates its staff.
FSM and RMI responses. In its written comments on our draft report, the  FSM National Government agreed on the importance of the three issues  that were the focus of our JEMCO-related recommendation to Interior.  The FSM identified activities under way to plan for the decrement and  cited implementation of a contract to assess the national education  system’s ability to produce valid and reliable data, as well as efforts to  review the quality of health indicators with government staff. The FSM  remarked on our report’s discussion of the possibility of achieving  increased accountability over noncompact grant funds through a high-risk  designation, noting that it was assured because the process involved in a  high-risk designation is not an arbitrary one.
In its written comments on our draft report, the RMI government stated its  belief that it had submitted adequate plans to JEMFAC regarding the  medium-term budget and investment framework and the decrement. The  RMI generally agreed with our findings of data reliability problems in both  the education and health sectors and cited challenges in data collection in  both sectors, noting that its Ministry of Health was seeking external  assistance to improve data quality. With regard to our recommendation  that 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 stated 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. We addressed several of the comments in the  RMI’s letter by adding or updating information in the report, or to note  areas of RMI concern. In reprinting the letter in the report, we also  provided specific responses to a number of the comments.
Chairman Fleming, Ranking Member Sablan, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to respond to any questions you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, 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 statement. GAO staff who made key contributions  to this testimony include Emil Friberg (Assistant Director), Ashley Alley,  Christina Bruff, David Dayton, Martin De Alteriis, Julie Hirshen, Jeffrey  Isaacs, and Kathleen Monahan.
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